Note 5 – Acquired Loans

The presentation of the acquired loans disclosures has been modified from prior filings to eliminate the segmentation of acquired noncovered loans and acquired covered loans due to the significantly reduced size of the acquired covered loan portfolio. 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 revised presentation reflects total acquired loan information in the accompanying consolidated balance sheets and tables below. All prior period information has been reclassified to conform to the current period presentation.

At March 31, 2017 and December 31, 2016, acquired loans consisted of the following ($ in thousands):

	March 31, 2017		December 31, 2016
Loans secured by real estate:
Construction, land development and other land	$	17,651	$	20,850
Secured by 1-4 family residential properties		54,721		69,540
Secured by nonfarm, nonresidential properties		92,075		103,820
Other real estate secured		16,275		19,010
Commercial and industrial loans		20,691		36,896
Consumer loans		2,664		3,365
Other loans		14,165		18,766
Acquired loans		218,242		272,247
Less allowance for loan losses, acquired loans		10,006		11,397
Net acquired loans	$	208,236	$	260,850

The following table presents changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):

	Acquired Impaired			Acquired Not ASC 310-30 (1)
Carrying value, net at January 1, 2016	$	310,762		$	67,657
Accretion to interest income		18,405			40
Payments received, net		(111,522	)		(24,953	)
Other (2)		(134	)		—
Less change in allowance for loan losses, acquired loans		596			(1	)
Carrying value, net at December 31, 2016		218,107			42,743
Transfers (3)		—			(36,719	)
Accretion to interest income		3,673			—
Payments received, net		(14,645	)		(6,024	)
Other (2)		(290	)		—
Less change in allowance for loan losses, acquired loans		1,391			—
Carrying value, net at March 31, 2017	$	208,236		$	—

(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)	During the first quarter of 2017, Trustmark transferred the remaining balance of the “Acquired Not ASC 310-30” loans to LHFI due to the discount on these loans being fully amortized.

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):

	Three Months Ended March 31,
	2017			2016
Accretable yield at beginning of period	$	(38,918	)	$	(52,672	)
Accretion to interest income		3,673			5,230
(Additions)/disposals		(183	)		1,067
Reclassification from nonaccretable difference (1)		(1,788	)		(3,403	)
Accretable yield at end of period	$	(37,216	)	$	(49,778	)

(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 March 31,
	2017			2016
Balance at beginning of period	$	11,397		$	11,992
Provision for loan losses, acquired loans		(1,605	)		1,309
Loans charged-off		—			(397	)
Recoveries		214			631
Net recoveries		214			234
Balance at end of period	$	10,006		$	13,535

As discussed in Note 4 - Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI, Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to segregate the level of risk across the ten unique risk ratings. These credit quality measures are unique to commercial loans. Credit quality for consumer loans is based on individual credit scores, aging status of the loan and payment activity.

The tables below present the acquired loans by loan type and credit quality indicator at March 31, 2017 and December 31, 2016 ($ in thousands):

	March 31, 2017
			Commercial Loans
			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			$	11,322	$	93	$	4,130	$	522	$	16,067
Secured by 1-4 family residential properties				12,649		52		3,573		52		16,326
Secured by nonfarm, nonresidential properties				73,125		—		18,389		515		92,029
Other real estate secured				12,775		—		2,536		544		15,855
Commercial and industrial loans				12,354		18		7,202		1,117		20,691
Consumer loans				—		—		—		—		—
Other loans				8,613		—		5,432		117		14,162
Total acquired loans			$	130,838	$	163	$	41,262	$	2,867	$	175,130

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (1)		Subtotal		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	1,469	$	102	$	13	$	—	$	1,584	$	17,651
Secured by 1-4 family residential properties		36,509		1,500		386		—		38,395		54,721
Secured by nonfarm, nonresidential properties		46		—		—		—		46		92,075
Other real estate secured		420		—		—		—		420		16,275
Commercial and industrial loans		—		—		—		—		—		20,691
Consumer loans		2,603		58		3		—		2,664		2,664
Other loans		3		—		—		—		3		14,165
Total acquired loans	$	41,050	$	1,660	$	402	$	—	$	43,112	$	218,242

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

	December 31, 2016
			Commercial Loans
			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			$	12,148	$	99	$	6,469	$	322	$	19,038
Secured by 1-4 family residential properties				14,552		61		4,066		69		18,748
Secured by nonfarm, nonresidential properties				83,271		435		19,553		511		103,770
Other real estate secured				15,344		—		2,673		565		18,582
Commercial and industrial loans				22,024		18		13,494		1,354		36,890
Consumer loans				—		—		—		—		—
Other loans				12,954		—		5,649		161		18,764
Total acquired loans			$	160,293	$	613	$	51,904	$	2,982	$	215,792

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual (1)		Subtotal		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	1,801	$	—	$	11	$	—	$	1,812	$	20,850
Secured by 1-4 family residential properties		48,695		1,364		709		24		50,792		69,540
Secured by nonfarm, nonresidential properties		50		—		—		—		50		103,820
Other real estate secured		428		—		—		—		428		19,010
Commercial and industrial loans		6		—		—		—		6		36,896
Consumer loans		3,250		51		64		—		3,365		3,365
Other loans		2		—		—		—		2		18,766
Total acquired loans	$	54,232	$	1,415	$	784	$	24	$	56,455	$	272,247

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

At March 31, 2017 and December 31, 2016, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At March 31, 2017, there were no acquired loans not accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans as a result of the transfer of the remaining balance of the acquired loans not accounted for under FASB ASC Topic 310-30 to the LHFI portfolio during the first quarter of 2017. Approximately $631 thousand of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans at December 31, 2016.

The following tables provide an aging analysis of contractually past due and nonaccrual acquired loans by loan type at March 31, 2017 and December 31, 2016 ($ in thousands):

	March 31, 2017
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual (2)		Current Loans		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	102	$	176	$	1,513	$	1,791	$	—	$	15,860	$	17,651
Secured by 1-4 family residential properties		1,568		625		683		2,876		—		51,845		54,721
Secured by nonfarm, nonresidential properties		166		1,739		1,850		3,755		—		88,320		92,075
Other real estate secured		—		—		576		576		—		15,699		16,275
Commercial and industrial loans		18		—		5		23		—		20,668		20,691
Consumer loans		58		—		3		61		—		2,603		2,664
Other loans		—		—		—		—		—		14,165		14,165
Total acquired loans	$	1,912	$	2,540	$	4,630	$	9,082	$	—	$	209,160	$	218,242

(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, 2016
	Past Due
	30-59 Days		60-89 Days		90 Days or More (1)		Total		Nonaccrual (2)		Current Loans		Total Acquired Loans
Loans secured by real estate:
Construction, land development and other land	$	321	$	100	$	821	$	1,242	$	—	$	19,608	$	20,850
Secured by 1-4 family residential properties		1,495		412		1,057		2,964		41		66,535		69,540
Secured by nonfarm, nonresidential properties		1,658		38		343		2,039		328		101,453		103,820
Other real estate secured		769		—		1,445		2,214		—		16,796		19,010
Commercial and industrial loans		60		39		—		99		262		36,535		36,896
Consumer loans		51		—		64		115		—		3,250		3,365
Other loans		—		—		—		—		—		18,766		18,766
Total acquired loans	$	4,354	$	589	$	3,730	$	8,673	$	631	$	262,943	$	272,247

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

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