Note 5 – Acquired Loans

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

	March 31, 2014				December 31, 2013
	Covered		Noncovered		Covered		Noncovered
Loans secured by real estate:
Construction, land development and other land loans	$	2,239	$	88,683	$	2,363	$	98,928
Secured by 1-4 family residential properties		15,572		145,213		16,416		157,914
Secured by nonfarm, nonresidential properties		10,629		271,696		10,945		287,136
Other		2,470		34,787		2,644		33,948
Commercial and industrial loans		361		135,114		394		149,495
Consumer loans		49		15,024		119		18,428
Other loans		1,350		23,130		1,335		24,141
Acquired loans		32,670		713,647		34,216		769,990
Less allowance for loan losses, acquired loans		1,800		8,740		2,387		7,249
Net acquired loans	$	30,870	$	704,907	$	31,829	$	762,741

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 and third quarters of 2013, Trustmark recorded fair value adjustments based on the estimated fair value of certain acquired loans which resulted in a net decrease in acquired noncovered loans totaling $6.8 million. The purchase price allocation for these loans was considered final as of December 31, 2013.

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		201,324
Cash flows expected to be collected		1,055,345
Accretable yield		98,394
FASB ASC Topic 310-20 discount		12,716
Fair value of loans at acquisition	$	944,235

The following table presents changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):

	Covered						Noncovered
	Acquired Impaired			Acquired Not ASC 310-30 (1)			Acquired Impaired			Acquired Not ASC 310-30 (1)
Carrying value, net at January 1, 2013	$	45,391		$	2,460		$	72,942		$	6,696
Loans acquired (2)		-			-			790,335			153,900
Accretion to interest income		5,150			159			35,538			2,628
Payments received, net		(18,976	)		(819	)		(229,618	)		(39,281	)
Other		(3,202	)		(137	)		(24,177	)		(858	)
Less change in allowance for loan losses, acquired loans		1,803			-			(5,364	)		-
Carrying value, net at December 31, 2013		30,166			1,663			639,656			123,085
Loans acquired		-			-			-			-
Accretion to interest income		1,020			1			11,689			456
Payments received, net		(2,763	)		171			(42,834	)		(4,748	)
Other		25			-			(13,417	)		(7,489	)
Less change in allowance for loan losses, acquired loans		587			-			(1,491	)		-
Carrying value, net at March 31, 2014	$	29,035		$	1,835		$	593,603		$	111,304

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

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

Under FASB ASC Topic 310-30, the accretable yield is the excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans 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. The following table presents changes in the accretable yield for the three months ended March 31, 2014 and 2013 ($ in thousands):

	Three Months Ended March 31,
	2014			2013
Accretable yield at January 1,	$	(109,006	)	$	(26,383	)
Additions due to acquisition (1)		-			(98,394	)
Accretion to interest income		12,709			7,816
Disposals		2,883			1,575
Reclassification to / (from) nonaccretable difference (2)		(11,904	)		(2,556	)
Accretable yield at March 31,	$	(105,318	)	$	(117,942	)

(1) Accretable yield on loans acquired from BancTrust on February 15, 2013, adjusted for measurement period adjustments.

(2) Reclassifications from nonaccretable difference are due to lower loss expectations and improvements in expected cash flows.

The following tables present the components of the allowance for loan losses on acquired loans for the three months ended March 31, 2014 and 2013 ($ in thousands):

	Covered			Noncovered		Total
Balance at January 1, 2014	$	2,387		$	7,249	$	9,636
Provision for loan losses, acquired loans		(474	)		537		63
Loans charged-off		(53	)		729		676
Recoveries		(60	)		225		165
Net (charge-offs) recoveries		(113	)		954		841
Balance at March 31, 2014	$	1,800		$	8,740	$	10,540

	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 recoveries (charge-offs)		871			(618	)		253
Balance at March 31, 2013	$	4,497		$	1,961		$	6,458

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, 2014 and December 31, 2013 ($ in thousands):

	March 31, 2014
			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			$	203	$	-	$	1,110	$	796	$	2,109
Secured by 1-4 family residential properties				1,802		374		1,403		-		3,579
Secured by nonfarm, nonresidential properties				5,333		105		4,549		-		9,987
Other				857		128		722		2		1,709
Commercial and industrial loans				227		27		107		-		361
Consumer loans				-		-		-		-		-
Other loans				247		-		435		665		1,347
Total covered loans				8,669		634		8,326		1,463		19,092

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans				34,577		1,456		38,280		8,363		82,676
Secured by 1-4 family residential properties				33,574		1,611		15,828		214		51,227
Secured by nonfarm, nonresidential properties				176,764		6,787		84,451		3,694		271,696
Other				29,228		910		4,266		285		34,689
Commercial and industrial loans				105,176		1,886		22,509		5,543		135,114
Consumer loans				-		-		-		-		-
Other loans				20,720		-		1,004		1,351		23,075
Total noncovered loans				400,039		12,650		166,338		19,450		598,477
Total acquired loans			$	408,708	$	13,284	$	174,664	$	20,913	$	617,569

	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	$	130	$	-	$	-	$	-	$	130	$	2,239
Secured by 1-4 family residential properties		10,804		753		431		5		11,993		15,572
Secured by nonfarm, nonresidential properties		469		-		173		-		642		10,629
Other		676		85		-		-		761		2,470
Commercial and industrial loans		-		-		-		-		-		361
Consumer loans		44		5		-		-		49		49
Other loans		3		-		-		-		3		1,350
Total covered loans		12,126		843		604		5		13,578		32,670

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		5,371		135		501		-		6,007		88,683
Secured by 1-4 family residential properties		87,982		3,135		2,786		83		93,986		145,213
Secured by nonfarm, nonresidential properties		-		-		-		-		-		271,696
Other		98		-		-		-		98		34,787
Commercial and industrial loans		-		-		-		-		-		135,114
Consumer loans		14,781		236		7		-		15,024		15,024
Other loans		55		-		-		-		55		23,130
Total noncovered loans		108,287		3,506		3,294		83		115,170		713,647
Total acquired loans	$	120,413	$	4,349	$	3,898	$	88	$	128,748	$	746,317

(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, 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			$	228	$	-	$	1,126	$	771	$	2,125
Secured by 1-4 family residential properties				1,629		430		1,798		-		3,857
Secured by nonfarm, nonresidential properties				5,446		109		4,723		-		10,278
Other				832		134		717		2		1,685
Commercial and industrial loans				254		28		112		-		394
Consumer loans				-		-		-		-		-
Other loans				271		-		414		646		1,331
Total covered loans				8,660		701		8,890		1,419		19,670

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans				39,075		2,506		42,486		8,445		92,512
Secured by 1-4 family residential properties				33,810		2,983		17,422		538		54,753
Secured by nonfarm, nonresidential properties				184,594		9,027		88,952		4,563		287,136
Other				28,156		1,437		4,071		184		33,848
Commercial and industrial loans				116,818		2,248		24,084		6,039		149,189
Consumer loans				21		-		-		-		21
Other loans				21,881		-		882		1,306		24,069
Total noncovered loans				424,355		18,201		177,897		21,075		641,528
Total acquired loans			$	433,015	$	18,902	$	186,787	$	22,494	$	661,198

	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	$	133	$	77	$	28	$	-	$	238	$	2,363
Secured by 1-4 family residential properties		11,179		428		952		-		12,559		16,416
Secured by nonfarm, nonresidential properties		495		-		172		-		667		10,945
Other		617		342		-		-		959		2,644
Commercial and industrial loans		-		-		-		-		-		394
Consumer loans		119		-		-		-		119		119
Other loans		4		-		-		-		4		1,335
Total covered loans		12,547		847		1,152		-		14,546		34,216

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		5,813		108		495		-		6,416		98,928
Secured by 1-4 family residential properties		95,987		3,599		3,466		109		103,161		157,914
Secured by nonfarm, nonresidential properties		-		-		-		-		-		287,136
Other		100		-		-		-		100		33,948
Commercial and industrial loans		306		-		-		-		306		149,495
Consumer loans		18,076		239		92		-		18,407		18,428
Other loans		72		-		-		-		72		24,141
Total noncovered loans		120,354		3,946		4,053		109		128,462		769,990
Total acquired loans	$	132,901	$	4,793	$	5,205	$	109	$	143,008	$	804,206

(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.

At March 31, 2014 and December 31, 2013, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At March 31, 2014, approximately $2.8 million of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $2.4 million of acquired loans at December 31, 2013.

The following table provides an aging analysis of contractually past due and nonaccrual acquired loans, by class at March 31, 2014 and December 31, 2013 ($ in thousands):

	March 31, 2014
	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	$	553	$	554	$	445	$	1,240	$	2,239
Secured by 1-4 family residential properties		1,275		535		1,810		5		13,757		15,572
Secured by nonfarm, nonresidential properties		2,429		487		2,916		-		7,713		10,629
Other		358		301		659		-		1,811		2,470
Commercial and industrial loans		39		-		39		74		248		361
Consumer loans		5		-		5		-		44		49
Other loans		435		665		1,100		-		250		1,350
Total covered loans		4,542		2,541		7,083		524		25,063		32,670

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		1,476		28,046		29,522		230		58,931		88,683
Secured by 1-4 family residential properties		5,146		4,838		9,984		530		134,699		145,213
Secured by nonfarm, nonresidential properties		5,728		14,990		20,718		293		250,685		271,696
Other		100		2,662		2,762		283		31,742		34,787
Commercial and industrial loans		7,640		2,999		10,639		958		123,517		135,114
Consumer loans		236		7		243		-		14,781		15,024
Other loans		169		89		258		19		22,853		23,130
Total noncovered loans		20,495		53,631		74,126		2,313		637,208		713,647
Total acquired loans	$	25,037	$	56,172	$	81,209	$	2,837	$	662,271	$	746,317

(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, 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	$	87	$	553	$	640	$	445	$	1,278	$	2,363
Secured by 1-4 family residential properties		873		1,142		2,015		-		14,401		16,416
Secured by nonfarm, nonresidential properties		1,905		793		2,698		-		8,247		10,945
Other		710		2		712		-		1,932		2,644
Commercial and industrial loans		13		-		13		41		340		394
Consumer loans		-		-		-		-		119		119
Other loans		-		646		646		-		689		1,335
Total covered loans		3,588		3,136		6,724		486		27,006		34,216

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		2,116		31,744		33,860		67		65,001		98,928
Secured by 1-4 family residential properties		5,067		7,589		12,656		116		145,142		157,914
Secured by nonfarm, nonresidential properties		7,978		15,421		23,399		461		263,276		287,136
Other		40		1,922		1,962		33		31,953		33,948
Commercial and industrial loans		743		3,387		4,130		1,170		144,195		149,495
Consumer loans		239		92		331		-		18,097		18,428
Other loans		-		153		153		20		23,968		24,141
Total noncovered loans		16,183		60,308		76,491		1,867		691,632		769,990
Total acquired loans	$	19,771	$	63,444	$	83,215	$	2,353	$	718,638	$	804,206

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

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