TRUSTMARK CORP 10-Q

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. 55 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 March 31, 2024, TNB had total assets of $18.374 billion, which represented approximately 99.99% of the consolidated assets of Trustmark. Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through offices and 2,712 full-time equivalent associates (measured at March 31, 2024) located in the states of Alabama (including the Georgia Loan Production Office (LPO), which are collectively referred to herein as Trustmark's Alabama market region), Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in the Memphis and Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). Trustmark’s operations are managed along three operating segments: General Banking Segment, Wealth Management Segment and Insurance Segment. See “Executive Overview” below for a description of TNB’s plans to sell its wholly owned subsidiary Fisher Brown Bottrell Insurance, Inc., which comprises the entirety of Trustmark’s Insurance Segment. For a complete overview of Trustmark’s business, see the section captioned “The Corporation” included in Part I. Item 1. – Business of Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2023 (2023 Annual Report). Executive Overview Trustmark's financial results for the three months ended March 31, 2024 reflected continued growth in loans held for investment (LHFI), solid credit quality and an increase in noninterest income. Trustmark's capital position remained solid, reflecting the consistent profitability of its diversified financial services businesses. Trustmark remains well-positioned and committed to meeting the banking and financial needs of its customers and the communities it serves, and remains focused on providing support, advice and solutions to meet its customers’ unique needs. Trustmark is committed to managing the franchise for the long term, supporting investments to promote profitable revenue growth, realigning delivery channels to support changing customer preferences as well as reengineering and efficiency opportunities to enhance long-term shareholder value. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable June 15, 2024, to shareholders of record on June 1, 2024. On April 23, 2024, TNB announced that it had entered into a definitive agreement to sell its wholly owned subsidiary, Fisher Brown Bottrell Insurance, Inc., (FBBI) to Marsh & McLennan Agency LLC (MMA) for $345.0 million in cash. The sale of FBBI, among the five largest bank-affiliated insurance brokerages in the nation and one of the largest agencies in the Southeast, is expected to allow Trustmark to capitalize on the strong valuation premiums in the insurance brokerage sector. The $345.0 million transaction value represents approximately 5.9 times FBBI’s 2023 revenue and 28.0 times net income. The estimated after-tax proceeds of $228.0 million are expected to be used to reposition Trustmark’s balance sheet to increase earnings, elevate profitability and enhance capital. TNB anticipates that the transaction, which is subject to standard closing conditions and regulatory approval, will close by the end of the second quarter of 2024. Upon consummation of this transaction, Trustmark will no longer engage in insurance brokerage activity and will no longer report an Insurance Segment in its periodic and other reports as filed with the SEC. On April 8, 2024, Visa commenced an initial exchange offer expiring on May 3, 2024, for any and all outstanding shares of Visa Class B-1 common stock (Visa B-1 shares). Holders participating in the exchange offer would receive a combination of Visa Class B-2 common stock (Visa B-2 shares) and Visa Class C common stock (Visa C shares) in exchange for Visa B-1 shares that are validly tendered and accepted for exchange by Visa. TNB has tendered its 38.7 thousand Visa B-1 shares, and that tender is pending Visa’s acceptance. In exchange for each Visa B-1 share that is validly tendered and accepted for exchange by Visa, TNB would receive 50.0% of a newly issued Visa B-2 share and newly issued Visa C shares equivalent in value to 50.0% of a Visa B-1 share. Upon acceptance by Visa of TNB’s tender, the Visa C shares received by TNB would be recognized at fair value, which is expected to result in a realized gain that may be recorded during the second quarter of 2024. The Visa B-2 shares would continue to be held at their nominal carrying value. Recent Economic and Industry Developments Economic activity improved slightly during the first quarter of 2024; however, economic concerns remain as a result of the cumulative weight of uncertainty regarding the potential economic impact of geopolitical developments, such as the conflicts in Ukraine and the Middle East, inflation, other economic and industry volatility, the 2024 election cycle in the United States, higher energy prices and broader price pressures. Doubts surrounding the near-term direction of global markets and the potential impact on the United States economy are expected to persist for the near term. While Trustmark's customer base is wholly domestic, international economic conditions affect domestic economic conditions, and thus may have an impact upon Trustmark's financial condition or results of operations. 56 Market interest rates began to rise during 2022 after an extended period at historical lows. Starting in March 2022, the FRB began raising the target federal funds rate for the first time in three years and continued with multiple increases throughout 2022 and the first half of 2023. The FRB has maintained the target federal funds rate at a range of 5.25% to 5.50% since July 2023. In addition, the FRB increased the interest that it pays on reserves multiple times during 2022 and first half of 2023 from 0.10% to 5.40% as of July 2023. The FRB has maintained the rate it pays on reserves at 5.40% since July 2023. As interest rates have increased, so have competitive pressures on the deposit cost of funds. It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on Trustmark's results of operations. In the April 2024 “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” the twelve Federal Reserve Districts’ reports suggested that during the reporting period (covering the period from February 26, 2024 through April 8, 2024) economic activity expanded slightly. Reports by the twelve Federal Reserve Districts (Districts) noted the following during the reporting period: • Consumer spending barely increased overall, but reports were quite mixed across Districts and spending categories. Several reports mentioned weakness in discretionary spending, as consumers’ price sensitivity remained elevated. Auto spending was buoyed notably in some Districts by improved inventories and dealer incentives. Tourism activity increased modestly, on average, but reports varied widely. Manufacturing activity declined slightly. • On average, contacts reported slight increases in nonfinancial services activity. Bank lending was roughly flat overall. Residential construction increased a little, on average, and home sales strengthened in most Districts. In contrast, nonresidential construction was flat, and commercial real estate leasing fell slightly. • Overall economic expectations for the coming months was generally cautiously optimistic. • Employment rose at a slight pace overall. Most Districts noted increases in labor supply and in the quality of job applicants; however, many Districts described persistent shortages of qualified applicants for certain positions, including machinists, trades workers, and hospitality workers. Several Districts reported improved retention of employees, and others pointed to staff reductions at some firms. Wages grew at a slight to moderate pace. Multiple Districts said that annual wage growth rates had recently returned to their historical averages. On balance, contacts expected that labor demand and supply would remain relatively stable, with modest further job gains and continued moderation of wage growth back to pre-pandemic levels. • On average, price increases were modest. Movements in raw materials prices were mixed. Contacts in several Districts reported sharp increases in insurance rates, for both businesses and homeowners. Another frequent comment was that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins. Inflation also caused strain at nonprofit entities, resulting in service reductions in some cases. On balance, contacts expected that inflation would hold steady at a slow pace moving forward; however, contacts in a few Districts—mostly manufacturers—perceived upside risks to near-term inflation in both input prices and output prices. Reports by the Federal Reserve’s Sixth District, Atlanta (which includes Trustmark’s Alabama, Florida and Mississippi market regions), Eighth District, St. Louis (which includes Trustmark’s Tennessee market region), and Eleventh District, Dallas (which includes Trustmark’s Texas market region), noted similar findings for the reporting period as those discussed above. The Federal Reserve’s Sixth District also noted lending remained relatively flat amid continued contraction in most consumer loan segments, with one notable exception being home equity lines of credit, which have steadily increased in originations and utilization and a minor increase in commercial real estate loan originations, including multifamily. The Federal Reserve's Sixth District also reported the allowance for loan and lease losses continued to increase as economic uncertainty drove banks to adjust reserves, cash balances increased slightly, consistent with broader industry trends, large time deposits experienced continued growth but may be showing early signs of flattening and borrowings declined over the reporting period as banks paid down this more expensive source of funding. The Federal Reserve’s Eleventh District also reported that loan volumes declined, credit standards continued to tighten, loan pricing continued to rise and loan nonperformance rose slightly. The Federal Reserve’s Eleventh District also noted bankers’ outlooks remained mixed with an expectation of an increase in loan demand six months from now but a deterioration in loan performance and overall business activity. Financial Highlights Trustmark reported net income of $41.5 million, or basic and diluted earnings per share (EPS) of $0.68, in the first quarter of 2024, compared to $50.3 million, or basic and diluted EPS of $0.82, in the first quarter of 2023. Trustmark’s reported performance during the quarter ended March 31, 2024 produced a return on average tangible equity of 12.98%, a return on average assets of 0.89%, an average equity to average assets ratio of 8.98% and a dividend payout ratio of 33.82%, compared to a return on average tangible equity of 18.03%, a return on average assets of 1.10%, an average equity to average assets ratio of 8.24% and a dividend payout ratio of 28.05% during the quarter ended March 31, 2023. 57 Total revenue, which is defined as net interest income plus noninterest income, for the three months ended March 31, 2024 was $188.2 million, a decrease of $793 thousand, or 0.4%, when compared to the same time period in 2023. The decrease in total revenue for the three months ended March 31, 2024, when compared to the same time period in 2023, was the result of a decrease in net interest income largely offset by an increase in noninterest income. Net interest income for the three months ended March 31, 2024 totaled $132.8 million, a decrease of $4.8 million, or 3.5%, when compared to the same time period in 2023, principally due to an increase in interest on deposits partially offset by an increase in interest and fees on loans held for sale (LHFS) and LHFI and a decline in other interest expense. Interest income totaled $229.8 million for the three months ended March 31, 2024, an increase of $30.9 million, or 15.6%, when compared to the same time period in 2023, principally due to an increase in interest and fees on LHFS and LHFI primarily as a result of the higher interest rate environment and loan growth. Interest expense totaled $97.0 million for the three months ended March 31, 2024, an increase of $35.7 million, or 58.2%, when compared to the same time period in 2023. The increase in interest expense when the three months ended March 31, 2024 is compared to the same time period in 2023 was principally due to an increase in interest on deposits primarily due to rising interest rates, increased competition for deposits and higher average balances, partially offset by a decrease in other interest expense primarily due to a decrease in short-term Federal Home Loan Bank (FHLB) advances. Noninterest income for the three months ended March 31, 2024 totaled $55.3 million, an increase of $4.0 million, or 7.7%, when compared to the same time period in 2023, primarily due to increases in mortgage banking, net, insurance commissions and other, net. Mortgage banking, net totaled $8.9 million for the three months ended March 31, 2024, an increase of $1.3 million, or 16.7%, when compared to the same time period in 2023, principally due to an increase in the gain on sales of loans, net. Insurance commissions totaled $15.5 million for the first quarter of 2024, an increase of $1.2 million, or 8.1%, when compared to the same time period in 2023, principally due to increases in commercial property and casualty commissions. Other, net totaled $3.6 million for the first quarter of 2024, an increase of $1.1 million, or 44.5%, when compared to the same time period in 2023, principally due to increases in cash management service fees and other miscellaneous income. Noninterest expense for the three months ended March 31, 2024 totaled $131.1 million, an increase of $2.8 million, or 2.2%, when compared to the same time period in 2023. The increase in noninterest expense for the three months ended March 31, 2024 was principally due to increases in other expense and salaries and employee benefits. Salaries and employee benefits totaled $75.5 million for the three months ended March 31, 2024, an increase of $1.4 million, or 1.9%, when compared to the same time period in 2023, principally due to increases in salaries expense, primarily due to general merit increases, partially offset by a decline in medical insurance expense. Other expense totaled $17.0 million for the three months ended March 31, 2024, an increase of $2.2 million, or 14.6%, when compared to the same time period in 2023, principally due to an increase in FDIC assessment expense, primarily due to an increase in the assessment rate. Trustmark’s provision for credit losses (PCL) on LHFI for the three months ended March 31, 2024 totaled $7.7 million, an increase of $4.5 million when compared to the same time period in 2023. The PCL on LHFI for the three months ended March 31, 2024 primarily reflected an increase in required reserves as a result of changes in the macroeconomic forecasts resulting from the annual loss driver analysis performed during the first quarter of 2024 partially offset by a decline in required reserves as a result of updates to the qualitative reserve factors. The PCL on off-balance sheet credit exposures totaled a negative $192 thousand for the three months ended March 31, 2024, a decrease in the negative provision of $2.1 million, or 91.4%, when compared to the same time period in 2023. The negative PCL on off-balance sheet credit exposures for the three months ended March 31, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments largely offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor. Please see the section captioned “Provision for Credit Losses” for additional information regarding the PCL on LHFI and off-balance sheet credit exposures. At March 31, 2024, nonperforming assets totaled $106.0 million, a decrease of $904 thousand, or 0.8%, compared to December 31, 2023, reflecting a decrease in nonaccrual LHFI partially offset by an increase in other real estate. Nonaccrual LHFI totaled $98.4 million at March 31, 2024, a decrease of $1.7 million, or 1.7%, relative to December 31, 2023, primarily as a result of the resolution of one large nonaccrual commercial credit in the Texas market region partially offset by one large commercial credit placed on nonaccrual in the Texas market region as well as an increase in mortgage nonaccruals. Other real estate, net totaled $7.6 million at March 31, 2024, an increase of $753 thousand, or 11.0%, when compared to December 31, 2023, principally due to properties foreclosed in the Mississippi market region partially offset by properties sold in the Alabama and Mississippi market regions as well as write-downs of properties in the Texas market region. LHFI totaled $13.058 billion at March 31, 2024, an increase of $107.4 million, or 0.8%, compared to December 31, 2023. The increase in LHFI during the first three months of 2024 was primarily due to net growth in LHFI secured by real estate partially offset by a decline in state and other political subdivision LHFI. For additional information regarding changes in LHFI and comparative balances by loan category, see the section captioned “LHFI.” 58 Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, FHLB advances and brokered deposits. See the section captioned “Capital Resources and Liquidity” for further discussion of the components of Trustmark’s excess funding capacity. Total deposits were $15.339 billion at March 31, 2024, a decrease of $231.2 million, or 1.5%, compared to December 31, 2023. During the first three months of 2024, noninterest-bearing deposits decreased $158.0 million, or 4.9%, as a result of declines in all categories of noninterest-bearing deposits reflecting customers migration into higher-yielding products. Interest-bearing deposits decreased $73.2 million, or 0.6%, during the first three months of 2024, primarily due to declines in public and consumer interest checking accounts and consumer certificates of deposits (CDs), partially offset by growth in business and consumer money market deposit accounts (MMDA). Federal funds purchased and securities sold under repurchase agreements totaled $393.2 million at March 31, 2024, a decrease of $12.5 million, or 3.1%, compared to December 31, 2023, principally due to a decrease in upstream federal funds purchased. Other borrowings totaled $482.0 million at March 31, 2024, a decrease of $1.2 million, or 0.2%, compared to December 31, 2023, principally due to a decline in GNMA loans eligible for repurchase. Recent Legislative and Regulatory Developments Bank Merger Review On March 21, 2024, the FDIC published proposed revisions to its Statement of Policy on Bank Merger Transactions that may change the way the FDIC reviews bank merger applications. While the Federal Reserve has not issued a similar proposal, Federal Reserve Vice Chair for Supervision Michael Barr has stated that the Federal Reserve is working with the Department of Justice to update guidelines setting forth standards for the review of the competitive impact of a bank merger transaction. These pending regulatory revisions create uncertainty regarding the standards that the agencies may apply to their review of bank mergers and may make it more difficult and/or costly to obtain regulatory approval of a bank merger, or otherwise result in more burdensome conditions in approval orders than the agencies have previously imposed. Additionally, the agencies may begin to apply new standards in practice before they formally finalize changes to their merger policies. As a result, these new standards may limit banking organizations’ ability to grow through an acquisition or make it more costly or less beneficial for them to do so. For additional information regarding legislation and regulation applicable to Trustmark, see the section captioned “Supervision and Regulation” included in Part I. Item 1. – Business of Trustmark’s 2023 Annual Report. 59 Selected Financial Data The following tables present financial data derived from Trustmark’s consolidated financial statements as of and for the periods presented ($ in thousands, except per share data): Three Months Ended March 31, 2024 2023 Consolidated Statements of Income Total interest income $ 229,840 $ 198,900 Total interest expense 97,010 61,305 Net interest income 132,830 137,595 PCL, LHFI 7,708 3,244 PCL, off-balance sheet credit exposures (192 ) (2,242 ) Noninterest income 55,349 51,377 Noninterest expense 131,146 128,327 Income before income taxes 49,517 59,643 Income taxes 7,982 9,343 Net Income $ 41,535 $ 50,300 Total Revenue (1) $ 188,179 $ 188,972 Per Share Data Basic EPS $ 0.68 $ 0.82 Diluted EPS 0.68 0.82 Cash dividends per share 0.23 0.23 Performance Ratios Return on average equity 9.96 % 13.39 % Return on average tangible equity 12.98 % 18.03 % Return on average assets 0.89 % 1.10 % Average equity / average assets 8.98 % 8.24 % Net interest margin (fully taxable equivalent) 3.21 % 3.39 % Dividend payout ratio 33.82 % 28.05 % Credit Quality Ratios Net charge-offs (recoveries) / average loans 0.12 % 0.04 % PCL, LHFI / average loans 0.24 % 0.10 % Nonaccrual LHFI / (LHFI + LHFS) 0.74 % 0.57 % Nonperforming assets / (LHFI + LHFS) plus other real estate 0.80 % 0.58 % ACL, LHFI / LHFI 1.10 % 0.98 % (1) Consistent with Trustmark’s audited annual financial statements, total revenue is defined as net interest income plus noninterest income. 60 March 31, 2024 2023 Consolidated Balance Sheets Total assets $ 18,376,612 $ 18,877,178 Securities 3,117,324 3,458,500 Total loans (LHFI + LHFS) 13,230,880 12,673,121 Deposits 15,338,557 14,783,661 Total shareholders' equity 1,682,599 1,562,099 Stock Performance Market value - close $ 28.11 $ 24.70 Book value 27.50 25.59 Tangible book value 21.18 19.24 Capital Ratios Total equity / total assets 9.16 % 8.28 % Tangible equity / tangible assets 7.20 % 6.35 % Tangible equity / risk-weighted assets 8.49 % 7.94 % Tier 1 leverage ratio 8.76 % 8.29 % Common equity Tier 1 risk-based capital ratio 10.12 % 9.76 % Tier 1 risk-based capital ratio 10.51 % 10.17 % Total risk-based capital ratio 12.42 % 11.95 % Non-GAAP Financial Measures In addition to capital ratios defined by U.S. generally accepted accounting principles (GAAP) and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets. Trustmark's common equity Tier 1 capital includes common stock, capital surplus and retained earnings, and is reduced by goodwill and other intangible assets, net of associated net deferred tax liabilities as well as disallowed deferred tax assets and threshold deductions as applicable. Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations. In Management’s experience, many stock analysts use tangible common equity measures in conjunction with more traditional bank capital ratios to compare capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions. These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculation methods may not be comparable with those of other organizations. Also, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure. 61 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 March 31, 2024 2023 TANGIBLE EQUITY AVERAGE BALANCES Total shareholders' equity $ 1,676,521 $ 1,523,828 Less: Goodwill (384,237 ) (384,237 ) Identifiable intangible assets (2,920 ) (3,523 ) Total average tangible equity $ 1,289,364 $ 1,136,068 PERIOD END BALANCES Total shareholders' equity $ 1,682,599 $ 1,562,099 Less: Goodwill (384,237 ) (384,237 ) Identifiable intangible assets (2,845 ) (3,352 ) Total tangible equity (a) $ 1,295,517 $ 1,174,510 TANGIBLE ASSETS Total assets $ 18,376,612 $ 18,877,178 Less: Goodwill (384,237 ) (384,237 ) Identifiable intangible assets (2,845 ) (3,352 ) Total tangible assets (b) $ 17,989,530 $ 18,489,589 Risk-weighted assets (c) $ 15,257,385 $ 14,793,893 NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION Net income $ 41,535 $ 50,300 Plus: Intangible amortization net of tax 90 216 Net income adjusted for intangible amortization $ 41,625 $ 50,516 Period end shares outstanding (d) 61,178,366 61,048,516 TANGIBLE EQUITY MEASUREMENTS Return on average tangible equity (1) 12.98 % 18.03 % Tangible equity/tangible assets (a)/(b) 7.20 % 6.35 % Tangible equity/risk-weighted assets (a)/(c) 8.49 % 7.94 % Tangible book value (a)/(d)*1,000 $ 21.18 $ 19.24 COMMON EQUITY TIER 1 CAPITAL (CET1) Total shareholders' equity $ 1,682,599 $ 1,562,099 CECL transitional adjustment 6,500 13,000 AOCI-related adjustments 227,154 242,381 CET1 adjustments and deductions: Goodwill net of associated deferred tax liabilities (DTLs) (370,205 ) (370,234 ) Other adjustments and deductions for CET1 (2) (2,588 ) (3,275 ) CET1 capital (e) 1,543,460 1,443,971 Additional Tier 1 capital instruments plus related surplus 60,000 60,000 Tier 1 Capital $ 1,603,460 $ 1,503,971 Common equity Tier 1 risk-based capital ratio (e)/(c) 10.12 % 9.76 % (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 and threshold deductions, 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 table shows the average balances for all assets and liabilities of Trustmark and the interest income or expense associated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted to a FTE basis using the federal statutory corporate tax rate in effect for each of the periods shown. Loans on nonaccrual have been included in the average loan balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest associated with the average LHFS and LHFI balances were immaterial. 62 Net interest income-FTE for the three months ended March 31, 2024 decreased $4.9 million, or 3.5%, when compared with the same time period in 2023. The decrease in net interest income-FTE when the three months ended March 31, 2024 is compared to the same time period in 2023 was principally due to an increase in interest on deposits partially offset by an increase in interest and fees on LHFS and LHFI-FTE and a decrease in other interest expense. The net interest margin-FTE for the three months ended March 31, 2024 decreased 18 basis points to 3.21% when compared to the same time period in 2023. The decrease in the net interest margin for the three months ended March 31, 2024 when compared to the same time period in 2023, was principally due to an increase in the cost of interest-bearing deposits partially offset by the increase in the yield on the LHFS and LHFI portfolios. Average interest-earning assets for the three months ended March 31, 2024 was $17.088 billion compared to $16.856 billion for the same time period in 2023, an increase of $231.3 million, or 1.4%. The increase in average interest-earning assets for the three months ended March 31, 2024 when compared to the same time period in 2023, was principally due to an increase in average loans (LHFS and LHFI) partially offset by a decline in average total securities and average other earning assets. Average loans (LHFS and LHFI) increased $639.4 million, or 5.1%, when the three months ended March 31, 2024 is compared to the same time period in 2023, principally due to an increase in the average balance of the LHFI portfolio of $603.6 million, or 4.9%. The increase in the LHFI portfolio when the balances at March 31, 2024 are compared to March 31, 2023 was principally due to net growth in LHFI secured by real estate and other commercial loans and leases, partially offset by a decrease in state and other political subdivision LHFI. Average total securities declined $329.3 million, or 9.0%, when the three months ended March 31, 2024 is compared to the same time period in 2023, principally due to calls, maturities and pay-downs of the loans underlying GSE guaranteed securities. Average other earning assets decreased $76.5 million, or 11.8%, when the three months ended March 31, 2024 is compared to the same time period in 2023, primarily due to decreases in reserves held at the FRBA and investments in FHLB stock. Interest income-FTE for the three months ended March 31, 2024 totaled $233.2 million, an increase of $30.8 million, or 15.2%, while the yield on total earning assets increased to 5.49% compared to 4.87% for the same time period in 2023. The increase in interest income-FTE for the three months ended March 31, 2024 was primarily due to an increase in interest and fees on LHFS and LHFI-FTE. During the three months ended March 31, 2024, interest and fees on LHFS and LHFI-FTE increased $30.5 million, or 17.0%, while the yield on LHFS and LHFI increased 61 basis points to 6.40% when compared to the same time period in 2023, primarily due to the higher interest rate environment as well as the increase in the average balance of LHFI. Average interest-bearing liabilities for the three months ended March 31, 2024 totaled $13.376 billion compared to $12.585 billion for the same time period in 2023, an increase of $791.5 million, or 6.3%. The increase in average interest-bearing liabilities when the three months ended March 31, 2024 is compared to the same time period in 2023 was primarily the result of an increase in average interest-bearing deposits partially offset by a decline in average other borrowings. Average interest-bearing deposits for the three months ended March 31, 2024 increased $1.447 billion, or 13.3%, when compared to the same time period in 2023, reflecting growth in average time deposits and average interest-bearing demand deposits, partially offset by declines in savings deposits. Average other borrowings for the three months ended March 31, 2024 decreased $647.2 million, or 49.9%, when compared to the same time period in 2023, principally due to the decrease in outstanding short-term FHLB advances with the FHLB of Dallas as a result of changes in funding needs. Interest expense for the three months ended March 31, 2024 totaled $97.0 million, an increase of $35.7 million, or 58.2%, when compared with the same time period in 2023, while the rate on total interest-bearing liabilities increased 94 basis points to 2.92% principally due to an increase in interest on deposits partially offset by a decline in other interest expense. Interest on deposits for the three months ended March 31, 2024 increased $42.8 million while the rate on interest-bearing deposits increased 121 basis points to 2.74% when compared to the same time period in 2023, primarily due to higher interest rates, reflecting the increased competitive pressures on deposits, and increases in average balances of time deposits and MMDA accounts. Other interest expense for the three months ended March 31, 2024 decreased $7.9 million, or 50.5%, while the rate on other borrowings decreased to 4.78% compared to 4.87% for the same time period in 2023, primarily due to the decrease in outstanding short-term FHLB advances with the FHLB of Dallas. 63 The following table provides the tax equivalent basis yield or rate for each component of the tax equivalent net interest margin for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets Interest-earning assets: Federal funds sold and securities purchased under reverse repurchase agreements $ 114 $ 1 3.53 % $ 2,379 $ 30 5.11 % Securities - taxable 3,346,095 15,634 1.88 % 3,666,404 16,761 1.85 % Securities - nontaxable 340 4 4.73 % 9,321 92 4.00 % Loans (LHFS and LHFI) 13,169,805 209,456 6.40 % 12,530,449 178,967 5.79 % Other earning assets 571,215 8,110 5.71 % 647,760 6,527 4.09 % Total interest-earning assets 17,087,569 233,205 5.49 % 16,856,313 202,377 4.87 % Other assets 1,730,521 1,762,449 ACL, LHFI (138,711 ) (119,978 ) Total Assets $ 18,679,379 $ 18,498,784 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing deposits $ 12,299,407 83,716 2.74 % $ 10,852,367 40,898 1.53 % Federal funds purchased and securities sold under repurchase agreements 428,127 5,591 5.25 % 436,535 4,832 4.49 % Other borrowings 648,816 7,703 4.78 % 1,295,980 15,575 4.87 % Total interest-bearing liabilities 13,376,350 97,010 2.92 % 12,584,882 61,305 1.98 % Noninterest-bearing demand deposits 3,120,566 3,813,248 Other liabilities 505,942 576,826 Shareholders' equity 1,676,521 1,523,828 Total Liabilities and Shareholders' Equity $ 18,679,379 $ 18,498,784 Net Interest Margin 136,195 3.21 % 141,072 3.39 % Less tax equivalent adjustment 3,365 3,477 Net Interest Margin per Consolidated Statements of Income $ 132,830 $ 137,595 Provision for Credit Losses The PCL, LHFI is the amount necessary to maintain the ACL for LHFI at the amount of expected credit losses inherent within the LHFI portfolio. The amount of PCL and the related ACL for LHFI are based on Trustmark’s ACL methodology. The PCL, LHFI totaled $7.7 million for the three months ended March 31, 2024, compared to $3.2 million for the same time period in 2023. The PCL on LHFI for the three months ended March 31, 2024 primarily reflected an increase in required reserves as a result of changes in the macroeconomic forecasts resulting from the annual loss driver analysis performed during the first quarter of 2024 partially offset by a decline in required reserves as a result of updates to the qualitative reserve factors. FASB ASC Topic 326 requires Trustmark to estimate expected credit losses for off-balance sheet credit exposures which are not unconditionally cancellable by Trustmark. Trustmark maintains a separate ACL for off-balance sheet credit exposures, including unfunded commitments and letters of credit. Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. The PCL, off-balance sheet credit exposures totaled a negative $192 thousand for the three months ended March 31, 2024, compared to a negative $2.2 million for the same time period in 2023. The negative PCL on off-balance sheet credit exposures for the three months ended March 31, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments largely offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor. 64 See the section captioned “Allowance for Credit Losses” for information regarding Trustmark’s ACL methodology as well as further analysis of the PCL. Noninterest Income Noninterest income represented 29.4% of total revenue for the three months ended March 31, 2024, compared to 27.2% for the three months ended March 31, 2023. The following table provides the comparative components of noninterest income for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 $ Change % Change Service charges on deposit accounts $ 10,958 $ 10,336 $ 622 6.0 % Bank card and other fees 7,428 7,803 (375 ) -4.8 % Mortgage banking, net 8,915 7,639 1,276 16.7 % Insurance commissions 15,464 14,305 1,159 8.1 % Wealth management 8,952 8,780 172 2.0 % Other, net 3,632 2,514 1,118 44.5 % Total noninterest income $ 55,349 $ 51,377 $ 3,972 7.7 % 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.” 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 March 31, 2024 2023 $ Change % Change Mortgage servicing income, net $ 6,934 $ 6,785 $ 149 2.2 % Change in fair value-MSR from runoff (1,926 ) (1,145 ) (781 ) -68.2 % Gain on sales of loans, net 5,009 3,797 1,212 31.9 % Mortgage banking income before net hedge ineffectiveness 10,017 9,437 580 6.1 % Change in fair value-MSR from market changes 5,123 (3,972 ) 9,095 n/m Change in fair value of derivatives (6,225 ) 2,174 (8,399 ) n/m Net hedge ineffectiveness (1,102 ) (1,798 ) 696 38.7 % Mortgage banking, net $ 8,915 $ 7,639 $ 1,276 16.7 % n/m - percentage changes greater than +/- 100% are not considered meaningful The increase in mortgage banking, net for the three months ended March 31, 2024 when compared to the same time period in 2023 was principally due to an increase in the gain on sales of loans, net. Mortgage loan production for the three months ended March 31, 2024 was $274.0 million, a decrease of $87.1 million, or 24.1%, when compared to the same time period in 2023. Loans serviced for others totaled $8.553 billion at March 31, 2024, compared with $8.152 billion at March 31, 2023, an increase of $401.3 million, or 4.9%. Representing a significant component of mortgage banking income is the gain on sales of loans, net. The increase in the gain on sales of loans, net when the three months ended March 31, 2024 is compared to the same time period in 2023, was primarily the result of higher profit margins in secondary marketing activities and an increase in the volume of loans sold, partially offset by a decline in the mortgage fair value adjustment. Loan sales totaled $258.3 million for the three months ended March 31, 2024, an increase of $44.5 million, or 20.8%, when compared with the same time period in 2023. 65 Other, Net The following table illustrates the components of other, net included in noninterest income for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 $ Change % Change Partnership amortization for tax credit purposes $ (1,834 ) $ (1,961 ) $ 127 6.5 % Increase in life insurance cash surrender value 1,844 1,693 151 8.9 % Other miscellaneous income 3,622 2,782 840 30.2 % Total other, net $ 3,632 $ 2,514 $ 1,118 44.5 % The increase in other, net for the first three months of 2024, when compared to the same time period in 2023 was principally due to increases in cash management service fees and other miscellaneous income. Noninterest Expense The following table illustrates the comparative components of noninterest expense for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 $ Change % Change Salaries and employee benefits $ 75,458 $ 74,056 $ 1,402 1.9 % Services and fees 24,839 25,426 (587 ) -2.3 % Net occupancy-premises 7,496 7,629 (133 ) -1.7 % Equipment expense 6,385 6,405 (20 ) -0.3 % Other expense 16,968 14,811 2,157 14.6 % Total noninterest expense $ 131,146 $ 128,327 $ 2,819 2.2 % 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 months ended March 31, 2024 is compared to the same time period in 2023 was principally due to increases in salaries expense, primarily due to general merit increases, partially offset by a decline in medical insurance expense. Other Expense The following table illustrates the comparative components of other noninterest expense for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 $ Change % Change Loan expense $ 2,955 $ 2,538 $ 417 16.4 % Amortization of intangibles 120 288 (168 ) -58.3 % FDIC assessment expense 4,509 2,370 2,139 90.3 % Other real estate expense, net 671 172 499 n/m Other miscellaneous expense 8,713 9,443 (730 ) -7.7 % Total other expense $ 16,968 $ 14,811 $ 2,157 14.6 % n/m - percentage changes greater than +/- 100% are not considered meaningful The increase in other expense when the three months ended March 31, 2024 is compared to the same time period in 2023 was principally due to an increase in FDIC assessment expense, primarily due to an increase in the assessment rate. The increase in FDIC assessment rate was principally due to increases in the overall assessment rate and the 2 basis point increase in the initial base assessment rate by the FDIC during the second quarter of 2023 as part of the FDIC's final rule to restore the DIF to required levels. Results of Segment Operations For a description of the methodologies used to measure financial performance and financial information by reportable segment, please see Note 18 – Segment Information included in Part I. Item 1. – Financial Statements of this report. The following discusses changes in the results of operations of each reportable segment for the three months ended March 31, 2024 and 2023. 66 General Banking Net interest income for the General Banking Segment decreased $4.6 million, or 3.4%, when the three months ended March 31, 2024 is compared with the same time period in 2023. The decrease in net interest income was principally due to an increase in interest on deposits partially offset by an increase in interest and fees on LHFS and LHFI and a decline in other interest expense. The PCL (LHFI and off-balance sheet credit exposures) for the General Banking Segment for the three months ended March 31, 2024 totaled $7.3 million compared to a PCL of $934 thousand for the same period in 2023, an increase of $6.4 million. For more information on these net interest income and PCL items, please see the sections captioned “Financial Highlights” and “Results of Operations.” Noninterest income for the General Banking Segment increased $2.0 million, or 7.2%, when the first three months of 2024 is compared to the same time period in 2023, primarily due to the increases in mortgage banking, net and cash management service fees. Noninterest income for the General Banking Segment represented 18.8% of total revenue for this segment for the first three months of 2024 compared to 17.2% for the same time period in 2023. Noninterest income for the General Banking Segment includes service charges on deposit accounts; wealth management; bank card and other fees; mortgage banking, net; other, 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 $2.1 million, or 1.9%, when the first three months of 2024 is compared with the same time period in 2023, principally due to increases in data processing charges related to software and FDIC assessment expense, partially offset by declines in outside services and fees. 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 three months of 2024 increased $48 thousand, or 3.1%, when compared to the same time period in 2023, primarily due to an increase in noninterest income partially offset by a decline in net interest income. Net interest income for the Wealth Management Segment decreased $123 thousand, or 8.5%, when the first three months of 2024 is compared to the same time period in 2023, principally due to an increase in interest expense on deposits as well as a decline in interest and fees on loans generated by the Private Banking Department. The PCL for the three months ended March 31, 2024 totaled $168 thousand compared to a PCL of $68 thousand for the same period in 2023. Noninterest income for the Wealth Management Segment, which primarily includes income related to investment management, trust and brokerage services, increased $238 thousand, or 2.7%, when the first three months of 2024 is compared to the same time period in 2023, primarily due to an increase in income from brokerage services partially offset by a decrease in income from trust management services. Noninterest expense for the Wealth Management Segment decreased $43 thousand, or 0.5%, when the first three months of 2024 is compared to the same time period in 2023, principally due to declines in business process outsourcing expense and miscellaneous other expenses largely offset by an increase in salaries and employee benefits expense, primarily related to broker commissions and trust incentives. At March 31, 2024 and 2023, Trustmark held assets under management and administration of $8.799 billion and $17.448 billion, respectively, and brokerage assets of $2.712 billion and $2.375 billion, respectively. Insurance Net income for the Insurance Segment for the first three months of 2024 increased $707 thousand, or 26.3%, when compared to the same time period in 2023. Noninterest income for the Insurance Segment, which is predominately composed of insurance commissions, increased $1.7 million, or 11.9%, when the first three months of 2024 is compared to the same time period in 2023, primarily due to new business commission volume in the commercial property and casualty business. Noninterest expense for the Insurance Segment increased $744 thousand, or 7.0%, when the first three months of 2024 is compared to the same time period in 2023, primarily due to an increase in salaries expense principally resulting from an increase in commission expense as a result of higher business volumes. See the section captioned “Executive Overview” above for a description of TNB’s plans to sell its wholly owned subsidiary FBBI, which comprises the entirety of Trustmark’s Insurance Segment. Income Taxes For the three months ended March 31, 2024, Trustmark’s combined effective tax rate was 16.1% compared to 15.7% for the same time period in 2023. 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. 67 Financial Condition Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold, securities sold under reverse repurchase agreements and other earning assets. Average earning assets totaled $17.088 billion, or 91.5% of total average assets, for the three months ended March 31, 2024, compared to $16.856 billion, or 91.1% of total average assets, for the three months ended March 31, 2023, an increase of $231.3 billion, or 1.4%. 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 4.3 years at March 31, 2024 compared to 4.5 years at December 31, 2023. When compared to December 31, 2023, total investment securities decreased by $71.8 million, or 2.3%, during the first three months of 2024. This decrease resulted primarily from calls, maturities and pay-downs of the loans underlying GSE guaranteed securities. Trustmark sold no securities during the first three months of 2024 or 2023. During 2022, Trustmark reclassified approximately $766.0 million of securities available for sale to securities held to maturity to mitigate the potential adverse impact of a rising interest rate environment on the fair value of the available for sale securities and the related impact on tangible common equity. At the date of these transfers, the net unrealized holding loss on the available for sale securities totaled approximately $91.9 million ($68.9 million net of tax). The resulting net unrealized holding losses are being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. At March 31, 2024, the net unamortized, unrealized loss on all transferred securities included in accumulated other comprehensive income (loss) (AOCI) in the accompanying consolidated balance sheets totaled $54.8 million compared to $57.6 million at December 31, 2023. Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in AOCI, a separate component of shareholders’ equity. At March 31, 2024, available for sale securities totaled $1.702 billion, which represented 54.6% of the securities portfolio, compared to $1.763 billion, or 55.3% of total securities, at December 31, 2023. At March 31, 2024, unrealized losses, net on available for sale securities totaled $198.7 million compared to unrealized losses, net of $196.1 million at December 31, 2023. At March 31, 2024, available for sale securities consisted of U.S. Treasury securities, obligations of states and political subdivisions, GSE guaranteed mortgage-related securities and direct obligations of government agencies and GSEs. Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At March 31, 2024, held to maturity securities totaled $1.415 billion, which represented 45.4% of the total securities portfolio, compared to $1.426 billion, or 44.7% of total securities, at December 31, 2023. Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of 100.0% of the portfolio in GSE-backed obligations and other Aaa-rated securities as determined by Moody’s Investors Services (Moody’s). None of the securities owned by Trustmark are collateralized by assets which are considered sub-prime. Furthermore, outside of stock ownership in the FHLB of Dallas, FHLB of Atlanta and FRBA, Trustmark does not hold any other equity investment in a GSE or other governmental entity. As of March 31, 2024, Trustmark did not hold securities of any one issuer with a carrying value exceeding 10% of total shareholders’ equity, other than certain GSEs which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the GSEs and held in Trustmark’s securities portfolio. 68 The following table presents Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating, as determined by Moody’s, at March 31, 2024 and December 31, 2023 ($ in thousands): March 31, 2024 Amortized Cost Estimated Fair Value Amount % Amount % Securities Available for Sale Aaa $ 1,900,980 100.0 % $ 1,702,299 100.0 % Total securities available for sale $ 1,900,980 100.0 % $ 1,702,299 100.0 % Securities Held to Maturity Aaa $ 1,414,685 100.0 % $ 1,332,674 100.0 % Not Rated (1) 340 — 340 — Total securities held to maturity $ 1,415,025 100.0 % $ 1,333,014 100.0 % December 31, 2023 Amortized Cost Estimated Fair Value Amount % Amount % Securities Available for Sale Aaa $ 1,959,007 100.0 % $ 1,762,878 100.0 % Total securities available for sale $ 1,959,007 100.0 % $ 1,762,878 100.0 % Securities Held to Maturity Aaa $ 1,425,939 100.0 % $ 1,355,164 100.0 % Not Rated (1) 340 — 340 — Total securities held to maturity $ 1,426,279 100.0 % $ 1,355,504 100.0 % (1) Not rated securities primarily consist of Mississippi municipal general obligations. The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. LHFS At March 31, 2024, LHFS totaled $172.9 million, consisting of $95.2 million of residential real estate mortgage loans in the process of being sold to third parties and $77.7 million of GNMA optional repurchase loans. At December 31, 2023, LHFS totaled $184.8 million, consisting of $106.0 million of residential real estate mortgage loans in the process of being sold to third parties and $78.8 million of GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first three months of 2024 or 2023. For additional information regarding the GNMA optional repurchase loans, please see the section captioned “Past Due LHFS” included in Note 3 – LHFI and Allowance for Credit Losses, LHFI of Part I. Item 1. – Financial Statements of this report. 69 LHFI At March 31, 2024 and December 31, 2023, LHFI consisted of the following ($ in thousands): March 31, 2024 December 31, 2023 Amount % Amount % Loans secured by real estate: Construction, land development and other land $ 617,008 4.7 % $ 642,886 5.0 % Other secured by 1-4 family residential properties 625,387 4.8 % 622,397 4.8 % Secured by nonfarm, nonresidential properties 3,543,235 27.1 % 3,489,434 26.9 % Other real estate secured 1,384,610 10.6 % 1,312,551 10.1 % Other loans secured by real estate: Other construction 922,453 7.1 % 867,793 6.7 % Secured by 1-4 family residential properties 2,266,094 17.4 % 2,282,318 17.6 % Commercial and industrial loans 1,922,711 14.7 % 1,922,910 14.9 % Consumer loans 159,340 1.2 % 165,734 1.3 % State and other political subdivision loans 1,052,844 8.1 % 1,088,466 8.4 % Other commercial loans and leases 564,261 4.3 % 556,035 4.3 % LHFI $ 13,057,943 100.0 % $ 12,950,524 100.0 % LHFI increased $107.4 million, or 0.8%, compared to December 31, 2023. The increase in LHFI during the first three months of 2024 was primarily due to net growth in LHFI secured by real estate partially offset by a decline in state and other political subdivision LHFI. LHFI secured by real estate increased $141.4 million, or 1.5%, during the first three months of 2024, primarily due to net growth in other real estate secured LHFI, other construction LHFI and LHFI secured by nonfarm, nonresidential properties (NFNR), partially offset by net declines in construction, land development and other land LHFI and LHFI secured by 1-4 family residential properties. Other real estate secured LHFI increased $72.1 million, or 5.5%, during the first three months of 2024, primarily due to other construction loans that moved to LHFI secured by multi-family residential properties in the Texas, Alabama and Mississippi market regions. Excluding other construction loan reclassifications, other real estate secured LHFI decreased $14.5 million, or 1.1%, during the first three months of 2024 principally due to declines in LHFI secured by multi-family residential properties in the Alabama market region, partially offset by growth in LHFI secured by multi-family residential properties in the Texas and Mississippi market regions. Other construction loans increased $54.7 million, or 6.3%, during the first three months of 2024 primarily due to new construction loans across all five market regions partially offset by other construction loans moved to other loan categories upon the completion of the related construction project. During the first three months of 2024, $224.1 million loans were moved from other construction to other loan categories, including $86.6 million to multi-family residential loans, $126.6 million to nonowner-occupied loans and $10.9 million to owner-occupied loans. Excluding all reclassifications between loan categories, growth in other construction loans totaled $255.7 million, or 29.5%, during the first three months of 2024. NFNR LHFI increased $53.8 million, or 1.5%, during the first three months of 2024 principally due to other construction loans that moved to NFNR LHFI in the Mississippi, Alabama, Texas and Florida market regions. Excluding other construction loan reclassifications, NFNR LHFI decreased $83.7 million, or 2.4%, during the first three months of 2024 principally due to declines in nonowner-occupied loans in the Mississippi and Texas market regions. LHFI secured by construction, land development and other land decreased $25.9 million, or 4.0%, during the first three months of 2024 primarily due to declines in land development loans in the Alabama and Mississippi market regions. LHFI secured by 1-4 family residential properties decreased $16.2 million, or 0.7%, during the first three months of 2024 primarily in the Mississippi market region. Trustmark's LHFI secured by 1-4 family residential properties are primarily included in the Mississippi market region because these loans are centrally analyzed and approved as part of the mortgage line of business which is located in Jackson, Mississippi. State and other political subdivision LHFI declined $35.6 million, or 3.3%, during the first three months of 2024, reflecting declines across all five market regions. The following table provides information regarding Trustmark’s home equity loans and home equity lines of credit which are included in the LHFI secured by 1-4 family residential properties for the periods presented ($ in thousands): March 31, 2024 December 31, 2023 Home equity loans $ 61,619 $ 58,176 Home equity lines of credit 437,565 430,933 Percentage of loans and lines for which Trustmark holds first lien 47.8 % 47.8 % Percentage of loans and lines for which Trustmark does not hold first lien 52.2 % 52.2 % 70 Due to the increased risk associated with second liens, loan terms and underwriting guidelines differ from those used for products secured by first liens. Loan amounts and loan-to-value ratios are limited and are lower for second liens than first liens. Also, interest rates and maximum amortization periods are adjusted accordingly. In addition, regardless of lien position, the passing credit score for approval of all home equity lines of credit is generally higher than that of term loans. The ACL on LHFI is also reflective of the increased risk related to second liens through application of a greater loss factor to this portion of the portfolio. Trustmark’s variable rate LHFI are based primarily on various prime and SOFR interest rate bases. The following tables provide information regarding the interest rate terms of Trustmark’s LHFI as of March 31, 2024 and December 31, 2023 ($ in thousands): March 31, 2024 Fixed Variable Total Loans secured by real estate: Construction, land development and other land $ 170,106 $ 446,902 $ 617,008 Other secured by 1- 4 family residential properties 180,579 444,808 625,387 Secured by nonfarm, nonresidential properties 1,479,121 2,064,114 3,543,235 Other real estate secured 148,393 1,236,217 1,384,610 Other loans secured by real estate: Other construction 3,805 918,648 922,453 Secured by 1- 4 family residential properties 1,362,948 903,146 2,266,094 Commercial and industrial loans 837,159 1,085,552 1,922,711 Consumer loans 132,397 26,943 159,340 State and other political subdivision loans 988,707 64,137 1,052,844 Other commercial loans and leases 319,503 244,758 564,261 LHFI $ 5,622,718 $ 7,435,225 $ 13,057,943 December 31, 2023 Fixed Variable Total Loans secured by real estate: Construction, land development and other land $ 158,143 $ 484,743 $ 642,886 Other secured by 1- 4 family residential properties 180,665 441,732 622,397 Secured by nonfarm, nonresidential properties 1,487,255 2,002,179 3,489,434 Other real estate secured 147,111 1,165,440 1,312,551 Other loans secured by real estate: Other construction 10,240 857,553 867,793 Secured by 1- 4 family residential properties 1,374,499 907,819 2,282,318 Commercial and industrial loans 756,812 1,166,098 1,922,910 Consumer loans 137,424 28,310 165,734 State and other political subdivision loans 1,022,092 66,374 1,088,466 Other commercial loans and leases 300,094 255,941 556,035 LHFI $ 5,574,335 $ 7,376,189 $ 12,950,524 In the following tables, LHFI reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages) and credit cards. These loans are included in the Mississippi Region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi. 71 The following table presents the LHFI composition by region at March 31, 2024 and reflects each region’s diversified mix of loans ($ in thousands): March 31, 2024 LHFI Composition by Region Total Alabama Florida Mississippi Tennessee Texas Loans secured by real estate: Construction, land development and other land $ 617,008 $ 269,322 $ 36,361 $ 167,709 $ 40,862 $ 102,754 Other secured by 1-4 family residential properties 625,387 154,303 54,099 303,207 79,415 34,363 Secured by nonfarm, nonresidential properties 3,543,235 981,921 233,109 1,485,304 150,017 692,884 Other real estate secured 1,384,610 561,115 1,728 417,757 6,965 397,045 Other loans secured by real estate: Other construction 922,453 484,596 2,429 224,134 126 211,168 Secured by 1-4 family residential properties 2,266,094 — — 2,262,217 3,877 — Commercial and industrial loans 1,922,711 657,294 23,941 841,797 150,313 249,366 Consumer loans 159,340 21,241 7,385 99,001 18,109 13,604 State and other political subdivision loans 1,052,844 70,161 52,069 782,985 23,700 123,929 Other commercial loans and leases 564,261 236,836 8,216 197,907 57,167 64,135 LHFI $ 13,057,943 $ 3,436,789 $ 419,337 $ 6,782,018 $ 530,551 $ 1,889,248 Construction, Land Development and Other Land Loans by Region Lots $ 70,445 $ 28,830 $ 8,196 $ 17,829 $ 4,587 $ 11,003 Development 122,788 56,825 1,260 28,668 12,576 23,459 Unimproved land 110,272 20,907 13,404 29,759 8,006 38,196 1-4 family construction 313,503 162,760 13,501 91,453 15,693 30,096 Construction, land development and other land loans $ 617,008 $ 269,322 $ 36,361 $ 167,709 $ 40,862 $ 102,754 Loans Secured by Nonfarm, Nonresidential Properties by Region Nonowner-occupied: Retail $ 367,575 $ 139,444 $ 24,147 $ 106,123 $ 17,381 $ 80,480 Office 261,984 101,364 19,605 73,689 1,617 65,709 Hotel/motel 255,925 128,356 48,992 53,054 25,523 — Mini-storage 165,962 40,724 1,864 103,323 745 19,306 Industrial 438,626 83,304 19,377 147,199 8,143 180,603 Health care 97,837 69,786 684 24,707 331 2,329 Convenience stores 25,572 3,214 419 13,599 239 8,101 Nursing homes/senior living 513,854 227,254 — 186,507 4,724 95,369 Other 109,838 31,790 9,067 51,626 8,211 9,144 Total nonowner-occupied loans 2,237,173 825,236 124,155 759,827 66,914 461,041 Owner-occupied: Office 150,283 41,047 37,629 41,658 11,555 18,394 Churches 56,697 14,208 4,094 32,706 3,215 2,474 Industrial warehouses 156,148 11,553 4,537 39,874 15,766 84,418 Health care 124,330 11,337 8,163 85,172 2,251 17,407 Convenience stores 148,158 12,172 29,156 72,715 — 34,115 Retail 88,445 9,457 15,287 35,730 17,087 10,884 Restaurants 48,491 4,008 2,930 21,360 16,367 3,826 Auto dealerships 42,394 5,138 194 21,007 16,055 — Nursing homes/senior living 353,641 35,216 — 292,264 — 26,161 Other 137,475 12,549 6,964 82,991 807 34,164 Total owner-occupied loans 1,306,062 156,685 108,954 725,477 83,103 231,843 Loans secured by nonfarm, nonresidential properties $ 3,543,235 $ 981,921 $ 233,109 $ 1,485,304 $ 150,017 $ 692,884 Allowance for Credit Losses LHFI Trustmark’s ACL methodology for LHFI is based upon guidance within FASB ASC Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost,” as well as applicable regulatory guidance from its primary regulator. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within Trustmark’s existing LHFI portfolio. The ACL on LHFI is adjusted through the PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries. 72 The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Trustmark’s LHFI portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is estimated. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations. The econometric models currently in production reflect segment or pool level sensitivities of probability of default (PD) to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of Trustmark's assets, as required by FASB ASC Topic 326. Under stable forecasts, these linear regressions will reasonably predict a pool’s PD. However, due to the COVID-19 pandemic, the macroeconomic variables used for reasonable and supportable forecasting changed rapidly. At the macroeconomic levels experienced during the COVID-19 pandemic, it was not clear that the models in production would produce reasonably representative results since the models were originally estimated using data beginning in 2004 through 2019. During this period, a traditional, albeit severe, economic recession occurred. Thus, econometric models are sensitive to similar future levels of PD. In order to prevent the econometric models from extrapolating beyond reasonable boundaries of their input variables, Trustmark chose to establish an upper and lower limit process when applying the periodic forecasts. In this way, Management will not rely upon unobserved and untested relationships in the setting of the quantitative reserve. This approach applies to all input variables, including: Southern Unemployment, National Unemployment, National Gross Domestic Product (GDP), National Home Price Index (HPI), National Commercial Real Estate (CRE) Price Index and the BBB 7-10 Year US Corporate Bond Index. The upper and lower limits are based on the distribution of the macroeconomic variable by selecting extreme percentiles at the upper and lower limits of the distribution, the 1st and 99th percentiles, respectively. These upper and lower limits are then used to calculate the PD for the forecast time period in which the forecasted values are outside of the upper and lower limit range. Due to multiple periods having a PD or loss given default (LGD) at or near zero as a result of the improving macroeconomic forecasts, Management implemented PD and LGD floors to account for the risk associated with each portfolio. The PD and LGD floors are based on Trustmark's historical loss experience and applied at a portfolio level. The external factors qualitative factor is Management’s best judgment on the loan or pool level impact of all factors that affect the portfolio that are not accounted for using any other part of the ACL methodology (i.e., natural disasters, changes in legislation, impacts due to technology and pandemics). Trustmark's External Factor – Pandemic ensured reserve adequacy for collectively evaluated loans most likely to be impacted by the unique economic and behavioral conditions created by the COVID-19 pandemic. Additional qualitative reserves are derived based on two principles. The first is the disconnect of economic factors to Trustmark’s modeled PD (derived from the econometric models underpinning the quantitative pooled reserves). During the pandemic, extraordinary measures by the federal government were made available to consumers and businesses, including COVID-19 loan payment concessions, direct transfer payments to households, tax deferrals and reduced interest rates, among others. These government interventions may have extended the lag between economic conditions and default, relative to what was captured in the model development data. Because Trustmark’s econometric PD models rely on the observed relationship from the economic downturn from 2007 to 2009 in both timing and severity, Management did not expect the models to reflect these conditions. For example, while the models would predict contemporaneous unemployment peaks and loan defaults, this might not have occurred when borrowers could request payment deferrals. Thus, for the affected population, economic conditions were not fully considered as a part of Trustmark’s quantitative reserve. The second principle is the change in risk that is identified by rating changes. As a part of Trustmark’s credit review process, loans in the affected population were given more frequent screening to ensure accurate ratings were maintained through this dynamic period. Trustmark’s quantitative reserve did not directly address changes in ratings; thus, a migration qualitative factor was designed to work in concert with the quantitative reserve. As discussed above, the disconnect of economic factors means that changes in rating caused by deteriorating and weak economic conditions as a result of the pandemic were not being captured in the quantitative reserve. During 2020, due to unforeseen pandemic conditions that varied from Management’s expectations, additional reserves were further dimensioned in order to appropriately reflect the risk within the portfolio related to the COVID-19 pandemic. In an effort to ensure the External Factor – Pandemic qualitative factor was reasonable and supportable, historical Trustmark loss data was leveraged to construct a framework that was quantitative in nature. To dimension the additional reserve, Management used the sensitivity of the quantitative commercial loan reserve to changes in macroeconomic conditions to apply to loans rated acceptable or better (risk rates 1-4). In addition, to account for the known changes in risk, a weighted average of the commercial loan portfolio loss rate, derived from the performance trends qualitative factor, was used to dimension additional reserves for downgraded credits. Loans rated acceptable with risk (risk rate 5) or watch (risk rate 6) received the additional reserves based on the average of the macroeconomic conditions and weighted average of the commercial loan portfolio loss rate while the loans rated special mention (risk rate 7) and substandard (risk rate 8) received additional reserves based on the weighted-average described above. During 2022, Management noted that all pass rate loans (risk rate 5 and 6) related to the External Factor - Pandemic qualitative factor either did not experience significant stress related to the pandemic or had since recovered and did not expect 73 future stresses attributed to the pandemic that could affect these loans. As a result, Management decided to accelerate the release of the additional pandemic reserves on all pass rate loans as a result of pandemic conditions resolving. During the fourth quarter of 2023, Management decided to resolve the External Factor-Pandemic qualitative factor as a result of the remaining loan balances that were identified as COVID affected loans being immaterial from both a reserve and balance perspective. The remaining loans were incorporated back into the performance qualitative factor as a result of this resolution. Further, due to this resolution there is no longer any active External Factor as of December 31, 2023. During 2022, Management elected to activate the nature and volume of the portfolio qualitative factor as a result of a sub-pool of the secured by 1-4 family residential properties growing to a significant size along with the underlying nature being different as well. The nature and volume of the portfolio qualitative factor utilizes a WARM methodology that uses industry data for the assumptions to support the qualitative adjustment. The industry data is used to compile a PD based on credit score ranges along with using the industry data to compile an LGD. The sub-pool of credits is then aggregated into the appropriate credit score bands in which a weighted-average loss rate is calculated based on the PD and LGD for each credit score range. This weighted-average loss rate is then applied to the expected balance for the sub-segment of credits. This total is then used as the qualitative reserve adjustment. Trustmark's current quantitative methodologies do not completely incorporate changes in credit quality. As a result, Trustmark utilizes the performance trends qualitative factor. This factor is based on migration analyses, that allocates additional ACL to non-pass/delinquent loans within each pool. In this way, Management believes the ACL will directly reflect changes in risk, based on the performance of the loans within a pool, whether declining or improving. The performance trends qualitative factor is estimated by properly segmenting loan pools into risk levels by risk rating for commercial credits and delinquency status for consumer credits. A migration analysis is then performed quarterly using a third-party software and the results for each risk level are compiled to calculate the historical PD average for each loan portfolio based on risk levels. This average historical PD rate is updated annually. For the mortgage portfolio, Trustmark uses an internal report to incorporate a roll rate method for the calculation of the PD rate. In addition to the PD rate for each portfolio, Management incorporates the quantitative rate and the k value derived from the Frye-Jacobs method to calculate a loss estimate that includes both PD and LGD. The quantitative rate is used to eliminate any additional reserve that the quantitative reserve already includes. Finally, the loss estimate rate is then applied to the total balances for each risk level for each portfolio to calculate a qualitative reserve. Determining the appropriateness of the allowance is complex and requires judgment by Management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall LHFI portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense. For a complete description of Trustmark’s ACL methodology and the quantitative and qualitative factors included in the calculation, please see Note 3 – LHFI and Allowance for Credit Losses, LHFI included in Part I. Item 1. – Financial Statements of this report. At March 31, 2024, the ACL on LHFI was $143.0 million, an increase of $3.6 million, or 2.6%, when compared with December 31, 2023. The increase in the ACL during the first three months of 2024 was principally due to changes in the macroeconomic forecasts resulting from the annual loss driver analysis performed during the first quarter of 2024 partially offset by updates to the qualitative reserve factors. Allocation of Trustmark’s $143.0 million ACL on LHFI, represented 0.93% of commercial LHFI and 1.63% of consumer and home mortgage LHFI, resulting in an ACL to total LHFI of 1.10% as of March 31, 2024. This compares with an ACL to total LHFI of 1.08% at December 31, 2023, which was allocated to commercial LHFI at 0.85% and to consumer and mortgage LHFI at 1.81%. The following table presents changes in the ACL on LHFI for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 Balance at beginning of period $ 139,367 $ 120,214 Provision for credit losses, LHFI 7,708 3,244 LHFI charged-off (6,324 ) (2,996 ) Recoveries 2,247 1,777 Net (charge-offs) recoveries (4,077 ) (1,219 ) Balance at end of period $ 142,998 $ 122,239 The increase in net charge-offs when the three months ended March 31, 2024 is compared to the same time period in 2023 was principally due to increases in gross charge-offs across all five market regions, partially offset by an increase in recoveries in the Florida and Texas market regions. 74 The following table presents the net (charge-offs) recoveries by geographic market region for the periods presented ($ in thousands): Three Months Ended March 31, 2024 2023 Alabama $ (341 ) $ (268 ) Florida 277 (36 ) Mississippi (1,489 ) (775 ) Tennessee (179 ) (124 ) Texas (2,345 ) (16 ) Total net (charge-offs) recoveries $ (4,077 ) $ (1,219 ) The PCL, LHFI for the three months ended March 31, 2024 totaled 0.24% of average loans (LHFS and LHFI) compared to 0.10% of average loans (LHFS and LHFI) for the same time period in 2023. The PCL on LHFI for the three months ended March 31, 2024 primarily reflected an increase in required reserves as a result of changes in the macroeconomic forecasts resulting from the annual loss driver analysis performed during the first quarter of 2024 partially offset by a decline in required reserves as a result of updates to the qualitative reserve factors. Off-Balance Sheet Credit Exposures Trustmark maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which is included on the accompanying consolidated balance sheets. Expected credit losses for off-balance sheet credit exposures are estimated by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by Trustmark. Trustmark calculates a loan pool level unfunded amount for the period. Trustmark calculates an expected funding rate each period which is applied to each pool’s unfunded commitment balances to ensure that reserves will be applied to each pool based upon balances expected to be funded based upon historical levels. Additionally, a reserve rate is applied to the unfunded commitment balance, which incorporates both quantitative and a majority of the qualitative aspects of the current period’s expected credit loss rate. The reserve rate that is applied excludes the reserve impact of the performance trends qualitative factor. During the first quarter of 2024, Management decided to implement a performance trends qualitative factor for unfunded commitments. The same assumptions are applied in this calculation that the funded balances utilize with the addition of using the funding rates on the unfunded commitments. The performance trends qualitative factor reserve is then added to the other calculated reserve to get a total reserve for off-balance sheet credit exposures. See the section captioned “ACL on Off-Balance Sheet Credit Exposures” in Note 12 – Contingencies included in Part I. Item 1. – Financial Statements of this report for complete description of Trustmark’s ACL methodology on off-balance sheet credit exposures. Adjustments to the ACL on off-balance sheet credit exposures are recorded to the PCL, off-balance sheet credit exposures. At March 31, 2024, the ACL on off-balance sheet credit exposures totaled $33.9 million compared to $34.1 million at December 31, 2023, a decrease of $192 thousand, or 0.6%. The PCL, off-balance sheet credit exposures totaled a negative $192 thousand for the three months ended March 31, 2024, compared to a negative $2.2 million for the same time period in 2023. The release in PCL on off-balance sheet credit exposures for the three months ended March 31, 2024, primarily reflected a decrease in required reserves as a result of a decrease in unfunded commitments largely offset by an increase in required reserves as a result of implementing the performance trend qualitative reserve factor. 75 Nonperforming Assets The table below provides the components of nonperforming assets by geographic market region at March 31, 2024 and December 31, 2023 ($ in thousands): March 31, 2024 December 31, 2023 Nonaccrual LHFI Alabama $ 23,261 $ 23,271 Florida 585 170 Mississippi 59,059 54,615 Tennessee 1,800 1,802 Texas 13,646 20,150 Total nonaccrual LHFI 98,351 100,008 Other real estate Alabama 1,050 1,397 Florida 71 — Mississippi 2,870 1,242 Tennessee 86 — Texas 3,543 4,228 Total other real estate 7,620 6,867 Total nonperforming assets $ 105,971 $ 106,875 Nonperforming assets/total loans (LHFS and LHFI) and ORE 0.80 % 0.81 % Loans past due 90 days or more LHFI $ 5,243 $ 5,790 LHFS - Guaranteed GNMA serviced loans (1) $ 56,530 $ 51,243 (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 March 31, 2024, nonaccrual LHFI totaled $98.4 million, or 0.74% of total LHFS and LHFI, reflecting a decrease of $1.7 million, or 1.7%, relative to December 31, 2023. The decrease in nonaccrual LHFI during the first three months of 2024 was primarily as a result of the resolution of one large nonaccrual commercial credit in the Texas market region partially offset by one large commercial credit placed on nonaccrual in the Texas market region as well as an increase in mortgage nonaccruals. For additional information regarding nonaccrual LHFI, see the section captioned “Nonaccrual and Past Due LHFI” included in Note 3 – LHFI and Allowance for Credit Losses, LHFI in Part I. Item 1. – Financial Statements of this report. Other Real Estate Other real estate at March 31, 2024 increased $753 thousand, or 11.0%, when compared with December 31, 2023. The increase in other real estate was principally due to properties foreclosed in the Mississippi market region partially offset by properties sold in the Alabama and Mississippi market regions as well as write-downs of properties in the Texas market region. The following tables illustrate changes in other real estate by geographic market region for the periods presented ($ in thousands): Three Months Ended March 31, 2024 Total Alabama Florida Mississippi Tennessee Texas Balance at beginning of period $ 6,867 $ 1,397 $ — $ 1,242 $ — $ 4,228 Additions 2,228 92 — 2,102 34 — Disposals (957 ) (522 ) — (435 ) — — (Write-downs) recoveries (518 ) 83 — 32 52 (685 ) Adjustments — — 71 (71 ) — — Balance at end of period $ 7,620 $ 1,050 $ 71 $ 2,870 $ 86 $ 3,543 76 Three Months Ended March 31, 2023 Total Alabama Florida Mississippi Tennessee Texas Balance at beginning of period $ 1,986 $ 194 $ — $ 1,769 $ 23 $ — Additions 300 — — 111 189 — Disposals (542 ) (194 ) — (325 ) (23 ) — (Write-downs) recoveries (60 ) — — (60 ) — — Balance at end of period $ 1,684 $ — $ — $ 1,495 $ 189 $ — 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 $458 thousand when the first three months of 2024 is compared to the same time period in 2023, primarily due to an increase in the reserve for other real estate write-downs in the Texas market region as a result of periodic revaluations of other real estate properties. For additional information regarding other real estate, please see Note 5 – Other Real Estate included in Part I. Item 1. – Financial Statements of this report. Deposits Trustmark’s deposits are its primary source of funding and primarily consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, MMDA, CDs and individual retirement accounts. Total deposits were $15.339 billion at March 31, 2024 compared to $15.570 billion at December 31, 2023, a decrease of $231.2 million, or 1.5%. During the first three months of 2024, noninterest-bearing deposits decreased $158.0 million, or 4.9%, reflecting declines in all categories of noninterest-bearing deposits reflecting customers migration into higher-yielding products. Interest-bearing deposits decreased $73.2 million, or 0.6%, during the first three months of 2024, primarily due to declines in public and consumer interest checking accounts and consumer CDs, partially offset by growth in business and consumer MMDA. At March 31, 2024, Trustmark's total uninsured deposits were $5.531 billion, or 36.1% of total deposits, compared to $5.601 billion, or 36.0% of total deposits, at December 31, 2023. Borrowings Trustmark uses short-term borrowings, such as federal funds purchased, securities sold under repurchase agreements and short-term FHLB advances, to fund growth of earning assets in excess of deposit growth. See the section captioned “Liquidity” for further discussion of the components of Trustmark’s excess funding capacity. Federal funds purchased and securities sold under repurchase agreements totaled $393.2 million at March 31, 2024 compared to $405.7 million at December 31, 2023, a decrease of $12.5 million, or 3.1%, principally due to a decrease in upstream federal funds purchased. At March 31, 2024 and December 31, 2023, $48.2 million and $35.7 million represented customer related transactions, such as commercial sweep repurchase balances. Trustmark had $345.0 million of upstream federal funds purchased at March 31, 2024 compared to $370.0 million at December 31, 2023. Other borrowings totaled $482.0 million at March 31, 2024, a decrease of $1.2 million, or 0.2%, when compared with $483.2 million at December 31, 2023, principally due to a decline in GNMA loans eligible for repurchase. Legal Environment Information required in this section is set forth under the heading “Legal Proceedings” of Note 12 – 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 12 – Contingencies included in Part I. Item 1. – Financial Statements of this report. 77 Capital Resources and Liquidity Trustmark places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms and enhances Trustmark’s ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. Trustmark manages capital based upon risks and growth opportunities as well as regulatory requirements. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders. At March 31, 2024, Trustmark’s total shareholders’ equity was $1.683 billion, an increase of $20.8 million, or 1.2%, when compared to December 31, 2023. During the first three months of 2024, shareholders’ equity increased primarily as a result of net income of $41.5 million, partially offset by common stock dividends of $14.2 million. Regulatory Capital Trustmark and TNB are subject to minimum risk-based capital and leverage capital requirements, as described in the section captioned “Capital Adequacy” included in Part I. Item 1. – Business of Trustmark’s 2023 Annual Report, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Trustmark’s and TNB’s minimum risk-based capital requirements include a capital conservation buffer of 2.5%. AOCI is not included in computing regulatory capital. Trustmark elected the five-year phase-in transition period (through December 31, 2024) related to adopting FASB ASU 2016-13 for regulatory capital purposes. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB and limit Trustmark’s and TNB’s ability to pay dividends. At March 31, 2024, Trustmark and TNB exceeded all applicable minimum capital standards. In addition, Trustmark and TNB met applicable regulatory guidelines to be considered well-capitalized at March 31, 2024. To be categorized in this manner, Trustmark and TNB maintained minimum common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios, and were not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by their primary federal regulators to meet and maintain a specific capital level for any capital measures. There are no significant conditions or events that have occurred since March 31, 2024 which Management believes have affected Trustmark’s or TNB’s present classification. In 2020, Trustmark enhanced its capital structure with the issuance of $125.0 million of subordinated notes. At both March 31, 2024 and December 31, 2023, the carrying amount of the subordinated notes was $123.5 million. The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. For regulatory capital purposes, the subordinated notes qualified as Tier 2 capital for Trustmark at March 31, 2024 and December 31, 2023. Trustmark may utilize the full carrying value of the subordinated notes as Tier 2 capital until December 1, 2025 (five years prior to maturity). Beginning December 1, 2025, the subordinated notes will phase out of Tier 2 capital 20.0% each year until maturity. In 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities. For regulatory capital purposes, the trust preferred securities qualified as Tier 1 capital at March 31, 2024 and December 31, 2023. Trustmark intends to continue to utilize $60.0 million in trust preferred securities issued by Trustmark Preferred Capital Trust I (the Trust) as Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III Final Rule. Refer to the section captioned “Regulatory Capital” included in Note 15 – 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 March 31, 2024 and December 31, 2023. Dividends on Common Stock Dividends per common share for the three months ended March 31, 2024 and 2023 were $0.23. Trustmark’s indicated dividend for 2024 is $0.92 per common share, which is the same as dividends per common share declared in 2023. 78 Stock Repurchase Program From time to time, Trustmark's Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow Trustmark to proactively manage its capital position and return excess capital to shareholders. Shares purchased also provide Trustmark with shares of common stock necessary to satisfy obligations related to stock compensation awards. On December 6, 2022, the Board of Directors of Trustmark authorized a stock repurchase program, effective January 1, 2023, under which $50.0 million of Trustmark's outstanding common stock could be acquired through December 31, 2023. No shares were repurchased under this authority. On December 5, 2023, the Board of Directors of Trustmark authorized a new stock repurchase program, effective January 1, 2024, under which $50.0 million of Trustmark's outstanding common stock may be acquired through December 31, 2024. The repurchase program, which is subject to market conditions and management discretion, will be implemented through open market repurchases or privately negotiated transactions. No shares have been repurchased under this authority. Liquidity Liquidity is the ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances. The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities as well as the ability to pledge or sell certain loans and securities. The liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes federal funds purchased, FHLB advances, securities sold under repurchase agreements, the Federal Reserve Discount Window (Discount Window) and brokered deposits to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity. Trustmark's liquidity position is continuously monitored and adjustments are made to manage the balance as deemed appropriate. Liquidity risk management is an important element to Trustmark's asset/liability management process. Trustmark regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions or other significant occurrences as deemed appropriate by Management. These scenarios are incorporated into Trustmark's contingency funding plan, which provides the basis for the identification of its liquidity needs. Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled $15.420 billion for the first three months of 2024 and represented approximately 82.6% of average liabilities and shareholders’ equity, compared to average deposits of $14.666 billion, which represented 79.3% of average liabilities and shareholders’ equity for the first three months of 2023. For more information on average interest-bearing deposits, please see the analysis included in the section captioned “Net Interest Income.” Trustmark had $368.5 million held in an interest-bearing account at the FRBA at March 31, 2024, compared to $712.0 million held at December 31, 2023. Trustmark utilizes brokered deposits to supplement other wholesale funding sources. At March 31, 2024, brokered sweep MMDA deposits totaled $10.5 million compared to $10.6 million at December 31, 2023. In addition, Trustmark had $586.9 million of brokered CDs at March 31, 2024 compared to $578.8 million at December 31, 2023. At March 31, 2024, Trustmark had $345.0 million of upstream federal funds purchased compared to $370.0 million of upstream federal funds purchased at December 31, 2023. Trustmark maintains adequate federal funds lines to provide sufficient short-term liquidity. Trustmark maintains a relationship with the FHLB of Dallas, which provided $400.0 million of outstanding short-term and no long-term advances at both March 31, 2024 and December 31, 2023. Trustmark had no letters of credit outstanding with the FHLB of Dallas at March 31, 2024 and December 31, 2023. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances or letters of credit with the FHLB of Dallas by $4.065 billion at March 31, 2024. 79 In addition, at March 31, 2024, Trustmark had no short-term and $53 thousand in long-term FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger in 2013, compared to no short-term and $58 thousand in long-term FHLB advances at December 31, 2023. 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 March 31, 2024, Trustmark had approximately $799.0 million available in unencumbered U.S. Treasury and agency securities compared to $842.0 million in unencumbered Treasury and agency securities at December 31, 2023. Another borrowing source is the Discount Window. At March 31, 2024, Trustmark had approximately $1.412 billion available in collateral capacity at the Discount Window primarily from pledges of commercial and industrial LHFI, compared with $1.374 billion at December 31, 2023. Additionally, on March 15, 2020, in response to the COVID-19 pandemic, the FRB reduced reserve requirements for insured depository institutions to zero percent, which increased TNB’s available liquidity. During 2020, Trustmark issued $125.0 million aggregate principal amount of its 3.625% fixed-to-floating rate subordinated notes. At both March 31, 2024 and December 31, 2023, the carrying amount of the subordinated notes was $123.5 million . The subordinated notes mature December 1, 2030 and are redeemable at Trustmark’s option under certain circumstances. The subordinated notes are unsecured obligations and are subordinated in right of payment to all of Trustmark’s existing and future senior indebtedness, whether secured or unsecured. The subordinated notes are obligations of Trustmark only and are not obligations of, and are not guaranteed by, any of its subsidiaries, including TNB. During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through a newly formed Delaware trust affiliate, the Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s junior subordinated debentures. The Board of Directors of Trustmark currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At March 31, 2024, Trustmark had no shares of preferred stock issued and outstanding. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions. As of March 31, 2024, Management is not aware of any events that are reasonably likely to have a material adverse effect on Trustmark's liquidity, capital resources or operations. In addition, Management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on Trustmark. In the ordinary course of business, Trustmark has entered into contractual obligations and has made other commitments to make future payments. Please refer to the accompanying notes to the consolidated financial statements included in Part I. Item 1. – Financial Statements of this report and Trustmark's 2023 Annual Report for the expected timing of such payments as of March 31, 2024 and December 31, 2023. There have been no material changes in Trustmark's contractual obligations since year-end. Asset/Liability Management Overview Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the income generated by Trustmark’s financial products or services, which results from changes in various market interest rates. Market rate changes may take the form of absolute shifts, variances in the relationships between different rates and changes in the shape or slope of the interest rate term structure. Following the LIBOR cessation date of June 30, 2023, the nationwide process for replacing LIBOR in financial contracts that mature thereafter and that do not provide for an effective means to replace LIBOR upon its cessation took effect pursuant to the Adjustable Interest Rate (LIBOR) Act. For contracts in which a party has the discretion to identify a replacement rate, the Adjustable Interest Rate (LIBOR) Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the FRB. Trustmark had a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that were either directly or indirectly dependent on LIBOR. As of March 31, 2024, all of Trustmark’s LIBOR exposure was remediated or in the process of being remediated. The transition from LIBOR could create costs and additional risk. Trustmark cannot predict what the ultimate impact of the transition from LIBOR will be; however, Trustmark has implemented various measures to manage the 80 transition and mitigate risks. For additional information regarding the transition from LIBOR and Trustmark’s management of this transition, please see the respective risk factor included in Part I. Item 1A. – Risk Factors, of Trustmark’s 2023 Annual Report. Management continually develops and applies cost-effective strategies to manage these risks. Management’s Asset/Liability Committee sets the day-to-day operating guidelines, approves strategies affecting net interest income and coordinates activities within policy limits established by the Board of Directors of Trustmark. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist Management in maintaining stability in the net interest margin under varying interest rate environments. Derivatives Trustmark uses financial derivatives for management of interest rate risk. Management’s Asset/Liability Committee, in its oversight role for the management of interest rate risk, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives employed by Trustmark are interest rate lock commitments, forward contracts (both futures contracts and options on futures contracts), interest rate swaps, interest rate caps and interest rate floors. As a general matter, the values of these instruments are designed to be inversely related to the values of the assets that they hedge ( i.e ., if the value of the hedged asset falls, the value of the related hedge rises). In addition, Trustmark has entered into derivatives contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions are designed to hedge interest rate, currency or other exposures of the customers and are not entered into by Trustmark for speculative purposes. Increased federal regulation of the derivatives markets may increase the cost to Trustmark to administer derivatives programs. Derivatives Designated as Hedging Instruments During 2022, Trustmark initiated a cash flow hedging program. Trustmark's objectives in initiating this hedging program were to add stability to interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Trustmark making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floor spreads designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates fall below the purchased floor strike rate on the contract and payments of variable rate amounts if interest rates fall below the sold floor strike rate on the contract. Trustmark uses such derivatives to hedge the variable cash flows associated with existing and anticipated variable-rate loan assets. At March 31, 2024, the aggregate notional value of Trustmark's interest rate swaps and floor spreads designated as cash flow hedges totaled $1.225 billion compared to $1.125 billion at December 31, 2023. Trustmark records any gains or losses on these cash flow hedges in AOCI. Gains and losses on derivatives representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with Trustmark’s accounting policy election. The earnings recognition of excluded components totaled $85 thousand and $9 thousand of amortization expense for the three months ended March 31, 2024 and 2023, respectively, and is included in interest and fees on LHFS and LHFI. As interest payments are received on Trustmark's variable-rate assets, amounts reported in AOCI are reclassified into interest and fees on LHFS and LHFI in the accompanying consolidated statements of income during the same period. For the three months ended March 31, 2024 and 2023, Trustmark reclassified a loss, net of tax, of $3.6 million and $2.2 million, respectively, into interest and fees on LHFS and LHFI. During the next twelve months, Trustmark estimates that $15.5 million will be reclassified as a reduction to interest and fees on LHFS and LHFI. This amount could differ due to changes in interest rates, hedge de-designations or the addition of other hedges. Derivatives Not Designated as Hedging Instruments As part of Trustmark’s risk management strategy in the mortgage banking business, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. Trustmark’s obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. The gross notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $217.0 million at March 31, 2024, with a positive valuation adjustment of $949 thousand, compared to $171.4 million, with a negative valuation adjustment of $150 thousand at December 31, 2023. Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. The total notional amount of these derivative instruments was $301.0 million at March 31, 2024 compared to $285.0 million at December 31, 2023. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded as noninterest income in mortgage 81 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 $1.1 million and $1.8 million for the three months ended March 31, 2024 and 2023, respectively. Trustmark offers certain interest rate derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk under loans they have entered into with TNB. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships under GAAP and are, therefore, carried on Trustmark’s financial statements at fair value with the change in fair value recorded as noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. As of March 31, 2024, Trustmark had interest rate swaps with an aggregate notional amount of $1.470 billion related to this program, compared to $1.500 billion as of December 31, 2023. Credit-Risk-Related Contingent Features Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be deemed to be in default on its derivatives obligations. At March 31, 2024, there was no termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements compared to $1.4 million at December 31, 2023. At March 31, 2024 and December 31, 2023, Trustmark had posted collateral of $40 thousand and $2.0 million, respectively, against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at March 31, 2024, it could have been required to settle its obligations under the agreements at the termination value (which is expected to approximate fair market value). Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At March 31, 2024, Trustmark had entered into seven risk participation agreements as a beneficiary with an aggregate notional amount of $44.9 million compared to six risk participation agreements as a beneficiary with an aggregate notional amount of $40.1 million at December 31, 2023. At March 31, 2024 and December 31, 2023, Trustmark had entered into thirty-five risk participation agreements as a guarantor with an aggregate notional amount of $304.1 million and $304.7 million, respectively. The aggregate fair values of these risk participation agreements were immaterial at both March 31, 2024 and December 31, 2023. Trustmark’s participation in the derivatives markets is subject to increased federal regulation of these markets. Trustmark believes that it may continue to use financial derivatives to manage interest rate risk and also to offer derivatives products to certain qualified commercial lending clients in compliance with the Volcker Rule. However, the increased federal regulation of the derivatives markets has increased the cost to Trustmark of administering its derivatives programs. Some of these costs (particularly compliance costs related to the Volcker Rule and other federal regulations) are expected to recur in the future. Market/Interest Rate Risk Management The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines. 82 Financial simulation models are the primary tools used by Management’s Asset/Liability Committee to measure interest rate exposure. The significant increase in short-term market interest rates and the overall interest rate environment is likely to affect the balance sheet composition and rates. The simulation incorporates assumptions regarding the effects of such changes based on a combination of historical analysis and expected behavior. Using a wide range of scenarios, Management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates. Based on the results of the simulation models using static balances, the table below summarizes the effect various one-year interest rate shift scenarios would have on net interest income compared to a base case, flat scenario at March 31, 2024 and 2023. Estimated % Change in Net Interest Income Change in Interest Rates 2024 2023 +200 basis points 1.4 % 3.5 % +100 basis points 0.7 % 1.7 % -100 basis points -0.8 % -1.8 % -200 basis points -2.3 % -4.8 % Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2024 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term. Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark uses computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base case scenario, is the amount of EVE at risk from those rate environments. The following table summarizes the effect that various interest rate shifts would have on net portfolio value at March 31, 2024 and 2023. Estimated % Change in Net Portfolio Value Change in Interest Rates 2024 2023 +200 basis points -1.9 % -1.7 % +100 basis points -0.7 % -0.6 % 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. 83 At March 31, 2024, the MSR fair value was $138.0 million, compared to $127.2 million at March 31, 2023. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at March 31, 2024, would be a decline in fair value of approximately $5.0 million and $5.7 million, respectively, compared to a decline in fair value of approximately $4.5 million and $5.2 million, respectively, at March 31, 2023. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts. Critical Accounting Policies For an overview of Trustmark’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Trustmark’s 2023 Annual Report. There have been no significant changes in Trustmark’s critical accounting policies during the first three months of 2024. For additional information regarding Trustmark’s basis of presentation and accounting policies, see Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation included in Part I. Item 1. – Financial Statements of this report. Accounting Policies Recently Adopted and Pending Accounting Pronouncements For a complete list of recently adopted and pending accounting policies and the impact on Trustmark, see Note 19 – 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.