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



	September 30,		December 31,
(in thousands)	2018		2017
Commercial non-real estate	$	8,438,884	$	8,297,937
Commercial real estate - owner occupied		2,300,271		2,142,439
Total commercial and industrial		10,739,155		10,440,376
Commercial real estate - income producing		2,311,699		2,384,599
Construction and land development		1,523,419		1,373,421
Residential mortgages		2,846,916		2,690,472
Consumer		2,122,528		2,115,295
Total loans	$	19,543,717	$	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 nine months ended September 30, 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		and industrial		producing		development		mortgages		Consumer		Total
	Nine Months Ended September 30, 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		(15,401)		(7,330)		(22,731)		(1,633)		(265)		(585)		(18,599)		(43,813)
Recoveries		13,234		282		13,516		221		68		1,854		4,028		19,687
Net provision for loan losses		(5,073)		7,203		2,130		6,288		6,248		(1,803)		15,153		28,016
Reduction as a result of sale of subsidiary		—		—		—		—		—		—		(6,648)		(6,648)
Ending balance	$	120,678	$	13,117	$	133,795	$	18,585	$	13,423	$	24,310	$	24,437	$	214,550
Ending balance:
Allowance:	September 30, 2018
Individually evaluated for impairment	$	23,101	$	225	$	23,326	$	285	$	1	$	163	$	131	$	23,906
Amounts related to purchased credit impaired loans		327		403		730		45		91		10,109		433		11,408
Collectively evaluated for impairment		97,250		12,489		109,739		18,255		13,331		14,038		23,873		179,236
Total allowance	$	120,678	$	13,117	$	133,795	$	18,585	$	13,423	$	24,310	$	24,437	$	214,550
Loans:
Individually evaluated for impairment	$	275,966	$	22,437	$	298,403	$	4,615	$	112	$	3,061	$	890	$	307,081
Purchased credit impaired loans		7,907		7,113		15,020		3,790		4,232		107,535		4,458		135,035
Collectively evaluated for impairment		8,155,011		2,270,721		10,425,732		2,303,294		1,519,075		2,736,320		2,117,180		19,101,601
Total loans	$	8,438,884	$	2,300,271	$	10,739,155	$	2,311,699	$	1,523,419	$	2,846,916	$	2,122,528	$	19,543,717



			Commercial				Commercial
	Commercial		real estate-		Total		real estate-		Construction
	non-real		owner		commercial		income		and land		Residential
(in thousands)	estate		occupied		and 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
Charge-offs		(35,247)		(527)		(35,774)		(160)		(670)		(2,485)		(22,844)		(61,933)
Recoveries		6,442		447		6,889		655		1,050		339		5,248		14,181
Net provision for loan losses		15,895		2,556		18,451		486		(70)		4,163		20,952		43,982
Decrease in FDIC loss share receivable		(47)		—		(47)		—		—		(2,344)		(135)		(2,526)
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	$	302,398
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		18,307,776
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

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)	2018		2017
Commercial non-real estate	$	126,429	$	152,863
Commercial real estate - owner occupied		20,719		25,989
Total commercial and industrial		147,148		178,852
Commercial real estate - income producing		3,941		14,574
Construction and land development		3,249		3,807
Residential mortgages		31,732		40,480
Consumer		15,576		15,087
Total loans	$	201,646	$	252,800

Nonaccrual loans include nonaccruing loans modified in troubled debt restructurings (“TDRs”) of $92.7 million and $99.2 million at September 30, 2018 and December 31, 2017, respectively. Total TDRs, both accruing and nonaccruing, were $254.9 million at September 30, 2018 and $219.7 million at December 31, 2017. All TDRs are individually evaluated for impairment. At September 30, 2018 and December 31, 2017, the Company had unfunded commitments of $8.2 million and $7.3 million, respectively, to borrowers whose loan terms have been modified in a TDR.

The tables below detail by portfolio class TDRs that were modified during the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended
($ in thousands)		September 30, 2018						September 30, 2017
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
		Number	Outstanding		Outstanding			Number	Outstanding		Outstanding
		of	Recorded		Recorded			of	Recorded		Recorded
Troubled Debt Restructurings:		Contracts	Investment		Investment		Contracts		Investment		Investment
Commercial non-real estate		11	$	23,347	$	23,347		13		42,148		42,148
Commercial real estate - owner occupied		1		229		229		—		—		—
Total commercial and industrial		12		23,576		23,576		13		42,148		42,148
Commercial real estate - income producing		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Residential mortgages		8		930		930		7		970		970
Consumer		6		89		89		—		—		—
Total loans		26	$	24,595	$	24,595		20		43,118		43,118



	Nine Months Ended
($ in thousands)		September 30, 2018						September 30, 2017
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
		Number	Outstanding		Outstanding			Number	Outstanding		Outstanding
		of	Recorded		Recorded			of	Recorded		Recorded
Troubled Debt Restructurings:		Contracts	Investment		Investment		Contracts		Investment		Investment
Commercial non-real estate		29	$	85,306	$	85,306		50	$	135,926	$	135,926
Commercial real estate - owner occupied		2		6,138		6,138		4		3,734		3,734
Total commercial and industrial		31		91,444		91,444		54		139,660		139,660
Commercial real estate - income producing		1		1,564		1,564		5		5,684		5,684
Construction and land development		—		—		—		—		—		—
Residential mortgages		11		1,048		1,048		13		2,068		2,068
Consumer		7		311		311		1		40		42
Total loans		50	$	94,367	$	94,367		73	$	147,452	$	147,454

The TDRs modified during the nine months ended September 30, 2018 reflected in the table above include $50.7 million of loans with extended amortization terms or other payment concessions, $14.6 million with significant covenant waivers and $29.1 million with other modifications. The TDRs modified during the nine months ended September 30, 2017 include $96.1 million of loans with extended amortization terms or other payment concessions, $50.1 million with significant covenant waivers and $1.3 million with other modifications.

One residential mortgage totaling $0.2 million and one owner-occupied commercial real estate loan totaling $1.9 million that defaulted during the nine months ended September 30, 2018 were modified in TDRs during the twelve months prior to default. There were no defaults on loans during the nine months ended September 30, 2017 that had been modified in a TDR during the prior twelve months.

The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at September 30, 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.



	September 30, 2018
		Recorded investment		Recorded investment		Unpaid
(in thousands)		without an allowance		with an allowance		principal balance		Related allowance
Commercial non-real estate	$	140,504	$	135,462	$	293,012	$	23,101
Commercial real estate - owner occupied		13,259		9,178		26,787		225
Total commercial and industrial		153,763		144,640		319,799		23,326
Commercial real estate - income producing		2,977		1,638		5,474		285
Construction and land development		100		12		112		1
Residential mortgages		1,482		1,579		3,609		163
Consumer		279		611		1,136		131
Total loans	$	158,601	$	148,480	$	330,130	$	23,906


	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 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

The tables below present the average balances and interest income for total impaired loans for the three and nine months ended September 30, 2018 and 2017. Interest income recognized represents interest on accruing loans modified in a TDR.



	Three Months Ended
	September 30, 2018				September 30, 2017
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial non-real estate	$	283,519	$	2,275	$	260,640	$	872
Commercial real estate - owner occupied		24,702		90		6,916		24
Total commercial and industrial		308,221		2,365		267,556		896
Commercial real estate - income producing		6,718		15		14,604		35
Construction and land development		113		—		663		1
Residential mortgages		3,397		4		6,204		7
Consumer		745		10		1,179		4
Total loans	$	319,194	$	2,394	$	290,206	$	943



	Nine Months Ended
	September 30, 2018				September 30, 2017
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial non-real estate	$	295,636	$	5,863	$	251,129	$	1,806
Commercial real estate - owner occupied		26,416		258		5,895		46
Total commercial and industrial		322,052		6,121		257,024		1,852
Commercial real estate - income producing		10,988		64		14,449		112
Construction and land development		155		—		1,216		1
Residential mortgages		6,307		14		4,449		12
Consumer		769		28		1,644		9
Total loans	$	340,271	$	6,227	$	278,782	$	1,986

Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at September 30, 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
September 30, 2018	past due		past due		past due		past due		Current		Loans		still accruing
(in thousands)
Commercial non-real estate	$	10,752	$	26,454	$	116,791	$	153,997	$	8,284,887	$	8,438,884	$	27,606
Commercial real estate - owner occupied		2,001		459		16,377		18,837		2,281,434		2,300,271		641
Total commercial and industrial		12,753		26,913		133,168		172,834		10,566,321		10,739,155		28,247
Commercial real estate - income producing		1,541		198		6,371		8,110		2,303,589		2,311,699		1,830
Construction and land development		11,976		1,532		2,044		15,552		1,507,867		1,523,419		78
Residential mortgages		36,632		11,976		18,006		66,614		2,780,302		2,846,916		—
Consumer		14,582		4,919		9,162		28,663		2,093,865		2,122,528		371
Total	$	77,484	$	45,538	$	168,751	$	291,773	$	19,251,944	$	19,543,717	$	30,526



													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 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	$	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 September 30, 2018 and December 31, 2017.



	September 30, 2018
(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	$	7,593,629	$	2,106,568	$	9,700,197	$	2,211,829	$	1,473,080	$	13,385,106
Pass-Watch		201,226		70,831		272,057		46,155		37,100		355,312
Special Mention		89,825		34,133		123,958		26,086		952		150,996
Substandard		554,184		88,739		642,923		27,629		12,287		682,839
Doubtful		20		—		20		—		—		20
Total	$	8,438,884	$	2,300,271	$	10,739,155	$	2,311,699	$	1,523,419	$	14,574,273

	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



	September 30, 2018						December 31, 2017
(in thousands)	Residential mortgage		Consumer		Total		Residential mortgage		Consumer		Total
Performing	$	2,815,184	$	2,106,581	$	4,921,765	$	2,647,784	$	2,099,637	$	4,747,421
Nonperforming		31,732		15,947		47,679		42,688		15,658		58,346
Total	$	2,846,916	$	2,122,528	$	4,969,444	$	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 nine months ended September 30, 2018 and the year ended December 31, 2017.



	September 30, 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		(30,448)		(4,564)		(69,591)		(7,412)
Accretion		12,080		(12,080)		17,079		(17,079)
Decrease in expected cash flows based on actual cash flows and changes in cash flow assumptions		—		(2,801)		—		(30,379)
Net transfers from nonaccretable difference to accretable yield		—		—		—		3,701
Balance at end of period	$	135,035	$	43,072	$	153,403	$	62,517

Certain of the Company’s purchased credit impaired loans were covered by a loss share agreement with the FDIC. The agreement was terminated by the Company during the third quarter of 2017. Prior to termination, the Company carried a receivable from the FDIC representing an indemnification asset arising from the agreement. The receivable was accounted for separately from the covered loans as the agreement was not contractually part of the loans and were not transferrable should the Company have disposed of the loans.

Residential Mortgage Loans in Process of Foreclosure

Included in loans are $6.9 million and $7.5 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of September 30, 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 $1.9 million and $3.4 million of foreclosed single family residential properties in other real estate owned as of September 30, 2018 and December 31, 2017, respectively.