Note 5 – LHFI and Allowance for Loan Losses, LHFI

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

	December 31,
	2016		2015
Loans secured by real estate:
Construction, land development and other land	$	831,437	$	824,723
Secured by 1-4 family residential properties		1,660,043		1,649,501
Secured by nonfarm, nonresidential properties		2,034,176		1,736,476
Other real estate secured		318,148		211,228
Commercial and industrial loans		1,528,434		1,343,211
Consumer loans		170,562		169,135
State and other political subdivision loans		917,515		734,615
Other loans		390,898		422,496
LHFI		7,851,213		7,091,385
Less allowance for loan losses, LHFI		71,265		67,619
Net LHFI	$	7,779,948	$	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 December 31, 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.

Related Party Loans

At December 31, 2016 and 2015, loans to certain executive officers and directors, including their immediate families and companies in which they are principal owners, totaled $47.1 million and $82.2 million, respectively. During 2016, $390.9 million of new loan advances were made, while repayments were $389.6 million. In addition, decreases in loans due to changes in executive officers and directors totaled $36.4 million.

Nonaccrual/Impaired LHFI

At December 31, 2016 and 2015, the carrying amounts of nonaccrual LHFI were $49.2 million and $55.3 million, respectively. Included in these amounts were $14.4 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 years in the three-year period ended December 31, 2016.

Trustmark considers all nonaccrual LHFI to be impaired loans. All commercial nonaccrual LHFI (including those classified as TDRs) over $500 thousand were 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 December 31, 2016 and 2015, specifically evaluated impaired LHFI totaled $23.7 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 $6.4 million, $10.1 million and $137 thousand for 2016, 2015 and 2014, respectively. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded. At December 31, 2016 and 2015, reserves related to specifically evaluated impaired LHFI totaled $3.0 million and $7.0 million, respectively. Provision recapture on specifically evaluated impaired LHFI totaled $2.2 million for 2016, compared to provision expense of $4.8 million and $3.5 million for 2015 and 2014, respectively.

At December 31, 2016 and 2015, impaired LHFI, excluding the specifically evaluated impaired LHFI, totaled $25.5 million and $28.8 million, respectively. In addition, these impaired LHFI had allocated allowance for loan losses of $2.5 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 years in the three-year period ended December 31, 2016.

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

	December 31, 2016
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	3,323	$	828,114	$	831,437
Secured by 1-4 family residential properties		20,329		1,639,714		1,660,043
Secured by nonfarm, nonresidential properties		8,482		2,025,694		2,034,176
Other real estate secured		402		317,746		318,148
Commercial and industrial loans		15,824		1,512,610		1,528,434
Consumer loans		300		170,262		170,562
State and other political subdivision loans		—		917,515		917,515
Other loans		574		390,324		390,898
Total	$	49,234	$	7,801,979	$	7,851,213

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

	December 31, 2016
	LHFI
	Unpaid		With No Related		With an		Total				Average
	Principal		Allowance		Allowance		Carrying		Related		Recorded
	Balance		Recorded		Recorded		Amount		Allowance		Investment
Loans secured by real estate:
Construction, land development and other land	$	6,743	$	2,260	$	1,063	$	3,323	$	616	$	4,723
Secured by 1-4 family residential properties		24,805		221		20,108		20,329		1,420		21,704
Secured by nonfarm, nonresidential properties		11,227		5,784		2,698		8,482		851		13,141
Other real estate secured		429		—		402		402		118		274
Commercial and industrial loans		16,887		11,461		4,363		15,824		2,425		11,723
Consumer loans		303		—		300		300		3		165
State and other political subdivision loans		—		—		—		—		—		—
Other loans		756		95		479		574		111		543
Total	$	61,150	$	19,821	$	29,413	$	49,234	$	5,544	$	52,273

	December 31, 2015
	LHFI
	Unpaid		With No Related		With an		Total				Average
	Principal		Allowance		Allowance		Carrying		Related		Recorded
	Balance		Recorded		Recorded		Amount		Allowance		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 collectibility by obtaining more cash or other value from the borrower or by increasing the probability of receipt by granting the concession than by not granting it. Other concessions may arise from court proceedings or may be imposed by law. In addition, TDRs also include those credits that are extended or renewed to a borrower who is not able to obtain funds from sources other than Trustmark at a market interest rate for new debt with similar risk.

A formal TDR may include, but is not necessarily limited to, one or a combination of the following situations:

•

Trustmark accepts a third-party receivable or other asset(s) of the borrower, in lieu of the receivable from the borrower.

•

Trustmark accepts an equity interest in the borrower in lieu of the receivable.

•

Trustmark accepts modification of the terms of the debt including but not limited to:

Reduction of (absolute or contingent) the stated interest rate to below the current market rate.

Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the note or other agreement.

Reduction (absolute or contingent) of accrued interest.

Troubled debt restructurings are addressed in Trustmark’s loan policy, and in accordance with that policy, any modifications or concessions that may result in a TDR are subject to a special approval process which allows for control, identification, and monitoring of these arrangements. Prior to granting a concession, a revised borrowing arrangement is proposed which is structured so as to improve collectability of the loan in accordance with a reasonable repayment schedule with any loss promptly identified. It is supported by a thorough evaluation of the borrower’s financial condition and prospects for repayment under those revised terms. Other TDRs arising from renewals or extensions of existing debt are routinely identified through the processes utilized in the Problem Loan Committees and in the Credit Quality Review Committee. All TDRs are subsequently reported to the Director Credit Policy Committee on a quarterly basis and are disclosed in Trustmark’s consolidated financial statements in accordance with GAAP and regulatory reporting guidance.

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 December 31, 2016 and 2015, Trustmark held $269 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. Consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings totaled $101 thousand at December 31, 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 December 31, 2016, 2015 and 2014, LHFI classified as TDRs totaled $14.5 million, $9.7 million and $11.3 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $9.8 million, $5.9 million and $7.4 million, respectively. The remaining TDRs at December 31, 2016, 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 $2.2 million at December 31, 2016, $1.8 million at December 31, 2015 and $1.7 million at December 31, 2014. 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 $1.0 million, $806 thousand and $75 thousand for the years ended December 31, 2016, 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):

	Year Ended December 31, 2016
Troubled Debt Restructurings	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		18		1,386		1,391
Loans secured by nonfarm, nonresidential properties		2		717		717
Commercial and industrial		5		10,043		9,982
Consumer loans		1		2		2
Total		27	$	12,162	$	12,106

	Year Ended December 31, 2015
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Loans secured by 1-4 family residential properties		13	$	688	$	688
Loans secured by nonfarm, nonresidential properties		5		3,613		3,613
Total		18	$	4,301	$	4,301

Year Ended December 31, 2014

Troubled Debt Restructurings

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Loans secured by 1-4 family residential properties

1,248

1,234

	Years Ended December 31,
	2016				2015				2014
TDRs that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Loans secured by 1-4 family residential properties		1	$	—		5	$	260		1	$	103
Commercial and industrial		2		2,154		—		—		—		—
Total		3	$	2,154		5	$	260		1	$	103

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 December 31, 2016, 2015 and 2014 ($ in thousands):

	December 31, 2016
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	405	$	405
Secured by 1-4 family residential properties		—		2,873		2,873
Secured by nonfarm, nonresidential properties		—		881		881
Commercial and industrial loans		53		10,266		10,319
Consumer loans		—		2		2
Total TDRs	$	53	$	14,427	$	14,480

	December 31, 2015
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	869	$	869
Secured by 1-4 family residential properties		1,426		2,424		3,850
Secured by nonfarm, nonresidential properties		809		3,662		4,471
Commercial and industrial loans		—		463		463
Total TDRs	$	2,235	$	7,418	$	9,653

	December 31, 2014
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	3,665	$	3,665
Secured by 1-4 family residential properties		1,385		3,733		5,118
Secured by nonfarm, nonresidential properties		—		1,854		1,854
Other real estate secured		—		149		149
Commercial and industrial loans		—		509		509
Total TDRs	$	1,385	$	9,910	$	11,295

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 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, commercial nonaccrual LHFI of $500 thousand or more 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 with 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 December 31, 2016 and 2015 ($ in thousands):

	December 31, 2016
	Commercial LHFI
	Pass -		Special Mention -		Substandard -		Doubtful -
	Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Loans secured by real estate:
Construction, land development and other land	$	752,318	$	9,567	$	8,086	$	465	$	770,436
Secured by 1-4 family residential properties		124,615		170		6,162		129		131,076
Secured by nonfarm, nonresidential properties		1,989,554		4,394		38,913		584		2,033,445
Other real estate secured		315,829		762		890		—		317,481
Commercial and industrial loans		1,386,155		7,095		134,199		985		1,528,434
Consumer loans		—		—		—		—		—
State and other political subdivision loans		899,935		6,450		11,130		—		917,515
Other loans		382,890		—		2,685		350		385,925
Total	$	5,851,296	$	28,438	$	202,065	$	2,513	$	6,084,312

	Consumer LHFI
			Past Due		Past Due
	Current		30-89 Days		90 Days or More		Nonaccrual		Subtotal		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	60,701	$	188	$	54	$	58	$	61,001	$	831,437
Secured by 1-4 family residential properties		1,503,096		7,377		1,436		17,058		1,528,967		1,660,043
Secured by nonfarm, nonresidential properties		731		—		—		—		731		2,034,176
Other real estate secured		667		—		—		—		667		318,148
Commercial and industrial loans		—		—		—		—		—		1,528,434
Consumer loans		168,031		1,891		341		299		170,562		170,562
State and other political subdivision loans		—		—		—		—		—		917,515
Other loans		4,940		33		—		—		4,973		390,898
Total	$	1,738,166	$	9,489	$	1,831	$	17,415	$	1,766,901	$	7,851,213

	December 31, 2015
	Commercial LHFI
	Pass -		Special Mention -		Substandard -		Doubtful -
	Categories 1-6		Category 7		Category 8		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
			Past Due		Past Due
	Current		30-89 Days		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 December 31, 2016 and 2015 ($ in thousands):

	December 31, 2016
	Past Due
					90 Days						Current
	30-59 Days		60-89 Days		or More (1)		Total		Nonaccrual		Loans		Total LHFI
Loans secured by real estate:
Construction, land development and other land	$	248	$	37	$	54	$	339	$	3,323	$	827,775	$	831,437
Secured by 1-4 family residential properties		5,308		2,434		1,436		9,178		20,329		1,630,536		1,660,043
Secured by nonfarm, nonresidential properties		606		100		—		706		8,482		2,024,988		2,034,176
Other real estate secured		179		—		—		179		402		317,567		318,148
Commercial and industrial loans		571		213		—		784		15,824		1,511,826		1,528,434
Consumer loans		1,561		330		341		2,232		300		168,030		170,562
State and other political subdivision loans		1,035		—		—		1,035		—		916,480		917,515
Other loans		178		53		—		231		574		390,093		390,898
Total	$	9,686	$	3,167	$	1,831	$	14,684	$	49,234	$	7,787,295	$	7,851,213

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

	December 31, 2015
	Past Due
					90 Days						Current
	30-59 Days		60-89 Days		or More (1)		Total		Nonaccrual		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 LHFS

LHFS past due 90 days or more totaled $28.3 million and $21.8 million at December 31, 2016 and 2015, respectively.

During 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 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.

During 2015, the 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. An additional provision of approximately $2.3 million was recorded in 2015 as result of this revision to the quantitative portion of the allowance for loan loss methodology for commercial LHFI. 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 trigger has occurred until the borrower exhibits the inability to pay or other evidence of credit deterioration. Trustmark estimates the loss event to have occurred within a nine month period prior to the event of default. The charge-off of the loss occurs within a ten month period after the event of default, resulting in a 1.5 year LEP.

During 2015, Trustmark also revised the quantitative portion of the allowance for loan loss methodology for commercial LHFI to incorporate third-party default data. The default data is used in conjunction with each market/commercial loan pool’s loss rate and the commercial loan LEP in calculating a total quantitative loss factor for each risk rating within each market and pool. The quantitative reserves are a result of the total quantitative loss factor multiplied by the outstanding balances within each loan group and risk rate. An additional provision of approximately $1.3 million was recorded in 2015 as a 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 within each key market region.

During 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 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 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 2015.

In addition, Trustmark revised the qualitative portion of the commercial LHFI allowance for loan loss methodology to incorporate the use of maximum observed gross historical losses as a way to calculate a maximum qualitative reserve limit. The maximum observed gross historical losses for each market were observed for a three-year period reflecting the last economic downturn (i.e., 2008-2010). The aggregate of these losses as a percentage of the three-year average commercial LHFI balance results in an entity wide maximum observed gross historical loss rate for commercial LHFI. Once the quantitative component of the allowance for loan loss methodology is calculated, the quantitative reserve percentage is deducted from the maximum observed gross historical loss rate, resulting in the maximum possible qualitative reserve limit. The overall Qualitative Risk Factor (QRF) percentage is calculated by weighting each market’s QRF and applied as a percentage to the maximum qualitative reserve limit. The result is the amount of qualitative adjustment to be distributed to each market. The distribution of qualitative reserves incorporates the nine separate commercial loan groups that are ranked in ascending order of risk by their respective weighted-average risk rates. The distribution of the qualitative adjustment among the risk rates was derived by an analysis that determines the probability of future credit deterioration. An additional provision of approximately $4.4 million was recorded in 2015 as a result of these revisions.

During 2015, Trustmark also revised the qualitative portion of the allowance for loan loss methodology for commercial LHFI regarding the loan facility risk component. Loan facility risk embodies the nature, frequency and duration of the repayment structure as it pertains to the actual source of loan repayment. The underlying loan structure and nature of the credit either is risk neutral for traditional structures or adds risk to the credit for any variance that represents additional credit risk from the traditional structures. If the facility structure adds additional credit risk, qualitative reserves are added to individual loans based on their respective commercial loan pools. Factors considered in assigning facility risk include whether the principal is amortizing or not amortizing, revolving or not revolving, the payment frequency and the duration of the payment structure. In order to estimate the facility reserve for amortizing and interest only structures, loan level detail is used to estimate the incremental payment amount at risk, which is then assigned a reserve factor based upon probability of default, loss given default and the degree of deviation from the traditional structures. A provision recapture of approximately $2.1 million was recorded in 2015 as a result of this revision to the qualitative portion of the allowance for loan loss methodology for commercial LHFI.

During 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 a formal analysis. 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 2014 as result of this revision to the qualitative portion of the allowance for loan loss methodology for commercial LHFI.

Trustmark made no revisions to the allowance for loan loss methodology for commercial LHFI during 2016.

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

•

Credit concentrations

•

Loan policy exceptions

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 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 2015 as a result of these revisions to the qualitative portion of the allowance for loan loss methodology for consumer LHFI.

In addition, Trustmark revised the quantitative portion of the allowance for loan loss methodology for the consumer mortgage portfolio. When the current allowance for loan loss methodology was originally established, the Florida market mortgages and non-Florida mortgages were treated separately due to the vast difference in loss experience. Since the credit metrics in the Florida market region now more closely resemble Trustmark as a whole, the quantitative portion of the loan loss methodology was revised to no longer segregate the mortgage portfolio into Florida and non-Florida portions. A provision recapture of approximately $455 thousand was recorded in 2015 as a result of this revision to the quantitative portion of the allowance for loan loss methodology for consumer LHFI.

During 2015, Trustmark also revised the qualitative portion of the consumer LHFI allowance for loan loss methodology to incorporate the use of maximum observed gross historical losses as a way to calculate a maximum qualitative reserve limit. The maximum observed gross historical losses for each consumer loan portfolio were observed for a three-year period reflecting the last economic downturn (i.e., 2008-2010). The aggregate of these losses as a percentage of the respective pool’s loan balance results in a maximum observed gross historical loss rate. Once the quantitative component of the allowance for loan loss methodology is calculated, the quantitative reserve is deducted from the maximum observed gross historical loss rate, resulting in the maximum possible qualitative reserve limit. The QRF percentage is calculated and applied as a percentage to the maximum qualitative reserve limit. The result is the amount of qualitative adjustment to be distributed to each consumer loan pool, with the exception of overdrafts due to their specific nature. An additional provision of approximately $750 thousand was recorded in 2015 as a result of this revision to the qualitative portion of the allowance for loan loss methodology for consumer LHFI.

During 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 2014 as a result of this revision to the qualitative portion of the allowance for loan loss methodology for consumer LHFI.

Trustmark made no revisions to the allowance for loan loss methodology for consumer LHFI during 2016.

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):

	Years Ended December31,
	2016			2015			2014
Balance at beginning of period	$	67,619		$	69,616		$	66,448
Loans charged-off		(18,930	)		(22,469	)		(13,226	)
Recoveries		11,619			12,097			15,183
Net (charge-offs) recoveries		(7,311	)		(10,372	)		1,957
Provision for loan losses, LHFI		10,957			8,375			1,211
Balance at end of period	$	71,265		$	67,619		$	69,616

The following tables detail the balance in the allowance for loan losses, LHFI by loan type at December 31, 2016 and 2015, respectively ($ in thousands):

	2016
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			December 31,
Loans secured by real estate:
Construction, land development and other land	$	11,587	$	(311	)	$	1,380	$	(3,571	)	$	9,085
Secured by 1-4 family residential properties		10,678		(1,319	)		1,122		(134	)		10,347
Secured by nonfarm, nonresidential properties		21,563		(3,067	)		976		1,495			20,967
Other real estate secured		2,467		(27	)		7		(184	)		2,263
Commercial and industrial loans		15,815		(6,602	)		732		12,066			22,011
Consumer loans		2,879		(1,864	)		4,007		(1,781	)		3,241
State and other political subdivision loans		809		—			—		50			859
Other loans		1,821		(5,740	)		3,395		3,016			2,492
Total allowance for loan losses, LHFI	$	67,619	$	(18,930	)	$	11,619	$	10,957		$	71,265

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	616	$	8,469	$	9,085
Secured by 1-4 family residential properties		1,420		8,927		10,347
Secured by nonfarm, nonresidential properties		851		20,116		20,967
Other real estate secured		118		2,145		2,263
Commercial and industrial loans		2,425		19,586		22,011
Consumer loans		3		3,238		3,241
State and other political subdivision loans		—		859		859
Other loans		111		2,381		2,492
Total allowance for loan losses, LHFI	$	5,544	$	65,721	$	71,265

	2015
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			December 31,
Loans secured by real estate:
Construction, land development and other land	$	13,073	$	(2,435	)	$	1,773	$	(824	)	$	11,587
Secured by 1-4 family residential properties		9,677		(2,473	)		920		2,554			10,678
Secured by nonfarm, nonresidential properties		18,523		(1,439	)		605		3,874			21,563
Other real estate secured		2,141		(24	)		136		214			2,467
Commercial and industrial loans		19,917		(8,081	)		1,761		2,218			15,815
Consumer loans		2,149		(2,171	)		3,289		(388	)		2,879
State and other political subdivision loans		1,314		—			—		(505	)		809
Other loans		2,822		(5,846	)		3,613		1,232			1,821
Total allowance for loan losses, LHFI	$	69,616	$	(22,469	)	$	12,097	$	8,375		$	67,619

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	909	$	10,678	$	11,587
Secured by 1-4 family residential properties		1,230		9,448		10,678
Secured by nonfarm, nonresidential properties		3,402		18,161		21,563
Other real estate secured		15		2,452		2,467
Commercial and industrial loans		3,304		12,511		15,815
Consumer loans		—		2,879		2,879
State and other political subdivision loans		—		809		809
Other loans		128		1,693		1,821
Total allowance for loan losses, LHFI	$	8,988	$	58,631	$	67,619