Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” was adopted by Trustmark on January 1, 2020. ASU 2016-13 introduces the current expected credit losses methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost, including securities held to maturity, and makes targeted improvements to the accounting for credit losses on securities available for sale.

Under ASU 2016-13, the allowance for credit losses is an estimate measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

In order to comply with ASU 2016-13, Trustmark conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero-credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. The reasons behind the adoption of the zero-credit loss assumption were as follows:

Trustmark will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt Trustmark to reconsider its zero-credit loss assumption.

At the date of adoption, Trustmark’s estimated allowance for credit losses on securities available for sale and held to maturity under ASU 2016-13 was deemed immaterial due to the composition of these portfolios. Both portfolios consist primarily of U.S. government agency guaranteed mortgage-backed securities for which the risk of loss is minimal. Therefore, Trustmark did not recognize a cumulative effect adjustment through retained earnings related to the available for sale or held to maturity securities.

ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available for sale. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held to maturity, securities available for sale are evaluated on an individual level and pooling of securities is not allowed.

Quarterly, Trustmark evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, Trustmark performs further analysis as outlined below:

The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service (Moody’s).

At September 30, 2020, the results of the analysis did not identify any securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available for sale.

Accrued interest receivable is excluded from the estimate of credit losses for securities available for sale. At September 30, 2020, accrued interest receivable totaled $4.2 million for securities available for sale and was reported in other assets on the accompanying consolidated balance sheet.

ASU 2016-13 requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risks exist. Trustmark uses several levels of segmentation in order to measure expected credit losses:

As discussed above, Trustmark has determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero, which include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption will be reviewed and attested to quarterly. Trustmark is using an internally built model to verify the accuracy of third-party provided calculations.

At September 30, 2020, Trustmark’s securities held to maturity totaled $611.3 million. The potential credit loss exposure was $31.5 million and consisted of municipal securities. After applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at September 30, 2020.

Accrued interest receivable is excluded from the estimate of credit losses for securities held to maturity. At September 30, 2020, accrued interest receivable totaled $1.5 million for securities held to maturity and was reported in other assets on the accompanying consolidated balance sheet.

At September 30, 2020, Trustmark had no securities held to maturity that were past due 30 days or more as to principal or interest payments. Trustmark had no securities held to maturity classified as nonaccrual at September 30, 2020.

Trustmark monitors the credit quality of securities held to maturity on a monthly basis through credit ratings. The following table presents the amortized cost of Trustmark’s securities held to maturity by credit rating, as determined by Moody’s, at September 30, 2020 ($ in thousands):

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

The following tables are a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2020 and December 31, 2019 ($ in thousands):

	Securities Available for Sale									Securities Held to Maturity
September 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government agency obligations	$	19,318	$	189	$	(496	)	$	19,011	$	—	$	—	$	—		$	—
Obligations of states and political subdivisions		7,714		601		—			8,315		31,605		375		(12	)		31,968
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		60,492		1,665		(1	)		62,156		8,244		353		—			8,597
Issued by FNMA and FHLMC		1,259,607		21,265		(953	)		1,279,919		78,213		2,776		—			80,989
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		487,567		13,309		(18	)		500,858		399,400		22,181		(10	)		421,571
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		51,162		1,316		(9	)		52,469		93,818		2,726		(4	)		96,540
Total	$	1,885,860	$	38,345	$	(1,477	)	$	1,922,728	$	611,280	$	28,411	$	(26	)	$	639,665


December 31, 2019
U.S. Government agency obligations	$	22,965	$	69	$	(707	)	$	22,327	$	3,781	$	220	$	—		$	4,001
Obligations of states and political subdivisions		24,952		513		—			25,465		31,781		434		(53	)		32,162
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		69,196		425		(369	)		69,252		10,820		266		(10	)		11,076
Issued by FNMA and FHLMC		714,350		2,171		(3,165	)		713,356		96,631		286		(370	)		96,547
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		656,162		3,777		(1,713	)		658,226		485,324		7,026		(656	)		491,694
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		113,359		625		(206	)		113,778		109,762		1,042		(82	)		110,722
Total	$	1,600,984	$	7,580	$	(6,160	)	$	1,602,404	$	738,099	$	9,274	$	(1,171	)	$	746,202

During 2013, Trustmark reclassified approximately $1.099 billion of securities available for sale to securities held to maturity. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. At the date of transfer, the net unrealized holding loss on the available for sale securities totaled approximately $46.6 million ($28.8 million, net of tax). The net unrealized holding loss is amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At September 30, 2020, the net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $9.7 million ($7.3 million, net of tax) compared to approximately $12.1 million ($9.1 million, net of tax) at December 31, 2019.

The tables below include securities with gross unrealized losses for which an allowance for credit losses has not been recorded and segregated by length of impairment at September 30, 2020 and December 31, 2019 ($ in thousands):

	Less than 12 Months					12 Months or More					Total
September 30, 2020	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
U.S. Government agency obligations	$	—	$	—		$	11,347	$	(496	)	$	11,347	$	(496	)
Obligations of states and political subdivisions		—		—			6,221		(12	)		6,221		(12	)
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		353		(1	)		—		—			353		(1	)
Issued by FNMA and FHLMC		399,494		(953	)		—		—			399,494		(953	)
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		11,155		(28	)		—		—			11,155		(28	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		15,029		(4	)		663		(9	)		15,692		(13	)
Total	$	426,031	$	(986	)	$	18,231	$	(517	)	$	444,262	$	(1,503	)


December 31, 2019
U.S. Government agency obligations	$	6,585	$	(105	)	$	12,886	$	(602	)	$	19,471	$	(707	)
Obligations of states and political subdivisions		—		—			6,216		(53	)		6,216		(53	)
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		23,544		(107	)		18,529		(272	)		42,073		(379	)
Issued by FNMA and FHLMC		112,879		(230	)		278,120		(3,305	)		390,999		(3,535	)
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		158,341		(738	)		151,271		(1,631	)		309,612		(2,369	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		51,312		(167	)		14,155		(121	)		65,467		(288	)
Total	$	352,661	$	(1,347	)	$	481,177	$	(5,984	)	$	833,838	$	(7,331	)

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity. Prior to the adoption of FASB ASU 2016-13, Trustmark did not consider these investments to be other-than-temporarily impaired at September 30, 2019. There were no other-than-temporary impairments for the nine months ended September 30, 2019.

During the three and nine months ended September 30, 2020 and 2019, there were no gross realized gains or losses as a result of calls and dispositions of securities. Realized gains and losses are determined using the specific identification method and are included in noninterest income as security gains (losses), net.

Securities with a carrying value of $1.991 billion and $1.770 billion at September 30, 2020 and December 31, 2019, respectively, were pledged to collateralize public deposits and securities sold under repurchase agreements and for other purposes as permitted by law. At both September 30, 2020 and December 31, 2019, none of these securities were pledged under the Federal Reserve Discount Window program to provide additional contingency funding capacity.

The amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2020, by contractual maturity, are shown below ($ in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.