| Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI | Note 3 – At September 30, 2015 and December 31, 2014, LHFI consisted of the following ($ in thousands): September 30, 2015 December 31, 2014 Loans secured by real estate: Construction, land development and other land $ 785,472 $ 619,877 Secured by 1-4 family residential properties 1,638,639 1,634,397 Secured by nonfarm, nonresidential properties 1,604,453 1,553,193 Other real estate secured 225,523 253,787 Commercial and industrial loans 1,270,277 1,270,350 Consumer loans 169,509 167,964 State and other political subdivision loans 677,539 602,727 Other loans 420,231 347,174 LHFI 6,791,643 6,449,469 Less allowance for loan losses, LHFI 65,607 69,616 Net LHFI $ 6,726,036 $ 6,379,853 Loan Concentrations Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At September 30, 2015, 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 and the recovery of a substantial portion of the carrying amount of other real estate are susceptible to changes in market conditions in these areas. Nonaccrual/Impaired LHFI At September 30, 2015 and December 31, 2014, the carrying amounts of nonaccrual LHFI, which are individually evaluated for impairment, were $61.1 million and $79.3 million, respectively. Of this total, all commercial nonaccrual LHFI over $500 thousand were specifically evaluated for impairment (specifically evaluated impaired LHFI) using a fair value approach. The remaining nonaccrual LHFI were not specifically reviewed and not written down to fair value less cost to sell. No material interest income was recognized in the income statement on impaired or nonaccrual LHFI for each of the periods ended September 30, 2015 and 2014. All of Trustmark’s specifically evaluated impaired LHFI are collateral dependent loans. At September 30, 2015 and December 31, 2014, specifically evaluated impaired LHFI totaled $32.5 million and $47.1 million, respectively. These specifically evaluated impaired LHFI had a related allowance of $6.4 million and $11.3 million at the end of the respective periods. For collateral dependent loans, when a loan is deemed impaired the full difference between the carrying amount of the loan and the most likely estimate of the collateral’s fair value less cost to sell is charged off. Charge-offs related to specifically evaluated impaired LHFI totaled $9.7 million and $55 thousand for the first nine months of 2015 and 2014, respectively. Provision expense on specifically evaluated impaired LHFI totaled $4.5 million for the first nine months of 2015 compared to $1.6 million for the first nine months of 2014. Fair value estimates for specifically evaluated impaired LHFI 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. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded. At September 30, 2015 and December 31, 2014, nonaccrual LHFI not specifically reviewed for impairment and not written down to fair value less cost to sell, totaled $28.6 million and $32.2 million, respectively. In addition, these nonaccrual LHFI had allocated allowance for loan losses of $1.7 million and $1.5 million at the end of the respective periods. The following tables detail LHFI individually and collectively evaluated for impairment at September 30, 2015 and December 31, 2014 ($ in thousands): September 30, 2015 LHFI Evaluated for Impairment Individually Collectively Total Loans secured by real estate: Construction, land development and other land $ 8,748 $ 776,724 $ 785,472 Secured by 1-4 family residential properties 22,342 1,616,297 1,638,639 Secured by nonfarm, nonresidential properties 20,465 1,583,988 1,604,453 Other real estate secured 434 225,089 225,523 Commercial and industrial loans 8,571 1,261,706 1,270,277 Consumer loans 45 169,464 169,509 State and other political subdivision loans - 677,539 677,539 Other loans 526 419,705 420,231 Total $ 61,131 $ 6,730,512 $ 6,791,643 December 31, 2014 LHFI Evaluated for Impairment Individually Collectively Total Loans secured by real estate: Construction, land development and other land $ 13,867 $ 606,010 $ 619,877 Secured by 1-4 family residential properties 25,621 1,608,776 1,634,397 Secured by nonfarm, nonresidential properties 25,717 1,527,476 1,553,193 Other real estate secured 1,318 252,469 253,787 Commercial and industrial loans 12,104 1,258,246 1,270,350 Consumer loans 88 167,876 167,964 State and other political subdivision loans - 602,727 602,727 Other loans 628 346,546 347,174 Total $ 79,343 $ 6,370,126 $ 6,449,469 At September 30, 2015 and December 31, 2014, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands): September 30, 2015 LHFI Unpaid With No Related With an Total Related Average Loans secured by real estate: Construction, land development and other land $ 13,708 $ 3,054 $ 5,694 $ 8,748 $ 2,054 $ 11,307 Secured by 1-4 family residential properties 27,733 1,262 21,080 22,342 267 23,981 Secured by nonfarm, nonresidential properties 23,227 10,340 10,125 20,465 2,602 23,091 Other real estate secured 484 - 434 434 28 876 Commercial and industrial loans 15,529 2,883 5,688 8,571 2,956 10,338 Consumer loans 47 - 45 45 - 66 State and other political subdivision loans - - - - - - Other loans 655 - 526 526 200 577 Total $ 81,383 $ 17,539 $ 43,592 $ 61,131 $ 8,107 $ 70,236 December 31, 2014 LHFI Unpaid With No Related With an Total Related Average Loans secured by real estate: Construction, land development and other land $ 20,849 $ 7,411 $ 6,456 $ 13,867 $ 2,767 $ 13,597 Secured by 1-4 family residential properties 31,151 1,650 23,971 25,621 450 23,612 Secured by nonfarm, nonresidential properties 27,969 12,868 12,849 25,717 2,787 23,763 Other real estate secured 1,594 - 1,318 1,318 52 1,322 Commercial and industrial loans 13,916 1,206 10,898 12,104 6,449 9,195 Consumer loans 152 - 88 88 - 120 State and other political subdivision loans - - - - - - Other loans 734 - 628 628 259 682 Total $ 96,365 $ 23,135 $ 56,208 $ 79,343 $ 12,764 $ 72,291 A troubled debt restructuring (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 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 September 30, 2015, Trustmark held $736 thousand 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 at September 30, 2015 totaled $144 thousand. 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 September 30, 2015 and 2014, LHFI classified as TDRs totaled $11.2 million and $12.0 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $7.5 million and $7.9 million, respectively. The remaining TDRs at September 30, 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 $1.2 million and $1.4 million at September 30, 2015 and 2014, 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 $806 thousand and $62 thousand for the nine months ended September 30, 2015 and 2014, respectively. The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands): Three Months Ended September 30, 2015 2014 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 Loans secured by 1-4 family residential properties 2 $ 35 $ 35 2 $ 191 $ 191 Nine Months Ended September 30, 2015 2014 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 Loans secured by 1-4 family residential properties 10 $ 495 $ 495 16 $ 1,172 $ 1,158 Loans secured by nonfarm, nonresidential properties 4 3,512 3,512 - - - Total 14 $ 4,007 $ 4,007 16 $ 1,172 $ 1,158 Nine Months Ended September 30, 2015 2014 TDRs that Subsequently Defaulted Number of Contracts Recorded Investment Number of Contracts Recorded Investment Loans secured by 1-4 family residential properties 4 $ 243 1 $ 106 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 September 30, 2015 and 2014 ($ in thousands): September 30, 2015 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ - $ 1,006 $ 1,006 Secured by 1-4 family residential properties 1,385 2,921 4,306 Secured by nonfarm, nonresidential properties 819 4,503 5,322 Other real estate secured - 62 62 Commercial and industrial loans - 477 477 Total TDRs $ 2,204 $ 8,969 $ 11,173 September 30, 2014 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ - $ 4,076 $ 4,076 Secured by 1-4 family residential properties 1,373 3,940 5,313 Secured by nonfarm, nonresidential properties - 1,923 1,923 Other real estate secured - 156 156 Commercial and industrial loans - 524 524 Total TDRs $ 1,373 $ 10,619 $ 11,992 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 is 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, loans of a certain size 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 not carried on Trustmark’s books over quarter-end as they are charged off within the period that the loss is determined. 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. · 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. Results are stress tested as to the capacity to absorb losses and price of lots. 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 $1.0 million or more. In addition, credits are stress tested for vacancies and rate sensitivity. Confirmation is obtained that guarantor financial statements are current, taxes have been paid and there are no other issues that need to be addressed. This analysis is reviewed by each senior credit officer in the respective market to determine the need for any risk rate or accrual status changes. Consumer Credits Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer. To assure that Trustmark continues to originate quality loans, this process allows Management to make necessary changes such as revisions to underwriting procedures and credit policies, or changes in loan authority to Trustmark personnel. Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. Trustmark also monitors its consumer LHFI delinquency trends by comparing them to quarterly industry averages. The tables below illustrate the carrying amount of LHFI by credit quality indicator at September 30, 2015 and December 31, 2014 ($ in thousands): September 30, 2015 Commercial LHFI Pass - Special Mention - Substandard - Doubtful - Subtotal Loans secured by real estate: Construction, land development and other land $ 701,003 $ 541 $ 17,525 $ 457 $ 719,526 Secured by 1-4 family residential properties 122,664 435 7,761 112 130,972 Secured by nonfarm, nonresidential properties 1,539,997 2,426 60,890 361 1,603,674 Other real estate secured 219,298 200 4,535 - 224,033 Commercial and industrial loans 1,216,819 18,555 34,274 624 1,270,272 Consumer loans - - - - - State and other political subdivision loans 656,126 12,546 8,867 - 677,539 Other loans 412,098 - 921 386 413,405 Total $ 4,868,005 $ 34,703 $ 134,773 $ 1,940 $ 5,039,421 Consumer LHFI Current Past Due Past Due Nonaccrual Subtotal Total LHFI Loans secured by real estate: Construction, land development and other land $ 65,545 $ 281 $ 1 $ 119 $ 65,946 $ 785,472 Secured by 1-4 family residential properties 1,477,432 7,874 2,961 19,400 1,507,667 1,638,639 Secured by nonfarm, nonresidential properties 779 - - - 779 1,604,453 Other real estate secured 1,490 - - - 1,490 225,523 Commercial and industrial loans - 5 - - 5 1,270,277 Consumer loans 167,516 1,689 260 44 169,509 169,509 State and other political subdivision loans - - - - - 677,539 Other loans 6,826 - - - 6,826 420,231 Total $ 1,719,588 $ 9,849 $ 3,222 $ 19,563 $ 1,752,222 $ 6,791,643 December 31, 2014 Commercial LHFI Pass - Special Mention - Substandard - Doubtful - Subtotal Loans secured by real estate: Construction, land development and other land $ 518,944 $ 479 $ 37,022 $ 196 $ 556,641 Secured by 1-4 family residential properties 125,203 1,652 7,483 213 134,551 Secured by nonfarm, nonresidential properties 1,462,226 8,431 81,661 - 1,552,318 Other real estate secured 246,099 306 4,975 - 251,380 Commercial and industrial loans 1,239,247 4,245 26,133 719 1,270,344 Consumer loans - - - - - State and other political subdivision loans 589,653 7,550 5,524 - 602,727 Other loans 338,598 - 1,255 564 340,417 Total $ 4,519,970 $ 22,663 $ 164,053 $ 1,692 $ 4,708,378 Consumer LHFI Current Past Due Past Due Nonaccrual Subtotal Total LHFI Loans secured by real estate: Construction, land development and other land $ 62,897 $ 199 $ 59 $ 81 $ 63,236 $ 619,877 Secured by 1-4 family residential properties 1,465,355 10,429 2,367 21,695 1,499,846 1,634,397 Secured by nonfarm, nonresidential properties 875 - - - 875 1,553,193 Other real estate secured 2,407 - - - 2,407 253,787 Commercial and industrial loans - 5 1 - 6 1,270,350 Consumer loans 165,504 2,162 211 87 167,964 167,964 State and other political subdivision loans - - - - - 602,727 Other loans 6,757 - - - 6,757 347,174 Total $ 1,703,795 $ 12,795 $ 2,638 $ 21,863 $ 1,741,091 $ 6,449,469 Past Due LHFI LHFI past due 90 days or more totaled $9.2 million and $2.8 million at September 30, 2015 and December 31, 2014, respectively. September 30, 2015 Past Due 30-59 Days 60-89 Days 90 Days (1) Total Nonaccrual Current Total LHFI Loans secured by real estate: Construction, land development and other land $ 393 $ 121 $ 1 $ 515 $ 8,748 $ 776,209 $ 785,472 Secured by 1-4 family residential properties 6,232 2,897 2,961 12,090 22,342 1,604,207 1,638,639 Secured by nonfarm, nonresidential properties 355 76 6,002 6,433 20,465 1,577,555 1,604,453 Other real estate secured 15 - - 15 434 225,074 225,523 Commercial and industrial loans 856 199 - 1,055 8,571 1,260,651 1,270,277 Consumer loans 1,382 307 260 1,949 45 167,515 169,509 State and other political subdivision loans - - - - - 677,539 677,539 Other loans 107 174 - 281 526 419,424 420,231 Total $ 9,340 $ 3,774 $ 9,224 $ 22,338 $ 61,131 $ 6,708,174 $ 6,791,643 (1) Past due 90 days or more but still accruing interest. December 31, 2014 Past Due 30-59 Days 60-89 Days 90 Days (1) Total Nonaccrual Current Total LHFI Loans secured by real estate: Construction, land development and other land $ 248 $ 17 $ 60 $ 325 $ 13,867 $ 605,685 $ 619,877 Secured by 1-4 family residential properties 8,424 2,428 2,367 13,219 25,621 1,595,557 1,634,397 Secured by nonfarm, nonresidential properties 1,960 34 - 1,994 25,717 1,525,482 1,553,193 Other real estate secured 80 - - 80 1,318 252,389 253,787 Commercial and industrial loans 2,491 306 126 2,923 12,104 1,255,323 1,270,350 Consumer loans 1,811 351 211 2,373 88 165,503 167,964 State and other political subdivision loans - - - - - 602,727 602,727 Other loans 132 9 - 141 628 346,405 347,174 Total $ 15,146 $ 3,145 $ 2,764 $ 21,055 $ 79,343 $ 6,349,071 $ 6,449,469 (1) Past due 90 days or more but still accruing interest. Past Due Loans Held for Sale (LHFS) LHFS past due 90 days or more totaled $15.2 million and $25.9 million at September 30, 2015 and December 31, 2014, 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. During the first quarter of 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 the first nine months of 2015. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the second or third quarters of 2015 or the first nine months of 2014. 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 the first quarter of 2015, the Loss Emergence Period (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. 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 event has occurred until the borrower exhibits the inability to pay or other evidence of credit deterioration. Trustmark considers the loss event to have occurred within a one year period prior to the event of default and the charge-off of the loss within a six month period after the event of default, resulting in a 1.5 year LEP. An additional provision of approximately $2.3 million was recorded in the first quarter of 2015 as 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 p |
