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:



	June 30, 2014			December 31, 2013
Commercial, financial, agricultural	$	447,826		$	468,963
Lease financing	1,814			53
Real estate – construction	176,577			161,436
Real estate – 1-4 family mortgage	1,221,288			1,208,233
Real estate – commercial mortgage	2,015,319			1,950,572
Installment loans to individuals	94,753			91,762
Gross loans	3,957,577			3,881,019
Unearned income	(47		)	(1		)
Loans, net of unearned income	3,957,530			3,881,018
Allowance for loan losses	(47,304		)	(47,665		)
Net loans	$	3,910,226		$	3,833,353

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
June 30, 2014
Commercial, financial, agricultural	$	630	$	972	$	443,663		$	445,265		$	137	$	1,139	$	1,285	$	2,561	$	447,826
Lease financing	—		—		1,814			1,814			—		—		—		—		1,814
Real estate – construction	713		11		174,205			174,929			—		1,648		—		1,648		176,577
Real estate – 1-4 family mortgage	9,437		5,047		1,193,582			1,208,066			336		7,306		5,580		13,222		1,221,288
Real estate – commercial mortgage	10,581		2,603		1,955,117			1,968,301			1,785		35,136		10,097		47,018		2,015,319
Installment loans to individuals	279		39		94,318			94,636			—		102		15		117		94,753
Unearned income	—		—		(47		)	(47		)	—		—		—		—		(47		)
Total	$	21,640	$	8,672	$	3,862,652		$	3,892,964		$	2,258	$	45,331	$	16,977	$	64,566	$	3,957,530
December 31, 2013
Commercial, financial, agricultural	$	2,067	$	607	$	463,521		$	466,195		$	138	$	1,959	$	671	$	2,768	$	468,963
Lease financing	—		—		53			53			—		—		—		—		53
Real estate – construction	664		—		159,124			159,788			—		1,648		—		1,648		161,436
Real estate – 1-4 family mortgage	10,168		2,206		1,179,703			1,192,077			1,203		6,041		8,912		16,156		1,208,233
Real estate – commercial mortgage	8,870		1,286		1,888,745			1,898,901			966		37,439		13,266		51,671		1,950,572
Installment loans to individuals	706		88		90,880			91,674			—		80		8		88		91,762
Unearned income	—		—		(1		)	(1		)	—		—		—		—		(1		)
Total	$	22,475	$	4,187	$	3,782,025		$	3,808,687		$	2,307	$	47,167	$	22,857	$	72,331	$	3,881,018

Restructured loans contractually 90 days past due or more totaled $0 at December 31, 2013. This balance increased to $110 in restructured loans contractually 90 days past due or more at June 30, 2014. The outstanding balance of restructured loans on nonaccrual status was $8,280 and $10,078 at June 30, 2014 and December 31, 2013, 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
June 30, 2014
Commercial, financial, agricultural	$	6,933	$	701	$	2,648	$	3,349	$	248
Real estate – construction	2,832		—		1,877		1,877		—
Real estate – 1-4 family mortgage	28,062		15,270		3,989		19,259		3,009
Real estate – commercial mortgage	122,322		42,531		40,934		83,465		11,726
Installment loans to individuals	—		—		—		—		—
Total	$	160,149	$	58,502	$	49,448	$	107,950	$	14,983
December 31, 2013
Commercial, financial, agricultural	$	6,575	$	743	$	2,043	$	2,786	$	260
Real estate – construction	2,447		—		1,648		1,648		—
Real estate – 1-4 family mortgage	42,868		25,374		8,542		33,916		7,353
Real estate – commercial mortgage	108,963		30,624		38,517		69,141		7,036
Installment loans to individuals	620		183		77		260		1
Totals	$	161,473	$	56,924	$	50,827	$	107,751	$	14,650

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
	June 30, 2014				June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial, financial, agricultural	$	5,279	$	—	$	5,601	$	—
Real estate – construction	2,034		—		1,650		—
Real estate – 1-4 family mortgage	21,747		170		34,732		108
Real estate – commercial mortgage	93,402		752		69,168		123
Installment loans to individuals	—		—		—		—
Total	$	122,462	$	922	$	111,151	$	231


(1)	Includes interest income recognized using the cash-basis method of income recognition of $0. No interest income was recognized using the cash-basis method of income recognition during the three months ended June 30, 2014.



	Six Months Ended				Six Months Ended
	June 30, 2014				June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial, financial, agricultural	$	5,382	$	—	$	5,551	$	—
Real estate – construction	2,036		2		1,650		—
Real estate – 1-4 family mortgage	22,122		204		34,874		291
Real estate – commercial mortgage	94,641		816		69,579		466
Installment loans to individuals	—		—		—		—
Total	$	124,181	$	1,022	$	111,654	$	757


(1)	Includes interest income recognized using the cash-basis method of income recognition of $0. No interest income was recognized using the cash-basis method of income recognition during the six months ended June 30, 2014.

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
June 30, 2014
Commercial, financial, agricultural	—	$	—	$	—
Real estate – construction	—	—		—
Real estate – 1-4 family mortgage	19	15,768		5,884
Real estate – commercial mortgage	18	17,112		14,955
Installment loans to individuals	—	—		—
Total	37	$	32,880	$	20,839
December 31, 2013
Commercial, financial, agricultural	1	$	20	$	19
Real estate – construction	—	—		—
Real estate – 1-4 family mortgage	23	19,371		10,354
Real estate – commercial mortgage	16	12,785		10,934
Installment loans to individuals	1	182		171
Total	41	$	32,358	$	21,478

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



	Number of Loans		Recorded Investment
Totals at January 1, 2014	41		$	21,478
Additional loans with concessions	1		1,289
Reductions due to:
Reclassified as nonperforming	(1	)	(331		)
Paid in full	(4	)	(335		)
Charge-offs	—		—
Transfer to other real estate owned	—		—
Principal paydowns			(1,259		)
Lapse of concession period	—		—
Totals at June 30, 2014	37		$	20,842

The allocated allowance for loan losses attributable to restructured loans was $3,122 and $2,984 at June 30, 2014 and December 31, 2013, respectively. The Company had $0 and $93 in remaining availability under commitments to lend additional funds on these restructured loans at June 30, 2014 and December 31, 2013, 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
June 30, 2014
Commercial, financial, agricultural	$	319,948	$	4,500	$	1,447	$	325,895
Real estate – construction	123,503		1,141		—		124,644
Real estate – 1-4 family mortgage	130,837		10,329		10,067		151,233
Real estate – commercial mortgage	1,414,585		29,749		48,178		1,492,512
Installment loans to individuals	1,677		—		—		1,677
Total	$	1,990,550	$	45,719	$	59,692	$	2,095,961
December 31, 2013
Commercial, financial, agricultural	$	328,959	$	10,588	$	4,266	$	343,813
Real estate – construction	114,428		588		—		115,016
Real estate – 1-4 family mortgage	126,916		13,864		23,370		164,150
Real estate – commercial mortgage	1,338,340		32,892		35,121		1,406,353
Installment loans to individuals	19		—		—		19
Total	$	1,908,662	$	57,932	$	62,757	$	2,029,351

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
June 30, 2014
Commercial, financial, agricultural	$	93,449	$	133	$	93,582
Lease financing	1,767		—		1,767
Real estate – construction	50,045		11		50,056
Real estate – 1-4 family mortgage	973,910		3,935		977,845
Real estate – commercial mortgage	249,378		436		249,814
Installment loans to individuals	87,439		81		87,520
Total	$	1,455,988	$	4,596	$	1,460,584
December 31, 2013
Commercial, financial, agricultural	$	89,490	$	176	$	89,666
Lease financing	53		—		53
Real estate – construction	43,535		—		43,535
Real estate – 1-4 family mortgage	938,994		2,527		941,521
Real estate – commercial mortgage	242,363		666		243,029
Installment loans to individuals	84,855		79		84,934
Total	$	1,399,290	$	3,448	$	1,402,738

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
June 30, 2014
Commercial, financial, agricultural	$	—	$	7,677	$	20,672	$	28,349
Lease financing	—		—		—		—
Real estate – construction	—		1,648		229		1,877
Real estate – 1-4 family mortgage	1,255		48,361		42,594		92,210
Real estate – commercial mortgage	19,044		89,122		164,827		272,993
Installment loans to individuals	—		22		5,534		5,556
Total	$	20,299	$	146,830	$	233,856	$	400,985
December 31, 2013
Commercial, financial, agricultural	$	—	$	9,546	$	25,938	$	35,484
Lease financing	—		—		—		—
Real estate – construction	—		1,648		1,237		2,885
Real estate – 1-4 family mortgage	835		53,631		48,096		102,562
Real estate – commercial mortgage	23,684		92,302		185,204		301,190
Installment loans to individuals	—		28		6,781		6,809
Total	$	24,519	$	157,155	$	267,256	$	448,930

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 June 30, 2014:



	Impaired Covered Loans			Other Covered Loans			Not Covered Loans			Total
Contractually-required principal and interest	$	57,279		$	183,328		$	317,561		$	558,168
Nonaccretable difference⁽¹⁾	(36,979		)	(33,251		)	(50,579		)	(120,809		)
Cash flows expected to be collected	20,300			150,077			266,982			437,359
Accretable yield⁽²⁾	(1		)	(3,247		)	(33,126		)	(36,374		)
Fair value	$	20,299		$	146,830		$	233,856		$	400,985


(1)	Represents contractual principal and interest cash flows of $112,523 and $8,286, respectively, not expected to be collected.


(2)	Represents contractual interest payments of $3,387 expected to be collected and purchase discount of $32,987.

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, 2014	$	(1	)	$	(3,758	)	$	(36,191	)	$	(39,950	)
Reclasses from nonaccretable difference	(50		)	(3,389		)	(355		)	(3,794		)
Accretion	50			3,900			3,420			7,370
Balance at June 30, 2014	$	(1	)	$	(3,247	)	$	(33,126	)	$	(36,374	)

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management based on its ongoing analysis of the loan portfolio to absorb probable credit losses inherent in the entire loan portfolio, 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 June 30, 2014
Allowance for loan losses:
Beginning balance	$	3,128		$	1,109	$	18,478		$	24,147		$	1,186		$	48,048
Charge-offs	—			—		(1,985		)	(483		)	(61		)	(2,529		)
Recoveries	75			3		206			28			23			335
Net (charge-offs) recoveries	75			3		(1,779		)	(455		)	(38		)	(2,194		)
Provision for loan losses	(95		)	154		(5,187		)	7,522			57			2,451
Benefit attributable to FDIC loss-share agreements	—			—		(66		)	(1,476		)	—			(1,542		)
Recoveries payable to FDIC	156			1		351			33			—			541
Provision for loan losses charged to operations	61			155		(4,902		)	6,079			57			1,450
Ending balance	$	3,264		$	1,267	$	11,797		$	29,771		$	1,205		$	47,304
Six Months Ended June 30, 2014
Allowance for loan losses:
Beginning balance	$	3,090		$	1,091	$	18,629		$	23,688		$	1,167		$	47,665
Charge-offs	(119		)	—		(2,872		)	(543		)	(292		)	(3,826		)
Recoveries	112			8		357			58			30			565
Net (charge-offs) recoveries	(7		)	8		(2,515		)	(485		)	(262		)	(3,261		)
Provision for loan losses	88			167		(4,691		)	8,002			300			3,866
Benefit attributable to FDIC loss-share agreements	(68		)	—		(135		)	(1,471		)	—			(1,674		)
Recoveries payable to FDIC	161			1		509			37			—			708
Provision for loan losses charged to operations	181			168		(4,317		)	6,568			300			2,900
Ending balance	$	3,264		$	1,267	$	11,797		$	29,771		$	1,205		$	47,304
Period-End Amount Allocated to:
Individually evaluated for impairment	$	245		$	—	$	2,062		$	8,584		$	—		$	10,891
Collectively evaluated for impairment	3,019			1,267		9,735			21,187			1,205			36,413
Acquired with deteriorated credit quality	—			—		—			—			—			—
Ending balance	$	3,264		$	1,267	$	11,797		$	29,771		$	1,205		$	47,304



	Commercial			Real Estate - Construction		Real Estate - 1-4 Family Mortgage			Real Estate - Commercial Mortgage			Installment and Other⁽¹⁾			Total
Three Months Ended June 30, 2013
Allowance for loan losses:
Beginning balance	$	2,942		$	676	$	19,737		$	22,096		$	1,054		$	46,505
Charge-offs	(46		)	—		(652		)	(2,527		)	(288		)	(3,513		)
Recoveries	90			47		132			756			17			1,042
Net (charge-offs) recoveries	44			47		(520		)	(1,771		)	(271		)	(2,471		)
Provision for loan losses	563			140		521			1,962			239			3,425
Benefit attributable to FDIC loss-share agreements	(83		)	—		(369		)	(50		)	—			(502		)
Recoveries payable to FDIC	12			—		63			2			—			77
Provision for loan losses charged to operations	492			140		215			1,914			239			3,000
Ending balance	$	3,478		$	863	$	19,432		$	22,239		$	1,022		$	47,034
Six Months Ended June 30, 2013
Allowance for loan losses:
Beginning balance	$	3,307		$	711	$	18,347		$	21,416		$	566		$	44,347
Charge-offs	(280		)	—		(1,266		)	(3,120		)	(352		)	(5,018		)
Recoveries	247			63		471			847			27			1,655
Net (charge-offs) recoveries	(33		)	63		(795		)	(2,273		)	(325		)	(3,363		)
Provision for loan losses	510			88		1,718			3,787			781			6,884
Benefit attributable to FDIC loss-share agreements	(330		)	—		(630		)	(711		)	—			(1,671		)
Recoveries payable to FDIC	24			1		792			20			—			837
Provision for loan losses charged to operations	204			89		1,880			3,096			781			6,050
Ending balance	$	3,478		$	863	$	19,432		$	22,239		$	1,022		$	47,034
Period-End Amount Allocated to:
Individually evaluated for impairment	$	834		$	—	$	7,843		$	7,267		$	—		$	15,944
Collectively evaluated for impairment	2,644			863		11,589			14,972			1,022			31,090
Acquired with deteriorated credit quality	—			—		—			—			—			—
Ending balance	$	3,478		$	863	$	19,432		$	22,239		$	1,022		$	47,034


(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
June 30, 2014
Individually evaluated for impairment	$	701	$	—	$	15,270	$	42,531	$	—	$	58,502
Collectively evaluated for impairment	418,776		174,700		1,113,808		1,699,795		90,964		3,498,043
Acquired with deteriorated credit quality	28,349		1,877		92,210		272,993		5,556		400,985
Ending balance	$	447,826	$	176,577	$	1,221,288	$	2,015,319	$	96,520	$	3,957,530
December 31, 2013
Individually evaluated for impairment	$	743	$	—	$	25,374	$	30,624	$	183	$	56,924
Collectively evaluated for impairment	432,736		158,551		1,080,297		1,618,758		84,822		3,375,164
Acquired with deteriorated credit quality	35,484		2,885		102,562		301,190		6,809		448,930
Ending balance	$	468,963	$	161,436	$	1,208,233	$	1,950,572	$	91,814	$	3,881,018


(1)	Includes lease financing receivables.