Note 5 –

Acquired Loans

For the periods presented, acquired loans consisted of the following ($ in thousands):

	September 30, 2012				December 31, 2011
	Covered		Noncovered		Covered		Noncovered (1)
Loans secured by real estate:
Construction, land development and other land loans	$	3,714	$	11,504	$	4,209	$	-
Secured by 1-4 family residential properties		24,949		18,032		31,874		76
Secured by nonfarm, nonresidential properties		28,291		47,114		30,889		-
Other		4,198		378		5,126		-
Commercial and industrial loans		1,803		3,371		2,971		69
Consumer loans		172		2,575		290		4,146
Other loans		1,376		136		1,445		72
Acquired loans		64,503		83,110		76,804		4,363
Less allowance for loan losses, acquired loans		3,526		817		502		-
Net acquired loans	$	60,977	$	82,293	$	76,302	$	4,363

(1)	Acquired noncovered loans were included in LHFI at December 31, 2011.

The acquired loans were recorded at their estimated fair value at the time of acquisition. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions regarding the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.

Loans acquired in an FDIC-assisted transaction and covered under loss-share agreements, such as those acquired from Heritage, are referred to as "covered loans" and are reported separately in Trustmark's consolidated financial statements. The covered loans were recorded at their estimated fair value at the time of acquisition exclusive of the expected reimbursement cash flows from the FDIC.

TNB accounts for acquired impaired loans under FASB ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that TNB would be unable to collect all contractually required payments. Revolving credit agreements such as home equity lines are excluded from acquired impaired loan accounting requirements. TNB acquired $5.9 million and $3.8 million of revolving credit agreements, at fair value, in the Bay Bank and Heritage acquisitions, respectively, consisting mainly of home equity loans and commercial asset-based lines of credit, where the borrower had revolving privileges on the acquisition date. As such, TNB has accounted for such revolving loans in accordance with accounting requirements for acquired nonimpaired loans.

For acquired impaired loans, TNB (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (b) estimated the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). Under acquired impaired loan accounting, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the acquired impaired loan portfolio and such amount is subject to change over time based on the performance of such loans.

The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the "accretable yield" and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. Improvements in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those originally estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. The carrying value of acquired impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

TNB aggregates certain acquired loans into pools of loans with common credit risk characteristics such as loan type and risk rating. To establish accounting pools of acquired loans, loans are first categorized by similar purpose, similar collateral, similar geographic region, and by their operational servicing center. Within each category, loans are further segmented by ranges of risk determinants observed at the time of acquisition. For commercial loans, the primary risk determinant is the risk rating as assigned by TNB's internal credit officers. For consumer loans, the risk determinants include delinquency, FICO and loan to value. Statistical comparison of the pools reflect that each pool is comprised of loans generally of statistically similar characteristics, including loan type, loan risk and weighted average life. Each pool is then reviewed for statistical similarity of the pool constituents, including standard deviation of purchase price, weighted average life and concentration of the largest loans. Loan pools are initially booked at the aggregate fair value of the loan pool constituents, based on the present value of TNB's expected cash flows from the loans. An acquired loan will be removed from a pool of loans only if the loan is sold, foreclosed, or payment is received in full satisfaction of the loan. The acquired loan will be removed from the pool at its carrying value. If an individual acquired loan is removed from a pool of loans, the difference between its relative carrying amount and its cash, fair value of the collateral, or other assets received will be recognized as a gain or loss immediately in interest income on loans and would not affect the effective yield used to recognize the accretable yield on the remaining pool. Certain acquired loans are not pooled and are accounted for individually. Such loans consist of loans subject to accounting for acquired nonimpaired loans and loans that require more specific estimates of actual timing and amounts of cash flows due to the significant impairment of the borrower's ability to pay.

As required by FASB ASC Topic 310-30, TNB periodically re-estimates the expected cash flows to be collected over the life of the acquired impaired loans. If, based on current information and events, it is probable that TNB will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition, the acquired loans are considered impaired. The decrease in the expected cash flows reduces the carrying value of the acquired impaired loans as well as the accretable yield and results in a charge to income through the provision for loans losses and the establishment of an allowance for loan losses. If, based on current information and events, it is probable that there is a significant increase in the cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, TNB will reduce any remaining allowance for loan losses established on the acquired impaired loans for the increase in the present value of cash flows expected to be collected. The increase in the expected cash flows for the acquired impaired loans over those originally estimated at acquisition increases the carrying value of the acquired impaired loans as well as the accretable yield. The increase in the accretable yield is recognized as interest income over the remaining average life of the acquired impaired loans.

On March 16, 2012, TNB completed its merger with Bay Bank. Loans acquired in the Bay Bank acquisition were evaluated for evidence of credit deterioration since origination and collectability of contractually required payments. TNB elected to account for all loans acquired in the Bay Bank acquisition as acquired impaired loans under FASB ASC Topic 310-30 except for $5.9 million of acquired loans with revolving privileges, which are outside the scope of the guidance. While not all loans acquired from Bay Bank exhibited evidence of significant credit deterioration, accounting for these acquired loans under ASC Topic 310-30 would have materially the same result as the alternative accounting treatment. The purchase price allocation was deemed preliminary as of March 31, 2012 and was finalized in the second quarter of 2012.

The following table presents the fair value of loans acquired as of the date of the Bay Bank acquisition ($ in thousands):

At acquisition date:	March 16, 2012
Contractually required principal and interest	$	134,615
Nonaccretable difference		20,161
Cash flows expected to be collected		114,454
Accretable yield (1)		16,540
Fair value of loans at acquisition	$	97,914

(1)	Includes $1.002 million of accretable yield relating to acquired loans not accounted for under FASB ASC Topic 310-30.

On April 15, 2011, TNB entered into a purchase and assumption agreement with the FDIC in which TNB agreed to assume all of the deposits and essentially all of the assets of Heritage. Loans comprised the majority of the assets acquired and $97.8 million, or 91% of total loans acquired, are subject to the loss-share agreement with the FDIC whereby TNB is indemnified against a portion of the losses on covered loans and covered other real estate.

The following tables present changes in the carrying value of the acquired loans for the periods presented ($ in thousands):

	Covered						Noncovered (1)
	Acquired			Acquired			Acquired			Acquired
	Impaired			Not ASC 310-30 (2)			Impaired			Not ASC 310-30 (2)
Carrying value at January 1, 2011	$	-		$	-		$	-		$	-
Loans acquired		93,940			3,830			9,468			176
Accretion to interest income		4,347			543			349			4
Payments received, net (3)		(25,764	)		(202	)		(5,076	)		(47	)
Other		110			-			(391	)		(120	)
Less allowance for loan losses, acquired loans		(502	)		-			-			-
Carrying value at December 31, 2011		72,131			4,171			4,350			13
Loans acquired (4)		-			-			91,987			5,927
Accretion to interest income		6,359			167			2,686			128
Payments received, net		(19,994	)		(683	)		(20,820	)		(1,331	)
Other		1,822			28			268			(98	)
Less allowance for loan losses, acquired loans		(3,024	)		-			(817	)		-
Carrying value at September 30, 2012	$	57,294		$	3,683		$	77,654		$	4,639

(1)	Acquired noncovered loans were included in LHFI at December 31, 2011.

(2)	"Acquired Not ASC 310-30" loans consist of revolving credit agreements that are not in scope for FASB ASC Topic 310-30.

(3)	Includes $4.3 million for loan recoveries and an adjustment to payments recorded for covered acquired impaired loans, which was reported as "Changes in expected cash flows" at December 31, 2011.

(4)	Fair value of loans acquired from Bay Bank on March 16, 2012.

The following table presents changes in the accretable yield for the nine months ended September 30, 2012 ($ in thousands):

Accretable yield at January 1, 2012 (1)	$	(17,653	)
Additions due to acquisition (2)		(15,538	)
Accretion to interest income		9,045
Disposals		2,687
Reclassification to / (from) nonaccretable difference		(6,429	)
Accretable yield at September 30, 2012	$	(27,888	)

(1)	Accretable yield at January 1, 2012, includes $777 thousand of accretable yield for noncovered loans acquired from Heritage and accounted for under FASB ASC Topic 310-30.

(2)	Accretable yield on loans acquired from Bay Bank on March 16, 2012.

No allowance for loan losses was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. Updates to expected cash flows for acquired impaired loans accounted for under FASB ASC Topic 310-30 may result in a provision for loan losses and the establishment of an allowance for loan losses to the extent the amount and timing of expected cash flows decrease compared to those originally estimated at acquisition. TNB initially established an allowance for loan losses associated with covered acquired impaired loans during the fourth quarter of 2011 as a result of valuation procedures performed during the period.

The following table presents the components of the allowance for loan losses on acquired impaired loans for the nine months ended September 30, 2012 ($ in thousands):

	Covered		Noncovered			Total
Balance at January 1, 2012	$	502	$	-		$	502
Loans charged-off		174		(278	)		(104	)
Recoveries		195		167			362
Net charge-offs		369		(111	)		258
Provision for loan losses, acquired loans		2,655		928			3,583
Balance at September 30, 2012	$	3,526	$	817		$	4,343

As discussed in Note 4 - Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI, TNB 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. These credit quality measures are unique to commercial loans. Credit quality for consumer loans is based on individual credit scores, aging status of the loan, and payment activity.

The tables below illustrate the carrying amount of acquired loans by credit quality indicator at September 30, 2012 and December 31, 2011 ($ in thousands):

	September 30, 2012
	Commercial Loans
	Pass -		Special Mention -		Substandard -		Doubtful -
	Categories 1-6		Category 7		Category 8		Category 9		Subtotal
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	1,159	$	18	$	1,275	$	742	$	3,194
Secured by 1-4 family residential properties		3,575		1,444		2,519		83		7,621
Secured by nonfarm, nonresidential properties		10,295		3,186		13,024		810		27,315
Other		361		346		1,486		-		2,193
Commercial and industrial loans		255		1,316		215		17		1,803
Consumer loans		-		-		-		-		-
Other loans		238		-		431		537		1,206
Total covered loans		15,883		6,310		18,950		2,189		43,332

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		2,227		882		6,207		835		10,151
Secured by 1-4 family residential properties		4,798		808		3,569		23		9,198
Secured by nonfarm, nonresidential properties		19,105		11,005		16,038		877		47,025
Other		208		31		122		-		361
Commercial and industrial loans		2,929		359		83		-		3,371
Consumer loans		-		-		-		-		-
Other loans		85		-		24		-		109
Total noncovered loans		29,352		13,085		26,043		1,735		70,215
Total acquired loans	$	45,235	$	19,395	$	44,993	$	3,924	$	113,547

	Consumer Loans
			Past Due		Past Due Greater						Total
	Current		30-89 Days		Than 90 Days		Nonaccrual		Subtotal		Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	311	$	209	$	-	$	-	$	520	$	3,714
Secured by 1-4 family residential properties		14,982		1,105		1,203		38		17,328		24,949
Secured by nonfarm, nonresidential properties		807		169		-		-		976		28,291
Other		1,821		130		44		10		2,005		4,198
Commercial and industrial loans		-		-		-		-		-		1,803
Consumer loans		172		-		-		-		172		172
Other loans		170		-		-		-		170		1,376
Total covered loans		18,263		1,613		1,247		48		21,171		64,503

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		1,314		-		39		-		1,353		11,504
Secured by 1-4 family residential properties		8,513		173		87		61		8,834		18,032
Secured by nonfarm, nonresidential properties		89		-		-		-		89		47,114
Other		17		-		-		-		17		378
Commercial and industrial loans		-		-		-		-		-		3,371
Consumer loans		2,474		80		21		-		2,575		2,575
Other loans		27		-		-		-		27		136
Total noncovered loans		12,434		253		147		61		12,895		83,110
Total acquired loans	$	30,697	$	1,866	$	1,394	$	109	$	34,066	$	147,613

(1)	Total dollar balances are presented in this table; however, these loans are covered by the loss-share agreement with the FDIC. TNB is at risk for only 20% of the losses incurred on these loans.

	December 31, 2011
	Commercial Loans
	Pass -			Special Mention -		Substandard -		Doubtful -
	Categories 1-6			Category 7		Category 8		Category 9		Subtotal
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	1,212		$	194	$	1,425	$	909	$	3,740
Secured by 1-4 family residential properties		6,402			1,256		1,943		19		9,620
Secured by nonfarm, nonresidential properties		13,302			5,275		8,932		2,134		29,643
Other		878			429		658		86		2,051
Commercial and industrial loans		1,780			1,109		82		-		2,971
Consumer loans		-			-		-		-		-
Other loans		212			63		402		535		1,212
Total covered loans		23,786			8,326		13,442		3,683		49,237

Noncovered loans: (2)
Loans secured by real estate:
Construction, land development and other land loans		-			-		-		-		-
Secured by 1-4 family residential properties		-			-		-		-		-
Secured by nonfarm, nonresidential properties		-			-		-		-		-
Other		-			-		-		-		-
Commercial and industrial loans		27			-		42		-		69
Consumer loans		-			-		-		-		-
Other loans		(3	)		-		-		-		(3	)
Total noncovered loans		24			-		42		-		66
Total acquired loans	$	23,810		$	8,326	$	13,484	$	3,683	$	49,303

	Consumer Loans
			Past Due		Past Due Greater						Total
	Current		30-89 Days		Than 90 Days		Nonaccrual		Subtotal		Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	448	$	18	$	3	$	-	$	469	$	4,209
Secured by 1-4 family residential properties		19,159		1,044		2,013		38		22,254		31,874
Secured by nonfarm, nonresidential properties		1,246		-		-		-		1,246		30,889
Other		2,953		108		14		-		3,075		5,126
Commercial and industrial loans		-		-		-		-		-		2,971
Consumer loans		290		-		-		-		290		290
Other loans		230		3		-		-		233		1,445
Total covered loans		24,326		1,173		2,030		38		27,567		76,804

Noncovered loans: (2)
Loans secured by real estate:
Construction, land development and other land loans		-		-		-		-		-		-
Secured by 1-4 family residential properties		71		5		-		-		76		76
Secured by nonfarm, nonresidential properties		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial and industrial loans		-		-		-		-		-		69
Consumer loans		3,943		202		1		-		4,146		4,146
Other loans		75		-		-		-		75		72
Total noncovered loans		4,089		207		1		-		4,297		4,363
Total acquired loans	$	28,415	$	1,380	$	2,031	$	38	$	31,864	$	81,167

(1)	Total dollar balances are presented in this table; however, these loans are covered by the loss-share agreement with the FDIC. TNB is at risk for only 20% of the losses incurred on these loans.

(2)	Acquired noncovered loans were included in LHFI at December 31, 2011.

Under FASB ASC Topic 310-30, acquired loans are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans as long as the estimated cash flows are received as expected. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding. At September 30, 2012, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2012, approximately $953 thousand of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $491 thousand of acquired loans at December 31, 2011.

The following table provides an aging analysis of contractually past due and nonaccrual acquired loans, by class at September 30, 2012 and December 31, 2011 ($ in thousands):

	September 30, 2012
	Past Due
			Greater than						Current		Total Acquired
	30-89 Days		90 Days (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	257	$	242	$	499	$	445	$	2,770	$	3,714
Secured by 1-4 family residential properties		1,936		1,379		3,315		237		21,397		24,949
Secured by nonfarm, nonresidential properties		1,603		3,514		5,117		-		23,174		28,291
Other		189		64		253		10		3,935		4,198
Commercial and industrial loans		152		-		152		41		1,610		1,803
Consumer loans		-		-		-		-		172		172
Other loans		429		-		429		-		947		1,376
Total past due covered loans		4,566		5,199		9,765		733		54,005		64,503

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		2,181		1,487		3,668		-		7,836		11,504
Secured by 1-4 family residential properties		435		1,325		1,760		61		16,211		18,032
Secured by nonfarm, nonresidential properties		661		951		1,612		159		45,343		47,114
Other		29		-		29		-		349		378
Commercial and industrial loans		65		17		82		-		3,289		3,371
Consumer loans		80		21		101		-		2,474		2,575
Other loans		-		-		-		-		136		136
Total past due noncovered loans		3,451		3,801		7,252		220		75,638		83,110
Total past due acquired loans	$	8,017	$	9,000	$	17,017	$	953	$	129,643	$	147,613

(1)	- Past due greater than 90 days but still accruing interest.

(2)	- Acquired loans not accounted for under FASB ASC Topic 310-30.

	December 31, 2011
	Past Due
			Greater than						Current		Total Acquired
	30-89 Days		90 Days (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	253	$	1,004	$	1,257	$	386	$	2,566	$	4,209
Secured by 1-4 family residential properties		1,339		2,159		3,498		92		28,284		31,874
Secured by nonfarm, nonresidential properties		4,464		2,463		6,927		-		23,962		30,889
Other		176		14		190		-		4,936		5,126
Commercial and industrial loans		37		45		82		13		2,876		2,971
Consumer loans		-		-		-		-		290		290
Other loans		3		-		3		-		1,442		1,445
Total past due covered loans		6,272		5,685		11,957		491		64,356		76,804

Noncovered loans: (3)
Loans secured by real estate:
Construction, land development and other land loans		-		-		-		-		-		-
Secured by 1-4 family residential properties		5		-		5		-		71		76
Secured by nonfarm, nonresidential properties		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial and industrial loans		19		-		19		-		50		69
Consumer loans		202		2		204		-		3,942		4,146
Other loans		-		-		-		-		72		72
Total past due noncovered loans		226		2		228		-		4,135		4,363
Total past due acquired loans	$	6,498	$	5,687	$	12,185	$	491	$	68,491	$	81,167

(1)	- Past due greater than 90 days but still accruing interest.

(2)	- Acquired loans not accounted for under FASB ASC Topic 310-30.

(3)	- Acquired noncovered loans were included in LHFI at December 31, 2011.