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.



	March 31,		December 31,
(in thousands)	2018		2017
Commercial non-real estate	$	8,336,222	$	8,297,937
Commercial real estate - owner occupied		2,185,543		2,142,439
Total commercial & industrial		10,521,765		10,440,376
Commercial real estate - income producing		2,394,862		2,384,599
Construction and land development		1,413,878		1,373,421
Residential mortgages		2,732,821		2,690,472
Consumer		2,029,178		2,115,295
Total loans	$	19,092,504	$	19,004,163

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 tangible or intangible business assets such as accounts receivable, inventory, ownership, enterprise value 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 tables show activity in the allowance for loan losses by portfolio class for the three months ended March 31, 2018 and 2017, as well as the corresponding recorded investment in loans at the end of each period. Charge-off, recovery and provision activity in the purchased credit impaired portfolio previously segregated has been collapsed into the remainder of the portfolio’s activity as it is no longer material, and the respective reclassifications have been made to the prior period to conform to the current presentation.



			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
	Three Months Ended March 31, 2018
Allowance for loan losses:
Beginning balance	$	127,918	$	12,962	$	140,880	$	13,709	$	7,372	$	24,844	$	30,503	$	217,308
Charge-offs		(9,335)		(851)		(10,186)		—		(10)		(192)		(8,048)		(18,436)
Recoveries		4,146		88		4,234		63		29		116		1,794		6,236
Net provision for loan losses		3,877		1,421		5,298		(787)		2,533		150		5,059		12,253
Reduction as a result of sale of subsidiary		—		—		—		—		—		—		(6,648)		(6,648)
Ending balance	$	126,606	$	13,620	$	140,226	$	12,985	$	9,924	$	24,918	$	22,660	$	210,713

Allowance at end of period:
Individually evaluated for impairment	$	20,356	$	2,475	$	22,831	$	1,261	$	1	$	276	$	232	$	24,601
Amounts related to purchased credit impaired loans		471		495		966		576		173		11,720		612		14,047
Collectively evaluated for impairment		105,779		10,650		116,429		11,148		9,750		12,922		21,816		172,065
Total allowance	$	126,606	$	13,620	$	140,226	$	12,985	$	9,924	$	24,918	$	22,660	$	210,713
Loans at end of period:
Individually evaluated for impairment	$	323,913	$	30,318	$	354,231	$	14,071	$	113	$	8,338	$	617	$	377,370
Purchased credit impaired loans		8,510		8,384		16,894		4,361		5,843		116,409		5,876		149,383
Collectively evaluated for impairment		8,003,799		2,146,841		10,150,640		2,376,430		1,407,922		2,608,074		2,022,685		18,565,751
Total loans	$	8,336,222	$	2,185,543	$	10,521,765	$	2,394,862	$	1,413,878	$	2,732,821	$	2,029,178	$	19,092,504



			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
	Three Months Ended March 31, 2017
Allowance for loan losses:
Beginning balance	$	147,052	$	11,083	$	158,135	$	13,509	$	6,271	$	25,361	$	26,142	$	229,418
Charge-offs		(24,791)		(29)		(24,820)		(7)		(91)		(348)		(8,678)		(33,944)
Recoveries		938		275		1,213		375		471		113		1,743		3,915
Net provision for loan losses		8,101		193		8,294		(266)		69		376		7,518		15,991
Decrease in FDIC loss share receivable		(31)		—		(31)		—		—		(1,696)		(103)		(1,830)
Ending balance	$	131,269	$	11,522	$	142,791	$	13,611	$	6,720	$	23,806	$	26,622	$	213,550

Allowance at end of period:
Individually evaluated for impairment	$	15,017	$	76	$	15,093	$	1,114	$	1	$	94	$	199	$	16,501
Amounts related to purchased credit impaired loans		411		787		1,198		213		283		13,286		1,019		15,999
Collectively evaluated for impairment		115,841		10,659		126,500		12,284		6,436		10,426		25,404		181,050
Total allowance	$	131,269	$	11,522	$	142,791	$	13,611	$	6,720	$	23,806	$	26,622	$	213,550
Loans at end of period:
Individually evaluated for impairment	$	231,988	$	3,894	$	235,882	$	13,599	$	1,592	$	3,236	$	2,149	$	256,458
Purchased credit impaired loans		6,693		12,468		19,161		7,669		4,326		138,260		9,951		179,367
Collectively evaluated for impairment		7,835,606		2,031,089		9,866,695		2,483,836		1,246,749		2,124,767		2,046,996		17,769,043
Total loans	$	8,074,287	$	2,047,451	$	10,121,738	$	2,505,104	$	1,252,667	$	2,266,263	$	2,059,096	$	18,204,868

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.



	March 31,		December 31,
(in thousands)	2018		2017
Commercial non-real estate	$	179,203	$	152,863
Commercial real estate - owner occupied		27,387		25,989
Total commercial & industrial		206,590		178,852
Commercial real estate - income producing		15,633		14,574
Construction and land development		3,724		3,807
Residential mortgages		35,069		40,480
Consumer		14,163		15,087
Total loans	$	275,179	$	252,800

Nonaccrual loans include nonaccruing loans modified in troubled debt restructurings (“TDRs”) of $118.0 million and $99.2 million at March 31, 2018 and December 31, 2017, respectively. Total TDRs, both accruing and nonaccruing, were $284.5 million at March 31, 2018 and $219.7 million at December 31, 2017. All TDRs are individually evaluated for impairment. At March 31, 2018 and December 31, 2017, the Company had unfunded commitments of $8.5 million and $7.3 million, respectively, to borrowers whose loan terms have been modified in a TDR.

The table below details by portfolio class TDRs that were modified during the three months ended March 31, 2018 and 2017:



	Three Months Ended
($ in thousands)		March 31, 2018						March 31, 2017
			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		13	$	55,482	$	55,482		9	$	38,659	$	38,659
Commercial real estate - owner occupied		1		5,909		5,909		1		656		656
Total commercial & industrial		14		61,391		61,391		10		39,315		39,315
Commercial real estate - income producing		1		1,564		1,564		2		5,527		5,527
Construction and land development		1		43		43		—		—		—
Residential mortgages		—		—		—		1		250		250
Consumer		1		222		222		—		—		—
Total loans		17	$	63,220	$	63,220		13	$	45,092	$	45,092

The TDRs modified during the three months ended March 31, 2018 reflected in the table above include $48.4 million of loans with extended amortization terms or other payment concessions, $14.6 million with significant covenant waivers and $0.2 million with other modifications. The TDRs modified during the three months ended March 31, 2017 include $27.4 million of loans with extended amortization terms or other payment concessions, $10.7 million with significant covenant waivers and $6.9 million with other modifications.

For the three month periods ended March 31, 2018 and 2017, there were no loans modified in a TDR within the previous twelve months that subsequently defaulted during the respective periods.

The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at March 31, 2018 and December 31, 2017. 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.



	March 31, 2018
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		principal balance		Related allowance
Commercial non-real estate	$	108,898	$	215,015	$	335,178	$	20,356
Commercial real estate - owner occupied		6,064		24,254		30,997		2,475
Total commercial & industrial		114,962		239,269		366,175		22,831
Commercial real estate - income producing		6,055		8,016		14,269		1,261
Construction and land development		100		13		114		1
Residential mortgages		5,861		2,477		11,682		276
Consumer		14		603		718		232
Total loans	$	126,992	$	250,378	$	392,958	$	24,601


	December 31, 2017
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		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 & 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

The tables below present the average balances and interest income for total impaired loans for the three months ended March 31, 2018 and 2017. Interest income recognized represents interest on accruing loans modified in a TDR.



	Three Months Ended
	March 31, 2018				March 31, 2017
	Average		Interest		Average			Interest
	recorded		income		recorded			income
(in thousands)	investment		recognized		investment			recognized
Commercial non-real estate	$	295,897	$	1,586	$	251,625	$	337
Commercial real estate - owner occupied		25,905		66		5,081		4
Total commercial & industrial		321,802		1,652		256,706		341
Commercial real estate - income producing		14,801		25		14,487		43
Construction and land development		238		—		1,766		—
Residential mortgages		9,489		5		3,792		2
Consumer		955		9		2,152		2
Total loans	$	347,285	$	1,691	$	278,903	$	388

Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at March 31, 2018 and December 31, 2017. 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
March 31, 2018	past due		past due		past due		past due		Current		Loans		still accruing
(in thousands)
Commercial non-real estate	$	45,309	$	18,497	$	130,360	$	194,166	$	8,142,056	$	8,336,222	$	20,330
Commercial real estate - owner occupied		7,464		115		22,138		29,717		2,155,826		2,185,543		1,360
Total commercial & industrial		52,773		18,612		152,498		223,883		10,297,882		10,521,765		21,690
Commercial real estate - income producing		928		1,954		8,419		11,301		2,383,561		2,394,862		2,771
Construction and land development		6,537		416		3,115		10,068		1,403,810		1,413,878		259
Residential mortgages		32,815		4,496		20,122		57,433		2,675,388		2,732,821		1,170
Consumer		16,083		5,124		7,542		28,749		2,000,429		2,029,178		573
Total	$	109,136	$	30,602	$	191,696	$	331,434	$	18,761,070	$	19,092,504	$	26,463



													Recorded
					Greater than								investment
	30-59 days		60-89 days		90 days		Total				Total		> 90 days and
December 31, 2017	past due		past due		past due		past due		Current		Loans		still 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 & 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	$	137,267	$	33,000	$	157,082	$	327,349	$	18,676,814	$	19,004,163	$	27,766

Credit Quality Indicators

The following tables present the credit quality indicators by segments and portfolio class of loans at March 31, 2018 and December 31, 2017.



	March 31, 2018
(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	$	7,250,715	$	1,954,384	$	9,205,099	$	2,268,358	$	1,334,456	$	12,807,913
Pass-Watch		269,657		51,856		321,513		58,092		59,208		438,813
Special Mention		100,005		35,971		135,976		9,344		6,279		151,599
Substandard		715,827		143,332		859,159		59,068		13,935		932,162
Doubtful		18		—		18		—		—		18
Total	$	8,336,222	$	2,185,543	$	10,521,765	$	2,394,862	$	1,413,878	$	14,330,505

	December 31, 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	$	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



	March 31, 2018						December 31, 2017
(in thousands)	Residential mortgage		Consumer		Total		Residential mortgage		Consumer		Total
Performing	$	2,696,582	$	2,014,442	$	4,711,024	$	2,647,784	$	2,099,637	$	4,747,421
Nonperforming		36,239		14,736		50,975		42,688		15,658		58,346
Total	$	2,732,821	$	2,029,178	$	4,761,999	$	2,690,472	$	2,115,295	$	4,805,767

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 three months ended March 31, 2018 and the year ended December 31, 2017.



	March 31, 2018				December 31, 2017
	Carrying				Carrying
	Amount		Accretable		Amount		Accretable
(in thousands)	of Loans		Yield		of Loans		Yield
Balance at beginning of period	$	153,403	$	62,517	$	190,915	$	113,686
Addition of cost recovery loans - FNBC I		—		—		15,000		—
Payments received, net		(8,288)		(1,703)		(69,591)		(7,412)
Accretion		4,268		(4,268)		17,079		(17,079)
Increase in expected cash flows based on actual cash flows and changes in cash flow assumptions		—		(956)		—		(30,379)
Net transfers from nonaccretable difference to accretable yield		—		—		—		3,701
Balance at end of period	$	149,383	$	55,590	$	153,403	$	62,517

During the three months ended March 31, 2017, certain of the Company’s purchased credit impaired loans were covered by two loss share agreements with the FDIC. The Company had a receivable representing an indemnification asset arising from the agreements. The receivable was accounted for separately from the covered loans as the agreements were not contractually part of the loans and were not transferrable should the Company have disposed of the loans. The agreements were terminated by the Company during the third quarter of 2017.

Residential Mortgage Loans in Process of Foreclosure

Included in loans are $7.8 million and $7.5 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of March 31, 2018 and December 31, 2017, 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 $3.7 million and $3.4 million of foreclosed single family residential properties in other real estate owned as of March 31, 2018 and December 31, 2017, respectively.