4. Loans and Allowance for Loan Losses

The Company generally makes loans in its market areas of south Mississippi, southern and central Alabama, south Louisiana, the Houston, Texas areas and the northern, central and panhandle regions of Florida. Loans, net of unearned income, by portfolio are presented in the table below.



	June 30,		December 31,
(in thousands)	2017		2016
Commercial non-real estate	$	8,093,104	$	7,613,917
Commercial real estate - owner occupied		2,078,332		1,906,821
Total commercial & industrial		10,171,436		9,520,738
Commercial real estate - income producing		2,401,673		2,013,890
Construction and land development		1,313,522		1,010,879
Residential mortgages		2,493,923		2,146,713
Consumer		2,093,287		2,059,931
Total loans	$	18,473,841	$	16,752,151

The following briefly describes the composition of each loan category.

Commercial and industrial

Commercial and industrial loans are made available to businesses for working capital (including financing of inventory and receivables), business expansion, to facilitate the acquisition of a business, and the purchase of equipment and machinery, including equipment leasing. These loans are primarily made based on the identified cash flows of the borrower and, when secured, have the added strength of the underlying collateral.

Commercial non-real estate loans may be secured by the assets being financed or other business assets such as accounts receivable, inventory, ownership or commodity interests, and may incorporate a personal or corporate guarantee; however, some short-term loans may be made on an unsecured basis, including a small portfolio of corporate credit cards, generally issued as a part of overall customer relationships.

Commercial real estate – owner occupied loans consist of commercial mortgages on properties where repayment is generally dependent on the cash flow from the ongoing operations and activities of the borrower. Like commercial non-real estate, these loans are primarily made based on the identified cash flows of the borrower, but also have the added strength of the value of underlying real estate collateral.

Commercial real estate – income producing

Commercial real estate – income producing loans consist of loans secured by commercial mortgages on properties where the loan is made to real estate developers or investors and repayment is dependent on the sale, refinance, or income generated from the operation of the property. Properties financed include retail, office, multifamily, senior housing, hotel/motel, skilled nursing facilities and other commercial properties.

Construction and land development

Construction and land development loans are made to facilitate the acquisition, development, improvement and construction of both commercial and residential-purpose properties. Such loans are made to builders and investors where repayment is expected to be made from the sale, refinance or operation of the property or to businesses to be used in their business operations. This portfolio also includes a small amount of residential construction loans and loans secured by raw land not yet under development.

Residential Mortgages

Residential mortgages consist of closed-end loans secured by first liens on 1- 4 family residential properties. The portfolio includes both fixed and adjustable rate loans, although most longer-term, fixed-rate loans originated are sold in the secondary mortgage market.

Consumer

Consumer loans include second lien mortgage home loans, home equity lines of credit and nonresidential consumer purpose loans. Nonresidential consumer loans include both direct and indirect loans. Direct nonresidential consumer loans are made to finance the purchase of personal property, including automobiles, recreational vehicles and boats, and for other personal purposes (secured and unsecured), and deposit account secured loans. Indirect nonresidential loans include automobile financing provided to the consumer through an agreement with automobile dealerships. Consumer loans also include a small portfolio of credit card receivables issued on the basis of applications received through referrals from the Bank’s branches, online and other marketing efforts.

Allowance for Loan Losses

The following schedule shows activity in the allowance for loan losses by portfolio class for the six months ended June 30, 2017 and 2016, as well as the corresponding recorded investment in loans at the end of each period.



			Commercial				Commercial
	Commercial		real estate-		Total		real estate-		Construction
		non-real	owner		commercial &		income		and land		Residential
(in thousands)	estate		occupied		industrial		producing		development		mortgages		Consumer		Total
	Six months ended June 30, 2017
Allowance for loan losses:
Beginning balance	$	147,052	$	11,083	$	158,135	$	13,509	$	6,271	$	25,361	$	26,142	$	229,418
Purchased credit impaired activity:
Charge-offs		—		—		—		—		(58)		(86)		(153)		(297)
Recoveries		2		93		95		—		39		19		71		224
Net provision for loan losses		(46)		(245)		(291)		(61)		(148)		(10)		(112)		(622)
Decrease in FDIC loss share receivable		(47)		—		(47)		—		—		(2,344)		(135)		(2,526)
Non-purchased credit impaired activity:
Charge-offs		(26,218)		(517)		(26,735)		(160)		(114)		(690)		(15,107)		(42,806)
Recoveries		1,816		243		2,059		398		716		262		3,475		6,910
Net provision for loan losses		14,804		1,441		16,245		(146)		343		868		14,254		31,564
Ending balance	$	137,363	$	12,098	$	149,461	$	13,540	$	7,049	$	23,380	$	28,435	$	221,865
Ending balance:
Allowance:
Individually evaluated for impairment	$	22,758	$	280	$	23,038	$	1,402	$	1	$	172	$	283	$	24,896
Amounts related to purchased credit impaired loans		395		742		1,137		192		239		12,622		942		15,132
Collectively evaluated for impairment		114,210		11,076		125,286		11,946		6,809		10,586		27,210		181,837
Total allowance	$	137,363	$	12,098	$	149,461	$	13,540	$	7,049	$	23,380	$	28,435	$	221,865
Loans:
Individually evaluated for impairment	$	250,256	$	7,480	$	257,736	$	14,913	$	847	$	3,466	$	1,053	$	278,015
Purchased credit impaired loans		5,422		9,848		15,270		6,247		4,160		129,198		8,280		163,155
Collectively evaluated for impairment		7,837,426		2,061,004		9,898,430		2,380,513		1,308,515		2,361,259		2,083,954		18,032,671
Total loans	$	8,093,104	$	2,078,332	$	10,171,436	$	2,401,673	$	1,313,522	$	2,493,923	$	2,093,287	$	18,473,841



			Commercial				Commercial
	Commercial		real estate-		Total		real estate-		Construction
	non-real		owner		commercial &		income		and land		Residential
(in thousands)	estate		occupied		industrial		producing		development		mortgages		Consumer		Total
	Six months ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	109,428	$	9,858	$	119,286	$	6,041	$	5,642	$	25,353	$	24,857	$	181,179
Purchased credit impaired activity:
Charge-offs		—		(28)		(28)		(1)		(18)		(23)		(8)		(78)
Recoveries		8		120		128		2		53		3		106		292
Net provision for loan losses		79		(170)		(91)		26		(117)		1,165		(1,290)		(307)
Decrease in FDIC loss share receivable		39		—		39		—		—		(3,378)		(98)		(3,437)
Non-purchased credit impaired activity:
Charge-offs		(22,212)		(1,199)		(23,411)		(191)		(592)		(592)		(11,268)		(36,054)
Recoveries		1,802		238		2,040		268		1,125		480		3,039		6,952
Net provision for loan losses		61,628		1,857		63,485		6,654		(1,087)		466		8,021		77,539
Ending balance	$	150,772	$	10,676	$	161,448	$	12,799	$	5,006	$	23,474	$	23,359	$	226,086
Ending balance:
Allowance:
Individually evaluated for impairment	$	12,885	$	183	$	13,068	$	72	$	1	$	167	$	41	$	13,349
Amounts related to purchased credit impaired loans		572		1,015		1,587		741		575		15,430		1,257		19,590
Collectively evaluated for impairment		137,315		9,478		146,793		11,986		4,430		7,877		22,061		193,147
Total allowance	$	150,772	$	10,676	$	161,448	$	12,799	$	5,006	$	23,474	$	23,359	$	226,086
Loans:
Individually evaluated for impairment	$	232,785	$	5,898	$	238,683	$	7,803	$	1,247	$	1,068	$	166	$	248,967
Purchased credit impaired loans		10,483		15,428		25,911		10,752		8,761		151,674		12,826		209,924
Collectively evaluated for impairment		6,889,251		1,894,874		8,784,125		2,005,916		870,580		1,864,908		2,051,376		15,576,905
Total loans	$	7,132,519	$	1,916,200	$	9,048,719	$	2,024,471	$	880,588	$	2,017,650	$	2,064,368	$	16,035,796

Impaired Loans

The following table shows the composition of nonaccrual loans by portfolio class. Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be performing and are excluded from the table.



	June 30,		December 31,
(in thousands)	2017		2016
Commercial non-real estate	$	167,710	$	249,037
Commercial real estate - owner occupied		11,750		14,413
Total commercial & industrial		179,460		263,450
Commercial real estate - income producing		13,438		13,954
Construction and land development		2,821		4,550
Residential mortgages		28,158		23,665
Consumer		14,342		12,351
Total loans	$	238,219	$	317,970

Nonaccrual loans include loans modified in troubled debt restructurings (“TDRs”) of $96.3 million and $81.9 million at June 30, 2017 and December 31, 2016, respectively. Total TDRs, both accruing and nonaccruing, were $186.8 million as of June 30, 2017 and $121.7 million at December 31, 2016. All TDRs are individually evaluated for impairment.

The table below details TDRs that were modified during the six months ended June 30, 2017 and June 30, 2016 by portfolio class.



	Six months ended
($ in thousands)		June 30, 2017						June 30, 2016
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
		Number of	Recorded		Recorded			Number of	Recorded		Recorded
Troubled Debt Restructurings:		Contracts	Investment		Investment		Contracts		Investment		Investment
Commercial non-real estate		37	$	92,976	$	92,976		17	$	57,915	$	57,915
Commercial real estate - owner occupied		4		3,734		3,734		—		—		—
Total commercial & industrial		41		96,710		96,710		17		57,915		57,915
Commercial real estate - income producing		5		6,486		6,486		—		—		—
Construction and land development		—		—		—		—		—		—
Residential mortgages		6		1,098		1,098		4		432		432
Consumer		1		40		42		—		—		—
Total loans		53	$	104,334	$	104,336		21	$	58,347	$	58,347

The TDRs during the six months ended June 30, 2017 reflected in the table above include $28.4 million of loans with extended amortization terms or other payment concessions, $40.2 million of loans with significant covenant waivers and $35.7 million with other modifications. The TDRs during the six months ended June 30, 2016 include $31.0 million of loans with extended terms or other payment concessions and $27.3 million of other modifications.

No TDRs that subsequently defaulted within twelve months of modification were recorded in the six months ended June 30, 2017 or 2016.

The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at June 30, 2017 and December 31, 2016. Loans individually evaluated for impairment include TDRs and loans that are determined to be impaired and have aggregate relationship balances of $1 million or more.



	June 30, 2017
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		principal balance		Related allowance
Commercial non-real estate	$	107,555	$	142,701	$	260,544	$	22,758
Commercial real estate - owner occupied		3,514		3,966		7,570		280
Total commercial & industrial		111,069		146,667		268,114		23,038
Commercial real estate - income producing		5,678		9,235		15,349		1,402
Construction and land development		831		16		1,820		1
Residential mortgages		2,338		1,128		3,984		172
Consumer		1		1,052		1,055		283
Total loans	$	119,917	$	158,098	$	290,322	$	24,896


	December 31, 2016
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		principal balance		Related allowance
Commercial non-real estate	$	150,650	$	120,612	$	295,445	$	28,187
Commercial real estate - owner occupied		4,261		2,007		6,646		246
Total commercial & industrial		154,911		122,619		302,091		28,433
Commercial real estate - income producing		10,447		4,929		15,708		466
Construction and land development		1,106		832		2,903		38
Residential mortgages		2,877		1,470		4,865		91
Consumer		—		2,154		2,155		267
Total loans	$	169,341	$	132,004	$	327,722	$	29,295

The tables below present the average balances and interest income for total impaired loans for the three and six months ended June 30, 2017 and 2016. Interest income recognized represents interest on accruing loans modified in a TDR.



	Three months ended
	June 30, 2017				June 30, 2016
	Average		Interest		Average			Interest
	recorded		income		recorded			income
(in thousands)	investment		recognized		investment			recognized
Commercial non-real estate	$	241,122	$	597	$	216,907	$	493
Commercial real estate - owner occupied		5,687		18		5,959		14
Total commercial & industrial		246,809		615		222,866		507
Commercial real estate - income producing		14,257		34		8,242		22
Construction and land development		1,219		—		7,660		—
Residential mortgages		3,352		3		976		2
Consumer		1,601		3		112		1
Total loans	$	267,238	$	655	$	239,856	$	532



	Six months ended
	June 30, 2017				June 30, 2016
	Average		Interest		Average			Interest
	recorded		income		recorded			income
(in thousands)	investment		recognized		investment			recognized
Commercial non-real estate	$	246,374	$	934	$	179,117	$	847
Commercial real estate - owner occupied		5,384		22		5,836		29
Total commercial & industrial		251,758		956		184,953		876
Commercial real estate - income producing		14,372		77		9,072		43
Construction and land development		1,492		—		10,905		—
Residential mortgages		3,572		5		932		4
Consumer		1,876		5		109		2
Total loans	$	273,070	$	1,043	$	205,971	$	925

Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at June 30, 2017 and December 31, 2016. Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be current.



													Recorded
					Greater than								investment
	30-59 days		60-89 days		90 days		Total				Total		> 90 days and
June 30, 2017	past due		past due		past due		past due		Current		Loans		still accruing
(in thousands)
Commercial non-real estate	$	27,751	$	27,974	$	91,987	$	147,712	$	7,945,392	$	8,093,104	$	13,088
Commercial real estate - owner occupied		4,532		1,189		6,321		12,042		2,066,290		2,078,332		424
Total commercial & industrial		32,283		29,163		98,308		159,754		10,011,682		10,171,436		13,512
Commercial real estate - income producing		3,369		2,319		5,040		10,728		2,390,945		2,401,673		1,989
Construction and land development		6,250		619		1,980		8,849		1,304,673		1,313,522		—
Residential mortgages		25,433		12,208		22,088		59,729		2,434,194		2,493,923		2,801
Consumer		15,764		5,843		7,600		29,207		2,064,080		2,093,287		88
Total	$	83,099	$	50,152	$	135,016	$	268,267	$	18,205,574	$	18,473,841	$	18,390



													Recorded
					Greater than								investment
	30-59 days		60-89 days		90 days		Total				Total		> 90 days and
December 31, 2016	past due		past due		past due		past due		Current		Loans		still accruing
(in thousands)
Commercial non-real estate	$	19,722	$	1,909	$	68,505	$	90,136	$	7,523,781	$	7,613,917	$	384
Commercial real estate - owner occupied		3,008		581		6,310		9,899		1,896,922		1,906,821		52
Total commercial & industrial		22,730		2,490		74,815		100,035		9,420,703		9,520,738		436
Commercial real estate - income producing		838		50		5,026		5,914		2,007,976		2,013,890		216
Construction and land development		694		171		5,300		6,165		1,004,714		1,010,879		1,563
Residential mortgages		24,599		8,816		14,369		47,784		2,098,929		2,146,713		1
Consumer		18,621		7,441		9,147		35,209		2,024,722		2,059,931		823
Total	$	67,482	$	18,968	$	108,657	$	195,107	$	16,557,044	$	16,752,151	$	3,039

Credit Quality Indicators

The following tables present the credit quality indicators by segments and portfolio class of loans at June 30, 2017 and December 31, 2016.



	June 30, 2017
(in thousands)	Commercial non-real estate		Commercial real estate - owner-occupied		Total commercial & industrial		Commercial real estate - income producing		Construction and land development		Total commercial
Grade:
Pass	$	6,897,989	$	1,859,185	$	8,757,174	$	2,214,329	$	1,233,082	$	12,204,585
Pass-Watch		298,254		55,146		353,400		117,247		58,024		528,671
Special Mention		215,373		43,219		258,592		13,840		7,591		280,023
Substandard		678,032		120,782		798,814		56,247		14,825		869,886
Doubtful		3,456		—		3,456		10		—		3,466
Loss		—		—		—		—		—		—
Total	$	8,093,104	$	2,078,332	$	10,171,436	$	2,401,673	$	1,313,522	$	13,886,631

	December 31, 2016
(in thousands)	Commercial non-real estate		Commercial real estate - owner-occupied		Total commercial & industrial		Commercial real estate - income producing		Construction and land development		Total commercial
Grade:
Pass	$	6,364,348	$	1,719,114	$	8,083,462	$	1,873,644	$	968,505	$	10,925,611
Pass-Watch		203,311		47,676		250,987		78,309		22,592		351,888
Special Mention		181,763		40,299		222,062		22,492		4,142		248,696
Substandard		846,793		99,732		946,525		39,434		15,640		1,001,599
Doubtful		17,702		—		17,702		11		—		17,713
Loss		—		—		—		—		—		—
Total	$	7,613,917	$	1,906,821	$	9,520,738	$	2,013,890	$	1,010,879	$	12,545,507



	June 30, 2017						December 31, 2016
(in thousands)	Residential mortgage		Consumer		Total		Residential mortgage		Consumer		Total
Performing	$	2,462,964	$	2,078,857	$	4,541,821	$	2,123,048	$	2,046,757	$	4,169,805
Nonperforming		30,959		14,430		45,389		23,665		13,174		36,839
Total	$	2,493,923	$	2,093,287	$	4,587,210	$	2,146,713	$	2,059,931	$	4,206,644

Below are the definitions of the Company’s internally assigned grades:

Commercial:

Pass – loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.

Pass-Watch – credits in this category are of sufficient risk to cause concern. This category is reserved for credits that display negative performance trends. The “Watch” grade should be regarded as a transition category.

Special Mention – a criticized asset category defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Special mention credits are not considered part of the Classified credit categories and do not expose the institution to sufficient risk to warrant adverse classification.

Substandard – an asset that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – an asset that has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – credits classified as Loss are considered uncollectable and are charged off promptly once so classified.

Residential and Consumer:

Performing – loans on which payments of principal and interest are less than 90 days past due.

Nonperforming – a nonperforming loan is a loan that is in default or close to being in default and there are good reasons to doubt that payments will be made in full. All loans rated as nonaccrual loans are also classified as nonperforming.

Purchased Credit Impaired Loans

Changes in the carrying amount of purchased credit impaired loans and related accretable yield are presented in the following table for the six months ended June 30, 2017 and the year ended December 31, 2016.



	June 30, 2017				December 31, 2016
	Carrying				Carrying
	Amount		Accretable		Amount		Accretable
(in thousands)	of Loans		Yield		of Loans		Yield
Balance at beginning of period	$	190,915	$	113,686	$	225,838	$	129,488
Payments received, net		(36,950)		(6,258)		(55,194)		(11,024)
Accretion		9,190		(9,190)		20,271		(20,271)
Increase in expected cash flows based on actual cash flows and changes in cash flow assumptions		—		4,405		—		5,358
Net transfers from nonaccretable difference to accretable yield		—		5,183		—		10,135
Balance at end of period	$	163,155	$	107,826	$	190,915	$	113,686

Loans Acquired in an FDIC-Assisted Transaction and the Related FDIC Loss Share Receivable

Loans purchased in the 2009 acquisition of Peoples First Community Bank were covered by two loss share agreements between the FDIC and the Company. In the second quarter of 2017, the Company reached an agreement with the FDIC to terminate the agreements on the remaining covered loan balances, totaling $154 million at June 30, 2017. The Company wrote down the indemnification asset by $6.6 million to the settlement amount of $3.2 million in the second quarter of 2017, with the final payment to occur in the third quarter of 2017.

The following schedule shows activity in the FDIC loss share receivable for the six months ended June 30, 2017 and 2016.




	June 30,		June 30,
(in thousands)	2017		2016
Beginning Balance	$	16,219	$	29,868
Amortization		(2,427)		(3,139)
Charge-offs, write-downs and other recoveries		(2,442)		(2,683)
External expenses qualifying under loss share agreement		79		307
Adjustment due to changes in cash flow projections		(2,526)		(3,437)
Net payments to FDIC		934		159
Write-down for termination of loss share agreement		(6,603)		—
Ending balance	$	3,234	$	21,075

Residential Mortgage Loans in Process of Foreclosure

Included in loans are $4.2 million and $10.1 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of June 30, 2017 and December 31, 2016, respectively. Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. In addition to the single family residential real estate loans in process of foreclosure, the Company also held $2.7 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of June 30, 2017 and December 31, 2016, respectively.