Note 4 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI

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

	September 30, 2013		December 31, 2012
Loans secured by real estate:
Construction, land development and other land loans	$	572,057	$	468,975
Secured by 1-4 family residential properties		1,482,963		1,497,480
Secured by nonfarm, nonresidential properties		1,408,342		1,410,264
Other		196,328		189,949
Commercial and industrial loans		1,132,863		1,169,513
Consumer loans		164,612		171,660
Other loans		739,476		684,913
LHFI		5,696,641		5,592,754
Less allowance for loan losses, LHFI		68,632		78,738
Net LHFI	$	5,628,009	$	5,514,016

Loan Concentrations

Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At September 30, 2013, Trustmark's geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate are susceptible to changes in market conditions in these areas.

Nonaccrual/Impaired LHFI

At September 30, 2013 and December 31, 2012, the carrying amounts of nonaccrual LHFI, which are individually evaluated for impairment, were $73.4 million and $82.4 million, respectively. Of this total, all commercial nonaccrual LHFI over $500 thousand were specifically evaluated for impairment (specifically evaluated impaired LHFI) using a fair value approach. The remaining nonaccrual LHFI were not all specifically reviewed and written down to fair value less cost to sell. No material interest income was recognized in the income statement on impaired or nonaccrual LHFI for each of the periods ended September 30, 2013 and 2012.

All of Trustmark’s specifically evaluated impaired LHFI are collateral dependent loans. At September 30, 2013 and December 31, 2012, specifically evaluated impaired LHFI totaled $32.2 million and $40.6 million, respectively. In addition, these specifically evaluated impaired LHFI had a related allowance of $2.0 million and $5.9 million at the end of the respective periods. For collateral dependent loans, when a loan is deemed impaired, the full difference between the carrying amount of the loan and the most likely estimate of the asset’s fair value less cost to sell is charged off. Charge-offs related to specifically evaluated impaired LHFI totaled $2.1 million and $11.0 million for the first nine months of 2013 and 2012, respectively. Provision recapture on specifically evaluated impaired LHFI totaled $3.5 million for the first nine months of 2013, compared to provision expense of $276 thousand for the same time period in 2012.

Fair value estimates for specifically evaluated impaired LHFI are derived from appraised values based on the current market value/as-is value of the property, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date. 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, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. At the time a specifically evaluated impaired LHFI is deemed to be impaired, the full difference between book value and the most likely estimate of the asset’s net realizable value is charged off. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.

At September 30, 2013 and December 31, 2012, nonaccrual LHFI not specifically evaluated for impairment and written down to fair value less cost to sell, totaled $41.2 million and $41.8 million, respectively. In addition, these nonaccrual LHFI had allocated allowance for loan losses of $7.7 million and $4.6 million at the end of the respective periods.

The following table details LHFI individually and collectively evaluated for impairment at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land loans	$	14,454	$	557,603	$	572,057
Secured by 1-4 family residential properties		23,715		1,459,248		1,482,963
Secured by nonfarm, nonresidential properties		21,290		1,387,052		1,408,342
Other		503		195,825		196,328
Commercial and industrial loans		12,196		1,120,667		1,132,863
Consumer loans		203		164,409		164,612
Other loans		1,020		738,456		739,476
Total	$	73,381	$	5,623,260	$	5,696,641

	December 31, 2012
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land loans	$	27,105	$	441,870	$	468,975
Secured by 1-4 family residential properties		27,114		1,470,366		1,497,480
Secured by nonfarm, nonresidential properties		18,289		1,391,975		1,410,264
Other		3,956		185,993		189,949
Commercial and industrial loans		4,741		1,164,772		1,169,513
Consumer loans		360		171,300		171,660
Other loans		798		684,115		684,913
Total	$	82,363	$	5,510,391	$	5,592,754

At September 30, 2013 and December 31, 2012, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):

	September 30, 2013
	LHFI
	Unpaid		With No Related		With an		Total				Average
	Principal		Allowance		Allowance		Carrying		Related		Recorded
	Balance		Recorded		Recorded		Amount		Allowance		Investment

Loans secured by real estate:
Construction, land development and other land loans	$	26,139	$	11,073	$	3,381	$	14,454	$	957	$	20,779
Secured by 1-4 family residential properties		28,078		3,206		20,509		23,715		260		25,415
Secured by nonfarm, nonresidential properties		24,270		12,391		8,899		21,290		2,733		19,790
Other		543		-		503		503		37		2,229
Commercial and industrial loans		15,549		1,918		10,278		12,196		5,393		8,468
Consumer loans		392		-		203		203		2		281
Other loans		1,154		49		971		1,020		324		909
Total	$	96,125	$	28,637	$	44,744	$	73,381	$	9,706	$	77,871

	December 31, 2012
	LHFI
	Unpaid		With No Related		With an		Total				Average
	Principal		Allowance		Allowance		Carrying		Related		Recorded
	Balance		Recorded		Recorded		Amount		Allowance		Investment

Loans secured by real estate:
Construction, land development and other land loans	$	46,558	$	9,571	$	17,534	$	27,105	$	4,992	$	33,759
Secured by 1-4 family residential properties		35,155		2,533		24,581		27,114		1,469		25,731
Secured by nonfarm, nonresidential properties		23,337		8,184		10,105		18,289		2,296		21,135
Other		6,036		566		3,390		3,956		760		4,914
Commercial and industrial loans		7,251		2,336		2,405		4,741		640		9,444
Consumer loans		624		-		360		360		5		592
Other loans		857		-		798		798		342		835
Total	$	119,818	$	23,190	$	59,173	$	82,363	$	10,504	$	96,410

A troubled debt restructuring (TDR) occurs when a borrower is experiencing financial difficulties, and for related economic or legal reasons, a concession is granted to the borrower that Trustmark would not otherwise consider. Whatever the form of a concession granted by Trustmark, the objective is to make the best of a difficult situation by obtaining more cash or other value from the borrower or by increasing the probability of receipt by granting the concession than by not granting it. Other concessions may arise from court proceedings or may be imposed by law. In addition, TDRs also include those credits that are extended or renewed to a borrower who is not able to obtain funds from sources other than Trustmark at a market interest rate for new debt with similar risk.

A formal TDR may include, but is not necessarily limited to, one or a combination of the following situations:

Trustmark accepts a third-party receivable or other asset(s) of the borrower, in lieu of the receivable from the borrower.

Trustmark accepts an equity interest in the borrower in lieu of the receivable.

Trustmark accepts modification of the terms of the debt including but not limited to:

Reduction of (absolute or contingent) the stated interest rate to below the current market rate.

Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the note or other agreement.

Reduction (absolute or contingent) of accrued interest.

Troubled debt restructurings are addressed in Trustmark’s loan policy, and in accordance with that policy, any modifications or concessions that may result in a TDR are subject to a special approval process which allows for control, identification, and monitoring of these arrangements. Prior to granting a concession, a revised borrowing arrangement is proposed which is structured so as to improve collectability of the loan in accordance with a reasonable repayment schedule with any loss promptly identified. It is supported by a thorough evaluation of the borrower’s financial condition and prospects for repayment under those revised terms. Other TDRs arising from renewals or extensions of existing debt are routinely identified through the processes utilized in the Problem Loan Committees and in the Credit Quality Review Committee. All TDRs are subsequently reported to the Director Credit Policy Committee on a quarterly basis and are disclosed in Trustmark’s consolidated financial statements in accordance with GAAP and regulatory reporting guidance.

All loans whose terms have been modified in a troubled debt restructuring are evaluated for impairment under FASB ASC Topic 310. Accordingly, Trustmark measures any loss on the restructuring in accordance with that guidance. A TDR in which Trustmark receives physical possession of the borrower’s assets, regardless of whether formal foreclosure or repossession proceedings take place, is accounted for in accordance with FASB ASC Subtopic 310-40, “Troubled Debt Restructurings by Creditors.” Thus, the loan is treated as if assets have been received in satisfaction of the loan and reported as a foreclosed asset.

A TDR may be returned to accrual status if Trustmark is reasonably assured of repayment of principal and interest under the modified terms and the borrower has demonstrated sustained performance under those terms for a period of at least six months. Otherwise, the restructured loan must remain on nonaccrual.

At September 30, 2013 and December 31, 2012, LHFI classified as TDRs totaled $16.8 million and $24.3 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time totaling $12.6 million and $21.6 million, respectively. The remaining TDRs at September 30, 2013 and December 31, 2012 resulted from real estate loans discharged through Chapter 7 bankruptcy that were not reaffirmed or from payment or maturity extensions.

For TDRs, Trustmark had a related loan loss allowance of $1.7 million and $4.3 million at the end of each respective period. LHFI classified as TDRs are charged down to the most likely fair value estimate less an estimated cost to sell for collateral dependent loans, which would approximate net realizable value. Specific charge-offs related to TDRs totaled $703 thousand and $5.3 million for the nine months ended September 30, 2013 and 2012, respectively.

The following table illustrates the impact of modifications classified as TDRs for the three and nine months ended September 30, 2013 and 2012 as well as those TDRs modified within the last 12 months for which there was a payment default during the period ($ in thousands):

	Three Months Ended September 30,
	2013						2012
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Secured by 1-4 family residential properties		1	$	32	$	32		39	$	3,695	$	3,691
Other loans secured by real estate		-		-		-		1		199		199
Total		1	$	32	$	32		40	$	3,894	$	3,890

	Nine Months Ended September 30,
	2013						2012
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction, land development and other land loans		-	$	-	$	-		11	$	4,078	$	4,078
Secured by 1-4 family residential properties		6		412		358		44		5,062		5,069
Secured by nonfarm, nonresidential properties		1		952		952		2		1,210		1,210
Other loans secured by real estate		-		-		-		1		199		199
Commercial and industrial		2		944		937		-		-		-
Other loans		1		2,490		2,490		-		-		-
Total		10	$	4,798	$	4,737		58	$	10,549	$	10,556

	Nine Months Ended September 30,
	2013				2012
Troubled Debt Restructurings that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Construction, land development and other land loans		1	$	9		10	$	3,671
Secured by 1-4 family residential properties		4		389		8		1,781
Secured by nonfarm, nonresidential properties		-		-		1		870
Total		5	$	398		19	$	6,322

Trustmark’s TDRs have resulted primarily from allowing the borrower to pay interest only for an extended period of time rather than from forgiveness. Accordingly, as shown above, these TDRs have a similar recorded investment for both the pre-modification and post-modification disclosure. Trustmark has utilized loans 90 days or more past due to define payment default in determining TDRs that have subsequently defaulted.

At September 30, 2013 and December 31, 2012, the following table details LHFI classified as TDRs by loan type ($ in thousands):

	September 30, 2013
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	227	$	7,304	$	7,531
Secured by 1-4 family residential properties		1,255		4,965		6,220
Secured by nonfarm, nonresidential properties		-		2,349		2,349
Other loans secured by real estate		-		174		174
Commercial and industrial		-		568		568
Total Troubled Debt Restructurings by Type	$	1,482	$	15,360	$	16,842

	December 31, 2012
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	233	$	12,073	$	12,306
Secured by 1-4 family residential properties		1,280		5,908		7,188
Secured by nonfarm, nonresidential properties		-		4,582		4,582
Other loans secured by real estate		-		197		197
Total Troubled Debt Restructurings by Type	$	1,513	$	22,760	$	24,273

Credit Quality Indicators

Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are unique to commercial loans.

In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to credit file completion and financial statement exceptions, total policy exceptions, collateral exceptions and violations of law as shown below:

Credit File Completeness and Financial Statement Exceptions – evaluates the quality and condition of credit files in terms of content, completeness and organization and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to insure compliance with policy such as financial statements, review memos and loan agreements.

Underwriting/Policy – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within requirements of bank loan policy. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measures the level of underwriting and other policy exceptions within a loan portfolio.

Collateral Documentation – focuses on the adequacy of documentation to support the obligation, perfect Trustmark’s collateral position and protect collateral value. There are two parts to this measure:

Collateral exceptions are where certain collateral documentation is either not present, is not considered current or has expired.

90 days and over collateral exceptions are where certain collateral documentation is either not present, is not considered current or has expired and the exception has been identified in excess of 90 days.

Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and Regulation O requirements.

Commercial Credits

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 delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows:

Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

Other Assets Especially Mentioned (OAEM) (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade.

Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at this time or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment does not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans.

Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time.

Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible.

By definition, credit risk grades OAEM (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark.

The credit risk grades represent the probability of default (PD) for an individual credit and as such are not a direct indication of loss given default (LGD). The LGD aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the LGD aspects of the risk rate system, the loss expectations for each risk rating is integrated into the allowance for loan loss methodology where the calculated LGD is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The LGD aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area.

To enhance this process, loans of a certain size that are rated in one of the criticized categories are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a special reserve or impairment is generally applied.

The distribution of the losses is accomplished by means of a loss distribution model that assigns a loss factor to each risk rating (1 to 9) in each commercial loan pool. A factor is not applied to risk rate 10 (Loss) as loans classified as Losses are not carried on Trustmark’s books over quarter-end as they are charged off within the period that the loss is determined.

The expected loss distribution is spread across the various risk ratings by the perceived level of risk for loss. The nine grade scale described above ranges from a negligible risk of loss to an identified loss across its breadth. The loss distribution factors are graduated through the scale on a basis proportional to the degree of risk that appears manifest in each individual rating and assumes that migration through the loan grading system will occur.

Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio concentrations both on the underlying credit quality of each individual loan portfolio as well as the adherence to bank loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area.

In addition to the ongoing internal risk rate monitoring described above, Trustmark conducts monthly credit quality reviews (CQR) for the credits described below, as well as semi-annual analysis and stress testing on all residential real estate development credits and non-owner occupied commercial real estate (CRE) credits of $1.0 million or more as described below:

Trustmark’s Credit Quality Review Committee meets monthly and performs the following functions: detailed review and evaluation of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual, including determination of appropriate risk ratings, accrual status, and appropriate servicing officer; review of risk rate changes for relationships of $100 thousand or more; quarterly review of all nonaccruals less than $100 thousand to determine whether the credit should be charged off, returned to accrual, or remain in nonaccrual status; monthly/quarterly review of continuous action plans for all credits rated seven or worse for relationships of $100 thousand or more; monthly review of all commercial charge-offs of $25 thousand or more for the preceding month.

Residential real estate developments - a development project analysis is performed on all projects regardless of size. Performance of the development is assessed through an evaluation of the number of lots remaining, the payout ratios, and the loan-to-value ratios. Results are stress tested as to absorption and price of lots. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes.

Non-owner occupied commercial real estate – a cash flow analysis is performed on all projects with an outstanding balance of $1.0 million or more. In addition, credits are stress tested for vacancies and rate sensitivity. Confirmation is obtained that guarantor’s financial statements are current, taxes have been paid, and that there are no other issues that need to be addressed. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes.

Consumer Credits

Consumer loans that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer. To assure that Trustmark continues to originate quality loans, this process allows Management to make necessary changes such as revisions to underwriting procedures and credit policies, or changes in loan authority to Trustmark personnel.

Trustmark monitors the levels and severity of past due consumer loans on a daily basis through its collection activities. A detailed assessment of consumer loan delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. Trustmark also monitors its consumer loan delinquency trends by comparing them to quarterly industry averages.

The table below illustrates the carrying amount of LHFI by credit quality indicator at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	Commercial LHFI
	Pass -		Special Mention -		Substandard -		Doubtful -
	Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land loans	$	444,526	$	24,211	$	56,419	$	143	$	525,299
Secured by 1-4 family residential properties		120,665		567		8,257		113		129,602
Secured by nonfarm, nonresidential properties		1,304,158		9,854		92,908		556		1,407,476
Other		185,201		2		7,361		-		192,564
Commercial and industrial loans		1,080,726		2,951		41,506		7,618		1,132,801
Consumer loans		494		-		-		-		494
Other loans		730,609		-		1,737		696		733,042
	$	3,866,379	$	37,585	$	208,188	$	9,126	$	4,121,278

	Consumer LHFI
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total LHFI
Loans secured by real estate:
Construction, land development and other land loans	$	46,473	$	71	$	-	$	214	$	46,758	$	572,057
Secured by 1-4 family residential properties		1,321,599		10,228		1,998		19,536		1,353,361		1,482,963
Secured by nonfarm, nonresidential properties		857		9		-		-		866		1,408,342
Other		3,687		77		-		-		3,764		196,328
Commercial and industrial loans		49		8		1		4		62		1,132,863
Consumer loans		161,592		2,018		306		202		164,118		164,612
Other loans		6,434		-		-		-		6,434		739,476
	$	1,540,691	$	12,411	$	2,305	$	19,956	$	1,575,363	$	5,696,641

	December 31, 2012
	Commercial LHFI
	Pass -		Special Mention -		Substandard -		Doubtful -
	Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land loans	$	335,179	$	23,812	$	63,832	$	143	$	422,966
Secured by 1-4 family residential properties		110,333		1,012		13,303		432		125,080
Secured by nonfarm, nonresidential properties		1,298,820		12,156		98,082		-		1,409,058
Other		178,790		444		5,768		-		185,002
Commercial and industrial loans		1,091,356		36,992		39,479		1,334		1,169,161
Consumer loans		404		-		-		-		404
Other loans		676,618		59		1,714		784		679,175
	$	3,691,500	$	74,475	$	222,178	$	2,693	$	3,990,846

	Consumer LHFI
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total LHFI
Loans secured by real estate:
Construction, land development and other land loans	$	44,131	$	1,109	$	-	$	769	$	46,009	$	468,975
Secured by 1-4 family residential properties		1,339,000		10,332		2,630		20,438		1,372,400		1,497,480
Secured by nonfarm, nonresidential properties		1,206		-		-		-		1,206		1,410,264
Other		4,746		150		-		51		4,947		189,949
Commercial and industrial loans		313		29		-		10		352		1,169,513
Consumer loans		167,131		3,481		285		359		171,256		171,660
Other loans		5,738		-		-		-		5,738		684,913
	$	1,562,265	$	15,101	$	2,915	$	21,627	$	1,601,908	$	5,592,754

Past Due LHFI and Loans Held for Sale (LHFS)

LHFI past due 90 days or more totaled $2.3 million and $6.4 million at September 30, 2013 and December 31, 2012, respectively. The following table provides an aging analysis of past due and nonaccrual LHFI by class at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	Past Due
			90 Days						Current
	30-89 Days		or More (1)		Total		Nonaccrual		Loans		Total LHFI

Loans secured by real estate:
Construction, land development and other land loans	$	12,401	$	1	$	12,402	$	14,454	$	545,201	$	572,057
Secured by 1-4 family residential properties		10,925		1,996		12,921		23,715		1,446,327		1,482,963
Secured by nonfarm, nonresidential properties		6,163		-		6,163		21,290		1,380,889		1,408,342
Other		120		-		120		503		195,705		196,328
Commercial and industrial loans		2,665		41		2,706		12,196		1,117,961		1,132,863
Consumer loans		2,018		306		2,324		203		162,085		164,612
Other loans		88		-		88		1,020		738,368		739,476
Total	$	34,380	$	2,344	$	36,724	$	73,381	$	5,586,536	$	5,696,641

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

	December 31, 2012
	Past Due
			90 Days						Current
	30-89 Days		or More (1)		Total		Nonaccrual		Loans		Total LHFI

Loans secured by real estate:
Construction, land development and other land loans	$	4,957	$	438	$	5,395	$	27,105	$	436,475	$	468,975
Secured by 1-4 family residential properties		12,626		3,131		15,757		27,114		1,454,609		1,497,480
Secured by nonfarm, nonresidential properties		9,460		-		9,460		18,289		1,382,515		1,410,264
Other		172		-		172		3,956		185,821		189,949
Commercial and industrial loans		4,317		2,525		6,842		4,741		1,157,930		1,169,513
Consumer loans		3,480		284		3,764		360		167,536		171,660
Other loans		181		-		181		798		683,934		684,913
Total	$	35,193	$	6,378	$	41,571	$	82,363	$	5,468,820	$	5,592,754

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

LHFS past due 90 days or more totaled $18.4 million and $43.1 million at September 30, 2013 and December 31, 2012, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (GNMA). GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer's option and without GNMA's prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings.

During the first quarter of 2013, Trustmark exercised its option to repurchase delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are fully guaranteed by FHA/VA. As a result of this repurchase and sale, the loans are no longer carried as LHFS. The transaction resulted in a gain of $534 thousand, which is included in mortgage banking, net for the first nine months of 2013. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2012.

Allowance for Loan Losses, LHFI

Trustmark’s allowance for loan loss methodology for commercial LHFI is based upon regulatory guidance from its primary regulator and GAAP. The methodology segregates the commercial purpose and commercial construction LHFI portfolios into nine separate loan types (or pools) which have similar characteristics such as repayment, collateral and risk profiles. The nine basic loan pools are further segregated into Trustmark’s five key market regions, Alabama, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market. A 10-point risk rating system is utilized for each separate loan pool to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. As a result, there are 450 risk rate factors for commercial loan types. The nine separate pools are segmented below:

Commercial Purpose LHFI

Real Estate – Owner Occupied

Real Estate – Non-Owner Occupied

Working Capital

Non-Working Capital

Land

Lots and Development

Political Subdivisions

Commercial Construction LHFI

1 to 4 Family

Non-1 to 4 Family

The quantitative factors of the allowance methodology reflect a twelve-quarter rolling average of net charge-offs by loan type within each key market region. This allows for a greater sensitivity to current trends, such as economic changes, as well as current loss profiles and creates a more accurate depiction of historical losses.

Qualitative factors used in the allowance methodology include the following:

National and regional economic trends and conditions

Impact of recent performance trends

Experience, ability and effectiveness of management

Adherence to Trustmark’s loan policies, procedures and internal controls

Collateral, financial and underwriting exception trends

Credit concentrations

Acquisitions

Catastrophe

Each qualitative factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk), other than the last two factors, which are applied on a dollar-for-dollar basis to ensure that the combination of such factors is proportional. The resulting ratings from the individual factors are weighted and summed to establish the weighted average qualitative factor of a specific loan portfolio within each key market region. This weighted average qualitative factor is then distributed over the nine primary loan pools within each key market region based on the ranking by risk of each.

During the fourth quarter of 2012, Trustmark revised the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI. Trustmark converted the historical loss factor from a 20-quarter net charge-off rolling average to a 12-quarter rolling average and developed a separate reserve for junior liens on 1-4 family LHFI. The change in quantitative methodology allows Trustmark to more readily correlate portfolio risk to the current market environment as the impact of more recent experience is emphasized. This change also allows for a greater sensitivity to current trends such as economic and performance changes, which includes current loss profiles, and creates a more accurate depiction of historical losses. Loans and lines of credit secured by junior liens on 1-4 family residential properties are being reserved for separately in light of continued uncertainty in the economy and the housing market in particular. An additional provision of approximately $1.4 million was recorded in the fourth quarter of 2012 as a result of this revision to the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI.

The allowance for loan loss methodology segregates the consumer LHFI portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profiles. These homogeneous pools of loans are shown below:

Residential Mortgage

Direct Consumer

Auto Finance

Junior Lien on 1-4 Family Residential Properties

Credit Cards

Overdrafts

The historical loss experience for these pools is determined by calculating a 12-quarter rolling average of net charge-offs, one quarter in arrears, which is applied to each pool to establish the quantitative aspect of the methodology. Where, in Management’s estimation, the calculated loss experience does not fully cover the anticipated loss for a pool, an estimate is also applied to each pool to establish the qualitative aspect of the methodology, which represents the perceived risks across the loan portfolio at the current point in time. This qualitative methodology utilizes five separate factors made up of unique components that when weighted and combined produce an estimated level of reserve for each of the loan pools. The five qualitative factors include the following:

Economic indicators

Performance trends

Management experience

Lending policy measures

Credit concentrations

The risk measure for each factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk) to ensure that the combination of such factors is proportional. The determination of the risk measurement for each qualitative factor is done for all markets combined. The resulting estimated reserve factor is then applied to each pool.

The resulting ratings from the individual factors are weighted and summed to establish the weighted average qualitative factor of a specific loan portfolio. This weighted average qualitative factor is then applied over the six loan pools.

Changes in the allowance for loan losses, LHFI were as follows ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at January 1,	$	78,738		$	89,518
Loans charged-off		(10,173	)		(22,547	)
Recoveries		11,505			9,254
Net recoveries (charge-offs)		1,332			(13,293	)
Provision for loan losses, LHFI		(11,438	)		7,301
Balance at September 30,	$	68,632		$	83,526

The following tables detail the balance in the allowance for loan losses, LHFI by portfolio segment at September 30, 2013 and 2012, respectively ($ in thousands):

	2013
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			September 30,
Loans secured by real estate:
Construction, land development and other land loans	$	21,838	$	(1,091	)	$	2,561	$	(7,419	)	$	15,889
Secured by 1-4 family residential properties		12,957		(839	)		363		(3,723	)		8,758
Secured by nonfarm, nonresidential properties		21,096		(572	)		64		(1,828	)		18,760
Other		2,197		(910	)		80		497			1,864
Commercial and industrial loans		14,319		(1,225	)		2,190		2,004			17,288
Consumer loans		3,087		(1,789	)		3,561		(2,256	)		2,603
Other loans		3,244		(3,747	)		2,686		1,287			3,470
Total allowance for loan losses, LHFI	$	78,738	$	(10,173	)	$	11,505	$	(11,438	)	$	68,632

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land loans	$	957	$	14,932	$	15,889
Secured by 1-4 family residential properties		260		8,498		8,758
Secured by nonfarm, nonresidential properties		2,733		16,027		18,760
Other		37		1,827		1,864
Commercial and industrial loans		5,393		11,895		17,288
Consumer loans		2		2,601		2,603
Other loans		324		3,146		3,470
Total allowance for loan losses, LHFI	$	9,706	$	58,926	$	68,632

	2012
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			September 30,
Loans secured by real estate:
Construction, land development and other land loans	$	27,220	$	(2,944	)	$	-	$	(1,732	)	$	22,544
Secured by 1-4 family residential properties		12,650		(3,238	)		364		2,203			11,979
Secured by nonfarm, nonresidential properties		24,358		(5,409	)		-		3,823			22,772
Other		3,079		(1,602	)		-		733			2,210
Commercial and industrial loans		15,868		(2,985	)		2,123		3,428			18,434
Consumer loans		3,656		(2,360	)		4,189		(2,620	)		2,865
Other loans		2,687		(4,009	)		2,578		1,466			2,722
Total allowance for loan losses, LHFI	$	89,518	$	(22,547	)	$	9,254	$	7,301		$	83,526

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land loans	$	4,829	$	17,715	$	22,544
Secured by 1-4 family residential properties		1,373		10,606		11,979
Secured by nonfarm, nonresidential properties		3,259		19,513		22,772
Other		855		1,355		2,210
Commercial and industrial loans		2,995		15,439		18,434
Consumer loans		4		2,861		2,865
Other loans		336		2,386		2,722
Total allowance for loan losses, LHFI	$	13,651	$	69,875	$	83,526