TRUSTMARK CORP - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________

Commission file number 000-03683

Trustmark Corporation

(Exact name of registrant as specified in its charter)

Mississippi		64-0471500
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

248 East Capitol Street, Jackson, Mississippi		39201
(Address of principal executive offices)		(Zip Code)

(601) 208-5111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act.

	Large accelerated filer þ		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 31, 2013, there were 67,186,694 shares outstanding of the registrant’s common stock (no par value).

Forward-Looking Statements

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include, but are not limited to, statements relating to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things, and encompass any estimate, prediction, expectation, projection, opinion, anticipation, outlook or statement of belief included therein as well as the management assumptions underlying these forward-looking statements. You should be aware that the occurrence of the events described under the caption “Risk Factors” in Trustmark’s filings with the Securities and Exchange Commission could have an adverse effect on our business, results of operations and financial condition. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected.

Risks that could cause actual results to differ materially from current expectations of Management include, but are not limited to, changes in the level of nonperforming assets and charge-offs, local, state and national economic and market conditions, including the extent and duration of the current volatility in the credit and financial markets, a material decline in, or changes in our ability to measure the fair value of assets in our portfolio (including loans and investment securities), material changes in the level and/or volatility of market interest rates, the performance and demand for the products and services we offer, including the level and timing of withdrawals from our deposit accounts, acceleration of significantly extended deterioration in loan performance and default levels, a significant increase in foreclosure activity, the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, our ability to attract noninterest-bearing deposits and other low-cost funds, competition in loan and deposit pricing, as well as the entry of new competitors into our markets through de novo expansion and acquisitions, economic conditions, including the potential impact of the European financial crisis on the U.S. economy and the markets we serve, and monetary and other governmental actions designed to address the level and volatility of interest rates and the volatility of securities, currency and other markets, the enactment of legislation and changes in existing regulations, or enforcement practices, or the adoption of new regulations, changes in accounting standards and practices, including changes in the interpretation of existing standards, that affect our consolidated financial statements, changes in consumer spending, borrowings and savings habits, technological changes, changes in the financial performance or condition of our borrowers, changes in our ability to control expenses, changes in our compensation and benefit plans, greater than expected costs or difficulties related to the integration of acquisitions or new products and lines of business, natural disasters, environmental disasters, acts of war or terrorism, and other risks described in our filings with the Securities and Exchange Commission.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Except as required by law, we undertake no obligation to update or revise any of this information, whether as the result of new information, future events or developments or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Trustmark Corporation and Subsidiaries

Consolidated Balance Sheets

($ in thousands)

	(Unaudited)
	September 30,			December 31,
	2013			2012
Assets
Cash and due from banks (noninterest-bearing)	$	335,695		$	231,489
Federal funds sold and securities purchased under reverse repurchase agreements		7,867			7,046
Securities available for sale (at fair value)		3,372,101			2,657,745
Securities held to maturity (fair value: $70,949-2013; $46,888-2012)		69,980			42,188
Loans held for sale (LHFS)		119,986			257,986
Loans held for investment (LHFI)		5,696,641			5,592,754
Less allowance for loan losses, LHFI		68,632			78,738
Net LHFI		5,628,009			5,514,016
Acquired loans:
Noncovered loans		837,875			81,523
Covered loans		37,250			52,041
Less allowance for loan losses, acquired loans		5,333			6,075
Net acquired loans		869,792			127,489
Net LHFI and acquired loans		6,497,801			5,641,505
Premises and equipment, net		208,837			154,841
Mortgage servicing rights		63,150			47,341
Goodwill		372,463			291,104
Identifiable intangible assets		44,424			17,306
Other real estate, excluding covered other real estate		116,329			78,189
Covered other real estate		5,092			5,741
FDIC indemnification asset		17,085			21,774
Other assets		574,387			374,412
Total Assets	$	11,805,197		$	9,828,667

Liabilities
Deposits:
Noninterest-bearing	$	2,643,612		$	2,254,211
Interest-bearing		7,143,622			5,642,306
Total deposits		9,787,234			7,896,517
Federal funds purchased and securities sold under repurchase agreements		342,465			288,829
Short-term borrowings		60,698			86,920
Long-term FHLB advances		8,562			-
Subordinated notes		49,896			49,871
Junior subordinated debt securities		61,856			61,856
Other liabilities		164,972			157,305
Total Liabilities		10,475,683			8,541,298

Shareholders' Equity
Common stock, no par value:
Authorized: 250,000,000 shares Issued and outstanding: 67,181,694 shares - 2013; 64,820,414 shares - 2012		13,998			13,506
Capital surplus		343,759			285,905
Retained earnings		1,023,983			984,563
Accumulated other comprehensive (loss) income, net of tax		(52,226	)		3,395
Total Shareholders' Equity		1,329,514			1,287,369
Total Liabilities and Shareholders' Equity	$	11,805,197		$	9,828,667

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Income

($ in thousands except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Interest Income
Interest and fees on LHFI & LHFS	$	65,403		$	69,656		$	194,572		$	212,783
Interest and fees on acquired loans		19,183			5,229			52,952			13,263
Interest on securities:
Taxable		18,654			15,909			53,740			51,645
Tax exempt		1,274			1,358			3,869			4,080
Interest on federal funds sold and securities purchased under reverse repurchase agreements		8			6			17			17
Other interest income		372			339			1,099			1,005
Total Interest Income		104,894			92,497			306,249			282,793

Interest Expense
Interest on deposits		4,970			5,725			14,950			19,543
Interest on federal funds purchased and securities sold under repurchase agreements		106			135			275			448
Other interest expense		1,389			1,358			4,392			4,131
Total Interest Expense		6,465			7,218			19,617			24,122
Net Interest Income		98,429			85,279			286,632			258,671
Provision for loan losses, LHFI		(3,624	)		3,358			(11,438	)		7,301
Provision for loan losses, acquired loans		3,292			2,105			1,870			3,583
Net Interest Income After Provision for Loan Losses		98,761			79,816			296,200			247,787

Noninterest Income
Service charges on deposit accounts		13,852			13,135			38,462			37,960
Bank card and other fees		8,929			6,924			26,381			22,467
Mortgage banking, net		8,440			11,150			28,318			29,629
Insurance commissions		8,227			7,533			23,483			21,318
Wealth management		7,520			5,612			21,335			16,875
Other, net		165			512			(3,171	)		3,120
Security gains (losses), net		-			(1	)		378			1,041
Total Noninterest Income		47,133			44,865			135,186			132,410

Noninterest Expense
Salaries and employee benefits		56,043			47,404			165,040			140,795
Services and fees		13,580			11,682			39,428			34,179
Net occupancy - premises		6,644			5,352			19,302			15,244
Equipment expense		6,271			5,095			18,138			15,190
ORE/Foreclosure expense		3,079			1,702			12,030			7,992
FDIC assessment expense		2,376			1,826			6,773			5,427
Other expense		13,531			10,399			50,153			38,366
Total Noninterest Expense		101,524			83,460			310,864			257,193
Income Before Income Taxes		44,370			41,221			120,522			123,004
Income taxes		11,336			11,317			31,501			33,431
Net Income	$	33,034		$	29,904		$	89,021		$	89,573

Earnings Per Common Share
Basic	$	0.49		$	0.46		$	1.33		$	1.39

Diluted	$	0.49		$	0.46		$	1.33		$	1.38

Dividends Per Common Share	$	0.23		$	0.23		$	0.69		$	0.69

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

($ in thousands)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2012		2013			2012
Net income per consolidated statements of income	$	33,034		$	29,904	$	89,021		$	89,573
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on available for sale securities:
Unrealized holding (losses) gains arising during the period		(17,461	)		2,618		(60,596	)		1,834
Less: adjustment for net gains realized in net income		-			-		(233	)		(643	)
Pension and other postretirement benefit plans:
Change in the net actuarial loss during the period		1,565			976		3,996			2,936
Derivatives:
Change in the accumulated gain on effective cash flow hedge derivatives		(242	)		-		1,212			-
Other comprehensive (loss) income, net of tax		(16,138	)		3,594		(55,621	)		4,127
Comprehensive income	$	16,896		$	33,498	$	33,400		$	93,700

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

($ in thousands)

(Unaudited)

	2013			2012
Balance, January 1,	$	1,287,369		$	1,215,037
Net income per consolidated statements of income		89,021			89,573
Other comprehensive (loss) income		(55,621	)		4,127
Common stock dividends paid		(46,674	)		(44,941	)
Common stock issued-net, long-term incentive plans:
Stock options		845			268
Restricted stock		(963	)		(1,203	)
Excess tax (expense) benefit from stock-based compensation arrangements		(808	)		35
Compensation expense, long-term incentive plans		2,850			3,119
Common stock issued, business combinations		53,495			12,000
Balance, September 30,	$	1,329,514		$	1,278,015

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Operating Activities
Net income	$	89,021		$	89,573
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses, net		(9,568	)		10,884
Depreciation and amortization		27,800			21,718
Net amortization of securities		5,390			5,499
Securities gains, net		(378	)		(1,041	)
Gains on sales of loans, net		(24,220	)		(21,884	)
Bargain purchase gain on acquisition		-			(3,635	)
Deferred income tax provision (benefit)		14,145			(13,035	)
Proceeds from sales of loans held for sale		1,156,310			1,330,506
Purchases and originations of loans held for sale		(1,021,237	)		(1,419,368	)
Originations and sales of mortgage servicing rights, net		(15,551	)		(17,074	)
Net increase in other assets		(74,411	)		(46,425	)
Net (decrease) increase in other liabilities		(3,431	)		48,541
Other operating activities, net		7,390			17,048
Net cash provided by operating activities		151,260			1,307

Investing Activities
Proceeds from calls and maturities of securities held to maturity		7,269			12,240
Proceeds from calls and maturities of securities available for sale		642,687			692,179
Proceeds from sales of securities available for sale		67,558			34,826
Purchases of securities held to maturity		(35,045	)		-
Purchases of securities available for sale		(1,000,015	)		(927,652	)
Net (increase) decrease in federal funds sold and securities purchased under reverse repurchase agreements		(821	)		3,963
Net decrease in loans		59,025			312,194
Purchases of premises and equipment		(12,862	)		(12,466	)
Proceeds from sales of premises and equipment		3,782			(3	)
Proceeds from sales of other real estate		30,389			26,185
Net cash received in business combination		89,037			78,151
Net cash (used in) provided by investing activities		(148,996	)		219,617

Financing Activities
Net increase in deposits		150,463			28,882
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		53,636			(195,789	)
Net decrease in short-term borrowings		(21,174	)		(1,613	)
Payments on long-term FHLB advances		(383	)		-
Redemption of junior subordinated debt securities		(33,000	)		-
Common stock dividends		(46,674	)		(44,941	)
Common stock issued-net, long-term incentive plans		(118	)		(935	)
Excess tax (expense) benefit from stock-based compensation arrangements		(808	)		35
Net cash provided by (used in) financing activities		101,942			(214,361	)

Increase in cash and cash equivalents		104,206			6,563
Cash and cash equivalents at beginning of period		231,489			202,625
Cash and cash equivalents at end of period	$	335,695		$	209,188

See notes to consolidated financial statements.

Trustmark Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Business, Basis of Financial Statement Presentation and Principles of Consolidation

Trustmark Corporation (Trustmark) is a multi-bank holding company headquartered in Jackson, Mississippi. Through its subsidiaries, Trustmark operates as a financial services organization providing banking and financial solutions to corporate institutions and individual customers through 214 offices in Alabama, Florida, Mississippi, Tennessee and Texas.

The consolidated financial statements in this quarterly report on Form 10-Q include the accounts of Trustmark and all other entities in which Trustmark has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements, and notes thereto, included in Trustmark’s 2012 annual report on Form 10-K.

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. In the opinion of Management, all adjustments considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting period and the related disclosures. Although Management’s estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2013 actual conditions could vary from those anticipated, which could affect Trustmark’s results of operations and financial condition. The allowance for loan losses, the amount and timing of expected cash flows from acquired loans and the Federal Deposit Insurance Corporation (FDIC) indemnification asset, the valuation of other real estate, the fair value of mortgage servicing rights, the valuation of goodwill and other identifiable intangibles, the status of contingencies and the fair values of financial instruments are particularly subject to change. Actual results could differ from those estimates.

Note 2 – Business Combinations

Oxford, Mississippi Branches

On March 29, 2013, Trustmark National Bank (TNB), a subsidiary of Trustmark, announced the signing of a definitive Branch Purchase and Assumption Agreement (the Agreement) pursuant to which TNB would acquire the two branches of SOUTHBank, F.S.B. (SOUTHBank), serving the Oxford, Mississippi market. TNB completed its purchase of the two branches from SOUTHBank effective as of the close of business on July 26, 2013. Pursuant to the Agreement, TNB assumed deposit accounts of approximately $11.7 million in addition to purchasing the two physical branch offices. The transaction was not material to Trustmark’s consolidated financial statements and was not considered a business combination in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations.”

BancTrust Financial Group, Inc.

On February 15, 2013, Trustmark completed its merger with BancTrust Financial Group, Inc. (BancTrust), a 26-year-old bank holding company headquartered in Mobile, Alabama. In accordance with the terms of the definitive agreement, the holders of BancTrust common stock received 0.125 of a share of Trustmark common stock for each share of BancTrust common stock in a tax-free exchange. Trustmark issued approximately 2.24 million shares of its common stock for all issued and outstanding shares of BancTrust common stock. The total value of the 2.24 million shares of Trustmark common stock issued to the BancTrust shareholders on the acquisition date was approximately $53.5 million, based on a closing stock price of $23.83 per share of Trustmark common stock on February 15, 2013. At closing, Trustmark repurchased the $50.0 million of BancTrust preferred stock and associated warrant issued to the U.S. Department of Treasury under the Capital Purchase Program for approximately $52.6 million.

The acquisition of BancTrust was consistent with Trustmark’s strategic plan to selectively expand the Trustmark franchise. The acquisition provided Trustmark entry into more than 15 markets in Alabama and enhanced the Trustmark franchise in the Florida Panhandle.

This acquisition was accounted for under the acquisition method in accordance with FASB ASC Topic 805. Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The fair values of assets acquired and liabilities assumed are subject to adjustment if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability during the measurement period, which is not to exceed one year from the acquisition date of February 15, 2013. Assets that are particularly susceptible to adjustment include certain loans, other real estate and certain premises and equipment.

During the second and third quarters of 2013, Trustmark recorded fair value adjustments based on the estimated fair value of certain acquired loans and other real estate. These measurement period adjustments resulted in a decrease in acquired noncovered loans of $6.8 million, a decrease in other real estate of $2.6 million, an increase in the deferred tax asset of $3.1 million, and an increase in goodwill of $5.9 million. Trustmark also recorded an adjustment to transfer $1.6 million of acquired property from premises and equipment, net to other real estate. These measurement period adjustments have been presented on a retrospective basis, consistent with applicable accounting guidance. The statement of assets purchased and liabilities assumed in the BancTrust acquisition is presented below at their adjusted estimated fair values, which were considered preliminary at September 30, 2013, as of the acquisition date of February 15, 2013 ($ in thousands):

Assets:
Cash and due from banks	$	141,616
Securities available for sale		528,016
Loans held for sale		1,050
Acquired noncovered loans		944,235
Premises and equipment, net		55,579
Identifiable intangible assets		33,498
Other real estate		40,103
Other assets		101,833
Total Assets		1,845,930

Liabilities:
Deposits		1,740,254
Other borrowings		64,051
Other liabilities		16,761
Total Liabilities		1,821,066

Net identified assets acquired at fair value		24,864
Goodwill		81,210
Net assets acquired at fair value	$	106,074

The excess of the consideration paid over the estimated fair value of the net assets acquired was $81.2 million, which was recorded as goodwill under FASB ASC Topic 805. The identifiable intangible assets acquired represent the core deposit intangible at fair value at the acquisition date. The core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years.

Loans, excluding loans held for sale (LHFS), acquired from BancTrust were evaluated under a fair value process involving various degrees of deterioration in credit quality since origination, and also for those loans for which it was probable at acquisition that Trustmark would not be able to collect all contractually required payments. These loans, with the exception of revolving credit agreements and leases, are referred to as acquired impaired loans and are accounted for in accordance with FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” Refer to Note 5 – Acquired Loans for further information on acquired loans.

The operations of BancTrust are included in Trustmark’s operating results from February 15, 2013, and added revenue of $50.5 million and net income, excluding non-routine transaction expenses, of approximately $13.0 million through September 30, 2013. Included in BancTrust’s net income through September 30, 2013 are recoveries on pay-offs of acquired loans of $4.2 million (after tax). Included in noninterest expense during the first nine months of 2013 are non-routine BancTrust transaction expenses totaling approximately $9.4 million (change in control and severance expense of $1.4 million included in salaries and benefits; professional fees, contract termination and other expenses of $7.9 million included in other expense). Such operating results are not necessarily indicative of future operating results.

The following table presents the unaudited pro forma financial information as if the acquisition of BancTrust had occurred on January 1, 2012. The unaudited pro forma information for the three and nine months ended September 30, 2013 and 2012, contains certain adjustments, including acquisition accounting fair value adjustments, amortization of the core deposit intangible and related income tax effects. The non-routine transaction expenses related to the BancTrust acquisition incurred during the first three months of 2013 as well as potential cost savings from the acquisition are not reflected in the unaudited pro forma amounts. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the acquisition been effected on the assumed date ($ in thousands except per share data).

	Pro Forma				Pro Forma
	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012

Net Interest Income	$	98,429	$	103,287	$	294,171	$	309,481

Total Noninterest Income		47,133		48,110		137,049		142,513

Net Income		33,034		34,818		96,830		104,750

Pro Forma Earnings Per Common Share
Basic	$	0.49	$	0.52	$	1.40	$	1.57

Diluted	$	0.49	$	0.52	$	1.40	$	1.56

Bay Bank & Trust Company

On March 16, 2012, Trustmark completed its merger with Bay Bank & Trust Co. (Bay Bank), a 76-year old financial institution headquartered in Panama City, Florida. Trustmark acquired all outstanding common stock of Bay Bank for approximately $22 million in cash and stock, comprised of $10 million in cash and the issuance of approximately 510 thousand shares of Trustmark common stock valued at $12 million. This acquisition was accounted for under the acquisition method in accordance with FASB ASC Topic 805. Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The purchase price allocation was finalized in the second quarter of 2012.

The statement of assets purchased and liabilities assumed in the Bay Bank acquisition is presented below at their estimated fair values as of the acquisition date of March 16, 2012 ($ in thousands):

Assets:
Cash and due from banks	$	88,154
Securities available for sale		26,369
Acquired noncovered loans		97,914
Premises and equipment, net		9,466
Identifiable intangible assets		7,017
Other real estate		2,569
Other assets		3,471
Total Assets		234,960

Liabilities:
Deposits		208,796
Other liabilities		526
Total Liabilities		209,322

Net assets acquired at fair value		25,638
Consideration paid to Bay Bank		22,003

Bargain purchase gain		3,635
Income taxes		-
Bargain purchase gain, net of taxes	$	3,635

The bargain purchase gain represents the excess of the net of the estimated fair value of the assets acquired and liabilities assumed over the consideration paid to Bay Bank. Initially, Trustmark recognized a bargain purchase gain of $2.8 million during the first quarter of 2012 and subsequently increased the bargain purchase gain $881 thousand during the second quarter of 2012 as the fair values associated with the Bay Bank acquisition were finalized. The gain of $3.6 million recognized by Trustmark was considered a gain from a bargain purchase under FASB ASC Topic 805 and was included in other noninterest income for the nine months ended September 30, 2012. Included in noninterest expense during the first quarter of 2012 are non-routine Bay Bank transaction expenses totaling approximately $2.6 million (change in control and severance expense of $672 thousand included in salaries and benefits; contract termination and other expenses of $1.9 million included in other expense).

The identifiable intangible assets represent the core deposit intangible at fair value at the acquisition date. The core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years.

Loans acquired from Bay Bank were evaluated under a fair value process involving various degrees of deterioration in credit quality since origination, and also for those loans for which it was probable at acquisition that Trustmark would not be able to collect all contractually required payments. These loans, with the exception of revolving credit agreements, are referred to as acquired impaired loans and are accounted for in accordance with FASB ASC Topic 310-30. Refer to Note 5 – Acquired Loans for further information on acquired loans.

Fair Value of Acquired Financial Instruments

For financial instruments measured at fair value, Trustmark utilized Level 2 inputs to determine the fair value of securities available for sale, time deposits (included in deposits above) and Federal Home Loan Bank (FHLB) advances (included in other borrowings above). Level 3 inputs were used to determine the fair value of acquired loans, identifiable intangible assets, and other real estate. The methodology and significant assumptions used in estimating the fair values of these financial assets and liabilities are as follows:

Securities Available for Sale

Estimated fair values for securities available for sale are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.

Acquired Loans

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.

Identifiable Intangible Assets

The fair value assigned to the identifiable intangible assets, in this case core deposit intangibles, represent the future economic benefit of the potential cost savings from acquiring core deposits in the acquisition compared to the cost of obtaining alternative funding from market sources.

Other Real Estate

Other real estate was initially recorded at its estimated fair value on the acquisition date based on independent appraisals less estimated selling costs.

Time Deposits

Time deposits were valued by projecting expected cash flows into the future based on each account’s contracted rate and then determining the present value of those expected cash flows using current rates for deposits with similar maturities.

FHLB Advances

FHLB advances were valued by projecting expected cash flows into the future based on each advance’s contracted rate and then determining the present value of those expected cash flows using current rates for advances with similar maturities.

Please refer to Note 16 – Fair Value for more information on Trustmark’s classification of financial instruments based on valuation inputs within the fair value hierarchy.

Note 3 – Securities Available for Sale and Held to Maturity

The following table is a summary of the amortized cost and estimated fair value of securities available for sale and held to maturity ($ in thousands):

	Securities Available for Sale									Securities Held to Maturity
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
September 30, 2013	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Treasury securities	$	503	$	-	$	-		$	503	$	-	$	-	$	-		$	-
U.S. Government agency obligations
Issued by U.S. Government agencies		133,258		1,125		(1,370	)		133,013		-		-		-			-
Issued by U.S. Government sponsored agencies		138,937		24		(6,536	)		132,425		-		-		-			-
Obligations of states and political subdivisions		206,168		7,460		(637	)		212,991		30,229		2,974		-			33,203
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		48,737		596		(1,093	)		48,240		2,420		158		-			2,578
Issued by FNMA and FHLMC		211,031		4,427		(663	)		214,795		564		35		-			599
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		2,083,906		14,665		(50,296	)		2,048,275		-		-		-			-
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		349,679		8,568		(4,116	)		354,131		36,767		114		(2,312	)		34,569
Asset-backed securities and structured financial products		225,621		2,119		(12	)		227,728		-		-		-			-
Total	$	3,397,840	$	38,984	$	(64,723	)	$	3,372,101	$	69,980	$	3,281	$	(2,312	)	$	70,949

December 31, 2012
U.S. Government agency obligations
Issued by U.S. Government agencies	$	10	$	-	$	-		$	10	$	-	$	-	$	-	$	-
Issued by U.S. Government sponsored agencies		105,396		339		-			105,735		-		-		-		-
Obligations of states and political subdivisions		202,877		12,900		(16	)		215,761		36,206		4,184		-		40,390
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		18,981		921		-			19,902		3,245		227		-		3,472
Issued by FNMA and FHLMC		201,493		7,071		-			208,564		572		52		-		624
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		1,436,812		29,574		(20	)		1,466,366		-		-		-		-
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		380,514		19,420		(154	)		399,780		2,165		237		-		2,402
Asset-backed securities and structured financial products		238,893		2,755		(21	)		241,627		-		-		-		-
Total	$	2,584,976	$	72,980	$	(211	)	$	2,657,745	$	42,188	$	4,700	$	-	$	46,888

Temporarily Impaired Securities

The table below includes securities with gross unrealized losses segregated by length of impairment ($ in thousands):

	Less than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
September 30, 2013	Fair Value		(Losses)			Fair Value		(Losses)			Fair Value		(Losses)
U.S. Government agency obligations
Issued by U.S. Government agencies	$	60,939	$	(1,370	)	$	-	$	-		$	60,939	$	(1,370	)
Issued by U.S. Government sponsored agencies		132,140		(6,536	)		-		-			132,140		(6,536	)
Obligations of states and political subdivisions		27,414		(636	)		569		(1	)		27,983		(637	)
Mortgage-backed securities
Residential mortgage pass-through securities
Guaranteed by GNMA		36,322		(1,093	)		-		-			36,322		(1,093	)
Issued by FNMA and FHLMC		49,792		(663	)		-		-			49,792		(663	)
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		1,352,905		(50,293	)		368		(3	)		1,353,273		(50,296	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC, or GNMA		153,092		(6,428	)		-		-			153,092		(6,428	)
Asset-backed securities and structured financial products		16,513		(12	)		-		-			16,513		(12	)
Total	$	1,829,117	$	(67,031	)	$	937	$	(4	)	$	1,830,054	$	(67,035	)

December 31, 2012
Obligations of states and political subdivisions	$	5,878	$	(16	)	$	-	$	-		$	5,878	$	(16	)
Mortgage-backed securities
Other residential mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		3,055		(20	)		-		-			3,055		(20	)
Commercial mortgage-backed securities
Issued or guaranteed by FNMA, FHLMC or GNMA		-		-			16,339		(154	)		16,339		(154	)
Asset-backed securities and structured financial products		16,412		(21	)		-		-			16,412		(21	)
Total	$	25,345	$	(57	)	$	16,339	$	(154	)	$	41,684	$	(211	)

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive loss. In estimating other-than-temporary impairment losses, Management considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability of Trustmark to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses shown above are primarily due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. Because Trustmark does not intend to sell these securities and it is more likely than not that Trustmark will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Trustmark does not consider these investments to be other-than-temporarily impaired at September 30, 2013. There were no other-than-temporary impairments for the nine months ended September 30, 2013 and 2012.

Security Gains and Losses

Gains and losses as a result of calls and dispositions of securities, as well as any associated proceeds, were as follows ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
Available for Sale	2013		2012			2013			2012
Proceeds from calls and sales of securities	$	-	$	2,710		$	64,778		$	37,536
Gross realized gains		-		-			394			1,050
Gross realized (losses)		-		(1	)		(16	)		(12	)

Held to Maturity
Proceeds from calls of securities	$	-	$	-		$	-		$	175
Gross realized gains		-		-			-			3

Realized gains and losses are determined using the specific identification method and are included in noninterest income as security gains (losses), net.

Contractual Maturities

The amortized cost and estimated fair value of securities available for sale and held to maturity at September 30, 2013, by contractual maturity, are shown below ($ in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities				Securities
	Available for Sale				Held to Maturity
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	10,080	$	10,142	$	1,627	$	1,650
Due after one year through five years		244,598		248,610		13,744		14,789
Due after five years through ten years		271,029		270,117		14,104		15,974
Due after ten years		178,780		177,791		754		790
		704,487		706,660		30,229		33,203
Mortgage-backed securities		2,693,353		2,665,441		39,751		37,746
Total	$	3,397,840	$	3,372,101	$	69,980	$	70,949

Note 4 – Loans Held for Investment (LHFI) and Allowance for Loan Losses, LHFI

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

	September 30, 2013		December 31, 2012
Loans secured by real estate:
Construction, land development and other land loans	$	572,057	$	468,975
Secured by 1-4 family residential properties		1,482,963		1,497,480
Secured by nonfarm, nonresidential properties		1,408,342		1,410,264
Other		196,328		189,949
Commercial and industrial loans		1,132,863		1,169,513
Consumer loans		164,612		171,660
Other loans		739,476		684,913
LHFI		5,696,641		5,592,754
Less allowance for loan losses, LHFI		68,632		78,738
Net LHFI	$	5,628,009	$	5,514,016

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, 2013, Trustmark's geographic loan distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate are susceptible to changes in market conditions in these areas.

Nonaccrual/Impaired LHFI

At September 30, 2013 and December 31, 2012, the carrying amounts of nonaccrual LHFI, which are individually evaluated for impairment, were $73.4 million and $82.4 million, respectively. Of this total, all commercial nonaccrual LHFI over $500 thousand were specifically evaluated for impairment (specifically evaluated impaired LHFI) using a fair value approach. The remaining nonaccrual LHFI were not all specifically reviewed and written down to fair value less cost to sell. No material interest income was recognized in the income statement on impaired or nonaccrual LHFI for each of the periods ended September 30, 2013 and 2012.

All of Trustmark’s specifically evaluated impaired LHFI are collateral dependent loans. At September 30, 2013 and December 31, 2012, specifically evaluated impaired LHFI totaled $32.2 million and $40.6 million, respectively. In addition, these specifically evaluated impaired LHFI had a related allowance of $2.0 million and $5.9 million at the end of the respective periods. For collateral dependent loans, when a loan is deemed impaired, the full difference between the carrying amount of the loan and the most likely estimate of the asset’s fair value less cost to sell is charged off. Charge-offs related to specifically evaluated impaired LHFI totaled $2.1 million and $11.0 million for the first nine months of 2013 and 2012, respectively. Provision recapture on specifically evaluated impaired LHFI totaled $3.5 million for the first nine months of 2013, compared to provision expense of $276 thousand for the same time period in 2012.

Fair value estimates for specifically evaluated impaired LHFI are derived from appraised values based on the current market value/as-is value of the property, normally from recently received and reviewed appraisals. Current appraisals are ordered on an annual basis based on the inspection date. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Trustmark’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. Once this estimated net realizable value has been determined, the value used in the impairment assessment is updated. At the time a specifically evaluated impaired LHFI is deemed to be impaired, the full difference between book value and the most likely estimate of the asset’s net realizable value is charged off. As subsequent events dictate and estimated net realizable values decline, required reserves may be established or further adjustments recorded.

At September 30, 2013 and December 31, 2012, nonaccrual LHFI not specifically evaluated for impairment and written down to fair value less cost to sell, totaled $41.2 million and $41.8 million, respectively. In addition, these nonaccrual LHFI had allocated allowance for loan losses of $7.7 million and $4.6 million at the end of the respective periods.

The following table details LHFI individually and collectively evaluated for impairment at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land loans	$	14,454	$	557,603	$	572,057
Secured by 1-4 family residential properties		23,715		1,459,248		1,482,963
Secured by nonfarm, nonresidential properties		21,290		1,387,052		1,408,342
Other		503		195,825		196,328
Commercial and industrial loans		12,196		1,120,667		1,132,863
Consumer loans		203		164,409		164,612
Other loans		1,020		738,456		739,476
Total	$	73,381	$	5,623,260	$	5,696,641

	December 31, 2012
	LHFI Evaluated for Impairment
	Individually		Collectively		Total

Loans secured by real estate:
Construction, land development and other land loans	$	27,105	$	441,870	$	468,975
Secured by 1-4 family residential properties		27,114		1,470,366		1,497,480
Secured by nonfarm, nonresidential properties		18,289		1,391,975		1,410,264
Other		3,956		185,993		189,949
Commercial and industrial loans		4,741		1,164,772		1,169,513
Consumer loans		360		171,300		171,660
Other loans		798		684,115		684,913
Total	$	82,363	$	5,510,391	$	5,592,754

At September 30, 2013 and December 31, 2012, the carrying amount of LHFI individually evaluated for impairment consisted of the following ($ in thousands):

	September 30, 2013
	LHFI
	Unpaid		With No Related		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 loans	$	26,139	$	11,073	$	3,381	$	14,454	$	957	$	20,779
Secured by 1-4 family residential properties		28,078		3,206		20,509		23,715		260		25,415
Secured by nonfarm, nonresidential properties		24,270		12,391		8,899		21,290		2,733		19,790
Other		543		-		503		503		37		2,229
Commercial and industrial loans		15,549		1,918		10,278		12,196		5,393		8,468
Consumer loans		392		-		203		203		2		281
Other loans		1,154		49		971		1,020		324		909
Total	$	96,125	$	28,637	$	44,744	$	73,381	$	9,706	$	77,871

	December 31, 2012
	LHFI
	Unpaid		With No Related		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 loans	$	46,558	$	9,571	$	17,534	$	27,105	$	4,992	$	33,759
Secured by 1-4 family residential properties		35,155		2,533		24,581		27,114		1,469		25,731
Secured by nonfarm, nonresidential properties		23,337		8,184		10,105		18,289		2,296		21,135
Other		6,036		566		3,390		3,956		760		4,914
Commercial and industrial loans		7,251		2,336		2,405		4,741		640		9,444
Consumer loans		624		-		360		360		5		592
Other loans		857		-		798		798		342		835
Total	$	119,818	$	23,190	$	59,173	$	82,363	$	10,504	$	96,410

A troubled debt restructuring (TDR) occurs when a borrower is experiencing financial difficulties, and for related economic or legal reasons, a concession is granted to the borrower that Trustmark would not otherwise consider. Whatever the form of a concession granted by Trustmark, the objective is to make the best of a difficult situation 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.

A formal TDR may include, but is not necessarily limited to, one or a combination of the following situations:

Trustmark accepts a third-party receivable or other asset(s) of the borrower, in lieu of the receivable from the borrower.

Trustmark accepts an equity interest in the borrower in lieu of the receivable.

Trustmark accepts modification of the terms of the debt including but not limited to:

Reduction of (absolute or contingent) the stated interest rate to below the current market rate.

Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the note or other agreement.

Reduction (absolute or contingent) of accrued interest.

Troubled debt restructurings are addressed in Trustmark’s loan policy, and in accordance with that policy, any modifications or concessions that may result in a TDR are subject to a special approval process which allows for control, identification, and monitoring of these arrangements. Prior to granting a concession, a revised borrowing arrangement is proposed which is structured so as to improve collectability of the loan in accordance with a reasonable repayment schedule with any loss promptly identified. It is supported by a thorough evaluation of the borrower’s financial condition and prospects for repayment under those revised terms. Other TDRs arising from renewals or extensions of existing debt are routinely identified through the processes utilized in the Problem Loan Committees and in the Credit Quality Review Committee. All TDRs are subsequently reported to the Director Credit Policy Committee on a quarterly basis and are disclosed in Trustmark’s consolidated financial statements in accordance with GAAP and regulatory reporting guidance.

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.

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, 2013 and December 31, 2012, LHFI classified as TDRs totaled $16.8 million and $24.3 million, respectively, and were primarily comprised of credits with interest-only payments for an extended period of time totaling $12.6 million and $21.6 million, respectively. The remaining TDRs at September 30, 2013 and December 31, 2012 resulted from real estate loans discharged through Chapter 7 bankruptcy that were not reaffirmed or from payment or maturity extensions.

For TDRs, Trustmark had a related loan loss allowance of $1.7 million and $4.3 million at the end of each respective period. 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 $703 thousand and $5.3 million for the nine months ended September 30, 2013 and 2012, respectively.

The following table illustrates the impact of modifications classified as TDRs for the three and nine months ended September 30, 2013 and 2012 as well as those TDRs modified within the last 12 months for which there was a payment default during the period ($ in thousands):

	Three Months Ended September 30,
	2013						2012
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
Secured by 1-4 family residential properties		1	$	32	$	32		39	$	3,695	$	3,691
Other loans secured by real estate		-		-		-		1		199		199
Total		1	$	32	$	32		40	$	3,894	$	3,890

	Nine Months Ended September 30,
	2013						2012
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		-	$	-	$	-		11	$	4,078	$	4,078
Secured by 1-4 family residential properties		6		412		358		44		5,062		5,069
Secured by nonfarm, nonresidential properties		1		952		952		2		1,210		1,210
Other loans secured by real estate		-		-		-		1		199		199
Commercial and industrial		2		944		937		-		-		-
Other loans		1		2,490		2,490		-		-		-
Total		10	$	4,798	$	4,737		58	$	10,549	$	10,556

	Nine Months Ended September 30,
	2013				2012
Troubled Debt Restructurings that Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Construction, land development and other land loans		1	$	9		10	$	3,671
Secured by 1-4 family residential properties		4		389		8		1,781
Secured by nonfarm, nonresidential properties		-		-		1		870
Total		5	$	398		19	$	6,322

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.

At September 30, 2013 and December 31, 2012, the following table details LHFI classified as TDRs by loan type ($ in thousands):

	September 30, 2013
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	227	$	7,304	$	7,531
Secured by 1-4 family residential properties		1,255		4,965		6,220
Secured by nonfarm, nonresidential properties		-		2,349		2,349
Other loans secured by real estate		-		174		174
Commercial and industrial		-		568		568
Total Troubled Debt Restructurings by Type	$	1,482	$	15,360	$	16,842

	December 31, 2012
	Accruing		Nonaccrual		Total
Construction, land development and other land loans	$	233	$	12,073	$	12,306
Secured by 1-4 family residential properties		1,280		5,908		7,188
Secured by nonfarm, nonresidential properties		-		4,582		4,582
Other loans secured by real estate		-		197		197
Total Troubled Debt Restructurings by Type	$	1,513	$	22,760	$	24,273

Credit Quality Indicators

Trustmark’s loan portfolio credit quality indicators focus on six key quality ratios that are compared against bank tolerances. The loan indicators are total classified outstanding, total criticized outstanding, nonperforming loans, nonperforming assets, delinquencies and net loan losses. Due to the homogenous nature of consumer loans, Trustmark does not assign a formal internal risk rating to each credit and therefore the criticized and classified measures are unique to commercial loans.

In addition to monitoring portfolio credit quality indicators, Trustmark also measures how effectively the lending process is being managed and risks are being identified. As part of an ongoing monitoring process, Trustmark grades the commercial portfolio as it relates to credit file completion and financial statement exceptions, total policy exceptions, collateral exceptions and violations of 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 such as financial statements, review memos and loan agreements.

Underwriting/Policy – evaluates whether credits are adequately analyzed, appropriately structured and properly approved within requirements of bank loan policy. A properly approved credit is approved by adequate authority in a timely manner with all conditions of approval fulfilled. Total policy exceptions measures the level of underwriting and other policy exceptions within a loan portfolio.

Collateral Documentation – focuses on the adequacy of documentation to support the obligation, perfect Trustmark’s collateral position and protect collateral value. There are two parts to this measure:

Collateral exceptions are where certain collateral documentation is either not present, is not considered current or has expired.

90 days and over collateral exceptions are where certain collateral documentation is either not present, is not considered current or has expired and the exception has been identified in excess of 90 days.

Compliance with Law – focuses on underwriting, documentation, approval and reporting in compliance with banking laws and regulations. Primary emphasis is directed to 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 (OAEM) (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 this time or where either the capital or collateral is not adequate to support the loan and the secondary means of repayment does 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 OAEM (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.

The credit risk grades represent the probability of default (PD) for an individual credit and as such are not a direct indication of loss given default (LGD). The LGD 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 LGD aspects of the risk rate system, the loss expectations for each risk rating is integrated into the allowance for loan loss methodology where the calculated LGD is allotted for each individual risk rating with respect to the individual loan group and unique geographic area. The LGD 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 (Loss) as loans classified as Losses are not carried on Trustmark’s books over quarter-end as they are charged off within the period that the loss is determined.

The expected loss distribution is spread across the various risk ratings by the perceived level of risk for loss. The nine grade scale described above ranges from a negligible risk of loss to an identified loss across its breadth. The loss distribution factors are graduated through the scale on a basis proportional to the degree of risk that appears manifest in each individual rating and assumes that migration through the loan grading system will occur.

Each loan officer assesses the appropriateness of the internal risk rating assigned to their credits on an ongoing basis. Trustmark’s Asset Review area conducts independent credit quality reviews of the majority of Trustmark’s commercial loan portfolio concentrations both on the underlying credit quality of each individual loan portfolio as well as the adherence to bank 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 conducts monthly credit quality reviews (CQR) for the credits described below, as well as semi-annual analysis and stress testing on all residential real estate development credits and non-owner occupied commercial real estate (CRE) credits of $1.0 million or more as described below:

Trustmark’s Credit Quality Review Committee meets monthly and performs the following functions: detailed review and evaluation of all loans of $100 thousand or more that are either delinquent thirty days or more or on nonaccrual, including determination of appropriate risk ratings, accrual status, and appropriate servicing officer; review of risk rate changes for relationships of $100 thousand or more; quarterly review of all nonaccruals less than $100 thousand to determine whether the credit should be charged off, returned to accrual, or remain in nonaccrual status; monthly/quarterly review of continuous action plans for all credits rated seven or worse for relationships of $100 thousand or more; monthly review of all commercial charge-offs of $25 thousand or more for the preceding month.

Residential real estate developments - a development project analysis is performed on all projects regardless of size. Performance of the development is assessed through an evaluation of the number of lots remaining, the payout ratios, and the loan-to-value ratios. Results are stress tested as to absorption and price of lots. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes.

Non-owner occupied commercial real estate – a cash flow analysis is performed on all projects with an outstanding balance of $1.0 million or more. In addition, credits are stress tested for vacancies and rate sensitivity. Confirmation is obtained that guarantor’s financial statements are current, taxes have been paid, and that there are no other issues that need to be addressed. This information is reviewed by each senior credit officer for that market to determine the need for any risk rate or accrual status changes.

Consumer Credits

Consumer loans that do not meet a minimum custom credit score are reviewed quarterly by Management. The Retail Credit Review Committee reviews the volume and percentage of approvals that did not meet the minimum passing custom score by region, individual location, and officer. To assure that Trustmark continues to originate quality loans, this process allows Management to make necessary changes such as revisions to underwriting procedures and credit policies, or changes in loan authority to Trustmark personnel.

Trustmark monitors the levels and severity of past due consumer loans on a daily basis through its collection activities. A detailed assessment of consumer loan 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 loan delinquency trends by comparing them to quarterly industry averages.

The table below illustrates the carrying amount of LHFI by credit quality indicator at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	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 loans	$	444,526	$	24,211	$	56,419	$	143	$	525,299
Secured by 1-4 family residential properties		120,665		567		8,257		113		129,602
Secured by nonfarm, nonresidential properties		1,304,158		9,854		92,908		556		1,407,476
Other		185,201		2		7,361		-		192,564
Commercial and industrial loans		1,080,726		2,951		41,506		7,618		1,132,801
Consumer loans		494		-		-		-		494
Other loans		730,609		-		1,737		696		733,042
	$	3,866,379	$	37,585	$	208,188	$	9,126	$	4,121,278

	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 loans	$	46,473	$	71	$	-	$	214	$	46,758	$	572,057
Secured by 1-4 family residential properties		1,321,599		10,228		1,998		19,536		1,353,361		1,482,963
Secured by nonfarm, nonresidential properties		857		9		-		-		866		1,408,342
Other		3,687		77		-		-		3,764		196,328
Commercial and industrial loans		49		8		1		4		62		1,132,863
Consumer loans		161,592		2,018		306		202		164,118		164,612
Other loans		6,434		-		-		-		6,434		739,476
	$	1,540,691	$	12,411	$	2,305	$	19,956	$	1,575,363	$	5,696,641

	December 31, 2012
	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 loans	$	335,179	$	23,812	$	63,832	$	143	$	422,966
Secured by 1-4 family residential properties		110,333		1,012		13,303		432		125,080
Secured by nonfarm, nonresidential properties		1,298,820		12,156		98,082		-		1,409,058
Other		178,790		444		5,768		-		185,002
Commercial and industrial loans		1,091,356		36,992		39,479		1,334		1,169,161
Consumer loans		404		-		-		-		404
Other loans		676,618		59		1,714		784		679,175
	$	3,691,500	$	74,475	$	222,178	$	2,693	$	3,990,846

	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 loans	$	44,131	$	1,109	$	-	$	769	$	46,009	$	468,975
Secured by 1-4 family residential properties		1,339,000		10,332		2,630		20,438		1,372,400		1,497,480
Secured by nonfarm, nonresidential properties		1,206		-		-		-		1,206		1,410,264
Other		4,746		150		-		51		4,947		189,949
Commercial and industrial loans		313		29		-		10		352		1,169,513
Consumer loans		167,131		3,481		285		359		171,256		171,660
Other loans		5,738		-		-		-		5,738		684,913
	$	1,562,265	$	15,101	$	2,915	$	21,627	$	1,601,908	$	5,592,754

Past Due LHFI and Loans Held for Sale (LHFS)

LHFI past due 90 days or more totaled $2.3 million and $6.4 million at September 30, 2013 and December 31, 2012, respectively. The following table provides an aging analysis of past due and nonaccrual LHFI by class at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	Past Due
			90 Days						Current
	30-89 Days		or More (1)		Total		Nonaccrual		Loans		Total LHFI

Loans secured by real estate:
Construction, land development and other land loans	$	12,401	$	1	$	12,402	$	14,454	$	545,201	$	572,057
Secured by 1-4 family residential properties		10,925		1,996		12,921		23,715		1,446,327		1,482,963
Secured by nonfarm, nonresidential properties		6,163		-		6,163		21,290		1,380,889		1,408,342
Other		120		-		120		503		195,705		196,328
Commercial and industrial loans		2,665		41		2,706		12,196		1,117,961		1,132,863
Consumer loans		2,018		306		2,324		203		162,085		164,612
Other loans		88		-		88		1,020		738,368		739,476
Total	$	34,380	$	2,344	$	36,724	$	73,381	$	5,586,536	$	5,696,641

(1) - Past due 90 days or more but still accruing interest.

	December 31, 2012
	Past Due
			90 Days						Current
	30-89 Days		or More (1)		Total		Nonaccrual		Loans		Total LHFI

Loans secured by real estate:
Construction, land development and other land loans	$	4,957	$	438	$	5,395	$	27,105	$	436,475	$	468,975
Secured by 1-4 family residential properties		12,626		3,131		15,757		27,114		1,454,609		1,497,480
Secured by nonfarm, nonresidential properties		9,460		-		9,460		18,289		1,382,515		1,410,264
Other		172		-		172		3,956		185,821		189,949
Commercial and industrial loans		4,317		2,525		6,842		4,741		1,157,930		1,169,513
Consumer loans		3,480		284		3,764		360		167,536		171,660
Other loans		181		-		181		798		683,934		684,913
Total	$	35,193	$	6,378	$	41,571	$	82,363	$	5,468,820	$	5,592,754

(1) - Past due 90 days or more but still accruing interest.

LHFS past due 90 days or more totaled $18.4 million and $43.1 million at September 30, 2013 and December 31, 2012, respectively. LHFS past due 90 days or more are serviced loans eligible for repurchase, which are fully guaranteed by the Government National Mortgage Association (GNMA). GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer's option and without GNMA's prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When Trustmark is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings.

During the first quarter of 2013, Trustmark exercised its option to repurchase delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are fully guaranteed by FHA/VA. As a result of this repurchase and sale, the loans are no longer carried as LHFS. The transaction resulted in a gain of $534 thousand, which is included in mortgage banking, net for the first nine months of 2013. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the first nine months of 2012.

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 segmented 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

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 of a specific loan portfolio within each key market region. This weighted average qualitative factor is then distributed over the nine primary loan pools within each key market region based on the ranking by risk of each.

During the fourth quarter of 2012, Trustmark revised the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI. Trustmark converted the historical loss factor from a 20-quarter net charge-off rolling average to a 12-quarter rolling average and developed a separate reserve for junior liens on 1-4 family LHFI. The change in quantitative methodology allows Trustmark to more readily correlate portfolio risk to the current market environment as the impact of more recent experience is emphasized. This change also allows for a greater sensitivity to current trends such as economic and performance changes, which includes current loss profiles, and creates a more accurate depiction of historical losses. Loans and lines of credit secured by junior liens on 1-4 family residential properties are being reserved for separately in light of continued uncertainty in the economy and the housing market in particular. An additional provision of approximately $1.4 million was recorded in the fourth quarter of 2012 as a result of this revision to the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI.

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

Auto Finance

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, one quarter in arrears, 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

Lending policy measures

Credit concentrations

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 six loan pools.

Changes in the allowance for loan losses, LHFI were as follows ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at January 1,	$	78,738		$	89,518
Loans charged-off		(10,173	)		(22,547	)
Recoveries		11,505			9,254
Net recoveries (charge-offs)		1,332			(13,293	)
Provision for loan losses, LHFI		(11,438	)		7,301
Balance at September 30,	$	68,632		$	83,526

The following tables detail the balance in the allowance for loan losses, LHFI by portfolio segment at September 30, 2013 and 2012, respectively ($ in thousands):

	2013
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			September 30,
Loans secured by real estate:
Construction, land development and other land loans	$	21,838	$	(1,091	)	$	2,561	$	(7,419	)	$	15,889
Secured by 1-4 family residential properties		12,957		(839	)		363		(3,723	)		8,758
Secured by nonfarm, nonresidential properties		21,096		(572	)		64		(1,828	)		18,760
Other		2,197		(910	)		80		497			1,864
Commercial and industrial loans		14,319		(1,225	)		2,190		2,004			17,288
Consumer loans		3,087		(1,789	)		3,561		(2,256	)		2,603
Other loans		3,244		(3,747	)		2,686		1,287			3,470
Total allowance for loan losses, LHFI	$	78,738	$	(10,173	)	$	11,505	$	(11,438	)	$	68,632

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land loans	$	957	$	14,932	$	15,889
Secured by 1-4 family residential properties		260		8,498		8,758
Secured by nonfarm, nonresidential properties		2,733		16,027		18,760
Other		37		1,827		1,864
Commercial and industrial loans		5,393		11,895		17,288
Consumer loans		2		2,601		2,603
Other loans		324		3,146		3,470
Total allowance for loan losses, LHFI	$	9,706	$	58,926	$	68,632

	2012
	Balance							Provision for			Balance
	January 1,		Charge-offs			Recoveries		Loan Losses			September 30,
Loans secured by real estate:
Construction, land development and other land loans	$	27,220	$	(2,944	)	$	-	$	(1,732	)	$	22,544
Secured by 1-4 family residential properties		12,650		(3,238	)		364		2,203			11,979
Secured by nonfarm, nonresidential properties		24,358		(5,409	)		-		3,823			22,772
Other		3,079		(1,602	)		-		733			2,210
Commercial and industrial loans		15,868		(2,985	)		2,123		3,428			18,434
Consumer loans		3,656		(2,360	)		4,189		(2,620	)		2,865
Other loans		2,687		(4,009	)		2,578		1,466			2,722
Total allowance for loan losses, LHFI	$	89,518	$	(22,547	)	$	9,254	$	7,301		$	83,526

	Disaggregated by Impairment Method
	Individually		Collectively		Total
Loans secured by real estate:
Construction, land development and other land loans	$	4,829	$	17,715	$	22,544
Secured by 1-4 family residential properties		1,373		10,606		11,979
Secured by nonfarm, nonresidential properties		3,259		19,513		22,772
Other		855		1,355		2,210
Commercial and industrial loans		2,995		15,439		18,434
Consumer loans		4		2,861		2,865
Other loans		336		2,386		2,722
Total allowance for loan losses, LHFI	$	13,651	$	69,875	$	83,526

Note 5 – Acquired Loans

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

	September 30, 2013				December 31, 2012
	Covered		Noncovered		Covered		Noncovered
Loans secured by real estate:
Construction, land development and other land loans	$	2,585	$	106,655	$	3,924	$	10,056
Secured by 1-4 family residential properties		17,785		168,573		23,990		19,404
Secured by nonfarm, nonresidential properties		12,120		301,686		18,407		45,649
Other		2,817		35,051		3,567		669
Commercial and industrial loans		478		186,649		747		3,035
Consumer loans		151		22,251		177		2,610
Other loans		1,314		17,010		1,229		100
Acquired loans		37,250		837,875		52,041		81,523
Less allowance for loan losses, acquired loans		2,326		3,007		4,190		1,885
Net acquired loans	$	34,924	$	834,868	$	47,851	$	79,638

Acquired loans are accounted for under the acquisition method of accounting.The acquired loans are 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 are referred to as “covered loans” and are reported separately in Trustmark’s consolidated financial statements. Covered loans are recorded at their estimated fair value at the time of acquisition exclusive of the expected reimbursement cash flows from the FDIC.

Trustmark accounts for acquired impaired loans under FASB ASC Topic 310-30. 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 Trustmark would be unable to collect all contractually required payments. Revolving credit agreements such as home equity lines and commercial leases are excluded from acquired impaired loan accounting requirements. Trustmark acquired $153.9 million of revolving credit agreements and commercial leases, at fair value, in the BancTrust acquisition and $5.9 million of revolving credit agreements, at fair value, in the Bay Bank acquisition, 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, Trustmark has accounted for such acquired loans in accordance with accounting requirements for acquired nonimpaired loans.

For acquired impaired loans, Trustmark (a) calculates the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (b) estimates the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). Under FASB ASC Topic 310-30, 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 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.

Trustmark 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, collateral and geographic region. 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 Trustmark. For consumer loans, the risk determinants include delinquency, FICO and loan-to-value ratios. Statistical comparison of the pools reflect that each pool is comprised of loans generally of similar characteristics, including loan type, loan risk and weighted average life. Each pool is then reviewed for 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 Trustmark's expected cash flows from the loans. An acquired loan is 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 is 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 are withheld from pools due to the inherent uncertainty of the timing and amount of their cash flows or because they are not a suitable similar constituent to the established pools.

As required by FASB ASC Topic 310-30, Trustmark 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 Trustmark 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, acquired loans and the establishment of an allowance for loan losses, acquired loans. 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, Trustmark will reduce any remaining allowance for loan losses, acquired loans 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 February 15, 2013, Trustmark completed its merger with BancTrust. Loans acquired in the BancTrust acquisition were evaluated for evidence of credit deterioration since origination and collectability of contractually required payments. Trustmark elected to account for all loans acquired in the BancTrust acquisition as acquired impaired loans under FASB ASC Topic 310-30 except for $153.9 million of acquired loans with revolving privileges and acquired commercial leases, which are outside the scope of the guidance. While not all loans acquired from BancTrust exhibited evidence of significant credit deterioration, accounting for these acquired loans under FASB ASC Topic 310-30 would have materially the same result as the alternative accounting treatment. During the second and third quarters of 2013, Trustmark recorded fair value adjustments based on the estimated fair value of certain acquired loans which resulted in a net decrease in acquired noncovered loans totaling $6.8 million. The purchase price allocation was deemed preliminary as of September 30, 2013 and is subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period.

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

At acquisition date:	February 15, 2013
Contractually required principal and interest	$	1,256,669
Nonaccretable difference		201,324
Cash flows expected to be collected		1,055,345
Accretable yield		98,394
FASB ASC Topic 310-20 discount		12,716
Fair value of loans at acquisition	$	944,235

On March 16, 2012, Trustmark 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. Trustmark 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 FASB 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 tables present changes in the net carrying value of the acquired loans for the periods presented ($ in thousands):

	Covered						Noncovered
	Acquired			Acquired			Acquired			Acquired
	Impaired			Not ASC 310-30 (1)			Impaired			Not ASC 310-30 (1)
Carrying value, net at January 1, 2012	$	72,131		$	4,171		$	4,350		$	13
Loans acquired (2)		-			-			91,987			5,927
Accretion to interest income		8,031			367			4,138			161
Payments received, net		(27,496	)		(2,107	)		(24,330	)		868
Other		(3,085	)		29			(1,318	)		(273	)
Less allowance for loan losses, acquired loans		(4,190	)		-			(1,885	)		-
Carrying value, net at December 31, 2012		45,391			2,460			72,942			6,696
Loans acquired (3)		-			-			790,335			153,900
Accretion to interest income		3,934			157			24,993			2,143
Payments received, net		(16,136	)		(743	)		(174,776	)		(22,804	)
Other		(1,866	)		(137	)		(17,243	)		(196	)
Less allowance for loan losses, acquired loans		1,864			-			(1,122	)		-
Carrying value, net at September 30, 2013	$	33,187		$	1,737		$	695,129		$	139,739

(1) Acquired nonimpaired loans consist of revolving credit agreements and commercial leases that are not in scope for FASB ASC Topic 310-30.

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

(3) Adjusted fair value of loans acquired from BancTrust on February 15, 2013.

The following table presents changes in the accretable yield ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Accretable yield at January 1,	$	(26,383	)	$	(17,653	)
Additions due to acquisition (1)		(98,394	)		(15,538	)
Accretion to interest income		28,927			9,045
Disposals		11,167			2,687
Reclassification to / (from) nonaccretable difference		(25,772	)		(6,429	)
Accretable yield at September 30,	$	(110,455	)	$	(27,888	)

(1) Accretable yield on loans acquired from BancTrust on February 15, 2013, and 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, acquired loans and the establishment of an allowance for loan losses, acquired loans to the extent the amount and timing of expected cash flows decrease compared to those originally estimated at acquisition.

The following table presents the components of the allowance for loan losses on acquired impaired loans for the nine months ended September 30, 2013 and 2012 ($ in thousands):

	Covered			Noncovered			Total
Balance at January 1, 2013	$	4,190		$	1,885		$	6,075
Provision for loan losses, acquired loans		(1,168	)		3,038			1,870
Loans charged-off		(663	)		(3,028	)		(3,691	)
Recoveries		(33	)		1,112			1,079
Net charge-offs		(696	)		(1,916	)		(2,612	)
Balance at September 30, 2013	$	2,326		$	3,007		$	5,333

	Covered		Noncovered			Total
Balance at January 1, 2012	$	502	$	-		$	502
Provision for loan losses, acquired loans		2,655		928			3,583
Loans charged-off		174		(278	)		(104	)
Recoveries		195		167			362
Net recoveries (charge-offs)		369		(111	)		258
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, 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 segregate the level of risk across the ten unique risk ratings. 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, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	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	$	204	$	-	$	1,354	$	748	$	2,306
Secured by 1-4 family residential properties		1,670		469		1,926		-		4,065
Secured by nonfarm, nonresidential properties		5,309		113		6,031		-		11,453
Other		909		142		737		2		1,790
Commercial and industrial loans		314		29		135		-		478
Consumer loans		-		-		-		-		-
Other loans		289		-		397		628		1,314
Total covered loans		8,695		753		10,580		1,378		21,406

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		33,404		11,028		46,329		8,170		98,931
Secured by 1-4 family residential properties		25,708		15,711		16,763		856		59,038
Secured by nonfarm, nonresidential properties		192,453		22,235		80,844		6,154		301,686
Other		23,298		6,469		5,181		-		34,948
Commercial and industrial loans		138,428		13,677		28,927		5,617		186,649
Consumer loans		82		-		-		-		82
Other loans		15,111		1,613		261		-		16,985
Total noncovered loans		428,484		70,733		178,305		20,797		698,319
Total acquired loans	$	437,179	$	71,486	$	188,885	$	22,175	$	719,725

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	251	$	28	$	-	$	-	$	279	$	2,585
Secured by 1-4 family residential properties		11,480		979		1,223		38		13,720		17,785
Secured by nonfarm, nonresidential properties		497		-		170		-		667		12,120
Other		903		124		-		-		1,027		2,817
Commercial and industrial loans		-		-		-		-		-		478
Consumer loans		151		-		-		-		151		151
Other loans		-		-		-		-		-		1,314
Total covered loans		13,282		1,131		1,393		38		15,844		37,250

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		6,810		179		735		-		7,724		106,655
Secured by 1-4 family residential properties		101,895		3,585		3,912		143		109,535		168,573
Secured by nonfarm, nonresidential properties		-		-		-		-		-		301,686
Other		103		-		-		-		103		35,051
Commercial and industrial loans		-		-		-		-		-		186,649
Consumer loans		21,566		494		109		-		22,169		22,251
Other loans		25		-		-		-		25		17,010
Total noncovered loans		130,399		4,258		4,756		143		139,556		837,875
Total acquired loans	$	143,681	$	5,389	$	6,149	$	181	$	155,400	$	875,125

(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, 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	$	1,341	$	18	$	1,489	$	744	$	3,592
Secured by 1-4 family residential properties		3,128		810		2,940		85		6,963
Secured by nonfarm, nonresidential properties		5,857		1,052		9,839		798		17,546
Other		443		318		1,231		-		1,992
Commercial and industrial loans		82		458		207		-		747
Consumer loans		-		-		-		-		-
Other loans		245		-		345		535		1,125
Total covered loans		11,096		2,656		16,051		2,162		31,965

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		3,259		119		4,915		921		9,214
Secured by 1-4 family residential properties		7,325		-		3,708		23		11,056
Secured by nonfarm, nonresidential properties		22,453		3,596		18,682		831		45,562
Other		236		-		417		-		653
Commercial and industrial loans		2,853		89		93		-		3,035
Consumer loans		-		-		-		-		-
Other loans		86		-		-		-		86
Total noncovered loans		36,212		3,804		27,815		1,775		69,606
Total acquired loans	$	47,308	$	6,460	$	43,866	$	3,937	$	101,571

	Consumer Loans
	Current		Past Due 30-89 Days		Past Due 90 Days or More		Nonaccrual		Subtotal		Total Acquired Loans
Covered Loans: (1)
Loans secured by real estate:
Construction, land development and other land loans	$	306	$	26	$	-	$	-	$	332	$	3,924
Secured by 1-4 family residential properties		14,311		1,028		1,650		38		17,027		23,990
Secured by nonfarm, nonresidential properties		692		169		-		-		861		18,407
Other		1,468		48		52		7		1,575		3,567
Commercial and industrial loans		-		-		-		-		-		747
Consumer loans		177		-		-		-		177		177
Other loans		104		-		-		-		104		1,229
Total covered loans		17,058		1,271		1,702		45		20,076		52,041

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		802		-		40		-		842		10,056
Secured by 1-4 family residential properties		7,715		357		215		61		8,348		19,404
Secured by nonfarm, nonresidential properties		87		-		-		-		87		45,649
Other		16		-		-		-		16		669
Commercial and industrial loans		-		-		-		-		-		3,035
Consumer loans		2,394		164		52		-		2,610		2,610
Other loans		14		-		-		-		14		100
Total noncovered loans		11,028		521		307		61		11,917		81,523
Total acquired loans	$	28,086	$	1,792	$	2,009	$	106	$	31,993	$	133,564

(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.

Under FASB ASC Topic 310-30, acquired impaired 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, 2013 and December 31, 2012, there were no acquired impaired loans accounted for under FASB ASC Topic 310-30 classified as nonaccrual loans. At September 30, 2013, approximately $3.0 million of acquired loans not accounted for under FASB ASC Topic 310-30 were classified as nonaccrual loans, compared to approximately $1.1 million of acquired loans at December 31, 2012.

The following table provides an aging analysis of contractually past due and nonaccrual acquired loans, by class at September 30, 2013 and December 31, 2012 ($ in thousands):

	September 30, 2013
	Past Due
			90 Days						Current		Total Acquired
	30-89 Days		or More (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	290	$	454	$	744	$	445	$	1,396	$	2,585
Secured by 1-4 family residential properties		1,338		1,355		2,693		38		15,054		17,785
Secured by nonfarm, nonresidential properties		873		542		1,415		-		10,705		12,120
Other		431		2		433		-		2,384		2,817
Commercial and industrial loans		21		49		70		53		355		478
Consumer loans		-		-		-		-		151		151
Other loans		397		628		1,025		-		289		1,314
Total covered loans		3,350		3,030		6,380		536		30,334		37,250

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		4,801		37,844		42,645		71		63,939		106,655
Secured by 1-4 family residential properties		6,273		8,825		15,098		872		152,603		168,573
Secured by nonfarm, nonresidential properties		8,053		14,105		22,158		293		279,235		301,686
Other		344		1,848		2,192		270		32,589		35,051
Commercial and industrial loans		9,531		4,844		14,375		951		171,323		186,649
Consumer loans		508		109		617		-		21,634		22,251
Other loans		91		8		99		-		16,911		17,010
Total noncovered loans		29,601		67,583		97,184		2,457		738,234		837,875
Total acquired loans	$	32,951	$	70,613	$	103,564	$	2,993	$	768,568	$	875,125

(1) - Past due 90 days or more but still accruing interest.

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

	December 31, 2012
	Past Due
			90 Days						Current		Total Acquired
	30-89 Days		or More (1)		Total		Nonaccrual (2)		Loans		Loans
Covered loans:
Loans secured by real estate:
Construction, land development and other land loans	$	240	$	246	$	486	$	445	$	2,993	$	3,924
Secured by 1-4 family residential properties		1,705		1,883		3,588		234		20,168		23,990
Secured by nonfarm, nonresidential properties		3,953		1,539		5,492		-		12,915		18,407
Other		221		52		273		9		3,285		3,567
Commercial and industrial loans		94		4		98		39		610		747
Consumer loans		-		-		-		-		177		177
Other loans		-		-		-		-		1,229		1,229
Total covered loans		6,213		3,724		9,937		727		41,377		52,041

Noncovered loans:
Loans secured by real estate:
Construction, land development and other land loans		-		3,622		3,622		-		6,434		10,056
Secured by 1-4 family residential properties		458		1,392		1,850		243		17,311		19,404
Secured by nonfarm, nonresidential properties		3,526		1,217		4,743		133		40,773		45,649
Other		30		44		74		-		595		669
Commercial and industrial loans		217		23		240		-		2,795		3,035
Consumer loans		164		52		216		-		2,394		2,610
Other loans		-		-		-		-		100		100
Total noncovered loans		4,395		6,350		10,745		376		70,402		81,523
Total acquired loans	$	10,608	$	10,074	$	20,682	$	1,103	$	111,779	$	133,564

(1) - Past due 90 days or more but still accruing interest.

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

Note 6 – Mortgage Banking

Trustmark recognizes as assets the rights to service mortgage loans based on the estimated fair value of the mortgage servicing rights (MSR) when loans are sold and the associated servicing rights are retained. Trustmark has elected to account for MSR at fair value.

The fair value of MSR is determined using discounted cash flow techniques benchmarked against third-party valuations. Estimates of fair value involve several assumptions, including the key valuation assumptions about market expectations of future prepayment rates, interest rates and discount rates which are provided by a third party firm. Prepayment rates are projected using an industry standard prepayment model. The model considers other key factors, such as a wide range of standard industry assumptions tied to specific portfolio characteristics such as remittance cycles, escrow payment requirements, geographic factors, foreclosure loss exposure, VA no-bid exposure, delinquency rates and cost of servicing, including base cost and cost to service delinquent mortgages. Prevailing market conditions at the time of analysis are factored into the accumulation of assumptions and determination of servicing value. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of MSR requires significant management judgment.

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of the MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $1.3 million compared to a net negative ineffectiveness of $1.8 million for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013, the impact was a net positive ineffectiveness of $2.7 million compared to a net negative ineffectiveness of $2.7 million for the nine months ended September 30, 2012.

The activity in MSR is detailed in the table below ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	47,341		$	43,274
Origination of servicing assets		15,551			17,074
Change in fair value:
Due to market changes		7,881			(8,960	)
Due to runoff		(7,623	)		(7,177	)
Balance at end of period	$	63,150		$	44,211

Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation and/or loans obtained through fraud by borrowers or other third parties. Putback requests may be made until the loan is paid in full. When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Effective January 1, 2013, Trustmark was required by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) to provide a response to putback requests within 60 days of the date of receipt. Currently, putback requests primarily relate to 2005 through 2008 vintage mortgage loans and to government sponsored entity-guaranteed mortgage-backed securities.

The total mortgage loan servicing putback expenses, included in other noninterest expense, incurred by Trustmark during the first nine months of 2013 and 2012 were $1.0 million and $7.2 million, respectively. During the second quarter of 2012, Trustmark updated its quarterly analysis of mortgage loan servicing putback exposure. This analysis, along with recent mortgage industry trends, resulted in Trustmark providing an additional reserve of approximately $4.0 million in the second quarter of 2012. At September 30, 2013 and December 31, 2012, the reserve for mortgage loan servicing putback expenses were $5.0 million and $7.8 million, respectively.

There is inherent uncertainty in reasonably estimating the requirement for reserves against future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for potential mortgage loan servicing putback requests.

During October 2013, Trustmark reached an agreement in principle with FNMA to resolve its existing and future repurchase and make whole obligations (collectively “Repurchase Obligations”) related to mortgage loans originated between January 1, 2000 and December 31, 2008 and delivered to FNMA. The terms of the agreement are subject to final approval by FNMA. Under the proposed terms of the agreement, Trustmark will pay FNMA approximately $4.4 million with respect to the Repurchase Obligations, subject to reconciliation and adjustment. Trustmark believes that it is in its best interests to execute the agreement in order to bring finality to the loss reimbursement exposure with FNMA for these years and reduce the resources spent on individual file reviews and defending loss reimbursement requests. The Repurchase Obligations are covered by Trustmark’s existing reserve for mortgage loan servicing putback expenses.

Note 7 –Other Real Estate and Covered Other Real Estate

Other Real Estate, excluding Covered Other Real Estate

Other real estate, excluding covered other real estate, is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Other real estate is revalued on an annual basis or more often if market conditions necessitate. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against an other real estate specific reserve or net income in ORE/Foreclosure expense, if a reserve does not exist. At September 30, 2013, Trustmark's geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate, excluding covered other real estate, is susceptible to changes in market conditions in these areas.

For the periods presented, changes and losses, net on other real estate, excluding covered other real estate, were as follows ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	78,189		$	79,053
Additions (1)		73,890			32,428
Disposals		(29,605	)		(24,248	)
Writedowns		(6,145	)		(4,758	)
Balance at end of period	$	116,329		$	82,475

Loss, net on the sale of other real estate included in ORE/Foreclosure expense	$	(110	)	$	(175	)

(1) Includes $40.1 million of other real estate acquired from BancTrust at September 30, 2013, and $2.6 million of other real estate acquired from Bay Bank at September 30, 2012.

Other real estate, excluding covered other real estate, by type of property consisted of the following for the periods presented ($ in thousands):

	September 30,		December 31,
	2013		2012
Construction, land development and other land properties	$	66,200	$	46,957
1-4 family residential properties		15,280		8,134
Nonfarm, nonresidential properties		32,249		22,760
Other real estate properties		2,600		338
Total other real estate, excluding covered other real estate	$	116,329	$	78,189

Other real estate, excluding covered other real estate, by geographic location consisted of the following for the periods presented ($ in thousands):

	September 30,		December 31,
	2013		2012
Alabama	$	25,308	$	-
Florida		39,198		18,569
Mississippi (1)		25,439		27,771
Tennessee (2)		14,615		17,589
Texas		11,769		14,260
Total other real estate, excluding covered other real estate	$	116,329	$	78,189

(1) - Mississippi includes Central and Southern Mississippi Regions

(2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions

Covered Other Real Estate

Covered other real estate is initially recorded at its estimated fair value on the acquisition date based on an independent appraisal less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value are charged to noninterest expense, and are mostly offset by noninterest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments are credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.

For the nine months ended September 30, 2013 and 2012, changes and gains, net on covered other real estate were as follows ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	5,741		$	6,331
Transfers from covered loans		1,380			1,424
FASB ASC 310-30 adjustment for the residual recorded investment		(541	)		(112	)
Net transfers from covered loans		839			1,312
Disposals		(848	)		(1,673	)
Writedowns		(640	)		(248	)
Balance at end of period	$	5,092		$	5,722

Gain, net on the sale of covered other real estate included in ORE/Foreclosure expense	$	47		$	440

Covered other real estate by type of property consisted of the following for the periods presented ($ in thousands):

	September 30,		December 31,
	2013		2012
Construction, land development and other land properties	$	733	$	1,284
1-4 family residential properties		1,777		1,306
Nonfarm, nonresidential properties		2,525		3,151
Other real estate properties		57		-
Total covered other real estate	$	5,092	$	5,741

Note 8 – FDIC Indemnification Asset

TNB elected to account for amounts receivable under the loss-share agreement TNB entered into at the time of its acquisition of the Heritage Banking Group (Heritage) as an indemnification asset in accordance with FASB ASC Topic 805. The FDIC indemnification asset was initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreement. The difference between the present value at the acquisition date and the undiscounted cash flows TNB expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. Pursuant to the provisions of the loss-share agreement, the FDIC indemnification asset is presented net of any true-up provision due to the FDIC at the termination of the loss-share agreement.

The FDIC indemnification asset is reduced as expected losses on covered loans and covered other real estate decline or as loss-share claims are submitted to the FDIC. The FDIC indemnification asset is revalued concurrent with the loan re-estimation and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of covered loans and covered other real estate. These adjustments are measured on the same basis as the related covered loans and covered other real estate. Increases in cash flow of the covered loans and covered other real estate over those expected reduce the FDIC indemnification asset, and decreases in cash flow of the covered loans and covered other real estate under those expected increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

In October 2012, FASB issued Accounting Standard Update (ASU) 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force),” to address the diversity in practice regarding how to account for the subsequent measurement of an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. ASU 2012-06 requires that the indemnification asset be measured subsequently on the same basis as the indemnified assets and, if the effect of the change in the cash flows expected to be collected on an indemnification asset must be amortized, the amortization period is limited to the lesser of the term of the indemnification agreement or the remaining life of the indemnified asset.

Trustmark has accounted for the FDIC indemnification asset using the “collectibility method,” which recognized write-downs of the FDIC indemnification asset resulting from improvements in expected cash flows and covered losses based on the re-estimation of the acquired covered loans, pay-offs of acquired covered loans, sales of covered other real estate, or reductions in FDIC loss claims immediately in noninterest income. Under ASU 2012-06, write-downs of the FDIC indemnification asset resulting from improvements in expected cash flows and covered losses based on the re-estimation of acquired covered loans will be recognized over the lesser of the remaining life or contractual period of the acquired covered loan by a yield adjustment on the accretion of the discount basis of the FDIC indemnification asset. All other valuation changes of the FDIC indemnification asset (i.e., pay-offs of acquired covered loans, sales of covered other real estate, and reductions of FDIC loss claims) will continue to be accounted for under the “collectibility method.” The amendments in ASU 2012-06 are effective prospectively for interim and annual periods beginning on or after December 15, 2012, and, therefore, were effective for Trustmark’s consolidated financial statements as of January 1, 2013. Management determined that the impact of this change in accounting principle was immaterial to Trustmark’s consolidated financial statements for the first nine months of 2013.

Pursuant to the provisions of the loss-share agreement, TNB may be required to make a true-up payment to the FDIC at the termination of the loss-share agreement should actual losses be less than certain thresholds established in the agreement. TNB calculates the projected true-up payable to the FDIC quarterly and records a FDIC true-up provision for the present value of the projected true-up payable to the FDIC at the termination of the loss-share agreement. TNB’s FDIC true-up provision totaled $1.3 million and $1.1 million at September 30, 2013 and December 31, 2012, respectively.

Trustmark periodically re-estimates the expected cash flows on the acquired loans as required by FASB ASC Topic 310-30. For the first nine months of 2013, this analysis resulted in improvements in the estimated future cash flows of the acquired covered loans that remain outstanding as well as lower expected remaining losses on those loans, primarily due to pay-offs of acquired covered loans. The pay-offs and improvements in the estimated expected cash flows of the acquired covered loans resulted in a reduction of the expected loss-share receivable from the FDIC. Other income included a write-down of the FDIC indemnification asset of $3.5 million and $3.0 million on covered loans as a result of loan payoffs, improved cash flow projections and lower loss expectations for loan pools for the nine months ended September 30, 2013 and 2012, respectively.

The following table presents changes in the FDIC indemnification asset for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	21,774		$	28,348
Accretion		(141	)		187
Transfers to FDIC claims receivable		(1,097	)		(1,271	)
Change in expected cash flows (1)		(3,251	)		(2,925	)
Change in FDIC true-up provision		(200	)		(360	)
Balance at end of period	$	17,085		$	23,979

(1) The decrease during the first nine months of 2013 was due to loan pay-offs, improved cash flow projections,and lower loss expectations for covered loans.

Note 9 – Deposits

Deposits consisted of the following for the periods presented ($ in thousands):

	September 30,		December 31,
	2013		2012
Noninterest-bearing demand deposits	$	2,643,612	$	2,254,211
Interest-bearing demand		1,826,118		1,481,182
Savings		2,977,391		2,322,280
Time		2,340,113		1,838,844
Total	$	9,787,234	$	7,896,517

Note 10 – Defined Benefit and Other Postretirement Benefits

Qualified Pension Plans

Trustmark maintains a noncontributory defined benefit pension plan (Trustmark Capital Accumulation Plan), which covers substantially all associates employed prior to 2007. The plan provides retirement benefits that are based on the length of credited service and final average compensation, as defined in the plan and vest upon three years of service. In an effort to control expenses, the Board voted to freeze plan benefits effective during 2009, with the exception of certain associates covered through plans obtained by acquisitions. Associates will not earn additional benefits, except for interest as required by the IRS regulations, after the effective date. Associates will retain their previously earned pension benefits. As a result of the BancTrust acquisition on February 15, 2013, Trustmark acquired a qualified pension plan, which was frozen prior to the acquisition date. The following table presents information regarding Trustmark’s net periodic benefit cost for the periods presented and includes amounts related to the acquisition of BancTrust ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net periodic benefit cost:
Service cost	$	148		$	134		$	446		$	413
Interest cost		1,252			947			3,506			2,837
Expected return on plan assets		(2,060	)		(1,438	)		(5,660	)		(4,238	)
Recognized net loss due to settlement		838			-			1,363			-
Recognized net actuarial loss		1,374			1,303			4,142			3,922
Net periodic benefit cost	$	1,552		$	946		$	3,797		$	2,934

In the table above, recognized net loss due to settlement is related to the lump sum settlement of certain benefits in the Trustmark Capital Accumulation Plan in accordance with FASB ASC Topic 715-30, “Defined Benefit Plans - Pension.” It is expected that additional settlement charges will be recognized during the remainder of the year.

The acceptable range of contributions to the plan is determined each year by the plan's actuary. Trustmark's policy is to fund amounts allowable for federal income tax purposes. The actual amount of the contribution is determined based on the plan's funded status and return on plan assets as of the measurement date, which is December 31. In July 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) became effective. Through MAP-21, Congress provides pension sponsors with funding relief by stabilizing interest rates used to determine required funding contributions to defined benefit plans. Under MAP-21, instead of using a two-year average of these rates, plan sponsors determine required pension funding contributions based on a 25-year average of these rates with a cap and a floor. For 2013, the cap is set at 115% and the floor is set at 85% of the 25-year average of these rates as of September 30, 2012, whereas for 2012 the cap was 110% and the floor was 90% of the average of these rates as of September 30, 2011. Trustmark expects its minimum required contribution for 2013 to be approximately $2.1 million. During 2012, Trustmark made a minimum required contribution of $1.5 million for the 2012 plan year. The increase of approximately $600 thousand in 2013 as compared to 2012 is primarily due to the change in MAP-21 interest rates, with the effective interest rate dropping from 6.82% in 2012 to 6.13% in 2013.

Supplemental Retirement Plan

Trustmark maintains a nonqualified supplemental retirement plan covering directors who elected to defer fees, key executive officers and senior officers. The plan provides for defined death benefits and/or retirement benefits based on a participant's covered salary. Trustmark has acquired life insurance contracts on the participants covered under the plan, which may be used to fund future payments under the plan. The measurement date for the plan is December 31. The following table presents information regarding the plan's net periodic benefit cost for the periods presented ($ in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net periodic benefit cost:
Service cost	$	150	$	170	$	448	$	510
Interest cost		484		517		1,452		1,550
Amortization of prior service cost		62		63		188		188
Recognized net actuarial loss		260		215		778		645
Net periodic benefit cost	$	956	$	965	$	2,866	$	2,893

Note 11 – Stock and Incentive Compensation Plans

Trustmark has granted, and currently has outstanding, stock and incentive compensation awards subject to the provisions of the 1997 Long Term Incentive Plan (the 1997 Plan) and the 2005 Stock and Incentive Compensation Plan (the 2005 Plan). New awards have not been issued under the 1997 Plan since it was replaced by the 2005 Plan. The 2005 Plan is designed to provide flexibility to Trustmark regarding its ability to motivate, attract and retain the services of key associates and directors. The 2005 Plan allows Trustmark to make grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance units to key associates and directors.

Stock Option Grants

Stock option awards under the 2005 Plan were granted with an exercise price equal to the market price of Trustmark’s stock on the date of grant. Stock options granted under the 2005 Plan vested equally over five years and had a contractual term of seven years. Stock option awards, which were granted under the 1997 Plan, had an exercise price equal to the market price of Trustmark’s stock on the date of grant, vested equally over four years with a contractual term of ten years. During 2011, compensation expense related to stock options was fully recognized. Compensation expense for stock options granted under these plans was estimated using the fair value of each option granted using the Black-Scholes option-pricing model and was recognized on the straight-line method over the requisite service period. No stock options have been granted since 2006, when Trustmark began granting restricted stock awards exclusively.

Restricted Stock Grants

Performance Awards

Trustmark’s performance awards are granted to Trustmark’s executive and senior management team. Performance awards granted vest based on performance goals of return on average tangible equity (ROATE) and total shareholder return (TSR) compared to a defined peer group. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date. The restriction period for performance awards covers a three-year vesting period. These awards are recognized using the straight-line method over the requisite service period. These awards provide for excess shares if performance measures exceed 100%. Any excess shares related to the performance awards granted in 2013 vest at the end of the three year performance period. Any excess shares related to the performance awards granted prior to 2013 are restricted for an additional three-year vesting period subsequent to the end of the three-year performance period. The restricted share agreement provides for voting rights and dividend privileges.

Time-Vested Awards

Trustmark’s time-vested awards are granted to Trustmark’s Board of Directors, executive and senior management team. The restriction period for time-vested awards covers a three-year vesting period. Time-vested awards are valued utilizing the fair value of Trustmark’s stock at the grant date. These awards are recognized on the straight-line method over the requisite service period.

The following tables summarize the stock and incentive plan activity for the periods presented:

	Three Months Ended September 30, 2013
	Stock			Performance		Time-Vested
	Options			Awards		Awards
Outstanding/Nonvested shares or units, beginning of period		289,700			160,520		348,251
Granted		-			-		1,800
Granted - excess shares		-			-		-
Exercised or released from restriction		(17,500	)		-		(1,044	)
Expired		(10,000	)		-		-
Forfeited		-			-		(2,181	)
Outstanding/Nonvested shares or units, end of period		262,200			160,520		346,826

	Nine Months Ended September 30, 2013
	Stock			Performance			Time-Vested
	Options			Awards			Awards
Outstanding/Nonvested shares or units, beginning of period		699,600			159,583			317,573
Granted		-			62,119			102,155
Granted - excess shares		-			-			10,809
Exercised or released from restriction		(33,300	)		(54,784	)		(68,960	)
Expired		(404,100	)		-			-
Forfeited		-			(6,398	)		(14,751	)
Outstanding/Nonvested shares or units, end of period		262,200			160,520			346,826

The following table presents information regarding compensation expense for stock and incentive plans for the periods presented ($ in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Compensation expense - Stock and Incentive plans:
Performance awards	$	222	$	229	$	620	$	677
Time-vested awards		754		749		2,230		2,442
Total	$	976	$	978	$	2,850	$	3,119

Note 12 – Contingencies

Lending Related

Trustmark makes commitments to extend credit and issues standby and commercial letters of credit (letters of credit) in the normal course of business in order to fulfill the financing needs of its customers. The carrying amount of commitments to extend credit and letters of credit approximates the fair value of such financial instruments. These amounts are not material to Trustmark’s financial statements.

Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions. Commitments generally have fixed expiration dates or other termination clauses. Because many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contract amount of those instruments. Trustmark applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed creditworthiness of the borrower. At September 30, 2013 and 2012, Trustmark had unused commitments to extend credit of $2.064 billion and $1.843 billion, respectively.

Letters of credit are conditional commitments issued by Trustmark to insure the performance of a customer to a third party. A financial standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument. A performance standby letter of credit irrevocably obligates Trustmark to pay a third-party beneficiary when a customer fails to perform some contractual, nonfinancial obligation. When issuing letters of credit, Trustmark uses essentially the same policies regarding credit risk and collateral which are followed in the lending process. At September 30, 2013 and 2012, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $148.5 million and $152.9 million, respectively. These amounts consist primarily of commitments with maturities of less than three years, which have an immaterial carrying value. Trustmark holds collateral to support standby letters of credit when deemed necessary. As of September 30, 2013, the fair value of collateral held was $39.9 million.

Legal Proceedings

Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in two lawsuits related to the collapse of the Stanford Financial Group. The first is a purported class action complaint that was filed on August 23, 2009 in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano, on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions unaffiliated with Trustmark as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled by R. Allen Stanford (collectively, the “Stanford Financial Group”) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Plaintiffs have demanded a jury trial. Plaintiffs did not quantify damages. In November 2009, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. In May 2010, all defendants (including TNB) filed motions to dismiss the lawsuit, and the motions to dismiss have been fully briefed by all parties. The court has not yet ruled on the defendants’ motions to dismiss. In August 2010, the court authorized and approved the formation of an Official Stanford Investors Committee (“OSIC”) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford investors. In December 2011, OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed an additional Intervenor Complaint that asserts claims against TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages. In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. The court has not yet ruled on the defendants’ motions to dismiss the OSIC’s claims.

The second Stanford-related lawsuit was filed on December 14, 2009 in the District Court of Ascension Parish, Louisiana, individually by Harold Jackson, Paul Blaine, Carolyn Bass Smith, Christine Nichols, and Ronald and Ramona Hebert naming TNB (misnamed as Trust National Bank) and other individuals and entities not affiliated with Trustmark as defendants. The complaint seeks to recover the money lost by these individual plaintiffs as a result of the collapse of the Stanford Financial Group (in addition to other damages) under various theories and causes of action, including negligence, breach of contract, breach of fiduciary duty, negligent misrepresentation, detrimental reliance, conspiracy, and violation of Louisiana’s uniform fiduciary, securities, and racketeering laws. The complaint does not quantify the amount of money the plaintiffs seek to recover. In January 2010, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. On March 29, 2010, the court stayed the case. TNB filed a motion to lift the stay, which was denied on February 28, 2012. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues.

TNB’s relationship with the Stanford Financial Group began as a result of Trustmark’s acquisition of a Houston-based bank in August 2006, and consisted of correspondent banking and other traditional banking services in the ordinary course of business. Both Stanford-related lawsuits are in their preliminary stages and have been previously disclosed by Trustmark.

TNB is the defendant in two putative class actions challenging TNB’s practices regarding "overdraft" or "non-sufficient funds" fees charged by TNB in connection with customer use of debit cards, including TNB’s order of processing transactions, notices and calculations of charges, and calculations of fees. Kathy D. White v. TNB was filed in Tennessee state court in Memphis, Tennessee and was removed on June 19, 2012 to the United States District Court for the Western District of Tennessee. (Plaintiff Kathy White had filed an earlier, virtually identical action that was voluntarily dismissed.) Leroy Jenkins v. TNB was filed on June 4, 2012 in the United States District Court for the Southern District of Mississippi. The White and Jenkins pleadings are matters of public record in the files of the courts. In both cases, the plaintiffs purport to represent classes of similarly-situated customers of TNB. The White complaint asserts claims of breach of contract, breach of a duty of good faith and fair dealing, unconscionability, conversion, and unjust enrichment. The Jenkins complaint originally included similar allegations as well as federal-law claims under the Electronic Funds Transfer Act (EFTA) and RICO; however, the RICO claims were voluntarily dismissed from the case on January 9, 2013. Each of these complaints seeks the imposition of a constructive trust and unquantified damages. These complaints were largely patterned after similar lawsuits that have been filed against other banks across the country. On July 19, 2012, the plaintiff in the White case filed an amended complaint to add plaintiffs from Mississippi and also to add federal EFTA claims. Trustmark contends that amended complaint was procedurally improper. On October 4, 2012, the plaintiff in the White case moved for leave to add two Tennessee plaintiffs. Trustmark filed preliminary dismissal and venue transfer motions, and discovery has begun, in the White case; the Jenkins case has also entered the active discovery stage. Trustmark also filed a motion to dismiss all claims except the EFTA claim in the Jenkins case. All of these motions remained pending when the parties began active settlement negotiations under the Mississippi federal court’s supervision in June of 2013.

On August 18, 2013, the class action plaintiffs in both cases and Trustmark agreed to a settlement, the terms and conditions of which are set forth in an executed Settlement Agreement and Release (the “Settlement”). The Settlement is a matter of public record in the court file in the Leroy Jenkins case referenced above. The parties reached the Settlement through arm’s-length negotiations following two court-ordered settlement conferences with United States Magistrate Judge F. Keith Ball. Under the Settlement, subject to the terms and conditions therein and subject to court approval, and without admission of liability, fault or wrongdoing by Trustmark, plaintiffs and a settlement class consisting of TNB account holders whose accounts met certain criteria with respect to overdraft and non-sufficient funds fees between September 28, 2005 and the date of the court’s preliminary approval of the Settlement (the “Settlement Class”) would fully, finally, and forever resolve, discharge, and release their claims in exchange for Trustmark’s payment of $4.0 million, inclusive of all attorneys’ fees and costs, to create a common fund to benefit the Settlement Class. In addition, Trustmark has agreed to adhere to its current method of time-ordered posting for non-recurring point of sale and ATM debit transactions for two years following the effective date of the Settlement, and to pay all fees and costs associated with providing notice to the Settlement Class and for implementation of the Settlement by the Settlement Administrator.

In an order dated October 11, 2013, the United States District Court for the Southern District of Mississippi preliminarily approved the Settlement. The court will hold a hearing in early 2014 to determine whether to issue final approval of the Settlement. As is common in class action settlements, notice will be provided to members of the Settlement Class, who will be given the option of opting out of the Settlement or objecting to the Settlement. Pursuant to court approval, a professional settlement administrator has been engaged to provide notices to class members and to facilitate apportionment of the Settlement funds among class members.

The Settlement of $4.0 million, or $2.5 million net of taxes, was included in other noninterest expense for the quarter ended June 30, 2013. Trustmark deposited the $4.0 million into the Settlement Administrator’s escrow account on October 25, 2013.

Trustmark and its subsidiaries are also parties to other lawsuits and other claims that arise in the ordinary course of business. Some of the lawsuits assert claims related to the lending, collection, servicing, investment, trust and other business activities, and some of the lawsuits allege substantial claims for damages.

All pending legal proceedings described above are being vigorously contested. In the regular course of business, Management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever Management believes that such losses are probable and can be reasonably estimated. At the present time, Management believes, based on the advice of legal counsel and Management’s evaluation, that (i) the final resolution of pending legal proceedings described above will not, individually or in the aggregate, have a material impact on Trustmark’s consolidated financial position or results of operations and (ii) a loss in any such case is not probable at this time, and thus no accrual is required under FASB ASC Topic 450-20, “Loss Contingencies.” In addition, given the preliminary nature of these matters and the lack of any quantification by plaintiffs of the relief being sought, to the extent that a loss in any such matter may be viewed as reasonably possible under FASB ASC Topic 450-20, it is not possible at this time to provide an estimate of any such possible loss (or range of possible loss) for any such matter.

Note 13 – Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted-average shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted-average shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. The following table reflects weighted-average shares used to calculate basic and diluted EPS for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Basic shares		67,177		64,778		66,779		64,616
Dilutive shares		205		215		184		189
Diluted shares		67,382		64,993		66,963		64,805

Weighted-average antidilutive stock awards were excluded in determining diluted earnings per share. The following table reflects weighted-average antidilutive shares for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012

Weighted-average antidilutive shares		270		501		379		705

Note 14 – Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. The following table reflects specific transaction amounts for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2013		2012
Income taxes paid	$	14,220	$	37,551
Interest expense paid on deposits and borrowings		18,656		24,197
Noncash transfers from loans to foreclosed properties (1)		34,226		33,740
Assets acquired in business combinations		1,845,930		234,960
Liabilities assumed in business combinations		1,821,066		209,322

(1) Includes transfers from covered loans to foreclosed properties

Note 15 – Shareholders' Equity

Trustmark and TNB are subject to minimum capital requirements, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Trustmark and TNB. As of September 30, 2013, Trustmark and TNB have exceeded all of the minimum capital standards for the parent company and its primary banking subsidiary as established by regulatory requirements. In addition, TNB has met applicable regulatory guidelines to be considered well-capitalized at September 30, 2013. To be categorized in this manner, TNB must maintain minimum total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as set forth in the accompanying table. There are no significant conditions or events that have occurred since September 30, 2013, which Management believes have affected Trustmark’s and TNB's present classification.

Trustmark's and TNB's actual regulatory capital amounts and ratios are presented in the table below ($ in thousands):

											Minimum Regulatory
	Actual					Minimum Regulatory					Provision to be
	Regulatory Capital					Capital Required					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount			Ratio
At September 30, 2013:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,097,058		14.02	%	$	626,067		8.00	%		n/	a		n/	a
Trustmark National Bank		1,055,807		13.63	%		619,558		8.00	%	$	774,448			10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	993,155		12.69	%	$	313,034		4.00	%		n/	a		n/	a
Trustmark National Bank		954,563		12.33	%		309,779		4.00	%	$	464,669			6.00	%

Tier 1 Capital (to Average Assets)
Trustmark Corporation	$	993,155		8.78	%	$	339,316		3.00	%		n/	a		n/	a
Trustmark National Bank		954,563		8.53	%		335,621		3.00	%	$	559,369			5.00	%

At December 31, 2012:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,157,838		17.22	%	$	537,861		8.00	%		n/	a		n/	a
Trustmark National Bank		1,119,438		16.85	%		531,577		8.00	%	$	664,472			10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,043,865		15.53	%	$	268,930		4.00	%		n/	a		n/	a
Trustmark National Bank		1,007,775		15.17	%		265,789		4.00	%	$	398,683			6.00	%

Tier 1 Capital (to Average Assets)
Trustmark Corporation	$	1,043,865		10.97	%	$	285,556		3.00	%		n/	a		n/	a
Trustmark National Bank		1,007,775		10.72	%		281,984		3.00	%	$	469,974			5.00	%

Accumulated Other Comprehensive Income

The following table presents the components of accumulated other comprehensive (loss) income and the related tax effects allocated to each component for the periods ended September 30, 2013 and 2012 ($ in thousands):

							Accumulated
							Other
	Before-Tax			Tax			Comprehensive
	Amount			Effect			(Loss) Income
Balance, January 1, 2013	$	5,533		$	(2,138	)	$	3,395
Unrealized holding losses on AFS arising during period		(98,130	)		37,534			(60,596	)
Adjustment for net gains realized in net income		(378	)		145			(233	)
Pension and other postretirement benefit plans		6,471			(2,475	)		3,996
Change in accumulated gain on effective cash flow hedge derivatives		1,963			(751	)		1,212
Balance, September 30, 2013	$	(84,541	)	$	32,315		$	(52,226	)

Balance, January 1, 2012	$	5,089		$	(1,968	)	$	3,121
Unrealized holding gains on AFS arising during period		2,970			(1,136	)		1,834
Adjustment for net gains realized in net income		(1,041	)		398			(643	)
Pension and other postretirement benefit plans		4,755			(1,819	)		2,936
Balance, September 30, 2012	$	11,773		$	(4,525	)	$	7,248

The following table presents the amounts affecting accumulated other comprehensive (loss) income that are included in their entirety in net income for the periods presented ($ in thousands). Reclassification adjustments related to securities available for sale are included in securities gains, net in the accompanying consolidated statements of income. The amortization of prior service cost and recognized net actuarial loss on pension and other postretirement benefit plans are included in the computation of net periodic benefit cost (see Note 10 – Defined Benefit and Other Postretirement Benefits for additional details).

	Pre-Tax			Tax			After Tax
	Income			(Expense)			Income
	(Expense)			Benefit			(Expense)
Nine Months Ended September 30, 2013:
Securities available for sale:
Reclassification adjustment for net gains realized in net income	$	378		$	(145	)	$	233

Pension and other postretirement benefit plans:
Amortization of prior service cost	$	(188	)	$	72		$	(116	)
Recognized net loss due to settlement		(1,363	)		521			(842	)
Recognized net actuarial loss		(4,920	)		1,882			(3,038	)
Total pension and other postretirement benefit plans	$	(6,471	)	$	2,475		$	(3,996	)

Nine Months Ended September 30, 2012:
Securities available for sale:
Reclassification adjustment for net gains realized in net income	$	1,041		$	(398	)	$	643

Pension and other postretirement benefit plans:
Amortization of prior service cost	$	(188	)	$	72		$	(116	)
Recognized net actuarial loss		(4,567	)		1,747			(2,820	)
Total pension and other postretirement benefit plans	$	(4,755	)	$	1,819		$	(2,936	)

Note 16 – Fair Value

Fair Value Measurements

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Depending on the nature of the asset or liability, Trustmark uses various valuation techniques and assumptions when estimating fair value. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that Trustmark has the ability to access at the measurement date.

Level 2 Inputs – Valuation is based upon quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates and inputs that are derived principally from or corroborated by observable market data.

Level 3 Inputs – Unobservable inputs reflecting the reporting entity’s own determination about the assumptions that market participants would use in pricing the asset or liability based on the best information available.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. Trustmark’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Financial Instruments Measured at Fair Value

The methodologies Trustmark uses in determining the fair values are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected upon exchange of the position in an orderly transaction between market participants at the measurement date. The large majority of assets that are stated at fair value are of a nature that can be valued using prices or inputs that are readily observable through a variety of independent data providers. The providers selected by Trustmark for fair valuation data are widely recognized and accepted vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio managers. Trustmark has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes that regularly test valuations for anomalies.

Trustmark utilizes an independent pricing service to advise it on the carrying value of the securities available for sale portfolio. As part of Trustmark’s procedures, the price provided from the service is evaluated for reasonableness given market changes. When a questionable price exists, Trustmark investigates further to determine if the price is valid. If needed, other market participants may be utilized to determine the correct fair value. Trustmark has also reviewed and confirmed its determinations in thorough discussions with the pricing source regarding their methods of price discovery.

Mortgage loan commitments are valued based on the securities prices of similar collateral, term, rate and delivery for which the loan is eligible to deliver in place of the particular security. Trustmark acquires a broad array of mortgage security prices that are supplied by a market data vendor, which in turn accumulates prices from a broad list of securities dealers. Prices are processed through a mortgage pipeline management system that accumulates and segregates all loan commitment and forward-sale transactions according to the similarity of various characteristics (maturity, term, rate, and collateral). Prices are matched to those positions that are deemed to be an eligible substitute or offset (i.e., “deliverable”) for a corresponding security observed in the market place.

Trustmark estimates fair value of MSR through the use of prevailing market participant assumptions and market participant valuation processes. This valuation is periodically tested and validated against other third-party firm valuations.

Trustmark obtains the fair value of interest rate swaps from a third-party pricing service that uses an industry standard discounted cash flow methodology. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate swap contracts for the effect of nonperformance risk, Trustmark has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB’s fair value measurement guidance, Trustmark made an accounting policy election to measure the credit risk of these derivative financial instruments, which are subject to master netting agreements, on a net basis by counterparty portfolio.

Trustmark has determined that the majority of the inputs used to value its interest rate swaps offered to qualified commercial borrowers fall within Level 2 of the fair value hierarchy, while the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads. Trustmark has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate swaps and has determined that the credit valuation adjustment is not significant to the overall valuation of these derivatives. As a result, Trustmark classifies its interest rate swap valuations in Level 2 of the fair value hierarchy.

Trustmark also utilizes exchange-traded derivative instruments such as Treasury note futures contracts and option contracts to achieve a fair value return that offsets the changes in fair value of MSR attributable to interest rates. Fair values of these derivative instruments are determined from quoted prices in active markets for identical assets therefore allowing them to be classified within Level 1 of the fair value hierarchy. In addition, Trustmark utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area which lack observable inputs for valuation purposes resulting in their inclusion in Level 3 of the fair value hierarchy.

At this time, Trustmark presents no fair values that are derived through internal modeling. Should positions requiring fair valuation arise that are not relevant to existing methodologies, Trustmark will make every reasonable effort to obtain market participant assumptions, or independent evaluation.

Financial Assets and Liabilities

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value ($ in thousands). There were no transfers between fair value levels for the nine months ended September 30, 2013 and the year ended December 31, 2012.

	September 30, 2013
	Total		Level 1		Level 2		Level 3
U.S. Treasury securities	$	503	$	-	$	503	$	-
U.S. Government agency obligations		265,438		-		265,438		-
Obligations of states and political subdivisions		212,991		-		212,991		-
Mortgage-backed securities		2,665,441		-		2,665,441		-
Asset-backed securities		227,728		-		227,728		-
Securities available for sale		3,372,101		-		3,372,101		-
Loans held for sale		119,986		-		119,986		-
Mortgage servicing rights		63,150		-		-		63,150
Other assets - derivatives		10,841		2,633		6,161		2,047
Other liabilities - derivatives		7,305		480		6,825		-

	December 31, 2012
	Total		Level 1			Level 2		Level 3
U.S. Government agency obligations	$	105,745	$	-		$	105,745	$	-
Obligations of states and political subdivisions		215,761		-			215,761		-
Mortgage-backed securities		2,094,612		-			2,094,612		-
Asset-backed securities		241,627		-			241,627		-
Securities available for sale		2,657,745		-			2,657,745		-
Loans held for sale		257,986		-			257,986		-
Mortgage servicing rights		47,341		-			-		47,341
Other assets - derivatives		7,107		(440	)		5,263		2,284
Other liabilities - derivatives		6,612		545			6,067		-

The changes in Level 3 assets measured at fair value on a recurring basis for the periods ended September 30, 2013 and 2012 are summarized as follows ($ in thousands):

	MSR			Other Assets - Derivatives
Balance, January 1, 2013	$	47,341		$	2,284
Total net gains included in net income (1)		258			7,558
Additions		15,551			-
Sales		-			(7,795	)
Balance, September 30, 2013	$	63,150		$	2,047

The amount of total gains for the period included in earnings that are attributable to the change in unrealized gains or losses still held at September 30, 2013	$	7,881		$	954

Balance, January 1, 2012	$	43,274		$	702
Total net (losses) gains included in net income (1)		(16,137	)		10,261
Additions		17,074			-
Sales		-			(6,658	)
Balance, September 30, 2012	$	44,211		$	4,305

The amount of total (losses) gains for the period included in earnings that are attributable to the change in unrealized gains or losses still held at September 30, 2012	$	(8,960	)	$	2,320

(1) Total net gains (losses) included in net income relating to MSR includes changes in fair value due to market changes and due to runoff.

Trustmark may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. Assets at September 30, 2013, which have been measured at fair value on a nonrecurring basis, include impaired LHFI. Loans for which it is probable Trustmark will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement are considered impaired. Impaired LHFI have been determined to be collateral dependent and assessed using a fair value approach. Specific allowances for impaired LHFI are based on comparisons of the recorded carrying values of the loans to the present value of the estimated cash flows of these loans at each loan’s original effective interest rate, the fair value of the collateral or the observable market prices of the loans. Fair value estimates begin with appraised values based on the current market value/as-is value of the property being appraised, normally from recently received and reviewed appraisals. 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. Appraised values are adjusted down for costs associated with asset disposal. At September 30, 2013, Trustmark had outstanding balances of $32.2 million in impaired LHFI that were specifically identified for evaluation and written down to fair value of the underlying collateral less cost to sell based on the fair value of the collateral or other unobservable input compared to $40.6 million at December 31, 2012. These specifically evaluated impaired LHFI are classified as Level 3 in the fair value hierarchy. Impaired LHFI are periodically reviewed and evaluated for additional impairment and adjusted accordingly based on the same factors identified above.

Please refer to Note 2 – Business Combinations, for financial assets and liabilities acquired, which were measured at fair value on a nonrecurring basis in accordance with GAAP.

Nonfinancial Assets and Liabilities

Certain nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment.

Other real estate, excluding covered other real estate, includes assets that have been acquired in satisfaction of debt through foreclosure and is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. At September 30, 2013, Trustmark's geographic other real estate distribution was concentrated primarily in its five key market regions: Alabama, Florida, Mississippi, Tennessee and Texas. The ultimate recovery of a substantial portion of the carrying amount of other real estate, excluding covered other real estate, is susceptible to changes in market conditions in these areas. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market.

Certain foreclosed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on adjusted observable market data. Foreclosed assets measured at fair value upon initial recognition totaled $73.9 million (utilizing Level 3 valuation inputs) during the nine months ended September 30, 2013 compared with $32.4 million for the same period in 2012. Foreclosed assets measured at fair value upon initial recognition for the nine months ended September 30, 2013 and 2012, included $40.1 million of other real estate acquired from BancTrust and $2.6 million of other real estate acquired from Bay Bank, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, Trustmark recognized charge-offs of the allowance for loan losses totaling $9.2 million and $8.5 million for the first nine months of 2013 and 2012, respectively. Other than foreclosed assets measured at fair value upon initial recognition, $35.0 million of foreclosed assets were remeasured during the first nine months of 2013, requiring write-downs of $5.5 million to reach their current fair values compared to $29.7 million of foreclosed assets that were remeasured during the first nine months of 2012, requiring write-downs of $4.8 million.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments can be found in Note 19 – Fair Value included in Item 8 of Trustmark’s Form 10-K Annual Report for the year ended December 31, 2012.

The carrying amounts and estimated fair values of financial instruments at September 30, 2013 and December 31, 2012, are as follows ($ in thousands):

	September 30, 2013				December 31, 2012
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Financial Assets:
Level 2 Inputs:
Cash and short-term investments	$	343,562	$	343,562	$	238,535	$	238,535
Securities held to maturity		69,980		70,949		42,188		46,888
Level 3 Inputs:
Net LHFI		5,628,009		5,701,646		5,514,016		5,619,933
Net acquired loans		869,792		869,792		127,489		127,489
FDIC indemnification asset		17,085		17,085		21,774		21,774

Financial Liabilities:
Level 2 Inputs:
Deposits		9,787,234		9,792,076		7,896,517		7,904,179
Short-term liabilities		403,163		403,163		375,749		375,749
Long-term FHLB advances		8,562		8,562		-		-
Subordinated notes		49,896		53,605		49,871		53,980
Junior subordinated debt securities		61,856		40,206		61,856		40,206

In cases where quoted market prices are not available, fair values are generally based on estimates using present value techniques. Trustmark’s premise in present value techniques is to represent the fair values on a basis of replacement value of the existing instrument given observed market rates on the measurement date. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates for those assets or liabilities cannot be necessarily substantiated by comparison to independent markets and, in many cases, may not be realizable in immediate settlement of the instruments. The estimated fair value of financial instruments with immediate and shorter-term maturities (generally 90 days or less) is assumed to be the same as the recorded book value. All nonfinancial instruments, by definition, have been excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Trustmark.

The fair values of net LHFI are estimated for portfolios of loans with similar financial characteristics. For variable rate LHFI that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values of certain mortgage LHFI, such as 1-4 family residential properties, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other types of LHFI are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The processes for estimating the fair value of net LHFI described above does not represent an exit price under FASB ASC Topic 820 and such an exit price could potentially produce a different fair value estimate at September 30, 2013 and December 31, 2012.

Note 17 – Derivative Financial Instruments

Trustmark maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. Trustmark’s interest rate risk management strategy involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Under the guidelines of FASB ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are required to be recognized as either assets or liabilities and be carried at fair value on the balance sheet. The fair value of derivative positions outstanding is included in other assets and/or other liabilities in the accompanying consolidated balance sheets and in the net change in these financial statement line items in the accompanying consolidated statements of cash flows as well as included in noninterest income in the accompanying consolidated statements of income.

Derivatives Designated as Hedging Instruments

As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. Trustmark’s obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. These derivative instruments are designated as fair value hedges under FASB ASC Topic 815. The ineffective portion of changes in the fair value of the forward contracts and changes in the fair value of the loans designated as loans held for sale are recorded in noninterest income in mortgage banking, net. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $149.5 million at September 30, 2013, with a negative valuation adjustment of $2.9 million, compared to $310.3 million, with a negative valuation adjustment of $738 thousand as of December 31, 2012.

On April 4, 2013, Trustmark entered into an interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to Trustmark Preferred Capital Trust I throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, Trustmark will pay a fixed interest rate of 1.66% and receive a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly settlements.

No ineffectiveness related to the interest rate derivative designated as a cash flow hedge was recognized in the consolidated statements of income during the three or nine months ended September 30, 2013. The accumulated net after-tax gain related to effective cash flow hedges included in accumulated other comprehensive loss totaled $1.2 million at September 30, 2013. Trustmark does not expect to reclassify any amounts from accumulated other comprehensive loss to interest expense during the next 12 months since Trustmark’s derivative relating to its junior subordinated debentures does not become effective until December 31, 2014.

Derivatives not Designated as Hedging Instruments

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded in noninterest income in mortgage banking, net and are offset by changes in the fair value of MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $1.3 million compared to a net negative ineffectiveness of $1.8 million for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013, the impact was a net positive ineffectiveness of $2.7 million compared to a net negative ineffectiveness of $2.7 million for the nine months ended September 30, 2012.

Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of forward sales contracts. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $111.5 million at September 30, 2013, with a positive valuation adjustment of $2.0 million, compared to $186.9 million, with a positive valuation adjustment of $2.3 million as of December 31, 2012.

Trustmark offers certain derivatives products directly to qualified commercial borrowers seeking to manage their interest rate risk. Trustmark economically hedges interest rate swap transactions executed with commercial borrowers by entering into offsetting interest rate swap transactions with third parties. Derivative transactions executed as part of this program are not designated as qualifying hedging relationships and are, therefore, carried at fair value with the change in fair value recorded in noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value substantially offset. As of September 30, 2013, Trustmark had interest rate swaps with an aggregate notional amount of $365.7 million related to this program, compared to $321.3 million as of December 31, 2012.

Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be declared in default on its derivative obligations.

As of September 30, 2013, the termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $908 thousand compared to $5.4 million as of December 31, 2012. As of September 30, 2013, Trustmark had posted collateral with a market value of $1.2 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2013, it could have been required to settle its obligations under the agreements at the termination value.

Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. As of September 30, 2013, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $19.8 million, compared to two risk participation agreements with an aggregate notional amount of $10.1 million at December 31, 2012. The fair values of these risk participation agreements were immaterial at September 30, 2013.

Tabular Disclosures

The following tables disclose the fair value of derivative instruments in Trustmark’s balance sheets as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	September 30,		December 31,
	2013		2012
Derivatives in hedging relationships
Interest rate contracts:
Interest rate swaps included in other assets	$	1,963	$	-
Forward contracts included in other liabilities		2,878		738

Derivatives not designated as hedging instruments
Interest rate contracts:
Futures contracts included in other assets	$	2,228	$	(482	)
Exchange traded purchased options included in other assets		405		42
OTC written options (rate locks) included in other assets		2,047		2,284
Interest rate swaps included in other assets		4,174		5,241
Credit risk participation agreements included in other assets		24		22
Exchange traded written options included in other liabilities		480		545
Interest rate swaps included in other liabilities		3,947		5,329

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Derivatives in hedging relationships
Amount of loss recognized in mortgage banking, net	$	(13,008	)	$	(4,212	)	$	(2,141	)	$	(5,279	)

Derivatives not designated as hedging instruments
Amount of gain (loss) recognized in mortgage banking, net	$	2,728		$	2,883		$	(5,421	)	$	9,913
Amount of (loss) gain recognized in bankcard and other fees		(203	)		(85	)		192			(246	)

The following table discloses the amount included in other comprehensive (loss) income for derivative instruments designated as cash flow hedges for the periods presented ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Derivatives in cash flow hedging relationship
Amount of (loss) gain recognized in other comprehensive (loss) income	$	(242	)	$	-	$	1,212	$	-

Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Information about financial instruments that are eligible for offset in the consolidated balance sheets as of September 30, 2013 and December 31, 2012 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of September 30, 2013
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received			Net Amount
Derivatives	$	6,137	$	-	$	6,137	$	(1,253	)	$	(1,500	)	$	3,384

Offsetting of Derivative Liabilities
As of September 30, 2013
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Posted		Net Amount
Derivatives	$	3,947	$	-	$	3,947	$	(1,253	)	$	-	$	2,694

Offsetting of Derivative Assets
As of December 31, 2012
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
Derivatives	$	5,241	$	-	$	5,241	$	-	$	-	$	5,241

Offsetting of Derivative Liabilities
As of December 31, 2012
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Posted			Net Amount
Derivatives	$	5,329	$	-	$	5,329	$	-	$	(594	)	$	4,735

Note 18 – Segment Information

Trustmark’s management reporting structure includes three segments: General Banking, Wealth Management and Insurance. General Banking is primarily responsible for all traditional banking products and services, including loans and deposits. General Banking also consists of internal operations such as Human Resources, Executive Administration, Treasury, Funds Management, Public Affairs and Corporate Finance. Wealth Management provides customized solutions for affluent customers by integrating financial services with traditional banking products and services such as private banking, money management, full-service brokerage, financial planning, personal and institutional trust and retirement services. Through Fisher Brown Bottrell Insurance, Inc. (FBBI), a wholly owned subsidiary of TNB, Trustmark’s Insurance Division provides a full range of retail insurance products including commercial risk management products, bonding, group benefits and personal lines coverage.

The accounting policies of each reportable segment are the same as those of Trustmark except for its internal allocations. Noninterest expenses for back-office operations support are allocated to segments based on estimated uses of those services. Trustmark measures the net interest income of its business segments with a process that assigns cost of funds or earnings credit on a matched-term basis. This process, called "funds transfer pricing", charges an appropriate cost of funds to assets held by a business unit, or credits the business unit for potential earnings for carrying liabilities. The net of these charges and credits flows through to the General Banking segment, which contains the management team responsible for determining Trustmark’s funding and interest rate risk strategies.

The following table discloses financial information by reportable segment for the periods presented ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
General Banking
Net interest income	$	97,210		$	84,125	$	283,134		$	255,184
Provision for loan losses, net		(375	)		5,448		(9,606	)		10,849
Noninterest income		31,367			30,433		90,250			92,772
Noninterest expense		88,615			72,029		272,951			224,256
Income before income taxes		40,337			37,081		110,039			112,851
Income taxes		9,916			9,817		27,803			29,834
General banking net income	$	30,421		$	27,264	$	82,236		$	83,017

Selected Financial Information
Average assets	$	11,621,803		$	9,664,428	$	11,312,070		$	9,653,259
Depreciation and amortization	$	9,182		$	7,514	$	26,897		$	20,649

Wealth Management
Net interest income	$	1,117		$	1,065	$	3,261		$	3,254
Provision for loan losses, net		43			15		38			35
Noninterest income		7,535			6,895		21,440			18,327
Noninterest expense		6,877			5,957		19,824			16,894
Income before income taxes		1,732			1,988		4,839			4,652
Income taxes		570			701		1,591			1,549
Wealth management net income	$	1,162		$	1,287	$	3,248		$	3,103

Selected Financial Information
Average assets	$	66,760		$	77,999	$	71,417		$	78,684
Depreciation and amortization	$	43		$	42	$	126		$	132

Insurance
Net interest income	$	102		$	89	$	237		$	233
Provision for loan losses, net		-			-		-			-
Noninterest income		8,231			7,537		23,496			21,311
Noninterest expense		6,032			5,474		18,089			16,043
Income before income taxes		2,301			2,152		5,644			5,501
Income taxes		850			799		2,107			2,048
Insurance net income	$	1,451		$	1,353	$	3,537		$	3,453

Selected Financial Information
Average assets	$	70,545		$	68,936	$	67,268		$	65,876
Depreciation and amortization	$	258		$	306	$	777		$	937

Consolidated
Net interest income	$	98,429		$	85,279	$	286,632		$	258,671
Provision for loan losses, net		(332	)		5,463		(9,568	)		10,884
Noninterest income		47,133			44,865		135,186			132,410
Noninterest expense		101,524			83,460		310,864			257,193
Income before income taxes		44,370			41,221		120,522			123,004
Income taxes		11,336			11,317		31,501			33,431
Consolidated net income	$	33,034		$	29,904	$	89,021		$	89,573

Selected Financial Information
Average assets	$	11,759,108		$	9,811,363	$	11,450,755		$	9,797,819
Depreciation and amortization	$	9,483		$	7,862	$	27,800		$	21,718

Note 19 – Accounting Policies Recently Adopted and Pending Accounting Pronouncements

ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).” Issued in July 2013, ASU 2013-11 provides that an entity’s unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. The exception states that to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 applies prospectively for all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists at the reporting date. ASU 2013-11 is effective for fiscal years, and interim periods within those years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a significant impact to Trustmark’s consolidated financial statements.

ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” Issued in February 2013, ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on net income line items only for those items that are reported in their entirety in net income in the period of reclassification. For these items, entities are required to disclose the effect of the reclassification on each line item of net income that is affected by the reclassification adjustment. For items that are not reclassified in their entirety into net income, an entity is required to add a cross-reference to the note that includes additional information about the effect of the reclassification. For entities that only have reclassifications into net income in their entirety, this information may be presented either in the notes or parenthetically on the face of the statement that reports net income as long as the required information is reported in a single location. Entities that have one or more reclassification items that are not presented in their entirety in net income in the period of reclassification must present this information in the notes to the financial statements. ASU 2013-02 became effective for Trustmark’s financial statements on January 1, 2013, and the adoption did not have a significant impact to Trustmark’s consolidated financial statements. The required disclosures are reported in Note 15 – Shareholders’ Equity.

ASU 2013-01. “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” Issued in January 2013, ASU 2013-01 clarifies that the scope of ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” applies to derivatives accounted for in accordance with FASB ASC Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreements. ASU 2013-01 became effective for Trustmark’s financial statements on January 1, 2013, and the adoption did not have a significant impact to Trustmark’s consolidated financial statements. The required disclosures are reported in Note 17 – Derivatives.

ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force).” Issued in October 2012, ASU 2012-06 addresses the diversity in practice about how to subsequently measure an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The amendments in ASU 2012-06 require a reporting entity to subsequently account for a change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. ASU 2012-06 further requires that any amortization of changes in value be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments in ASU 2012-06 are effective prospectively for fiscal years beginning on or after December 15, 2012, and, therefore, were effective for Trustmark’s consolidated financial statements as of January 1, 2013. The adoption of ASU 2012-06 did not have a significant impact on Trustmark’s consolidated financial statements. The required disclosures are reported in Note 8 – FDIC Indemnification Asset.

ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” Issued in July 2012, ASU 2012-02 amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets other than goodwill for impairment. Under the revised guidance, entities testing indefinite-lived intangible assets for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the indefinite-lived intangible assets impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The ASU does not change how indefinite-lived intangible assets are calculated or assigned to reporting units, nor does it revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the ASU does not amend the requirement to test indefinite-lived intangible assets for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments of ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. ASU 2012-02 became effect for Trustmark as of January 1, 2013. As Trustmark does not have any indefinite-lived intangible assets other than goodwill, the adoption of ASU 2012-02 had no impact on Trustmark’s consolidated financial statements.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following provides a narrative discussion and analysis of Trustmark Corporation’s (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the supplemental financial data included elsewhere in this report.

Description of Business

Trustmark, a Mississippi business corporation incorporated in 1968, is a bank holding company headquartered in Jackson, Mississippi. Trustmark’s principal subsidiary is Trustmark National Bank (TNB), initially chartered by the State of Mississippi in 1889. At September 30, 2013, TNB had total assets of $11.691 billion, which represented approximately 99.0% of the consolidated assets of Trustmark.

Through TNB and its other subsidiaries, Trustmark operates as a financial services organization providing banking and other financial solutions through 214 offices and 3,110 full-time equivalent associates located in the states of Alabama (primarily in the central and southern regions of that state, which are collectively referred to herein as Trustmark’s Alabama market), Florida (primarily in the northwest or “Panhandle” region of that state, which is referred to herein as Trustmark’s Florida market), Mississippi, Tennessee (in Memphis and the Northern Mississippi regions, which are collectively referred to herein as Trustmark’s Tennessee market), and Texas (primarily in Houston, which is referred to herein as Trustmark’s Texas market). The principal products produced and services rendered by TNB and Trustmark’s other subsidiaries are as follows:

Trustmark National Bank

Commercial Banking – TNB provides a full range of commercial banking services to corporations and other business customers. Loans are provided for a variety of general corporate purposes, including financing for commercial and industrial projects, income producing commercial real estate, owner-occupied real estate and construction and land development. TNB also provides deposit services, including checking, savings and money market accounts and certificates of deposit as well as treasury management services.

Consumer Banking – TNB provides banking services to consumers, including checking, savings, and money market accounts as well as certificates of deposit and individual retirement accounts. In addition, TNB provides consumer customers with installment and real estate loans and lines of credit.

Mortgage Banking – TNB provides mortgage banking services, including construction financing, production of conventional and government insured mortgages, secondary marketing and mortgage servicing. At September 30, 2013, TNB’s mortgage loan portfolio totaled approximately $1.007 billion, while its portfolio of mortgage loans serviced for others, including Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA), totaled approximately $5.435 billion.

Insurance – TNB provides a competitive array of insurance solutions for business and individual risk management needs. Business insurance offerings include services and specialized products for medical professionals, construction, manufacturing, hospitality, real estate and group life and health plans. Individual customers are also provided life and health insurance, and personal line policies. TNB provides these services through Fisher Brown Bottrell Insurance, Inc. (FBBI), a Mississippi corporation which is based in Jackson, Mississippi.

Wealth Management and Trust Services – TNB offers specialized services and expertise in the areas of wealth management, trust, investment and custodial services for corporate and individual customers. These services include the administration of personal trusts and estates as well as the management of investment accounts for individuals, employee benefit plans and charitable foundations. TNB also provides corporate trust and institutional custody, securities brokerage, financial and estate planning, retirement plan services as well as life insurance and other risk management services provided by FBBI. TNB’s wealth management division is also served by Trustmark Investment Advisors, Inc. (TIA), a Securities and Exchange Commission (SEC)-registered investment adviser. TIA provides customized investment management services for TNB. During the third quarter of 2012, Trustmark completed the sale and reorganization of $929.0 million of assets managed by TIA for the Performance Funds Trust (Performance Funds) to Federated Investors, Inc. (Federated) and certain of Federated’s subsidiaries. TIA no longer serves as investment adviser or custodian to the Performance Funds. However, Performance Funds held by Trustmark wealth management clients at the time of the reorganization were converted to various pre-determined Federated funds, and remain in Trustmark wealth management accounts. At September 30, 2013, Trustmark held assets under management and administration of $10.447 billion and brokerage assets of $1.288 billion.

New Market Tax Credits (NMTC) – TNB provides an intermediary vehicle for the provision of loans or investments in Low-Income Communities (LICs) through its subsidiary Southern Community Capital, LLC (SCC). SCC is a Mississippi limited liability company and a certified Community Development Entity (CDE). The primary mission of SCC is to provide investment capital for LICs, as defined by Section 45D of the Internal Revenue Code, or Low-Income Persons (LIPs). As a certified CDE, SCC was able to apply to the Community Development Financial Institutions Fund (CDFI Fund) to receive a NMTC allocation to offer its investor, TNB, in exchange for equity investments in qualified projects. In April 2013, SCC was awarded a $50.0 million allocation by the CDFI Fund under the calendar year 2012 allocation round of the NMTC Program.

Somerville Bank & Trust Company

Somerville Bank & Trust Company (Somerville), headquartered in Somerville, Tennessee, provides banking services in the eastern Memphis metropolitan statistical area (MSA) through five offices. At September 30, 2013, Somerville had total assets of $204.5 million.

On October 3, 2013, TNB received approval from the Office of the Comptroller of the Currency (OCC) to merge Somerville with and into TNB, with TNB as the surviving entity in the merger. TNB and Somerville are both wholly owned subsidiaries of Trustmark; as such, the proposed merger represents a business reorganization between affiliates.

Capital Trusts

Trustmark Preferred Capital Trust I (Trustmark Trust) is a Delaware trust affiliate formed in 2006 to facilitate a private placement of $60.0 million in trust preferred securities. As defined in applicable accounting standards, Trustmark Trust is considered a variable interest entity for which Trustmark is not the primary beneficiary. Accordingly, the accounts of the trust are not included in Trustmark’s consolidated financial statements.

Executive Overview

While the economy has shown moderate signs of improvement, the outlook remains uncertain. Estimated employment growth in the United States continued to decline during the third quarter of 2013 to average 143,000 jobs created per month, compared to an average 207,000 and 196,000 jobs per month during the first and second quarters of 2013, respectively. However, the unemployment rate fell slightly to 7.2% as the number of people that reportedly exited the labor force exceeded the number of people that reportedly entered the labor force looking for employment. Consumer confidence was reported to have declined slightly during the third quarter of 2013, as consumers reportedly had concerns about the short-term outlook for both jobs and earnings. However, these reports also indicated that consumers’ assessments regarding current business and labor market conditions were positive.

In the October 2013 “Summary of Commentary on Current Economic Conditions by Federal Reserve Districts,” the twelve Federal Reserve Districts’ reports suggested overall economic activity continued to expanded at a modest to moderate pace during the third quarter reporting period. According to the Federal Reserve Districts’ reports, the Districts remain cautiously optimistic in their outlook for future economic activity, although many noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate. These moderate signs of improvement in the economy have caused increased uncertainty regarding the Federal Reserve’s stimulus program and potential tightening of monetary policy.

The OCC’s “Fact Sheets” for the Southern District, which includes all of Trustmark’s market regions, dated September 25, 2013, reported substantial improvement in economic conditions over the past year, but the pace of recovery was uneven through the district. The OCC reported that overall financial conditions for financial institutions in the Southern District continued to improve and metrics for key financial areas were positive. Most banks within the district with asset quality issues have reportedly had success in reducing problem assets and other real estate owned. The OCC reported a significant decrease in the number of problem banks and has terminated many enforcement actions since 2012. According to the OCC, considerable work remains as national banks struggle to stabilize shrinking net interest margins, but capital and liquidity levels are strong and economic conditions continue to improve. Doubts surrounding the sustainability of these signs of improvement are expected to persist for some time, especially as the magnitude of economic distress facing local markets place continued pressure on asset growth, asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets.

The European financial crisis has created risks and uncertainties affecting the global economy. As global markets react to potential resolutions of the European financial crisis and potential economic policy changes in Europe, assets, liabilities and cash flows with no direct connection to the European Union could be influenced. The potential impact on markets within the United States and on the economy of the United States is difficult to predict. Trustmark has no direct or indirect exposure to any debt of European sovereign and non-sovereign issuers, nor is it dependent upon any funding sources in the Eurozone for any short- or long-term liquidity. However, Trustmark, as a member of the global economy, could be indirectly affected if events in the Eurozone broadly cause widening of interest rate spreads or otherwise increase global market volatility.

On March 29, 2013, TNB announced the signing of a definitive Branch Purchase and Assumption Agreement (the Agreement) pursuant to which TNB would acquire the two branches of SOUTHBank, F.S.B. (SOUTHBank), serving the Oxford, Mississippi market. TNB completed its purchase of the two branches from SOUTHBank effective as of the close of business on July 26, 2013. Pursuant to the Agreement, TNB assumed deposit accounts of approximately $11.7 million in addition to purchasing the two physical branch offices. The transaction was not material to Trustmark’s consolidated financial statements and was not considered a business combination in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations.”

The acquisition of BancTrust is consistent with Trustmark’s strategic plan to selectively expand the Trustmark franchise. The acquisition provided Trustmark entry into more than 15 markets in Alabama and enhanced the Trustmark franchise in the Florida Panhandle. See Note 2 – Business Combinations included elsewhere in this report for additional information regarding the BancTrust acquisition.

Management has continued to carefully monitor the impact of illiquidity in the financial markets, values of securities and other assets, loan performance, default rates and other financial and macro-economic indicators, in order to navigate the challenging economic environment. Trustmark has continued to experience improvements in credit quality on loans held for investment (LHFI). As of September 30, 2013, classified LHFI balances decreased $30.8 million, or 11.2%, while criticized LHFI balances decreased $68.1 million, or 19.5%, when compared to balances at September 30, 2012. The volume of classified and criticized LHFI decreased year-over-year primarily as a result of noted improvement in repayment capacity of borrowers and subsequent upgrade of those credits to a pass category as well as repayment of several credits of significant size.

TNB did not make significant changes to its loan underwriting standards during the first nine months of 2013. TNB’s willingness to make loans to qualified applicants that meet its traditional, prudent lending standards has not changed. TNB adheres to interagency guidelines regarding concentration limits of commercial real estate loans. As a result of the economic downturn, TNB remains cautious in granting credit involving certain categories of real estate as well as making exceptions to its loan policy.

Management has continued its practice of maintaining excess funding capacity to provide Trustmark with adequate liquidity for its ongoing operations. In this regard, Trustmark benefits from its strong deposit base, its highly liquid investment portfolio and its access to funding from a variety of external funding sources such as upstream federal funds lines, Federal Home Loan Bank (FHLB) advances and brokered deposits.

Critical Accounting Policies

Trustmark’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the financial services industry. Application of these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual financial results could differ from those estimates.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. There have been no significant changes in Trustmark’s critical accounting estimates during the first nine months of 2013.

Recent Legislative and Regulatory Developments

On June 7, 2012, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and the OCC jointly issued proposed rules to enhance regulatory capital requirements. The proposed rules were designed to address perceived shortcomings in the existing regulatory capital requirements that became evident during the recent financial crisis by implementing capital requirements in the Dodd-Frank Act and international capital regulatory standards by the Basel Committee. The proposed rules would have increased and revised the federal bank agencies’ current minimum risk-based and leverage capital ratio requirements; introduced new risk-weight calculation methods for the “standardized” denominator; adopted a minimum common equity Tier 1 risk-based capital requirement; revised regulatory capital components and calculations; required regulatory capital buffers above the minimum risk-based capital requirements for certain banking organizations; and more generally restructured the agencies’ capital rules. Many of the proposed rules would have applied to all depository institutions, bank holding companies with consolidated assets of $500 million or more, and savings and loan holding companies. The proposed rules also addressed the relevant provisions of the Dodd-Frank Act, including removal of references to credit ratings in the capital rules and implementation of a capital floor, known as the “Collins Amendment.”

The new final rule revising regulatory capital requirements was issued by the FRB on July 2, 2013, and approved by the FDIC and the OCC on July 9, 2013. The new final capital rule adopts many of the new standards and requirements that were included in the proposed rules, such as a new common equity Tier 1 requirement and higher minimum Tier 1 requirements. The new final capital rule contains three key changes from the proposed rules in an effort to reduce the burden on smaller banking organizations. First, the new final capital rule does not change the current treatment of residential mortgage exposures. Second, banking organizations that are not subject to the advanced approaches capital rules can opt not to incorporate most amounts reported as accumulated other comprehensive income (AOCI) in the calculation of their regulatory capital, which is consistent with the treatment of AOCI under the current rules. Finally, smaller depository institution holding companies (those with assets less than $15 billion) and most mutual holding companies will be allowed to continue to count as Tier 1 capital most existing trust preferred securities that were issued prior to May 19, 2010 rather than phasing such securities out of regulatory capital. Most banking organizations will be required to apply the new capital rules on January 1, 2015. It is expected that banking organizations subject to the new final capital rules, including Trustmark, will be required to hold a greater amount of capital and a greater amount of common equity than they are currently required to hold. Management is currently evaluating the impact the new final capital rules will have on Trustmark.

On January 18, 2013, the Consumer Financial Protection Bureau (CFPB), FRB, FDIC, OCC, Federal Housing Finance Agency, and National Credit Union Administration, issued a final rule implementing amendments to the Truth in Lending Act made by the Dodd-Frank Act. The final rule imposes heightened appraisal requirements for higher-priced mortgage loans and becomes mandatory on January 18, 2014. The six agencies subsequently issued a proposed rule on July 10, 2013, that would create exemptions from these appraisal requirements for loans of $25,000 or less, certain “streamlined” refinancings, and certain loans secured by manufactured housing. If implemented, this proposal is expected to provide creditors with some relief from the mortgage appraisal requirements. Management is currently evaluating the impact the proposed rules could have on Trustmark.

On July 30, 2013, the FRB, OCC, and the FDIC proposed guidance describing supervisory expectations for company-run stress tests conducted by medium-sized firms with between $10 billion and $50 billion in total consolidated assets. The guidance relates to annual company-run stress tests that were mandated by previous rules finalized in October 2012. If implemented, this proposal is expected to provide firms with greater clarity as to the stress test requirements. Because Trustmark did not exceed the $10 billion threshold until February 2013, it will not be subject to these stress test requirements until September 2014, with a formal filing requirement of March 2015.

Financial Highlights

Trustmark reported net income of $33.0 million, or basic and diluted earnings per common share of $0.49 in the third quarter of 2013, compared to $29.9 million, or basic and diluted earnings per common share of $0.46, in the third quarter of 2012. Trustmark’s performance during the quarter ended September 30, 2013, produced a return on average tangible common equity of 14.92% and a return on average assets of 1.11% compared to a return on average tangible common equity of 12.61% and a return on average assets of 1.21% during the quarter ended September 30, 2012. During the nine months ended September 30, 2013, Trustmark's net income totaled $89.0 million, or basic and diluted earnings per common share of $1.33, a decrease of $552 thousand and $0.06 and $0.05 when compared to the nine months ended September 30, 2012. Trustmark's performance during the nine months ended September 30, 2013, produced a return on average tangible common equity of 13.25% and a return on average assets of 1.04%, an increase of 0.34% and a decrease of 0.18%, respectively, when compared to the nine months ended September 30, 2012. Trustmark’s performance for the three and nine months ended September 30, 2013 was significantly impacted by the BancTrust acquisition. Highlights of the impact of the BancTrust acquisition are provided in the discussion below, while additional details are provided in the appropriate sections included elsewhere in this report. Trustmark’s Board of Directors declared a quarterly cash dividend of $0.23 per common share. The dividend is payable December 15, 2013, to shareholders of record on December 1, 2013.

At September 30, 2013, nonperforming assets, excluding acquired loans and covered other real estate, totaled $189.7 million, an increase of $29.2 million, or 18.2%, compared to December 31, 2012, and total nonaccrual LHFI were $73.4 million, representing a decrease of $9.0 million relative to December 31, 2012. Total net recoveries for the nine months ended September 30, 2013 were $1.3 million compared to total net charge-offs of $13.3 million for the same time period in 2012.

As discussed elsewhere in this report under the heading “Executive Overview”, Trustmark completed its merger with BancTrust on February 15, 2013. At September 30, 2013, the carrying value of loans and deposits resulting from the BancTrust acquisition was $859.9 million and $1.667 billion, respectively. The operations of BancTrust are included in Trustmark’s operating results from February 15, 2013, and added revenue of $50.5 million and net income, excluding non-routine merger expenses, of approximately $13.0 million through September 30, 2013. Included in noninterest expense for the first nine months of 2013 are non-routine BancTrust merger expenses totaling approximately $9.4 million (change in control and severance expense of $1.4 million included in salaries and employee benefits; professional fees, contract termination and other expenses of $7.9 million included in other expense). Such operating results are not necessarily indicative of future operating results.

Selected Financial Data
($ in thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Consolidated Statements of Income
Total interest income	$	104,894		$	92,497		$	306,249		$	282,793
Total interest expense		6,465			7,218			19,617			24,122
Net interest income		98,429			85,279			286,632			258,671
Provision for loan losses, LHFI		(3,624	)		3,358			(11,438	)		7,301
Provision for loan losses, acquired loans		3,292			2,105			1,870			3,583
Noninterest income		47,133			44,865			135,186			132,410
Noninterest expense		101,524			83,460			310,864			257,193
Income before income taxes		44,370			41,221			120,522			123,004
Income taxes		11,336			11,317			31,501			33,431
Net Income	$	33,034		$	29,904		$	89,021		$	89,573

Common Share Data
Basic earnings per share	$	0.49		$	0.46		$	1.33		$	1.39
Diluted earnings per share		0.49			0.46			1.33			1.38
Cash dividends per share		0.23			0.23			0.69			0.69

Performance Ratios
Return on average common equity		9.83	%		9.34	%		8.92	%		9.55	%
Return on average tangible common equity		14.92	%		12.61	%		13.25	%		12.91	%
Return on average assets		1.11	%		1.21	%		1.04	%		1.22	%
Net interest margin (fully taxable equivalent)		3.94	%		4.06	%		3.98	%		4.14	%

Credit Quality Ratios (1)
Net charge-offs/average loans		0.04	%		0.31	%		-0.03	%		0.30	%
Provision for loan losses/average loans		-0.25	%		0.23	%		-0.27	%		0.16	%
Nonperforming loans/total loans (incl LHFS*)		1.26	%		1.38	%
Nonperforming assets/total loans (incl LHFS) plus ORE*		3.20	%		2.75	%
Allowance for loan losses/total loans (excl LHFS*)		1.20	%		1.51	%

September 30,	2013			2012
Consolidated Balance Sheets
Total assets	$	11,805,197		$	9,872,159
Securities		3,442,081			2,769,930
Loans held for investment and acquired loans (including LHFS*)		6,691,752			6,000,473
Deposits		9,787,234			7,804,041
Common shareholders' equity		1,329,514			1,278,015

Common Stock Performance
Market value - close	$	25.60		$	24.34
Common book value		19.79			19.73
Tangible common book value		13.58			14.95

Capital Ratios
Common equity/total assets		11.26	%		12.95	%
Tangible common equity/tangible assets		8.01	%		10.13	%
Tangible common equity/risk-weighted assets		11.66	%		14.49	%
Tier 1 leverage ratio		8.78	%		10.83	%
Tier 1 common risk-based capital ratio		11.92	%		14.50	%
Tier 1 risk-based capital ratio		12.69	%		15.40	%
Total risk-based capital ratio		14.02	%		17.25	%

(1) - Excludes Acquired Loans and Covered Other Real Estate.

* - LHFS is Loans Held for Sale.

** - ORE is Other Real Estate.

Non-GAAP Financial Measures

In addition to capital ratios defined by GAAP and banking regulators, Trustmark utilizes various tangible common equity measures when evaluating capital utilization and adequacy. Tangible common equity, as defined by Trustmark, represents common equity less goodwill and identifiable intangible assets.

Trustmark believes these measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of Trustmark’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of which varies across organizations.

These calculations are intended to complement the capital ratios defined by GAAP and banking regulators. Because GAAP does not include these capital ratio measures, Trustmark believes there are no comparable GAAP financial measures to these tangible common equity ratios. Despite the importance of these measures to Trustmark, there are no standardized definitions for them and, as a result, Trustmark’s calculations may not be comparable with other organizations. In addition, there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its consolidated financial statements and the notes related thereto in their entirety and not to rely on any single financial measure. The following table reconciles Trustmark’s calculation of these measures to amounts reported under GAAP.

Reconciliation of Non-GAAP Financial Measures
($ in thousands)		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
TANGIBLE COMMON EQUITY
AVERAGE BALANCES
Total shareholders' equity		$	1,333,356		$	1,273,605		$	1,334,437		$	1,252,684
Less: Goodwill			(368,482	)		(291,104	)		(353,485	)		(291,104	)
Identifiable intangible assets			(45,988	)		(18,971	)		(43,232	)		(17,152	)
Total average tangible common equity		$	918,886		$	963,530		$	937,720		$	944,428

PERIOD END BALANCES
Total shareholders' equity		$	1,329,514		$	1,278,015
Less: Goodwill			(372,463	)		(291,104	)
Identifiable intangible assets			(44,424	)		(18,327	)
Total tangible common equity	(a)	$	912,627		$	968,584

TANGIBLE ASSETS
Total assets		$	11,805,197		$	9,872,159
Less: Goodwill			(372,463	)		(291,104	)
Identifiable intangible assets			(44,424	)		(18,327	)
Total tangible assets	(b)	$	11,388,310		$	9,562,728

Risk-weighted assets	(c)	$	7,825,839		$	6,684,820

NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION
Net income		$	33,034		$	29,904		$	89,021		$	89,573
Plus: Intangible amortization net of tax			1,523			635			3,939			1,708
Net income adjusted for intangible amortization		$	34,557		$	30,539		$	92,960		$	91,281

Period end common shares outstanding	(d)		67,181,694			64,779,937

TANGIBLE COMMON EQUITY MEASUREMENTS
Return on average tangible common equity ¹			14.92	%		12.61	%		13.25	%		12.91	%
Tangible common equity/tangible assets	(a)/(b)		8.01	%		10.13	%
Tangible common equity/risk-weighted assets	(a)/(c)		11.66	%		14.49	%
Tangible common book value	(a)/(d) *1,000	$	13.58		$	14.95

		September 30,
TIER 1 COMMON RISK-BASED CAPITAL		2013			2012
Total shareholders' equity		$	1,329,514		$	1,278,015
Eliminate qualifying AOCI			52,226			(7,248	)
Qualifying tier 1 capital			60,000			60,000
Disallowed goodwill			(372,463	)		(291,104	)
Adjustment to goodwill allowed for deferred taxes			14,093			12,683
Other disallowed intangibles			(44,424	)		(18,327	)
Disallowed servicing intangible			(6,315	)		(4,421	)
Disallowed deferred taxes			(39,476	)		-
Total tier 1 capital		$	993,155		$	1,029,598
Less: Qualifying tier 1 capital			(60,000	)		(60,000	)
Total tier 1 common capital	(e)	$	933,155		$	969,598

Tier 1 common risk-based capital ratio	(e)/(c)		11.92	%		14.50	%

¹ Calculation = ((net income adjusted for intangible amortization/number of days in period)*number of days in year)/total average tangible common equity

Results of Operations

Net Interest Income

Net interest income is the principal component of Trustmark’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The net interest margin (NIM) is computed by dividing fully taxable equivalent net interest income by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of funding them. The accompanying Yield/Rate Analysis Table shows the average balances for all assets and liabilities of Trustmark and the interest income or expense associated with earning assets and interest-bearing liabilities. The yields and rates have been computed based upon interest income and expense adjusted to a fully taxable equivalent (FTE) basis using a 35% federal marginal tax rate for all periods shown. Loans on nonaccrual have been included in the average loan balances, and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Loan fees included in interest associated with the average loan balances are immaterial.

As previously discussed, Trustmark acquired BancTrust on February 15, 2013. This acquisition resulted in additional net interest income of $18.0 million and $42.3 million for the three and nine months ended September 30, 2013, and year to date growth in both average interest-earning assets and average interest-bearing liabilities of $1.111 billion and $1.119 billion, respectively, which are also included in the current period balances shown in the following three paragraphs.

Net interest income-FTE for the three and nine months ended September 30, 2013, increased $13.2 million, or 14.9%, and $28.4 million, or 10.5%, respectively, when compared with the same periods in 2012. The net interest margin decreased 16 basis points to 3.98% for the first nine months of 2013, compared with the same time period in 2012. The decrease in the net interest margin is primarily a result of a downward repricing of fixed rate assets and changes to Trustmark’s asset mix due to growth in lower yielding investment securities. The impact of this was partially offset by the significant increase in acquired loans due to the BancTrust acquisition, the significant increase in recoveries of acquired impaired loans, as well as lower deposit costs.

Average interest-earning assets for the first nine months of 2013 were $9.998 billion compared to $8.700 billion for the same time period in 2012, an increase of $1.299 billion. The growth in average interest-earning assets was primarily due to an increase in average total securities and average acquired noncovered loans of $790.3 million and $722.3 million, respectively, during the first nine months of 2013. The increase in securities and acquired noncovered loans, which resulted primarily from the BancTrust acquisition, was partially offset by a decrease in average loans (LHFI and loans held for sale) of $192.3 million, or 3.2%, during the first nine months of 2013. The decrease in average loans is primarily attributable to the decrease in loans held for sale (LHFS) of $204.9 million, or 63.1%, due to declines in mortgage loan production as interest rates rise. During the first nine months of 2013, interest on securities-taxable increased $2.1 million, or 4.1%, as the yield on taxable securities decreased 63 basis points when compared with the same time period in 2012 due to the run-off of higher yielding securities replaced at lower yields. During the first nine months of 2013, interest and fees on LHFS and LHFI-FTE decreased $17.7 million, or 8.0%, due to lower average loan balances while the yield on loans fell to 4.73% compared to 4.97% during the same time period in 2012. During the first nine months of 2013, interest and fees on acquired loans increased $39.7 million while the yield on acquired loans fell to 8.48% compared to 12.74% during the same time period in 2012. The increase in interest and fees on acquired loans and the decrease in the yield on acquired loans were a result of the significant increase in average acquired loans due to the BancTrust acquisition, which had a lower yield than the acquired loans at September 30, 2012, and approximately $14.2 million of recoveries of acquired impaired loans. As a result of these factors, interest income-FTE increased $23.8 million, or 8.1%, when the first nine months of 2013 is compared with the same time period in 2012. The impact of these changes is also illustrated by the decline in the yield on total earning assets, which fell from 4.51% for the first nine months of 2012 to 4.24% for the same time period in 2013, a decrease of 27 basis points.

Average interest-bearing liabilities for the first nine months of 2013 totaled $7.563 billion compared to $6.462 billion for the same time period in 2012, an increase of $1.102 billion, or 17.0%. During the first nine months of 2013, average interest-bearing deposits increased $1.154 billion, or 19.5%, while the combination of federal funds purchased, securities sold under repurchase agreements and other borrowings decreased by $52.4 million, or 9.4%. The overall yield on interest-bearing liabilities declined 15 basis points when the first nine months of 2013 is compared with the same time period in 2012, primarily due to a reduction in the costs of certificates of deposit and interest checking accounts. As a result of these factors, total interest expense for the first nine months of 2013 decreased $4.5 million, or 18.7%, when compared with the same time period in 2012.

Yield/Rate Analysis Table
($ in thousands)

	Three Months Ended September 30,
	2013								2012

	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest-earning assets:
Federal funds sold and securities purchased under reverse repurchase agreements	$	8,978		$	8		0.35	%	$	6,583		$	6		0.36	%
Securities - taxable		3,338,774			18,654		2.22	%		2,437,625			15,909		2.60	%
Securities - nontaxable		183,079			1,960		4.25	%		187,398			2,089		4.43	%
Loans (including LHFS)		5,784,170			68,417		4.69	%		5,886,447			72,554		4.90	%
Acquired loans		928,444			19,183		8.20	%		153,821			5,229		13.52	%
Other earning assets		38,226			372		3.86	%		31,758			339		4.25	%
Total interest-earning assets		10,281,671			108,594		4.19	%		8,703,632			96,126		4.39	%
Cash and due from banks		272,320								236,566
Other assets		1,284,813								958,030
Allowance for loan losses, net		(79,696	)							(86,865	)
Total Assets	$	11,759,108							$	9,811,363

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	7,212,391			4,970		0.27	%	$	5,815,203			5,725		0.39	%
Federal funds purchased and securities sold under repurchase agreements		364,446			106		0.12	%		374,885			135		0.14	%
Other borrowings		179,690			1,389		3.07	%		193,487			1,358		2.79	%
Total interest-bearing liabilities		7,756,527			6,465		0.33	%		6,383,575			7,218		0.45	%
Noninterest-bearing demand deposits		2,479,082								2,039,729
Other liabilities		190,143								114,454
Shareholders' equity		1,333,356								1,273,605
Total Liabilities and Shareholders' Equity	$	11,759,108							$	9,811,363

Net Interest Margin					102,129		3.94	%					88,908		4.06	%

Less tax equivalent adjustment					3,700								3,629

Net Interest Margin per Consolidated Statements of Income				$	98,429							$	85,279

Yield/Rate Analysis Table
($ in thousands)

	Nine Months Ended September 30,
	2013								2012

	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest-earning assets:
Federal funds sold and securities purchased under reverse repurchase agreements	$	7,477		$	17		0.30	%	$	7,151		$	17		0.32	%
Securities - taxable		3,182,404			53,740		2.26	%		2,390,199			51,645		2.89	%
Securities - nontaxable		183,659			5,952		4.33	%		185,517			6,277		4.52	%
Loans (including LHFS)		5,753,759			203,579		4.73	%		5,946,031			221,284		4.97	%
Acquired loans		835,172			52,952		8.48	%		139,028			13,263		12.74	%
Other earning assets		35,893			1,099		4.09	%		31,838			1,005		4.22	%
Total interest-earning assets		9,998,364			317,339		4.24	%		8,699,764			293,491		4.51	%
Cash and due from banks		275,711								246,958
Other assets		1,260,227								941,468
Allowance for loan losses, net		(83,547	)							(90,371	)
Total Assets	$	11,450,755							$	9,797,819

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	7,057,428			14,950		0.28	%	$	5,903,452			19,543		0.44	%
Federal funds purchased and securities sold under repurchase agreements		315,113			275		0.12	%		364,332			448		0.16	%
Other borrowings		190,850			4,392		3.08	%		193,986			4,131		2.84	%
Total interest-bearing liabilities		7,563,391			19,617		0.35	%		6,461,770			24,122		0.50	%
Noninterest-bearing demand deposits		2,377,583								1,969,445
Other liabilities		175,344								113,920
Shareholders' equity		1,334,437								1,252,684
Total Liabilities and Shareholders' Equity	$	11,450,755							$	9,797,819

Net Interest Margin					297,722		3.98	%					269,369		4.14	%

Less tax equivalent adjustment					11,090								10,698

Net Interest Margin per Consolidated Statements of Income				$	286,632							$	258,671

Provision for Loan Losses, LHFI

The provision for loan losses, LHFI is determined by Management as the amount necessary to adjust the allowance for loan losses, LHFI to a level, which, in Management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses, LHFI reflects loan quality trends, including the levels of and trends related to nonaccrual LHFI, past due LHFI, potential problem LHFI, criticized LHFI, net charge-offs or recoveries and growth in the LHFI portfolio among other factors. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses, LHFI related to newly identified criticized LHFI, as well as the actions taken related to other LHFI including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. As shown in the table below, the provision for loan losses, LHFI for the first nine months of 2013 totaled a negative $11.4 million, or -0.27% of average loans, compared with a positive provision of $7.3 million, or 0.16% of average loans, for the same time period in 2012. Reduced loan provisioning during the first nine months of 2013 was a result of updated quantitative and qualitative reserve factors.

Provision for Loan Losses, LHFI
($ in thousands)	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Alabama	$	550		$	-	$	1,458		$	-
Florida		(2,642	)		7		(9,742	)		(24	)
Mississippi (1)		(1,051	)		466		(3,491	)		5,759
Tennessee (2)		(150	)		687		(863	)		1,497
Texas		(331	)		2,198		1,200			69
Total provision for loan losses, LHFI	$	(3,624	)	$	3,358	$	(11,438	)	$	7,301

(1) - Mississippi includes Central and Southern Mississippi Regions

(2) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions

Trustmark continues to devote significant resources to managing credit risks resulting from the slowdown in commercial developments of residential real estate. Management believes that the construction and land development portfolio is appropriately risk rated and adequately reserved based on current conditions.

See the section captioned “LHFI and Allowance for Loan Losses, LHFI” elsewhere in this discussion for further analysis of the provision for loan losses, LHFI, which includes the table of nonperforming assets.

Provision for Loan Losses, Acquired Loans

The provision for loan losses, acquired loans is recognized subsequent to acquisition to the extent it is probable that Trustmark will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition, considering both the timing and amount of those expected cash flows. Provisions may be required when actual losses of unpaid principal incurred exceed previous loss expectations to date, or future cash flows previously expected to be collectible are no longer probable of collection. The provision for loan losses, acquired loans is reflected as a valuation allowance netted against the carrying value of the acquired loans balance accounted for under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The provision for loan losses, acquired loans totaled $3.3 million and $1.9 million for the three and nine months ended September 30, 2013, respectively, compared with a provision of $2.1 million and $3.6 million for the same time periods in 2012. The provision for loan losses, acquired loans for loans acquired from BancTrust totaled $2.3 million and $2.5 million for the three and nine months ended September 30, 2013, respectively. The decrease in the provision for loan losses, acquired loans during the first nine months of 2013 was a result of changes in expectations based on the periodic re-estimations performed during the period.

Noninterest Income

Trustmark’s noninterest income continues to play an important role in improving net income and total shareholder value. Noninterest income represented 32.4% and 32.0% of total revenue, before securities gains, net for the three and nine months ended September 30, 2013, and 34.5% and 33.7% of total revenue, before securities gains, net for the three and nine months ended September 30, 2012, respectively. Total noninterest income before securities gains, net for the three months ended September 30, 2013 totaled $47.1 million, an increase of $2.3 million, or 5.1%, when compared to the same period in 2012. Total noninterest income before securities gains, net for the nine months ended September 30, 2013 totaled $134.8 million, an increase of $3.4 million, or 2.6%, when compared to the same period in 2012. The comparative components of noninterest income for the periods ended September 30, 2013 and 2012 are shown in the accompanying table:

Noninterest Income
($ in thousands)
	Three Months Ended September 30,											Nine Months Ended September 30,
	2013		2012			$ Change			% Change			2013			2012		$ Change			% Change
Service charges on deposit accounts	$	13,852	$	13,135		$	717			5.5	%	$	38,462		$	37,960	$	502			1.3	%
Mortgage banking, net		8,440		11,150			(2,710	)		-24.3	%		28,318			29,629		(1,311	)		-4.4	%
Bank card and other fees		8,929		6,924			2,005			29.0	%		26,381			22,467		3,914			17.4	%
Insurance commissions		8,227		7,533			694			9.2	%		23,483			21,318		2,165			10.2	%
Wealth management		7,520		5,612			1,908			34.0	%		21,335			16,875		4,460			26.4	%
Other, net		165		512			(347	)		67.8	%		(3,171	)		3,120		(6,291	)		n/	m
Total Noninterest Income before securities gains, net		47,133		44,866			2,267			5.1	%		134,808			131,369		3,439			2.6	%
Security gains (losses), net		-		(1	)		1			-100.0	%		378			1,041		(663	)		-63.7	%
Total Noninterest Income	$	47,133	$	44,865		$	2,268			5.1	%	$	135,186		$	132,410	$	2,776			2.1	%

n/m - percentage changes greater than +/- 100% are not considered meaningful

Service Charges on Deposit Accounts

Service charges on deposit accounts during the first nine months of 2013 totaled $38.5 million, an increase of $502 thousand when compared to the same time period in 2012. BancTrust contributed approximately $3.2 million of service charges on deposit accounts for the first nine months of 2013. Service charges on deposit accounts, excluding BancTrust, during the first nine months of 2013 totaled $35.3 million, a decrease of $2.7 million from the same time period in 2012. This decrease was primarily due to a decrease in non-sufficient funds/overdraft fees, excluding BancTrust, of approximately $2.2 million. This decrease was a result of the modification to the processing sequence component of Trustmark’s overdraft programs, which became effective on October 1, 2012. Management estimates this modification could reduce service charges on deposit accounts included in noninterest income by approximately $3.0 million on an annual basis.

Mortgage Banking, Net

Net revenue from mortgage banking totaled $8.4 million for the three months ended September 30, 2013 a decrease of $2.7 million, or 24.3%, when compared to the same time period in 2012. The decrease in net revenue from mortgage banking during the third quarter of 2013 was primarily due to net valuation decreases in the fair value of loans held for sale, interest rate lock commitments and forward sale contracts and a decrease in gain on sales of loans, net, which was partially offset by the net positive hedge ineffectiveness. Net revenue from mortgage banking was $28.3 million during the first nine months of 2013 compared with $29.6 million for the same time period in 2012, as shown in the accompanying table. The $1.3 million decrease in net revenue from mortgage banking for the first nine months of 2013 was primarily due to net valuation decreases in the fair value of loans held for sale, interest rate lock commitments and forward sale contracts, which was partially offset by an increase in gain on sales of loans, net as well as the net positive hedge ineffectiveness. Loans serviced for others totaled $5.435 billion at September 30, 2013, compared with $4.974 billion at September 30, 2012, due to increased mortgage refinancing activity during the first half of 2013.

The following table illustrates the components of mortgage banking revenue included in noninterest income in the accompanying income statements:

Mortgage Banking Income

($ in thousands)
	Three Months Ended September 30,												Nine Months Ended September 30,
	2013			2012			$ Change			% Change			2013			2012			$ Change			% Change
Mortgage servicing income, net	$	4,552		$	3,984		$	568			14.3	%	$	13,204		$	11,761		$	1,443			12.3	%
Change in fair value-MSR from runoff		(2,407	)		(2,751	)		344			12.5	%		(7,623	)		(7,177	)		(446	)		-6.2	%
Gain on sales of loans, net		6,465			9,114			(2,649	)		-29.1	%		24,227			21,884			2,343			10.7	%
Other, net		(1,485	)		2,608			(4,093	)		n/	m		(4,186	)		5,812			(9,998	)		n/	m
Mortgage banking income before hedge ineffectiveness		7,125			12,955			(5,830	)		-45.0	%		25,622			32,280			(6,658	)		-20.6	%
Change in fair value-MSR from market changes		287			(3,282	)		3,569			n/	m		7,881			(8,960	)		16,841			n/	m
Change in fair value of derivatives		1,028			1,477			(449	)		-30.4	%		(5,185	)		6,309			(11,494	)		n/	m
Net positive (negative) hedge ineffectiveness		1,315			(1,805	)		3,120			n/	m		2,696			(2,651	)		5,347			n/	m
Mortgage banking, net	$	8,440		$	11,150		$	(2,710	)		-24.3	%	$	28,318		$	29,629		$	(1,311	)		-4.4	%

n/m - percentage changes greater than +/- 100% are not considered meaningful

Representing a significant component of mortgage banking income is gain on sales of loans, net, which equaled $24.2 million during the first nine months of 2013 compared with $21.9 million for the same time period in 2012. The increase in the gain on sales of loans, net during the first nine months of 2013 resulted from higher profit margins from secondary marketing activities. Loan sales totaled $1.132 billion during the first nine months of 2013, a decrease of $176.5 million when compared with the same time period in 2012.

During the first quarter of 2013, Trustmark exercised its option to repurchase delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are fully guaranteed by FHA/VA. As a result of this repurchase and sale, the loans are no longer carried as LHFS. The transaction resulted in a gain of $534 thousand, which is included in gain on sales of loans, net for the first nine months of 2013. For additional information, please see “Loans Held for Sale (LHFS)” included elsewhere in this report.

As part of Trustmark’s risk management strategy, exchange-traded derivative instruments are utilized to offset changes in the fair value of mortgage servicing rights (MSR) attributable to changes in interest rates. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $1.3 million and a net negative ineffectiveness of $1.8 million for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013, the impact was a net positive ineffectiveness of $2.7 million compared to a net negative ineffectiveness of $2.7 million for the nine months ended September 30, 2012. The net positive ineffectiveness primarily resulted from the hedge income produced by a positively-sloped yield curve and net option premium.

Other mortgage banking income, net decreased by approximately $4.1 million and $10.0 million when comparing the three and nine months ended September 30, 2013 with the same period in 2012 and resulted primarily from a net valuation decrease in the fair value of loans held for sale, interest rate lock commitments and forward sale contracts.

Bank Card and Other Fees

Bank card and other fees totaled $26.4 million during the first nine months of 2013 compared with $22.5 million for the same time period in 2012. BancTrust contributed approximately $1.3 million of bank card and other fees for the first nine months of 2013. Bank card and other fees consist primarily of fees earned on bank card products as well as fees on various bank products and services and safe deposit box fees. Excluding BancTrust, bank card and other fees increased $2.6 million in the first nine months of 2013. The increase was primarily the result of growth in interchange revenue and fees earned on other bank products and services.

The Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) to authorize the FRB to issue regulations regarding any interchange fee that an issuer may receive or charge for an electronic debit card transaction. On June 29, 2011, the FRB issued a final rule (Regulation II - Debit Card Interchange Fees and Routing) establishing standards for debit card interchange fees. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees was effective as of October 1, 2011. On July 31, 2013, however, the United States District Court for the District of Columbia held that, in determining the debit card interchange fee standard in the final rule, the FRB improperly considered costs it was prohibited by the EFTA from considering. The court, accordingly, remanded to the FRB with instructions to vacate the final rule, but stayed the order to vacate to provide the FRB an opportunity to replace the invalid portions of the final rule. On September 19, 2013, the United States Circuit Court of Appeals for the District of Columbia ordered an expedited appeal of the District Courts ruling overturning the FRB’s debit card interchange fee standard. Also on September 19, 2013, the United States District Court for the District of Columbia stayed the order to vacate allowing the FRB’s debit card interchange fee standard to remain in place while the United States Circuit Court of Appeals hears the case. Management is closely monitoring developments, but cannot predict what the final outcome will be. Any revision to the debit card interchange fee standard to comply with the court’s interpretation of the EFTA may impose a lower maximum permissible interchange fee on Trustmark, which would affect the accuracy of Management’s prediction of the impact of the interchange fee rule on Trustmark’s results of operations.

In addition, the FRB also approved an interim rule that allows for an upward adjustment of no more than one cent to an issuer's debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim rule. The fraud-prevention adjustment was effective as of October 1, 2011, concurrent with the debit card interchange fee limits.

In accordance with the statute, issuers that, together with their affiliates, have assets of less than $10.0 billion on the annual measurement date (December 31) are exempt from the debit card interchange fee standards. At December 31, 2012, the annual measurement date, Trustmark had assets of less than $10.0 billion; therefore, no impact of the FRB final rule to noninterest income is expected during 2013. However, following the closing of the merger with BancTrust on February 15, 2013, Trustmark had assets greater than $10.0 billion and expects to have assets greater than $10.0 billion at the December 31, 2013 annual measurement date. Trustmark therefore will be required to comply with the debit card interchange fee standards by July 1, 2014. Management estimates that the effect of the FRB final rule as issued on June 29, 2011 could reduce noninterest income by approximately $7.0 million to $10.0 million on an annual basis given Trustmark’s current debit card volumes (includes the impact of BancTrust). Management is continuing to evaluate Trustmark’s product structure and services in light of the anticipated impact of the FRB final rule.

Insurance Commissions

Insurance commissions were $23.5 million during the first nine months of 2013 compared with $21.3 million for the same time period in 2012. The increase in insurance commissions experienced during the first nine months of 2013 was primarily due to new business commission volume and increasing premium rates on commercial property and casualty policies and group health coverage. Downward rate pressures on insurable risks have begun to subside, with most lines experiencing price increases as renewals occur. General business activity has improved slightly, resulting in a small increase in the demand for coverage on inventories, property, equipment, general liability and workers’ compensation.

Wealth Management

Wealth management income totaled $21.3 million for the first nine months of 2013, an increase of $4.5 million when compared with the same time period in 2012. BancTrust wealth management operations contributed approximately $2.6 million of the increase for the first nine months of 2013. Wealth management consists of income related to investment management, trust and brokerage services. The growth in wealth management income, excluding BancTrust, was primarily attributable to brokerage services. During the second quarter of 2013, the Custody Services Department assumed a custody role over a large public entity account which significantly increased the assets under administration. At September 30, 2013 and 2012, Trustmark held assets under management and administration of $10.447 billion and $6.932 billion, respectively, and brokerage assets of $1.288 billion and $1.266 billion, respectively.

Other Income, Net

The following table illustrates the components of other income, net included in noninterest income for the periods presented:

Other Income, Net
($ in thousands)
	Three Months Ended September 30,												Nine Months Ended September 30,
	2013			2012			$ Change			% Change			2013			2012			$ Change			% Change
Partnership amortization for tax credit purposes	$	(2,388	)	$	(2,302	)	$	(86	)		-3.7	%	$	(6,726	)	$	(5,215	)	$	(1,511	)		-29.0	%
Bargain purchase gain on acquisition		-			-			-			-			-			3,635			(3,635	)		-100.0	%
Increase (Decrease) in FDIC indemnification asset		211			(609	)		820			n/	m		(3,471	)		(2,979	)		(492	)		-16.5	%
Other miscellaneous income		2,342			3,423			(1,081	)		-31.6	%		7,026			7,679			(653	)		-8.5	%
Total other, net	$	165		$	512		$	(347	)		-67.8	%	$	(3,171	)	$	3,120		$	(6,291	)		n/	m

n/m - percentage changes greater than +/- 100% are not considered meaningful

Other income, net for the first nine months of 2013 was a negative $3.2 million compared with a positive $3.1 million for the same time period in 2012. The decrease of $6.3 million during the first nine months of 2013 is primarily the result of the $1.5 million increase in partnership amortization for tax credit purposes as well as the nonrecurring bargain purchase gain of $3.6 million resulting from Trustmark’s acquisition of Bay Bank & Trust Company (Bay Bank) during the first quarter of 2012.

Security Gains, Net

From time to time, Trustmark manages the risk and return profile of the securities portfolio through sales of available for sale securities prior to their maturity. During the first nine months of 2013, Trustmark sold approximately $67.2 million in available for sale securities, generating a net gain of $378 thousand. Similarly, during the first nine months of 2012, Trustmark sold approximately $33.8 million in available for sale securities, generating a net gain of $1.0 million.

Noninterest Expense

Trustmark’s noninterest expense for the three and nine months ended September 30, 2013 increased $18.1 million, or 21.6%, and $53.7 million, or 20.9%, when compared with the same time period in 2012, respectively. The increase in noninterest expense during the three months ended September 30, 2013 was primarily attributable to BancTrust operating expenses of $12.2 million as well as an increase in salaries and employee benefits expense. The increase in noninterest expense during the first nine months of 2013 was primarily attributable to BancTrust non-routine merger expenses of $9.4 million and BancTrust operating expenses of $30.3 million. Excluding BancTrust, noninterest expense for the three and nine months ended September 30, 2013 increased $5.9 million, or 7.0%, and $14.0 million, or 5.5%, when compared with the same time period in 2012, respectively. Management considers disciplined expense management a key area of focus in the support of improving shareholder value. The comparative components of noninterest expense for the periods ended September 30, 2013 and 2012 are shown in the accompanying table:

Noninterest Expense
($ in thousands)
	Three Months Ended September 30,									Nine Months Ended September 30,
	2013		2012		$ Change		% Change			2013		2012		$ Change		% Change
Salaries and employee benefits	$	56,043	$	47,404	$	8,639		18.2	%	$	165,040	$	140,795	$	24,245		17.2	%
Services and fees		13,580		11,682		1,898		16.2	%		39,428		34,179		5,249		15.4	%
Net occupancy-premises		6,644		5,352		1,292		24.1	%		19,302		15,244		4,058		26.6	%
Equipment expense		6,271		5,095		1,176		23.1	%		18,138		15,190		2,948		19.4	%
ORE/Foreclosure expense:
Writedowns		1,748		668		1,080		n/	m		6,785		4,758		2,027		42.6	%
Carrying costs		1,331		1,034		297		28.7	%		5,245		3,234		2,011		62.2	%
Total ORE/Foreclosure expense		3,079		1,702		1,377		80.9	%		12,030		7,992		4,038		50.5	%
FDIC assessment expense		2,376		1,826		550		30.1	%		6,773		5,427		1,346		24.8	%
Other expense		13,531		10,399		3,132		30.1	%		50,153		38,366		11,787		30.7	%
Total noninterest expense	$	101,524	$	83,460	$	18,064		21.6	%	$	310,864	$	257,193	$	53,671		20.9	%

n/m - percentage changes greater than +/- 100% are not considered meaningful

Salaries and Employee Benefits

Salaries and employee benefits, the largest category of noninterest expense, for the three and nine months ended September 30, 2013 increased $8.6 million, or 18.2%, and $24.2 million, or 17.2%, respectively, when compared with the same time period in 2012. Salaries and employee benefits expense for BancTrust was $5.4 million and $16.0 million for the three and nine months ended September 30, 2013, respectively, which included non-routine merger expenses of $1.4 million for change in control and severance expense. Excluding BancTrust, salaries and employee benefits for the three and nine months ended September 30, 2013 increased $3.2 million and $8.2 million, respectively, when compared to the same time period in 2012. This increase primarily reflects modest general merit increases, higher commissions expense resulting from improved performance in Trustmark’s Insurance and Wealth Management Divisions, and increases in incentives for mortgage loan originators.

ORE/Foreclosure Expense

ORE/Foreclosure expense totaled $3.1 million and $12.0 million for the three and nine months ended September 30, 2013, an increase of $1.4 million and $4.0 million when compare to the same time period in 2012, respectively. BancTrust contributed $1.1 million and $1.5 million of ORE/Foreclosure expense for the three and nine months ended September 30, 2013. The increase in other real estate write-downs for the three months ended September 30, 2013 was primarily due to write-downs of other real estate property acquired from BancTrust. The increase in ORE/Foreclosure expense for the nine months ended September 30, 2013 was primarily attributable to increases in the carrying cost of other real estate due to the increase in other real estate activity compared to 2012 as well as the write-down of a property in the Tennessee market region during the second quarter of 2013.

FDIC Assessment Expense

During the first nine months of 2013, FDIC insurance expense increased $1.3 million, or 24.8% when compared with the same time period in 2012, primarily resulting from $1.2 million of additional fees for BancTrust, which was partially offset by the FDIC’s revised deposit insurance assessment methodology. As required by the Dodd-Frank Act, the FDIC revised the deposit insurance assessment system to base assessments on the average total consolidated assets of insured depository institutions less the average tangible equity during the assessment period. In addition, the Dodd-Frank Act increased the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% of estimated insurable deposits, or the comparable percentage of the assessment base by September 30, 2020. The FDIC must offset the effect of the increase in the minimum reserve ratio on insured depository institutions with total consolidated assets of less than $10.0 billion. With total assets slightly below $10.0 billion at December 31, 2012, Trustmark benefitted from the change in the assessment methodology during the first nine months of 2013. Trustmark had assets greater than $10.0 billion following the merger with BancTrust, and thus, will lose the benefit of this offset beginning in 2014. Management estimates the change in the assessment methodology will have an immaterial impact on Trustmark’s results of operations.

Other Expense

Other noninterest expense consisted of the following for the periods presented:

Other Expense
($ in thousands)
	Three Months Ended September 30,									Nine Months Ended September 30,
	2013		2012		$ Change		% Change			2013		2012		$ Change			% Change
Loan expense	$	3,390	$	3,150	$	240		7.6	%	$	10,652	$	16,974	$	(6,322	)		-37.2	%
Non-routine transaction expenses on acquisition		-		-		-		-			7,920		1,917		6,003			n/	m
Amortization of intangibles		2,466		1,028		1,438		n/	m		6,380		2,766		3,614			n/	m
Other miscellaneous expense		7,675		6,221		1,454		23.4	%		25,201		16,709		8,492			50.8	%
Total other expense	$	13,531	$	10,399	$	3,132		30.1	%	$	50,153	$	38,366	$	11,787			30.7	%

n/m - percentage changes greater than +/- 100% are not considered meaningful

Other expense for the three and nine months ended September 30, 2013 increased $3.1 million, or 30.1%, and $11.8 million, or 30.7%, respectively, compared to the same time period in 2012. BancTrust contributed $2.7 million and $14.1 million of other expense for the three and nine months ended September 30, 2013, respectively. The growth in other expense for the three months ended September 30, 2013 was primarily due to the increase in the amortization of the core deposit intangible and other miscellaneous expenses as a result of the BancTrust acquisition. The growth in other expenses during the nine months ended September 30, 2013 was primarily due to BancTrust non-routine merger expenses of $7.9 million ($2.2 million of professional fees and $5.7 million of contract termination and other expenses), the increase in the amortization of the core deposit intangible and other miscellaneous expenses as a result of the BancTrust acquisition, and the $4.0 million of non-routine litigation expense related to the settlement regarding Trustmark’s overdraft fees for insufficient funds on debit card purchases and ATM withdrawals. Excluding BancTrust and the non-routine litigation expense, other expense declined $6.3 million for the nine months ended September 30, 2013, which was primarily attributable to a decrease in loan expenses that resulted from lower mortgage loan putback expenses.

During the normal course of business, Trustmark's mortgage banking operations originates and sells certain loans to investors in the secondary market. Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation and/or loans obtained through fraud by borrowers or other third parties. Putback requests may be made until the loan is paid in full. When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Effective January 1, 2013, Trustmark was required by FNMA and FHLMC to provide a response to putback requests within 60 days of the date of receipt. Currently, putback requests primarily relate to 2005 through 2008 vintage mortgage loans and to government sponsored entity-guaranteed mortgage-backed securities.

The total mortgage loan servicing putback expenses, included in loan expense, incurred by Trustmark during the three and nine months ended September 30, 2013 were $147 thousand and $1.0 million, compared to $122 thousand and $7.2 million for the three and nine months ended September 30, 2012, respectively. During the second quarter of 2012, Trustmark updated its quarterly analysis of mortgage loan servicing putback exposure. This analysis, along with recent mortgage industry trends, resulted in Trustmark providing an additional reserve of approximately $4.0 million in the second quarter of 2012. At September 30, 2013 and December 31, 2012, the reserve for mortgage loan servicing putback expenses were $5.0 million and $7.8 million, respectively.

Segment Information

Results of Segment Operations

Trustmark’s operations are managed along three operating segments: General Banking, Wealth Management and Insurance. For financial information by reportable segment, please see Note 18 – Segment Information in the accompanying notes to the consolidated financial statements included elsewhere in this report. The following discusses changes in the financial results of each reportable segment for the nine months ended September 30, 2013 and 2012.

General Banking

The General Banking Division is responsible for all traditional banking products and services including a full range of commercial and consumer banking services such as checking accounts, savings programs, overdraft facilities, commercial, installment and real estate loans, home equity loans and lines of credit, drive-in and night deposit services and safe deposit facilities offered through 214 offices in Alabama, Florida, Mississippi, Tennessee and Texas. The General Banking Division also consists of internal operations that include Human Resources, Executive Administration, Treasury (Funds Management), Public Affairs and Corporate Finance. Included in these operational units are expenses related to mergers, mark-to-market adjustments on loans and deposits, general incentives, stock options, supplemental retirement and amortization of core deposits. Other than Treasury, these business units are support-based in nature and are largely responsible for general overhead expenditures that are not allocated.

Trustmark’s acquisition of BancTrust contributed approximately $42.3 million to net interest income, $2.8 million to provision for loan losses, net, $5.7 million to noninterest income and $39.6 million to noninterest expense of the General Banking Division during the first nine months of 2013, which are also included in the current period balances shown in the following three paragraphs.

Net interest income for the nine months ended September 30, 2013 increased $28.0 million when compared with the same time period in 2012. The growth in net interest income is mostly due to the significant increase in interest and fees on acquired loans due to the BancTrust acquisition as well as modest declines in the cost of interest-bearing deposits, partially offset by downward repricing of loans and securities. The provision for loan losses, net for the nine months ended September 30, 2013 totaled a negative $9.6 million compared to a positive $10.8 million for the same period in 2012, a decrease of $20.5 million. For more information on this change, please see the analysis of the Provision for Loan Losses, LHFI, and Provision for Loan Losses, Acquired Loans, located elsewhere in this report.

Noninterest income for the General Banking Division decreased $2.5 million during the first nine months of 2013 compared to the same time period in 2012. Noninterest income for the General Banking Division represents 24.2% of total revenues for the first nine months of 2013 as opposed to 26.7% for the same time period in 2012, and includes service charges on deposit accounts; bank card and other fees; mortgage banking, net; other, net and securities gains, net. For more information on these noninterest income items, please see the analysis of Noninterest Income located elsewhere in this report.

Noninterest expense for the General Banking Division increased $48.7 million during the first nine months of 2013 when compared with the same time period in 2012. For more information on these noninterest expense items, please see the analysis of Noninterest Expense located elsewhere in this report.

Wealth Management

The Wealth Management Division has been strategically organized to serve Trustmark’s customers as a financial partner providing reliable guidance and sound, practical advice for accumulating, preserving, and transferring wealth. The Investment Services group and the Trust group are the primary service providers in this segment. TIA, a wholly owned subsidiary of TNB that is included in the Wealth Management Division, is a registered investment adviser that provides investment management services to individual and institutional accounts. During the third quarter of 2012, Trustmark completed the reorganization and sale of the Performance Funds by TIA to Federated and certain of Federated’s subsidiaries, pursuant to the terms of the definitive agreement between Federated, TIA and TNB. TIA no longer serves as investment advisor or custodian to the Performance Funds.

During the first nine months of 2013, net income for the Wealth Management Division increased $145 thousand, or 4.7%, when compared to the same time period in 2012. Noninterest income increased $3.1 million when the first nine months of 2013 are compared to the same time period in 2012. BancTrust contributed approximately $2.6 million of noninterest income to the Wealth Management Division for the first nine months of 2013. The increase in noninterest income, excluding BancTrust, was primarily attributable to brokerage services. For more information on the change in wealth management revenue, please see the analysis included in Noninterest Income located elsewhere in this report.

Insurance

Trustmark’s Insurance Division provides a full range of retail insurance products, including commercial risk management products, bonding, group benefits and personal lines coverage through FBBI, a Mississippi corporation and subsidiary of TNB.

During the first nine months of 2013, net income for the Insurance Division increased $84 thousand, or 2.4%, when compared to the same time period in 2012. Noninterest income increased $2.2 million when the first nine months of 2013 are compared to the same time period in 2012. The increase in noninterest income was due to expanded business development efforts as well as the continued firming of insurance rates. For more information on the change in insurance commissions, please see the analysis included in Noninterest Income located elsewhere in this report.

Income Taxes

For the nine months ended September 30, 2013, Trustmark’s combined effective tax rate was 26.1% compared to 27.2% for the same time period in 2012. Trustmark invests in partnerships that provide income tax credits on a Federal and/or State basis (i.e., new market tax credits, low income housing tax credits or historical tax credits). These investments are recorded based on the equity method of accounting, which requires the equity in partnership losses to be recognized when incurred and are recorded as a reduction in other income. The income tax credits related to these partnerships are utilized as specifically allowed by income tax law and are recorded as a reduction in income tax expense. The decrease in Trustmark's effective tax rate is mainly due to increased investment in these partnerships along with the appropriate tax credits and immaterial net increase in permanent items as a percentage of pretax income.

Earning Assets

Earning assets serve as the primary revenue streams for Trustmark and are comprised of securities, loans, federal funds sold, securities purchased under reverse repurchase agreements and other earning assets. Average earning assets totaled $9.998 billion, or 87.3% of total assets, at September 30, 2013, compared with $8.700 billion, or 88.8% of total assets, at September 30, 2012, an increase of $1.299 billion, or 14.9%. Approximately $1.111 billion of the increase in average earning assets was attributable to the BancTrust acquisition.

Securities

The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering duration, composition and/or balance of the portfolio. The weighted-average life of the portfolio increased to 4.6 years at September 30, 2013, compared to 3.7 years at December 31, 2012, primarily due to slower mortgage prepayment estimates.

When compared with December 31, 2012, total investment securities increased by $742.1 million, or 27.5%, during the first nine months of 2013. This increase resulted primarily from purchases of U.S. Government-sponsored agency (GSE) guaranteed securities, offset by maturities and pay-downs, as well as $380.0 million of securities attributable to the BancTrust acquisition. During the first nine months of 2013, Trustmark sold approximately $67.2 million in securities, generating a gain of $378 thousand, compared with $33.8 million sold during the same time period in 2012, which generated a gain of $1.0 million.

Available for sale securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. At September 30, 2013, available for sale securities totaled $3.372 billion, which represented 98.0% of the securities portfolio, compared to $2.658 billion, or 98.4%, at December 31, 2012. At September 30, 2013, unrealized losses, net on available for sale securities totaled $25.7 million compared with unrealized gains, net of $72.8 million at December 31, 2012. The decrease in the value of the available for sale securities portfolio during the first nine months of 2013 was primarily attributable to the rising interest rate environment. At September 30, 2013, available for sale securities consisted of U.S. Treasury securities, obligations of states and political subdivisions, GSE guaranteed mortgage-related securities, direct obligations of government agencies and GSEs and asset-backed securities and structured financial products.

Held to maturity securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At September 30, 2013, held to maturity securities totaled $70.0 million and represented 2.0% of the total securities portfolio, compared with $42.2 million, or 1.6%, at December 31, 2012.

Management continues to focus on asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of approximately 92% of the portfolio in GSE-backed obligations and other Aaa rated securities as determined by Moody’s. None of the securities owned by Trustmark are collateralized by assets that are considered sub-prime. Furthermore, outside of membership in the FHLB of Dallas, FHLB of Atlanta and Federal Reserve Bank, Trustmark does not hold any equity investment in any GSE.

As of September 30, 2013, Trustmark did not hold securities of any one issuer with a carrying value exceeding ten percent of total shareholders’ equity, other than certain GSEs which are exempt from inclusion. Management continues to closely monitor the credit quality as well as the ratings of the debt and mortgage-backed securities issued by the GSEs and held in Trustmark’s securities portfolio in light of issues currently facing these entities.

The following tables present Trustmark’s securities portfolio by amortized cost and estimated fair value and by credit rating at September 30, 2013:

Securities Portfolio by Credit Rating (1)

($ in thousands)

	September 30, 2013
	Amortized Cost					Estimated Fair Value
	Amount		%			Amount		%
Securities Available for Sale
Aaa	$	3,147,626		92.6	%	$	3,114,451		92.4	%
Aa1 to Aa3		128,441		3.8	%		132,567		3.9	%
A1 to A3		6,411		0.2	%		6,583		0.2	%
Baa1 to Baa3		-		0.0	%		-		0.0	%
Not Rated (2)		115,362		3.4	%		118,500		3.5	%
Total securities available for sale	$	3,397,840		100.0	%	$	3,372,101		100.0	%

Securities Held to Maturity
Aaa	$	39,750		56.8	%	$	37,746		53.2	%
Aa1 to Aa3		18,719		26.7	%		21,258		30.0	%
A1 to A3		2,378		3.4	%		2,446		3.4	%
Baa1 to Baa3		331		0.5	%		347		0.5	%
Not Rated (2)		8,802		12.6	%		9,152		12.9	%
Total securities held to maturity	$	69,980		100.0	%	$	70,949		100.0	%

(1) - Credit ratings obtained from Moody's Investors Service.

(2) - Not rated issues primarily consist of Mississippi municipal general obligations.

The table above presenting the credit rating of Trustmark’s securities is formatted to show the securities according to the credit rating category, and not by category of the underlying security. At September 30, 2013, approximately 92.4% of the available for sale securities and 56.8% of held to maturity securities were rated Aaa.

Loans Held for Sale (LHFS)

At September 30, 2013, LHFS totaled $120.0 million, consisting of $87.4 million of residential real estate mortgage loans in the process of being sold to third parties and $32.6 million of GNMA optional repurchase loans. At December 31, 2012, LHFS totaled $258.0 million, consisting of $198.2 million in residential real estate mortgage loans in the process of being sold to third parties and $59.8 million in GNMA optional repurchase loans. Please refer to the nonperforming assets table that follows for information on GNMA loans eligible for repurchase which are past due 90 days or more.

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 LHFS, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings.

During the first quarter of 2013, Trustmark exercised its option to repurchase delinquent loans serviced for GNMA. These loans were subsequently sold to a third party under different repurchase provisions. Trustmark retained the servicing for these loans, which are fully guaranteed by FHA/VA. As a result of this repurchase and sale, the loans are no longer carried as LHFS. The transaction resulted in a gain of $534 thousand, which is included in gain on sales of loans, net for the first nine months of 2013. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA during the second or third quarter of 2013 or the first nine months of 2012.

LHFI and Allowance for Loan Losses, LHFI

LHFI

LHFI at September 30, 2013 totaled $5.697 billion compared to $5.593 billion at December 31, 2012, an increase of $103.9 million. LHFI at September 30, 2013 included $78.5 million of LHFI in the Alabama market region and $1.6 million of LHFI in the Florida market region as a result of the BancTrust acquisition. Growth in LHFI is directly attributable to growth in the commercial and 1-4 family residential construction loan portfolios, which was partially offset by pay-downs in 1-4 family mortgage loans as well as declines in the commercial and industrial loans portfolio. The construction lending portfolio increased $125.5 million, which was the result of growth in commercial construction of $104.5 million and 1-4 family residential construction of $21.0 million in the Alabama, Mississippi, Tennessee, and Texas market regions. The other loans portfolio increase of $54.6 million was primarily due to increased lending to public entities in the Alabama, Mississippi, Tennessee and Texas market regions. The commercial and industrial loan portfolio decrease of $36.7 million was primarily the result of declines in the Mississippi market region, which was partially offset by growth in the Alabama market region. The 1-4 family mortgage loan portfolio decline of $14.5 million was primarily due to pay-downs in the portfolio since December 31, 2012, as many customers took advantage of opportunities to refinance existing mortgages at lower interest rates. In 2012, Trustmark made the decision to sell the vast majority of these lower-rate, longer-term mortgage loans in the secondary market rather than replacing the runoff in this portfolio. Based on the interest rate spread at the time, Management felt it was more profitable to sell these lower-rate, longer-term mortgage loans than to record the loans on the balance sheet and add liquidity and interest rate risk. Due to the rise in interest rates and the tightening of the secondary marketing spreads, Management made the decision in the third quarter of 2013 to resume Trustmark’s traditional practice of retaining select 15-year mortgage loans on the balance sheet. As a result of this decision, pay-downs in the 1-4 family mortgage loan portfolio since December 31, 2012 were partially offset by a $68.1 million increase in the portfolio during the three months ended September 30, 2013. The consumer loan portfolio decrease of $7.0 million primarily represents a decrease in the indirect consumer auto portfolio, partially offset by growth in the Alabama market region. The indirect auto portfolio balance at September 30, 2013 was $5.8 million compared with $25.5 million at December 31, 2012.

The table below shows the carrying value of the LHFI portfolio for each of the periods presented:

LHFI by Type
($ in thousands)
	September 30,		December 31,
	2013		2012
Loans secured by real estate:
Construction, land development and other land loans	$	572,057	$	468,975
Secured by 1- 4 family residential properties		1,482,963		1,497,480
Secured by nonfarm, nonresidential properties		1,408,342		1,410,264
Other		196,328		189,949
Commercial and industrial loans		1,132,863		1,169,513
Consumer loans		164,612		171,660
Other loans		739,476		684,913
LHFI		5,696,641		5,592,754
Less allowance for loan losses, LHFI		68,632		78,738
Net LHFI	$	5,628,009	$	5,514,016

In the following tables, LHFI reported by region (along with related nonperforming assets and net charge-offs) are associated with location of origination except for loans secured by 1-4 family residential properties (representing traditional mortgages), credit cards and indirect consumer auto loans. These loans are included in the Mississippi Region because they are centrally analyzed and approved as part of a specific line of business located at Trustmark’s headquarters in Jackson, Mississippi.

The LHFI composition by region at September 30, 2013 is illustrated in the following table and reflects a diversified mix of loans by region.

LHFI Composition by Region
($ in thousands)

	September 30, 2013
LHFI Composition by Region (1)	Total		Alabama		Florida		Mississippi (Central and Southern Regions)		Tennessee (Memphis, TN and Northern MS Regions)		Texas
Loans secured by real estate:
Construction, land development and other land loans	$	572,057	$	14,305	$	77,506	$	287,825	$	42,259	$	150,162
Secured by 1-4 family residential properties		1,482,963		6,920		50,725		1,266,813		135,703		22,802
Secured by nonfarm, nonresidential properties		1,408,342		15,704		147,717		742,171		149,689		353,061
Other		196,328		4,465		5,337		137,331		22,055		27,140
Commercial and industrial loans		1,132,863		15,325		12,182		759,569		84,947		260,840
Consumer loans		164,612		10,555		2,500		130,618		18,450		2,489
Other loans		739,476		11,181		24,672		594,734		46,538		62,351
LHFI	$	5,696,641	$	78,455	$	320,639	$	3,919,061	$	499,641	$	878,845


Construction, Land Development and Other Land Loans by Region (1)
Lots	$	45,538	$	609	$	29,256	$	12,316	$	688	$	2,669
Development		75,160		-		8,965		40,548		3,804		21,843
Unimproved land		137,448		2,844		37,417		64,306		15,695		17,186
1-4 family construction		98,067		7,718		1,728		62,548		2,440		23,633
Other construction		215,844		3,134		140		108,107		19,632		84,831
Construction, land development and other land loans	$	572,057	$	14,305	$	77,506	$	287,825	$	42,259	$	150,162

Loans Secured by Nonfarm, Nonresidential Properties by Region (1)
Income producing:
Retail	$	145,103	$	562	$	41,302	$	56,350	$	16,434	$	30,455
Office		171,325		3,613		34,992		86,843		7,033		38,844
Nursing homes/assisted living		98,441		-		-		90,088		4,404		3,949
Hotel/motel		63,289		-		375		28,706		24,985		9,223
Industrial		70,469		698		6,346		27,165		144		36,116
Health care		24,981		3,168		-		10,395		105		11,313
Convenience stores		11,154		-		-		7,010		725		3,419
Other		154,278		2,790		18,755		67,998		4,448		60,287
Total income producing loans		739,040		10,831		101,770		374,555		58,278		193,606

Owner-occupied:
Office		106,476		1,454		15,150		62,181		3,649		24,042
Churches		80,975		1,711		3,011		42,520		26,036		7,697
Industrial warehouses		97,960		940		3,164		43,308		7,114		43,434
Health care		102,437		-		13,917		58,051		15,163		15,306
Convenience stores		55,993		-		1,674		30,276		3,721		20,322
Retail		36,272		-		3,668		25,102		2,777		4,725
Restaurants		30,883		-		864		24,920		3,386		1,713
Auto dealerships		12,768		-		290		10,699		1,733		46
Other		145,538		768		4,209		70,559		27,832		42,170
Total owner-occupied loans		669,302		4,873		45,947		367,616		91,411		159,455
Loans secured by nonfarm, nonresidential properties	$	1,408,342	$	15,704	$	147,717	$	742,171	$	149,689	$	353,061

(1) Excludes Acquired Loans.

Trustmark makes loans in the normal course of business to certain directors, their immediate families and companies in which they are principal owners. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility at the time of the transaction.

There is no industry standard definition of “subprime loans.” Trustmark categorizes certain loans as subprime for its purposes using a set of factors, which Management believes are consistent with industry practice. TNB has not originated or purchased subprime mortgages. At September 30, 2013, Trustmark held “alt A” mortgages with an aggregate principal balance of $2.1 million (0.06% of total LHFI secured by real estate at that date). These “alt A” loans have been originated by Trustmark as an accommodation to certain Trustmark customers for whom Trustmark determined that such loans were suitable under the purposes of the Fannie Mae “alt A” program and under Trustmark’s loan origination standards. Trustmark does not have any no-interest loans, other than a small number of loans made to customers that are charitable organizations, the aggregate amount of which is not material to Trustmark’s financial condition or results of operations.

Allowance for Loan Losses, LHFI

The allowance for loan losses, LHFI is established through provisions for estimated loan losses charged against net income. The allowance reflects Management’s best estimate of the probable loan losses related to specifically identified LHFI as well as probable incurred loan losses in the remaining loan portfolio and requires considerable judgment. The allowance is based upon Management’s current judgments and the credit quality of the loan portfolio, including all internal and external factors that impact loan collectibility. Accordingly, the allowance is based upon both past events and current economic conditions.

Trustmark’s allowance has been developed using different factors to estimate losses based upon specific evaluation of identified individual LHFI considered impaired, estimated identified losses on various pools of LHFI and/or groups of risk rated LHFI with common risk characteristics and other external and internal factors of estimated probable losses based on other facts and circumstances.

Trustmark’s allowance for loan loss methodology is based on guidance provided in SAB No. 102 as well as other regulatory guidance. The level of Trustmark’s allowance reflects Management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio growth, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. This evaluation takes into account other qualitative factors including recent acquisitions; national, regional and local economic trends and conditions; changes in industry and credit concentration; changes in levels and trends of delinquencies and nonperforming LHFI; changes in levels and trends of net charge-offs; and changes in interest rates and collateral, financial and underwriting exceptions.

Trustmark’s allowance for loan loss 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

During the fourth quarter of 2012, Trustmark revised the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI. Trustmark converted the historical loss factor from a 20-quarter net charge-off rolling average to a 12-quarter rolling average and developed a separate reserve for junior liens on 1-4 family LHFI. The change in the quantitative methodology allows Trustmark to more readily correlate portfolio risk to the current market environment as the impact of more recent experience is emphasized. This change also allows for a greater sensitivity to current trends such as economic and performance changes, which includes current loss profiles, and creates a more accurate depiction of historical losses. Loans and lines of credit secured by junior liens on 1-4 family residential properties are being reserved for separately in light of continued uncertainty in the economy and the housing market in particular. An additional provision of approximately $1.4 million was recorded during the fourth quarter of 2012 as a result of this revision to the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI.

Residential Mortgage

Direct Consumer

Auto Finance

Junior Lien on 1-4 Family Residential Properties

Credit Cards

Overdrafts

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

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 of a specific loan portfolio within each key market region. This weighted average qualitative factor is then distributed over the nine primary loan pools within each key market region based on the ranking by risk of each.

At September 30, 2013, the allowance for loan losses, LHFI was $68.6 million, a decrease of $10.1 million when compared with December 31, 2012. Total allowance coverage of nonperforming LHFI, excluding impaired LHFI, at September 30, 2013, was 161.96%, compared to 174.46% at December 31, 2012. Allocation of Trustmark’s $68.6 million allowance for loan losses, LHFI represented 1.39% of commercial LHFI and 0.73% of consumer and home mortgage LHFI, resulting in an allowance to total LHFI of 1.20% as of September 30, 2013. This compares with an allowance to total LHFI of 1.41% at December 31, 2012, which was allocated to commercial LHFI at 1.59% and to consumer and mortgage LHFI at 0.97%.

Recoveries exceeded charge-offs for the first nine months of 2013 resulting in a net recovery of $1.3 million, or -0.03% of average LHFI, compared to net charge-offs of $13.3 million, or 0.30% of average LHFI, during the same time period in 2012. Net recoveries for the Florida market region totaled $2.4 million for the first nine months of 2013, which was partially offset by net charge-offs in Trustmark’s other market regions. The increase in recoveries can be primarily attributed to impaired LHFI paid off in excess of the book value, which is net of previous charge-downs. The net charge-offs exceeded the provision for Mississippi and Tennessee for the first nine months of 2013 due to updated quantitative and qualitative reserve factors, coupled with a large portion of charge-offs that had been fully reserved in prior periods. An immaterial amount of net charge-offs for the Alabama market region were recorded in the first nine months of 2013 due primarily to overdrafts on deposit accounts acquired in the BancTrust merger. Management continues to monitor the impact of real estate values on borrowers and is proactively managing these situations.

Net Charge-Offs (Recoveries) (1)
($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Alabama	$	132		$	-		$	210		$	-
Florida		(138	)		(488	)		(2,413	)		5,498
Mississippi (2)		375			4,726			376			6,728
Tennessee (3)		(153	)		438			199			1,197
Texas		353			(35	)		296			(130	)
Total net charge-offs (recoveries)	$	569		$	4,641		$	(1,332	)	$	13,293

(1) - Excludes Acquired Loans

(2) - Mississippi includes Central and Southern Mississippi Regions

(3) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions

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, including 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.

Nonperforming Assets, excluding Acquired Loans and Covered Other Real Estate

Nonperforming assets, excluding acquired loans and covered other real estate, totaled $189.7 million at September 30, 2013, an increase of $29.2 million relative to December 31, 2012. Collectively, total nonperforming assets to total nonacquired loans and noncovered other real estate at September 30, 2013 was 3.20% compared to 2.71% at December 31, 2012. During the first nine months of 2013, nonperforming LHFI decreased $9.0 million, or 10.9%, relative to December 31, 2012 to total $73.4 million, or 1.26% of total LHFI and LHFS.

Nonperforming Assets (1)
($ in thousands)
	September 30, 2013			December 31, 2012
Nonaccrual loans
Alabama	$	81		$	-
Florida		14,619			19,314
Mississippi (2)		43,132			38,960
Tennessee (3)		5,596			8,401
Texas		9,953			15,688
Total nonaccrual loans		73,381			82,363
Other real estate
Alabama		25,308			-
Florida		39,198			18,569
Mississippi (2)		25,439			27,771
Tennessee (3)		14,615			17,589
Texas		11,769			14,260
Total other real estate		116,329			78,189
Total nonperforming assets	$	189,710		$	160,552

Nonperforming assets/total loans (including loans held for sale) and ORE		3.20	%		2.71	%

Loans Past Due 90 days or more and still Accruing
LHFI	$	2,344		$	6,378

LHFS-Guaranteed GNMA serviced loans (4)	$	18,432		$	43,073

(1) - Excludes Acquired Loans and Covered Other Real Estate

(2) - Mississippi includes Central and Southern Mississippi Regions

(3) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions

(4) - No obligation to repurchase

See the previous discussion of LHFS for more information on Trustmark’s serviced GNMA loans eligible for repurchase.

The following table illustrates nonaccrual LHFI by loan type for the periods presented:

Nonaccrual LHFI by Loan Type (1)
($ in thousands)

	September 30, 2013		December 31, 2012
Construction, land development and other land loans	$	14,454	$	27,105
Secured by 1-4 family residential properties		23,715		27,114
Secured by nonfarm, nonresidential properties		21,290		18,289
Other loans secured by real estate		503		3,956
Commercial and industrial		12,196		4,741
Consumer loans		203		360
Other loans		1,020		798
Total Nonaccrual LHFI by Type	$	73,381	$	82,363

(1) - Excludes Acquired Loans

Other real estate, excluding covered other real estate, includes assets that have been acquired through foreclosure and is recorded at the lower of cost or estimated fair value less the estimated cost of disposition. Fair value is based on independent appraisals and other relevant factors. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. At September 30, 2013, total other real estate, excluding covered other real estate, was $116.3 million, an increase of $38.1 million when compared with December 31, 2012. The BancTrust acquisition contributed $44.4 million of the increase in other real estate, excluding covered other real estate. Excluding other real estate resulting from the BancTrust merger, other real estate, excluding covered other real estate, declined $6.2 million when compared with December 31, 2012.

The following table illustrates other real estate, excluding covered other real estate, by type of property for the periods presented:

Other Real Estate by Property Type (1)
($ in thousands)

	September 30, 2013		December 31, 2012
Construction, land development and other land properties	$	66,200	$	46,957
1-4 family residential properties		15,280		8,134
Nonfarm, nonresidential properties		32,249		22,760
Other real estate properties		2,600		338
Total other real estate, excluding covered other real estate	$	116,329	$	78,189

(1) - Excludes Covered Other Real Estate

Other real estate is revalued on an annual basis or more often if market conditions necessitate. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against an other real estate specific reserve or net income in ORE/Foreclosure expense, if a reserve does not exist. Write-downs of other real estate, excluding covered other real estate, increased $1.4 million during the first nine months of 2013 compared to the same time period in 2012. The increase in other real estate write-downs is primarily the result of a write-down on a property within the Tennessee market region during the second quarter of 2013 as well as $712 thousand of write-downs on BancTrust other real estate, which was partially offset by write-downs fully reserved in prior periods.

The following table illustrates write-downs of other real estate, excluding covered other real estate, by region for the periods presented:

Writedowns of Other Real Estate by Region (1)
($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Alabama	$	627		$	-		$	689		$	-
Florida		343			(791	)		674			1,677
Mississippi (2)		16			1,277			(136	)		2,009
Tennessee (3)		(15	)		204			3,198			592
Texas		750			(22	)		1,720			480
Total writedowns of other real estate	$	1,721		$	668		$	6,145		$	4,758

(1) - Excludes Covered Other Real Estate

(2) - Mississippi includes Central and Southern Mississippi Regions

(3) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions

Acquired Loans

For the periods presented, acquired loans consisted of the following:

Acquired Loans
($ in thousands)

	September 30, 2013				December 31, 2012
	Covered		Noncovered		Covered		Noncovered
Loans secured by real estate:
Construction, land development and other land loans	$	2,585	$	106,655	$	3,924	$	10,056
Secured by 1-4 family residential properties		17,785		168,573		23,990		19,404
Secured by nonfarm, nonresidential properties		12,120		301,686		18,407		45,649
Other		2,817		35,051		3,567		669
Commercial and industrial loans		478		186,649		747		3,035
Consumer loans		151		22,251		177		2,610
Other loans		1,314		17,010		1,229		100
Acquired loans		37,250		837,875		52,041		81,523
Less allowance for loan losses, acquired loans		2,326		3,007		4,190		1,885
Net acquired loans	$	34,924	$	834,868	$	47,851	$	79,638

Loans acquired in the BancTrust acquisition were evaluated for evidence of credit deterioration since origination and collectability of contractually required payments. Trustmark elected to account for all loans acquired in the BancTrust acquisition as acquired impaired loans under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” except for $153.9 million of acquired loans with revolving privileges and acquired commercial leases, which are outside the scope of the guidance. While not all loans acquired from BancTrust 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. During the second quarter of 2013, Trustmark recorded a fair value adjustment based on the estimated fair value of certain acquired loans which resulted in a net decrease in acquired noncovered loans of $524 thousand. During the third quarter of 2013, Trustmark recorded a fair value adjustment based on the estimated fair value of certain acquired loans which resulted in a net decrease in acquired noncovered loans of $6.3 million. The purchase price allocation was deemed preliminary as of September 30, 2013 and is subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period.

On March 16, 2012, Trustmark 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. Trustmark 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 finalized in the second quarter of 2012.

Trustmark accounts for acquired impaired loans under FASB ASC Topic 310-30. An acquired loan is considered impaired when there is evidence of credit deterioration since the origination and it is probable at the date of acquisition that Trustmark would be unable to collect all contractually required payments. Revolving credit agreements such as home equity lines and commercial leases are excluded from acquired impaired loan accounting requirements. Trustmark acquired $153.9 million of revolving credit agreements and commercial leases, at fair value, in the BancTrust acquisition and $5.9 million of revolving credit agreements, at fair value, in the Bay Bank acquisition, 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, Trustmark has accounted for such acquired loans in accordance with accounting requirements for acquired nonimpaired loans.

The following table illustrates changes in the net carrying value of the acquired loans for the periods presented:

Acquired Loans Carrying Value
($ in thousands)

	Covered						Noncovered
	Acquired			Acquired			Acquired			Acquired
	Impaired			Not ASC 310-30 (1)			Impaired			Not ASC 310-30 (1)
Carrying value, net at January 1, 2012	$	72,131		$	4,171		$	4,350		$	13
Loans acquired (2)		-			-			91,987			5,927
Accretion to interest income		8,031			367			4,138			161
Payments received, net		(27,496	)		(2,107	)		(24,330	)		868
Other		(3,085	)		29			(1,318	)		(273	)
Less allowance for loan losses, acquired loans		(4,190	)		-			(1,885	)		-
Carrying value, net at December 31, 2012		45,391			2,460			72,942			6,696
Loans acquired (3)		-			-			790,335			153,900
Accretion to interest income		3,934			157			24,993			2,143
Payments received, net		(16,136	)		(743	)		(174,776	)		(22,804	)
Other		(1,866	)		(137	)		(17,243	)		(196	)
Less allowance for loan losses, acquired loans		1,864			-			(1,122	)		-
Carrying value, net at September 30, 2013	$	33,187		$	1,737		$	695,129		$	139,739

(1) Acquired nonimpaired loans consist of revolving credit agreements and commercial leases that are not in scope for FASB ASC Topic 310-30.

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

(3) Adjusted fair value of loans acquired from BancTrust on February 15, 2013.

Covered Other Real Estate

All other real estate acquired in a FDIC-assisted acquisition, such as the Heritage Banking Group (Heritage) acquisition, that is subject to a FDIC loss-share agreement is referred to as covered other real estate and reported separately in Trustmark’s consolidated balance sheets. Covered other real estate is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered other real estate at the collateral’s net realizable value.

Covered other real estate by type of property consisted of the following for the periods presented:

Covered Other Real Estate by Property Type
($ in thousands)

	September 30,		December 31,
	2013		2012
Construction, land development and other land properties	$	733	$	1,284
1-4 family residential properties		1,777		1,306
Nonfarm, nonresidential properties		2,525		3,151
Other real estate properties		57		-
Total covered other real estate	$	5,092	$	5,741

For the nine months ended September 30, 2013 and 2012, changes and gains, net on covered other real estate were as follows:

Change in Covered Other Real Estate
($ in thousands)

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	5,741		$	6,331
Transfers from covered loans		1,380			1,424
FASB ASC 310-30 adjustment for the residual recorded investment		(541	)		(112	)
Net transfers from covered loans		839			1,312
Disposals		(848	)		(1,673	)
Writedowns		(640	)		(248	)
Balance at end of period	$	5,092		$	5,722

Gain, net on the sale of covered other real estate included in ORE/Foreclosure expense	$	47		$	440

FDIC Indemnification Asset

TNB has elected to account for amounts receivable under the loss-share agreement as an indemnification asset in accordance with FASB ASC Topic 805. The FDIC indemnification asset was initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreement. The difference between the present value and the undiscounted cash flows TNB expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. Pursuant to the provisions of the loss-share agreement, the FDIC indemnification asset is presented net of any true-up provision due to the FDIC at the termination of the loss-share agreement.

In October 2012, FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force),” to address the diversity in practice regarding how to account for the subsequent measurement of an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. ASU 2012-06 requires that the indemnification asset be measured subsequently on the same basis as the indemnified assets and, if the effect of the change in the cash flows expected to be collected on an indemnification asset must be amortized, the amortization period is limited to the lesser of the term of the indemnification agreement or the remaining life of the indemnified asset.

The following table illustrates changes in the FDIC indemnification asset for the periods presented:

FDIC Indemnification Asset
($ in thousands)

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	21,774		$	28,348
Accretion		(141	)		187
Transfers to FDIC claims receivable		(1,097	)		(1,271	)
Change in expected cash flows (1)		(3,251	)		(2,925	)
Change in FDIC true-up provision		(200	)		(360	)
Balance at end of period	$	17,085		$	23,979

(1)	The decrease during the first nine months of 2013 was due to loan pay-offs, improved cash flow projections, and lower loss expectations for covered loans.

Pursuant to the provisions of the Heritage loss-share agreement, TNB may be required to make a true-up payment to the FDIC at the termination of the loss-share agreement should actual losses be less than certain thresholds established in the agreement. TNB calculates the projected true-up payable to the FDIC quarterly and records a FDIC true-up provision for the present value of the projected true-up payable to the FDIC at the termination of the loss-share agreement. TNB’s FDIC true-up provision totaled $1.3 million and $1.1 million at September 30, 2013 and December 31, 2012, respectively.

Other Earning Assets

Federal funds sold and securities purchased under reverse repurchase agreements were $7.9 million at September 30, 2013, an increase of $821 thousand when compared with December 31, 2012. Trustmark utilizes these products as offerings for its correspondent banking customers as well as a short-term investment alternative whenever it has excess liquidity.

Average other earning assets totaled $35.9 million at September 30, 2013, compared with $31.8 million at September 30, 2012, an increase of $4.1 million, or 12.7%, of which $1.1 million was attributable to the BancTrust acquisition.

Deposits and Other Interest-Bearing Liabilities

Trustmark’s deposits are its primary source of funding and consist of core deposits from the communities Trustmark serves. Deposits include interest-bearing and noninterest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. Total deposits were $9.787 billion at September 30, 2013, compared with $7.897 billion at December 31, 2012, an increase of $1.891 billion, or 23.9%. Deposit growth was driven by increases in both noninterest-bearing and interest-bearing deposits of $389.4 million and $1.501 billion, respectively. The BancTrust acquisition contributed $329.2 million of noninterest-bearing deposits and $1.338 billion of interest-bearing deposits at September 30, 2013. As previously discussed, Trustmark assumed deposit accounts and purchased two physical branches from SOUTHBank in Oxford, Mississippi on July 26, 2013. The Oxford branches contributed $2.5 million of noninterest-bearing deposits and $42.5 million of interest-bearing deposits at September 30, 2013. Excluding BancTrust and the Oxford branches, deposit growth was driven by an increase in both noninterest-bearing and interest-bearing deposits of $57.7 million and $121.0 million, respectively. The increase in noninterest-bearing deposits was primarily the result of the elimination of the Eurodollar deposit offering, as customers moved their former Eurodollar deposits into noninterest-bearing accounts at or near quarter-end while considering alternative investments. Trustmark anticipates that a portion of these funds will return to interest-bearing accounts. The increase in interest-bearing deposits resulted primarily from increases in public deposits and growth in money market accounts, which was partially offset by the elimination of Eurodollar deposits. For additional information on Eurodollar deposits, please see “Liquidity” located elsewhere in this report. Additionally, time deposit account balances, excluding BancTrust and the Oxford branches, declined by $130.5 million as Trustmark continued its efforts to reduce high-cost deposit balances. A portion of the decline in time deposit balances was offset by the growth in money market balances due to customer preference for liquidity in today’s interest rate environment.

Trustmark uses short-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings consist primarily of federal funds purchased, securities sold under repurchase agreements and GNMA optional repurchase loans. Short-term borrowings totaled $403.2 million at September 30, 2013, an increase of $27.4 million when compared with $375.7 million at December 31, 2012. Of these amounts, $342.8 million and $285.1 million, respectively, were customer related transactions, such as commercial sweep repo balances. The increase in short-term borrowings resulted primarily from increases in federal funds purchased and securities sold under repurchase agreements of $14.5 million and $39.1 million, respectively, as deposit growth was slightly exceeded by growth in total assets. In addition, Trustmark exercised its option to repurchase delinquent loans serviced for GNMA during the first quarter of 2013. These loans were subsequently sold to a third party under different repurchase provisions. As a result of this repurchase and sale, the loans are no longer carried as LHFS with the offsetting amount in short-term borrowings. For additional information, please see “Loans Held for Sale (LHFS)” included elsewhere in this report.

Legal Environment

Trustmark’s wholly-owned subsidiary, TNB, has been named as a defendant in two lawsuits related to the collapse of the Stanford Financial Group. The first is a purported class action complaint that was filed on August 23, 2009 in the District Court of Harris County, Texas, by Peggy Roif Rotstain, Guthrie Abbott, Catherine Burnell, Steven Queyrouze, Jaime Alexis Arroyo Bornstein and Juan C. Olano, on behalf of themselves and all others similarly situated, naming TNB and four other financial institutions unaffiliated with Trustmark as defendants. The complaint seeks to recover (i) alleged fraudulent transfers from each of the defendants in the amount of fees and other monies received by each defendant from entities controlled by R. Allen Stanford (collectively, the “Stanford Financial Group”) and (ii) damages allegedly attributable to alleged conspiracies by one or more of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud on the asserted grounds that defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme. Plaintiffs have demanded a jury trial. Plaintiffs did not quantify damages. In November 2009, the lawsuit was removed to federal court by certain defendants and then transferred by the United States Panel on Multidistrict Litigation to federal court in the Northern District of Texas (Dallas) where multiple Stanford related matters are being consolidated for pre-trial proceedings. In May 2010, all defendants (including TNB) filed motions to dismiss the lawsuit, and the motions to dismiss have been fully briefed by all parties. The court has not yet ruled on the defendants’ motions to dismiss. In August 2010, the court authorized and approved the formation of an Official Stanford Investors Committee (“OSIC”) to represent the interests of Stanford investors and, under certain circumstances, to file legal actions for the benefit of Stanford investors. In December 2011, the OSIC filed a motion to intervene in this action. In September 2012, the district court referred the case to a magistrate judge for hearing and determination of certain pretrial issues. In December 2012, the court granted the OSIC’s motion to intervene, and the OSIC filed an Intervenor Complaint against one of the other defendant financial institutions. In February 2013, the OSIC filed an additional Intervenor Complaint that asserts claims against TNB and the remaining defendant financial institutions. The OSIC seeks to recover: (i) alleged fraudulent transfers in the amount of the fees each of the defendants allegedly received from Stanford Financial Group, the profits each of the defendants allegedly made from Stanford Financial Group deposits, and other monies each of the defendants allegedly received from Stanford Financial Group; (ii) damages attributable to alleged conspiracies by each of the defendants with the Stanford Financial Group to commit fraud and/or aid and abet fraud and conversion on the asserted grounds that the defendants knew or should have known the Stanford Financial Group was conducting an illegal and fraudulent scheme; and (iii) punitive damages. The OSIC did not quantify damages. In July 2013, all defendants (including TNB) filed motions to dismiss the OSIC’s claims. The court has not yet ruled on the defendants’ motions to dismiss the OSIC’s claims.

Off-Balance Sheet Arrangements

Trustmark makes commitments to extend credit and issues standby and commercial letters of credit in the normal course of business in order to fulfill the financing needs of its customers. These loan commitments and letters of credit are off-balance sheet arrangements.

Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions. Commitments generally have fixed expiration dates or other termination clauses. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Trustmark applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed creditworthiness of the borrower. At September 30, 2013 and 2012, Trustmark had unused commitments to extend credit of $2.064 billion and $1.843 billion, respectively. At September 30, 2013, unused commitments to extend credit due to the BancTrust acquisition were $141.3 million.

Standby and commercial letters of credit are conditional commitments issued by Trustmark to ensure the performance of a customer to a third party. When issuing letters of credit, Trustmark uses essentially the same policies regarding credit risk and collateral that are followed in the lending process. At September 30, 2013 and 2012, Trustmark’s maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $148.5 million and $152.9 million, respectively. These amounts consist primarily of commitments with maturities of less than three years. Trustmark holds collateral to support certain letters of credit when deemed necessary.

Contractual Obligations

Payments due from Trustmark under specified long-term and certain other binding contractual obligations were scheduled in our Annual Report on Form 10-K for the year ended December 31, 2012. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. Other than the contractual obligations associated with the BancTrust acquisition, there have been no material changes since year-end.

Capital Resources

At September 30, 2013, Trustmark’s total shareholders’ equity was $1.330 billion, an increase of $42.1 million from its level at December 31, 2012. During the first nine months of 2013, shareholders’ equity increased primarily as a result of net income of $89.0 million and the $53.5 million of common stock issued in the BancTrust acquisition, and was partially offset by common stock dividends of $46.7 million and accumulated other comprehensive loss, net of tax, of $52.2 million. The decrease in accumulated other comprehensive loss for the nine months ended September 30, 2013 was primarily due to $60.8 million of net unrealized losses on available for sale securities, net of tax. Trustmark utilizes a capital model in order to provide Management with a monthly tool for analyzing changes in its strategic capital ratios. This allows Management to hold sufficient capital to provide for growth opportunities and protect the balance sheet against sudden adverse market conditions, while maintaining an attractive return on equity to shareholders.

Regulatory Capital

Trustmark and TNB are subject to minimum capital requirements, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of both Trustmark and TNB. TNB aims to exceed the well-capitalized guidelines for regulatory capital. As of September 30, 2013, Trustmark and TNB have exceeded all of the minimum capital standards for the parent company and its primary banking subsidiary as established by regulatory requirements. In addition, TNB has met applicable regulatory guidelines to be considered well-capitalized at September 30, 2013. To be categorized in this manner, TNB must maintain minimum total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as set forth in the accompanying table. There are no significant conditions or events that have occurred since September 30, 2013, which Management believes have affected Trustmark’s and TNB’s present classification.

During 2006, Trustmark enhanced its capital structure with the issuance of trust preferred securities and Subordinated Notes. For regulatory capital purposes, the trust preferred securities currently qualify as Tier 1 capital while the Subordinated Notes qualify as Tier 2 capital. The addition of these capital instruments provided Trustmark a cost effective manner in which to manage shareholders’ equity and enhance financial flexibility. Trustmark will continue to utilize $60.0 million in trust preferred securities issued by Trustmark Trust as Tier 1 capital up to the regulatory limit, as permitted by the grandfather provision in the Dodd-Frank Act and the Basel III Final Rule.

Regulatory Capital Table
($ in thousands)
											Minimum Regulatory
	Actual					Minimum Regulatory					Provision to be
	Regulatory Capital					Capital Required					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount			Ratio
At September 30, 2013:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,097,058		14.02	%	$	626,067		8.00	%		n/	a		n/	a
Trustmark National Bank		1,055,807		13.63	%		619,558		8.00	%	$	774,448			10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	993,155		12.69	%	$	313,034		4.00	%		n/	a		n/	a
Trustmark National Bank		954,563		12.33	%		309,779		4.00	%	$	464,669			6.00	%

Tier 1 Capital (to Average Assets)
Trustmark Corporation	$	993,155		8.78	%	$	339,316		3.00	%		n/	a		n/	a
Trustmark National Bank		954,563		8.53	%		335,621		3.00	%	$	559,369			5.00	%

At December 31, 2012:
Total Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,157,838		17.22	%	$	537,861		8.00	%		n/	a		n/	a
Trustmark National Bank		1,119,438		16.85	%		531,577		8.00	%	$	664,472			10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Trustmark Corporation	$	1,043,865		15.53	%	$	268,930		4.00	%		n/	a		n/	a
Trustmark National Bank		1,007,775		15.17	%		265,789		4.00	%	$	398,683			6.00	%

Tier 1 Capital (to Average Assets)
Trustmark Corporation	$	1,043,865		10.97	%	$	285,556		3.00	%		n/	a		n/	a
Trustmark National Bank		1,007,775		10.72	%		281,984		3.00	%	$	469,974			5.00	%

Dividends on Common Stock

Dividends per common share for the nine months ended September 30, 2013 and 2012 were $0.69. Trustmark’s indicated dividend for 2013 is $0.92 per common share, which is the same as dividends per common share in 2012.

Liquidity

Liquidity is the ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Consistent cash flows from operations and adequate capital provide internally generated liquidity. Furthermore, Management maintains funding capacity from a variety of external sources to meet daily funding needs, such as those required to meet deposit withdrawals, loan disbursements and security settlements. Liquidity strategy also includes the use of wholesale funding sources to provide for the seasonal fluctuations of deposit and loan demand and the cyclical fluctuations of the economy that impact the availability of funds. Management keeps excess funding capacity available to meet potential demands associated with adverse circumstances.

The asset side of the balance sheet provides liquidity primarily through maturities and cash flows from loans and securities, as well as the ability to sell certain loans and securities while the liability portion of the balance sheet provides liquidity primarily through noninterest and interest-bearing deposits. Trustmark utilizes federal funds purchased, FHLB advances, securities sold under repurchase agreements as well as the Federal Reserve Discount Window (Discount Window) and, on a limited basis as discussed below, brokered deposits to provide additional liquidity. Access to these additional sources represents Trustmark’s incremental borrowing capacity.

Deposit accounts represent Trustmark’s largest funding source. Average deposits totaled to $9.435 billion for the first nine months of 2013 and represented approximately 82.4% of average liabilities and shareholders’ equity compared to average deposits of $7.873 billion, which represented 80.4% of average liabilities and shareholders’ equity for the same time period in 2012.

Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At September 30, 2013, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $37.6 million compared to $42.9 million at December 31, 2012. At September 30, 2013, Trustmark had $50.0 million in term fixed-rate brokered CDs outstanding compared to $49.9 million at December 31, 2012. The addition of brokered CDs during 2011 was part of an interest rate risk management strategy and represented the lowest cost alternative for term fixed-rate funding.

At September 30, 2013, Trustmark had $26.8 million of reciprocal Certificate of Deposit Account Registry Service (CDARS) time deposits, which were acquired in the BancTrust merger. CDARS is a product offered by a third-party through which a customer’s deposits in excess of FDIC insurance limits is distributed to multiple participating banks, with Trustmark remaining as the relationship bank. When a customer’s excess deposits are distributed through the CDARS system, Trustmark receives reciprocal excess deposits from other participating banks. Trustmark has no customer relationship or contact with the customers whose excess deposits it receives. The funds receive 100% FDIC insurance as none of the deposits received exceed the FDIC insurance limit at the individual customer level.

At September 30, 2013, Trustmark had $120.0 million in upstream federal funds purchased, compared to $68.0 million at December 31, 2012. Trustmark maintains adequate federal funds lines in excess of the amount utilized to provide sufficient short-term liquidity. Trustmark also maintains a relationship with the FHLB of Dallas, which provided no advances at September 30, 2013 or December 31, 2012. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances with the FHLB of Dallas by $1.760 billion at September 30, 2013. In addition, at September 30, 2013, Trustmark had $10.7 million in FHLB advances outstanding with the FHLB of Atlanta, which were acquired in the BancTrust merger. Trustmark has a non-member status and no additional borrowing capacity with the FHLB of Atlanta.

Additionally, Trustmark has the ability to enter into wholesale funding repurchase agreements as a source of borrowing by utilizing its unencumbered investment securities as collateral. At September 30, 2013, Trustmark had approximately $464.8 million available in repurchase agreement capacity compared to $467.0 million at December 31, 2012.

Another borrowing source is the Discount Window. At September 30, 2013, Trustmark had approximately $895.2 million available in collateral capacity at the Discount Window from pledges of loans and securities, compared with $798.2 million at December 31, 2012. The increase in the Discount Window capacity was primarily due to the increase in the commercial loan portfolio resulting from the BancTrust merger.

TNB has outstanding $50.0 million in aggregate principal amount of Subordinated Notes (the Notes) due December 15, 2016. At September 30, 2013, the carrying amount of the Notes was $49.9 million. The Notes were sold pursuant to the terms of regulations issued by the OCC and in reliance upon an exemption provided by the Securities Act of 1933. The Notes are unsecured and subordinate and junior in right of payment to TNB’s obligations to its depositors, its obligations under bankers’ acceptances and letters of credit, its obligations to any Federal Reserve Bank or the FDIC and its obligations to its other creditors, and to any rights acquired by the FDIC as a result of loans made by the FDIC to TNB.

During 2006, Trustmark completed a private placement of $60.0 million of trust preferred securities through Trustmark Trust. The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark’s option. The proceeds from the sale of the trust preferred securities were used by Trustmark Trust to purchase $61.9 million in aggregate principal amount of Trustmark’s junior subordinated debentures.

BancTrust Trust I and BancTrust Trust II were trust affiliates acquired as a result of Trustmark’s acquisition of BancTrust. BancTrust Trust I was formed in 2003 to facilitate the issuance of $18.0 million trust preferred securities. BancTrust Trust II was formed in 2006 to facilitate the issuance of $15.0 million in trust preferred securities. Trustmark redeemed the $15.0 million of trust preferred securities issued by BancTrust Trust II on April 29, 2013. Trustmark redeemed the $18.0 million of trust preferred securities issued by BancTrust Trust I on June 14, 2013.

Another funding mechanism set into place in 2006 was Trustmark’s grant of a Class B banking license from the Cayman Islands Monetary Authority. Subsequently, Trustmark established a branch in the Cayman Islands through an agent bank. The branch was established as a mechanism to attract dollar denominated foreign deposits (i.e., Eurodollars) as an additional source of funding. At September 30, 2013, Trustmark had $831 thousand in Eurodollar deposits outstanding, compared to $75.0 million at December 31, 2012. On October 1, 2013, the remaining $831 thousand in Eurodollar deposits were closed. The former Eurodollar deposits were transferred to other deposit options including repurchase agreements and money market deposit accounts. The decision to discontinue offering the Eurodollar deposit option was made in anticipation of Trustmark surrendering its Class B banking license prior to the end of 2013, due primarily to economic and regulatory changes since the branch was established.

The Board of Directors currently has the authority to issue up to 20.0 million preferred shares with no par value. The ability to issue preferred shares in the future will provide Trustmark with additional financial and management flexibility for general corporate and acquisition purposes. At September 30, 2013, Trustmark has no shares of preferred stock issued.

Liquidity position and strategy are reviewed regularly by the Asset/Liability Committee and continuously adjusted in relationship to Trustmark’s overall strategy. Management believes that Trustmark has sufficient liquidity and capital resources to meet presently known cash flow requirements arising from ongoing business transactions.

Asset/Liability Management

Overview

Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the income generated by Trustmark’s financial products or services, which results from changes in various market interest rates. Market rate changes may take the form of absolute shifts, variances in the relationships between different rates and changes in the shape or slope of the interest rate term structure.

Management continually develops and applies cost-effective strategies to manage these risks. The Asset/Liability Committee sets the day-to-day operating guidelines, approves strategies affecting net interest income and coordinates activities within policy limits established by the Board of Directors. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist Management in maintaining stability in the net interest margin under varying interest rate environments.

Derivatives

Trustmark uses financial derivatives for management of interest rate risk. The Asset/Liability Committee, in its oversight role for the management of interest rate risk, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives employed by Trustmark are interest rate lock commitments, forward contracts (both futures contracts and options on futures contracts), interest rate swaps, interest rate caps and interest rate floors. In addition, Trustmark has entered into derivative contracts as counterparty to one or more customers in connection with loans extended to those customers. These transactions are designed to hedge interest rate, currency or other exposures of the customers and are not entered into by Trustmark for speculative purposes. Increased federal regulation of the derivative markets may increase the cost to Trustmark to administer derivative programs.

As part of Trustmark’s risk management strategy in the mortgage banking area, various derivative instruments such as interest rate lock commitments and forward sales contracts are utilized. Rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified period of time. Trustmark’s obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. The forward sales contracts are derivative instruments designated as fair value hedges under FASB ASC Topic 815, “Derivatives and Hedging.” The gross, notional amount of Trustmark’s off-balance sheet obligations under these derivative instruments totaled $261.0 million at September 30, 2013, with a negative valuation adjustment of $831 thousand, compared to $497.2 million, with a positive valuation adjustment of $1.5 million as of December 31, 2012. The decline during the first nine months of 2013 was due to declining mortgage loan refinancing activity, following an extended low mortgage rate environment.

On April 4, 2013, Trustmark entered into an interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to Trustmark Trust throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, Trustmark will pay a fixed interest rate of 1.66% and receive a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly settlements.

Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in fair value of MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. These exchange-traded derivative instruments are accounted for at fair value with changes in the fair value recorded in noninterest income in mortgage banking, net and are offset by the changes in the fair value of MSR. The MSR fair value represents the present value of future cash flows, which among other things includes decay and the effect of changes in interest rates. Ineffectiveness of hedging the MSR fair value is measured by comparing the change in value of hedge instruments to the change in the fair value of the MSR asset attributable to changes in interest rates and other market driven changes in valuation inputs and assumptions. The impact of this strategy resulted in a net positive ineffectiveness of $1.3 million and a net negative ineffectiveness of $1.8 million for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013, the impact was a net positive ineffectiveness of $2.7 million compared to a net negative ineffectiveness of $2.7 million for the nine months ended September 30, 2012.

Trustmark offers certain derivatives products directly to qualified commercial borrowers seeking to manage their interest rate risk. Trustmark economically hedges interest rate swap transactions executed with commercial borrowers by entering into offsetting interest rate swap transactions with third parties. Derivative transactions executed as part of this program are not designated as qualifying hedging relationships and are, therefore, carried at fair value with the change in fair value recorded in noninterest income in bank card and other fees. Because the derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value substantially offset. As of September 30, 2013, Trustmark had interest rate swaps with an aggregate notional amount of $365.7 million related to this program, compared to $321.3 million as of December 31, 2012.

Market/Interest Rate Risk Management

The primary purpose in managing interest rate risk is to invest capital effectively and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

Financial simulation models are the primary tools used by Trustmark’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, Management is provided with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Trustmark’s balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of Trustmark’s balance sheet, resulting from both strategic plans and customer behavior. In addition, the model incorporates Management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.

Based on the results of the simulation models using static balances, it is estimated that net interest income may increase 0.8% and 0.1% in a one-year, shocked, up 200 basis point rate shift scenario, compared to a base case, flat rate scenario at September 30, 2013 and 2012, respectively. In the event of a 100 basis point decrease in interest rates using static balances at September 30, 2013, it is estimated that net interest income may decrease by 2.6% compared to a 5.2% decrease at September 30, 2012. At September 30, 2013 and 2012, the impact of a 200 basis point drop scenario was not calculated due to the historically low interest rate environment.

The table below summarizes the effect various rate shift scenarios would have on net interest income at September 30, 2013 and 2012:

Interest Rate Exposure Analysis	Estimated Annual % Change
	in Net Interest Income
	2013			2012
Change in Interest Rates
+200 basis points		0.8	%		0.1	%
+100 basis points		0.2	%		0.0	%
-100 basis points		-2.6	%		-5.2	%

As shown in the table above, the interest rate shocks for the first nine months of 2013 illustrate little to no change in net interest income in rising rate scenarios while displaying modest exposure to a falling rate environment. The exposure to falling rates is primarily due to a repricing downward of various earning assets with minimal contribution from liabilities given the already low cost of deposits in the base scenario. Management cannot provide any assurance about the actual effect of changes in interest rates on net interest income. The estimates provided do not include the effects of possible strategic changes in the balances of various assets and liabilities throughout 2013 or additional actions Trustmark could undertake in response to changes in interest rates. Management will continue to prudently manage the balance sheet in an effort to control interest rate risk and maintain profitability over the long term.

Another component of interest rate risk management is measuring the economic value-at-risk for a given change in market interest rates. The economic value-at-risk may indicate risks associated with longer-term balance sheet items that may not affect net interest income at risk over shorter time periods. Trustmark also uses computer-modeling techniques to determine the present value of all asset and liability cash flows (both on- and off-balance sheet), adjusted for prepayment expectations, using a market discount rate. The economic value of equity (EVE), also known as net portfolio value, is defined as the difference between the present value of asset cash flows and the present value of liability cash flows. The resulting change in EVE in different market rate environments, from the base case scenario, is the amount of EVE at risk from those rate environments. As of September 30, 2013, the EVE at risk for an instantaneous up 200 basis point shift in rates produced an increase in net portfolio value of 4.6%, compared to a net portfolio value increase of 5.3% at September 30, 2012. An instantaneous 100 basis point decrease in interest rates produced a decline in net portfolio value of 3.3% at September 30, 2013, compared to a decline of 6.9% at September 30, 2012. At September 30, 2013 and 2012, the impact of a 200 basis point drop scenario was not calculated due to the historically low interest rate environment. The following table summarizes the effect that various rate shifts would have on net portfolio value at September 30, 2013 and 2012:

Economic Value - at - Risk	Estimated % Change
	in Net Portfolio Value
	2013			2012
Change in Interest Rates
+200 basis points		4.6	%		5.3	%
+100 basis points		2.7	%		4.2	%
-100 basis points		-3.3	%		-6.9	%

Trustmark determines the fair value of MSR using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

By way of example, an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of MSR requires significant management judgment.

At September 30, 2013, the MSR fair value was approximately $62.9 million. The impact on the MSR fair value of a 10% adverse change in prepayment speed or a 100 basis point increase in discount rate at September 30, 2013, would be a decline in fair value of approximately $2.3 million and $2.0 million, respectively. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is included in the discussion of Market/Interest Rate Risk Management found in Management’s Discussion and Analysis.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by Trustmark’s Management, with the participation of its Chief Executive Officer and Treasurer and Principal Financial Officer (Principal Financial Officer), of the effectiveness of Trustmark’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that Trustmark’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There has been no change in Trustmark’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Trustmark’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Information required by this item is set forth in under the heading “Legal Environment” in Part I. Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – of this report, which is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

There has been no material change in the risk factors previously disclosed in Trustmark’s Annual Report on Form 10-K for its fiscal year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Trustmark did not engage in any unregistered sales of equity securities during the third quarter of 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6.

EXHIBITS

The exhibits listed in the Exhibit Index are filed herewith or are incorporated herein by reference.

EXHIBIT INDEX

31-a	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31-b	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32-a	Certification by Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32-b	Certification by Principal Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

All other exhibits are omitted, as they are inapplicable or not required by the related instructions.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TRUSTMARK CORPORATION

BY:	/s/ Gerard R. Host	BY:	/s/ Louis E. Greer
	Gerard R. Host		Louis E. Greer
	President and Chief Executive Officer		Treasurer, Principal Financial Officer and Principal Accounting Officer

DATE:	November 7, 2013	DATE:	November 7, 2013