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, 2014		December 31, 2013
Loans secured by real estate:
Construction, land development and other land	$	580,794	$	596,889
Secured by 1-4 family residential properties		1,625,480		1,485,564
Secured by nonfarm, nonresidential properties		1,560,901		1,415,139
Other		239,819		189,362
Commercial and industrial loans		1,246,753		1,157,614
Consumer loans		168,813		165,308
Other loans		911,091		789,005
LHFI		6,333,651		5,798,881
Less allowance for loan losses, LHFI		70,134		66,448
Net LHFI	$	6,263,517	$	5,732,433

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, 2014, 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, 2014 and December 31, 2013, the carrying amounts of nonaccrual LHFI, which are individually evaluated for impairment, were $88.3 million and $65.2 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 specifically reviewed and not written down to fair value less cost to sell. No material interest income was recognized in the income statement on impaired or nonaccrual loans for each of the periods ended September 30, 2014 and 2013.

All of Trustmark’s specifically evaluated impaired LHFI are collateral dependent loans. At September 30, 2014 and December 31, 2013, specifically evaluated impaired LHFI totaled $54.1 million and $31.6 million, respectively. In addition, these specifically evaluated impaired LHFI had a related allowance of $9.0 million and $2.2 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 $55 thousand and $2.1 million for the first nine months of 2014 and 2013, respectively. Provision expense on specifically evaluated impaired LHFI totaled $1.6 million for the first nine months of 2014 compared to provision recapture of $3.5 million for the first nine months of 2013.

Fair value estimates for specifically evaluated impaired LHFI are derived from appraised values based on the current market value or 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, 2014 and December 31, 2013, nonaccrual LHFI not specifically reviewed for impairment and not written down to fair value less cost to sell, totaled $34.2 million and $33.7 million, respectively. In addition, these nonaccrual LHFI had allocated allowance for loan losses of $1.7 million and $3.0 million at the end of the respective periods.

The following table details LHFI individually and collectively evaluated for impairment at September 30, 2014 and December 31, 2013 ($ in thousands):

	September 30, 2014
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land	$	20,286	$	560,508	$	580,794
Secured by 1-4 family residential properties		27,017		1,598,463		1,625,480
Secured by nonfarm, nonresidential properties		23,885		1,537,016		1,560,901
Other		1,203		238,616		239,819
Commercial and industrial loans		15,178		1,231,575		1,246,753
Consumer loans		160		168,653		168,813
Other loans		585		910,506		911,091
Total	$	88,314	$	6,245,337	$	6,333,651

	December 31, 2013
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land	$	13,327	$	583,562	$	596,889
Secured by 1-4 family residential properties		21,603		1,463,961		1,485,564
Secured by nonfarm, nonresidential properties		21,809		1,393,330		1,415,139
Other		1,327		188,035		189,362
Commercial and industrial loans		6,286		1,151,328		1,157,614
Consumer loans		151		165,157		165,308
Other loans		735		788,270		789,005
Total	$	65,238	$	5,733,643	$	5,798,881

At September 30, 2014 and December 31, 2013, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):

	September 30, 2014
	LHFI
	Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Total Carrying Amount		Related Allowance		Average Recorded Investment

Loans secured by real estate:
Construction, land development and other land	$	27,271	$	9,491	$	10,795	$	20,286	$	2,607	$	16,806
Secured by 1-4 family residential properties		32,478		1,758		25,259		27,017		431		24,310
Secured by nonfarm, nonresidential properties		26,702		14,420		9,465		23,885		2,163		22,847
Other		1,468		-		1,203		1,203		57		1,265
Commercial and industrial loans		16,624		1,916		13,262		15,178		5,203		10,732
Consumer loans		239		-		160		160		1		156
Other loans		698		-		585		585		263		661
Total	$	105,480	$	27,585	$	60,729	$	88,314	$	10,725	$	76,777

	December 31, 2013
	LHFI
	Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Total Carrying Amount		Related Allowance		Average Recorded Investment
Loans secured by real estate:
Construction, land development and other land	$	24,350	$	9,817	$	3,510	$	13,327	$	989	$	20,216
Secured by 1-4 family residential properties		26,541		3,095		18,508		21,603		191		24,359
Secured by nonfarm, nonresidential properties		24,879		10,225		11,584		21,809		2,307		20,049
Other		1,375		-		1,327		1,327		122		2,641
Commercial and industrial loans		8,702		2,506		3,780		6,286		1,253		5,513
Consumer loans		286		-		151		151		2		255
Other loans		849		-		735		735		317		767
Total	$	86,982	$	25,643	$	39,595	$	65,238	$	5,181	$	73,800

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 concession that might be granted by Trustmark, Management’s objective is to enhance collectibility 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.

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, 2014, December 31, 2013 and September 30, 2013, LHFI classified as TDRs totaled $12.0 million, $14.8 million and $16.8 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time totaling $7.9 million, $11.1 million and $12.6 million, respectively. The remaining TDRs at September 30, 2014, December 31, 2013 and September 30, 2013 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 $1.4 million, $1.6 million and $1.7 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 $62 thousand and $703 thousand for the nine months ended September 30, 2014 and 2013, respectively.

The following table illustrates the impact of modifications classified as TDRs for the three and nine months ended September 30, 2014 and 2013 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,
	2014						2013
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		2	$	191	$	191		1	$	32	$	32

	Nine Months Ended September 30,
	2014						2013
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		16	$	1,172	$	1,158		6	$	412	$	358
Secured by nonfarm, nonresidential properties		-		-		-		1		952		952
Commercial and industrial		-		-		-		2		944		937
Other loans		-		-		-		1		2,490		2,490
Total		16	$	1,172	$	1,158		10	$	4,798	$	4,737

	Nine Months Ended September 30,
	2014				2013
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
Secured by 1-4 family residential properties		1		106		4		389
Total		1	$	106		5	$	398

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.

The following tables detail LHFI classified as TDRs by loan type for the periods presented ($ in thousands):

	September 30, 2014
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	-	$	4,076	$	4,076
Secured by 1-4 family residential properties		1,373		3,940		5,313
Secured by nonfarm, nonresidential properties		-		1,923		1,923
Other loans secured by real estate		-		156		156
Commercial and industrial		-		524		524
Total Troubled Debt Restructurings by Type	$	1,373	$	10,619	$	11,992

	December 31, 2013
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	-	$	6,247	$	6,247
Secured by 1-4 family residential properties		1,320		4,201		5,521
Secured by nonfarm, nonresidential properties		-		2,292		2,292
Other loans secured by real estate		-		167		167
Commercial and industrial		-		549		549
Total Troubled Debt Restructurings by Type	$	1,320	$	13,456	$	14,776

	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

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 measure 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:

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

ü	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 the 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 the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do 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 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 Trustmark’s 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’s Credit Quality Review Committee meets monthly and performs a detailed review and evaluation of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of troubled debt restructurings. In addition, on a quarterly basis the Committee reviews and modifies continuous action plans for all credits rated seven or worse for relationships of $100 thousand or more.

Consumer Credits

Consumer LHFI 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 LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI 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 LHFI 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, 2014 and December 31, 2013 ($ in thousands):

	September 30, 2014
			Commercial LHFI
			Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land			$	482,131	$	1,774	$	37,353	$	143	$	521,401
Secured by 1-4 family residential properties				129,352		1,692		7,576		263		138,883
Secured by nonfarm, nonresidential properties				1,442,787		31,921		85,081		212		1,560,001
Other				230,604		-		6,700		-		237,304
Commercial and industrial loans				1,210,480		6,007		29,418		847		1,246,752
Consumer loans				198		-		-		-		198
Other loans				890,052		7,670		6,545		586		904,853
			$	4,385,604	$	49,064	$	172,673	$	2,051	$	4,609,392

	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	$	58,866	$	424	$	-	$	103	$	59,393	$	580,794
Secured by 1-4 family residential properties		1,451,174		9,411		2,845		23,167		1,486,597		1,625,480
Secured by nonfarm, nonresidential properties		900		-		-		-		900		1,560,901
Other		2,515		-		-		-		2,515		239,819
Commercial and industrial loans		-		-		1		-		1		1,246,753
Consumer loans		166,314		1,870		272		159		168,615		168,813
Other loans		6,238		-		-		-		6,238		911,091
	$	1,686,007	$	11,705	$	3,118	$	23,429	$	1,724,259	$	6,333,651

	December 31, 2013
			Commercial LHFI
			Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land			$	493,380	$	4,383	$	47,610	$	318	$	545,691
Secured by 1-4 family residential properties				119,640		479		7,839		110		128,068
Secured by nonfarm, nonresidential properties				1,313,470		12,620		87,203		399		1,413,692
Other				178,951		-		6,756		235		185,942
Commercial and industrial loans				1,099,429		18,771		37,209		2,187		1,157,596
Consumer loans				496		-		-		-		496
Other loans				777,395		60		4,126		669		782,250
			$	3,982,761	$	36,313	$	190,743	$	3,918	$	4,213,735

	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	$	50,850	$	131	$	-	$	217	$	51,198	$	596,889
Secured by 1-4 family residential properties		1,327,624		8,937		2,996		17,939		1,357,496		1,485,564
Secured by nonfarm, nonresidential properties		1,439		8		-		-		1,447		1,415,139
Other		3,418		2		-		-		3,420		189,362
Commercial and industrial loans		13		5		-		-		18		1,157,614
Consumer loans		162,348		2,012		302		150		164,812		165,308
Other loans		6,755		-		-		-		6,755		789,005
	$	1,552,447	$	11,095	$	3,298	$	18,306	$	1,585,146	$	5,798,881

Past Due LHFI

LHFI past due 90 days or more totaled $3.8 million and $3.3 million at September 30, 2014 and December 31, 2013, respectively. The following tables provide an aging analysis of past due and nonaccrual LHFI by class at September 30, 2014 and December 31, 2013 ($ in thousands):

	September 30, 2014
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual		Current Loans		Total LHFI

Loans secured by real estate:
Construction, land development and other land	$	466	$	360	$	268	$	1,094	$	20,286	$	559,414	$	580,794
Secured by 1-4 family residential properties		6,685		2,893		2,845		12,423		27,017		1,586,040		1,625,480
Secured by nonfarm, nonresidential properties		9,787		3,614		-		13,401		23,885		1,523,615		1,560,901
Other		202		65		-		267		1,203		238,349		239,819
Commercial and industrial loans		1,806		97		454		2,357		15,178		1,229,218		1,246,753
Consumer loans		1,627		243		272		2,142		160		166,511		168,813
Other loans		82		27		-		109		585		910,397		911,091
Total	$	20,655	$	7,299	$	3,839	$	31,793	$	88,314	$	6,213,544	$	6,333,651

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

	December 31, 2013
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual		Current Loans		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	656	$	267	$	-	$	923	$	13,327	$	582,639	$	596,889
Secured by 1-4 family residential properties		7,322		2,115		2,996		12,433		21,603		1,451,528		1,485,564
Secured by nonfarm, nonresidential properties		1,934		110		-		2,044		21,809		1,391,286		1,415,139
Other		2		3		-		5		1,327		188,030		189,362
Commercial and industrial loans		809		198		-		1,007		6,286		1,150,321		1,157,614
Consumer loans		1,866		146		302		2,314		151		162,843		165,308
Other loans		17		-		-		17		735		788,253		789,005
Total	$	12,606	$	2,839	$	3,298	$	18,743	$	65,238	$	5,714,900	$	5,798,881

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

Past Due LHFS

LHFS past due 90 days or more totaled $25.0 million and $21.5 million at September 30, 2014 and December 31, 2013, 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.

Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2014. During the first quarter of 2013, Trustmark exercised its option to repurchase approximately $57.4 million 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 was included in mortgage banking, net for the first nine months of 2013.

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 shown 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 2013, Trustmark revised the qualitative portion of the allowance for loan loss methodology for commercial LHFI to incorporate a loan facility risk component. Loan facility risk embodies the nature, frequency and duration of the repayment structure as it pertains to the actual source of loan repayment. The underlying loan structure and nature of the credit either is risk neutral for standard structure or adds risk to the credit for any variance that represents additional credit risk from the standard structure. If the facility structure adds additional credit risk, qualitative reserves are added to individual loans based on their respective commercial loan pools. Factors considered in assigning facility risk include whether the principal is amortizing or not amortizing, revolving or not revolving, the payment frequency and the duration of the payment structure. An additional provision of approximately $1.6 million was recorded in 2013 as a result of this revision to the qualitative portion of the allowance for loan loss methodology for commercial LHFI.

For each commercial loan portfolio, the loan facility risk factor’s percentage of the balances are summed and weighted based on commercial loan portfolio rankings. This weighted-average facility 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 third quarter 2014, Trustmark revised the qualitative portion of the allowance for loan loss methodology for commercial LHFI to incorporate an additional reserve component for commercial nonaccrual loans under $500 thousand. A LHFI is considered impaired when, based on current information and events, it is probable that Trustmark will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. A formal impairment analysis is performed on all commercial nonaccrual LHFI with an outstanding balance of $500 thousand or more, and based upon this analysis LHFI are written down to net realizable value. These commercial nonaccrual credits under $500 thousand are generally not currently protected by an identified source of repayment or any viable secondary means of repayment and do not have collateral sufficient to extinguish the credit. For such loans, it is currently unlikely that full repayment of both principal and interest will be realized. An additional provision of approximately $822 thousand was recorded in the third quarter of 2014 as result of this revision to the qualitative portion of the allowance for loan loss methodology for commercial 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, 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.

During the second quarter 2014, Trustmark revised the qualitative portion of the allowance for loan loss methodology for consumer LHFI to incorporate the use of consumer credit bureau scores developed and provided by an independent third party. The credit bureau scores reflect the customer’s historical willingness and ability to service their debt. These credit bureau scores are monitored on an ongoing basis and represent a consumer’s credit payment history with all of their creditors including their repayment performance with Trustmark. The implementation of this consumer qualitative factor will allow Trustmark to better monitor shifts in risk that are represented in the retail portfolio and ensure that it is reflective in the allowance for loan loss calculation. An additional provision of approximately $1.4 million was recorded in the second quarter of 2014 as a result of this revision to the qualitative portion of the allowance for loan loss methodology for consumer LHFI.

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 for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2014			2013
Balance at beginning of period	$	66,448		$	78,738
Loans charged-off		(10,052	)		(10,173	)
Recoveries		11,134			11,505
Net recoveries		1,082			1,332
Provision for loan losses, LHFI		2,604			(11,438	)
Balance at end of period	$	70,134		$	68,632

The following tables detail the balance in the allowance for loan losses, LHFI by portfolio segment at September 30, 2014 and 2013, respectively ($ in thousands):

	2014
	Balance January 1,		Charge-offs			Recoveries		Provision for Loan Losses			Balance September 30,
Loans secured by real estate:
Construction, land development and other land	$	13,165	$	(604	)	$	3,413	$	(6,139	)	$	9,835
Secured by 1-4 family residential properties		9,633		(2,306	)		861		1,986			10,174
Secured by nonfarm, nonresidential properties		19,672		(240	)		400		1,099			20,931
Other		2,080		(277	)		-		571			2,374
Commercial and industrial loans		15,522		(1,787	)		1,321		4,490			19,546
Consumer loans		2,405		(1,304	)		2,760		(1,631	)		2,230
Other loans		3,971		(3,534	)		2,379		2,228			5,044
Total allowance for loan losses, LHFI	$	66,448	$	(10,052	)	$	11,134	$	2,604		$	70,134

						Disaggregated by Impairment Method
						Individually		Collectively			Total
Loans secured by real estate:
Construction, land development and other land						$	2,607	$	7,228		$	9,835
Secured by 1-4 family residential properties							431		9,743			10,174
Secured by nonfarm, nonresidential properties							2,163		18,768			20,931
Other							57		2,317			2,374
Commercial and industrial loans							5,203		14,343			19,546
Consumer loans							1		2,229			2,230
Other loans							263		4,781			5,044
Total allowance for loan losses, LHFI						$	10,725	$	59,409		$	70,134

	2013
	Balance January 1,		Charge-offs			Recoveries			Provision for Loan Losses				Balance September 30,
Loans secured by real estate:
Construction, land development and other land	$	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							$	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