Loans and the Allowance for Loan Losses

(In Thousands, Except Number of Loans)

The following is a summary of loans as of the dates presented:



	September 30, 2013			December 31, 2012
Commercial, financial, agricultural	$	481,243		$	317,050
Lease financing	76			195
Real estate – construction	152,217			105,706
Real estate – 1-4 family mortgage	1,192,223			903,423
Real estate – commercial mortgage	1,960,584			1,426,643
Installment loans to individuals	95,190			57,241
Gross loans	3,881,533			2,810,258
Unearned income	(1		)	(5		)
Loans, net of unearned income	3,881,532			2,810,253
Allowance for loan losses	(46,250		)	(44,347		)
Net loans	$	3,835,282		$	2,765,906

Past Due and Nonaccrual Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than the time the loan is 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual regardless of whether or not such loans are considered past due. All interest accrued for the current year, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:



	Accruing Loans										Nonaccruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Current Loans			Total Loans			30-89 Days Past Due		90 Days or More Past Due		Current Loans		Total Loans		Total Loans
September 30, 2013
Commercial, financial, agricultural	$	1,362	$	272	$	476,874		$	478,508		$	—	$	1,922	$	813	$	2,735	$	481,243
Lease financing	—		—		76			76			—		—		—		—		76
Real estate – construction	1		592		149,976			150,569			—		1,648		—		1,648		152,217
Real estate – 1-4 family mortgage	11,965		3,436		1,158,038			1,173,439			2,276		5,788		10,720		18,784		1,192,223
Real estate – commercial mortgage	10,526		6,796		1,896,754			1,914,076			3,294		33,224		9,990		46,508		1,960,584
Installment loans to individuals	324		56		94,681			95,061			—		129		—		129		95,190
Unearned income	—		—		(1		)	(1		)	—		—		—		—		(1		)
Total	$	24,178	$	11,152	$	3,776,398		$	3,811,728		$	5,570	$	42,711	$	21,523	$	69,804	$	3,881,532
December 31, 2012
Commercial, financial, agricultural	$	484	$	15	$	312,943		$	313,442		$	215	$	3,131	$	262	$	3,608	$	317,050
Lease financing	—		—		195			195			—		—		—		—		195
Real estate – construction	80		—		103,978			104,058			—		1,648		—		1,648		105,706
Real estate – 1-4 family mortgage	6,685		1,992		867,053			875,730			1,249		13,417		13,027		27,693		903,423
Real estate – commercial mortgage	5,084		1,250		1,373,470			1,379,804			325		38,297		8,217		46,839		1,426,643
Installment loans to individuals	197		50		56,715			56,962			7		265		7		279		57,241
Unearned income	—		—		(5		)	(5		)	—		—		—		—		(5		)
Total	$	12,530	$	3,307	$	2,714,349		$	2,730,186		$	1,796	$	56,758	$	21,513	$	80,067	$	2,810,253

Restructured loans contractually 90 days past due or more totaled $646 at December 31, 2012. There were no restructured loans contractually 90 days past due or more at September 30, 2013. The outstanding balance of restructured loans on nonaccrual status was $12,662 and $11,420 at September 30, 2013 and December 31, 2012, respectively.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial, consumer and construction loans above a minimum dollar amount threshold by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are evaluated collectively for impairment. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then they are recorded as recoveries of any amounts previously charged-off. For impaired loans, a specific reserve is established to adjust the carrying value of the loan to its estimated net realizable value.

Impaired loans recognized in conformity with Financial Accounting Standards Board Accounting Standards Codification Topic ("ASC") 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of the dates presented:



	Unpaid Contractual Principal Balance		Recorded Investment With Allowance		Recorded Investment With No Allowance		Total Recorded Investment		Related Allowance
September 30, 2013
Commercial, financial, agricultural	$	6,536	$	603	$	2,193	$	2,796	$	260
Lease financing	—		—		—		—		—
Real estate – construction	2,447		—		1,648		1,648		—
Real estate – 1-4 family mortgage	39,279		25,285		4,776		30,061		7,569
Real estate – commercial mortgage	107,940		30,545		39,269		69,814		7,079
Installment loans to individuals	—		—		—		—		—
Total	$	156,202	$	56,433	$	47,886	$	104,319	$	14,908
December 31, 2012
Commercial, financial, agricultural	$	5,142	$	1,620	$	1,620	$	3,240	$	708
Lease financing	—		—		—		—		—
Real estate – construction	2,447		—		1,648		1,648		—
Real estate – 1-4 family mortgage	80,022		28,848		10,094		38,942		9,201
Real estate – commercial mortgage	118,167		34,400		39,450		73,850		7,688
Installment loans to individuals	—		—		—		—		—
Totals	$	205,778	$	64,868	$	52,812	$	117,680	$	17,597

The following table presents the average recorded investment and interest income recognized on impaired loans for the periods presented:



	Three Months Ended				Three Months Ended
	September 30, 2013				September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial, financial, agricultural	$	5,183	$	4	$	3,474	$	25
Lease financing	—		—		—		—
Real estate – construction	1,650		—		2,086		6
Real estate – 1-4 family mortgage	32,274		158		58,104		917
Real estate – commercial mortgage	75,312		379		89,463		620
Installment loans to individuals	—		—		—		—
Total	$	114,419	$	541	$	153,127	$	1,568


(1)	Includes interest income recognized using the cash-basis method of income recognition of $814. No interest income was recognized using the cash-basis method of income recognition during the three months ended September 30, 2013.



	Nine Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial, financial, agricultural	$	5,123	$	4	$	3,610	$	41
Lease financing	—		—		—		—
Real estate – construction	1,650		—		2,087		6
Real estate – 1-4 family mortgage	33,181		449		62,320		1,515
Real estate – commercial mortgage	75,997		845		95,050		1,696
Installment loans to individuals	—		—		—		—
Total	$	115,951	$	1,298	$	163,067	$	3,258


(1)	Includes interest income recognized using the cash-basis method of income recognition of $1,128. No interest income was recognized using the cash-basis method of income recognition during the nine months ended September 30, 2013.

Restructured Loans

Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and which are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. The following table presents restructured loans segregated by class as of the dates presented:



	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
September 30, 2013
Commercial, financial, agricultural	1	$	—	$	20
Lease financing	—	—		—
Real estate – construction	—	—		—
Real estate – 1-4 family mortgage	23	18,670		10,625
Real estate – commercial mortgage	16	12,224		11,419
Installment loans to individuals	1	—		172
Total	41	$	30,894	$	22,236
December 31, 2012
Commercial, financial, agricultural	—	$	—	$	—
Lease financing	—	—		—
Real estate – construction	—	—		—
Real estate – 1-4 family mortgage	19	18,450		10,853
Real estate – commercial mortgage	16	18,985		18,409
Installment loans to individuals	1	184		174
Total	36	$	37,619	$	29,436

Changes in the Company’s restructured loans are set forth in the table below:



	Number of Loans		Recorded Investment
Totals at January 1, 2013	36		$	29,436
Additional loans with concessions	13		4,319
Reductions due to:
Reclassified as nonperforming	(2	)	(3,227		)
Charge-offs	(2	)	(877		)
Transfer to other real estate owned	—		—
Principal paydowns			(1,674		)
Lapse of concession period	(4	)	(5,741		)
Totals at September 30, 2013	41		$	22,236

The allocated allowance for loan losses attributable to restructured loans was $3,218 and $3,969 at September 30, 2013 and December 31, 2012, respectively. The Company had $93 and $288 in remaining availability under commitments to lend additional funds on these restructured loans at September 30, 2013 and December 31, 2012, respectively.

Credit Quality

For loans originated for commercial purposes, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of these loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans that migrate toward the “Pass” grade (those with a risk rating between 1 and 4) or within the “Pass” grade generally have a lower risk of loss and therefore a lower risk factor. The “Watch” grade (those with a risk rating of 5) is utilized on a temporary basis for “Pass” grade loans where a significant adverse risk-modifying action is anticipated in the near term. Loans that migrate toward the “Substandard” grade (those with a risk rating between 6 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to those related loan balances. The following table presents the Company’s loan portfolio by risk-rating grades as of the dates presented:



	Pass		Watch		Substandard		Total
September 30, 2013
Commercial, financial, agricultural	$	330,739	$	27,455	$	1,868	$	360,062
Real estate – construction	106,040		922		—		106,962
Real estate – 1-4 family mortgage	129,710		13,960		28,652		172,322
Real estate – commercial mortgage	1,347,068		31,917		36,377		1,415,362
Installment loans to individuals	4		—		—		4
Total	$	1,913,561	$	74,254	$	66,897	$	2,054,712
December 31, 2012
Commercial, financial, agricultural	$	226,540	$	1,939	$	3,218	$	231,697
Real estate – construction	71,633		651		—		72,284
Real estate – 1-4 family mortgage	96,147		24,138		32,589		152,874
Real estate – commercial mortgage	989,095		46,148		37,996		1,073,239
Installment loans to individuals	7		—		—		7
Total	$	1,383,422	$	72,876	$	73,803	$	1,530,101

For portfolio balances of consumer, consumer mortgage and certain other loans originated for other than commercial purposes, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria. The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:



	Performing		Non- Performing		Total
September 30, 2013
Commercial, financial, agricultural	$	82,283	$	164	$	82,447
Lease financing	75		—		75
Real estate – construction	41,045		—		41,045
Real estate – 1-4 family mortgage	910,066		2,667		912,733
Real estate – commercial mortgage	227,578		263		227,841
Installment loans to individuals	87,388		95		87,483
Total	$	1,348,435	$	3,189	$	1,351,624
December 31, 2012
Commercial, financial, agricultural	$	74,003	$	210	$	74,213
Lease financing	195		—		195
Real estate – construction	31,774		—		31,774
Real estate – 1-4 family mortgage	670,074		5,328		675,402
Real estate – commercial mortgage	195,086		449		195,535
Installment loans to individuals	54,918		91		55,009
Total	$	1,026,050	$	6,078	$	1,032,128

Loans Acquired with Deteriorated Credit Quality

Loans acquired in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows as of the dates presented:



	Impaired Covered Loans		Other Covered Loans		Not Covered Loans		Total
September 30, 2013
Commercial, financial, agricultural	$	—	$	10,295	$	26,186	$	36,481
Lease financing	—		—		—		—
Real estate – construction	—		1,648		4,235		5,883
Real estate – 1-4 family mortgage	1,040		55,683		51,610		108,333
Real estate – commercial mortgage	24,279		103,036		196,548		323,863
Installment loans to individuals	—		31		7,489		7,520
Total	$	25,319	$	170,693	$	286,068	$	482,080
December 31, 2012
Commercial, financial, agricultural	$	—	$	10,800	$	340	$	11,140
Lease financing	—		—		—		—
Real estate – construction	—		1,648		—		1,648
Real estate – 1-4 family mortgage	6,122		67,326		1,699		75,147
Real estate – commercial mortgage	25,782		125,379		6,708		157,869
Installment loans to individuals	—		31		2,194		2,225
Total	$	31,904	$	205,184	$	10,941	$	248,029

The references in the table above and elsewhere in these Notes to "covered loans" and "not covered loans" (as well as to "covered OREO" and "not covered OREO") refer to loans (or OREO, as applicable) covered and not covered, respectively, by loss-share agreements with the FDIC. See Note E, "FDIC Loss-Share Indemnification Asset," below for more information.

The following table presents the fair value of loans determined to be impaired at the time of acquisition and determined not to be impaired at the time of acquisition at September 30, 2013:



	Impaired Covered Loans			Other Covered Loans			Not Covered Loans			Total
Contractually-required principal and interest	$	67,522		$	214,907		$	371,358		$	653,787
Nonaccretable difference⁽¹⁾	(42,202		)	(40,896		)	(48,859		)	(131,957		)
Cash flows expected to be collected	25,320			174,011			322,499			521,830
Accretable yield⁽²⁾	(1		)	(3,318		)	(36,431		)	(39,750		)
Fair value	$	25,319		$	170,693		$	286,068		$	482,080


(1)	Represents contractual principal and interest cash flows of $641,495 and $12,292, respectively, not expected to be collected.


(2)	Represents contractual interest payments of $3,355 expected to be collected and purchase discount of $36,395.

Changes in the accretable yield of loans acquired with deteriorated credit quality were as follows:



	Impaired Covered Loans			Other Covered Loans			Not Covered Loans			Total
Balance at January 1, 2013	$	(13	)	$	(6,705	)	$	(1,130	)	$	(7,848	)
Reclasses from nonaccretable difference	(109		)	(3,557		)	(36,668		)	(40,334		)
Accretion	121			6,944			1,367			8,432
Balance at September 30, 2013	$	(1	)	$	(3,318	)	$	(36,431	)	$	(39,750	)

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, “Contingencies”. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Management and the internal loan review staff evaluate the adequacy of the allowance for loan losses quarterly. The allowance for loan losses is evaluated based on a continuing assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including its risk rating system, regulatory guidance and economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is established through a provision for loan losses charged to earnings resulting from measurements of inherent credit risk in the loan portfolio and estimates of probable losses or impairments of individual loans. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The following table provides a roll forward of the allowance for loan losses and a breakdown of the ending balance of the allowance based on the Company’s impairment methodology for the periods presented:



	Commercial			Real Estate - Construction		Real Estate - 1-4 Family Mortgage			Real Estate - Commercial Mortgage			Installment and Other⁽¹⁾			Total
Three Months Ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	3,478		$	863	$	19,432		$	22,239		$	1,022		$	47,034
Charge-offs	(887		)	—		(1,251		)	(1,106		)	(82		)	(3,326		)
Recoveries	54			7		120			38			23			242
Net (charge-offs) recoveries	(833		)	7		(1,131		)	(1,068		)	(59		)	(3,084		)
Provision for loan losses	364			44		370			1,975			15			2,768
Benefit attributable to FDIC loss-share agreements	(67		)	—		(326		)	(129		)	—			(522		)
Recoveries payable to FDIC	5			—		45			4			—			54
Provision for loan losses charged to operations	302			44		89			1,850			15			2,300
Ending balance	$	2,947		$	914	$	18,390		$	23,021		$	978		$	46,250
Nine Months Ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	3,307		$	711	$	18,347		$	21,416		$	566		$	44,347
Charge-offs	(1,167		)	—		(2,517		)	(4,226		)	(434		)	(8,344		)
Recoveries	301			70		591			885			50			1,897
Net (charge-offs) recoveries	(866		)	70		(1,926		)	(3,341		)	(384		)	(6,447		)
Provision for loan losses	874			132		2,088			5,762			796			9,652
Benefit attributable to FDIC loss-share agreements	(397		)	—		(956		)	(840		)	—			(2,193		)
Recoveries payable to FDIC	29			1		837			24			—			891
Provision for loan losses charged to operations	506			133		1,969			4,946			796			8,350
Ending balance	$	2,947		$	914	$	18,390		$	23,021		$	978		$	46,250
Period-End Amount Allocated to:
Individually evaluated for impairment	$	260		$	—	$	7,569		$	7,079		$	—		$	14,908
Collectively evaluated for impairment	2,687			914		10,821			15,942			978			31,342
Acquired with deteriorated credit quality	—			—		—			—			—			—
Ending balance	$	2,947		$	914	$	18,390		$	23,021		$	978		$	46,250



	Commercial			Real Estate - Construction			Real Estate - 1-4 Family Mortgage			Real Estate - Commercial Mortgage			Installment and Other⁽¹⁾			Total
Three Months Ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	3,235		$	966		$	18,980		$	20,765		$	833		$	44,779
Charge-offs	(2,590		)	—			(2,682		)	(780		)	(118		)	(6,170		)
Recoveries	145			3			648			22			17			835
Net (charge-offs) recoveries	(2,445		)	3			(2,034		)	(758		)	(101		)	(5,335		)
Provision for loan losses	2,795			79			2,269			988			(164		)	5,967
Benefit attributable to FDIC loss-share agreements	(335		)	—			(1,187		)	(60		)	—			(1,582		)
Recoveries payable to FDIC	2			—			162			76			—			240
Provision for loan losses charged to operations	2,462			79			1,244			1,004			(164		)	4,625
Ending balance	$	3,252		$	1,048		$	18,190		$	21,011		$	568		$	44,069
Nine Months Ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	4,197		$	1,073		$	17,191		$	20,979		$	900		$	44,340
Charge-offs	(4,623		)	(42		)	(7,230		)	(3,806		)	(321		)	(16,022		)
Recoveries	323			6			981			247			69			1,626
Net charge-offs	(4,300		)	(36		)	(6,249		)	(3,559		)	(252		)	(14,396		)
Provision for loan losses	4,052			28			10,269			6,640			(84		)	20,905
Benefit attributable to FDIC loss-share agreements	(723		)	(17		)	(3,421		)	(3,592		)	—			(7,753		)
Recoveries payable to FDIC	26			—			400			543			4			973
Provision for loan losses charged to operations	3,355			11			7,248			3,591			(80		)	14,125
Ending balance	$	3,252		$	1,048		$	18,190		$	21,011		$	568		$	44,069
Period-End Amount Allocated to:
Individually evaluated for impairment	$	715		$	2		$	10,011		$	8,441		$	—		$	19,169
Collectively evaluated for impairment	2,537			1,046			8,179			12,570			568			24,900
Acquired with deteriorated credit quality	—			—			—			—			—			—
Ending balance	$	3,252		$	1,048		$	18,190		$	21,011		$	568		$	44,069


(1)	Includes lease financing receivables.

The following table provides the recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:



	Commercial		Real Estate - Construction		Real Estate - 1-4 Family Mortgage		Real Estate - Commercial Mortgage		Installment and Other⁽¹⁾		Total
September 30, 2013
Individually evaluated for impairment	$	771	$	—	$	25,537	$	30,545	$	—	$	56,853
Collectively evaluated for impairment	443,991		146,334		1,058,353		1,606,176		87,745		3,342,599
Acquired with deteriorated credit quality	36,481		5,883		108,333		323,863		7,520		482,080
Ending balance	$	481,243	$	152,217	$	1,192,223	$	1,960,584	$	95,265	$	3,881,532
December 31, 2012
Individually evaluated for impairment	$	1,620	$	—	$	28,848	$	34,400	$	—	$	64,868
Collectively evaluated for impairment	304,290		104,058		799,428		1,234,374		55,206		2,497,356
Acquired with deteriorated credit quality	11,140		1,648		75,147		157,869		2,225		248,029
Ending balance	$	317,050	$	105,706	$	903,423	$	1,426,643	$	57,431	$	2,810,253


(1)	Includes lease financing receivables.