Note 3 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI

At September 30, 2015 and December 31, 2014, LHFI consisted of the following ($ in thousands):

	September 30, 2015		December 31, 2014
Loans secured by real estate:
Construction, land development and other land	$	785,472	$	619,877
Secured by 1-4 family residential properties		1,638,639		1,634,397
Secured by nonfarm, nonresidential properties		1,604,453		1,553,193
Other real estate secured		225,523		253,787
Commercial and industrial loans		1,270,277		1,270,350
Consumer loans		169,509		167,964
State and other political subdivision loans		677,539		602,727
Other loans		420,231		347,174
LHFI		6,791,643		6,449,469
Less allowance for loan losses, LHFI		65,607		69,616
Net LHFI	$	6,726,036	$	6,379,853

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, 2015, 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, 2015 and December 31, 2014, the carrying amounts of nonaccrual LHFI, which are individually evaluated for impairment, were $61.1 million and $79.3 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 LHFI for each of the periods ended September 30, 2015 and 2014.

All of Trustmark’s specifically evaluated impaired LHFI are collateral dependent loans. At September 30, 2015 and December 31, 2014, specifically evaluated impaired LHFI totaled $32.5 million and $47.1 million, respectively. These specifically evaluated impaired LHFI had a related allowance of $6.4 million and $11.3 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 collateral’s fair value less cost to sell is charged off. Charge-offs related to specifically evaluated impaired LHFI totaled $9.7 million and $55 thousand for the first nine months of 2015 and 2014, respectively. Provision expense on specifically evaluated impaired LHFI totaled $4.5 million for the first nine months of 2015 compared to $1.6 million for the first nine months of 2014.

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 collateral, 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 collateral’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, 2015 and December 31, 2014, nonaccrual LHFI not specifically reviewed for impairment and not written down to fair value less cost to sell, totaled $28.6 million and $32.2 million, respectively. In addition, these nonaccrual LHFI had allocated allowance for loan losses of $1.7 million and $1.5 million at the end of the respective periods.

The following tables detail LHFI individually and collectively evaluated for impairment at September 30, 2015 and December 31, 2014 ($ in thousands):

	September 30, 2015
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	8,748	$	776,724	$	785,472
Secured by 1-4 family residential properties		22,342		1,616,297		1,638,639
Secured by nonfarm, nonresidential properties		20,465		1,583,988		1,604,453
Other real estate secured		434		225,089		225,523
Commercial and industrial loans		8,571		1,261,706		1,270,277
Consumer loans		45		169,464		169,509
State and other political subdivision loans		-		677,539		677,539
Other loans		526		419,705		420,231
Total	$	61,131	$	6,730,512	$	6,791,643

	December 31, 2014
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	13,867	$	606,010	$	619,877
Secured by 1-4 family residential properties		25,621		1,608,776		1,634,397
Secured by nonfarm, nonresidential properties		25,717		1,527,476		1,553,193
Other real estate secured		1,318		252,469		253,787
Commercial and industrial loans		12,104		1,258,246		1,270,350
Consumer loans		88		167,876		167,964
State and other political subdivision loans		-		602,727		602,727
Other loans		628		346,546		347,174
Total	$	79,343	$	6,370,126	$	6,449,469

At September 30, 2015 and December 31, 2014, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):

	September 30, 2015
	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	$	13,708	$	3,054	$	5,694	$	8,748	$	2,054	$	11,307
Secured by 1-4 family residential properties		27,733		1,262		21,080		22,342		267		23,981
Secured by nonfarm, nonresidential properties		23,227		10,340		10,125		20,465		2,602		23,091
Other real estate secured		484		-		434		434		28		876
Commercial and industrial loans		15,529		2,883		5,688		8,571		2,956		10,338
Consumer loans		47		-		45		45		-		66
State and other political subdivision loans		-		-		-		-		-		-
Other loans		655		-		526		526		200		577
Total	$	81,383	$	17,539	$	43,592	$	61,131	$	8,107	$	70,236

	December 31, 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	$	20,849	$	7,411	$	6,456	$	13,867	$	2,767	$	13,597
Secured by 1-4 family residential properties		31,151		1,650		23,971		25,621		450		23,612
Secured by nonfarm, nonresidential properties		27,969		12,868		12,849		25,717		2,787		23,763
Other real estate secured		1,594		-		1,318		1,318		52		1,322
Commercial and industrial loans		13,916		1,206		10,898		12,104		6,449		9,195
Consumer loans		152		-		88		88		-		120
State and other political subdivision loans		-		-		-		-		-		-
Other loans		734		-		628		628		259		682
Total	$	96,365	$	23,135	$	56,208	$	79,343	$	12,764	$	72,291

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 collectability 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. At September 30, 2015, Trustmark held $736 thousand of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. Consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings at September 30, 2015 totaled $144 thousand.

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, 2015 and 2014, LHFI classified as TDRs totaled $11.2 million and $12.0 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $7.5 million and $7.9 million, respectively. The remaining TDRs at September 30, 2015 and 2014, 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 $1.2 million and $1.4 million at September 30, 2015 and 2014, respectively. 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 $806 thousand and $62 thousand for the nine months ended September 30, 2015 and 2014, respectively.

The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands):

	Three Months Ended September 30,
	2015						2014
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
Loans secured by 1-4 family residential properties		2	$	35	$	35		2	$	191	$	191

	Nine Months Ended September 30,
	2015						2014
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
Loans secured by 1-4 family residential properties		10	$	495	$	495		16	$	1,172	$	1,158
Loans secured by nonfarm, nonresidential properties		4		3,512		3,512		-		-		-
Total		14	$	4,007	$	4,007		16	$	1,172	$	1,158

	Nine Months Ended September 30,
	2015				2014
TDRs that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Loans secured by 1-4 family residential properties		4	$	243		1	$	106

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 at September 30, 2015 and 2014 ($ in thousands):

	September 30, 2015
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	-	$	1,006	$	1,006
Secured by 1-4 family residential properties		1,385		2,921		4,306
Secured by nonfarm, nonresidential properties		819		4,503		5,322
Other real estate secured		-		62		62
Commercial and industrial loans		-		477		477
Total TDRs	$	2,204	$	8,969	$	11,173

	September 30, 2014
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	-	$	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 real estate secured		-		156		156
Commercial and industrial loans		-		524		524
Total TDRs	$	1,373	$	10,619	$	11,992

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, underwriting, collateral documentation and compliance with 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.

Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. 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 perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a loan portfolio. Collateral exceptions occur when certain collateral documentation is either not present, is not considered current or has expired.

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 (Special Mention) - (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 special mention (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.

Each commercial loan is assigned a credit risk grade that is an indication for the likelihood of default and is not a direct indication of loss at default. The loss at default 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 loss at default aspects of the risk rating system, the loss expectations for each risk rating is integrated into the allowance for loan loss methodology where the calculated loss at default is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The loss at default 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 review 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 TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more. In addition, the Credit Quality Review Committee performs the following reviews on an annual basis:

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, payout ratios, and loan-to-value ratios. Results are stress tested as to the capacity to absorb losses and price of lots. This analysis is reviewed by each senior credit officer for the respective 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 financial statements are current, taxes have been paid and there are no other issues that need to be addressed. This analysis is reviewed by each senior credit officer in the respective market to determine the need for any risk rate or accrual status changes.

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 tables below illustrate the carrying amount of LHFI by credit quality indicator at September 30, 2015 and December 31, 2014 ($ in thousands):

	September 30, 2015
			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			$	701,003	$	541	$	17,525	$	457	$	719,526
Secured by 1-4 family residential properties				122,664		435		7,761		112		130,972
Secured by nonfarm, nonresidential properties				1,539,997		2,426		60,890		361		1,603,674
Other real estate secured				219,298		200		4,535		-		224,033
Commercial and industrial loans				1,216,819		18,555		34,274		624		1,270,272
Consumer loans				-		-		-		-		-
State and other political subdivision loans				656,126		12,546		8,867		-		677,539
Other loans				412,098		-		921		386		413,405
Total			$	4,868,005	$	34,703	$	134,773	$	1,940	$	5,039,421

	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	$	65,545	$	281	$	1	$	119	$	65,946	$	785,472
Secured by 1-4 family residential properties		1,477,432		7,874		2,961		19,400		1,507,667		1,638,639
Secured by nonfarm, nonresidential properties		779		-		-		-		779		1,604,453
Other real estate secured		1,490		-		-		-		1,490		225,523
Commercial and industrial loans		-		5		-		-		5		1,270,277
Consumer loans		167,516		1,689		260		44		169,509		169,509
State and other political subdivision loans		-		-		-		-		-		677,539
Other loans		6,826		-		-		-		6,826		420,231
Total	$	1,719,588	$	9,849	$	3,222	$	19,563	$	1,752,222	$	6,791,643

	December 31, 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			$	518,944	$	479	$	37,022	$	196	$	556,641
Secured by 1-4 family residential properties				125,203		1,652		7,483		213		134,551
Secured by nonfarm, nonresidential properties				1,462,226		8,431		81,661		-		1,552,318
Other real estate secured				246,099		306		4,975		-		251,380
Commercial and industrial loans				1,239,247		4,245		26,133		719		1,270,344
Consumer loans				-		-		-		-		-
State and other political subdivision loans				589,653		7,550		5,524		-		602,727
Other loans				338,598		-		1,255		564		340,417
Total			$	4,519,970	$	22,663	$	164,053	$	1,692	$	4,708,378

	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	$	62,897	$	199	$	59	$	81	$	63,236	$	619,877
Secured by 1-4 family residential properties		1,465,355		10,429		2,367		21,695		1,499,846		1,634,397
Secured by nonfarm, nonresidential properties		875		-		-		-		875		1,553,193
Other real estate secured		2,407		-		-		-		2,407		253,787
Commercial and industrial loans		-		5		1		-		6		1,270,350
Consumer loans		165,504		2,162		211		87		167,964		167,964
State and other political subdivision loans		-		-		-		-		-		602,727
Other loans		6,757		-		-		-		6,757		347,174
Total	$	1,703,795	$	12,795	$	2,638	$	21,863	$	1,741,091	$	6,449,469

Past Due LHFI

LHFI past due 90 days or more totaled $9.2 million and $2.8 million at September 30, 2015 and December 31, 2014, respectively. The following tables provide an aging analysis of past due and nonaccrual LHFI by class at September 30, 2015 and December 31, 2014 ($ in thousands):

	September 30, 2015
	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	$	393	$	121	$	1	$	515	$	8,748	$	776,209	$	785,472
Secured by 1-4 family residential properties		6,232		2,897		2,961		12,090		22,342		1,604,207		1,638,639
Secured by nonfarm, nonresidential properties		355		76		6,002		6,433		20,465		1,577,555		1,604,453
Other real estate secured		15		-		-		15		434		225,074		225,523
Commercial and industrial loans		856		199		-		1,055		8,571		1,260,651		1,270,277
Consumer loans		1,382		307		260		1,949		45		167,515		169,509
State and other political subdivision loans		-		-		-		-		-		677,539		677,539
Other loans		107		174		-		281		526		419,424		420,231
Total	$	9,340	$	3,774	$	9,224	$	22,338	$	61,131	$	6,708,174	$	6,791,643

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

	December 31, 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	$	248	$	17	$	60	$	325	$	13,867	$	605,685	$	619,877
Secured by 1-4 family residential properties		8,424		2,428		2,367		13,219		25,621		1,595,557		1,634,397
Secured by nonfarm, nonresidential properties		1,960		34		-		1,994		25,717		1,525,482		1,553,193
Other real estate secured		80		-		-		80		1,318		252,389		253,787
Commercial and industrial loans		2,491		306		126		2,923		12,104		1,255,323		1,270,350
Consumer loans		1,811		351		211		2,373		88		165,503		167,964
State and other political subdivision loans		-		-		-		-		-		602,727		602,727
Other loans		132		9		-		141		628		346,405		347,174
Total	$	15,146	$	3,145	$	2,764	$	21,055	$	79,343	$	6,349,071	$	6,449,469

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

Past Due Loans Held for Sale (LHFS)

LHFS past due 90 days or more totaled $15.2 million and $25.9 million at September 30, 2015 and December 31, 2014, 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 2015, Trustmark exercised its option to repurchase approximately $28.5 million of 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 subject to guarantees 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 $304 thousand, which is included in mortgage banking, net for the first nine months of 2015. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the second or third quarters of 2015 or the first nine months of 2014.

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.

During the first quarter of 2015, the Loss Emergence Period (LEP), a component of the quantitative portion of the allowance for loan loss methodology for commercial LHFI, was revised to reflect a 1.5 year period rather than a one year period. The LEP refers to the period of time between the events that trigger a loss and a charge-off of that loss. Losses are usually not immediately known, and determining the loss event can be challenging. It takes time for the borrower and extent of loss to be identified and determined. Trustmark may not be aware that the loss event has occurred until the borrower exhibits the inability to pay or other evidence of credit deterioration. Trustmark considers the loss event to have occurred within a one year period prior to the event of default and the charge-off of the loss within a six month period after the event of default, resulting in a 1.5 year LEP. An additional provision of approximately $2.3 million was recorded in the first quarter of 2015 as result of this revision to the quantitative portion of the allowance for loan loss methodology for commercial LHFI.

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

Loan facility risk

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 first quarter of 2015, Trustmark eliminated caps and floors from the criticized risk grades in the qualitative portion and adjusted the Florida market region’s distribution factors in the qualitative and quantitative portions of the allowance for loan loss methodology for commercial LHFI. The caps and floors for criticized risk ratings were eliminated in order to allow the risk associated with those credits to be reflected without constraint of pre-existing limits (caps or floors) on the risk ratings. When the current allowance for loan loss methodology was originally established, the vast majority of the reserve for the Florida market region’s assets was covered by the quantitative features of the allowance for loan loss methodology due to the amount of gross charge-offs at that time and captured the vast majority of the embedded risk in the portfolio. The distribution for the Florida market region was adjusted to be the same as Trustmark’s other key market regions since the credit metrics in the Florida market region now more closely resemble Trustmark as a whole. The elimination of the caps and floors for criticized risk ratings in the qualitative portion of the allowance for loan loss methodology for commercial LHFI resulted in a provision recapture of $1.8 million in the first quarter of 2015. The change in the Florida market region distribution resulted in an additional provision expense of $2.1 million related to the qualitative portion and an additional provision expense of $785 thousand related to the quantitative portion of the allowance for loan loss methodology for commercial LHFI in the first quarter of 2015. Combined, these revisions to the allowance for loan loss methodology for commercial LHFI resulted in an additional provision of approximately $1.1 million recorded during the first quarter of 2015.

During the third quarter of 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. The implementation of this commercial qualitative factor will allow Trustmark to address additional credit risk and loss potential due to inadequate source of repayment and collateral for commercial nonaccrual LHFI below the $500 thousand threshold. 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

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 third quarter of 2015, Trustmark revised the qualitative portion of the allowance for loan loss methodology for consumer LHFI by recalibrating the loss expectation component to be more representative of current conditions as well as recalculating the expected loss potential component, which reflects the consumer 12-quarter rolling average of net charge-offs, for each of the respective consumer loan groups. An additional provision of $2.2 million was recorded in the third quarter of 2015 as a result of these revisions to the qualitative portion of the allowance for loan loss methodology for consumer LHFI.

During the second quarter of 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.

Trustmark’s loan policy dictates the guidelines to be followed in determining when a loan is charged off. Commercial purpose loans are charged off when a determination is made that the loan is uncollectible and continuance as a bankable asset is not warranted or an impairment evaluation indicates that a value adjustment is necessary. Consumer loans secured by 1-4 family residential real estate are generally charged off or written down when the credit becomes severely delinquent and the balance exceeds the fair value of the property less costs to sell. Non-real estate consumer purpose loans, both secured and unsecured, are generally charged off in full during the month in which the loan becomes 120 days past due. Credit card loans are generally charged off in full when the loan becomes 180 days past due.

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

	Nine Months Ended September 30,
	2015			2014
Balance at beginning of period	$	69,616		$	66,448
Loans charged-off		(18,688	)		(10,052	)
Recoveries		9,347			11,134
Net (charge-offs) recoveries		(9,341	)		1,082
Provision for loan losses, LHFI		5,332			2,604
Balance at end of period	$	65,607		$	70,134

The following tables detail the balance in the allowance for loan losses, LHFI by portfolio segment at September 30, 2015 and 2014 ($ in thousands):

	2015
	Balance January 1,		Charge-offs			Recoveries		Provision for Loan Losses			Balance September 30,
Loans secured by real estate:
Construction, land development and other land	$	13,073	$	(2,236	)	$	1,274	$	395		$	12,506
Secured by 1-4 family residential properties		9,677		(2,013	)		781		1,529			9,974
Secured by nonfarm, nonresidential properties		18,523		(1,282	)		397		(1,517	)		16,121
Other real estate secured		2,141		(24	)		6		(382	)		1,741
Commercial and industrial loans		19,917		(7,243	)		1,553		5,109			19,336
Consumer loans		2,149		(1,543	)		2,639		(1,166	)		2,079
State and other political subdivision loans		1,314		-			-		(624	)		690
Other loans		2,822		(4,347	)		2,697		1,988			3,160
Total allowance for loan losses, LHFI	$	69,616	$	(18,688	)	$	9,347	$	5,332		$	65,607

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	2,054	$	10,452	$	12,506
Secured by 1-4 family residential properties		267		9,707		9,974
Secured by nonfarm, nonresidential properties		2,602		13,519		16,121
Other real estate secured		28		1,713		1,741
Commercial and industrial loans		2,956		16,380		19,336
Consumer loans		-		2,079		2,079
State and other political subdivision loans		-		690		690
Other loans		200		2,960		3,160
Total allowance for loan losses, LHFI	$	8,107	$	57,500	$	65,607

	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 loans	$	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 real estate secured		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
State and other political subdivision loans		1,205		-			-		736			1,941
Other loans		2,766		(3,534	)		2,379		1,492			3,103
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 loans	$	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 real estate secured		57		2,317		2,374
Commercial and industrial loans		5,203		14,343		19,546
Consumer loans		1		2,229		2,230
State and other political subdivision loans		-		1,941		1,941
Other loans		263		2,840		3,103
Total allowance for loan losses, LHFI	$	10,725	$	59,409	$	70,134