LHFI and Allowance for Loan Losses, LHFI | Note 5 – LHFI and Allowance for Loan Losses, LHFI At December 31, 2017 and 2016, LHFI consisted of the following ($ in thousands): December 31, 2017 2016 Loans secured by real estate: Construction, land development and other land $ 987,624 $ 831,437 Secured by 1-4 family residential properties 1,675,311 1,660,043 Secured by nonfarm, nonresidential properties 2,193,823 2,034,176 Other real estate secured 517,956 318,148 Commercial and industrial loans 1,570,345 1,528,434 Consumer loans 171,918 170,562 State and other political subdivision loans 952,483 917,515 Other loans 500,507 390,898 LHFI (1) 8,569,967 7,851,213 Less allowance for loan losses, LHFI 76,733 71,265 Net LHFI $ 8,493,234 $ 7,779,948 (1) During the first quarter of 2017, Trustmark reclassified $36.7 million of acquired loans not accounted for under FASB ASC Topic 310-30 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 December 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. Related Party Loans At December 31, 2017 and 2016, loans to certain executive officers and directors, including their immediate families and companies in which they are principal owners, totaled $59.9 million and $47.1 million, respectively. During 2017, $418.5 million of new loan advances were made, while repayments were Nonaccrual and Past Due LHFI At December 31, 2017 and 2016, the carrying amounts of nonaccrual LHFI were $67.6 million and $49.2 million, respectively. Included in these amounts were $23.2 million and $14.4 million, respectively, of nonaccrual LHFI classified as TDRs. No material interest income was recognized in the income statement on nonaccrual LHFI for each of the years in the three-year period ended December 31, 2017. The following table details nonaccrual LHFI by loan type at December 31, 2017 and 2016 ($ in thousands): December 31, 2017 2016 Loans secured by real estate: Construction, land development and other land $ 2,105 $ 3,323 Secured by 1-4 family residential properties 19,022 20,329 Secured by nonfarm, nonresidential properties 12,608 8,482 Other real estate secured 212 402 Commercial and industrial loans 33,338 15,824 Consumer loans 135 300 State and other political subdivision loans — — Other loans 155 574 Total nonaccrual LHFI $ 67,575 $ 49,234 The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at December 31, 2017 and 2016 ($ in thousands): December 31, 2017 Past Due 90 Days Current 30-59 Days 60-89 Days or More (1) Total Nonaccrual Loans Total 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. December 31, 2016 Past Due 90 Days Current 30-59 Days 60-89 Days or More (1) Total Nonaccrual Loans Total 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 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. 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 homogenous 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 accompanying consolidated statements of income on impaired LHFI for each of the years in the three-year period ended December 31, 2017. At December 31, 2017 and 2016, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands): December 31, 2017 LHFI Unpaid Wit h o With an Total Average Principal Allowance Allowance Carrying Related Recorded Balance Recorded Recorded Amount Allowance 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 December 31, 2016 LHFI Unpaid Wit h o With an Total Average Principal Allowance Allowance Carrying Related Recorded Balance Recorded Recorded Amount Allowance Investment Loans secured by real estate: Construction, land development and other land $ 5,691 $ 2,213 $ 228 $ 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 11,222 2,447 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 $ 19,440 $ 7,635 $ 27,075 $ 3,260 $ 29,140 Troubled Debt Restructurings At December 31, 2017, 2016 and 2015, LHFI classified as TDRs totaled $23.9 million, $14.5 million and $9.7 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $20.5 million, $9.8 million and $5.9 million, respectively. The remaining TDRs at December 31, 2017, 2016 and 2015 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 $458 thousand at December 31, 2017, $2.2 million at December 31, 2016 and $1.8 million at December 31, 2015. 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 $127 thousand, $1.0 million and $806 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, Trustmark held $366 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. There were no consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings at December 31, 2017 compared to $101 thousand at December 31, 2016. The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands): Year Ended December 31, 2017 Modifications Classified as TDRs Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Loans secured by real estate: Construction, land development and other land 1 $ 341 $ 325 Secured by 1-4 family residential properties 22 1,478 1,487 Secured by nonfarm, nonresidential properties 1 426 426 Commercial and industrial loans 8 12,836 12,836 Other loans 1 556 556 Total 33 $ 15,637 $ 15,630 Year Ended December 31, 2016 Modifications Classified as TDRs Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Loans secured by real estate: Construction, land development and other land 1 $ 14 $ 14 Secured by 1-4 family residential properties 18 1,386 1,391 Secured by nonfarm, nonresidential properties 2 717 717 Commercial and industrial loans 5 10,043 9,982 Consumer loans 1 2 2 Total 27 $ 12,162 $ 12,106 Year Ended December 31, 2015 Modifications Classified as TDRs Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Loans secured by real estate: Secured by 1-4 family residential properties 13 $ 688 $ 688 Secured by nonfarm, nonresidential properties 5 3,613 3,613 Total 18 $ 4,301 $ 4,301 Years Ended December 31, 2017 2016 2015 TDRs that Subsequently Defaulted Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Loans secured by 1-4 family residential properties 4 $ 78 1 $ — 5 $ 260 Commercial and industrial loans 3 9,526 2 2,154 — — Total 7 $ 9,604 3 $ 2,154 5 $ 260 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 December 31, 2017, 2016 and 2015 ($ in thousands): December 31, 2017 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 199 $ 199 Secured by 1-4 family residential properties 51 3,140 3,191 Secured by nonfarm, nonresidential properties — 421 421 Commercial and industrial loans 53 19,434 19,487 Consumer loans — 17 17 Other loans 556 — 556 Total TDRs $ 660 $ 23,211 $ 23,871 December 31, 2016 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 405 $ 405 Secured by 1-4 family residential properties — 2,873 2,873 Secured by nonfarm, nonresidential properties — 881 881 Commercial and industrial loans 53 10,266 10,319 Consumer loans — 2 2 Total TDRs $ 53 $ 14,427 $ 14,480 December 31, 2015 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 869 $ 869 Secured by 1-4 family residential properties 1,426 2,424 3,850 Secured by nonfarm, nonresidential properties 809 3,662 4,471 Commercial and industrial loans — 463 463 Total TDRs $ 2,235 $ 7,418 $ 9,653 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, 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 $100 thousand or more. In addition, a semi-annual review of significant development, commercial construction, multi-family and non-owner occupied projects is performed. This review assesses each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination made as to the appropriateness of existing risk ratings and accrual status. Consumer Credits Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark continues to originate quality loans. Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. The tables below present LHFI by loan type and credit quality indicator at December 31, 2017 and 2016 ($ in thousands): December 31, 2017 Commercial LHFI Pass - Special Mention - Substandard - Doubtful - Categories Category 7 Category 8 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 Past Due Past Due Current 30-89 Days 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 December 31, 2016 Commercial LHFI Pass - Special Mention - Substandard - Doubtful - Categories 1-6 Category 7 Category 8 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 Past Due Past Due Current 30-89 Days 90 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 LHFS LHFS past due 90 days or more totaled $35.5 million and $28.3 million at December 31, 2017 and 2016, respectively. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during 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. During 2015, the 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. An additional provision of approximately $2.3 million was recorded in 2015 as result of this revision to the quantitative portion of the allowance for loan loss methodology for commercial LHFI. 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 trigger has occurred until the borrower exhibits the inability to pay or other evidence of credit deterioration. Trustmark estimates the loss event to have occurred within a nine month period prior to the event of default. The charge-off of the loss occurs within a ten month period after the event of default, resulting in a 1.5 year LEP. During 2015, Trustmark also revised the quantitative portion of the allowance for loan loss methodology for commercial LHFI to incorporate third-party default data. The default data is used in conjunction with each market/commercial loan pool’s loss rate and the commercial loan LEP in calculating a total quantitative loss factor for each risk rating within each market and pool. The quantitative reserves are a result of the total quantitative loss factor multiplied by the outstanding balances within each loan group and risk rate. An additional provision of approximately $1.3 million was recorded in 2015 as a 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 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. During 2015, Trustmark eliminated caps and floors from the criticized risk grades in the qualitative portion and adjusted the Florida market region’s distribution factors in the qualitative and quantitative portions of the allowance for loan loss methodology for commercial LHFI. The caps and floors for criticized risk ratings were eliminated in order to allow the risk associated with those credits to be reflected without constraint of pre-existing limits (caps or floors) on the risk ratings. When the current allowance for loan loss methodology was originally established, the vast majority of the reserve for the Florida market region’s assets was covered by the quantitative features of the allowance for loan loss methodology due to the amount of gross charge-offs at that time and captured the vast majority of the embedded risk in the portfolio. The distribution for the Florida market region was adjusted to be the same as Trustmark’s other key market regions since the credit metrics in the Florida market region now more closely resemble Trustmark as a whole. The elimination of the caps and floors for criticized risk ratings in the qualitative portion of the allowance for loan loss methodology for commercial LHFI resulted in a provision recapture of $1.8 million in 2015. The change in the Florida market region distribution resulted in an additional provision expense of $2.1 million related to the qualitative portion and an additional provision expense of $785 thousand related to the quantitative portion of the allowance for loan loss methodology for commercial LHFI in 2015. Combined, these revisions to the allowance for loan loss methodology for commercial LHFI resulted in an additional provision of approximately $1.1 million recorded during 2015. In addition, Trustmark revised the qualitative portion of the commercial LHFI allowance for loan loss methodology to incorporate the use of maximum observed gross historical losses as a way to calculate a maximum qualitative reserve limit. The maximum observed gross historical losses for each market were observed for a three-year period reflecting the last economic downturn (i.e., 2008-2010). The aggregate of these losses as a percentage of the three-year ave |