Note 5 – Acquired Loans

During the first quarter of 2017, Trustmark modified the presentation of the acquired loans disclosures 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.

Loans acquired in the Reliance merger completed on April 7, 2017 were evaluated using a fair value process to determine the degree of credit deterioration since origination and the collectibility of contractually required payments. Approximately $7.9 million of the loans acquired in the Reliance merger exhibited evidence of significant credit deterioration since origination and for which it was probable at acquisition that Trustmark would not be able to collect all contractually required payments. These loans are accounted for as acquired impaired loans under FASB ASC Topic 310-30.

At September 30, 2017 and December 31, 2016, acquired loans consisted of the following ($ in thousands):

	September 30, 2017			December 31, 2016
Loans secured by real estate:
Construction, land development and other land	$	29,384		$	20,850
Secured by 1-4 family residential properties		65,746			69,540
Secured by nonfarm, nonresidential properties		122,200			103,820
Other real estate secured		18,431			19,010
Commercial and industrial loans		34,124			36,896
Consumer loans		2,749			3,365
Other loans		11,123			18,766
Acquired loans		283,757			272,247
Allowance for loan losses, acquired loans		(5,768	)		(11,397	)
Net acquired loans	$	277,989		$	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	)		—
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	)
Additions (4)		7,899			109,548
Accretion to interest income		11,021			1,159
Payments received, net		(50,406	)		(29,266	)
Other (2)		(2,946	)		1,220
Change in allowance for loan losses, acquired loans		5,629			—
Carrying value, net at September 30, 2017	$	189,304		$	88,685

(1)	"Acquired Not ASC 310-30" loans consist of loans 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)	“Acquired Not ASC 310-30” loans transferred to LHFI due to the discount on these loans being fully amortized.

(4)	Loans acquired in the Reliance merger on April 7, 2017.

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,
	2017			2016
Accretable yield at beginning of period	$	(38,918	)	$	(52,672	)
Accretion to interest income		11,021			14,351
Additions due to acquisitions (1)		(784	)		—
Disposals, net		1,759			4,306
Reclassification from nonaccretable difference (2)		(7,204	)		(7,046	)
Accretable yield at end of period	$	(34,126	)	$	(41,061	)

(1)	Accretable yield on loans acquired from Reliance on April 7, 2017.

(2)	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,						Nine Months Ended September 30,
	2017			2016			2017			2016
Balance at beginning of period	$	7,423		$	12,480		$	11,397		$	11,992
Provision for loan losses, acquired loans		(1,653	)		691			(5,822	)		2,607
Loans charged-off		(2	)		(2,590	)		(21	)		(5,041	)
Recoveries		—			799			214			1,822
Net (charge-offs) recoveries		(2	)		(1,791	)		193			(3,219	)
Balance at end of period	$	5,768		$	11,380		$	5,768		$	11,380

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 September 30, 2017 and December 31, 2016 ($ in thousands):

	September 30, 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			$	19,223	$	783	$	6,421	$	263	$	26,690
Secured by 1-4 family residential properties				14,817		908		3,348		—		19,073
Secured by nonfarm, nonresidential properties				99,324		2,858		19,479		501		122,162
Other real estate secured				12,967		106		4,452		499		18,024
Commercial and industrial loans				23,612		743		8,279		1,490		34,124
Consumer loans				—		—		—		—		—
Other loans				6,258		18		4,732		115		11,123
Total acquired loans			$	176,201	$	5,416	$	46,711	$	2,868	$	231,196

	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	$	2,673	$	13	$	8	$	—	$	2,694	$	29,384
Secured by 1-4 family residential properties		44,683		1,101		754		135		46,673		65,746
Secured by nonfarm, nonresidential properties		38		—		—		—		38		122,200
Other real estate secured		407		—		—		—		407		18,431
Commercial and industrial loans		—		—		—		—		—		34,124
Consumer loans		2,714		33		2		—		2,749		2,749
Other loans		—		—		—		—		—		11,123
Total acquired loans	$	50,515	$	1,147	$	764	$	135	$	52,561	$	283,757

(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 September 30, 2017 and December 31, 2016, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2017, approximately $314 thousand of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $631 thousand of acquired loans at December 31, 2016.

The following tables provide an aging analysis of contractually past due and nonaccrual acquired loans by loan type at September 30, 2017 and December 31, 2016 ($ in thousands):

	September 30, 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	$	1,946	$	23	$	1,880	$	3,849	$	—	$	25,535	$	29,384
Secured by 1-4 family residential properties		1,050		481		823		2,354		314		63,078		65,746
Secured by nonfarm, nonresidential properties		442		—		1,005		1,447		—		120,753		122,200
Other real estate secured		4		—		271		275		—		18,156		18,431
Commercial and industrial loans		740		—		—		740		—		33,384		34,124
Consumer loans		33		—		2		35		—		2,714		2,749
Other loans		—		—		—		—		—		11,123		11,123
Total acquired loans	$	4,215	$	504	$	3,981	$	8,700	$	314	$	274,743	$	283,757

(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.