Note 5 – Acquired Loans

For the periods presented, acquired loans consisted of the following ($ in thousands):

	March 31, 2013				December 31, 2012
	Covered		Noncovered		Covered		Noncovered
Loans secured by real estate:
Construction, land development and other land loans	$	3,875	$	138,442	$	3,924	$	10,056
Secured by 1-4 family residential properties		20,980		209,658		23,990		19,404
Secured by nonfarm, nonresidential properties		17,355		339,953		18,407		45,649
Other		3,365		32,208		3,567		669
Commercial and industrial loans		648		235,286		747		3,035
Consumer loans		179		32,694		177		2,610
Other loans		1,187		14,886		1,229		100
Acquired loans		47,589		1,003,127		52,041		81,523
Less allowance for loan losses, acquired loans		4,497		1,961		4,190		1,885
Net acquired loans	$	43,092	$	1,001,166	$	47,851	$	79,638

Acquired loans are accounted for under the acquisition method of accounting.The acquired loans are recorded at their estimated fair value at the time of acquisition. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.

Loans acquired in an FDIC-assisted transaction and covered under loss-share agreements are referred to as "covered loans" and are reported separately in Trustmark's consolidated financial statements. The covered loans were recorded at their estimated fair value at the time of acquisition exclusive of the expected reimbursement cash flows from the FDIC.

Trustmark accounts for acquired impaired loans under FASB ASC Topic 310-30. An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that Trustmark would be unable to collect all contractually required payments. Revolving credit agreements such as home equity lines and commercial leases are excluded from acquired impaired loan accounting requirements. Trustmark acquired $154.8 million of revolving credit agreements and commercial leases, at fair value, in the BancTrust acquisition and $5.9 million of revolving credit agreements, at fair value, in the Bay Bank acquisition, consisting mainly of home equity loans and commercial asset-based lines of credit, where the borrower had revolving privileges on the acquisition date. As such, Trustmark has accounted for such acquired loans in accordance with accounting requirements for acquired nonimpaired loans.

For acquired impaired loans, Trustmark (a) calculates the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (b) estimates the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). Under FASB ASC Topic 310-30, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the acquired impaired loan portfolio, and such amount is subject to change over time based on the performance of such loans.

The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the "accretable yield" and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. Improvements in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those originally estimated decrease the accretable yield and result in a provision for loan losses and the establishment of an allowance for loan losses. The carrying value of acquired impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

Trustmark aggregates certain acquired loans into pools of loans with common credit risk characteristics such as loan type and risk rating. To establish accounting pools of acquired loans, loans are first categorized by similar purpose, collateral and geographic region. Within each category, loans are further segmented by ranges of risk determinants observed at the time of acquisition. For commercial loans, the primary risk determinant is the risk rating as assigned by Trustmark. For consumer loans, the risk determinants include delinquency, FICO and loan-to-value ratios. Statistical comparison of the pools reflect that each pool is comprised of loans generally of similar characteristics, including loan type, loan risk and weighted average life. Each pool is then reviewed for similarity of the pool constituents, including standard deviation of purchase price, weighted average life and concentration of the largest loans. Loan pools are initially booked at the aggregate fair value of the loan pool constituents, based on the present value of Trustmark's expected cash flows from the loans. An acquired loan is removed from a pool of loans only if the loan is sold, foreclosed, or payment is received in full satisfaction of the loan. The acquired loan is removed from the pool at its carrying value. If an individual acquired loan is removed from a pool of loans, the difference between its relative carrying amount and its cash, fair value of the collateral, or other assets received will be recognized as a gain or loss immediately in interest income on loans and would not affect the effective yield used to recognize the accretable yield on the remaining pool. Certain acquired loans are not pooled and are accounted for individually. Such loans are withheld from pools due to the inherent uncertainty of the timing and amount of their cash flows or because they are not a suitable similar constituent to the established pools.

As required by FASB ASC Topic 310-30, Trustmark periodically re-estimates the expected cash flows to be collected over the life of the acquired impaired loans. If, based on current information and events, it is probable that Trustmark will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition, the acquired loans are considered impaired. The decrease in the expected cash flows reduces the carrying value of the acquired impaired loans as well as the accretable yield and results in a charge to income through the provision for loans losses, acquired loans and the establishment of an allowance for loan losses, acquired loans. If, based on current information and events, it is probable that there is a significant increase in the cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, Trustmark will reduce any remaining allowance for loan losses, acquired loans established on the acquired impaired loans for the increase in the present value of cash flows expected to be collected. The increase in the expected cash flows for the acquired impaired loans over those originally estimated at acquisition increases the carrying value of the acquired impaired loans as well as the accretable yield. The increase in the accretable yield is recognized as interest income over the remaining average life of the acquired impaired loans.

On February 15, 2013, Trustmark completed its merger with BancTrust. Loans acquired in the BancTrust acquisition were evaluated for evidence of credit deterioration since origination and collectability of contractually required payments. Trustmark elected to account for all loans acquired in the BancTrust acquisition as acquired impaired loans under FASB ASC Topic 310-30 except for $154.8 million of acquired loans with revolving privileges and acquired commercial leases, which are outside the scope of the guidance. While not all loans acquired from BancTrust exhibited evidence of significant credit deterioration, accounting for these acquired loans under ASC Topic 310-30 would have materially the same result as the alternative accounting treatment. The purchase price allocation was deemed preliminary as of March 31, 2013.

The following table presents the fair value of loans acquired as of the date of the BancTrust acquisition ($ in thousands):

At acquisition date:	February 15, 2013
Contractually required principal and interest	$	1,228,684
Nonaccretable difference		180,638
Cash flows expected to be collected		1,048,046
Accretable yield		86,221
FAS 91 discount		10,814
Fair value of loans at acquisition	$	951,011

On March 16, 2012, Trustmark completed its merger with Bay Bank. Loans acquired in the Bay Bank acquisition were evaluated for evidence of credit deterioration since origination and collectability of contractually required payments. Trustmark elected to account for all loans acquired in the Bay Bank acquisition as acquired impaired loans under FASB ASC Topic 310-30 except for $5.9 million of acquired loans with revolving privileges, which are outside the scope of the guidance. While not all loans acquired from Bay Bank exhibited evidence of significant credit deterioration, accounting for these acquired loans under ASC Topic 310-30 would have materially the same result as the alternative accounting treatment. The purchase price allocation was deemed preliminary as of March 31, 2012 and was finalized in the second quarter of 2012.

The following tables present changes in the carrying value of the acquired loans for the periods presented ($ in thousands):

	Covered						Noncovered
	Acquired			Acquired			Acquired			Acquired
	Impaired			Not ASC 310-30 (1)			Impaired			Not ASC 310-310 (1)
Carrying value, net at January 1, 2012	$	72,131		$	4,171		$	4,350		$	13
Loans acquired (2)		-			-			91,987			5,927
Accretion to interest income		8,031			367			4,138			161
Payments received, net		(27,496	)		(2,107	)		(24,330	)		868
Other		(3,085	)		29			(1,318	)		(273	)
Less allowance for loan losses, acquired loans		(4,190	)		-			(1,885	)		-
Carrying value, net at December 31, 2012		45,391			2,460			72,942			6,696
Loans acquired (3)		-			-			796,172			154,839
Accretion to interest income (4)		1,516			156			6,301			453
Payments received, net		(5,801	)		(370	)		(33,477	)		(1,700	)
Other		76			(29	)		(1,024	)		40
Less allowance for loan losses, acquired loans		(307	)		-			(76	)		-
Carrying value, net at March 31, 2013	$	40,875		$	2,217		$	840,838		$	160,328

(1) Acquired nonimpaired loans consist of revolving credit agreements and commercial leases that are not in scope for FASB ASC Topic 310-30.

(2) Fair value of loans acquired from Bay Bank on March 16, 2012.

(3) Fair value of loans acquired from BancTrust on February 15, 2013.

(4) Accretion to interest income for BancTrust since acquisition at February 15, 2013 is considered immaterial.

The following table presents changes in the accretable yield for the three months ended March 31, 2013 ($ in thousands):

Accretable yield at January 1, 2013	$	(26,383	)
Additions due to acquisition (1)		(86,221	)
Accretion to interest income (2)		7,816
Disposals		1,575
Reclassification to / (from) nonaccretable difference		(2,556	)
Accretable yield at March 31, 2013	$	(105,769	)

(1) Accretable yield on loans acquired from BancTrust on February 15, 2013.

(2) Accretion to interest income for BancTrust since acquisition at February 15, 2013 is considered immaterial.

No allowance for loan losses was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. Updates to expected cash flows for acquired impaired loans accounted for under FASB ASC Topic 310-30 may result in a provision for loan losses, acquired loans and the establishment of an allowance for loan losses, acquired loans to the extent the amount and timing of expected cash flows decrease compared to those originally estimated at acquisition.

The following table presents the components of the allowance for loan losses on acquired loans for the three months ended March 31, 2013 and 2012 ($ in thousands):

	Covered			Noncovered			Total
Balance at January 1, 2013	$	4,190		$	1,885		$	6,075
Provision for loan losses, acquired loans		(564	)		694			130
Loans charged-off		862			(642	)		220
Recoveries		9			24			33
Net charge-offs		871			(618	)		253
Balance at March 31, 2013	$	4,497		$	1,961		$	6,458

	Covered			Noncovered			Total
Balance at January 1, 2012	$	502		$	-		$	502
Provision for loan losses, acquired loans		(248	)		54			(194	)
Loans charged-off		89			(26	)		63
Recoveries		393			9			402
Net charge-offs		482			(17	)		465
Balance at March 31, 2012	$	736		$	37		$	773

As discussed in Note 4 - Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI, Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to segregate the level of risk across the ten unique risk ratings. These credit quality measures are unique to commercial loans. Credit quality for consumer loans is based on individual credit scores, aging status of the loan and payment activity.

The tables below illustrate the carrying amount of acquired loans by credit quality indicator at March 31, 2013 and December 31, 2012 ($ in thousands):

			March 31, 2013
			Commercial Loans
			Pass -		Special Mention -		Substandard -		Doubtful -
			Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans			$	1,518	$	18	$	1,416	$	743	$	3,695
Secured by 1-4 family residential properties				1,734		715		2,829		20		5,298
Secured by nonfarm, nonresidential properties				6,651		122		9,040		691		16,504
Other				985		173		777		1		1,936
Commercial and industrial loans				395		72		181		-		648
Consumer loans				-		-		-		-		-
Other loans				244		1		367		575		1,187
Total covered loans				11,527		1,101		14,610		2,030		29,268

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans				35,605		10,435		68,231		10,392		124,663
Secured by 1-4 family residential properties				29,548		21,509		25,569		614		77,240
Secured by nonfarm, nonresidential properties				217,009		29,462		85,961		7,434		339,866
Other				19,993		7,236		4,979		-		32,208
Commercial and industrial loans				175,965		17,861		37,230		4,230		235,286
Consumer loans				-		-		-		-		-
Other loans				12,592		2,119		91		-		14,802
Total noncovered loans				490,712		88,622		222,061		22,670		824,065
Total acquired loans			$	502,239	$	89,723	$	236,671	$	24,700	$	853,333

	Consumer Loans
			Past Due		Past Due						Total
	Current		30-89 Days		90 Days or More		Nonaccrual		Subtotal		Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	180	$	-	$	-	$	-	$	180	$	3,875
Secured by 1-4 family residential properties		12,989		1,453		1,202		38		15,682		20,980
Secured by nonfarm, nonresidential properties		682		-		169		-		851		17,355
Other		1,324		101		-		4		1,429		3,365
Commercial and industrial loans		-		-		-		-		-		648
Consumer loans		179		-		-		-		179		179
Other loans		-		-		-		-		-		1,187
Total covered loans		15,354		1,554		1,371		42		18,321		47,589

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		12,532		355		892		-		13,779		138,442
Secured by 1-4 family residential properties		122,141		6,093		3,647		537		132,418		209,658
Secured by nonfarm, nonresidential properties		87		-		-		-		87		339,953
Other		-		-		-		-		-		32,208
Commercial and industrial loans		-		-		-		-		-		235,286
Consumer loans		31,208		1,042		444		-		32,694		32,694
Other loans		80		4		-		-		84		14,886
Total noncovered loans		166,048		7,494		4,983		537		179,062		1,003,127
Total acquired loans	$	181,402	$	9,048	$	6,354	$	579	$	197,383	$	1,050,716

(1)	Total dollar balances are presented in this table; however, these loans are covered by the loss-share agreement with the FDIC.

TNB is at risk for only 20% of the losses incurred on these loans.

			December 31, 2012
			Commercial Loans
			Pass -		Special Mention -		Substandard -		Doubtful -
			Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans			$	1,341	$	18	$	1,489	$	744	$	3,592
Secured by 1-4 family residential properties				3,128		810		2,940		85		6,963
Secured by nonfarm, nonresidential properties				5,857		1,052		9,839		798		17,546
Other				443		318		1,231		-		1,992
Commercial and industrial loans				82		458		207		-		747
Consumer loans				-		-		-		-		-
Other loans				245		-		345		535		1,125
Total covered loans				11,096		2,656		16,051		2,162		31,965

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans				3,259		119		4,915		921		9,214
Secured by 1-4 family residential properties				7,325		-		3,708		23		11,056
Secured by nonfarm, nonresidential properties				22,453		3,596		18,682		831		45,562
Other				236		-		417		-		653
Commercial and industrial loans				2,853		89		93		-		3,035
Consumer loans				-		-		-		-		-
Other loans				86		-		-		-		86
Total noncovered loans				36,212		3,804		27,815		1,775		69,606
Total acquired loans			$	47,308	$	6,460	$	43,866	$	3,937	$	101,571

	Consumer Loans
			Past Due		Past Due						Total
	Current		30-89 Days		90 Days or More		Nonaccrual		Subtotal		Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	306	$	26	$	-	$	-	$	332	$	3,924
Secured by 1-4 family residential properties		14,311		1,028		1,650		38		17,027		23,990
Secured by nonfarm, nonresidential properties		692		169		-		-		861		18,407
Other		1,468		48		52		7		1,575		3,567
Commercial and industrial loans		-		-		-		-		-		747
Consumer loans		177		-		-		-		177		177
Other loans		104		-		-		-		104		1,229
Total covered loans		17,058		1,271		1,702		45		20,076		52,041

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		802		-		40		-		842		10,056
Secured by 1-4 family residential properties		7,715		357		215		61		8,348		19,404
Secured by nonfarm, nonresidential properties		87		-		-		-		87		45,649
Other		16		-		-		-		16		669
Commercial and industrial loans		-		-		-		-		-		3,035
Consumer loans		2,394		164		52		-		2,610		2,610
Other loans		14		-		-		-		14		100
Total noncovered loans		11,028		521		307		61		11,917		81,523
Total acquired loans	$	28,086	$	1,792	$	2,009	$	106	$	31,993	$	133,564

(1)	Total dollar balances are presented in this table; however, these loans are covered by the loss-share agreement with the FDIC.

TNB is at risk for only 20% of the losses incurred on these loans.

Under FASB ASC Topic 310-30, acquired impaired loans are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans as long as the estimated cash flows are received as expected. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding. At March 31, 2013 and December 31, 2012, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At March 31, 2013, approximately $2.9 million of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $1.1 million of acquired loans at December 31, 2012.

The following table provides an aging analysis of contractually past due and nonaccrual acquired loans, by class at March 31, 2013 and December 31, 2012 ($ in thousands):

	March 31, 2013
	Past Due
			90 Days						Current		Total Acquired
	30-89 Days		or More (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	1,315	$	250	$	1,565	$	445	$	1,865	$	3,875
Secured by 1-4 family residential properties		2,043		1,344		3,387		176		17,417		20,980
Secured by nonfarm, nonresidential properties		3,817		592		4,409		-		12,946		17,355
Other		121		-		121		6		3,238		3,365
Commercial and industrial loans		90		64		154		48		446		648
Consumer loans		-		-		-		-		179		179
Other loans		367		-		367		-		820		1,187
Total covered loans		7,753		2,250		10,003		675		36,911		47,589

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		5,376		44,209		49,585		475		88,382		138,442
Secured by 1-4 family residential properties		8,063		12,396		20,459		537		188,662		209,658
Secured by nonfarm, nonresidential properties		13,737		12,733		26,470		435		313,048		339,953
Other		1,358		965		2,323		26		29,859		32,208
Commercial and industrial loans		2,156		2,722		4,878		763		229,645		235,286
Consumer loans		1,042		444		1,486		-		31,208		32,694
Other loans		193		-		193		-		14,693		14,886
Total noncovered loans		31,925		73,469		105,394		2,236		895,497		1,003,127
Total acquired loans	$	39,678	$	75,719	$	115,397	$	2,911	$	932,408	$	1,050,716

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

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

	December 31, 2012
	Past Due
			90 Days						Current		Total Acquired
	30-89 Days		or More (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	240	$	246	$	486	$	445	$	2,993	$	3,924
Secured by 1-4 family residential properties		1,705		1,883		3,588		234		20,168		23,990
Secured by nonfarm, nonresidential properties		3,953		1,539		5,492		-		12,915		18,407
Other		221		52		273		9		3,285		3,567
Commercial and industrial loans		94		4		98		39		610		747
Consumer loans		-		-		-		-		177		177
Other loans		-		-		-		-		1,229		1,229
Total covered loans		6,213		3,724		9,937		727		41,377		52,041

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		-		3,622		3,622		-		6,434		10,056
Secured by 1-4 family residential properties		458		1,392		1,850		243		17,311		19,404
Secured by nonfarm, nonresidential properties		3,526		1,217		4,743		133		40,773		45,649
Other		30		44		74		-		595		669
Commercial and industrial loans		217		23		240		-		2,795		3,035
Consumer loans		164		52		216		-		2,394		2,610
Other loans		-		-		-		-		100		100
Total noncovered loans		4,395		6,350		10,745		376		70,402		81,523
Total acquired loans	$	10,608	$	10,074	$	20,682	$	1,103	$	111,779	$	133,564

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

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