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 area and the northern, central and panhandle regions of Florida. Loans, net of unearned income, by portfolio are presented in the table below.



	September 30,		December 31,
(in thousands)	2017		2016
Commercial non-real estate	$	8,129,429	$	7,613,917
Commercial real estate - owner occupied		2,076,014		1,906,821
Total commercial & industrial		10,205,443		9,520,738
Commercial real estate - income producing		2,511,808		2,013,890
Construction and land development		1,373,048		1,010,879
Residential mortgages		2,596,692		2,146,713
Consumer		2,099,294		2,059,931
Total loans	$	18,786,285	$	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 consumer 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 nine months ended September 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
	Nine Months Ended September 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		—		—		—		—		(77)		(102)		(153)		(332)
Recoveries		5		110		115		—		49		23		72		259
Net provision for loan losses		(27)		(220)		(247)		(54)		(124)		175		(192)		(442)
Decrease in FDIC loss share receivable		(47)		—		(47)		—		—		(2,344)		(135)		(2,526)
Non-purchased credit impaired activity:
Charge-offs		(35,247)		(527)		(35,774)		(160)		(593)		(2,383)		(22,691)		(61,601)
Recoveries		6,437		337		6,774		655		1,001		316		5,176		13,922
Net provision for loan losses		15,922		2,776		18,698		540		54		3,988		21,144		44,424
Ending balance	$	134,095	$	13,559	$	147,654	$	14,490	$	6,581	$	25,034	$	29,363	$	223,122
Ending balance:
Allowance:
Individually evaluated for impairment	$	20,880	$	477	$	21,357	$	1,321	$	1	$	406	$	405	$	23,490
Amounts related to purchased credit impaired loans		417		784		1,201		199		254		12,795		863		15,312
Collectively evaluated for impairment		112,798		12,298		125,096		12,970		6,326		11,833		28,095		184,320
Total allowance	$	134,095	$	13,559	$	147,654	$	14,490	$	6,581	$	25,034	$	29,363	$	223,122
Loans:
Individually evaluated for impairment	$	271,024	$	6,351	$	277,375	$	14,295	$	480	$	8,942	$	1,306	$	302,397
Purchased credit impaired loans		20,186		13,021		33,207		5,353		6,670		123,244		7,637		176,111
Collectively evaluated for impairment		7,838,219		2,056,642		9,894,861		2,492,160		1,365,898		2,464,506		2,090,351		18,307,777
Total loans	$	8,129,429	$	2,076,014	$	10,205,443	$	2,511,808	$	1,373,048	$	2,596,692	$	2,099,294	$	18,786,285



			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
	Nine Months Ended September 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)		(91)		(8)		(146)
Recoveries		76		163		239		2		98		33		112		484
Net provision for loan losses		54		(140)		(86)		(436)		(253)		1,685		(1,633)		(723)
(Decrease) increase in FDIC loss share receivable		(2)		—		(2)		—		—		(3,341)		316		(3,027)
Non-purchased credit impaired activity:
Charge-offs		(27,504)		(1,660)		(29,164)		(191)		(827)		(908)		(17,403)		(48,493)
Recoveries		2,709		287		2,996		673		1,422		497		4,272		9,860
Net provision for loan losses		74,500		2,303		76,803		4,862		(216)		964		14,514		96,927
Ending balance	$	159,261	$	10,783	$	170,044	$	10,950	$	5,848	$	24,192	$	25,027	$	236,061
Ending balance:
Allowance:
Individually evaluated for impairment	$	20,665	$	223	$	20,888	$	57	$	6	$	94	$	85	$	21,130
Amounts related to purchased credit impaired loans		574		1,088		1,662		279		484		15,949		1,334		19,708
Collectively evaluated for impairment		138,022		9,472		147,494		10,614		5,358		8,149		23,608		195,223
Total allowance	$	159,261	$	10,783	$	170,044	$	10,950	$	5,848	$	24,192	$	25,027	$	236,061
Loans:
Individually evaluated for impairment	$	235,039	$	6,458	$	241,497	$	7,655	$	2,062	$	3,864	$	1,485	$	256,563
Purchased credit impaired loans		11,534		16,417		27,951		8,087		8,436		145,273		12,045		201,792
Collectively evaluated for impairment		6,887,355		1,878,950		8,766,305		1,974,567		936,094		1,888,025		2,047,475		15,612,466
Total loans	$	7,133,928	$	1,901,825	$	9,035,753	$	1,990,309	$	946,592	$	2,037,162	$	2,061,005	$	16,070,821

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.



	September 30,		December 31,
(in thousands)	2017		2016
Commercial non-real estate	$	188,982	$	249,037
Commercial real estate - owner occupied		14,305		14,413
Total commercial & industrial		203,287		263,450
Commercial real estate - income producing		14,360		13,954
Construction and land development		3,292		4,550
Residential mortgages		34,674		23,665
Consumer		14,063		12,351
Total loans	$	269,676	$	317,970

Nonaccrual loans include nonaccruing loans modified in troubled debt restructurings (“TDRs”) of $119.3 million and $81.9 million at September 30, 2017 and December 31, 2016, respectively. Total TDRs, both accruing and nonaccruing, were $216.0 million as of September 30, 2017 and $121.7 million at December 31, 2016. All TDRs are individually evaluated for impairment.

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



	Nine Months Ended
($ in thousands)		September 30, 2017						September 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		50	$	135,926	$	135,926		17	$	57,915	$	57,915
Commercial real estate - owner occupied		4		3,734		3,734		—		—		—
Total commercial & industrial		54		139,660		139,660		17		57,915		57,915
Commercial real estate - income producing		5		5,684		5,684		—		—		—
Construction and land development		—		—		—		—		—		—
Residential mortgages		13		2,068		2,068		6		532		532
Consumer		1		40		42		—		—		—
Total loans		73	$	147,452	$	147,454		23	$	58,447	$	58,447

The TDRs modified during the nine months ended September 30, 2017 reflected in the table above include $96.1 million of loans with extended amortization terms or other payment concessions, $50.1 million of loans with significant covenant waivers and $1.3 million with other modifications. The TDRs modified during the nine months ended September 30, 2016 include $43.4 million of loans with extended amortization terms or other payment concessions, $14.7 million of loans with significant covenant waivers and $0.4 million of other modifications.

No TDRs recorded during the nine months ended September 30, 2017 and 2016 subsequently defaulted within twelve months of modification.

The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at September 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.



	September 30, 2017
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		principal balance		Related allowance
Commercial non-real estate	$	92,583	$	178,441	$	276,879	$	20,880
Commercial real estate - owner occupied		3,599		2,752		6,353		477
Total commercial & industrial		96,182		181,193		283,232		21,357
Commercial real estate - income producing		5,160		9,135		14,451		1,321
Construction and land development		464		16		1,445		1
Residential mortgages		6,311		2,630		11,961		406
Consumer		1		1,305		1,308		405
Total loans	$	108,118	$	194,279	$	312,397	$	23,490


	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 nine months ended September 30, 2017 and 2016. Interest income recognized represents interest on accruing loans modified in a TDR.



	Three Months Ended
	September 30, 2017				September 30, 2016
	Average		Interest		Average			Interest
	recorded		income		recorded			income
(in thousands)	investment		recognized		investment			recognized
Commercial non-real estate	$	260,640	$	872	$	233,913	$	155
Commercial real estate - owner occupied		6,916		24		6,374		10
Total commercial & industrial		267,556		896		240,287		165
Commercial real estate - income producing		14,604		35		7,729		24
Construction and land development		663		1		1,655		—
Residential mortgages		6,204		7		2,466		3
Consumer		1,179		4		826		2
Total loans	$	290,206	$	943	$	252,963	$	194



	Nine Months Ended
	September 30, 2017				September 30, 2016
	Average		Interest		Average			Interest
	recorded		income		recorded			income
(in thousands)	investment		recognized		investment			recognized
Commercial non-real estate	$	251,129	$	1,806	$	197,382	$	1,002
Commercial real estate - owner occupied		5,895		46		6,015		39
Total commercial & industrial		257,024		1,852		203,397		1,041
Commercial real estate - income producing		14,449		112		8,624		67
Construction and land development		1,216		1		7,821		—
Residential mortgages		4,449		12		1,444		7
Consumer		1,644		9		348		4
Total loans	$	278,782	$	1,986	$	221,634	$	1,119

Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at September 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
September 30, 2017	past due		past due		past due		past due		Current		Loans		still accruing
(in thousands)
Commercial non-real estate	$	31,634	$	3,880	$	104,334	$	139,848	$	7,989,581	$	8,129,429	$	24,400
Commercial real estate - owner occupied		18,579		303		8,950		27,832		2,048,182		2,076,014		767
Total commercial & industrial		50,213		4,183		113,284		167,680		10,037,763		10,205,443		25,167
Commercial real estate - income producing		1,540		3,731		5,676		10,947		2,500,861		2,511,808		2,907
Construction and land development		5,018		1,031		2,861		8,910		1,364,138		1,373,048		417
Residential mortgages		39,081		10,575		24,415		74,071		2,522,621		2,596,692		41
Consumer		15,574		7,426		7,710		30,710		2,068,584		2,099,294		318
Total	$	111,426	$	26,946	$	153,946	$	292,318	$	18,493,967	$	18,786,285	$	28,850



													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 September 30, 2017 and December 31, 2016.



	September 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	$	6,941,591	$	1,840,553	$	8,782,144	$	2,327,685	$	1,278,648	$	12,388,477
Pass-Watch		345,073		83,808		428,881		107,568		73,538		609,987
Special Mention		122,023		41,270		163,293		12,802		7,484		183,579
Substandard		717,436		110,383		827,819		63,744		13,378		904,941
Doubtful		3,306		—		3,306		9		—		3,315
Total	$	8,129,429	$	2,076,014	$	10,205,443	$	2,511,808	$	1,373,048	$	14,090,299

	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
Total	$	7,613,917	$	1,906,821	$	9,520,738	$	2,013,890	$	1,010,879	$	12,545,507



	September 30, 2017						December 31, 2016
(in thousands)	Residential mortgage		Consumer		Total		Residential mortgage		Consumer		Total
Performing	$	2,561,977	$	2,084,913	$	4,646,890	$	2,123,048	$	2,046,757	$	4,169,805
Nonperforming		34,715		14,381		49,096		23,665		13,174		36,839
Total	$	2,596,692	$	2,099,294	$	4,695,986	$	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 nine months ended September 30, 2017 and the year ended December 31, 2016.



	September 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
Addition of cost recovery loans		23,431		—		—		—
Payments received, net		(51,040)		(6,651)		(55,194)		(11,024)
Accretion		12,805		(12,805)		20,271		(20,271)
Increase in expected cash flows based on actual cash flows and changes in cash flow assumptions		—		4,149		—		5,358
Net transfers from nonaccretable difference to accretable yield		—		8,095		—		10,135
Balance at end of period	$	176,111	$	106,474	$	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 third quarter of 2017, the Company terminated the agreements with the FDIC on the remaining covered loan balances totaling $154 million at June 30, 2017. The indemnification asset was written down to the final settlement amount of $3.2 million in the second quarter of 2017. The final cash settlement was received from the FDIC in July 2017.

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



	September 30,		September 30,
(in thousands)	2017		2016
Beginning Balance	$	16,219	$	29,868
Amortization		(2,427)		(4,678)
Charge-offs, write-downs and other recoveries		(2,442)		(5,569)
External expenses qualifying under loss share agreements		79		1,000
Adjustment due to changes in cash flow projections		(2,526)		(3,027)
Net payments to FDIC		934		436
Write-down for termination of loss share agreements		(6,603)		—
Cash received from FDIC for final settlement of agreements		(3,234)		—
Ending balance	$	—	$	18,030

Residential Mortgage Loans in Process of Foreclosure

Included in loans are $8.0 million and $10.1 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of September 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 forecislosure, the Company also held $2.5 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of September 30, 2017 and December 31, 2016, respectively.