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, the northern, central and panhandle regions of Florida, and Nashville, Tennessee. Loans, net of unearned income, consisted of the following at December 31, 2018 and 2017:




(in thousands)	2018		2017
Commercial non-real estate	$	8,620,601	$	8,297,937
Commercial real estate - owner occupied		2,457,748		2,142,439
Total commercial and industrial		11,078,349		10,440,376
Commercial real estate - income producing		2,341,779		2,384,599
Construction and land development		1,548,335		1,373,421
Residential mortgages		2,910,081		2,690,472
Consumer		2,147,867		2,115,295
Total loans	$	20,026,411	$	19,004,163

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, 2018 and 2017 were approximately $37.5 million and $33.6 million, respectively. Related party loan activity for 2018 includes new loans of $16.3 million and repayments of $12.3 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 $1.2 billion and $1.1 billion at December 31, 2018 and 2017, respectively.

The following schedules show activity in the allowance for loan losses for the years ended December 31, 2018 and 2017 by portfolio segment, and the corresponding recorded investment in loans as of December 31, 2018 and 2017.



	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, 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		(40,069)		(8,059)		(48,128)		(1,633)		(334)		(614)		(23,913)		(74,622)
Recoveries		14,385		317		14,702		221		96		2,179		5,162		22,360
Net provision for loan losses		(4,482)		8,537		4,055		5,341		8,513		(2,627)		20,834		36,116
Other		—		—		—		—		—		—		(6,648)		(6,648)
Ending balance	$	97,752	$	13,757	$	111,509	$	17,638	$	15,647	$	23,782	$	25,938	$	194,514
Ending balance:
Allowance:
Individually evaluated for impairment	$	3,636	$	607	$	4,243	$	210	$	1	$	444	$	216	$	5,114
Amounts related to purchased credit impaired loans		239		215		454		43		83		9,766		388		10,734
Collectively evaluated for impairment		93,877		12,935		106,812		17,385		15,563		13,572		25,334		178,666
Total allowance	$	97,752	$	13,757	$	111,509	$	17,638	$	15,647	$	23,782	$	25,938	$	194,514
Loans:
Individually evaluated for impairment	$	239,384	$	21,666	$	261,050	$	2,701	$	121	$	3,876	$	1,007	$	268,755
Purchased credit impaired loans		6,629		6,212		12,841		3,757		3,387		105,430		4,181		129,596
Collectively evaluated for impairment		8,374,588		2,429,870		10,804,458		2,335,321		1,544,827		2,800,775		2,142,679		19,628,060
Total loans	$	8,620,601	$	2,457,748	$	11,078,349	$	2,341,779	$	1,548,335	$	2,910,081	$	2,147,867	$	20,026,411



	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
Charge-offs		(51,479)		(558)		(52,037)		(259)		(696)		(2,839)		(31,430)		(87,261)
Recoveries		7,526		848		8,374		988		1,603		1,064		6,680		18,709
Net provision for loan losses		24,866		1,589		26,455		(529)		194		3,602		29,246		58,968
Increase (decrease) in FDIC loss share receivable		(47)		—		(47)		—		—		(2,344)		(135)		(2,526)
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

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)	2018		2017
Commercial non-real estate	$	110,653	$	152,863
Commercial real estate - owner occupied		16,895		25,989
Total commercial and industrial		127,548		178,852
Commercial real estate - income producing		4,991		14,574
Construction and land development		2,146		3,807
Residential mortgages		35,866		40,480
Consumer		16,744		15,087
Total loans	$	187,295	$	252,800

Nonaccrual loans include loans modified in troubled debt restructurings (TDRs) of $85.5 million and $99.2 million, respectively, at December 31, 2018 and 2017. Total TDRs, both accruing and nonaccruing, were $224.6 million at December 31, 2018 and $219.7 million at December 31, 2017.

The table below details the TDRs that were modified during the years ended December 31, 2018, 2017 and 2016 by portfolio segment. All such loans are individually evaluated for impairment.



	Years Ended December 31,
($ in thousands)	2018					2017					2016
		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	29	$	85,306	$	85,306	52	$	162,909	$	162,909	38	$	128,449	$	128,449
Commercial real estate - owner occupied	2		6,138		6,138	5		5,684		5,684	1		148		148
Total commercial and industrial	31		91,444		91,444	57		168,593		168,593	39		128,597		128,597
Commercial real estate - income producing	1		1,564		1,564	5		5,625		5,625	1		2,943		2,943
Construction and land development	—		—		—	—		—		—	—		—		—
Residential mortgages	14		1,297		1,297	15		2,812		2,812	7		694		694
Consumer	10		455		455	1		40		40	—		—		—
Total loans	56	$	94,760	$	94,760	78	$	177,070	$	177,070	47	$	132,234	$	132,234

The TDRs modified during the year ended December 31, 2018 reflected in the table above include $50.8 million of loans with extended amortization terms or other payment concessions, $14.6 million of loans with significant covenant waivers and $29.4 million with other modifications. The TDRs modified during the year ended December 31, 2017 include $98.1 million of loans with extended terms or other payment concessions of $76.2 mllion of loans with significant convenant 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 million of loans with significant covenant waivers, and $0.5 million of other modifications.

At December 31, 2018 and 2017, the Company had unfunded commitments of approximately $2.1 million and $7.3 million, respectively, to borrowers whose loan terms had been modified in TDRs.

One residential mortgage totaling $0.2 million, one owner-occupied commercial real estate loan totaling $1.8 million and one consumer loan totaling less than $ 0.1 million defaulted within 12 months of the modification for December 31, 2018. No TDRs modified during the year end December 31, 2017 subsequently defaulted within twelve months of modification. 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.

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



	December 31, 2018
(in thousands)	Recorded Investment Without an Allowance		Recorded Investment With an Allowance		Unpaid Principal Balance		Related Allowance
Commercial non-real estate	$	144,625	$	94,759	$	273,290	$	3,636
Commercial real estate - owner occupied		13,027		8,639		25,888		607
Total commercial and industrial		157,652		103,398		299,178		4,243
Commercial real estate - income producing		1,138		1,563		3,428		210
Construction and land development		100		21		121		1
Residential mortgages		2,058		1,818		4,421		444
Consumer		279		728		1,253		216
Total loans	$	161,227	$	107,528	$	308,401	$	5,114



	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

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



	Years Ended
	December 31, 2018				December 31, 2017
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial non-real estate	$	286,146	$	7,919	$	255,710	$	2,774
Commercial real estate - owner occupied		25,325		343		7,901		62
Total commercial and industrial		311,471		8,262		263,611		2,836
Commercial real estate - income producing		9,155		71		14,565		146
Construction and land development		145		-		1,018		2
Residential mortgages		5,598		18		5,784		18
Consumer		814		39		1,558		13
Total loans	$	327,183	$	8,390	$	286,536	$	3,015

Aging Analysis

The following table presents the age analysis of past due loans at December 31, 2018 and 2017. Purchased credit impaired loans with an accretable yield are considered to be current in the following delinquency table:



December 31, 2018	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	$	12,257	$	3,895	$	77,551	$	93,703	$	8,526,898	$	8,620,601	$	10,823
Commercial real estate - owner occupied		2,394		1,570		14,542		18,506		2,439,242		2,457,748		380
Total commercial and industrial		14,651		5,465		92,093		112,209		10,966,140		11,078,349		11,203
Commercial real estate - income producing		2,371		772		5,495		8,638		2,333,141		2,341,779		1,844
Construction and land development		7,397		1,129		2,165		10,691		1,537,644		1,548,335		644
Residential mortgages		32,869		14,706		23,175		70,750		2,839,331		2,910,081		—
Consumer		20,402		4,695		9,665		34,762		2,113,105		2,147,867		618
Total loans	$	77,690	$	26,767	$	132,593	$	237,050	$	19,789,361	$	20,026,411	$	14,309



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

Credit Quality Indicators

The following table presents the credit quality indicators of the Company’s various classes of loans at December 31, 2018 and December 31, 2017.



	December 31, 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	$	7,875,588	$	2,274,211	$	10,149,799	$	2,265,087	$	1,487,599	$	13,902,485
Pass-Watch		260,510		84,271		344,781		46,535		49,099		440,415
Special Mention		75,752		23,149		98,901		5,510		816		105,227
Substandard		408,751		76,117		484,868		24,647		10,821		520,336
Doubtful		—		—		—		—		—		—
Total	$	8,620,601	$	2,457,748	$	11,078,349	$	2,341,779	$	1,548,335	$	14,968,463



	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, 2018						December 31, 2017
(in thousands)	Residential Mortgage		Consumer		Total		Residential Mortgage		Consumer		Total
Performing	$	2,873,669	$	2,130,395	$	5,004,064	$	2,647,784	$	2,099,637	$	4,747,421
Nonperforming		36,412		17,472		53,884		42,688		15,658		58,346
Total	$	2,910,081	$	2,147,867	$	5,057,948	$	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 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 – accruing loans that have not been modified in a troubled debt restructuring.

Nonperforming – loans for which there are good reasons to doubt that payments will be made in full. All loans with nonaccrual status and all loans that have been modified in a troubled debt restructuring are 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, 2018 and 2017:



	2018				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
Additions		—		—		15,000		—
Payments received, net		(39,556)		(5,779)		(69,591)		(7,412)
Accretion		15,749		(15,749)		17,079		(17,079)
Increase (decrease) in expected cash flows based on actual
cash flow and changes in cash flow assumptions		—		(3,695)		—		(30,379)
Net transfers from nonaccretable difference
to accretable yield		—		—		—		3,701
Balance at end of period	$	129,596	$	37,294	$	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

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 $7.1 million and $7.5 million of consumer loans secured by single family residential mortgage real estate that are in process of foreclosure as of December 31, 2018 and 2017, respectively. In addition to the single family residential real estate loans in process of foreclosure, the Company also held $1.8 million and $3.4 million of foreclosed single family residential properties in other real estate owned as of December 31, 2018 and 2017, respectively.

Loans Held for Sale

Loans held for sale totaled $28.1 million and $39.9 million, respectively, at December 31, 2018 and 2017. 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.