Note 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, consisted of the following at December 31, 2017 and 2016:




(in thousands)	2017		2016
Commercial non-real estate	$	8,297,937	$	7,613,917
Commercial real estate - owner occupied		2,142,439		1,906,821
Total commercial and industrial		10,440,376		9,520,738
Commercial real estate - income producing		2,384,599		2,013,890
Construction and land development		1,373,421		1,010,879
Residential mortgages		2,690,472		2,146,713
Consumer		2,115,295		2,059,931
Total loans	$	19,004,163	$	16,752,151

The Bank makes loans in the normal course of business to directors and executive officers of the Company and the Bank and to their associates. Loans to such related parties are made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of collectability when originated. Balances of loans to the Company’s directors, executive officers and their associates at December 31, 2017 and 2016 were approximately $33.6 million and $15.3 million, respectively. Related party loan activity for 2017 includes new loans of $25.8 million and repayments of $7.5 million.

The Bank has a line of credit with the Federal Home Loan Bank of Dallas that is secured by blanket pledges of certain qualifying loan types. The Bank had borrowings on this line of $1.1 billion and $865 million at December 31, 2017 and 2016, respectively.

The following schedules show activity in the allowance for loan losses for the year ended December 31, 2017 and 2016 by portfolio segment, and the corresponding recorded investment in loans as of December 31, 2017 and 2016. Purchased credit impaired loans accounted for using the cost recovery method that are individually evaluated for impairment are reflected as such.



	Commercial Non-Real Estate		Commercial Real Estate- Owner Occupied		Total Commercial and Industrial		Commercial Real Estate- Income Producing		Construction and Land Development		Residential Mortgages		Consumer		Total
(in thousands)	Year Ended December 31, 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)		(297)		(153)		(527)
Recoveries		7		453		460		1		144		24		75		704
Net provision for loan losses		79		(882)		(803)		(213)		(301)		(168)		(412)		(1,897)
(Decrease) increase in FDIC loss share receivable		(47)		—		(47)		—		—		(2,344)		(135)		(2,526)
Non-purchased credit impaired activity:																—
Charge-offs		(51,479)		(558)		(52,037)		(259)		(619)		(2,542)		(31,277)		(86,734)
Recoveries		7,519		395		7,914		987		1,459		1,040		6,605		18,005
Net provision for loan losses		24,787		2,471		27,258		(316)		495		3,770		29,658		60,865
Ending balance	$	127,918	$	12,962	$	140,880	$	13,709	$	7,372	$	24,844	$	30,503	$	217,308
Ending balance:
Allowance:
Individually evaluated for impairment	$	16,129	$	793	$	16,922	$	1,326	$	11	$	189	$	118	$	18,566
Amounts related to purchased credit impaired loans		525		465		990		41		172		12,258		646		14,107
Collectively evaluated for impairment		111,264		11,704		122,968		12,342		7,189		12,397		29,739		184,635
Total allowance	$	127,918	$	12,962	$	140,880	$	13,709	$	7,372	$	24,844	$	30,503	$	217,308
Loans:
Individually evaluated for impairment	$	267,881	$	21,491	$	289,372	$	15,530	$	363	$	10,640	$	1,292	$	317,197
Purchased credit impaired loans		5,941		7,294		13,235		2,742		5,829		119,553		6,178		147,537
Collectively evaluated for impairment		8,024,115		2,113,654		10,137,769		2,366,327		1,367,229		2,560,279		2,107,825		18,539,429
Total loans	$	8,297,937	$	2,142,439	$	10,440,376	$	2,384,599	$	1,373,421	$	2,690,472	$	2,115,295	$	19,004,163



	Commercial Non-Real Estate		Commercial Real Estate- Owner Occupied		Total Commercial and Industrial		Commercial Real Estate- Income Producing		Construction and Land Development		Residential Mortgages		Consumer		Total
(in thousands)	Year Ended December 31, 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)		(323)		(8)		(378)
Recoveries		115		269		384		2		361		36		189		972
Net provision for loan losses		(44)		(440)		(484)		(462)		(594)		1,876		(1,740)		(1,404)
Increase (decrease) in FDIC loss share receivable		(31)		—		(31)		—		—		(4,209)		283		(3,957)
Non-purchased credit impaired activity:
Charge-offs		(42,620)		(1,819)		(44,439)		(346)		(964)		(1,040)		(26,099)		(72,888)
Recoveries		3,969		480		4,449		989		1,725		859		5,809		13,831
Net provision for loan losses		76,235		2,763		78,998		7,286		119		2,809		22,851		112,063
Ending balance	$	147,052	$	11,083	$	158,135	$	13,509	$	6,271	$	25,361	$	26,142	$	229,418
Ending balance:
Allowance:
Individually evaluated for impairment	$	28,187	$	246	$	28,433	$	466	$	38	$	91	$	267	$	29,295
Amounts related to purchased credit impaired loans		486		894		1,380		253		406		15,043		1,271		18,353
Collectively evaluated for impairment		118,379		9,943		128,322		12,790		5,827		10,227		24,604		181,770
Total allowance	$	147,052	$	11,083	$	158,135	$	13,509	$	6,271	$	25,361	$	26,142	$	229,418
Loans:
Individually evaluated for impairment	$	271,262	$	6,268	$	277,530	$	15,376	$	1,938	$	4,347	$	2,154	$	301,345
Purchased credit impaired loans		11,368		13,323		24,691		7,928		5,271		141,992		11,033		190,915
Collectively evaluated for impairment		7,331,287		1,887,230		9,218,517		1,990,586		1,003,670		2,000,374		2,046,744		16,259,891
Total loans	$	7,613,917	$	1,906,821	$	9,520,738	$	2,013,890	$	1,010,879	$	2,146,713	$	2,059,931	$	16,752,151

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.



	December 31,
(in thousands)	2017		2016
Commercial non-real estate	$	152,863	$	249,037
Commercial real estate - owner occupied		25,989		14,413
Total commercial and industrial		178,852		263,450
Commercial real estate - income producing		14,574		13,954
Construction and land development		3,807		4,550
Residential mortgages		40,480		23,665
Consumer		15,087		12,351
Total loans	$	252,800	$	317,970

Nonaccrual loans include loans modified in troubled debt restructurings (TDRs) of $99.2 million and $81.9 million, respectively, at December 31, 2017 and 2016. Total TDRs, both accruing and nonaccruing, were $219.7 million at December 31, 2017 and $121.7 million at December 31, 2016.

The table below details the TDRs that were modified during 2017 and 2016 by portfolio segment. All such loans are individually evaluated for impairment.



	Years Ended December 31,
($ in thousands)	2017					2016					2015
		Outstanding Recorded Investment					Outstanding Recorded Investment					Outstanding Recorded Investment
Troubled Debt Restructurings:	Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification		Number of Contracts	Pre- Modification		Post- Modification
Commercial non-real estate	52	$	162,909	$	162,909	38	$	128,449	$	128,449	1	$	4,420	$	4,420
Commercial real estate - owner occupied	5		5,684		5,684	1		148		148	—		—		—
Total commercial and industrial	57		168,593		168,593	39		128,597		128,597	1		4,420		4,420
Commercial real estate - income producing	5		5,625		5,625	1		2,943		2,943	1		485		482
Construction and land development	—		—		—	—		—		—	—		—		—
Residential mortgages	15		2,812		2,812	7		694		694	4		195		185
Consumer	1		40		40	—		—		—	1		20		20
Total loans	78	$	177,070	$	177,070	47	$	132,234	$	132,234	7	$	5,120	$	5,107

The TDRs modified during the year ended December 31, 2017 reflected in the table above include $98.1 million of loans with extended amortization terms or other payment concessions, $76.2 million of loans with significant covenant waivers and $2.8 million with other modifications. The TDRs modified during the year ended December 31, 2016 include $108.9 million of loans with extended terms or other payment concessions of $22.8 mllion of loans with significant convenant waivers, and $0.5 million with other modifications. The TDRs modified during the year ended December 31, 2015 include $5.0 million of loans with extended terms or other payment concessions and $0.1 million of other modifications.

As of December 31, 2017 and 2016, the Company had unfunded commitments of approximately $7.3 million and $6.8 million, respectively, to borrowers whose loan terms had been modified in TDRs.

Four commercial non-real estate loans modified in TDRs during the year ended December 31, 2016 defaulted within twelve months of modification. The loans were part of a single relationship and had an aggregate carrying balance of $20.8 million at the time of default. No TDRs modified during the years ended December 31, 2017 or 2015 subsequently defaulted within twelve months of modification.

The tables below present loans that are individually evaluated for impairment disaggregated by class at December 31, 2017 and 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.



	December 31, 2017
(in thousands)	Recorded Investment Without an Allowance		Recorded Investment With an Allowance		Unpaid Principal Balance		Related Allowance
Commercial non-real estate	$	116,682	$	151,199	$	285,685	$	16,129
Commercial real estate - owner occupied		16,927		4,564		24,829		793
Total commercial and industrial		133,609		155,763		310,514		16,922
Commercial real estate - income producing		5,101		10,429		15,687		1,326
Construction and land development		100		263		363		11
Residential mortgages		8,245		2,395		13,855		189
Consumer		—		1,292		1,294		118
Total loans	$	147,055	$	170,142	$	341,713	$	18,566



	December 31, 2016
(in thousands)	Recorded Investment Without an Allowance		Recorded Investment With an Allowance		Unpaid 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 and 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 years ended December 31, 2017 and 2016. Interest income recognized represents interest on accruing loans modified in a TDR.



	Years Ended
	December 31, 2017				December 31, 2016
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial non-real estate	$	255,710	$	2,774	$	211,324	$	1,164
Commercial real estate - owner occupied		7,901		62		6,151		44
Total commercial and industrial		263,611		2,836		217,475		1,208
Commercial real estate - income producing		14,565		146		9,347		106
Construction and land development		1,018		2		6,366		1
Residential mortgages		5,784		18		2,109		10
Consumer		1,558		13		716		5
Total loans	$	286,536	$	3,015	$	236,013	$	1,330

Aging Analysis

The following table presents the age analysis of past due loans at December 31, 2017 and 2016. Purchased credit impaired loans with an accretable yield are considered to be current in the following delinquency table:



December 31, 2017	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days past due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
(in thousands)
Commercial non-real estate	$	62,766	$	10,761	$	92,982	$	166,509	$	8,131,428	$	8,297,937	$	21,989
Commercial real estate - owner occupied		8,493		648		15,517		24,658		2,117,781		2,142,439		2,032
Total commercial and industrial		71,259		11,409		108,499		191,167		10,249,209		10,440,376		24,021
Commercial real estate - income producing		5,315		2,165		6,081		13,561		2,371,038		2,384,599		489
Construction and land development		4,113		1,056		3,412		8,581		1,364,840		1,373,421		477
Residential mortgages		33,621		10,554		30,537		74,712		2,615,760		2,690,472		2,208
Consumer		22,959		7,816		8,553		39,328		2,075,967		2,115,295		571
Total loans	$	137,267	$	33,000	$	157,082	$	327,349	$	18,676,814	$	19,004,163	$	27,766



December 31, 2016	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and 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 and 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 loans	$	67,482	$	18,968	$	108,657	$	195,107	$	16,557,044	$	16,752,151	$	3,039

Credit Quality Indicators

The following table presents the credit quality indicators of the Company’s various classes of loans at December 31, 2017 and December 31, 2016.



	December 31, 2017
(in thousands)	Commercial Non-Real Estate		Commercial Real Estate - Owner Occupied		Total Commercial and Industrial		Commercial Real Estate - Income Producing		Construction and Land Development		Total Commercial
Grade:
Pass	$	7,190,604	$	1,896,366	$	9,086,970	$	2,223,245	$	1,291,638	$	12,601,853
Pass-Watch		293,069		82,913		375,982		83,444		60,804		520,230
Special Mention		80,649		27,456		108,105		13,244		4,788		126,137
Substandard		733,558		135,704		869,262		64,658		16,191		950,111
Doubtful		57		—		57		8		—		65
Total	$	8,297,937	$	2,142,439	$	10,440,376	$	2,384,599	$	1,373,421	$	14,198,396



	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



	December 31, 2017						December 31, 2016
(in thousands)	Residential Mortgage		Consumer		Total		Residential Mortgage		Consumer		Total
Performing	$	2,647,784	$	2,099,637	$	4,747,421	$	2,123,048	$	2,046,757	$	4,169,805
Nonperforming		42,688		15,658		58,346		23,665		13,174		36,839
Total	$	2,690,472	$	2,115,295	$	4,805,767	$	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 an 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 nor 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.

The Company assigns risk ratings at loan origination and reviews these ratings at minimum on annual basis, or at any point management becomes aware of information that may affect a borrower’s ability to service its debt. Credit Review uses a risk-focused continuous monitoring program that provides for an independent, objective and timely review of credit risk within the Company.

Purchased Credit Impaired Loans

Changes in the carrying amount of purchased credit impaired loans not individually evaluated for impairment and accretable yield are presented in the following table for the years ended December 31, 2017 and 2016:



	2017				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
Additions		15,000		—		—		—
Payments received, net		(69,591)		(7,412)		(55,194)		(11,024)
Accretion		17,079		(17,079)		20,271		(20,271)
Increase (decrease) in expected cash flows based on actual
cash flow and changes in cash flow assumptions		—		(30,379)		—		5,358
Net transfers from nonaccretable difference
to accretable yield		—		3,701		—		10,135
Balance at end of period	$	153,403	$	62,517	$	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. As of December 31, 2016, $149 million of purchased credit impaired loans were covered by the single family loss share agreement. In July 2017, the Company terminated the agreements with the FDIC on the remaining covered loan balances. The Company wrote down the indemnification asset by $6.6 million to the final settlement received of $3.2 million.

The receivable arising from the loss-sharing agreements (referred to as the “FDIC loss share receivable” on our consolidated balance sheet) was measured separately from the covered loans as the agreements were not contractually part of the loans and were not transferable should the Company have disposed of the loans.

The following schedule shows activity in the FDIC loss share receivable for the year ended December 31, 2017 and 2016:



(in thousands)	2017		2016
Balance, January 1	$	16,219	$	29,868
Amortization		(2,427)		(5,918)
Charge-offs, write-downs and other (recoveries)		(2,442)		(8,264)
External expenses qualifying under loss share agreement		79		1,356
Adjustments due to changes in cash flow projections		(2,526)		(3,957)
Net payments to FDIC		934		3,134
Loss on termination of loss share agreements		(6,603)		—
Cash received from FDIC for final settlement of agreements		(3,234)		—
Balance, December 31	$	—	$	16,219

Residential Mortgage Loans in Process of Foreclosure

Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. Included in loans are $7.5 million and $10.1 million of consumer loans secured by single family residential mortgage real estate that are in process of foreclosure as of December 31, 2017 and 2016, respectively. In addition to the single family residential real estate loans in process of foreclosure, the Company also held $3.4 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of December 31, 2017 and 2016, respectively. As of December 31, 2016, $4.9 million of loans in process of foreclosure and $0.9 million of foreclosed single family residential properties were covered by an FDIC loss share agreement that provided protection against losses.

Loans Held for Sale

Loans held for sale totaled $39.9 million and $34.1 million, respectively, at December 31, 2017 and 2016. Substantially all loans held for sale are residential mortgage loans originated on a best-efforts basis, whereby a commitment by a third party to purchase the loan has been received concurrent with the Bank’s commitment to the borrower to originate the loan.