Note 4 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI

At June 30, 2018 and December 31, 2017, LHFI consisted of the following ($ in thousands):

	June 30, 2018			December 31, 2017
Loans secured by real estate:
Construction, land development and other land	$	1,038,745		$	987,624
Secured by 1-4 family residential properties		1,742,496			1,675,311
Secured by nonfarm, nonresidential properties		2,321,734			2,193,823
Other real estate secured		397,538			517,956
Commercial and industrial loans		1,572,764			1,570,345
Consumer loans		175,261			171,918
State and other political subdivision loans		925,452			952,483
Other loans		504,993			500,507
LHFI		8,678,983			8,569,967
Allowance for loan losses, LHFI		(83,566	)		(76,733	)
Net LHFI	$	8,595,417		$	8,493,234

Loan Concentrations

Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At June 30, 2018, 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 and Past Due LHFI

At June 30, 2018 and December 31, 2017, the carrying amounts of nonaccrual LHFI were $61.4 million and $67.6 million, respectively. Included in these amounts were $33.2 million and $23.2 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 June 30, 2018 and 2017.

The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at June 30, 2018 and December 31, 2017 ($ in thousands):

	June 30, 2018
	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	$	39	$	80	$	—	$	119	$	2,566	$	1,036,060	$	1,038,745
Secured by 1-4 family residential properties		4,089		1,307		309		5,705		16,753		1,720,038		1,742,496
Secured by nonfarm, nonresidential properties		863		412		—		1,275		7,997		2,312,462		2,321,734
Other real estate secured		140		—		43		183		69		397,286		397,538
Commercial and industrial loans		1,183		204		—		1,387		32,548		1,538,829		1,572,764
Consumer loans		1,281		340		163		1,784		174		173,303		175,261
State and other political subdivision loans		—		—		—		—		—		925,452		925,452
Other loans		40		4		14		58		1,256		503,679		504,993
Total	$	7,635	$	2,347	$	529	$	10,511	$	61,363	$	8,607,109	$	8,678,983

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

	December 31, 2017
	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	$	391	$	1	$	—	$	392	$	2,105	$	985,127	$	987,624
Secured by 1-4 family residential properties		6,412		2,084		1,917		10,413		19,022		1,645,876		1,675,311
Secured by nonfarm, nonresidential properties		2,319		256		—		2,575		12,608		2,178,640		2,193,823
Other real estate secured		—		—		—		—		212		517,744		517,956
Commercial and industrial loans		759		1,233		12		2,004		33,338		1,535,003		1,570,345
Consumer loans		2,141		255		242		2,638		135		169,145		171,918
State and other political subdivision loans		350		39		—		389		—		952,094		952,483
Other loans		18		4		—		22		155		500,330		500,507
Total	$	12,390	$	3,872	$	2,171	$	18,433	$	67,575	$	8,483,959	$	8,569,967

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

Impaired LHFI

Trustmark’s individually evaluated impaired LHFI include all commercial nonaccrual relationships of $500 thousand or more, which are specifically reviewed for impairment and deemed impaired, and all LHFI classified as TDRs in accordance with FASB ASC Topic 310-10-50-20 “Impaired Loans”, and 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 or more often if market conditions necessitate. 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 LHFI that has been individually evaluated for impairment 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. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.

No material interest income was recognized in the income statement on impaired LHFI for each of the periods ended June 30, 2018 and 2017.

At June 30, 2018 and December 31, 2017, individually evaluated impaired LHFI consisted of the following ($ in thousands):

	June 30, 2018
	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	$	2,007	$	1,558	$	208	$	1,766	$	60	$	1,845
Secured by 1-4 family residential properties		5,885		707		3,908		4,615		42		4,654
Secured by nonfarm, nonresidential properties		6,724		6,148		370		6,518		133		7,420
Other real estate secured		—		—		—		—		—		—
Commercial and industrial loans		37,891		14,347		17,225		31,572		8,499		27,153
Consumer loans		4		—		4		4		—		6
State and other political subdivision loans		—		—		—		—		—		—
Other loans		1,206		—		1,106		1,106		1,106		716
Total	$	53,717	$	22,760	$	22,821	$	45,581	$	9,840	$	41,794

	December 31, 2017
	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	$	1,704	$	1,206	$	199	$	1,405	$	75	$	1,923
Secured by 1-4 family residential properties		6,031		160		4,576		4,736		1,331		4,693
Secured by nonfarm, nonresidential properties		15,205		10,027		396		10,423		165		8,321
Other real estate secured		—		—		—		—		—		—
Commercial and industrial loans		36,874		31,281		518		31,799		131		22,734
Consumer loans		17		—		17		17		—		9
State and other political subdivision loans		—		—		—		—		—		—
Other loans		556		—		556		556		41		325
Total	$	60,387	$	42,674	$	6,262	$	48,936	$	1,743	$	38,005

Troubled Debt Restructurings

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 TDR are evaluated for impairment under FASB ASC Topic 310, “Receivables”. 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 June 30, 2018 and December 31, 2017, Trustmark held $546 thousand and $366 thousand, respectively, of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. At both June 30, 2018 and December 31, 2017, Trustmark had no consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings.

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 June 30, 2018 and 2017, LHFI classified as TDRs totaled $34.5 million and $13.2 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $21.8 million and $9.5 million, respectively. The remaining TDRs at June 30, 2018 and 2017 resulted from real estate loans discharged through Chapter 7 bankruptcy that were not reaffirmed or from payment or maturity extensions. Trustmark had no material unused commitments on TDRs at June 30, 2018 and 2017.

For TDRs, Trustmark had a related loan loss allowance of $9.1 million and $506 thousand at June 30, 2018 and 2017, 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 totaled $300 thousand for the six months ended June 30, 2018 compared to none for the six months ended June 30, 2017.

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 June 30,
	2018						2017
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	$	22	$	22		—	$	—	$	—
Loans secured by 1-4 family residential properties		12		1,634		1,193		9		834		839
Commercial and industrial loans		5		9,275		9,258		1		244		244
Consumer loans		3		4		4		—		—		—
Total		21	$	10,935	$	10,477		10	$	1,078	$	1,083

	Six Months Ended June 30,
	2018						2017
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	$	22	$	22		1	$	341	$	325
Loans secured by 1-4 family residential properties		16		1,752		1,311		16		1,168		1,177
Commercial and industrial loans		6		11,746		11,729		1		244		244
Consumer loans		3		4		4		—		—		—
Total		26	$	13,524	$	13,066		18	$	1,753	$	1,746

	Six Months Ended June 30,
	2018				2017
TDRs that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Construction, land development and other land loans		1	$	22		—	$	—
Loans secured by 1-4 family residential properties		2		30		—		—
Commercial and industrial loans		3		7,414		2		—
Total		6	$	7,466		2	$	—

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 June 30, 2018 and 2017 ($ in thousands):

	June 30, 2018
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	208	$	208
Secured by 1-4 family residential properties		501		3,407		3,908
Secured by nonfarm, nonresidential properties		—		370		370
Commercial and industrial loans		733		28,673		29,406
Consumer loans		—		4		4
Other loans		—		556		556
Total TDRs	$	1,234	$	33,218	$	34,452

	June 30, 2017
	Accruing		Nonaccrual		Total
Loans secured by real estate:
Construction, land development and other land	$	—	$	641	$	641
Secured by 1-4 family residential properties		—		3,589		3,589
Secured by nonfarm, nonresidential properties		—		802		802
Commercial and industrial loans		—		8,207		8,207
Consumer loans		—		1		1
Total TDRs	$	—	$	13,240	$	13,240

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 and completeness 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 or not current.

•

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), Regulation O requirements and regulations governing appraisals.

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 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, nonaccrual relationships of $500 thousand or more 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 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, a semi-annual review of significant development, commercial construction, multi-family and non-owner occupied projects is performed. The review assesses each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination as to the appropriateness of existing risk ratings and accrual status.

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.

The tables below present LHFI by loan type and credit quality indicator at June 30, 2018 and December 31, 2017 ($ in thousands):

	June 30, 2018
		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		$	970,330	$	337	$	3,622	$	212	$	974,501
Secured by 1-4 family residential properties			126,253		100		4,098		65		130,516
Secured by nonfarm, nonresidential properties			2,282,660		3,953		34,558		495		2,321,666
Other real estate secured			396,830		—		387		—		397,217
Commercial and industrial loans			1,452,384		21,689		97,125		1,566		1,572,764
Consumer loans			—		—		—		—		—
State and other political subdivision loans			909,203		5,250		10,999		—		925,452
Other loans			494,525		509		5,139		105		500,278
Total		$	6,632,185	$	31,838	$	155,928	$	2,443	$	6,822,394

	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	$	63,761	$	83	$	—	$	400	$	64,244	$	1,038,745
Secured by 1-4 family residential properties		1,591,476		4,605		309		15,590		1,611,980		1,742,496
Secured by nonfarm, nonresidential properties		68		—		—		—		68		2,321,734
Other real estate secured		321		—		—		—		321		397,538
Commercial and industrial loans		—		—		—		—		—		1,572,764
Consumer loans		173,303		1,621		163		174		175,261		175,261
State and other political subdivision loans		—		—		—		—		—		925,452
Other loans		4,715		—		—		—		4,715		504,993
Total	$	1,833,644	$	6,309	$	472	$	16,164	$	1,856,589	$	8,678,983

	December 31, 2017
		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		$	922,563	$	316	$	3,780	$	222	$	926,881
Secured by 1-4 family residential properties			127,405		134		4,948		76		132,563
Secured by nonfarm, nonresidential properties			2,135,749		6,684		50,785		527		2,193,745
Other real estate secured			517,036		—		517		—		517,553
Commercial and industrial loans			1,437,590		28,780		103,089		886		1,570,345
Consumer loans			—		—		—		—		—
State and other political subdivision loans			936,420		5,850		10,213		—		952,483
Other loans			478,083		—		16,390		108		494,581
Total		$	6,554,846	$	41,764	$	189,722	$	1,819	$	6,788,151

	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	$	60,240	$	342	$	—	$	161	$	60,743	$	987,624
Secured by 1-4 family residential properties		1,516,691		7,874		1,809		16,374		1,542,748		1,675,311
Secured by nonfarm, nonresidential properties		78		—		—		—		78		2,193,823
Other real estate secured		403		—		—		—		403		517,956
Commercial and industrial loans		—		—		—		—		—		1,570,345
Consumer loans		169,146		2,396		242		134		171,918		171,918
State and other political subdivision loans		—		—		—		—		—		952,483
Other loans		5,926		—		—		—		5,926		500,507
Total	$	1,752,484	$	10,612	$	2,051	$	16,669	$	1,781,816	$	8,569,967

Past Due Loans Held for Sale (LHFS)

LHFS past due 90 days or more totaled $34.7 million and $35.5 million at June 30, 2018 and December 31, 2017, 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.

Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first six months of 2018 or 2017.

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:

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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:

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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.

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.

The following tables detail the balance in the allowance for loan losses, LHFI allocated to each loan type segmented by the impairment evaluation methodology used at June 30, 2018 and December 31, 2017 ($ in thousands):

	June 30, 2018
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	60	$	7,830	$	7,890
Secured by 1-4 family residential properties		42		9,620		9,662
Secured by nonfarm, nonresidential properties		133		23,869		24,002
Other real estate secured		—		2,379		2,379
Commercial and industrial loans		8,499		23,029		31,528
Consumer loans		—		2,974		2,974
State and other political subdivision loans		—		765		765
Other loans		1,106		3,260		4,366
Total allowance for loan losses, LHFI	$	9,840	$	73,726	$	83,566

	December 31, 2017
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	75	$	7,790	$	7,865
Secured by 1-4 family residential properties		1,331		9,543		10,874
Secured by nonfarm, nonresidential properties		165		23,263		23,428
Other real estate secured		—		2,790		2,790
Commercial and industrial loans		131		22,720		22,851
Consumer loans		—		3,470		3,470
State and other political subdivision loans		—		789		789
Other loans		41		4,625		4,666
Total allowance for loan losses, LHFI	$	1,743	$	74,990	$	76,733

The following tables detail LHFI by loan type related to each balance in the allowance for loan losses, LHFI segregated by the impairment evaluation methodology used at June 30, 2018 and December 31, 2017 ($ in thousands):

	June 30, 2018
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	1,766	$	1,036,979	$	1,038,745
Secured by 1-4 family residential properties		4,615		1,737,881		1,742,496
Secured by nonfarm, nonresidential properties		6,518		2,315,216		2,321,734
Other real estate secured		—		397,538		397,538
Commercial and industrial loans		31,572		1,541,192		1,572,764
Consumer loans		4		175,257		175,261
State and other political subdivision loans		—		925,452		925,452
Other loans		1,106		503,887		504,993
Total	$	45,581	$	8,633,402	$	8,678,983

	December 31, 2017
	LHFI Evaluated for Impairment
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land	$	1,405	$	986,219	$	987,624
Secured by 1-4 family residential properties		4,736		1,670,575		1,675,311
Secured by nonfarm, nonresidential properties		10,423		2,183,400		2,193,823
Other real estate secured		—		517,956		517,956
Commercial and industrial loans		31,799		1,538,546		1,570,345
Consumer loans		17		171,901		171,918
State and other political subdivision loans		—		952,483		952,483
Other loans		556		499,951		500,507
Total	$	48,936	$	8,521,031	$	8,569,967

Changes in the allowance for loan losses, LHFI were as follows for the periods presented ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Balance at beginning of period	$	81,235		$	72,445		$	76,733		$	71,265
Transfers (1)		782			—			782			—
Loans charged-off		(3,421	)		(2,118	)		(5,963	)		(6,320	)
Recoveries		1,803			2,936			4,886			5,556
Net (charge-offs) recoveries		(1,618	)		818			(1,077	)		(764	)
Provision for loan losses, LHFI		3,167			2,921			7,128			5,683
Balance at end of period	$	83,566		$	76,184		$	83,566		$	76,184

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank & Trust Company (Bay Bank) merger on March 16, 2012, which were transferred from acquired loans to LHFI during the second quarter of 2018.

The following tables detail changes in the allowance for loan losses, LHFI by loan type for the periods ended June 30, 2018 and 2017 ($ in thousands):

	2018
	Balance January 1,		Transfers (1)			Charge-offs			Recoveries		Provision for Loan Losses			Balance June 30,
Loans secured by real estate:
Construction, land development and other land	$	7,865	$	573		$	(2	)	$	536	$	(1,082	)	$	7,890
Secured by 1-4 family residential properties		10,874		127			(1,302	)		342		(379	)		9,662
Secured by nonfarm, nonresidential properties		23,428		103			(1,117	)		36		1,552			24,002
Other real estate secured		2,790		(68	)		—			12		(355	)		2,379
Commercial and industrial loans		22,851		2			(178	)		1,347		7,506			31,528
Consumer loans		3,470		45			(1,007	)		1,037		(571	)		2,974
State and other political subdivision loans		789		—			—			—		(24	)		765
Other loans		4,666		—			(2,357	)		1,576		481			4,366
Total allowance for loan losses, LHFI	$	76,733	$	782		$	(5,963	)	$	4,886	$	7,128		$	83,566

(1)	The allowance for loan losses balance related to the remaining loans acquired in the Bay Bank merger on March 16, 2012, which were transferred from acquired loans to LHFI during the second quarter of 2018.

	2017
	Balance January 1,		Charge-offs			Recoveries		Provision for Loan Losses			Balance June 30,
Loans secured by real estate:
Construction, land development and other land loans	$	9,085	$	(58	)	$	753	$	(1,056	)	$	8,724
Secured by 1-4 family residential properties		10,347		(343	)		904		(414	)		10,494
Secured by nonfarm, nonresidential properties		20,967		(20	)		236		3,467			24,650
Other real estate secured		2,263		—			26		905			3,194
Commercial and industrial loans		22,011		(2,186	)		869		1,186			21,880
Consumer loans		3,241		(1,318	)		978		413			3,314
State and other political subdivision loans		859		—			—		(100	)		759
Other loans		2,492		(2,395	)		1,790		1,282			3,169
Total allowance for loan losses, LHFI	$	71,265	$	(6,320	)	$	5,556	$	5,683		$	76,184