Note 4 – Acquired Loans

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

	September 30, 2016				December 31, 2015
	Noncovered		Covered (1)		Noncovered		Covered
Loans secured by real estate:
Construction, land development and other land	$	25,040	$	—	$	41,623	$	1,021
Secured by 1-4 family residential properties		72,689		3,912		86,950		10,058
Secured by nonfarm, nonresidential properties		110,606		—		135,626		4,638
Other real estate secured		20,903		—		23,860		1,286
Commercial and industrial loans		39,519		—		55,075		624
Consumer loans		3,878		—		5,641		—
Other loans		19,190		—		23,936		73
Acquired loans		291,825		3,912		372,711		17,700
Less allowance for loan losses, acquired loans		11,330		50		11,259		733
Net acquired loans	$	280,495	$	3,862	$	361,452	$	16,967

(1)

Trustmark’s loss share agreement with the FDIC covering the acquired covered loans other than loans secured by 1-4 family residential properties expired on June 30, 2016. Trustmark’s loss share agreement with the FDIC covering the acquired covered loans secured by 1-4 family residential properties will expire in 2021. Effective July 1, 2016, all acquired covered loans excluding the acquired covered loans secured by 1-4 family residential properties were reclassified to acquired noncovered loans.

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, 2015	$	434,151		$	81,091		$	20,504		$	1,604
Accretion to interest income		28,193			479			2,308			—
Payments received, net		(164,671	)		(15,484	)		(8,592	)		(33	)
Other (2)		(1,589	)		—			391			—
Less change in allowance for loan losses, acquired loans		(718	)		—			785			—
Carrying value, net at December 31, 2015		295,366			66,086			15,396			1,571
Transfers (3)		9,157			446			(9,157	)		(446	)
Accretion to interest income		13,498			40			853			—
Payments received, net		(75,875	)		(28,861	)		(4,203	)		(421	)
Other (2)		709			—			(414	)		—
Less change in allowance for loan losses, acquired loans		(523	)		452			1,137			(454	)
Carrying value, net at September 30, 2016	$	242,332		$	38,163		$	3,612		$	250

(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, "Loans and Debt Securities Acquired with Deteriorated Credit Quality."

(2)	Includes miscellaneous timing adjustments as well as acquired loan terminations through foreclosure, charge-off and other terminations.

(3)	Covered acquired loans transferred to noncovered acquired loans as a result of expiration of the related indemnification agreement with the FDIC on June 30, 2016.

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 periods presented ($ in thousands):

	Nine Months Ended September 30,
	2016			2015
Accretable yield at beginning of period	$	(52,672	)	$	(77,149	)
Accretion to interest income		14,351			24,907
Disposals		4,306			8,194
Reclassification from nonaccretable difference (1)		(7,046	)		(12,215	)
Accretable yield at end of period	$	(41,061	)	$	(56,263	)

(1)	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 periods presented ($ in thousands):

	Three Months Ended September 30, 2016									Nine Months Ended September 30, 2016
	Noncovered			Covered			Total			Noncovered			Covered			Total
Balance at beginning of period	$	12,218		$	262		$	12,480		$	11,259		$	733		$	11,992
Transfers (1)		215			(215	)		—			215			(215	)		—
Provision for loan losses, acquired loans		686			5			691			2,969			(362	)		2,607
Loans charged-off		(2,590	)		—			(2,590	)		(4,959	)		(82	)		(5,041	)
Recoveries		801			(2	)		799			1,846			(24	)		1,822
Net charge-offs		(1,789	)		(2	)		(1,791	)		(3,113	)		(106	)		(3,219	)
Balance at end of period	$	11,330		$	50		$	11,380		$	11,330		$	50		$	11,380

	Three Months Ended September 30, 2015									Nine Months Ended September 30, 2015
	Noncovered			Covered			Total			Noncovered			Covered			Total
Balance at beginning of period	$	11,927		$	702		$	12,629		$	10,541		$	1,518		$	12,059
Provision for loan losses, acquired loans		1,221			35			1,256			2,797			(369	)		2,428
Loans charged-off		(2,456	)		(110	)		(2,566	)		(5,024	)		(560	)		(5,584	)
Recoveries		725			141			866			3,103			179			3,282
Net (charge-offs) recoveries		(1,731	)		31			(1,700	)		(1,921	)		(381	)		(2,302	)
Balance at end of period	$	11,417		$	768		$	12,185		$	11,417		$	768		$	12,185

(1)	The allowance for loan losses on covered acquired loans other than loans secured by 1-4 family residential properties transferred to the allowance for loan losses on noncovered acquired loans as a result of expiration of the related indemnification agreement with the FDIC on June 30, 2016.

As discussed in Note 3 - 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, 2016 and December 31, 2015 ($ in thousands):

	September 30, 2016
		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		$	14,624	$	117	$	7,900	$	322	$	22,963
Secured by 1-4 family residential properties			17,629		56		4,249		310		22,244
Secured by nonfarm, nonresidential properties			88,799		1,071		20,167		516		110,553
Other real estate secured			16,313		—		3,482		673		20,468
Commercial and industrial loans			23,860		23		14,230		1,406		39,519
Consumer loans			—		—		—		—		—
Other loans			13,361		—		5,665		162		19,188
Total noncovered loans			174,586		1,267		55,693		3,389		234,935

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land			—		—		—		—		—
Secured by 1-4 family residential properties			185		12		60		—		257
Secured by nonfarm, nonresidential properties			—		—		—		—		—
Other real estate secured			—		—		—		—		—
Commercial and industrial loans			—		—		—		—		—
Other loans			—		—		—		—		—
Total covered loans			185		12		60		—		257
Total acquired loans		$	174,771	$	1,279	$	55,753	$	3,389	$	235,192

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (2)		Subtotal		Total Acquired Loans
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land	$	2,066	$	3	$	8	$	—	$	2,077	$	25,040
Secured by 1-4 family residential properties		47,666		1,783		902		94		50,445		72,689
Secured by nonfarm, nonresidential properties		53		—		—		—		53		110,606
Other real estate secured		435		—		—		—		435		20,903
Commercial and industrial loans		—		—		—		—		—		39,519
Consumer loans		3,825		48		5		—		3,878		3,878
Other loans		2		—		—		—		2		19,190
Total noncovered loans		54,047		1,834		915		94		56,890		291,825

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land		—		—		—		—		—		—
Secured by 1-4 family residential properties		3,311		136		208		—		3,655		3,912
Secured by nonfarm, nonresidential properties		—		—		—		—		—		—
Other real estate secured		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—
Other loans		—		—		—		—		—		—
Total covered loans		3,311		136		208		—		3,655		3,912
Total acquired loans	$	57,358	$	1,970	$	1,123	$	94	$	60,545	$	295,737

(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.

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

	December 31, 2015
		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		$	15,839	$	253	$	19,252	$	3,874	$	39,218
Secured by 1-4 family residential properties			22,272		27		5,033		331		27,663
Secured by nonfarm, nonresidential properties			106,924		2,301		25,690		711		135,626
Other real estate secured			19,346		—		3,777		731		23,854
Commercial and industrial loans			36,670		844		15,526		2,035		55,075
Consumer loans			—		—		—		—		—
Other loans			17,150		—		6,624		162		23,936
Total noncovered loans			218,201		3,425		75,902		7,844		305,372

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land			235		—		588		119		942
Secured by 1-4 family residential properties			869		107		534		—		1,510
Secured by nonfarm, nonresidential properties			4,060		35		472		—		4,567
Other real estate secured			730		—		111		—		841
Commercial and industrial loans			560		22		42		—		624
Other loans			70		—		—		—		70
Total covered loans			6,524		164		1,747		119		8,554
Total acquired loans		$	224,725	$	3,589	$	77,649	$	7,963	$	313,926

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (2)		Subtotal		Total Acquired Loans
Noncovered Loans:
Loans secured by real estate:
Construction, land development and other land	$	2,353	$	24	$	28	$	—	$	2,405	$	41,623
Secured by 1-4 family residential properties		56,371		1,841		930		145		59,287		86,950
Secured by nonfarm, nonresidential properties		—		—		—		—		—		135,626
Other real estate secured		6		—		—		—		6		23,860
Commercial and industrial loans		—		—		—		—		—		55,075
Consumer loans		5,498		142		1		—		5,641		5,641
Other loans		—		—		—		—		—		23,936
Total noncovered loans		64,228		2,007		959		145		67,339		372,711

Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land		70		9		—		—		79		1,021
Secured by 1-4 family residential properties		7,472		314		762		—		8,548		10,058
Secured by nonfarm, nonresidential properties		71		—		—		—		71		4,638
Other real estate secured		445		—		—		—		445		1,286
Commercial and industrial loans		—		—		—		—		—		624
Other loans		3		—		—		—		3		73
Total covered loans		8,061		323		762		—		9,146		17,700
Total acquired loans	$	72,289	$	2,330	$	1,721	$	145	$	76,485	$	390,411

(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.

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

At September 30, 2016 and December 31, 2015, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2016, approximately $653 thousand of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $1.0 million of acquired loans at December 31, 2015.

The following tables provide an aging analysis of contractually past due and nonaccrual acquired loans, 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 (2)		Current Loans		Total Acquired Loans
Noncovered loans:
Loans secured by real estate:
Construction, land development and other land	$	203	$	12	$	889	$	1,104	$	—	$	23,936	$	25,040
Secured by 1-4 family residential properties		1,679		333		934		2,946		112		69,631		72,689
Secured by nonfarm, nonresidential properties		225		32		857		1,114		338		109,154		110,606
Other real estate secured		112		—		1,458		1,570		—		19,333		20,903
Commercial and industrial loans		832		33		1		866		203		38,450		39,519
Consumer loans		48		—		5		53		—		3,825		3,878
Other loans		—		—		—		—		—		19,190		19,190
Total noncovered loans		3,099		410		4,144		7,653		653		283,519		291,825

Covered loans:
Loans secured by real estate:
Construction, land development and other land		—		—		—		—		—		—		—
Secured by 1-4 family residential properties		55		81		208		344		—		3,568		3,912
Secured by nonfarm, nonresidential properties		—		—		—		—		—		—		—
Other real estate secured		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Other loans		—		—		—		—		—		—		—
Total covered loans		55		81		208		344		—		3,568		3,912
Total acquired loans	$	3,154	$	491	$	4,352	$	7,997	$	653	$	287,087	$	295,737

(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, 2015
	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	$	24	$	114	$	13,021	$	13,159	$	—	$	28,464	$	41,623
Secured by 1-4 family residential properties		1,544		636		1,220		3,400		387		83,163		86,950
Secured by nonfarm, nonresidential properties		192		195		5,913		6,300		144		129,182		135,626
Other real estate secured		9		—		737		746		—		23,114		23,860
Commercial and industrial loans		82		4		184		270		429		54,376		55,075
Consumer loans		119		23		1		143		—		5,498		5,641
Other loans		85		16		—		101		—		23,835		23,936
Total noncovered loans		2,055		988		21,076		24,119		960		347,632		372,711

Covered loans:
Loans secured by real estate:
Construction, land development and other land		9		—		119		128		—		893		1,021
Secured by 1-4 family residential properties		428		132		978		1,538		—		8,520		10,058
Secured by nonfarm, nonresidential properties		167		478		—		645		—		3,993		4,638
Other real estate secured		—		—		—		—		—		1,286		1,286
Commercial and industrial loans		—		—		—		—		51		573		624
Other loans		—		—		—		—		—		73		73
Total covered loans		604		610		1,097		2,311		51		15,338		17,700
Total acquired loans	$	2,659	$	1,598	$	22,173	$	26,430	$	1,011	$	362,970	$	390,411

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

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