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Fair Value | 6 Months Ended
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Jun. 30, 2015
Fair Value [Abstract] |
Fair Value | Note 16 – Fair Value Financial Instruments Measured at Fair Value The methodologies Trustmark uses in determining the fair values are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected upon exchange of the position in an orderly transaction between market participants at the measurement date. The predominant portion of assets that are stated at fair value are of a nature that can be valued using prices or inputs that are readily observable through a variety of independent data providers. The providers selected by Trustmark for fair valuation data are widely recognized and accepted vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio managers. Trustmark has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes that regularly test valuations for anomalies. Trustmark utilizes an independent pricing service to advise it on the carrying value of the securities available for sale portfolio. As part of Trustmark’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, Trustmark investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. Trustmark has also reviewed and confirmed its determinations in thorough discussions with the pricing source regarding their methods of price discovery. Mortgage loan commitments are valued based on the securities prices of similar collateral, term, rate and delivery for which the loan is eligible to deliver in place of the particular security. Trustmark acquires a broad array of mortgage security prices that are supplied by a market data vendor, which in turn accumulates prices from a broad list of securities dealers. Prices are processed through a mortgage pipeline management system that accumulates and segregates all loan commitment and forward-sale transactions according to the similarity of various characteristics (maturity, term, rate, and collateral). Prices are matched to those positions that are deemed to be an eligible substitute or offset (i.e., “deliverable”) for a corresponding security observed in the market place. Trustmark estimates fair value of MSR through the use of prevailing market participant assumptions and market participant valuation processes. This valuation is periodically tested and validated against other third-party firm valuations. Trustmark obtains the fair value of interest rate swaps from a third-party pricing service that uses an industry standard discounted cash flow methodology. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate swap contracts for the effect of nonperformance risk, Trustmark has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, Trustmark made an accounting policy election to measure the credit risk of these derivative financial instruments, which are subject to master netting agreements, on a net basis by counterparty portfolio. Trustmark has determined that the majority of the inputs used to value its interest rate swaps offered to qualified commercial borrowers fall within Level 2 of the fair value hierarchy, while the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads. Trustmark has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swaps and has determined that the credit valuation adjustment is not significant to the overall valuation of these derivatives. As a result, Trustmark classifies its interest rate swap valuations in Level 2 of the fair value hierarchy. Trustmark also utilizes exchange-traded derivative instruments such as Treasury note futures contracts and option contracts to achieve a fair value return that offsets the changes in fair value of MSR attributable to interest rates. Fair values of these derivative instruments are determined from quoted prices in active markets for identical assets therefore allowing them to be classified within Level 1 of the fair value hierarchy. In addition, Trustmark utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area which lack observable inputs for valuation purposes resulting in their inclusion in Level 3 of the fair value hierarchy. At this time, Trustmark presents no fair values that are derived through internal modeling. Should positions requiring fair valuation arise that are not relevant to existing methodologies, Trustmark will make every reasonable effort to obtain market participant assumptions, or independent evaluation. Financial Assets and Liabilities The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value ($ in thousands). There were no transfers between fair value levels for the six months ended June 30, 2015 and the year ended December 31, 2014.
|  | June 30, 2015 |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
U.S. Government agency obligations |  | $ | 107,418 |  |  | $ | - |  |  | $ | 107,418 |  |  | $ | - |
Obligations of states and political subdivisions |  |  | 151,322 |  |  |  | - |  |  |  | 151,322 |  |  |  | - |
Mortgage-backed securities |  |  | 2,159,176 |  |  |  | - |  |  |  | 2,159,176 |  |  |  | - |
Asset-backed securities and structured financial products |  |  | 28,467 |  |  |  | - |  |  |  | 28,467 |  |  |  | - |
Securities available for sale |  |  | 2,446,383 |  |  |  | - |  |  |  | 2,446,383 |  |  |  | - |
Loans held for sale |  |  | 147,539 |  |  |  | - |  |  |  | 147,539 |  |  |  | - |
Mortgage servicing rights |  |  | 71,422 |  |  |  | - |  |  |  | - |  |  |  | 71,422 |
Other assets - derivatives |  |  | 3,992 |  |  |  | (309 | ) |  |  | 2,680 |  |  |  | 1,621 |
Other liabilities - derivatives |  |  | 1,508 |  |  |  | 742 |  |  |  | 766 |  |  |  | - |
|  | December 31, 2014 |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
U.S. Treasury securities |  | $ | 100 |  |  | $ | - |  |  | $ | 100 |  |  | $ | - |
U.S. Government agency obligations |  |  | 112,474 |  |  |  | - |  |  |  | 112,474 |  |  |  | - |
Obligations of states and political subdivisions |  |  | 162,258 |  |  |  | - |  |  |  | 162,258 |  |  |  | - |
Mortgage-backed securities |  |  | 2,068,035 |  |  |  | - |  |  |  | 2,068,035 |  |  |  | - |
Asset-backed securities and structured financial products |  |  | 31,700 |  |  |  | - |  |  |  | 31,700 |  |  |  | - |
Securities available for sale |  |  | 2,374,567 |  |  |  | - |  |  |  | 2,374,567 |  |  |  | - |
Loans held for sale |  |  | 132,196 |  |  |  | - |  |  |  | 132,196 |  |  |  | - |
Mortgage servicing rights |  |  | 64,358 |  |  |  | - |  |  |  | - |  |  |  | 64,358 |
Other assets - derivatives |  |  | 5,527 |  |  |  | 1,181 |  |  |  | 3,047 |  |  |  | 1,299 |
Other liabilities - derivatives |  |  | 4,338 |  |  |  | 490 |  |  |  | 3,848 |  |  |  | - |
The changes in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2015 and 2014 are summarized as follows ($ in thousands):
|  | MSR |  |  | Other Assets - Derivatives |
Balance, January 1, 2015 |  | $ | 64,358 |  |  | $ | 1,299 |
Total net (loss) gain included in Mortgage banking, net (1) |  |  | (1,093 | ) |  |  | 3,715 |
Additions |  |  | 8,157 |  |  |  | - |
Sales |  |  | - |  |  |  | (3,393 | )
Balance, June 30, 2015 |  | $ | 71,422 |  |  | $ | 1,621 |
The amount of total gains (losses) for the period included in earnings that are attributable to the change in unrealized gains or losses still held at June 30, 2015 |  | $ | 3,708 |  |  | $ | (564 | )
Balance, January 1, 2014 |  | $ | 67,834 |  |  | $ | 126 |
Total net (loss) gain included in Mortgage banking, net (1) |  |  | (7,964 | ) |  |  | 2,493 |
Additions |  |  | 5,179 |  |  |  | - |
Sales |  |  | - |  |  |  | (410 | )
Balance, June 30, 2014 |  | $ | 65,049 |  |  | $ | 2,209 |
The amount of total losses for the period included in earnings that are attributable to the change in unrealized gains or losses still held at June 30, 2014 |  | $ | (3,761 | ) |  | $ | (594 | )
(1) | Total net (loss) gain included in Mortgage banking, net relating to MSR includes changes in fair value due to market changes and due to run-off.
Trustmark may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. Assets at June 30, 2015, which have been measured at fair value on a nonrecurring basis, include impaired LHFI. Loans for which it is probable Trustmark will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement are considered impaired. Impaired LHFI have been determined to be collateral dependent and assessed using a fair value approach. Specific allowances for impaired LHFI are based on comparisons of the recorded carrying values of the loans to the present value of the estimated cash flows of these loans at each loan’s original effective interest rate, the fair value of the collateral or the observable market prices of the loans. Fair value estimates begin with appraised values based on the current market value or as-is value of the property being appraised, normally from recently received and reviewed appraisals. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable. Appraised values are adjusted down for costs associated with asset disposal. At June 30, 2015, Trustmark had outstanding balances of $37.9 million in impaired LHFI that were specifically identified for evaluation and written down to the fair value of the underlying collateral less cost to sell based on the fair value of the collateral or other unobservable input compared to $47.1 million at December 31, 2014. These specifically evaluated impaired LHFI are classified as Level 3 in the fair value hierarchy. Impaired LHFI are periodically reviewed and evaluated for additional impairment and adjusted accordingly based on the same factors identified above. Nonfinancial Assets and Liabilities Certain nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment. Other real estate, excluding covered other real estate, includes assets that have been acquired in satisfaction of debt through foreclosure and is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. At June 30, 2015, Trustmark’s geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate, excluding covered other real estate, is susceptible to changes in market conditions in these areas. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Certain foreclosed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on adjusted observable market data. Foreclosed assets measured at fair value upon initial recognition totaled $20.5 million (utilizing Level 3 valuation inputs) during the six months ended June 30, 2015 compared with $24.6 million for the same period in 2014. In connection with the measurement and initial recognition of the foregoing foreclosed assets, Trustmark recognized charge-offs of the allowance for loan losses totaling $3.9 million and $6.7 million for the first six months of 2015 and 2014, respectively. Other than foreclosed assets measured at fair value upon initial recognition, $25.7 million of foreclosed assets were remeasured during the first six months of 2015, requiring write-downs of $993 thousand to reach their current fair values compared to $25.9 million of foreclosed assets that were remeasured during the first six months of 2014, requiring write-downs of $3.3 million. Fair Value of Financial Instruments FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments can be found in Note 19 – Fair Value included in Item 8 of Trustmark’s Annual Report on Form 10-K for the year ended December 31, 2014. The carrying amounts and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014, are as follows ($ in thousands):
|  | June 30, 2015 |  |  | December 31, 2014 |
|  | Carrying Value |  |  | Estimated Fair Value |  |  | Carrying Value |  |  | Estimated Fair Value |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |
Level 2 Inputs: |  |  |  |  |  |  |  |  |  |  |  |
Cash and short-term investments |  | $ | 255,050 |  |  | $ | 255,050 |  |  | $ | 317,858 |  |  | $ | 317,858 |
Securities held to maturity |  |  | 1,190,161 |  |  |  | 1,200,217 |  |  |  | 1,170,685 |  |  |  | 1,182,846 |
Level 3 Inputs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net LHFI |  |  | 6,375,907 |  |  |  | 6,431,470 |  |  |  | 6,379,853 |  |  |  | 6,453,618 |
Net acquired loans |  |  | 453,770 |  |  |  | 453,770 |  |  |  | 537,350 |  |  |  | 537,350 |
FDIC indemnification asset |  |  | 2,632 |  |  |  | 2,632 |  |  |  | 6,997 |  |  |  | 6,997 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Level 2 Inputs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 9,792,174 |  |  |  | 9,797,257 |  |  |  | 9,698,358 |  |  |  | 9,702,864 |
Short-term liabilities |  |  | 679,206 |  |  |  | 679,206 |  |  |  | 868,620 |  |  |  | 868,620 |
Long-term FHLB advances |  |  | 1,204 |  |  |  | 1,211 |  |  |  | 1,253 |  |  |  | 1,263 |
Subordinated notes |  |  | 49,953 |  |  |  | 52,626 |  |  |  | 49,936 |  |  |  | 53,504 |
Junior subordinated debt securities |  |  | 61,856 |  |  |  | 46,392 |  |  |  | 61,856 |  |  |  | 46,392 |
In cases where quoted market prices are not available, fair values are generally based on estimates using present value techniques. Trustmark’s premise in present value techniques is to represent the fair values on a basis of replacement value of the existing instrument given observed market rates on the measurement date. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates for those assets or liabilities cannot necessarily be substantiated by comparison to independent markets and, in many cases, may not be realizable in immediate settlement of the instruments. The estimated fair value of financial instruments with immediate and shorter-term maturities (generally 90 days or less) is assumed to be the same as the recorded book value. All nonfinancial instruments, by definition, have been excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Trustmark. The fair values of net LHFI are estimated for portfolios of loans with similar financial characteristics. For variable rate LHFI that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values of certain mortgage LHFI, such as 1-4 family residential properties, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other types of LHFI are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The processes for estimating the fair value of net LHFI described above does not represent an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” and such an exit price could potentially produce a different fair value estimate at June 30, 2015 and December 31, 2014. Fair Value Option Trustmark has elected to account for its mortgage LHFS purchased or originated on or after October 1, 2014 under the fair value option, with interest income on these mortgage LHFS reported in interest and fees on LHFS and LHFI. The fair value of the mortgage LHFS is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan. The mortgage LHFS are actively managed and monitored and certain market risks of the loans may be mitigated through the use of derivatives. These derivative instruments are carried at fair value with changes in fair value recorded in noninterest income in mortgage banking, net. The changes in the fair value of the LHFS are largely offset by changes in the fair value of the derivative instruments. For the three and six months ended June 30, 2015, a net loss of $2.2 million and $1.8 million was recorded in noninterest income in mortgage banking, net for changes in the fair value of the LHFS accounted for under the fair value option. Interest and fees on LHFS and LHFI for the three and six months ended June 30, 2015 included $1.3 million and $2.3 million, respectively, of interest earned on the LHFS accounted for under the fair value option. Election of the fair value option allows Trustmark to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The fair value option election does not apply to the GNMA optional repurchase loans. The following table provides information about the fair value and the contractual principal outstanding of the LHFS accounted for under the fair value option as of June 30, 2015 and December 31, 2014 ($ in thousands):
|  | June 30, 2015 |  |  | December 31, 2014 |
Fair value of LHFS |  | $ | 128,329 |  |  | $ | 91,182 |
LHFS contractual principal outstanding |  |  | 126,627 |  |  |  | 88,106 |
Fair value less unpaid principal |  | $ | 1,702 |  |  | $ | 3,076 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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