Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI | Note 4 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI At March 31, 2017 and December 31, 2016, LHFI consisted of the following ($ in thousands): March 31, 2017 December 31, 2016 Loans secured by real estate: Construction, land development and other land $ 859,927 $ 831,437 Secured by 1-4 family residential properties 1,656,837 1,660,043 Secured by nonfarm, nonresidential properties 2,064,352 2,034,176 Other real estate secured 399,636 318,148 Commercial and industrial loans 1,540,783 1,528,434 Consumer loans 166,314 170,562 State and other political subdivision loans 910,493 917,515 Other loans 406,315 390,898 LHFI (1) 8,004,657 7,851,213 Less allowance for loan losses, LHFI 72,445 71,265 Net LHFI $ 7,932,212 $ 7,779,948 (1) During the first quarter of 2017, Trustmark reclassified $36.7 million of acquired loans not accounted for under Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” to LHFI due to the discount on these loans being fully amortized. Loan Concentrations Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At March 31, 2017, 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 March 31, 2017 and December 31, 2016, the carrying amounts of nonaccrual LHFI were $61.3 million and $49.2 million, respectively. Included in these amounts were $12.4 million and $14.4 million, respectively, of nonaccrual LHFI classified as troubled debt restructurings (TDRs). No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended March 31, 2017 and 2016. The following table details nonaccrual LHFI by loan type at March 31, 2017 and December 31, 2016 ($ in thousands): March 31, 2017 December 31, 2016 Loans secured by real estate: Construction, land development and other land $ 2,856 $ 3,323 Secured by 1-4 family residential properties 20,537 20,329 Secured by nonfarm, nonresidential properties 11,492 8,482 Other real estate secured 191 402 Commercial and industrial loans 25,410 15,824 Consumer loans 325 300 State and other political subdivision loans — — Other loans 496 574 Total nonaccrual LHFI $ 61,307 $ 49,234 The following tables provide an aging analysis of past due and nonaccrual LHFI 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 (1) Total Nonaccrual Current Loans Total LHFI Loans secured by real estate: Construction, land development and other land $ 504 $ 35 $ 217 $ 756 $ 2,856 $ 856,315 $ 859,927 Secured by 1-4 family residential properties 5,738 1,814 612 8,164 20,537 1,628,136 1,656,837 Secured by nonfarm, nonresidential properties 626 214 — 840 11,492 2,052,020 2,064,352 Other real estate secured 61 — 228 289 191 399,156 399,636 Commercial and industrial loans 813 51 12 876 25,410 1,514,497 1,540,783 Consumer loans 1,495 194 238 1,927 325 164,062 166,314 State and other political subdivision loans — — — — — 910,493 910,493 Other loans 1 40 — 41 496 405,778 406,315 Total $ 9,238 $ 2,348 $ 1,307 $ 12,893 $ 61,307 $ 7,930,457 $ 8,004,657 (1) Past due 90 days or more but still accruing interest. December 31, 2016 Past Due 30-59 Days 60-89 Days 90 Days or (1) Total Nonaccrual Current Loans Total LHFI Loans secured by real estate: Construction, land development and other land $ 248 $ 37 $ 54 $ 339 $ 3,323 $ 827,775 $ 831,437 Secured by 1-4 family residential properties 5,308 2,434 1,436 9,178 20,329 1,630,536 1,660,043 Secured by nonfarm, nonresidential properties 606 100 — 706 8,482 2,024,988 2,034,176 Other real estate secured 179 — — 179 402 317,567 318,148 Commercial and industrial loans 571 213 — 784 15,824 1,511,826 1,528,434 Consumer loans 1,561 330 341 2,232 300 168,030 170,562 State and other political subdivision loans 1,035 — — 1,035 — 916,480 917,515 Other loans 178 53 — 231 574 390,093 390,898 Total $ 9,686 $ 3,167 $ 1,831 $ 14,684 $ 49,234 $ 7,787,295 $ 7,851,213 (1) Past due 90 days or more but still accruing interest. Impaired LHFI As of January 1, 2017, Trustmark modified its presentation of individually evaluated impaired LHFI in the accompanying notes to the consolidated financial statements to include all commercial nonaccrual LHFI 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. Previously, Trustmark presented all nonaccrual LHFI and LHFI classified as TDRs as impaired loans. Nonaccrual LHFI includes both individually evaluated impaired LHFI as well as smaller balance homogeneous loans that are collectively evaluated for impairment. As a result of this change in presentation, these smaller balance homogeneous nonaccrual LHFI are included within the LHFI collectively evaluated for impairment category. All prior period information has been reclassified to conform to the current period presentation. Trustmark’s individually evaluated impaired LHFI are primarily collateral dependent loans. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as is value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date 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 March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, individually evaluated impaired LHFI consisted of the following ($ in thousands): March 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 $ 4,977 $ 1,661 $ 336 $ 1,997 $ 111 $ 2,219 Secured by 1-4 family residential properties 6,351 203 4,589 4,792 1,357 4,720 Secured by nonfarm, nonresidential properties 11,512 6,438 2,753 9,191 852 7,705 Other real estate secured — — — — — — Commercial and industrial loans 23,343 13,130 9,877 23,007 1,562 18,338 Consumer loans 1 — 1 1 — 2 State and other political subdivision loans — — — — — — Other loans 95 95 — 95 — 95 Total $ 46,279 $ 21,527 $ 17,556 $ 39,083 $ 3,882 $ 33,079 December 31, 2016 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 $ 5,691 $ 2,260 $ 181 $ 2,441 $ 103 $ 2,943 Secured by 1-4 family residential properties 6,134 221 4,428 4,649 960 4,639 Secured by nonfarm, nonresidential properties 8,562 5,784 435 6,219 221 6,703 Other real estate secured — — — — — 500 Commercial and industrial loans 14,593 11,461 2,208 13,669 1,976 14,258 Consumer loans 2 — 2 2 — 2 State and other political subdivision loans — — — — — — Other loans 95 95 — 95 — 95 Total $ 35,077 $ 19,821 $ 7,254 $ 27,075 $ 3,260 $ 29,140 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 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 March 31, 2017 and December 31, 2016, Trustmark held $234 thousand and $269 thousand, respectively, of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. Consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings totaled $107 thousand at March 31, 2017compared to $101 thousand at December 31, 2016. 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 March 31, 2017 and 2016, LHFI classified as TDRs totaled $12.4 million and $9.2 million, respectively, and were comprised of credits with interest-only payments for an extended period of time which totaled $9.5 million and $5.7 million, respectively. The remaining TDRs at March 31, 2017 and 2016 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 $382 thousand and $1.7 million at March 31, 2017 and 2016, respectively. LHFI classified as TDRs are charged down to the most likely fair value estimate less an estimated cost to sell for collateral dependent loans, which would approximate net realizable value. There were no specific charge-offs related to TDRs for the three months ended March 31, 2017 or 2016. The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands): Three Months Ended March 31, 2017 2016 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 $ 341 $ 325 — $ — $ — Loans secured by 1-4 family residential properties 7 334 338 2 71 71 Total 8 $ 675 $ 663 2 $ 71 $ 71 Three Months Ended March 31, 2017 2016 TDRs that Subsequently Defaulted Number of Contracts Recorded Investment Number of Contracts Recorded Investment Loans secured by 1-4 family residential properties 1 $ — 1 $ 17 Commercial and industrial 2 — — — Total 3 $ — 1 $ 17 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 March 31, 2017 and 2016 ($ in thousands): March 31, 2017 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 642 $ 642 Secured by 1-4 family residential properties — 3,070 3,070 Secured by nonfarm, nonresidential properties — 841 841 Commercial and industrial loans — 7,845 7,845 Consumer loans — 1 1 Total TDRs $ — $ 12,399 $ 12,399 March 31, 2016 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 845 $ 845 Secured by 1-4 family residential properties 1,444 2,086 3,530 Secured by nonfarm, nonresidential properties 799 3,566 4,365 Commercial and industrial loans — 448 448 Total TDRs $ 2,243 $ 6,945 $ 9,188 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, completeness and organization and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to insure compliance with policy. • Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of underwriting and other policy exceptions within a loan portfolio. • Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a loan portfolio. Collateral exceptions occur when certain collateral documentation is either not present, is not considered current or has expired. • Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and Regulation O requirements. Commercial Credits Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows: • Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. • Other Assets Especially Mentioned (Special Mention) - (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade. • Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans. • Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time. • Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible. By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark. Each commercial loan is assigned a credit risk grade that is an indication for the likelihood of default and is not a direct indication of loss at default. The loss at default aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the loss at default aspects of the risk rating system, the loss expectations for each risk rating are integrated into the allowance for loan loss methodology where the calculated loss at default is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The loss at default aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area. To enhance this process, 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 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 concentrations both on the underlying credit quality of each individual loan portfolio as well as the adherence to Trustmark’s loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area. In addition to the ongoing internal risk rate monitoring described above, Trustmark’s Credit Quality Review Committee meets monthly and performs a review of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more. In addition, a semi-annual review of significant development, commercial construction, multi-family and non-owner occupied projects is performed. The review assesses each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination as to the appropriateness of existing risk ratings and accrual status. Consumer Credits Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark continues to originate quality loans. Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. Trustmark also monitors its consumer LHFI delinquency trends by comparing them to quarterly industry averages. The tables below present LHFI by loan type and credit quality indicator at March 31, 2017 and December 31, 2016 ($ in thousands): March 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 $ 790,145 $ — $ 6,567 $ 463 $ 797,175 Secured by 1-4 family residential properties 129,742 219 6,610 210 136,781 Secured by nonfarm, nonresidential properties 2,012,125 9,172 41,597 760 2,063,654 Other real estate secured 388,398 9,938 680 — 399,016 Commercial and industrial loans 1,390,084 18,807 130,806 1,086 1,540,783 Consumer loans — — — — — State and other political subdivision loans 893,139 6,450 10,904 — 910,493 Other loans 399,144 — 2,609 347 402,100 Total $ 6,002,777 $ 44,586 $ 199,773 $ 2,866 $ 6,250,002 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 $ 62,185 $ 446 $ — $ 121 $ 62,752 $ 859,927 Secured by 1-4 family residential properties 1,495,639 6,638 612 17,167 1,520,056 1,656,837 Secured by nonfarm, nonresidential properties 698 — — — 698 2,064,352 Other real estate secured 620 — — — 620 399,636 Commercial and industrial loans — — — — — 1,540,783 Consumer loans 164,063 1,689 238 324 166,314 166,314 State and other political subdivision loans — — — — — 910,493 Other loans 4,175 40 — — 4,215 406,315 Total $ 1,727,380 $ 8,813 $ 850 $ 17,612 $ 1,754,655 $ 8,004,657 December 31, 2016 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 $ 752,318 $ 9,567 $ 8,086 $ 465 $ 770,436 Secured by 1-4 family residential properties 124,615 170 6,162 129 131,076 Secured by nonfarm, nonresidential properties 1,989,554 4,394 38,913 584 2,033,445 Other real estate secured 315,829 762 890 — 317,481 Commercial and industrial loans 1,386,155 7,095 134,199 985 1,528,434 Consumer loans — — — — — State and other political subdivision loans 899,935 6,450 11,130 — 917,515 Other loans 382,890 — 2,685 350 385,925 Total $ 5,851,296 $ 28,438 $ 202,065 $ 2,513 $ 6,084,312 Consumer LHFI 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 $ 60,701 $ 188 $ 54 $ 58 $ 61,001 $ 831,437 Secured by 1-4 family residential properties 1,503,096 7,377 1,436 17,058 1,528,967 1,660,043 Secured by nonfarm, nonresidential properties 731 — — — 731 2,034,176 Other real estate secured 667 — — — 667 318,148 Commercial and industrial loans — — — — — 1,528,434 Consumer loans 168,031 1,891 341 299 170,562 170,562 State and other political subdivision loans — — — — — 917,515 Other loans 4,940 33 — — 4,973 390,898 Total $ 1,738,166 $ 9,489 $ 1,831 $ 17,415 $ 1,766,901 $ 7,851,213 Past Due Loans Held for Sale (LHFS) LHFS past due 90 days or more totaled $31.1 million and $28.3 million at March 31, 2017 and December 31, 2016, 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 three months of 2017 or 2016. Allowance for Loan Losses, LHFI Trustmark’s allowance for loan loss methodology for commercial LHFI is based upon regulatory guidance from its primary regulator and GAAP. The methodology segregates the commercial purpose and commercial construction LHFI portfolios into nine separate loan types (or pools) which have similar characteristics such as repayment, collateral and risk profiles. The nine basic loan pools are further segregated into Trustmark’s five key market regions, Alabama, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market. A 10-point risk rating system is utilized for each separate loan pool to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. As a result, there are 450 risk rate factors for commercial loan types. The nine separate pools are shown below: Commercial Purpose LHFI • Real Estate – Owner-Occupied • Real Estate – Non-Owner Occupied • Working Capital • Non-Working Capital • Land • Lots and Development • Political Subdivisions Commercial Construction LHFI • 1 to 4 Family • Non-1 to 4 Family The quantitative factors of the allowance methodology reflect a twelve-quarter rolling average of net charge-offs by loan type within each key market region. This allows for a greater sensitivity to current trends, such as economic changes, as well as current loss profiles and creates a more accurate depiction of historical losses. Qualitative factors used in the allowance methodology include the following: • National and regional economic trends and conditions • Impact of recent performance trends • Experience, ability and effectiveness of management • Adherence to Trustmark’s loan policies, procedures and internal controls • Collateral, financial and underwriting exception trends • Credit concentrations • Loan facility risk • Acquisitions • Catastrophe Each qualitative factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk), other than the last two factors, which are applied on a dollar-for-dollar basis to ensure that the combination of such factors is proportional. The resulting ratings from the individual factors are weighted and summed to establish the weighted-average qualitative factor within each key market region. The allowance for loan loss methodology segregates the consumer LHFI portfolio into homogeneous pools of loans that contain similar structure, repayment, collateral and risk profiles. These homogeneous pools of loans are shown below: • Residential Mortgage • Direct Consumer • Junior Lien on 1-4 Family Residential Properties • Credit Cards • Overdrafts The historical loss experience for these pools is determined by calculating a 12-quarter rolling average of net charge-offs, which is applied to each pool to establish the quantitative aspect of the methodology. Where, in Management’s estimation, the calculated loss experience does not fully cover the anticipated loss for a pool, an estimate is also applied to each pool to establish the qualitative aspect of the methodology, which represents the perceived risks across the loan portfolio at the current point in time. This qualitative methodology utilizes five separate factors made up of unique components that when weighted and combined produce an estimated level of reserve for each of the loan pools. The five qualitative factors include the following: • Economic indicators • Performance trends • Management experience • Credit concentrations • Loan policy exceptions The risk measure for each factor is converted to a scale ranging from 0 (No risk) to 100 (High Risk) to ensure that the combination of such factors is proportional. The determination of the risk measurement for each qualitative factor is done for all markets combined. The resulting estimated reserve factor is then applied to each pool. 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 pa |