Note 5 – Acquired Loans

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

	September 30, 2014				December 31, 2013
	Noncovered		Covered		Noncovered		Covered
Loans secured by real estate:
Construction, land development and other land	$	64,808	$	1,721	$	98,928	$	2,363
Secured by 1-4 family residential properties		120,366		14,114		157,914		16,416
Secured by nonfarm, nonresidential properties		214,806		8,270		287,136		10,945
Other		28,036		2,949		33,948		2,644
Commercial and industrial loans		103,185		327		149,495		394
Consumer loans		11,236		-		18,428		119
Other loans		22,105		226		24,141		1,335
Acquired loans		564,542		27,607		769,990		34,216
Less allowance for loan losses, acquired loans		11,136		813		7,249		2,387
Net acquired loans	$	553,406	$	26,794	$	762,741	$	31,829

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):

	Noncovered						Covered
	Acquired Impaired			Acquired Not ASC 310-30 (1)			Acquired Impaired			Acquired Not ASC 310-30 (1)
Carrying value, net at January 1, 2013	$	72,942		$	6,696		$	45,391		$	2,460
Loans acquired (2)		790,335			153,900			-			-
Accretion to interest income		35,538			2,628			5,150			159
Payments received, net		(229,618	)		(39,281	)		(18,976	)		(819	)
Other		(24,177	)		(858	)		(3,202	)		(137	)
Less change in allowance for loan losses, acquired loans		(5,364	)		-			1,803			-
Carrying value, net at December 31, 2013		639,656			123,085			30,166			1,663
Accretion to interest income		35,423			1,442			3,010			(1	)
Payments received, net		(185,880	)		(37,437	)		(7,831	)		126
Other		(26,284	)		(486	)		(1,429	)		(484	)
Less change in allowance for loan losses, acquired loans		4,400			(513	)		1,129			445
Carrying value, net at September 30, 2014	$	467,315		$	86,091		$	25,045		$	1,749

(1) "Acquired Not ASC 310-30" 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 nine months ended September 30, 2014 and 2013 ($ in thousands):

	Nine Months Ended September 30,
	2014			2013
Accretable yield at beginning of period	$	(109,006	)	$	(26,383	)
Additions due to acquisition (1)		-			(98,394	)
Accretion to interest income		38,433			28,927
Disposals		14,520			11,167
Reclassification to / (from) nonaccretable difference (2)		(26,826	)		(25,772	)
Accretable yield at end of period	$	(82,879	)	$	(110,455	)

(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 nine months ended September 30, 2014 and 2013 ($ in thousands):

	Noncovered			Covered			Total
Balance at January 1, 2014	$	7,249		$	2,387		$	9,636
Provision for loan losses, acquired loans		5,603			(611	)		4,992
Loans charged-off		(3,310	)		(917	)		(4,227	)
Recoveries		1,594			(46	)		1,548
Net charge-offs		(1,716	)		(963	)		(2,679	)
Balance at September 30, 2014	$	11,136		$	813		$	11,949

	Noncovered			Covered			Total
Balance at January 1, 2013	$	1,885		$	4,190		$	6,075
Provision for loan losses, acquired loans		3,038			(1,168	)		1,870
Loans charged-off		(3,028	)		(663	)		(3,691	)
Recoveries		1,112			(33	)		1,079
Net charge-offs		(1,916	)		(696	)		(2,612	)
Balance at September 30, 2013	$	3,007		$	2,326		$	5,333

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 September 30, 2014 and December 31, 2013 ($ in thousands):

	September 30, 2014
			Commercial Loans
			Pass - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land				24,028		300		30,121		6,295	$	60,744
Secured by 1-4 family residential properties				28,487		855		9,856		399		39,597
Secured by nonfarm, nonresidential properties				164,492		3,818		44,726		1,770		214,806
Other				22,882		94		4,769		284		28,029
Commercial and industrial loans				78,663		861		19,755		3,906		103,185
Consumer loans				4		-		-		-		4
Other loans				19,724		-		2,350		-		22,074
Total noncovered loans				338,280		5,928		111,577		12,654		468,439

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land				140		-		1,039		395		1,574
Secured by 1-4 family residential properties				1,644		248		1,190		-		3,082
Secured by nonfarm, nonresidential properties				4,693		230		3,077		-		8,000
Other				742		115		727		777		2,361
Commercial and industrial loans				159		25		143		-		327
Consumer loans				-		-		-		-		-
Other loans				226		-		-		-		226
Total covered loans				7,604		618		6,176		1,172		15,570
Total acquired loans			$	345,884	$	6,546	$	117,753	$	13,826	$	484,009

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total Acquired Loans
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land	$	3,695	$	58	$	311	$	-	$	4,064	$	64,808
Secured by 1-4 family residential properties		75,408		2,160		3,061		140		80,769		120,366
Secured by nonfarm, nonresidential properties		-		-		-		-		-		214,806
Other		7		-		-		-		7		28,036
Commercial and industrial loans		-		-		-		-		-		103,185
Consumer loans		11,000		164		68		-		11,232		11,236
Other loans		31		-		-		-		31		22,105
Total noncovered loans		90,141		2,382		3,440		140		96,103		564,542

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land		147		-		-		-		147		1,721
Secured by 1-4 family residential properties		10,133		546		353		-		11,032		14,114
Secured by nonfarm, nonresidential properties		270		-		-		-		270		8,270
Other		554		-		34		-		588		2,949
Commercial and industrial loans		-		-		-		-		-		327
Consumer loans		-		-		-		-		-		-
Other loans		-		-		-		-		-		226
Total covered loans		11,104		546		387		-		12,037		27,607
Total acquired loans	$	101,245	$	2,928	$	3,827	$	140	$	108,140	$	592,149

(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 - Categories 1-6		Special Mention - Category 7		Substandard - Category 8		Doubtful - Category 9		Subtotal
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land			$	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

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land				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
Total acquired loans			$	433,015	$	18,902	$	186,787	$	22,494	$	661,198

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total Acquired Loans
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land	$	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

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land		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
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 September 30, 2014 and December 31, 2013, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2014, approximately $988 thousand 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 tables provide an aging analysis of contractually past due and nonaccrual acquired loans, 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 (2)		Current Loans		Total Acquired Loans
Noncovered loans:
Loans secured by real estate:
Construction, land development and other land	$	176	$	1,208	$	24,675	$	26,059	$	201	$	38,548	$	64,808
Secured by 1-4 family residential properties		2,211		900		5,143		8,254		214		111,898		120,366
Secured by nonfarm, nonresidential properties		1,984		260		13,520		15,764		-		199,042		214,806
Other		-		-		747		747		-		27,289		28,036
Commercial and industrial loans		381		328		1,512		2,221		495		100,469		103,185
Consumer loans		105		60		68		233		-		11,003		11,236
Other loans		27		-		-		27		-		22,078		22,105
Total noncovered loans		4,884		2,756		45,665		53,305		910		510,327		564,542

Covered loans:
Loans secured by real estate:
Construction, land development and other land		-		-		395		395		-		1,326		1,721
Secured by 1-4 family residential properties		748		4		484		1,236		-		12,878		14,114
Secured by nonfarm, nonresidential properties		1,534		-		-		1,534		-		6,736		8,270
Other		253		-		1,126		1,379		-		1,570		2,949
Commercial and industrial loans		10		-		41		51		78		198		327
Consumer loans		-		-		-		-		-		-		-
Other loans		-		-		-		-		-		226		226
Total covered loans		2,545		4		2,046		4,595		78		22,934		27,607
Total acquired loans	$	7,429	$	2,760	$	47,711	$	57,900	$	988	$	533,261	$	592,149

(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
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual (2)		Current Loans		Total Acquired Loans
Noncovered loans:
Loans secured by real estate:
Construction, land development and other land	$	1,648	$	468	$	31,744	$	33,860	$	67	$	65,001	$	98,928
Secured by 1-4 family residential properties		3,901		1,166		7,589		12,656		116		145,142		157,914
Secured by nonfarm, nonresidential properties		4,851		3,127		15,421		23,399		461		263,276		287,136
Other		40		-		1,922		1,962		33		31,953		33,948
Commercial and industrial loans		526		217		3,387		4,130		1,170		144,195		149,495
Consumer loans		205		34		92		331		-		18,097		18,428
Other loans		-		-		153		153		20		23,968		24,141
Total noncovered loans		11,171		5,012		60,308		76,491		1,867		691,632		769,990

Covered loans:
Loans secured by real estate:
Construction, land development and other land		87		-		553		640		445		1,278		2,363
Secured by 1-4 family residential properties		515		358		1,142		2,015		-		14,401		16,416
Secured by nonfarm, nonresidential properties		243		1,662		793		2,698		-		8,247		10,945
Other		571		139		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		1,429		2,159		3,136		6,724		486		27,006		34,216
Total acquired loans	$	12,600	$	7,171	$	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.