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 September 30, 2018 and December 31, 2017, LHFI consisted of the following ($ in thousands): September 30, 2018 December 31, 2017 Loans secured by real estate: Construction, land development and other land $ 1,031,491 $ 987,624 Secured by 1-4 family residential properties 1,801,029 1,675,311 Secured by nonfarm, nonresidential properties 2,294,289 2,193,823 Other real estate secured 453,687 517,956 Commercial and industrial loans 1,565,922 1,570,345 Consumer loans 182,709 171,918 State and other political subdivision loans 929,178 952,483 Other loans 488,725 500,507 LHFI 8,747,030 8,569,967 Allowance for loan losses, LHFI (88,874 ) (76,733 ) Net LHFI $ 8,658,156 $ 8,493,234 Loan Concentrations Trustmark does not have any loan concentrations other than those reflected in the preceding table, which exceed 10% of total LHFI. At September 30, 2018, Trustmark’s geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans is susceptible to changes in market conditions in these areas. Nonaccrual and Past Due LHFI At September 30, 2018 and December 31, 2017, the carrying amounts of nonaccrual LHFI were $67.8 million and $67.6 million, respectively. Included in these amounts were $33.6 million and $23.2 million, respectively, of nonaccrual LHFI classified as troubled debt restructurings (TDRs). No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended September 30, 2018 and 2017. The following tables provide an aging analysis of past due and nonaccrual LHFI by loan type at September 30, 2018 and December 31, 2017 ($ in thousands): September 30, 2018 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 $ 203 $ 5 $ — $ 208 $ 2,262 $ 1,029,021 $ 1,031,491 Secured by 1-4 family residential properties 5,626 1,304 447 7,377 15,164 1,778,488 1,801,029 Secured by nonfarm, nonresidential properties 256 280 — 536 5,389 2,288,364 2,294,289 Other real estate secured 5 — — 5 742 452,940 453,687 Commercial and industrial loans 1,727 9 21 1,757 33,870 1,530,295 1,565,922 Consumer loans 1,480 241 258 1,979 228 180,502 182,709 State and other political subdivision loans — — — — 8,762 920,416 929,178 Other loans 419 33 — 452 1,419 486,854 488,725 Total $ 9,716 $ 1,872 $ 726 $ 12,314 $ 67,836 $ 8,666,880 $ 8,747,030 (1) Past due 90 days or more but still accruing interest. December 31, 2017 Past Due 30-59 Days 60-89 Days 90 Days or (1) Total Nonaccrual Current Loans Total LHFI Loans secured by real estate: Construction, land development and other land $ 391 $ 1 $ — $ 392 $ 2,105 $ 985,127 $ 987,624 Secured by 1-4 family residential properties 6,412 2,084 1,917 10,413 19,022 1,645,876 1,675,311 Secured by nonfarm, nonresidential properties 2,319 256 — 2,575 12,608 2,178,640 2,193,823 Other real estate secured — — — — 212 517,744 517,956 Commercial and industrial loans 759 1,233 12 2,004 33,338 1,535,003 1,570,345 Consumer loans 2,141 255 242 2,638 135 169,145 171,918 State and other political subdivision loans 350 39 — 389 — 952,094 952,483 Other loans 18 4 — 22 155 500,330 500,507 Total $ 12,390 $ 3,872 $ 2,171 $ 18,433 $ 67,575 $ 8,483,959 $ 8,569,967 (1) Past due 90 days or more but still accruing interest. Impaired LHFI Trustmark’s individually evaluated impaired LHFI include all commercial nonaccrual relationships of $500 thousand or more, which are specifically reviewed for impairment and deemed impaired, and all LHFI classified as TDRs in accordance with FASB ASC Topic 310-10-50-20 “Impaired Loans”, and are primarily collateral dependent loans. Fair value estimates for collateral dependent loans are derived from appraised values based on the current market value or as is value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date or more often if market conditions necessitate. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. At the time a LHFI that has been individually evaluated for impairment is deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value is charged off. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded. No material interest income was recognized in the income statement on impaired LHFI for each of the periods ended September 30, 2018 and 2017. At September 30, 2018 and December 31, 2017, individually evaluated impaired LHFI consisted of the following ($ in thousands): September 30, 2018 LHFI Unpaid Principal Balance With No Related Allowance Recorded With an Allowance Recorded Total Carrying Amount Related Allowance Average Recorded Investment Loans secured by real estate: Construction, land development and other land $ 1,801 $ 1,546 $ 26 $ 1,572 $ — $ 1,747 Secured by 1-4 family residential properties 4,771 126 3,614 3,740 43 4,217 Secured by nonfarm, nonresidential properties 3,585 3,010 360 3,370 78 5,845 Other real estate secured — — — — — — Commercial and industrial loans 39,845 14,657 19,045 33,702 13,869 28,218 Consumer loans 3 — 3 3 — 6 State and other political subdivision loans 8,765 4,079 4,683 8,762 683 4,381 Other loans 1,432 230 1,076 1,306 1,076 816 Total $ 60,202 $ 23,648 $ 28,807 $ 52,455 $ 15,749 $ 45,230 December 31, 2017 LHFI Unpaid Principal Balance With No Related Allowance Recorded With an Allowance Recorded Total Carrying Amount Related Allowance Average Recorded Investment Loans secured by real estate: Construction, land development and other land $ 1,704 $ 1,206 $ 199 $ 1,405 $ 75 $ 1,923 Secured by 1-4 family residential properties 6,031 160 4,576 4,736 1,331 4,693 Secured by nonfarm, nonresidential properties 15,205 10,027 396 10,423 165 8,321 Other real estate secured — — — — — — Commercial and industrial loans 36,874 31,281 518 31,799 131 22,734 Consumer loans 17 — 17 17 — 9 State and other political subdivision loans — — — — — — Other loans 556 — 556 556 41 325 Total $ 60,387 $ 42,674 $ 6,262 $ 48,936 $ 1,743 $ 38,005 Troubled Debt Restructurings A TDR occurs when a borrower is experiencing financial difficulties, and for related economic or legal reasons, a concession is granted to the borrower that Trustmark would not otherwise consider. Whatever the form of concession that might be granted by Trustmark, Management’s objective is to enhance collectability by obtaining more cash or other value from the borrower or by increasing the probability of receipt by granting the concession than by not granting it. Other concessions may arise from court proceedings or may be imposed by law. In addition, TDRs also include those credits that are extended or renewed to a borrower who is not able to obtain funds from sources other than Trustmark at a market interest rate for new debt with similar risk. All loans whose terms have been modified in a TDR are evaluated for impairment under FASB ASC Topic 310, “Receivables”. Accordingly, Trustmark measures any loss on the restructuring in accordance with that guidance. A TDR in which Trustmark receives physical possession of the borrower’s assets, regardless of whether formal foreclosure or repossession proceedings take place, is accounted for in accordance with FASB ASC Subtopic 310-40, “Troubled Debt Restructurings by Creditors.” Thus, the loan is treated as if assets have been received in satisfaction of the loan and reported as a foreclosed asset. At September 30, 2018 and December 31, 2017, Trustmark held $203 thousand and $366 thousand, respectively, of foreclosed residential real estate as a result of foreclosure or in substance repossession of consumer mortgage LHFI classified as TDRs. At September 30, 2018, Trustmark had $55 thousand of consumer mortgage LHFI classified as TDRs in the process of formal foreclosure proceedings compared to none at December 31, 2017. 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, 2018 and 2017, LHFI classified as TDRs totaled $36.0 million and $24.4 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time which totaled $24.7 million and $21.1 million, respectively. The remaining TDRs at September 30, 2018 and 2017 resulted from bankruptcies or from payment or maturity extensions. Trustmark had $7.7 million of unused commitments on TDRs at September 30, 2018 compared to no material unused commitments on TDRs at September 30, 2017. For TDRs, Trustmark had a related loan loss allowance of $14.3 million and $393 thousand at September 30, 2018 and 2017, respectively. LHFI classified as TDRs are charged down to the most likely fair value estimate less an estimated cost to sell for collateral dependent loans, which would approximate net realizable value. Specific charge-offs related to TDRs totaled $4.7 million for the nine months ended September 30, 2018 compared to $126 thousand for the nine months ended September 30, 2017. The following tables illustrate the impact of modifications classified as TDRs as well as those TDRs modified within the last 12 months for which there was a payment default during the period for the periods presented ($ in thousands): Three Months Ended September 30, 2018 2017 Troubled Debt Restructurings Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Loans secured by 1-4 family residential properties 3 $ 121 $ 121 1 $ 112 $ 113 Loans secured by nonfarm, nonresidential properties — — — 1 426 426 Commercial and industrial loans 9 11,153 10,062 6 12,500 12,500 Total 12 $ 11,274 $ 10,183 8 $ 13,038 $ 13,039 Nine Months Ended September 30, 2018 2017 Troubled Debt Restructurings Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Construction, land development and other land loans 1 $ 22 $ 22 1 $ 341 $ 325 Loans secured by 1-4 family residential properties 19 1,873 1,432 17 1,280 1,290 Loans secured by nonfarm, nonresidential properties — — — 1 426 426 Commercial and industrial loans 15 22,899 21,791 7 12,744 12,744 Consumer loans 3 4 4 — — — Total 38 $ 24,798 $ 23,249 26 $ 14,791 $ 14,785 Nine Months Ended September 30, 2018 2017 TDRs that Subsequently Defaulted Number of Contracts Recorded Investment Number of Contracts Recorded Investment Construction, land development and other land loans 1 $ 21 — $ — Loans secured by 1-4 family residential properties 6 321 4 64 Commercial and industrial loans 6 13,985 2 — Total 13 $ 14,327 6 $ 64 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, 2018 and 2017 ($ in thousands): September 30, 2018 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 26 $ 26 Secured by 1-4 family residential properties 563 3,052 3,615 Secured by nonfarm, nonresidential properties — 360 360 Commercial and industrial loans 1,783 29,636 31,419 Consumer loans — 3 3 Other loans — 540 540 Total TDRs $ 2,346 $ 33,617 $ 35,963 September 30, 2017 Accruing Nonaccrual Total Loans secured by real estate: Construction, land development and other land $ — $ 272 $ 272 Secured by 1-4 family residential properties 14 3,077 3,091 Secured by nonfarm, nonresidential properties 426 436 862 Commercial and industrial loans — 20,153 20,153 Consumer loans — 1 1 Total TDRs $ 440 $ 23,939 $ 24,379 Credit Quality Indicators Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are primarily composed of commercial loans. In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to credit file completion and financial statement exceptions, underwriting, collateral documentation and compliance with law as shown below: • Credit File Completeness and Financial Statement Exceptions – evaluates the quality and condition of credit files in terms of content and completeness and focuses on efforts to obtain and document sufficient information to determine the quality and status of credits. Also included is an evaluation of the systems/procedures used to insure compliance with policy. • Underwriting – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within loan policy requirements. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measure the level of underwriting and other policy exceptions within a loan portfolio. • Collateral Documentation – focuses on the adequacy of documentation to perfect Trustmark’s collateral position and substantiate collateral value. Collateral exceptions measure the level of documentation exceptions within a loan portfolio. Collateral exceptions occur when certain collateral documentation is either not present or not current. • Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Regulation O requirements and regulations governing appraisals. Commercial Credits Trustmark has established a loan grading system that consists of ten individual credit risk grades (risk ratings) that encompass a range from loans where the expectation of loss is negligible to loans where loss has been established. The model is based on the risk of default for an individual credit and establishes certain criteria to delineate the level of risk across the ten unique credit risk grades. Credit risk grade definitions are as follows: • Risk Rate (RR) 1 through RR 6 – Grades one through six represent groups of loans that are not subject to criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk measured by using a variety of credit risk criteria such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. • Other Assets Especially Mentioned (Special Mention) - (RR 7) – a loan that has a potential weakness that if not corrected will lead to a more severe rating. This rating is for credits that are currently protected but potentially weak because of an adverse feature or condition that if not corrected will lead to a further downgrade. • Substandard (RR 8) – a loan that has at least one identified weakness that is well defined. This rating is for credits where the primary sources of repayment are not viable at the time of evaluation or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment do not provide a sufficient level of support to offset the identified weakness. Loss potential exists in the aggregate amount of substandard loans but does not necessarily exist in individual loans. • Doubtful (RR 9) – a loan with an identified weakness that does not have a valid secondary source of repayment. Generally these credits have an impaired primary source of repayment and secondary sources are not sufficient to prevent a loss in the credit. The exact amount of the loss has not been determined at this time. • Loss (RR 10) – a loan or a portion of a loan that is deemed to be uncollectible. By definition, credit risk grades special mention (RR 7), substandard (RR 8), doubtful (RR 9) and loss (RR 10) are criticized loans while substandard (RR 8), doubtful (RR 9) and loss (RR 10) are classified loans. These definitions are standardized by all bank regulatory agencies and are generally equally applied to each individual lending institution. The remaining credit risk grades are considered pass credits and are solely defined by Trustmark. Each commercial loan is assigned a credit risk grade that is an indication for the likelihood of default and is not a direct indication of loss at default. The loss at default aspect of the subject risk ratings is neither uniform across the nine primary commercial loan groups or constant between the geographic areas. To account for the variance in the loss at default aspects of the risk rating system, the loss expectations for each risk rating are integrated into the allowance for loan loss methodology where the calculated loss at default is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The loss at default aspect of the reserve methodology is calculated each quarter as a component of the overall reserve factor for each risk grade by loan group and geographic area. To enhance this process, nonaccrual relationships of $500 thousand or more that are rated in one of the criticized categories are routinely reviewed to establish an expectation of loss, if any, and if such examination indicates that the level of reserve is not adequate to cover the expectation of loss, a special reserve or impairment is generally applied. The distribution of the losses is accomplished by means of a loss distribution model that assigns a loss factor to each risk rating (1 to 9) in each commercial loan pool. A factor is not applied to risk rate 10 as loans classified as losses are charged off within the period that the loss is determined and are not carried on Trustmark’s books over quarter-end. The expected loss distribution is spread across the various risk ratings by the perceived level of risk for loss. The nine grade scale described above ranges from a negligible risk of loss to an identified loss across its breadth. The loss distribution factors are graduated through the scale on a basis proportional to the degree of risk that appears manifest in each individual rating and assumes that migration through the loan grading system will occur. Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio both on the underlying credit quality of each individual loan portfolio as well as the adherence to Trustmark’s loan policy and the loan administration process. In general, Asset Review conducts reviews of each lending area within a six to eighteen month window depending on the overall credit quality results of the individual area. In addition to the ongoing internal risk rate monitoring described above, Trustmark’s Credit Quality Review Committee meets monthly and performs a review of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual. This review includes recommendations regarding risk ratings, accrual status, charge-offs and appropriate servicing officer as well as evaluation of problem credits for determination of TDRs. Quarterly, the Credit Quality Review Committee reviews and modifies continuous action plans for all credits risk rated seven or worse for relationships of $100 thousand or more. In addition, a semi-annual review of significant development, commercial construction, multi-family and non-owner occupied projects is performed. The review assesses each particular project with respect to location, project valuations, progress of completion, leasing status, current financial information, rents, operating expenses, cash flow, adherence to budget and projections and other information as applicable. Summary results are reviewed by Senior and Regional Credit Officers in addition to the Chief Credit Officer with a determination as to the appropriateness of existing risk ratings and accrual status. Consumer Credits Consumer LHFI that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer to ensure that Trustmark continues to originate quality loans. Trustmark monitors the levels and severity of past due consumer LHFI on a daily basis through its collection activities. A detailed assessment of consumer LHFI delinquencies is performed monthly at both a product and market level by delivery channel, which incorporates the perceived level of risk at time of underwriting. The tables below present LHFI by loan type and credit quality indicator at September 30, 2018 and December 31, 2017 ($ in thousands): September 30, 2018 Commercial LHFI Pass - Categories 1-6 Special Mention - Category 7 Substandard - Category 8 Doubtful - Category 9 Subtotal Loans secured by real estate: Construction, land development and other land $ 961,316 $ 78 $ 4,512 $ 208 $ 966,114 Secured by 1-4 family residential properties 125,998 175 2,960 60 129,193 Secured by nonfarm, nonresidential properties 2,259,388 3,052 31,302 484 2,294,226 Other real estate secured 452,095 454 515 — 453,064 Commercial and industrial loans 1,490,431 9,721 63,936 1,834 1,565,922 Consumer loans — — — — — State and other political subdivision loans 913,286 5,250 10,642 — 929,178 Other loans 458,118 15,597 10,469 77 484,261 Total $ 6,660,632 $ 34,327 $ 124,336 $ 2,663 $ 6,821,958 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 $ 65,028 $ 3 $ — $ 346 $ 65,377 $ 1,031,491 Secured by 1-4 family residential properties 1,651,019 6,566 447 13,804 1,671,836 1,801,029 Secured by nonfarm, nonresidential properties 63 — — — 63 2,294,289 Other real estate secured 623 — — — 623 453,687 Commercial and industrial loans — — — — — 1,565,922 Consumer loans 180,503 1,721 258 227 182,709 182,709 State and other political subdivision loans — — — — — 929,178 Other loans 4,464 — — — 4,464 488,725 Total $ 1,901,700 $ 8,290 $ 705 $ 14,377 $ 1,925,072 $ 8,747,030 December 31, 2017 Commercial LHFI Pass - Categories 1-6 Special Mention - Category 7 Substandard Category 8 Doubtful - Category 9 Subtotal Loans secured by real estate: Construction, land development and other land $ 922,563 $ 316 $ 3,780 $ 222 $ 926,881 Secured by 1-4 family residential properties 127,405 134 4,948 76 132,563 Secured by nonfarm, nonresidential properties 2,135,749 6,684 50,785 527 2,193,745 Other real estate secured 517,036 — 517 — 517,553 Commercial and industrial loans 1,437,590 28,780 103,089 886 1,570,345 Consumer loans — — — — — State and other political subdivision loans 936,420 5,850 10,213 — 952,483 Other loans 478,083 — 16,390 108 494,581 Total $ 6,554,846 $ 41,764 $ 189,722 $ 1,819 $ 6,788,151 Consumer LHFI Current Past Due 30-89 Days Past Due 90 Days or More Nonaccrual Subtotal Total LHFI Loans secured by real estate: Construction, land development and other land $ 60,240 $ 342 $ — $ 161 $ 60,743 $ 987,624 Secured by 1-4 family residential properties 1,516,691 7,874 1,809 16,374 1,542,748 1,675,311 Secured by nonfarm, nonresidential properties 78 — — — 78 2,193,823 Other real estate secured 403 — — — 403 517,956 Commercial and industrial loans — — — — — 1,570,345 Consumer loans 169,146 2,396 242 134 171,918 171,918 State and other political subdivision loans — — — — — 952,483 Other loans 5,926 — — — 5,926 500,507 Total $ 1,752,484 $ 10,612 $ 2,051 $ 16,669 $ 1,781,816 $ 8,569,967 Past Due Loans Held for Sale (LHFS) LHFS past due 90 days or more totaled $34.1 million and $35.5 million at September 30, 2018 and December 31, 2017, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (GNMA). GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2018 or 2017. Allowance for Loan Losses, LHFI Trustmark’s allowance for loan loss methodology for commercial LHFI is based upon regulatory guidance from its primary regulator and GAAP. The methodology segregates the commercial purpose and commercial construction LHFI portfolios into nine separate loan types (or pools) which have similar characteristics such as repayment, collateral and risk profiles. The nine basic loan pools are further segregated into Trustmark’s five key market regions, Alabama, Florida, Mississippi, Tennessee and Texas, to take into consideration the uniqueness of each market. A 10-point risk rating system is utilized for each separate loan pool to apply a reserve factor consisting of quantitative and qualitative components to determine the needed allowance by each loan type. As a result, there are 450 risk rate factors for commercial loan types. The nine separate pools are shown below: Commercial Purpose LHFI • Real Estate – Owner-Occupied • Real Estate – Non-Owner Occupied • Working Capital • Non-Working Capital • Land • Lots and Development • Political Subdivisions Commercial Construction LHFI • 1 to 4 Family • Non-1 to 4 Family The quantitative factors of the allowance methodology reflect a twelve-quarter rolling average of net charge-offs by loan type within each key market region. This allows for a greater sensitivity to current trends, such as economic changes, as well as current loss profiles and creates a more accurate depiction of historical losses. Qualitative factors used in the allowance methodology include the following: • 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 past due. The following tables detail the balance in the allowance for loan losses, LHFI allocated to each loan type segmented by the impairment evaluation methodology used at September 30, 2018 and December 31, 2017 ($ in thousands): September 30, 2018 Individually Collectively Total Loans secured by real estate: Construction, land development and other land $ — $ 8,414 $ 8,414 Secured by 1-4 family residential properties 43 9,265 9,308 Secured by nonfarm, nonresidential properties 78 24,781 24,859 Other real estate secur |