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

At September 30, 2016 and December 31, 2015, LHFI consisted of the following ($ in thousands):

	September 30, 2016		December 31, 2015
Loans secured by real estate:
Construction, land development and other land	$	766,685	$	824,723
Secured by 1-4 family residential properties		1,592,453		1,649,501
Secured by nonfarm, nonresidential properties		1,916,153		1,736,476
Other real estate secured		317,680		211,228
Commercial and industrial loans		1,421,382		1,343,211
Consumer loans		170,073		169,135
State and other political subdivision loans		875,973		734,615
Other loans		438,805		422,496
LHFI		7,499,204		7,091,385
Less allowance for loan losses, LHFI		70,871		67,619
Net LHFI	$	7,428,333	$	7,023,766

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, 2016, 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 is susceptible to changes in market conditions in these areas.

Nonaccrual/Impaired LHFI

At September 30, 2016 and December 31, 2015, the carrying amounts of nonaccrual LHFI were $54.4 million and $55.3 million, respectively. Included in these amounts were $3.7 million and $7.4 million, respectively, of nonaccrual LHFI classified as troubled debt restructurings (TDRs). No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended September 30, 2016 and 2015.

Trustmark considers all nonaccrual LHFI to be impaired loans. All commercial nonaccrual LHFI (including those classified as TDRs) over $500 thousand are specifically evaluated for impairment (specifically evaluated impaired LHFI) using a fair value approach. The remaining nonaccrual LHFI, which primarily consist of consumer loans secured by 1-4 family residential property, are not specifically reviewed. Consumer loans secured by 1-4 family residential property 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.

At September 30, 2016 and December 31, 2015, specifically evaluated impaired LHFI totaled $28.6 million and $26.5 million, respectively. Trustmark’s specifically evaluated impaired LHFI are primarily collateral dependent loans. Fair value estimates for collateral dependent loans 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. Charge-offs related to specifically evaluated impaired LHFI totaled $5.0 million and $9.7 million for the first nine months of 2016 and 2015, respectively. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded. At September 30, 2016 and December 31, 2015, reserves related to specifically evaluated impaired LHFI totaled $4.5 million and $7.0 million, respectively. Provision recapture on specifically evaluated impaired LHFI totaled $2.0 million for the first nine months of 2016 compared to provision expense of $4.5 million for the first nine months of 2015.

At September 30, 2016 and December 31, 2015, impaired LHFI, excluding the specifically evaluated impaired LHFI, totaled $25.8 million and $28.8 million, respectively. In addition, these impaired LHFI had allocated allowance for loan losses of $2.3 million and $2.0 million at the end of the respective periods. No material interest income was recognized in the income statement on impaired LHFI for each of the periods ended September 30, 2016 and 2015.

The following tables detail LHFI individually and collectively evaluated for impairment at September 30, 2016 and December 31, 2015 ($ in thousands):

	September 30, 2016
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	4,724	$	761,961	$	766,685
Secured by 1-4 family residential properties		20,107		1,572,346		1,592,453
Secured by nonfarm, nonresidential properties		10,313		1,905,840		1,916,153
Other real estate secured		1,731		315,949		317,680
Commercial and industrial loans		16,525		1,404,857		1,421,382
Consumer loans		189		169,884		170,073
State and other political subdivision loans		—		875,973		875,973
Other loans		821		437,984		438,805
Total	$	54,410	$	7,444,794	$	7,499,204

	December 31, 2015
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	6,123	$	818,600	$	824,723
Secured by 1-4 family residential properties		23,079		1,626,422		1,649,501
Secured by nonfarm, nonresidential properties		17,800		1,718,676		1,736,476
Other real estate secured		145		211,083		211,228
Commercial and industrial loans		7,622		1,335,589		1,343,211
Consumer loans		31		169,104		169,135
State and other political subdivision loans		—		734,615		734,615
Other loans		512		421,984		422,496
Total	$	55,312	$	7,036,073	$	7,091,385

At September 30, 2016 and December 31, 2015, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):

	September 30, 2016
	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	$	8,186	$	3,113	$	1,611	$	4,724	$	453	$	5,424
Secured by 1-4 family residential properties		25,160		495		19,612		20,107		1,514		21,593
Secured by nonfarm, nonresidential properties		11,633		1,312		9,001		10,313		2,316		14,058
Other real estate secured		1,782		1,000		731		1,731		90		938
Commercial and industrial loans		18,203		12,055		4,470		16,525		2,305		12,073
Consumer loans		193		—		189		189		2		111
State and other political subdivision loans		—		—		—		—		—		—
Other loans		966		—		821		821		154		667
Total	$	66,123	$	17,975	$	36,435	$	54,410	$	6,834	$	54,864

	December 31, 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	$	11,113	$	3,395	$	2,728	$	6,123	$	909	$	9,995
Secured by 1-4 family residential properties		27,678		283		22,796		23,079		1,230		24,350
Secured by nonfarm, nonresidential properties		20,387		8,037		9,763		17,800		3,402		21,758
Other real estate secured		160		—		145		145		15		732
Commercial and industrial loans		9,880		1,137		6,485		7,622		3,304		9,863
Consumer loans		34		—		31		31		—		59
State and other political subdivision loans		—		—		—		—		—		—
Other loans		642		—		512		512		128		570
Total	$	69,894	$	12,852	$	42,460	$	55,312	$	8,988	$	67,327

A 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, 2016 and December 31, 2015, Trustmark held $880 thousand and $1.0 million, respectively, of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. There were no consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings at September 30, 2016 compared to $83 thousand at December 31, 2015.

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, 2016 and 2015, LHFI classified as TDRs totaled $3.7 million and $11.2 million, respectively, and were comprised of credits with interest-only payments for an extended period of time which totaled $1.6 million and $7.5 million, respectively. The remaining TDRs at September 30, 2016 and 2015 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 $31 thousand and $1.2 million at September 30, 2016 and 2015, 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 for the nine months ended September 30, 2016 were $ 1.0 million compared to $806 thousand for the nine months ended September 30, 2015.

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,
	2016						2015
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

	Nine Months Ended September 30,
	2016						2015
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction, land development and other land loans		1	$	14	$	14		—	$	—	$	—
Loans secured by 1-4 family residential properties		8		740		740		10		495		495
Loans secured by nonfarm, nonresidential properties		—		—		—		4		3,512		3,512
Consumer loans		1		2		2		—		—		—
Total		10	$	756	$	756		14	$	4,007	$	4,007

	Nine Months Ended September 30,
	2016				2015
TDRs that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Loans secured by 1-4 family residential properties		1	$	101		4	$	243

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, 2016 and 2015 ($ in thousands):

	September 30, 2016
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	556	$	556
Secured by 1-4 family residential properties		—		2,545		2,545
Secured by nonfarm, nonresidential properties		—		179		179
Commercial and industrial loans		—		387		387
Consumer loans		—		2		2
Total TDRs	$	—	$	3,669	$	3,669

	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

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 primarily composed of 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 are 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 charged off within the period that the loss is determined and are not carried on Trustmark’s books over quarter-end.

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 following reviews are performed 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. 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. 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 ensure that Trustmark continues to originate quality loans.

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, 2016 and December 31, 2015 ($ in thousands):

	September 30, 2016
		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		$	687,123	$	8,494	$	9,410	$	469	$	705,496
Secured by 1-4 family residential properties			124,472		467		6,262		361		131,562
Secured by nonfarm, nonresidential properties			1,870,036		3,196		41,668		494		1,915,394
Other real estate secured			314,858		—		1,957		—		316,815
Commercial and industrial loans			1,304,137		9,094		107,405		746		1,421,382
Consumer loans			—		—		—		—		—
State and other political subdivision loans			858,168		6,450		11,355		—		875,973
Other loans			429,403		340		2,232		642		432,617
Total		$	5,588,197	$	28,041	$	180,289	$	2,712	$	5,799,239

	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	$	60,546	$	176	$	—	$	467	$	61,189	$	766,685
Secured by 1-4 family residential properties		1,435,347		8,173		717		16,654		1,460,891		1,592,453
Secured by nonfarm, nonresidential properties		759		—		—		—		759		1,916,153
Other real estate secured		865		—		—		—		865		317,680
Commercial and industrial loans		—		—		—		—		—		1,421,382
Consumer loans		167,817		1,845		218		193		170,073		170,073
State and other political subdivision loans		—		—		—		—		—		875,973
Other loans		6,188		—		—		—		6,188		438,805
Total	$	1,671,522	$	10,194	$	935	$	17,314	$	1,699,965	$	7,499,204

	December 31, 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		$	746,227	$	—	$	15,637	$	529	$	762,393
Secured by 1-4 family residential properties			125,268		345		7,525		190		133,328
Secured by nonfarm, nonresidential properties			1,680,846		2,031		52,485		361		1,735,723
Other real estate secured			205,097		—		4,768		—		209,865
Commercial and industrial loans			1,295,760		9,473		37,284		694		1,343,211
Consumer loans			—		—		—		—		—
State and other political subdivision loans			713,616		12,478		8,521		—		734,615
Other loans			414,089		183		2,663		375		417,310
Total		$	5,180,903	$	24,510	$	128,883	$	2,149	$	5,336,445

	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	$	62,158	$	146	$	—	$	26	$	62,330	$	824,723
Secured by 1-4 family residential properties		1,485,914		7,565		2,058		20,636		1,516,173		1,649,501
Secured by nonfarm, nonresidential properties		753		—		—		—		753		1,736,476
Other real estate secured		1,363		—		—		—		1,363		211,228
Commercial and industrial loans		—		—		—		—		—		1,343,211
Consumer loans		166,681		2,182		242		30		169,135		169,135
State and other political subdivision loans		—		—		—		—		—		734,615
Other loans		5,186		—		—		—		5,186		422,496
Total	$	1,722,055	$	9,893	$	2,300	$	20,692	$	1,754,940	$	7,091,385

Past Due LHFI

The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at September 30, 2016 and December 31, 2015 ($ in thousands):

	September 30, 2016
	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	$	1,136	$	78	$	—	$	1,214	$	4,724	$	760,747	$	766,685
Secured by 1-4 family residential properties		6,801		1,803		717		9,321		20,107		1,563,025		1,592,453
Secured by nonfarm, nonresidential properties		576		—		18		594		10,313		1,905,246		1,916,153
Other real estate secured		144		—		—		144		1,731		315,805		317,680
Commercial and industrial loans		868		180		—		1,048		16,525		1,403,809		1,421,382
Consumer loans		1,465		380		218		2,063		189		167,821		170,073
State and other political subdivision loans		—		—		—		—		—		875,973		875,973
Other loans		147		2		—		149		821		437,835		438,805
Total	$	11,137	$	2,443	$	953	$	14,533	$	54,410	$	7,430,261	$	7,499,204

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

	December 31, 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	$	214	$	—	$	—	$	214	$	6,123	$	818,386	$	824,723
Secured by 1-4 family residential properties		6,203		1,800		2,058		10,061		23,079		1,616,361		1,649,501
Secured by nonfarm, nonresidential properties		437		88		—		525		17,800		1,718,151		1,736,476
Other real estate secured		—		—		—		—		145		211,083		211,228
Commercial and industrial loans		921		45		—		966		7,622		1,334,623		1,343,211
Consumer loans		1,835		347		242		2,424		31		166,680		169,135
State and other political subdivision loans		65		—		—		65		—		734,550		734,615
Other loans		68		—		—		68		512		421,916		422,496
Total	$	9,743	$	2,280	$	2,300	$	14,323	$	55,312	$	7,021,750	$	7,091,385

(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 $25.6 million and $21.8 million at September 30, 2016 and December 31, 2015, 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 2015. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2016.

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

•

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 within each key market region.

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 four 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 four qualitative factors include the following:

•

Economic indicators

•

Performance trends

•

Management experience

•

Credit concentrations

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Balance at beginning of period	$	71,796		$	71,166		$	67,619		$	69,616
Loans charged-off		(8,279	)		(11,406	)		(14,893	)		(18,688	)
Recoveries		3,070			3,333			9,022			9,347
Net charge-offs		(5,209	)		(8,073	)		(5,871	)		(9,341	)
Provision for loan losses, LHFI		4,284			2,514			9,123			5,332
Balance at end of period	$	70,871		$	65,607		$	70,871		$	65,607

The following tables detail the balance in the allowance for loan losses, LHFI by loan type at September 30, 2016 and 2015 ($ in thousands):

	2016
	Balance January 1,		Charge-offs			Recoveries		Provision for Loan Losses			Balance September 30,
Loans secured by real estate:
Construction, land development and other land	$	11,587	$	(212	)	$	1,006	$	(3,183	)	$	9,198
Secured by 1-4 family residential properties		10,678		(1,129	)		680		172			10,401
Secured by nonfarm, nonresidential properties		21,563		(1,662	)		823		1,479			22,203
Other real estate secured		2,467		—			5		(213	)		2,259
Commercial and industrial loans		15,815		(6,408	)		519		10,982			20,908
Consumer loans		2,879		(1,398	)		3,397		(1,851	)		3,027
State and other political subdivision loans		809		—			—		68			877
Other loans		1,821		(4,084	)		2,592		1,669			1,998
Total allowance for loan losses, LHFI	$	67,619	$	(14,893	)	$	9,022	$	9,123		$	70,871

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	453	$	8,745	$	9,198
Secured by 1-4 family residential properties		1,514		8,887		10,401
Secured by nonfarm, nonresidential properties		2,316		19,887		22,203
Other real estate secured		90		2,169		2,259
Commercial and industrial loans		2,305		18,603		20,908
Consumer loans		2		3,025		3,027
State and other political subdivision loans		—		877		877
Other loans		154		1,844		1,998
Total allowance for loan losses, LHFI	$	6,834	$	64,037	$	70,871

	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 loans	$	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 loans	$	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