Note 5 – Acquired Loans

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

	June 30, 2013				December 31, 2012
	Covered		Noncovered		Covered		Noncovered
Loans secured by real estate:
Construction, land development and other land loans	$	3,662	$	132,116	$	3,924	$	10,056
Secured by 1-4 family residential properties		18,899		184,928		23,990		19,404
Secured by nonfarm, nonresidential properties		13,341		318,603		18,407		45,649
Other		2,929		34,869		3,567		669
Commercial and industrial loans		543		206,338		747		3,035
Consumer loans		173		27,420		177		2,610
Other loans		1,273		18,179		1,229		100
Acquired loans		40,820		922,453		52,041		81,523
Less allowance for loan losses, acquired loans		2,578		112		4,190		1,885
Net acquired loans	$	38,242	$	922,341	$	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. Covered loans are 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 $153.9 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 $153.9 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 FASB ASC Topic 310-30 would have materially the same result as the alternative accounting treatment. During the second quarter of 2013, Trustmark recorded a fair value adjustment based on the estimated fair value of certain acquired loans which resulted in a decrease in acquired noncovered loans of $524 thousand. The purchase price allocation was deemed preliminary as of June 30, 2013 and is subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period.

The following table presents the adjusted 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	$	1,256,669
Nonaccretable difference		193,962
Cash flows expected to be collected		1,062,707
Accretable yield		99,504
FASB ASC Topic 310-20 discount		12,716
Fair value of loans at acquisition	$	950,487

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 FASB 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 net 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 310-30 (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)		-			-			796,587			153,900
Accretion to interest income		2,806			157			13,834			1,719
Payments received, net		(12,595	)		(658	)		(102,206	)		(19,488	)
Other		(920	)		(11	)		(3,464	)		48
Less allowance for loan losses, acquired loans		1,612			-			1,773			-
Carrying value, net at June 30, 2013	$	36,294		$	1,948		$	779,466		$	142,875

(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) Adjusted fair value of loans acquired from BancTrust on February 15, 2013.

The following table presents changes in the accretable yield ($ in thousands):

	Six Months Ended June 30,
	2013			2012
Accretable yield at January 1,	$	(26,383	)	$	(17,653	)
Additions due to acquisition (1)		(99,504	)		(15,538	)
Accretion to interest income		16,639			5,721
Disposals		7,196			1,371
Reclassification to / (from) nonaccretable difference		(5,180	)		(965	)
Accretable yield at June 30,	$	(107,232	)	$	(27,064	)

(1) Accretable yield on loans acquired from BancTrust on February 15, 2013, and Bay Bank on March 16, 2012.

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 impaired loans for the six months ended June 30, 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		(1,328	)		(94	)		(1,422	)
Loans charged-off		(302	)		(2,142	)		(2,444	)
Recoveries		18			463			481
Net charge-offs		(284	)		(1,679	)		(1,963	)
Balance at June 30, 2013	$	2,578		$	112		$	2,690

	Covered			Noncovered			Total
Balance at January 1, 2012	$	502		$	-		$	502
Provision for loan losses, acquired loans		1,380			98			1,478
Loans charged-off		(591	)		(55	)		(646	)
Recoveries		173			19			192
Net charge-offs		(418	)		(36	)		(454	)
Balance at June 30, 2012	$	1,464		$	62		$	1,526

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 June 30, 2013 and December 31, 2012 ($ in thousands):

	June 30, 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	$	1,090	$	17	$	1,565	$	744	$	3,416
Secured by 1-4 family residential properties		1,892		489		2,223		-		4,604
Secured by nonfarm, nonresidential properties		5,532		253		6,885		-		12,670
Other		965		151		553		1		1,670
Commercial and industrial loans		367		1		175		-		543
Consumer loans		-		-		-		-		-
Other loans		260		-		377		609		1,246
Total covered loans		10,106		911		11,778		1,354		24,149

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		35,336		10,512		66,297		9,686		121,831
Secured by 1-4 family residential properties		26,064		19,222		18,386		1,071		64,743
Secured by nonfarm, nonresidential properties		200,350		24,534		86,652		6,982		318,518
Other		22,377		7,624		4,673		-		34,674
Commercial and industrial loans		159,783		15,895		25,925		4,735		206,338
Consumer loans		-		-		-		-		-
Other loans		16,142		1,694		263		-		18,099
Total noncovered loans		460,052		79,481		202,196		22,474		764,203
Total acquired loans	$	470,158	$	80,392	$	213,974	$	23,828	$	788,352

	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	$	246	$	-	$	-	$	-	$	246	$	3,662
Secured by 1-4 family residential properties		12,052		961		1,244		38		14,295		18,899
Secured by nonfarm, nonresidential properties		503		-		168		-		671		13,341
Other		1,182		75		-		2		1,259		2,929
Commercial and industrial loans		-		-		-		-		-		543
Consumer loans		173		-		-		-		173		173
Other loans		27		-		-		-		27		1,273
Total covered loans		14,183		1,036		1,412		40		16,671		40,820

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		8,803		305		1,177		-		10,285		132,116
Secured by 1-4 family residential properties		110,501		4,430		4,778		476		120,185		184,928
Secured by nonfarm, nonresidential properties		85		-		-		-		85		318,603
Other		195		-		-		-		195		34,869
Commercial and industrial loans		-		-		-		-		-		206,338
Consumer loans		26,622		599		199		-		27,420		27,420
Other loans		70		10		-		-		80		18,179
Total noncovered loans		146,276		5,344		6,154		476		158,250		922,453
Total acquired loans	$	160,459	$	6,380	$	7,566	$	516	$	174,921	$	963,273

(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 June 30, 2013 and December 31, 2012, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At June 30, 2013, approximately $2.2 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 June 30, 2013 and December 31, 2012 ($ in thousands):

	June 30, 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	$	260	$	428	$	688	$	445	$	2,529	$	3,662
Secured by 1-4 family residential properties		1,194		1,337		2,531		176		16,192		18,899
Secured by nonfarm, nonresidential properties		688		584		1,272		-		12,069		13,341
Other		91		1		92		2		2,835		2,929
Commercial and industrial loans		81		65		146		35		362		543
Consumer loans		-		-		-		-		173		173
Other loans		990		-		990		-		283		1,273
Total covered loans		3,304		2,415		5,719		658		34,443		40,820

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		8,418		49,107		57,525		75		74,516		132,116
Secured by 1-4 family residential properties		7,902		10,223		18,125		483		166,320		184,928
Secured by nonfarm, nonresidential properties		8,036		16,857		24,893		293		293,417		318,603
Other		262		1,326		1,588		247		33,034		34,869
Commercial and industrial loans		9,024		3,335		12,359		441		193,538		206,338
Consumer loans		599		199		798		-		26,622		27,420
Other loans		72		7		79		-		18,100		18,179
Total noncovered loans		34,313		81,054		115,367		1,539		805,547		922,453
Total acquired loans	$	37,617	$	83,469	$	121,086	$	2,197	$	839,990	$	963,273

(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.