TRUSTMARK CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 consolidated financial statements and the supplemental financial data included elsewhere in this report.

Executive Overview 2012 was a year of significant achievement for Trustmark, particularly in light of prevailing economic conditions. Trustmark continues to build upon and expand customer relationships, which is reflected in its strong financial performance. Trustmark's net income available to common shareholders increased 9.8% during 2012 despite a 2.3% decline in net interest income. Historically low interest rates contributed to record levels of profitability by Trustmark's mortgage banking business. Trustmark also experienced increased profitability in its insurance and wealth management businesses. Please see the section captioned "Financial Highlights" below for a more complete overview of Trustmark's 2012 financial performance. Trustmark's credit quality indicators continued to experience significant improvements. During 2012, Trustmark completed the acquisition of Bay Bank & Trust Company (Bay Bank) in Florida and announced plans to merge with Alabama-based BancTrust, which was effective as of the close of business on February 15, 2013. Trustmark also made investments in technology designed to increase revenue and improve efficiency.

While the economy has shown moderate signs of improvement, lingering economic concerns resulting from the cumulative weight of soft U.S. labor markets, the Eurozone crisis, slowing growth in emerging markets and uncertainty regarding the effects of the resolution of the U.S. "fiscal cliff," have tempered any optimism for economic improvement during 2013. Doubts surrounding the sustainability of these signs of improvement are expected to persist for some time, especially as the magnitude of economic distress facing the local markets in which Trustmark operates places continued pressure on asset growth, asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets. Please see The Current Economic Environment included in Item 1 - Business, located elsewhere in this report, for an overview of the economic environment and the impact to Trustmark.

29-------------------------------------------------------------------------------- Table of Contents 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. In response to this analysis, Management has continued to reduce certain loan categories, including land development, other land loans and indirect consumer auto loans.

Trustmark National Bank (TNB) did not make significant changes to its loan underwriting standards during 2012. 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. These critical accounting policies are described in detail below.

For additional information regarding the accounting policies discussed below, please see the notes to Trustmark's Consolidated Financial Statements set forth in Item 8 - Financial Statements and Supplementary Data.

Allowance for Loan Losses, Loans Held for Investment (LHFI) The allowance for loan losses, LHFI is established through provisions for estimated loan losses charged against net income. The allowance account is maintained at a level which is believed to be adequate by Management based on estimated probable losses within the LHFI portfolio. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions, and judgments as to the facts and circumstances of particular situations. Some of the factors considered, such as amounts and timing of future cash flows expected to be received, may be susceptible to significant change.

Trustmark's allowance methodology is based on guidance provided in the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No.

102, "Selected Loan Loss Allowance Methodology and Documentation Issues," as well as other regulatory guidance. The allowance for loan losses, LHFI consists of three components: (i) a historical valuation allowance determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 450, "Contingencies," based on historical loan loss experience for LHFI with similar characteristics and trends, (ii) a specific valuation allowance determined in accordance with FASB ASC Topic 310, "Receivables," based on probable losses on specific LHFI, and (iii) a qualitative risk valuation allowance determined in accordance with FASB ASC Topic 450 based on general economic conditions and other specific internal and external qualitative risk factors. Each of these components calls for estimates, assumptions, and judgments as described below.

Historical Valuation Allowance The historical valuation allowance is derived by application of a historical net loss percentage to the outstanding balances of LHFI contained in designated pools and risk rating categories. Pools are established by grouping credits that display similar characteristics and trends such as commercial LHFI for working capital purposes and non-working capital purposes, commercial real estate LHFI (which are further segregated into construction, land, lots and development, owner-occupied and non-owner occupied categories), 1-4 family mortgage LHFI and other consumer LHFI. LHFI are further segregated based on Trustmark's internal credit risk rating process that evaluates, among other things: the obligor's ability and willingness to pay, the value of underlying collateral, the ability of guarantors to meet their payment obligations, management experience and effectiveness and the economic environment and industry in which the borrower operates. The historical net loss percentages, calculated on a quarterly basis, are proportionally distributed to each grade within loan groups based upon degree of risk.

30-------------------------------------------------------------------------------- Table of Contents Loans-Specific Valuation Allowance Once a LHFI is classified, it is subject to periodic review to determine whether or not the loan is impaired. If determined to be impaired, the loan is evaluated using one of the valuation criteria contained in FASB ASC Topic 310. A formal impairment analysis is performed on all commercial non-accrual LHFI with an outstanding balance of $500,000 or more, and based upon this analysis LHFI are written down to net realizable value.

Qualitative Risk Valuation Allowance The qualitative risk valuation allowance is based on general economic conditions and other internal and external factors affecting Trustmark as a whole as well as specific LHFI. Factors considered include the following within Trustmark's four geographic market regions: the experience, ability, and effectiveness of Trustmark's lending management and staff; adherence to Trustmark's loans policies, procedures, and internal controls; the volume of other exceptions relating to collateral and financial documentation; concentrations; recent performance trends; regional economic trends; the impact of recent acquisitions; and the impact of significant natural disasters. These factors are evaluated on a quarterly basis with the results incorporated into a "qualitative factor allocation matrix" which is used to establish an appropriate allowance.

A significant shift in one or more factors identified above could result in a material change to Trustmark's allowance for loan losses, LHFI. For example, if there were changes in one or more of these estimates, assumptions or judgments as they relate to a portfolio of commercial LHFI, Trustmark could find that it needs to increase the level of future provisions for possible loan losses in respect of that portfolio. Additionally, credit deterioration of specific borrowers due to changes in these factors could cause the risk rating of those borrowers' commercial loans on Trustmark's internal loan grading system to shift to a more severe risk rating. As a result, Trustmark could find that it needs to increase the level of future provisions for possible loan losses in respect of these LHFI. Given the interdependent and highly factual nature of many of these estimates, assumptions and judgments, it is not possible to provide meaningful quantitative estimates of the impact of any such potential shifts.

Acquired Loans Acquired loans are accounted for under the acquisition method of accounting. The acquired loans are recorded at their estimated fair values as of the acquisition date. 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.

TNB accounts for acquired impaired loans under FASB ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that TNB will be unable to collect all contractually required payments. Acquired loans accounted for under FASB ASC Topic 310-30 are referred to as "acquired impaired loans." Revolving credit agreements such as home equity lines are excluded from acquired impaired loan accounting requirements.

For acquired impaired loans, TNB (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 usually result in a provision for loan losses and the establishment of an allowance for loan losses. The carrying value of acquired impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

31-------------------------------------------------------------------------------- Table of Contents As required by FASB ASC Topic 310-30, TNB periodically re-estimates the expected cash flows to be collected over the life of the acquired impaired loans. If, based on current information and events, it is probable that 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 and the establishment of an allowance for loan losses. If, based on current information and events, it is probable that there is a significant increase in the cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, TNB will reduce any remaining allowance for loan losses established on the acquired impaired loans for the increase in the present value of cash flows expected to be collected. The increase in the expected cash flows for the acquired impaired loans over those originally estimated at acquisition increases the carrying value of the acquired 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.

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.

Covered Loans Loans acquired in a FDIC-assisted transaction and covered under loss-share agreements, such as those acquired from Heritage Banking Group (Heritage) in 2011, are referred to as "covered loans" and are reported separately in Trustmark's consolidated financial statements. The covered loans are recorded at their estimated fair value at the time of acquisition exclusive of the expected reimbursement cash flows from the FDIC.

FDIC Indemnification Asset TNB has elected to account for amounts receivable under a loss-share agreement as an indemnification asset in accordance with FASB ASC Topic 805, "Business Combinations." The FDIC indemnification asset is 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. Please refer to Note 2 - Business Combinations in Item 8 - Financial Statements and Supplementary Data for additional information regarding the FDIC true-up provision under 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 the cash flow of the covered loans and covered other real estate over those expected reduce the FDIC indemnification asset, and decreases in the 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.

Mortgage Servicing Rights Trustmark recognizes as an asset the rights to service mortgage loans for others (mortgage servicing rights, or MSR) with respect to loans originated by Trustmark or acquired through its wholesale network. Trustmark carries MSR on its balance sheet at fair value.

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.

32-------------------------------------------------------------------------------- Table of Contents 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 December 31, 2012, the MSR fair value was approximately $46.9 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 December 31, 2012, would be a decline in fair value of approximately $2.4 million and $1.2 million, respectively. Changes of equal magnitude in the opposite direction would produce similar increases in fair value in the respective amounts.

Trustmark manages potential changes in the fair value of MSR through its comprehensive risk management strategy. To reduce the sensitivity of earnings to interest rate fluctuations, Trustmark 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, depending on the amount of MSR hedged. From time to time, Trustmark may choose not to fully hedge the MSR, partly because origination volume tends to act as a natural hedge. For example, as interest rates decline, the fair value of the MSR generally decreases and fees from new originations tend to increase. Conversely, as interest rates increase, the fair value of the MSR generally increases, while fees from new originations tend to decline.

Please refer to Note 8 - Mortgage Banking in Item 8 - Financial Statements and Supplementary Data for additional information on MSR.

Goodwill and Identifiable Intangible Assets Trustmark records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value as required by FASB ASC Topic 805. The carrying amount of goodwill at December 31, 2012 totaled $246.7 million for the General Banking segment and $44.4 million for the Insurance segment, a consolidated total of $291.1 million. Trustmark's goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Trustmark's identifiable intangible assets, which totaled $17.3 million at December 31, 2012, are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount.

The initial recording and subsequent impairment testing of goodwill requires subjective judgments concerning estimates of the fair value of the acquired assets. The goodwill impairment test is performed in two phases. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure, or a second step, compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Trustmark performed an annual impairment test of goodwill for reporting units contained in both the General Banking and Insurance segments as of October 1, 2012, 2011, and 2010, respectively, which indicated that no impairment charge was required. The impairment test for the General Banking reporting unit utilized valuations based on comparable deal values for financial institutions while the test for the Insurance reporting unit utilizes varying valuation scenarios for the multiple of earnings before interest, income taxes, depreciation and amortization (EBITDA) method based on recent acquisition activity. Based on this analysis, Trustmark concluded that no impairment charge was required. Significant changes in future profitability and value of our reporting units could affect Trustmark's impairment evaluation.

The carrying amount of Trustmark's identifiable intangible assets subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition. That assessment shall be based on the carrying amount of the intangible assets subject to amortization at the date it is tested for recoverability. Intangible assets subject to amortization shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

Fair value may be determined using market prices, comparison to similar assets, market multiples and other determinants. Factors that may significantly affect the estimates include, among others, competitive forces, customer behavior and attrition, changes in revenue growth trends and specific industry or market sector conditions. Other key judgments in accounting for intangibles include determining the useful life of the particular asset and classifying assets as either goodwill (which does not require amortization) or identifiable intangible assets (which does require amortization).

33-------------------------------------------------------------------------------- Table of Contents Other Real Estate Other real estate (ORE) 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. Other real estate is revalued on an annual basis or more often if market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged against an ORE specific reserve or net income in ORE/Foreclosure expense, if a reserve does not exist. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced in recent years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate.

Covered Other Real Estate All other real estate acquired in a FDIC-assisted 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 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.

Defined Benefit Plans Trustmark's plan assets, projected benefit liabilities and pension cost are determined utilizing actuarially-determined present value calculations. The valuation of the projected benefit obligation and net periodic pension expense for Trustmark's plans (Capital Accumulation Plan and Supplemental Retirement Plan) requires Management to make estimates regarding the amount and timing of expected cash outflows. Several variables affect these calculations, including (i) size and characteristics of the associate population, (ii) discount rate, (iii) expected long-term rate of return on plan assets and (iv) recognition of actual returns on plan assets. Below is a brief description of these variables and the effect they have on pension cost.

· Population and Characteristics of Associates. Pension cost is directly related to the number of associates covered by the plan and characteristics such as salary, age, years of service and benefit terms. In an effort to control expenses, the Board voted to freeze plan benefits effective May 15, 2009. Associates will not earn additional benefits, except for interest as required by the Internal Revenue Service (IRS) regulations, after the effective date. Associates will retain their previously earned pension benefits. At December 31, 2012, the pension plan census totaled 2,588 associates.

· Discount Rate. The discount rate utilized in determining the present value of the future benefit obligation is currently 3.50% (as compared to 4.00% at December 31, 2011). The discount rate for each plan is determined by matching the expected cash flows of each plan to a yield curve based on long term, high quality fixed income debt instruments available as of the measurement date (December 31, 2012). The discount rate is reset annually on the measurement date to reflect current economic conditions. If Trustmark assumes a 1.00% increase or decrease in the discount rate for Trustmark's defined benefit plans and kept all other assumptions constant, the benefit cost associated with these plans would decrease or increase by approximately $888 thousand and $1.0 million, respectively.

· Expected Long-Term Rate of Return on Plan Assets. Based on historical experience and market projection of the target asset allocation set forth in the investment policy for the Capital Accumulation Plan, the current pre-tax expected rate of return on the plan assets used in 2012 and 2011 was 8.0%. This expected rate of return is dependent upon the asset allocation decisions made with respect to plan assets. Annual differences, if any, between expected and actual return are included in the unrecognized net actuarial gain or loss amount. Trustmark generally amortizes any cumulative unrecognized net actuarial gain or loss in excess of 10% of the greater of the projected benefit obligation or the fair value of the plan assets. If Trustmark assumes a 1.00% increase or decrease in the expected long-term rate of return for the Capital Accumulation Plan, holding all other actuarial assumptions constant, the pension cost would decrease or increase by approximately $740 thousand.

34-------------------------------------------------------------------------------- Table of Contents · Recognition of Actual Asset Returns. Trustmark utilizes the provision of FASB ASC Topic 715, "Compensation - Retirement Benefits," which allow for the use of asset values that smoothes investment gains and losses over a period of up to five years. This could partially mitigate the impact of short-term gains or losses on reported net income.

· Other Actuarial Assumptions. To estimate the projected benefit obligation, actuarial assumptions are required to be made by Management, including mortality rate, retirement rate, disability rate and the rate of compensation increases. These factors do not change significantly over time, so the range of assumptions and their impact on net periodic pension expense is generally limited.

Contingent Liabilities Trustmark estimates contingent liabilities based on Management's evaluation of the probability of outcomes and their ability to estimate the range of exposure. As stated in FASB ASC Topic 450, a liability is contingent if the amount is not presently known but may become known in the future as a result of the occurrence of some uncertain future event. Accounting standards require that a liability be recorded if Management determines that it is probable that a loss has occurred, and the loss can be reasonably estimated. It is implicit in this standard that it must be probable that the loss will be confirmed by some future event. As part of the estimation process, Management is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of contingent liabilities, including legal contingencies and income tax liabilities, involves the use of critical estimates, assumptions and judgments. Management's estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events, such as court decisions or Internal Revenue Service positions, will not differ from Management's assessments. Whenever practicable, Management consults with outside experts (attorneys, consultants, claims administrators, etc.) to assist with the gathering and evaluation of information related to contingent liabilities.

Recent Legislative and Regulatory Developments On June 7, 2012, the Federal Reserve Board, FDIC and the Office of the Comptroller of the Currency (OCC) jointly issued proposed rules to enhance regulatory capital requirements. The proposed rules are 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 Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and international capital regulatory standards by the Basel Committee. The proposed rules would increase and revise the federal bank agencies' current minimum risk-based and leverage capital ratio requirements; introduce new risk-weight calculation methods for the "standardized" denominator; adopt a minimum common equity risk-based capital requirement; revise regulatory capital components and calculations; require regulatory capital buffers above the minimum risk-based capital requirements for certain banking organizations; and more generally restructure the agencies' capital rules. Many of the proposed rules would apply 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 address 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 Federal Reserve Board, FDIC, and OCC indefinitely delayed the effective date of the proposed rules, and they did not indicate when they will issue final rules or when such rules would become effective. If implemented, it is expected that banking organizations subject to the proposed 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 (although Trustmark's and TNB's current capital levels exceed the levels that are expected to be imposed once these proposed rules take effect).

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act represents very broad and complex legislation that enacts sweeping changes to the financial services industry. As the Dodd-Frank Act continues to turn into specific regulatory requirements, there will be further business impacts across a myriad of industries, not just banking. Some of those impacts are readily anticipated such as the change to interchange fees. The Dodd-Frank Act amends the Electronic Fund Transfer Act 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. 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.

35-------------------------------------------------------------------------------- Table of Contents 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, 2011, Trustmark had assets of less than $10.0 billion; therefore, there was no impact of the FRB final rule (Regulation II - Debit Card Interchange Fees and Routing) to Trustmark's noninterest income during 2012. However, following the closing of the merger with BancTrust on February 15, 2013, Trustmark had assets greater than $10.0 billion. Trustmark therefore expects that it will have assets greater than $10.0 billion as of the December 31 measurement date in 2013 and 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 could reduce noninterest income by approximately $6.0 million to $8.0 million on an annual basis given Trustmark's current debit card volumes. For more information on the merger with BancTrust, please see Note 2 - Business Combinations located in Item 8 - Financial Statements and Supplementary Data. Management is continuing to evaluate Trustmark's product structure and services to offset the anticipated impact of the FRB final rule.

However, other impacts of the Dodd-Frank Act are subtle and are not yet capable of precise quantification. Many of these more subtle impacts will likely only emerge after months and perhaps years of further analysis and evaluation. In addition, certain provisions that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Finally, implementation of certain significant provisions of the Dodd-Frank Act will continue to occur over a multi-year period. Because many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, it is difficult to anticipate the potential impact on Trustmark and its customers. It is clear, however, that the implementation of the Dodd-Frank Act will require Management to invest significant time and resources to evaluate the potential impact of this Act. Management will continue to evaluate this impact as more details regarding the implementation of these provisions become available.

Financial Highlights Net income available to common shareholders totaled $117.3 million for the year ended December 31, 2012, compared with $106.8 million for 2011 and $100.6 million for 2010. For 2012, Trustmark's basic earnings per common share were $1.81 compared with $1.67 for 2011 and $1.58 for 2010. Diluted earnings per share were $1.81 for 2012, $1.66 for 2011 and $1.57 for 2010. At December 31, 2012, Trustmark reported gross loans, including loans held for sale and acquired loans, of $5.984 billion, total assets of $9.829 billion, total deposits of $7.897 billion and total shareholders' equity of $1.287 billion. Trustmark's financial performance for 2012 resulted in a return on average tangible common shareholders' equity of 12.55%, a return on common equity of 9.30% and a return on assets of 1.20%. These compared with 2011 ratios of 12.25% for return on average tangible common shareholders' equity, 8.95% for return on common equity and 1.11% for return on assets, while in 2010 the return on average tangible common shareholders' equity was 12.31%, the return on common equity was 8.79% and the return on assets was 1.08%.

Net income available to common shareholders for 2012 increased $10.4 million, or 9.8%, compared to 2011. The increase was primarily the result of a decline in the provision for loan losses, LHFI, of $22.9 million. The increase in net income available to common shareholders was partially offset by a decline in interest income of $20.3 million predominantly due to decreases in interest and fees on loans and interest on securities-taxable, all as a result of the lower interest rate environment in 2012 as compared with 2011. For additional information on the changes in noninterest income and noninterest expense, please see accompanying sections included in Results of Operations.

Trustmark's 2012 provision for loan losses, LHFI, totaled $6.8 million, a decrease of $22.9 million when compared to 2011, while total net charge-offs decreased to $17.5 million during 2012, compared to $33.7 million for 2011 and $59.7 million for 2010. Total nonperforming assets, excluding acquired loans and covered other real estate, were $160.6 million at December 31, 2012, a decrease of $29.0 million compared to December 31, 2011. In addition, the percentage of loans, excluding acquired loans, that are 30 days or more past due and nonaccrual LHFI fell in 2012 to 3.10% compared to 3.23% in 2011 and 3.46% for 2010. These declines in 2012 exhibit the continued improvement in Trustmark's credit quality as significant progress was made in the resolution of credit issues.

On March 16, 2012, Trustmark completed its merger with Bay Bank. Trustmark paid consideration of approximately $22 million in cash and stock for all outstanding shares of Bay Bank common stock. At December 31, 2012, the carrying value of loans and deposits acquired from Bay Bank was $79.5 million and $178.9 million, respectively. Earnings for the year ended December 31, 2012, reflected a non-routine bargain purchase gain of $3.6 million, which was partially offset by non-routine merger expenses of $1.6 million, net of taxes. Collectively, the net impact of these two items increased net income in 2012 by approximately $2.0 million, or approximately $0.03 per share. The bargain purchase gain of $3.6 million was recognized as other noninterest income for the year ended December 31, 2012. Included in noninterest expense are non-routine Bay Bank transaction expenses totaling approximately $2.6 million pre-tax (these included change in control and severance expense of $672 thousand included in salaries and employee benefits and contract termination and other expenses of $1.9 million included in other expense).

36-------------------------------------------------------------------------------- Table of Contents Significant Non-routine Transactions Presented below are adjustments to net income as reported in accordance with GAAP resulting from significant non-routine items occurring during the periods presented. Management believes this information will help readers compare Trustmark's current results to those of prior periods as presented in the accompanying selected financial data table and the audited consolidated financial statements. Readers are cautioned that these adjustments are not permitted under GAAP. Trustmark encourages readers to consider its audited consolidated financial statements and the notes related thereto, included in Item 8 - Financial Statements and Supplementary Data of this report, in their entirety, and not to rely on any single financial measure.

Significant Non-routine Transactions ($ in thousands, except per share data) Years Ended December 31, 2012 2011 2010 Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Net Income available to common shareholders (GAAP) $ 117,283 $ 1.809 $ 106,841 $ 1.663 $ 100,636 $ 1.571 Significant non-routine transactions (net of taxes): Bargain purchase gain on acquisition (2,245 ) (0.035 ) (4,604 ) (0.072 ) - - Non-routine transaction expenses on acquisition 1,599 0.025 - - - - Acquisition termination fee, net of expenses - - - - (811 ) (0.013 ) (646 ) (0.010 ) (4,604 ) (0.072 ) (811 ) (0.013 ) Net Income available to common shareholders adjusted for significant non-routine transactions (Non-GAAP) $ 116,637 $ 1.799 $ 102,237 $ 1.591 $ 99,825 $ 1.558 Bargain Purchase Gain on Acquisition Trustmark recorded a bargain purchase gain of $3.6 million as a result of the Bay Bank acquisition. Trustmark initially recorded 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 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. The bargain purchase gain of $3.6 million was recognized as other noninterest income for the year ended December 31, 2012.

TNB recorded a pretax bargain purchase gain of $7.5 million as a result of the Heritage acquisition during the second quarter of 2011. The bargain purchase gain represents the net of the estimated fair value of the assets acquired and liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer's bid, the FDIC may be required to make a cash payment to the acquirer. The gain was recognized as other noninterest income in Trustmark's consolidated statements of income for the year ended December 31, 2011.

Non-routine Transaction Expenses on Acquisition Included in noninterest expense during 2012 are non-routine Bay Bank transaction expenses totaling approximately $2.6 million (these included change in control and severance expense of $672 thousand included in salaries and benefits and contract termination and other expenses of $1.9 million included in other expense).

Acquisition Termination Fee, Net of Expenses On September 21, 2010, Trustmark and Cadence Financial Corporation (Cadence), a Mississippi corporation with assets of $1.9 billion at June 30, 2010, entered into an Agreement and Plan of Reorganization (Agreement) pursuant to which Cadence agreed to merge with and into Trustmark (the Merger). The Agreement contemplated that Cadence's wholly-owned banking subsidiary, Cadence Bank, N.A., would be merged with and into TNB immediately following the Merger. On October 6, 2010, Trustmark received notice that the board of directors of Cadence had accepted another acquisition proposal and terminated the Agreement with Trustmark dated September 21, 2010. This action triggered a termination fee of $2.0 million from Cadence, which was recognized in other noninterest income and was offset by direct expenses of $687 thousand included in other noninterest expense.

37-------------------------------------------------------------------------------- Table of Contents 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. Also there may be limits in the usefulness of these measures to investors. As a result, Trustmark encourages readers to consider its audited 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.

In addition, Trustmark presents in this report a table which illustrates the impact of significant nonrecurring transactions on net income available to common shareholders as reported under GAAP. For this table, please see Financial Highlights - Significant Non-routine Transactions shown above.

38-------------------------------------------------------------------------------- Table of Contents Reconciliation of Non-GAAP Financial Measures ($ in thousands, except per share data) Years Ended December 31, 2012 2011 2010 TANGIBLE COMMON EQUITY AVERAGE BALANCES Total shareholders' equity $ 1,261,617 $ 1,194,273 $ 1,144,481 Less: Goodwill (291,104 ) (291,104 ) (291,104 ) Identifiable intangible assets (17,348 ) (15,464 ) (18,149 ) Total average tangible common equity $ 953,165 $ 887,705 $ 835,228 PERIOD END BALANCES Total shareholders' equity $ 1,287,369 $ 1,215,037 $ 1,149,484 Less: Goodwill (291,104 ) (291,104 ) (291,104 ) Identifiable intangible assets (17,306 ) (14,076 ) (16,306 ) Total tangible common equity (a) $ 978,959 $ 909,857 $ 842,074 TANGIBLE ASSETS Total assets $ 9,828,667 $ 9,727,007 $ 9,553,902 Less: Goodwill (291,104 ) (291,104 ) (291,104 ) Identifiable intangible assets (17,306 ) (14,076 ) (16,306 ) Total tangible assets (b) $ 9,520,257 $ 9,421,827 $ 9,246,492 Risk-weighted assets (c) $ 6,723,259 $ 6,576,953 $ 6,672,174 NET INCOME ADJUSTED FOR INTANGIBLE AMORTIZATION Net income available to common shareholders $ 117,283 $ 106,841 $ 100,636 Plus: Intangible amortization net of tax 2,339 1,945 2,173 Net income adjusted for intangible amortization $ 119,622 $ 108,786 $ 102,809 Period end common shares outstanding (d) 64,820,414 64,142,498 63,917,591 TANGIBLE COMMON EQUITY MEASUREMENTS Return on average tangible common equity 1 12.55 % 12.25 % 12.31 % Tangible common equity/tangible assets (a)/(b) 10.28 % 9.66 % 9.11 % Tangible common equity/risk-weighted assets (a)/(c) 14.56 % 13.83 % 12.62 % Tangible common book value (a)/(d)*1,000 $ 15.10 $ 14.18 $ 13.17 TIER 1 COMMON RISK-BASED CAPITAL Total shareholders' equity $ 1,287,369 $ 1,215,037 $ 1,149,484 Eliminate qualifying AOCI (3,395 ) (3,121 ) 11,426 Qualifying tier 1 capital 60,000 60,000 60,000 Disallowed goodwill (291,104 ) (291,104 ) (291,104 ) Adj to goodwill allowed for deferred taxes 13,035 11,625 10,215 Other disallowed intangibles (17,306 ) (14,076 ) (16,306 ) Disallowed servicing intangible (4,734 ) (4,327 ) (5,115 ) Total tier 1 capital $ 1,043,865 $ 974,034 $ 918,600 Less: Qualifying tier 1 capital (60,000 ) (60,000 ) (60,000 ) Total tier 1 common capital (e) $ 983,865 $ 914,034 $ 858,600 Tier 1 common risk-based capital ratio (e)/(c) 14.63 % 13.90 % 12.87 % 1 Calculation = net income adjusted for intangible amortization/total average tangible common equity 39 -------------------------------------------------------------------------------- Table of Contents 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 (through TNB) acquired Bay Bank during the first quarter of 2012. This acquisition resulted in additional net interest income of $5.6 million during 2012, and growth in both average interest-earning assets and average interest-bearing liabilities of $91.8 million and $105.2 million, respectively, for the year ended December 31, 2012. During the second quarter of 2011, Trustmark (through TNB) acquired Heritage. This acquisition resulted in additional net interest income of $8.7 million during 2011, and growth in both average interest-earning assets and average interest-bearing liabilities of $59.7 million and $106.6 million, respectively, for the year ended December 31, 2011. Amounts relating to these acquisitions are included in the current and prior year balances shown in the following three paragraphs.

Net interest income-FTE during 2012 decreased $8.1 million, or 2.2%, when compared with 2011. The net interest margin decreased 17 basis points to 4.09% during 2012 when compared with 2011. The decline in the net interest margin during 2012 is primarily a result of a downward repricing of loans and securities in response to the current lower interest rate environment, partially offset by improvements in the accreted yield of acquired covered loans as well as modest declines in the cost of interest-bearing deposits.

Average interest-earning assets for 2012 were $8.699 billion compared with $8.534 billion for 2011, an increase of $164.6 million. The growth in average interest-earning assets was due to an increase in average total securities of $206.4 million, or 8.6%, during 2012. The increase in securities, which resulted primarily from purchases of U.S. Government-sponsored agency guaranteed and highly rated asset-backed securities net of maturities and paydowns, was partially offset by a decrease in average total loans (including loans held for sale and acquired loans) of $36.4 million, or 0.6%, during 2012. The decrease in average total loans is directly attributable to paydowns in 1-4 family mortgage loans as well as the decision in prior years to discontinue indirect consumer auto loan financing. During 2012, interest on securities-taxable decreased $8.9 million, or 11.7%, as the yield on taxable securities decreased 66 basis points when compared with 2011 due to run-off of higher yielding securities replaced at lower yields. During 2012, interest and fees on loans-FTE decreased $11.4 million, or 3.6%, due to lower average loan balances while the yield on loans fell to 5.11% compared to 5.26% during 2011. As a result of these factors, interest income-FTE decreased $20.5 million, or 5.0%, when 2012 is compared with 2011. The impact of these changes is also reflected in the decline in the yield on total earning assets, which fell from 4.76% in 2011 to 4.44% in 2012, a decrease of 32 basis points.

Average interest-bearing liabilities for 2012 totaled $6.418 billion compared with $6.527 billion for 2011, a decrease of $109.2 million, or 1.7%. During 2012, average interest-bearing deposits increased $89.5 million, or 1.6%, while the combination of federal funds purchased, securities sold under repurchase agreements and other borrowings decreased by $198.8 million, or 26.0%. The overall yield on interest-bearing liabilities declined 18 basis points during 2012 when compared with 2011, primarily due to a reduction in the costs of certificates of deposit and higher yielding money market accounts. As a result of these factors, total interest expense for 2012 decreased $12.4 million, or 28.7%, when compared with 2011.

Net interest income-FTE during 2011 decreased $1.9 million, or 0.5%, when compared with 2010. The net interest margin decreased 15 basis points to 4.26% during 2011 when compared with 2010. During 2011, net interest income-FTE included $3.8 million associated with the re-estimation of cash flows required by FASB ASC 310-30 accounting guidelines. This re-estimation increased the yield on loans and earning assets by 6 basis points and 4 basis points, respectively.

Excluding this adjustment, the core net interest margin for year ended December 31, 2011, equaled 4.21%. The decline in the core net interest margin during 2011 is primarily a result of a downward repricing of fixed rate assets, accelerated premium amortization within the investment portfolio driven by a decline in interest rates and changes to Trustmark's asset mix as lower yielding securities supplemented declines in higher yielding loan products. The impact of this was partially offset by declines in deposit costs, mostly within certificates of deposits and higher yielding money market accounts.

40-------------------------------------------------------------------------------- Table of Contents Average interest-earning assets for 2011 were $8.534 billion compared with $8.287 billion for 2010, an increase of $247.2 million or 3.0%. The growth in average earning assets was due to an increase in average total securities of $443.4 million, or 22.7%, during 2011. The increase in securities was partially offset by a decrease in average total loans (including covered loans) of $191.6 million, or 3.0%, during 2011. This decrease reflects Trustmark's on-going efforts to reduce exposure to construction and land development lending, the decision in prior years to discontinue indirect consumer auto financing, as well as limited demand for loans. The overall yield on securities decreased 87 basis points when compared with 2010 due to run-off of higher yielding securities replaced at lower yields as well as accelerated premium amortization driven by a decline in interest rates. During 2011, interest and fees on loans-FTE decreased $13.7 million, or 4.1%, due to lower average loan balances while the yield on loans fell slightly to 5.26% compared to 5.32% during 2010. As a result of these factors, interest income-FTE decreased $15.1 million, or 3.6%, when 2011 is compared with 2010. The impact of these changes is also illustrated by the decline in the yield on total earning assets, which fell from 5.09% in 2010 to 4.76% in 2011, a decrease of 33 basis points.

Average interest-bearing liabilities for 2011 totaled $6.527 billion compared with $6.445 billion for 2010, a slight increase of $82.2 million, or 1.3%. During 2011, average interest-bearing deposits increased $249.3 million, or 4.5%, while the combination of federal funds purchased, securities sold under repurchase agreements and other borrowings decreased by $167.1 million, or 17.9%. The overall yield on interest-bearing liabilities declined 21 basis points during 2011 when compared with 2010, primarily due to a reduction in the costs of certificates of deposit and high yield money market accounts. As a result of these factors, total interest expense for 2011 decreased $13.2 million, or 23.4%, when compared with 2010.

41-------------------------------------------------------------------------------- Table of Contents Yield/Rate Analysis Table ($ in thousands) Years Ended December 31, 2012 2011 2010 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Federal funds sold and securities purchased under reverse repurchase agreements $ 7,552 $ 26 0.34 % $ 7,871 $ 30 0.38 % $ 9,274 $ 36 0.39 % Securities available for sale: Taxable 2,386,552 65,390 2.74 % 2,146,773 72,614 3.38 % 1,643,995 69,750 4.24 % Nontaxable 166,790 7,125 4.27 % 157,879 6,922 4.38 % 117,116 5,796 4.95 % Securities held to maturity: Taxable 29,551 1,560 5.28 % 66,164 3,229 4.88 % 151,361 7,328 4.84 % Nontaxable 19,188 1,218 6.35 % 24,891 1,609 6.46 % 39,787 2,784 7.00 % Loans (including acquired loans and LHFS) 6,057,423 309,395 5.11 % 6,093,804 320,804 5.26 % 6,285,443 334,527 5.32 % Other earning assets 31,669 1,342 4.24 % 36,719 1,321 3.60 % 39,954 1,409 3.53 % Total interest-earning assets 8,698,725 386,056 4.44 % 8,534,101 406,529 4.76 % 8,286,930 421,630 5.09 % Cash and due from banks 244,952 219,058 211,632 Other assets 949,328 922,905 895,764 Allowance for loan losses (89,954 ) (92,621 ) (102,499 ) Total Assets $ 9,803,051 $ 9,583,443 $ 9,291,827 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $ 1,542,601 3,975 0.26 % $ 1,528,963 7,077 0.46 % $ 1,322,382 8,621 0.65 % Savings deposits 2,357,424 6,004 0.25 % 2,131,057 8,144 0.38 % 1,925,159 8,479 0.44 % Time deposits 1,952,948 14,625 0.75 % 2,103,404 21,073 1.00 % 2,266,606 31,557 1.39 % Federal funds purchased and securities sold under repurchase agreements 370,283 588 0.16 % 507,925 965 0.19 % 580,427 1,183 0.20 % Short-term borrowings 83,042 1,208 1.45 % 142,984 1,605 1.12 % 209,550 1,798 0.86 % Long-term FHLB advances - - 0.00 % 1,240 7 0.56 % 22,441 133 0.59 % Subordinated notes 49,854 2,894 5.80 % 49,821 2,894 5.81 % 49,789 2,894 5.81 % Junior subordinated debt securities 61,856 1,375 2.22 % 61,856 1,271 2.05 % 68,703 1,530 2.23 % Total interest-bearing liabilities 6,418,008 30,669 0.48 % 6,527,250 43,036 0.66 % 6,445,057 56,195 0.87 % Noninterest-bearing demand deposits 2,006,230 1,761,946 1,602,187 Other liabilities 117,196 99,974 100,102 Shareholders' equity 1,261,617 1,194,273 1,144,481 Total Liabilities and Shareholders' Equity $ 9,803,051 $ 9,583,443 $ 9,291,827 Net Interest Margin 355,387 4.09 % 363,493 4.26 % 365,435 4.41 % Less tax equivalent adjustments: Investments 2,920 2,986 3,003 Loans 11,477 11,564 10,409 Net Interest Margin per Income Statements $ 340,990 $ 348,943 $ 352,023 42-------------------------------------------------------------------------------- Table of Contents The table below shows the change from year to year for each component of the tax equivalent net interest margin in the amount generated by volume changes and the amount generated by changes in the yield or rate (tax equivalent basis): Volume/Rate Analysis Table 2012 Compared to 2011 2011 Compared to 2010 ($ in thousands) Increase (Decrease) Due To: Increase (Decrease) Due To: Yield/ Yield/ Volume Rate Net Volume Rate Net Interest earned on: Federal funds sold and securities purchased under reverse repurchase agreements $ (1 ) $ (3 ) $ (4 ) $ (5 ) $ (1 ) $ (6 ) Securities available for sale: Taxable 7,515 (14,739 ) (7,224 ) 18,723 (15,859 ) 2,864 Nontaxable 381 (178 ) 203 1,850 (724 ) 1,126 Securities held to maturity: Taxable (1,915 ) 246 (1,669 ) (4,159 ) 60 (4,099 ) Nontaxable (364 ) (27 ) (391 ) (974 ) (201 ) (1,175 ) Loans, net of unearned income (includes acquired loans and LHFS) (1,975 ) (9,434 ) (11,409 ) (10,018 ) (3,705 ) (13,723 ) Other earning assets (196 ) 217 21 (116 ) 28 (88 ) Total interest-earning assets 3,445 (23,918 ) (20,473 ) 5,301 (20,402 ) (15,101 ) Interest paid on: Interest-bearing demand deposits 61 (3,163 ) (3,102 ) 1,213 (2,757 ) (1,544 ) Savings deposits 806 (2,946 ) (2,140 ) 868 (1,203 ) (335 ) Time deposits (1,435 ) (5,013 ) (6,448 ) (2,141 ) (8,343 ) (10,484 ) Federal funds purchased and securities sold under repurchase agreements (239 ) (138 ) (377 ) (156 ) (62 ) (218 ) Short-term borrowings (787 ) 390 (397 ) (657 ) 464 (193 ) Long-term FHLB advances (3 ) (4 ) (7 ) (119 ) (7 ) (126 ) Subordinated notes 3 (3 ) - - - - Junior subordinated debt securities - 104 104 (143 ) (116 ) (259 ) Total interest-bearing liabilities (1,594 ) (10,773 ) (12,367 ) (1,135 ) (12,024 ) (13,159 ) Change in net interest income on a tax equivalent basis $ 5,039 $ (13,145 ) $ (8,106 ) $ 6,436 $ (8,378 ) $ (1,942 ) The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each. Tax-exempt income has been adjusted to a tax equivalent basis using a tax rate of 35% for each of the three years presented. The balances of nonaccrual loans and related income recognized have been included for purposes of these computations.

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 2012 totaled $6.8 million, or 0.11% of average loans, compared with $29.7 million, or 0.49% of average loans in 2011 and $49.5 million, or 0.79% of average loans in 2010. Reduced loan provisioning during 2012 was a result of decreased levels of criticized LHFI, lower net charge-offs, adequate reserves established in prior years for both new and existing impaired LHFI, net loan risk rate upgrades and a smaller overall loan portfolio. While provisioning declined in each of Trustmark's four key market regions, the 2012 reduction was primarily a result of improvements in the Florida market. The decrease in the provision for loan losses, LHFI during 2012 was partially offset by an additional provision of approximately $1.4 million as a result of a revision to 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 to a 12 quarter net charge-off rolling average and also developed a separate reserve for junior liens on 1-4 family LHFI. For additional information on the change to the quantitative portion of the allowance for loan loss methodology for consumer and residential LHFI, please see the section captioned "LHFI and Allowance for Loan Losses, LHFI" included in Earning Assets located elsewhere in this report.

43-------------------------------------------------------------------------------- Table of Contents Provision for Loan Losses, LHFI ($ in thousands) Years Ended December 31, 2012 2011 2010 Florida $ (730 ) $ 16,500 $ 19,926 Mississippi (1) 7,790 9,917 14,249 Tennessee (2) 460 786 5,612 Texas (754 ) 2,501 9,759Total provision for loan losses, LHFI $ 6,766 $ 29,704 $ 49,546 (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 residential real estate developments. 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 Provisions for loan losses, acquired loans are 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. The provision for loan losses, acquired loans was $5.5 million for 2012, as compared to $624 thousand for 2011 and no provision for 2010. The provision for loan losses, acquired loans was initially established during the fourth quarter of 2011 as a result of valuation procedures performed during the period. The increase in the provision for loan losses, acquired loans during 2012 was a result of changes in expectations based on the periodic re-estimations performed during the year and the increased acquired loan portfolio as a result of the Bay Bank acquisition.

44-------------------------------------------------------------------------------- Table of Contents Noninterest Income Trustmark's noninterest income continues to play an important role in improving net income and total shareholder value and represents 33.7%, 31.4% and 31.7% of total revenue, before securities gains, net in 2012, 2011 and 2010, respectively. Total noninterest income before securities gains, net for 2012 increased $14.4 million compared to 2011, while total noninterest income before securities gains, net for 2011 decreased $3.8 million compared to 2010. The comparative components of noninterest income for the years ended December 31, 2012, 2011 and 2010, are shown in the accompanying table.

Noninterest Income ($ in thousands) 2012 2011 2010 Amount % Change Amount % Change Amount % Change Service charges on deposit accounts $ 50,351 -2.6 % $ 51,707 -6.3 % $ 55,183 2.0 % Mortgage banking, net 40,960 52.8 % 26,812 -8.6 % 29,345 1.6 % Bank card and other fees 30,445 10.8 % 27,474 9.8 % 25,014 8.6 % Insurance commissions 28,205 4.6 % 26,966 -2.6 % 27,691 -4.8 % Wealth management 23,056 0.4 % 22,962 5.0 % 21,872 -0.9 % Other, net 1,113 -71.1 % 3,853 -14.2 % 4,493 -20.0 % Total Noninterest Income before securities gains, net 174,130 9.0 % 159,774 -2.3 % 163,598 0.5 % Securities gains, net 1,059 n/m 80 -96.6 % 2,329 -57.4 % Total Noninterest Income $ 175,189 9.6 % $ 159,854 -3.7 % $ 165,927 -1.4 % n/m - percentage changes greater than +/- 100% are not considered meaningful Service Charges on Deposit Accounts Service charges on deposit accounts during 2012 totaled $50.4 million, a decrease of $1.4 million from the same time period in 2011. This decrease was due to a decrease in non-sufficient funds/overdraft fees of approximately $2.0 million, partially offset by the increase in service charges resulting from the monthly service charge fee on a personal account product Trustmark began offering during the fourth quarter of 2011. Service charges on deposit accounts during 2011 totaled $51.7 million, a decline of $3.5 million from the same time period in 2010. This decline was due to a reduction in NSF fees of $3.2 million which primarily resulted from the impact of the FRB rule (Regulation E - Electronic Fund Transfers) that went into effect during the third quarter of 2010. Regulation E prohibits financial institutions, such as Trustmark, from charging customers for paying overdrafts on ATM and one-time debit card transactions, unless the customer consents to the overdraft service for those products. In addition, on September 1, 2011, Trustmark implemented a five-item maximum per day for personal account overdrafts, which reduced noninterest income by approximately $400 thousand for the year ended December 31, 2011. The full impact of this change was a reduction in noninterest income of an estimated $1.1 million for 2012.

As previously reported, Trustmark continues to review selected components of its overdraft programs, specifically its processing sequences. Trustmark implemented a modification to the processing sequence component of its overdraft programs on October 1, 2012, which reduced noninterest income by approximately $750 thousand for the year ended December 31, 2012. Management estimates this modification could reduce service charges included in noninterest income by approximately $3.0 million in 2013.

Mortgage Banking, Net Net revenue from mortgage banking was $41.0 million during 2012, compared with $26.8 million in 2011 and $29.3 million in 2010. Mortgage banking, net increased $14.1 million during 2012 compared to a decrease of $2.5 million during 2011 primarily due to a significant increase in gains on sales of loans during the year. Loans serviced for others totaled $5.171 billion at December 31, 2012, compared with $4.518 billion at December 31, 2011, and $4.330 billion at December 31, 2010.

45-------------------------------------------------------------------------------- Table of Contents The following table illustrates the components of mortgage banking revenue included in noninterest income in the accompanying income statements: Mortgage Banking Income ($ in thousands) 2012 2011 2010 Amount % Change Amount % Change Amount % Change Mortgage servicing income, net $ 16,202 9.5 % $ 14,790 6.2 % $ 13,927 -12.3 % Change in fair value-MSR from runoff (9,808 ) -42.0 % (6,907 ) 5.4 % (7,305 ) 14.7 % Gain on sales of loans, net 33,919 n/m 11,952 -22.0 % 15,317 -26.2 % Other, net 4,022 58.2 % 2,542 n/m 94 -88.6 % Mortgage banking income before hedge ineffectiveness 44,335 98.1 % 22,377 1.6 % 22,033 -23.7 % Change in fair value-MSR from market changes (9,378 ) 38.0 % (15,130 ) -69.2 % (8,943 ) n/m Change in fair value of derivatives 6,003 -69.3 % 19,565 20.4 % 16,255 n/m Net (negative) positive hedge ineffectiveness (3,375 ) n/m 4,435 -39.3 % 7,312 n/m Mortgage banking, net $ 40,960 52.8 % $ 26,812 -8.6 % $ 29,345 1.6 % n/m - percentage changes greater than +/- 100% are not considered meaningful Representing a significant component of mortgage banking income is gain on the sales of loans, net which equaled $33.9 million in 2012 compared with $12.0 million in 2011 and $15.3 million in 2010. The increase in the gain on sales of loans, net during 2012 resulted from growth in loan sales and higher profit margins from secondary marketing activities as customers continued to take advantage of opportunities to refinance existing mortgages at historically low interest rates. The gain on sales of loans, net decreased during 2011 as a result of a reduction in loan sales and lower profit margins when compared to 2010. Loan sales increased $846.4 million during 2012 to total $1.816 billion compared to a decrease of $179.8 million during 2011 to total $969.4 million.

As part of Trustmark's risk management strategy, exchange-traded derivative instruments are utilized to offset changes in the fair value of 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. During 2012, net negative ineffectiveness of the MSR hedge was $3.4 million, which primarily resulted from the spread contraction between primary mortgage rates and yields on the ten-year Treasury note partially offset by hedge income produced by a positively-sloped yield curve and net option premium.

In comparison, during 2011, net positive ineffectiveness of the MSR hedge was $4.4 million, which primarily resulted from widening in the spread between primary mortgage rates and the yield on the ten-year Treasury note. Also contributing to the positive ineffectiveness was a modest income generated from a positively-sloped yield curve and net option premium, which are both core components of the MSR hedge strategy.

Other mortgage banking income, net increased by approximately $1.5 million during 2012 and $2.4 million during 2011 and resulted primarily from a net valuation increase in the fair value of loans held for sale, interest rate lock commitments and forward sale contracts during those years.

Bank Card and Other Fees Bank card and other fees totaled $30.4 million during 2012, compared with $27.5 million in 2011 and $25.0 million in 2010. 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. The increases in both 2012 and 2011 were primarily the result of growth in fees earned on ATMs and bank card products due to increased consumer utilization and income related to the commercial borrower hedge program. For additional information on Trustmark's commercial borrower hedge program, please see "Derivatives" included in Asset/Liability Management located elsewhere in this report.

The Dodd-Frank Act amends the Electronic Fund Transfer Act 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. 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.

46-------------------------------------------------------------------------------- Table of Contents 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, 2011, Trustmark had assets of less than $10.0 billion; therefore, there was no impact of the FRB final rule (Regulation II - Debit Card Interchange Fees and Routing) to Trustmark's noninterest income during 2012. However, following the closing of the merger with BancTrust on February 15, 2013, Trustmark had assets greater than $10.0 billion. Trustmark therefore expects that it will have assets greater than $10.0 billion as of the December 31 measurement date in 2013 and 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 could reduce noninterest income by approximately $6.0 million to $8.0 million on an annual basis given Trustmark's current debit card volumes. For more information on the merger with BancTrust, please see Note 2 - Business Combinations located in Item 8 - Financial Statements and Supplementary Data. Management is continuing to evaluate Trustmark's product structure and services to offset the anticipated impact of the FRB final rule.

Insurance Commissions Insurance commissions were $28.2 million during 2012, compared with $27.0 million in 2011 and $27.7 million in 2010. The increase in insurance commissions experienced during 2012 was primarily due to new business commission volume and increasing premium rates on commercial property and casualty policies and group health coverage. Improvements in these business lines compensated for a small decline in personal and life insurance sales. 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. The decline in insurance commissions experienced during 2011 was primarily due to lower commission volume on commercial property and casualty policies, primarily in the Florida markets.

Wealth Management Wealth management income totaled $23.1 million for 2012, compared with $23.0 million in 2011 and $21.9 million in 2010. Wealth management consists of income related to investment management, trust and brokerage services. During 2012, the slight growth in wealth management income is attributable to improved market conditions that in turn have generally improved market values in client accounts, growth in new custody business, inclusion of the trust operation of Bay Bank, brokerage activities, and growth in Trustmark's Houston market. These improvements offset the effect of deteriorating revenue from the Performance Funds Trust (Performance Funds) prior to the reorganization and sale of the Performance Funds in the third quarter of 2012 and declines in Personal Trust revenue. The growth in wealth management income in 2011 was largely attributable to improved market conditions that in turn generally improved market values in client accounts, as well as growth in retirement planning services and brokerage activities. At December 31, 2012 and 2011, Trustmark held assets under management and administration of $6.610 billion and $7.292 billion and brokerage assets of $1.316 billion and $1.185 billion, respectively.

During the third quarter of 2012, Trustmark completed the sale and reorganization of $929.0 million of assets managed by Trustmark Investment Advisors (TIA) for the Performance Funds to Federated Investors, Inc.

(Federated) and certain of Federated's subsidiaries, pursuant to the terms of the previously announced definitive agreement between Federated, TIA, and TNB.

The sale resulted in a payment of $1.2 million to Trustmark, which was recorded as other miscellaneous income.

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 reorganization were converted to various pre-determined Federated funds. While not a material transaction financially, this transaction will allow Trustmark to fully embrace open architecture in its wealth management business and focus additional resources on managing client relationships.

47-------------------------------------------------------------------------------- Table of Contents Other Income, Net The following table illustrates the components of other income, net included in noninterest income in the accompanying income statements: Other Income, Net ($ in thousands) 2012 2011 2010 Amount % Change Amount % Change Amount % Change Partnership amortization for tax credit purposes $ (8,417 ) 32.2 % $ (6,366 ) 41.3 % $ (4,504 ) n/m Bargain purchase gain on acquisition 3,635 -51.2 % 7,456 n/m - n/m Decrease in FDIC indemnification asset (3,722 ) -10.5 % (4,157 ) n/m - n/m Cadence termination fee - 0.0 % - n/m 2,000 n/m Other miscellaneous income 9,617 39.0 % 6,920 -1.1 % 6,997 2.8 % Total other, net $ 1,113 -71.1 % $ 3,853 -14.2 % $ 4,493 -20.0 % n/m - percentage changes greater than +/- 100% are not considered meaningful Other income, net for 2012 was $1.1 million, compared with $3.9 million in 2011 and $4.5 million in 2010. The decrease of $2.7 million during 2012 reflects an increase in partnership amortization of $2.1 million as a result of new tax credit investments entered into by Trustmark during 2012 and a writedown of the FDIC indemnification asset of $3.7 million on acquired covered loans obtained from Heritage as a result of loan payoffs, improved cash flow projections and lower loss expectations for loan pools, partially offset by the bargain purchase gain of $3.6 million resulting from Trustmark's acquisition of Bay Bank during the first quarter of 2012. The increase in other miscellaneous income in 2012 was primarily due to the $1.2 million payment from the sale of the Performance Funds by TIA and the receipt of a $780 thousand non-refundable arranger fee as lead syndicator for a large syndicated loan. The decline in other income, net during 2011 reflected an increase in partnership amortization of $1.9 million related to tax credit investments, the writedown of the FDIC indemnification asset of $4.2 million and the absence of a corresponding income event in 2011 to balance the Cadence termination fee received in 2010 of $2.0 million. These were offset by a nonrecurring bargain purchase gain of $7.5 million resulting from TNB's acquisition of Heritage during the second quarter of 2011.

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 2012, Trustmark sold approximately $33.8 million in available for sale securities, primarily in order to manage the duration risk of the securities portfolio, generating a net gain of approximately $1.0 million. Additionally, $3.9 million of securities called in 2012 prior to their maturity generated a net gain of approximately $20 thousand. Similarly, in 2011, Trustmark sold approximately $23.0 million in available for sale securities, generating a net gain of approximately $52 thousand. Additionally, $5.1 million of securities called in 2011 prior to their maturity generated a net gain of approximately $28 thousand.

Noninterest Expense Trustmark's noninterest expense for 2012 increased $14.7 million, or 4.4%, compared to 2011, while noninterest expense for 2011 increased $4.2 million, or 1.3%, compared to 2010. Excluding business combinations, noninterest expense for 2012 increased $7.7 million, or 2.3%, when compared to 2011, while noninterest expense for 2011 increased $2.3 million, or 0.7%, compared to 2010. The increase during 2012 was primarily attributable to growth in salaries and benefits, loan expenses and non-routine transaction expenses relating to the Bay Bank acquisition, offset by declines in other real estate writedowns and FDIC assessment expense. During 2011, the growth in noninterest expense was primarily attributable to growth in salaries and benefits and loan expenses. Management considers disciplined expense management a key area of focus in the support of improving shareholder value. The comparative components of noninterest expense for 2012, 2011 and 2010 are shown in the accompanying table.

48-------------------------------------------------------------------------------- Table of Contents Noninterest Expense ($ in thousands) 2012 2011 2010 Amount % Change Amount % Change Amount % Change Salaries and employee benefits $ 190,519 6.7 % $ 178,556 2.3 % $ 174,582 3.1 % Services and fees 46,751 6.6 % 43,858 4.6 % 41,949 4.1 % Net occupancy-premises 20,267 0.1 % 20,254 2.3 % 19,808 -1.2 % Equipment expense 20,478 1.5 % 20,177 17.8 % 17,135 4.1 % ORE/Foreclosure expense: Write-downs 6,874 -50.4 % 13,856 -19.1 % 17,127 n/m Carrying costs 4,291 76.1 % 2,437 -66.4 % 7,250 34.9 % Total ORE/Foreclosure expense 11,165 -31.5 % 16,293 -33.2 % 24,377 90.2 % FDIC assessment expense 6,502 -18.6 % 7,984 -34.3 % 12,161 -23.1 % Other expense 48,820 14.3 % 42,728 19.9 % 35,637 6.1 % Total noninterest expense $ 344,502 4.4 % $ 329,850 1.3 % $ 325,649 5.6 % 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, were $190.5 million in 2012, $178.6 million in 2011 and $174.6 million in 2010. The increase during 2012 primarily reflects modest general merit increases, higher general incentive costs resulting from improved corporate performance, increases in incentives for mortgage loan originators and higher costs for employee retirement programs, as well as $2.9 million in additional salaries and employee benefits resulting from the Bay Bank acquisition. Salaries and employee benefits expense for Bay Bank included a non-routine transaction expense of $672 thousand for change in control and severance expense.

During 2011, the increase in salaries and employee benefits primarily reflected modest general merit increases, higher general incentive costs resulting from improved corporate performance and higher costs for employee retirement programs, as well as $1.2 million in additional salaries and employee benefits resulting from the Heritage acquisition.

Services and Fees Services and fees for 2012 increased $2.9 million, or 6.6%, when compared with 2011, while an increase of $1.9 million, or 4.6%, occurred when 2011 is compared with 2010. The growth in services and fees expense during 2012 was related to increases in processing fees, software maintenance and other services and fees offset by a decline in legal expenses. The increase in processing fees and software maintenance is due to the deployment of a new ATM fleet, which included deposit automation, and the fourth quarter implementation of new finance and human resources operating systems during 2012. The increase in services and fees during 2011 was primarily due to increased legal expenses associated with litigation and the realignment of certain business units.

ORE/Foreclosure Expense ORE/Foreclosure expense totaled $11.2 million in 2012, compared with $16.3 million in 2011 and $24.4 million in 2010. The decline in ORE/Foreclosure expense during 2012 and 2011 can be primarily attributed to a decrease in other real estate writedowns of $7.0 million and $3.3 million, respectively. The decrease in other real estate writedowns is a result of stabilizing property values and adequate reserves established in prior periods.

FDIC Assessment Expense FDIC insurance expense decreased $1.5 million, or 18.6%, during 2012, compared to a decrease of $4.2 million, or 34.3%, during 2011. The decrease during 2012 and 2011 resulted from the implementation of the FDIC's revised deposit insurance assessment methodology implemented during the second quarter of 2011. As required by the Dodd-Frank Act, on April 1, 2011, 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, 2011, Trustmark benefitted during 2012 from the change in the assessment methodology. As discussed above, Trustmark has 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.

49-------------------------------------------------------------------------------- Table of Contents Other Expense The following table illustrates the components of other expense included in noninterest expense in the accompanying income statements: Other Expense ($ in thousands) 2012 2011 2010 Amount % Change Amount % Change Amount % Change Loan expense $ 20,248 11.1 % $ 18,229 50.4 % $ 12,118 32.1 % Non-routine transaction expenses on acquisition 1,917 100.0 % - n/m - n/m Amortization of intangibles 3,788 21.0 % 3,131 -11.1 % 3,520 -12.0 % Other miscellaneous expense 22,867 7.0 % 21,368 6.8 % 19,999 -2.0 % Total other expense $ 48,820 14.3 % $ 42,728 19.9 % $ 35,637 6.1 % n/m - percentage changes greater than +/- 100% are not considered meaningful During 2012, other expenses increased $6.1 million, or 14.3%, while in 2011, other expenses increased $7.1 million, or 19.9%. The growth in other expenses during 2012 was primarily due to non-routine Bay Bank acquisition transaction expenses and an increase in loan expenses of $2.0 million that resulted primarily from higher mortgage loan servicing putback expenses (further explained below). The growth in other expenses in 2011 was primarily due to increased loan expenses that resulted from higher mortgage foreclosure 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 is 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 incurred by Trustmark were $8.0 million during 2012, $5.1 million during 2011 and $2.1 million during 2010. During the second quarter of 2012, Trustmark updated its quarterly analysis of mortgage loan 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. At December 31, 2012, the reserve for mortgage loan servicing putback expenses totaled $7.8 million compared to $4.3 million at December 31, 2011.

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 repurchase requests.

Segment Information Results of Segment Operations Trustmark's operations are managed along three operating segments: General Banking Division, Wealth Management Division and Insurance Division. A description of each segment and the methodologies used to measure financial performance are described in Note 21 - Segment Information located in Item 8 - Financial Statements and Supplementary Data. Net income for 2012, 2011 and 2010 by operating segment is presented below ($ in thousands): 2012 2011 2010 General Banking $ 108,975 $ 100,568 $ 93,025 Wealth Management 3,823 2,810 3,975 Insurance 4,485 3,463 3,636 Consolidated Net Income $ 117,283 $ 106,841 $ 100,636 50-------------------------------------------------------------------------------- Table of Contents 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 approximately 170 offices in 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 Bay Bank contributed approximately $5.6 million to net interest income, $4.2 million to noninterest income (primarily from bargain purchase gain of $3.6 million) and $6.2 million to noninterest expense of the General Banking Division during 2012. During 2011, TNB's acquisition of Heritage contributed approximately $8.7 million to net interest income (including $3.8 million associated with the re-estimation of cash flows required by FASB ASC Topic 310-30 accounting guidelines), $4.2 million to noninterest income (primarily from bargain purchase gain of $7.5 million) and $1.8 million to noninterest expense of the General Banking Division. These amounts are included in the current year balances shown in the following three paragraphs.

Net interest income for the General Banking Division for 2012 decreased $8.1 million, or 2.3%, when compared with 2011. The decline in net interest income is mostly due to the downward repricing of loans and securities partially offset by modest declines in the cost of interest-bearing deposits. Net interest income during 2011 decreased $3.2 million, or 0.9%, when compared with 2010. The decrease in net interest income is primarily a result of a downward repricing of fixed rate assets, accelerated premium amortization within the investment portfolio and changes to Trustmark's asset mix as lower yielding securities supplemented declines in higher yielding loan balances. The provision for loan losses, net during 2012 totaled $12.2 million compared with $30.2 million during 2011 and $49.6 million during 2010. 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 document.

Noninterest income for the General Banking Division increased by approximately $12.8 million, or 11.7%, during 2012 compared to a decrease of $6.3 million, or 5.5%, during 2011. Noninterest income for the General Banking Division represents 26.7% of total revenues for 2012, 24.1% for 2011 and 25.0% for 2010. Noninterest income 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 document.

Noninterest expense for the General Banking Division increased $15.2 million and $1.8 million during 2012 and 2011, respectively. 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 previously announced definitive agreement between Federated, TIA and TNB. While TIA provided investment management services to the Performance Funds until completion of the sale to Federated, TIA no longer serves as investment advisor or custodian to the Performance Funds. For more information on the sale of the Performance Funds, please see the description included in Noninterest Income located elsewhere in this report. During 2010, TRMK Risk Management, Inc. (TRMI) acted as an agent to provide life, long-term care and disability insurance services for wealth management customers. On December 30, 2010, TRMI was merged into Fisher Brown Bottrell Insurance, Inc. (FBBI), another wholly owned subsidiary of TNB. All previous products and services provided to Wealth Management customers were provided by FBBI as part of the Insurance Division beginning in 2011.

51-------------------------------------------------------------------------------- Table of Contents During 2012, net income for the Wealth Management Division increased $1.0 million, or 36.0%, compared to a decrease of $1.2 million, or 29.3%, during 2011. Noninterest income increased $1.3 million during 2012 compared to an increase of $1.1 million during 2011. The increase in noninterest income during 2012 was due to an increase in wealth management income of approximately $100 thousand and the $1.2 million payment from the sale of the Performance Funds by TIA included in other miscellaneous income. During 2011, the increase in noninterest income was due to a growth in revenue for investment management, trust and brokerage services. Noninterest expense decreased $247 thousand during 2012 compared to an increase of $2.8 million during 2011. The increase during 2011 was primarily due to increased legal expenses associated with litigation and the realignment of certain business units in 2011. For more information on the change in wealth management revenue, please see the analysis included in Noninterest Income located elsewhere in this document.

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 2012, net income for the Insurance Division increased $1.0 million, or 29.5%, compared to a decrease of $173 thousand, or 4.8%, during 2011. The increase in net income during 2012 was primarily due to higher commission volume on commercial property and casualty policies. The decrease in 2011 was primarily due to lower commission volume on commercial property and casualty policies. For more information on the change in insurance commissions, please see the analysis included in Noninterest Income located elsewhere in this document.

During 2012, business conditions improved slightly in the markets served by FBBI. Trustmark performed an annual impairment test of the book value of capital held in the Insurance Division as of October 1, 2012, 2011, and 2010, respectively. Based on this analysis, Trustmark concluded that no impairment charge was required. A renewed period of falling prices and suppressed demand for the products of the Insurance Division may result in impairment of goodwill in the future. FBBI's ability in slowing a declining income trend is dependent on the success of the subsidiary's continued initiatives to attract new business through cross referrals between practice units and bank relationships and seeking new business in other markets. FBBI is actively pursuing new business in the Houston market, utilizing Trustmark branch relationships for sources of referrals.

Income Taxes For the year ended December 31, 2012, Trustmark's combined effective tax rate was 26.4% compared to 28.1% in 2011 and 29.5% in 2010. 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 and historical tax credits). These investments are recorded based on the equity method of accounting, which requires the equity in partnerships 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 in 2012 and 2011 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 and securities purchased under resale agreements. Average earning assets totaled $8.699 billion, or 88.7% of total assets, at December 31, 2012, compared with $8.534 billion, or 89.1% of total assets, at December 31, 2011, an increase of $164.6 million, or 1.9%.

Securities The securities portfolio is utilized by Management to manage interest rate risk, generate interest income, provide liquidity and use as collateral for public and wholesale funding. Risk and return can be adjusted by altering duration, composition and/or balance of portfolio. The weighted-average life of the portfolio increased to 3.7 years at December 31, 2012 compared to 3.6 years at December 31, 2011.

When compared with December 31, 2011, total investment securities increased by $173.2 million during 2012. This increase resulted primarily from purchases of U.S. Government-sponsored agency (GSE) guaranteed and highly rated asset-backed securities, offset by maturities and paydowns. $26.3 million of the increase in securities can be attributed to the Bay Bank acquisition. During 2012, Trustmark sold approximately $33.8 million in securities, generating a gain of $1.0 million, compared with $23.0 million during 2011, which generated a gain of $52 thousand.

52-------------------------------------------------------------------------------- Table of Contents The table below indicates the amortized cost of securities available for sale and held to maturity by type at year end for each of the last three years: Amortized Cost of Securities by Type ($ in thousands) December 31, 2012 2011 2010 Securities available for sale U.S. Government agency obligations Issued by U.S. Government agencies $ 10 $ 3 $ 12 Issued by U.S. Government sponsored agencies 105,396 64,573 124,093 Obligations of states and political subdivisions 202,877 190,868 159,418 Mortgage-backed securities Residential mortgage pass-through securities Guaranteed by GNMA 18,981 11,500 11,719 Issued by FNMA and FHLMC 201,493 340,839 432,162 Other residential mortgage-backed securities Issued or guaranteed by FNMA, FHLMC or GNMA 1,436,812 1,570,782 1,361,339 Commercial mortgage-backed securities Issued or guaranteed by FNMA, FHLMC or GNMA 380,514 216,698 54,331 Asset-backed securities 238,893 - - Total securities available for sale $ 2,584,976 $ 2,395,263 $ 2,143,074 Securities held to maturity Obligations of states and political subdivisions $ 36,206 $ 42,619 $ 53,246 Mortgage-backed securities Residential mortgage pass-through securities Guaranteed by GNMA 3,245 4,538 6,058 Issued by FNMA and FHLMC 572 588 763 Other residential mortgage-backed securities Issued or guaranteed by FNMA, FHLMC or GNMA - 7,749 78,526 Commercial mortgage-backed securities Issued or guaranteed by FNMA, FHLMC or GNMA 2,165 2,211 2,254 Total securities held to maturity $ 42,188 $ 57,705 $ 140,847 Available for sale (AFS) securities are carried at their estimated fair value with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income (loss), a separate component of shareholders' equity. At December 31, 2012, AFS securities at fair value totaled $2.658 billion, which represented 98.4% of the securities portfolio, compared to $2.469 billion, or 97.7%, at December 31, 2011. At December 31, 2012, unrealized gains, net on AFS securities totaled $72.8 million compared with unrealized gains, net of $73.7 million at December 31, 2011. At December 31, 2012, AFS securities consisted of obligations of states and political subdivisions, GSE guaranteed mortgage-related securities, direct obligations of GSEs and asset-backed securities.

Held to maturity (HTM) securities are carried at amortized cost and represent those securities that Trustmark both intends and has the ability to hold to maturity. At December 31, 2012, HTM securities totaled $42.2 million and represented 1.6% of the total portfolio, compared with $57.7 million, or 2.3%, at the end of 2011.

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 90% 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 which are considered sub-prime. Furthermore, outside of membership in the Federal Home Loan Bank of Dallas, Independent Bankers Bank of Florida and Federal Reserve Bank, Trustmark does not hold any equity investment in any GSE.

53-------------------------------------------------------------------------------- Table of Contents The following table details the maturities of securities available for sale and held to maturity using amortized cost at December 31, 2012, and the weighted-average yield for each range of maturities (tax equivalent basis): Maturity/Yield Analysis Table Maturing ($ in thousands) After One, After Five, Within But Within But Within After One Year Yield Five Years Yield Ten Years Yield Ten Years Yield Total Securities available for sale U.S. Government agency obligations Issued by U.S.

Government agencies $ 2 3.09 % $ 8 2.61 % $ - - $ - - $ 10 Issued by U.S.

Government sponsored agencies - - - - 105,396 2.04 % - - 105,396 Obligations of states and political subdivisions 12,048 3.01 % 82,132 3.71 % 103,843 4.42 % 4,854 4.79 % 202,877 Mortgage-backed securities Residential mortgage pass-through securities Guaranteed by GNMA - - 6 6.44 % 691 4.20 % 18,284 4.00 % 18,981 Issued by FNMA and FHLMC - - 152 8.14 % 271 3.83 % 201,070 3.20 % 201,493 Other residential mortgage-backed securities Issued or guaranteed by FNMA, FHLMC, or GNMA 29 2.17 % 5,306 4.63 % 40,635 2.35 % 1,390,842 2.81 % 1,436,812 Commercial mortgage-backed securities Issued or guaranteed by FNMA, FHLMC, or GNMA - - 61,823 2.89 % 241,866 2.70 % 76,825 2.52 % 380,514 Asset-backed securities - - - - 197,830 2.25 % 41,063 1.63 % 238,893 Total securities available for sale $ 12,079 3.01 % $ 149,427 3.41 % $ 690,532 2.71 % $ 1,732,938 2.83 % $ 2,584,976 Securities held to maturity Obligations of states and political subdivisions $ 1,946 6.13 % $ 16,507 6.95 % $ 16,526 8.04 % $ 1,227 7.88 % $ 36,206 Mortgage-backed securities Residential mortgage pass-through securities Guaranteed by GNMA - - - - - - 3,245 4.60 % 3,245 Issued by FNMA and FHLMC - - - - - - 572 4.31 % 572 Commercial mortgage-backed securities Issued or guaranteed by FNMA, FHLMC, or GNMA - - - - - - 2,165 4.77 % 2,165 Total securities held to maturity $ 1,946 6.13 % $ 16,507 6.95 % $ 16,526 8.04 % $ 7,209 5.19 % $ 42,188 Mortgage-backed securities and collateralized mortgage obligations are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As of December 31, 2012, 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.

54-------------------------------------------------------------------------------- Table of Contents The following tables present Trustmark's securities portfolio by amortized cost and estimated fair value and by credit rating at December 31, 2012: Securities Portfolio by Credit Rating (1) ($ in thousands) December 31, 2012 Amortized Cost Estimated Fair Value Amount % Amount % Securities Available for Sale Aaa $ 2,337,955 90.4 % $ 2,397,207 90.2 % Aa1 to Aa3 142,376 5.5 % 150,894 5.7 % A1 to A3 11,568 0.4 % 12,382 0.5 % Baa1 to Baa3 - 0.0 % - 0.0 % Not Rated (2) 93,077 3.7 % 97,262 3.7 %Total securities available for sale $ 2,584,976 100.0 % $ 2,657,745 100.0 % Securities Held to Maturity Aaa $ 5,982 14.2 % $ 6,498 13.9 % Aa1 to Aa3 21,843 51.8 % 25,391 54.2 % A1 to A3 1,224 2.9 % 1,274 2.7 % Baa1 to Baa3 331 0.8 % 357 0.8 % Not Rated (2) 12,808 30.3 % 13,368 28.5 % Total securities held to maturity $ 42,188 100.0 % $ 46,888 100.0 % (1) - Credit ratings obtained from Moody's Investors Service.

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

The table presenting the credit rating of Trustmark's securities is formatted to show the securities according to the credit rating category. At December 31, 2012, approximately 90.2% of the available for sale securities are rated Aaa and the same is true with respect to 14.2% of held to maturity securities, which are carried at amortized cost.

Loans Held for Sale (LHFS) At December 31, 2012, loans held for sale totaled $258.0 million, consisting of $198.2 million of residential real estate mortgage loans in the process of being sold to third parties and $59.8 million of Government National Mortgage Association (GNMA) optional repurchase loans. At December 31, 2011, loans held for sale totaled $216.6 million, consisting of $157.7 million of residential real estate mortgage loans in the process of being sold to third parties and $58.8 million of 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 loans held for sale, regardless of whether Trustmark intends to exercise the buy-back option. These loans are reported as held for sale with the offsetting liability being reported as short-term borrowings. Trustmark did not exercise its buy-back option on any delinquent loans serviced for GNMA in either 2012 or 2011.

LHFI and Allowance for Loan Losses, LHFI LHFI LHFI at December 31, 2012 totaled $5.593 billion compared to $5.857 billion at December 31, 2011, a decrease of $264.7 million. These declines are directly attributable to paydowns in 1-4 family mortgage loans as well as the decision in prior years to discontinue indirect consumer auto loan financing. The 1-4 family mortgage loan portfolio declined $263.5 million due to paydowns in the portfolio since December 31, 2011, as many customers continued to take advantage of opportunities to refinance existing mortgages at historically low interest rates. Trustmark has elected 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, 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. The consumer loan portfolio decrease of $72.1 million primarily represents a decrease in the indirect consumer auto portfolio. The indirect consumer auto portfolio balance at December 31, 2012 was $25.5 million compared with $86.9 million at December 31, 2011.

55-------------------------------------------------------------------------------- Table of Contents The table below shows the carrying value of the LHFI portfolio at the end of each of the last five years: LHFI by Type ($ in thousands) December 31, 2012 2011 2010 2009 2008 Loans secured by real estate: Construction, land development and other land loans $ 468,975 $ 474,082 $ 583,316 $ 830,069 $ 1,028,788 Secured by 1-4 family residential properties 1,497,480 1,760,930 1,732,056 1,650,743 1,524,061 Secured by nonfarm, nonresidential properties 1,410,264 1,425,774 1,498,108 1,467,307 1,422,658 Other real estate secured 189,949 204,849 231,963 197,421 186,915 Commercial and industrial loans 1,169,513 1,139,365 1,068,369 1,059,164 1,237,987 Consumer loans 171,660 243,756 402,165 606,315 895,046 Other loans 684,913 608,728 544,265 508,778 426,948 LHFI $ 5,592,754 $ 5,857,484 $ 6,060,242 $ 6,319,797 $ 6,722,403 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 decisioned and approved as part of a specific line of business located at Trustmark's headquarters in Jackson, Mississippi.

56-------------------------------------------------------------------------------- Table of Contents The LHFI composition by region at December 31, 2012 is illustrated in the following tables and reflects a diversified mix of loans by region.

LHFI Composition by Region ($ in thousands) December 31, 2012 Mississippi Tennessee (Centraland (Memphis, TN Southern and Northern LHFI Composition by Region (1) Total Florida Regions) MS Regions) Texas Loans secured by real estate: Construction, land development and other land loans $ 468,975 $ 85,592 $ 238,182 $ 38,660 $ 106,541 Secured by 1-4 family residential properties 1,497,480 50,598 1,281,057 141,613 24,212 Secured by nonfarm, nonresidential properties 1,410,264 144,718 750,771 173,472 341,303 Other real estate secured 189,949 9,391 146,729 5,957 27,872 Commercial and industrial loans 1,169,513 12,058 813,331 83,215 260,909 Consumer loans 171,660 1,769 148,005 18,466 3,420 Other loans 684,913 25,329 578,046 32,411 49,127 LHFI $ 5,592,754 $ 329,455 $ 3,956,121 $ 493,794 $ 813,384 Construction, Land Development and Other Land Loans by Region (1) Lots $ 53,370 $ 33,053 $ 15,833 $ 1,539 $ 2,945 Development 80,184 9,399 49,479 4,467 16,839 Unimproved land 147,022 41,425 62,224 14,715 28,658 1-4 family construction 77,074 1,445 59,535 2,042 14,052 Other construction 111,325 270 51,111 15,897 44,047 Construction, land development and other land loans $ 468,975 $ 85,592 $ 238,182 $ 38,660 $ 106,541 Loans Secured by Nonfarm, Nonresidential Properties by Region (1) Income producing: Retail $ 162,229 $ 41,379 $ 65,160 $ 23,491 $ 32,199 Office 164,624 37,033 85,004 10,415 32,172 Nursing homes/assisted living 100,018 - 91,477 4,052 4,489 Hotel/motel 86,034 1,691 24,815 32,274 27,254 Industrial 55,317 8,262 12,553 369 34,133 Health care 15,589 - 10,331 130 5,128 Convenience stores 8,846 - 4,881 1,419 2,546 Other 144,489 14,565 71,628 6,327 51,969 Total income producing loans 737,146 102,930 365,849 78,477 189,890 Owner-occupied: Office 110,149 13,143 68,545 4,928 23,533 Churches 80,918 3,128 45,665 27,102 5,023 Industrial warehouses 85,082 1,108 43,195 1,191 39,588 Health care 97,882 14,369 52,239 15,647 15,627 Convenience stores 59,848 1,747 37,441 3,923 16,737 Retail 36,929 3,720 24,318 2,989 5,902 Restaurants 32,287 987 24,991 4,761 1,548 Auto dealerships 14,342 437 11,993 1,851 61 Other 155,681 3,149 76,535 32,603 43,394 Total owner-occupied loans 673,118 41,788 384,922 94,995 151,413 Loans secured by nonfarm, nonresidential properties $ 1,410,264 $ 144,718 $ 750,771 $ 173,472 $ 341,303 (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.

57-------------------------------------------------------------------------------- Table of Contents 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 December 31, 2012, Trustmark held "alt A" mortgages with an aggregate principal balance of $3.1 million (0.09% 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.

Due to the short-term nature of most commercial real estate lending and the practice of annual renewal of commercial lines of credit, approximately one-third of Trustmark's portfolio matures in less than one year. Such a short-term maturity profile is not unusual for a commercial bank and provides Trustmark the opportunity to obtain updated financial information from its borrowers and to actively monitor its borrowers' creditworthiness. This maturity profile is well matched with many of Trustmark's sources of funding, which are also short-term in nature.

The following table provides information regarding Trustmark's LHFI maturities by category at December 31, 2012: LHFI Maturities by Category (1) ($ in thousands) Maturing One Year Within Through After One Year Five Five Loan Type or Less Years Years Total Construction, land development and other land loans $ 279,709 $ 164,653 $ 24,613 $ 468,975 Secured by 1-4 family residential properties 495,893 196,717 804,870 1,497,480 Other loans secured by real estate 511,142 892,216 196,855 1,600,213 Commercial and industrial 572,474 549,929 47,110 1,169,513 Consumer loans 59,524 110,356 1,780 171,660 Other loans 220,461 170,732 293,720 684,913 Total $ 2,139,203 $ 2,084,603 $ 1,368,948 $ 5,592,754 (1) - Excludes Acquired Loans The following table provides information regarding Trustmark's LHFI maturities by interest rate sensitivity at December 31, 2012: LHFI Maturities by Interest Rate Sensitivity (1) ($ in thousands) Maturing One Year Within Through After One Year Five Five Loan Type or Less Years Years Total Predetermined interest rates $ 1,318,284 $ 1,154,996 $ 1,256,068 $ 3,729,348 Floating interest rates: Loans which are at contractual floor 63,774 767,404 37,846 869,024 Loans which are free to float 757,145 162,203 75,034 994,382 Total floating interest rates 820,919 929,607 112,880 1,863,406 Total $ 2,139,203 $ 2,084,603 $ 1,368,948 $ 5,592,754 (1) - Excludes Acquired Loans 58-------------------------------------------------------------------------------- Table of Contents 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.

The table below illustrates the changes in Trustmark's allowance for loan losses, LHFI as well as Trustmark's loan loss experience for each of the last five years: Analysis of the Allowance for Loan Losses, LHFI ($ in thousands) Years Ended December 31, 2012 2011 2010 2009 2008 Balance at beginning of period $ 89,518 $ 93,510 $ 103,662 $ 94,922 $ 79,851 Loans charged off: Real estate loans (16,021 ) (30,648 ) (50,395 ) (55,148 ) (48,182 ) Loans to finance agricultural production and other loans to farmers (288 ) - - - (3 ) Commercial and industrial (6,922 ) (4,299 ) (4,186 ) (5,715 ) (3,182 ) Consumer (3,085 ) (5,629 ) (10,234 ) (15,759 ) (15,976 ) All other loans (5,060 ) (5,193 ) (7,082 ) (4,089 ) (4,424 ) Total charge-offs (31,376 ) (45,769 ) (71,897 ) (80,711 ) (71,767 ) Recoveries on loans previously charged off: Real estate loans 435 447 417 555 208 Commercial and industrial 4,298 2,739 2,245 2,935 1,137 Consumer 6,235 5,764 6,395 5,997 5,874 All other loans 2,862 3,123 3,142 2,852 3,207 Total recoveries 13,830 12,073 12,199 12,339 10,426 Net charge-offs (17,546 ) (33,696 ) (59,698 ) (68,372 ) (61,341 ) Provision for loan losses, LHFI 6,766 29,704 49,546 77,112 76,412 Balance at end of period $ 78,738 $ 89,518 $ 93,510 $ 103,662 $ 94,922 Percentage of net charge-offs during period to average LHFI outstanding during the period 0.30 % 0.56 % 0.95 % 1.01 % 0.87 % 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 loan 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 four key market regions, 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 360 risk rate factors for commercial loan types. The nine separate pools are shown below: 59-------------------------------------------------------------------------------- Table of Contents Commercial Purpose Loans · Real Estate - Owner Occupied · Real Estate - Non-Owner Occupied · Working Capital · Non-Working Capital · Land · Lots and Development · Political Subdivisions Commercial Construction Loans · 1 to 4 Family · Non-1 to 4 Family During 2011, Trustmark altered the quantitative factors of the allowance methodology to reflect a twelve-quarter rolling average of net charge-offs, one quarter in arrears, by loan type within each key market region. This change 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. Prior to this change, the quantitative factors reflected a three-year rolling average for Trustmark's commercial loans.

During 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 quantitative change allow the bank 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 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 loan 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, 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.

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.

60-------------------------------------------------------------------------------- Table of Contents At December 31, 2012, the allowance for loan losses, LHFI was $78.7 million, a decrease of $10.8 million when compared with December 31, 2011. Total allowance coverage of nonperforming LHFI, excluding impaired LHFI, at December 31, 2012, was 174.46%, compared to 194.2% at December 31, 2011. Allocation of Trustmark's $78.7 million allowance for loan losses, LHFI represents 1.59% of commercial LHFI and 0.97% of consumer and home mortgage LHFI, resulting in an allowance to total LHFI of 1.41% at December 31, 2012. This compares with an allowance to total LHFI of 1.53% at December 31, 2011, which was allocated to commercial LHFI at 1.91% and to consumer and mortgage LHFI at 0.76%.

Net charge-offs for 2012 totaled $17.5 million, or 0.30% of average loans, compared to $33.7 million, or 0.56% in 2011, and $59.7 million, or 0.95% in 2010. This decrease can be primarily attributed to a slowing in the decline of property values in commercial developments of residential real estate along with a substantial reduction in auto finance charge-offs. The net charge-offs exceeded the provisions for Florida and Mississippi during 2012 and for Florida, Tennessee and Texas during 2011 because a large portion of charge-offs had been fully reserved in prior periods. Management continues to monitor the impact of real estate values on borrowers and is proactively managing these situations.

Net Charge-Offs (1) ($ in thousands) Years Ended December 31, 2012 2011 2010 Florida $ 5,261 $ 18,843 $ 28,650 Mississippi (2) 7,602 8,355 18,963 Tennessee (3) 1,154 2,575 6,578 Texas 3,529 3,923 5,507Total net charge-offs $ 17,546 $ 33,696 $ 59,698 (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. 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 $160.6 million at December 31, 2012, a decrease of $29.0 million relative to December 31, 2011. Collectively, total nonperforming assets to total nonacquired loans and noncovered other real estate at December 31, 2012 was 2.71% compared to 3.08% at December 31, 2011. During 2012, nonperforming LHFI decreased $28.1 million, or 25.4%, relative to December 31, 2011 to total $82.4 million, or 1.41% of total nonacquired loans. Foreclosed real estate, excluding covered other real estate, decreased $864 thousand during 2012 to total $78.2 million.

61-------------------------------------------------------------------------------- Table of Contents Nonperforming Assets (1) ($ in thousands) December 31, 2012 2011 2010 2009 2008 Nonaccrual LHFI Florida $ 19,314 $ 23,002 $ 53,773 $ 74,159 $ 75,092 Mississippi (2) 38,960 46,746 39,803 31,050 18,703 Tennessee (3) 8,401 15,791 14,703 12,749 3,638 Texas 15,688 24,919 34,644 23,204 16,605 Total nonaccrual LHFI 82,363 110,458 142,923 141,162 114,038 Other real estate Florida 18,569 29,963 32,370 45,927 21,265 Mississippi (2) 27,771 19,483 24,181 22,373 6,113 Tennessee (3) 17,589 16,879 16,407 10,105 8,862 Texas 14,260 12,728 13,746 11,690 2,326 Total other real estate 78,189 79,053 86,704 90,095 38,566 Total nonperforming assets $ 160,552 $ 189,511 $ 229,627 $ 231,257 $ 152,604 Nonperforming assets/total loans (including loans held for sale) and ORE 2.71 % 3.08 % 3.64 % 3.48 % 2.18 % Loans Past Due 90 days or more LHFI $ 6,378 $ 4,230 $ 3,608 $ 8,901 $ 5,139 LHFS - Serviced GNMA loans eligible for repurchase (4) $ 43,073 $ 39,379 $ 15,777 $ 46,661 $ 18,095 (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 Loans Held for Sale for more information on Trustmark's serviced GNMA loans eligible for repurchase and the impact of Trustmark's repurchases of delinquent mortgage loans under the GNMA optional repurchase program.

Total nonaccrual LHFI decreased $28.1 million during 2012 to $82.4 million, or 1.41% of total loans including loans held for sale, due primarily to improvements in all of Trustmark's key market regions. At December 31, 2011, nonaccrual LHFI were $110.5 million, or 1.82% of total loans including loans held for sale, a decrease of $32.5 million when compared to December 31, 2010. The decrease during 2011 was due primarily to an improvement in Trustmark's Florida market.

The following table illustrates nonaccrual LHFI by loan type for the past five years: Nonaccrual LHFI by Loan Type (1) ($ in thousands) December 31, 2012 2011 2010 2009 2008 Construction, land development and other land loans $ 27,105 $ 40,413 $ 57,831 $ 81,805 $ 72,582 Secured by 1-4 family residential properties 27,114 24,348 30,313 31,464 11,699 Secured by nonfarm, nonresidential properties 18,289 23,981 29,013 18,056 10,775 Other loans secured by real estate 3,956 5,871 6,154 2,097 3,351 Commercial and industrial 4,741 14,148 16,107 6,630 14,617 Consumer loans 360 825 2,112 973 976 Other loans 798 872 1,393 137 38Total Nonaccrual LHFI by Type $ 82,363 $ 110,458 $ 142,923 $ 141,162 $ 114,038 (1) - Excludes Acquired Loans 62-------------------------------------------------------------------------------- Table of Contents 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 December 31, 2012, total other real estate, excluding covered other real estate, was $78.2 million a decrease of $864 thousand when compared with December 31, 2011. However, other real estate, excluding nonfarm, nonresidential properties, declined $9.7 million and $11.7 million during 2012 and 2011, respectively. The increase in nonfarm, nonresidential other real estate during 2012 was primarily due to the foreclosure of three commercial properties in Mississippi which totaled $8.0 million. The increase in nonfarm, nonresidential other real estate during 2011 was primarily due to the foreclosure of one commercial property in Mississippi and two commercial properties in Florida which totaled $4.9 million. The decline in construction, land development and other land properties and 1-4 family residential properties was primarily a result of other real estate properties sold or revalued during 2012 and 2011.

The following table illustrates other real estate, excluding covered other real estate, by type of property for the past five years: Other Real Estate by Property Type (1) ($ in thousands) December 31, 2012 2011 2010 2009 2008 Construction, land development and other land properties $ 46,957 $ 53,834 $ 61,963 $ 60,276 $ 28,824 1-4 family residential properties 8,134 10,557 13,509 11,001 8,443 Nonfarm, nonresidential properties 22,760 13,883 9,820 7,285 1,220 Other real estate properties 338 779 1,412 11,533 79 Total other real estate $ 78,189 $ 79,053 $ 86,704 $ 90,095 $ 38,566 (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 ORE specific reserve or net income in ORE/Foreclosure expense, if a reserve does not exist. Writedowns of other real estate, excluding covered other real estate, decreased $7.3 million and $3.3 million during 2012 and 2011, respectively. The decrease in other real estate writedowns is a result of stabilizing property values and adequate reserves established in prior periods.

The following table illustrates writedowns of other real estate, excluding covered other real estate, by region for the past three years: Writedowns of Other Real Estate by Region (1) ($ in thousands) Years Ended December 31, 2012 2011 2010 Florida $ 3,048 $ 5,651 $ 11,033 Mississippi (2) 2,102 6,782 4,844 Tennessee (3) 517 (67 ) 935 Texas 936 1,490 315 Total writedowns of other real estate $ 6,603 $ 13,856 $ 17,127 (1) - Excludes Covered Other Real Estate (2) - Mississippi includes Central and Southern Mississippi Regions (3) - Tennessee includes Memphis, Tennessee and Northern Mississippi Regions 63-------------------------------------------------------------------------------- Table of Contents Acquired Loans The acquired loan portfolio consisted of the following at the end of each of the last two years: Acquired Loans ($ in thousands) December 31, 2012 2011 Covered Noncovered Covered Noncovered (1) Loans secured by real estate: Construction, land development and other land loans $ 3,924 $ 10,056 $ 4,209 $ - Secured by 1-4 family residential properties 23,990 19,404 31,874 76 Secured by nonfarm, nonresidential properties 18,407 45,649 30,889 - Other real estate secured 3,567 669 5,126 - Commercial and industrial loans 747 3,035 2,971 69 Consumer loans 177 2,610 290 4,146 Other loans 1,229 100 1,445 72 Acquired loans 52,041 81,523 76,804 4,363 Less allowance for loan losses, acquired loans 4,190 1,885 502 - Net acquired loans $ 47,851 $ 79,638 $ 76,302 $ 4,363 (1) Acquired noncovered loans were reported in LHFI at December 31, 2011.

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

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

TNB 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 TNB will be unable to collect all contractually required payments. Revolving credit agreements such as home equity lines are excluded from acquired impaired loan accounting requirements. TNB acquired $5.9 million and $3.8 million of revolving credit agreements, at fair value, in the Bay Bank and Heritage acquisitions, respectively, consisting mainly of home equity loans and commercial asset-based lines of credit, where the borrower had revolving privileges on the acquisition date. As such, TNB has accounted for such revolving covered loans in accordance with accounting requirements for acquired nonimpaired loans.

64-------------------------------------------------------------------------------- Table of Contents The following table illustrates changes in the carrying value, net of the acquired loans for each of the last two years: Acquired Loans Carrying Value ($ in thousands) Covered Noncovered (1) Acquired Acquired Acquired Acquired Impaired Not ASC 310-30 (2) Impaired Not ASC 310-30 (2) Carrying value, net at January 1, 2011 $ - $ - $ - $ - Loans acquired 93,940 3,830 9,468 176 Accretion to interest income 4,347 543 349 4 Payments received, net (3) (25,764 ) (202 ) (5,076 ) (47 ) Other 110 - (391 ) (120 ) Less allowance for loan losses, acquired loans (502 ) - - - Carrying value, net at December 31, 2011 72,131 4,171 4,350 13 Loans acquired (4) - - 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 (1) Acquired noncovered loans were included in LHFI at December 31, 2011.

(2) "Acquired Not ASC 31-30" loans consist of revolving credit agreements that are not in scope for FASB ASC Topic 310-30.

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

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

Covered Other Real Estate The following table illustrates covered other real estate by type of property at the end of each of the past two years: Covered Other Real Estate by Property Type ($ in thousands) December 31, 2012 2011 Construction, land development and other land properties $ 1,284 $ 1,304 1-4 family residential properties 1,306 889 Nonfarm, nonresidential properties 3,151 4,022 Other real estate properties - 116 Total covered other real estate $ 5,741 $ 6,331 65-------------------------------------------------------------------------------- Table of Contents The following table illustrates changes and gains, net on covered other real estate for the past two years: Change in Covered Other Real Estate ($ in thousands) December 31, 2012 2011 Balance at January 1, $ 6,331 $ - Covered other real estate acquired - 7,485 Transfers from covered loans 1,424 632 FASB ASC 310-30 adjustment for the residual recorded investment (112 ) (264 ) Net transfers from covered loans 1,312 368 Disposals (1,631 ) (1,489 ) Writedowns (271 ) (33 ) Balance at December 31, $ 5,741 $ 6,331 Gain, net on the sale of covered other real estate included in ORE/Foreclosure expenses $ 485 $ 286 FDIC Indemnification Asset Trustmark periodically re-estimates the expected cash flows on the acquired loans of Heritage as required by FASB ASC Topic 310-30. For both 2012 and 2011, the analysis resulted in improvements in the estimated future cash flows of the acquired loans that remain outstanding as well as lower expected remaining losses on those loans. The improvements in the estimated expected cash flows of the covered loans resulted in a reduction of the expected loss-share receivable from the FDIC. During 2012, other income included a writedown of the FDIC indemnification asset of $3.7 million, compared to $4.2 million in 2011, on covered loans as a result of loan pay offs, improved cash flow projections and lower loss expectations for loan pools.

The following table illustrates changes in the FDIC indemnification asset for the each of the last two years: FDIC Indemnification Asset ($ in thousands) Balance at January 1, 2011 $ - Additions from acquisition 33,333 Accretion 185Loss-share payments received from FDIC (986 ) Change in expected cash flows (1) (4,157 ) Change in FDIC true-up provision (27 ) Balance at December 31, 2011 $ 28,348 Accretion 245 Transfers to FDIC claims receivable (2,544 ) Change in expected cash flows (1) (3,761 ) Change in FDIC true-up provision (514 ) Balance at December 31, 2012 $ 21,774 (1) The decrease was due to loan payoffs, 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 $1.1 million and $601 thousand at December 31, 2012 and 2011, respectively.

66-------------------------------------------------------------------------------- Table of Contents Other Earning Assets Federal funds sold and securities purchased under reverse repurchase agreements were $7.0 million at December 31, 2012, a decrease of $2.2 million when compared with December 31, 2011. Trustmark utilizes these products as offerings for its correspondent banking customers as well as a short-term investment alternative whenever it has excess liquidity.

Deposits and Other Interest-Bearing Liabilities Trustmark's deposit base is its primary source of funding and consists 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 $7.897 billion at December 31, 2012, compared with $7.566 billion at December 31, 2011, an increase of $330.2 million, or 4.4%. Deposit growth was driven by increases in both noninterest-bearing and interest-bearing deposits of $220.8 million and $109.4 million, respectively. Trustmark experienced noninterest-bearing deposit growth among all categories, with the Bay Bank acquisition contributing $46.2 million. The increase in interest-bearing deposits resulted primarily from growth in personal checking and savings accounts, with Bay Bank contributing $132.7 million in various types of interest-bearing deposits. However, time deposit account balances, excluding Bay Bank, declined by $222.2 million as Trustmark continued its efforts to reduce high-cost deposit balances. A portion of the decline in time deposit balances was offset by 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 of federal funds purchased, securities sold under repurchase agreements and short-term FHLB advances. Short-term borrowings totaled $375.7 million at December 31, 2012, a decrease of $316.4 million, when compared with $692.1 million at December 31, 2011. Of these amounts, $285.1 million and $239.4 million, respectively, were customer related transactions, such as commercial sweep repo balances. The decrease in short-term borrowings resulted primarily from declines of $263.5 million in federal funds purchased as funding pressures lessened due to strong deposit growth.

The table below presents information concerning qualifying components of Trustmark's short-term borrowings for each of the last three years ($ in thousands): Federal funds purchased and securities sold under repurchase agreements: 2012 2011 2010 Amount outstanding at end of period $ 288,829 $ 604,500 $ 700,138 Weighted average interest rate at end of period 0.10 % 0.12 % 0.19 % Maximum amount outstanding at any month end during each period $ 713,975 $ 845,234 $ 827,162 Average amount outstanding during each period $ 370,283 $ 507,925 $ 580,427 Weighted average interest rate during each period 0.16 % 0.19 % 0.20 % Short-term borrowings: Amount outstanding at end of period $ 86,920 $ 87,628 $ 425,343 Weighted average interest rate at end of period 1.42 % 1.77 % 0.57 % Maximum amount outstanding at any month end during each period $ 93,162 $ 308,072 $ 425,343 Average amount outstanding during each period $ 83,042 $ 142,984 $ 209,550 Weighted average interest rate during each period 1.45 % 1.12 % 0.86 % Benefit Plans Capital Accumulation Plan As disclosed in Note 15 - Defined Benefit and Other Postretirement Benefits included in Item 8 - Financial Statements and Supplementary Data, Trustmark maintains a noncontributory defined benefit pension 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 May 15, 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.

At December 31, 2012, the fair value of plan assets totaled $76.7 million and was exceeded by the plan projected benefit obligation of $103.2 million by $26.6 million. Net periodic benefit cost equaled $3.7 million in 2012 compared with $3.2 million in 2011 and $2.8 million in 2010.

67-------------------------------------------------------------------------------- Table of Contents The fair value of plan assets is determined utilizing current market quotes, while the benefit obligation and periodic benefit costs are determined utilizing actuarial methodology with certain weighted-average assumptions. For 2012, 2011 and 2010, the process used to select the discount rate assumption under FASB ASC Topic 715 takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. Assumptions, which have been chosen to represent the estimate of a particular event as required by GAAP, have been reviewed and approved by Management based on recommendations from its actuaries. Please refer to "Defined Benefit Plans" in the Critical Accounting Policies for additional information regarding the assumptions used by Management.

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 2012, the cap is set at 110% and the floor is set at 90% of the 25-year average of these rates as of September 30, 2011. As a result, for the plan years ended December 31, 2012 and 2011, Trustmark's minimum required contributions were $1.5 million and $896 thousand, respectively. During 2012, Trustmark made a contribution of $1.5 million for the plan year ended December 31, 2012 while during 2011, Trustmark made a contribution of $1.0 million for the plan year ended December 31, 2011. For the plan year ending December 31, 2013, Trustmark's minimum required contribution is expected to be $1.5 million; however, Management and the Board of Directors will monitor the plan throughout 2013 to determine any additional funding requirements by the plan's measurement date.

Supplemental Retirement Plan Trustmark maintains a nonqualified supplemental retirement plan covering directors who elect 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 are anticipated to fund future payments under the plan.

At December 31, 2012, the accrued benefit obligation equaled $56.6 million, while the net periodic benefit cost equaled $3.9 million in 2012, $3.6 million in 2011 and $3.5 million in 2010. The net periodic benefit cost and projected benefit obligation are determined using actuarial assumptions as of the plan's measurement date, which is December 31. The process used to select the discount rate assumption under FASB ASC Topic 715 takes into account the benefit cash flow and the segmented yields on high-quality corporate bonds that would be available to provide for the payment of the benefit cash flow. At December 31, 2012, unrecognized actuarial losses and unrecognized prior service costs continue to be amortized over future service periods.

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 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 Official Stanford Investors Committee ("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.

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.

68-------------------------------------------------------------------------------- Table of Contents 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 includes 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. 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. That motion is pending for decision. Trustmark has filed preliminary dismissal and venue transfer motions, and discovery has begun, in the White case; the Jenkins case has not yet entered the active discovery stage. Each of these complaints seeks the imposition of a constructive trust and unquantified damages. These complaints are largely patterned after similar lawsuits that have been filed against other banks across the country.

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 material adverse outcome in any such case is not reasonably possible.

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 both December 31, 2012 and 2011, Trustmark had commitments to extend credit of $1.909 billion and $1.690 billion, respectively.

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 December 31, 2012 and 2011, Trustmark's maximum exposure to credit loss in the event of nonperformance by the other party for letters of credit was $140.5 million and $156.7 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.

69-------------------------------------------------------------------------------- Table of Contents Contractual Obligations Trustmark is obligated under certain contractual arrangements. The amount of the payments due under those obligations as of December 31, 2012 is shown in the table below: Contractual Obligations ($ in thousands) Less than One to Three Three to Five After One Year Years Years Five Years Total Time deposits $ 1,347,371 $ 433,993 $ 57,156 $ 324 $ 1,838,844 Securities sold under repurchase agreements 156,124 - - - 156,124 Subordinated notes - - 49,871 - 49,871 Junior subordinated debt securities - - - 61,856 61,856 Operating lease obligations 6,482 10,176 4,329 7,275 28,262 Total $ 1,509,977 $ 444,169 $ 111,356 $ 69,455 $ 2,134,957 Capital Resources At December 31, 2012, Trustmark's total shareholders' equity was $1.287 billion, an increase of $72.3 million from December 31, 2011. During 2012, shareholders' equity increased primarily as a result of net income of $117.3 million and the $12.0 million of common stock issued in the Bay Bank acquisition, and was partially offset by common stock dividends of $60.0 million. 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, 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 various federal regulatory agencies. These capital requirements, as defined by federal guidelines, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can initiate 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. Trustmark aims to exceed the well-capitalized guidelines for regulatory capital. As of December 31, 2012, 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 December 31, 2012. To be categorized in this manner, TNB must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the accompanying table. There are no significant conditions or events that have occurred since December 31, 2012, which Management believes have affected 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. For so long as Trustmark's assets are less than $15 billion, it will be permitted to include the trust preferred securities as Tier 1 capital. See "Capital Adequacy" included in Supervision and Regulation located elsewhere in this report.

70-------------------------------------------------------------------------------- Table of Contents Regulatory Capital Table ($ in thousands) Actual Regulatory Capital Minimum Regulatory Capital Required Minimum Regulatory Provision to be Well-Capitalized At December 31, 2012: Amount Ratio Amount Ratio Amount Ratio 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 % At December 31, 2011: Total Capital (to Risk Weighted Assets) Trustmark Corporation $ 1,096,213 16.67 % $ 526,156 8.00 % n/a n/a Trustmark National Bank 1,057,932 16.28 % 519,709 8.00 % $ 649,636 10.00 % Tier 1 Capital (to Risk Weighted Assets) Trustmark Corporation $ 974,034 14.81 % $ 263,078 4.00 % n/a n/a Trustmark National Bank 938,122 14.44 % 259,855 4.00 % $ 389,782 6.00 % Tier 1 Capital (to Average Assets) Trustmark Corporation $ 974,034 10.43 % $ 280,162 3.00 % n/a n/a Trustmark National Bank 938,122 10.18 % 276,502 3.00 % $ 460,837 5.00 % Dividends on Common Stock Dividends per common share for the years ended December 31, 2012, 2011 and 2010 were $0.92. Trustmark's dividend payout ratio for 2012, 2011 and 2010 was 50.8%, 55.1%, and 58.2%, respectively. Approval by TNB's regulators is required if the total of all dividends declared in any calendar year exceeds the total of its net income for that year combined with its retained net income of the preceding two years. TNB will have available in 2013 approximately $92.0 million plus its net income for that year to pay as dividends to Trustmark. The actual amount of any dividends declared in 2013 by Trustmark will be determined by Trustmark's Board of Directors.

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 $7.859 billion for 2012 and represented approximately 80.2% of average liabilities and shareholders' equity when compared to average deposits of $7.525 billion, which represented 78.5% of average liabilities and shareholders' equity for 2011.

71-------------------------------------------------------------------------------- Table of Contents Trustmark utilizes a limited amount of brokered deposits to supplement other wholesale funding sources. At December 31, 2012, brokered sweep Money Market Deposit Account (MMDA) deposits totaled $42.9 million compared to $42.1 million at December 31, 2011. At December 31, 2012, Trustmark had $49.9 million in term fixed-rate brokered CDs outstanding compared with $49.7 million outstanding brokered CDs at December 31, 2011. 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 December 31, 2012, Trustmark had $68.0 million of upstream federal funds purchased, compared to $365.0 million at December 31, 2011. 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, which provided no advances at December 31, 2012, compared with $2.5 million in advances at December 31, 2011. Under the existing borrowing agreement, Trustmark had sufficient qualifying collateral to increase FHLB advances by $1.882 billion at December 31, 2012.

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 December 31, 2012, Trustmark had approximately $467.0 million available in repurchase agreement capacity compared to $603.0 million at December 31, 2011. The decrease in the repurchase agreement capacity at December 31, 2012, was primarily due to Trustmark's investment in highly rated asset-backed securities, which are not used as collateral for repurchase transactions.

Another borrowing source is the Discount Window. At December 31, 2012, Trustmark had approximately $798.2 million available in collateral capacity at the Discount Window from pledges of loans and securities, compared with $777.4 million at December 31, 2011.

TNB has outstanding $50.0 million in aggregate principal amount of Subordinated Notes (the Notes) due December 15, 2016. At December 31, 2012, 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 a newly formed Delaware trust affiliate, Trustmark Preferred Capital Trust I, (the Trust). The trust preferred securities mature September 30, 2036 and are redeemable at Trustmark's option at any time. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase $61.856 million in aggregate principal amount of Trustmark's junior subordinated debentures.

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 December 31, 2012, Trustmark had $75.0 million in Eurodollar deposits outstanding.

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 December 31, 2012, 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.

72-------------------------------------------------------------------------------- Table of Contents 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. These derivative instruments are 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 $497.2 million at December 31, 2012, with a positive valuation adjustment of $1.5 million, compared to $317.0 million, with a negative valuation adjustment of $1.5 million as of December 31, 2011. The growth during 2012 has been driven by record low mortgage rates, which has stimulated higher mortgage loan refinancing activity.

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 offsets the changes in fair value of MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting under GAAP. 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 negative ineffectiveness of $3.4 million for 2012 compared with a net positive ineffectiveness of $4.4 million for 2011. The net negative ineffectiveness is a result of the spread contraction between primary mortgage rates and yields on the ten-year Treasury note partially offset by hedge income produced by a positively-sloped yield curve and net option premium.

In the first quarter of 2011, Trustmark began offering 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 December 31, 2012, Trustmark had interest rate swaps with an aggregate notional amount of $321.3 million related to this program, compared to $71.2 million as of December 31, 2011. The increase in the aggregate notional amount in 2012 was attributable to the increase in the number of transactions as Trustmark realized its first full year of operation.

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 December 31, 2012, 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 $5.4 million compared to $1.8 million as of December 31, 2011. As of December 31, 2012, Trustmark had posted collateral with a market value of $1.4 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 December 31, 2012, 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 December 31, 2012, Trustmark had entered into two risk participation agreements as a beneficiary with an aggregate notional amount of $10.1 million, compared to no transactions as of December 31, 2011. The fair values of these risk participation agreements were immaterial at December 31, 2012.

73-------------------------------------------------------------------------------- Table of Contents Accounting Policies Recently Adopted and Pending Accounting Pronouncements 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 early adoption is permitted. Adoption of ASU 2012-06 is not expected to have a significant impact on Trustmark's consolidated financial statements.

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. As Trustmark does not have any indefinite-lived intangible assets other than goodwill, the adoption of ASU 2012-02 will have no impact on Trustmark's consolidated financial statements.

ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No.

2011-05." ASU 2011-12 defers the effective date of the requirement of ASU 2011-05 to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. ASU 2011-12 was issued to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Entities are still required to present reclassification adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements. All other requirements of ASU 2011-05 are not affected by ASU 2011-12. The requirements of ASU 2011-05, as amended by ASU 2011-12, became effective for Trustmark's financial statements beginning January 1, 2012. For Trustmark, the impact of the ASU is a change in presentation only and did not have a significant impact on Trustmark's consolidated financial statements.

ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment." Issued in September 2011, ASU 2011-08 amends the guidance in ASC 350-202 on testing goodwill for impairment. Under the revised guidance, entities testing goodwill 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 goodwill 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 goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the ASU does not amend the requirement to test goodwill 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 became effective for Trustmark's annual goodwill impairment tests beginning January 1, 2012. The adoption of ASU 2011-08 did not have an impact on Trustmark's consolidated financial statements.

ASU 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income." ASU 2011-05 amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. Early adoption is permitted. The ASU became effective for Trustmark's financial statements beginning January 1, 2012. For Trustmark, the impact of the ASU is a change in presentation only and did not have a significant impact on Trustmark's consolidated financial statements.

74-------------------------------------------------------------------------------- Table of Contents ASU 2011-04, "Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." The ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how to measure fair value and on what disclosures to provide about fair value measurements. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments were made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. However, some could change how fair value measurement guidance is applied. The ASU became effective for Trustmark's financial statements beginning January 1, 2012, and did not have a significant impact on Trustmark's consolidated financial statements. The required disclosures are reported in Note 19 - Fair Value.

ASU 2011-03, "Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements." The ASU eliminates from U.S. GAAP the requirement for entities to consider whether a transferor has the ability to repurchase the financial assets in a repurchase agreement. This requirement was one of the criteria that entities used to determine whether the transferor maintained effective control. Although entities must consider all the effective-control criteria under ASC 860, the elimination of this requirement may lead to more conclusions that a repurchase arrangement should be accounted for as a secured borrowing rather than as a sale. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The ASU became effective for Trustmark's financial statements beginning January 1, 2012, and did not have a significant impact on Trustmark's consolidated financial statements.

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