Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2021

3. Loans and Allowance for Credit Losses

The Company generally makes loans in its market areas of south and central Mississippi; southern and central Alabama; northwest, central and south Louisiana; the northern, central, and panhandle regions of Florida; certain areas of east and northeast Texas, including Houston, Beaumont and Dallas; and Nashville, Tennessee. Loans, net of unearned income, by portfolio are presented at amortized cost basis in the table below. Amortized cost does not include accrued interest, which is reflected in the accrued interest line item in the Consolidated Balance Sheets, totaling $80.1 million and $76.2 million at March 31, 2021 and December 31, 2020, respectively. Included in commercial non-real estate loans at March 31, 20201 and December 31, 2020 was $2.3 billion and $2.0 billion, respectively, of Paycheck Protection Program loans, described in more detail below. The following table presents loans, net of unearned income, by portfolio class at March 31, 2021 and December 31, 2020.

	March 31,		December 31,
(in thousands)	2021		2020
Commercial non-real estate	$	10,091,342	$	9,986,983
Commercial real estate - owner occupied		2,795,104		2,857,445
Total commercial and industrial		12,886,446		12,844,428
Commercial real estate - income producing		3,411,028		3,357,939
Construction and land development		1,122,141		1,065,057
Residential mortgages		2,488,792		2,665,212
Consumer		1,756,452		1,857,295
Total loans	$	21,664,859	$	21,789,931

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 non-real estate loans also include loans made under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). PPP loans are guaranteed by the SBA and are forgivable to the debtor upon satisfaction of certain criteria. The loans bear interest at 1% per annum and have two or five year terms, depending on the date of origination. These loans also earn an origination fee of 1%, 3%, or 5%, depending on the loan size; this origination fee is deferred and amortized over the estimated life of the loan using the effective yield method.

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, though the Company is no longer engaged in this type of lending and the remaining portfolio is in runoff. 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 Credit Losses

The following tables show activity in the allowance for credit losses by portfolio class for the three months ended March 31, 2021 and 2020, as well as the corresponding recorded investment in loans at the end of each period. Effective January 1, 2020, the Company adopted the provisions of Accounting Standards Codification (ASC) 326, “Financial Instruments – Credit Losses,” using a modified retrospective basis. ASC 326, commonly referred to as CECL, prescribed a change in computing allowance for credit losses from an incurred methodology to a life of loan methodology. The difference between the December 31, 2019 incurred allowance and the CECL allowance is reflected as a cumulative effect of change in accounting principle in the table below.

				Commercial			Total			Commercial
	Commercial			real estate-			commercial			real estate-			Construction
	non-real			owner			and			income			and land			Residential
(in thousands)	estate			occupied			industrial			producing			development			mortgages			Consumer			Total
	Three Months Ended March 31, 2021
Allowance for credit losses
Allowance for loan losses:
Beginning balance	$	149,693		$	69,134		$	218,827		$	109,474		$	26,462		$	48,842		$	46,572		$	450,177
Charge-offs		(17,512	)		(347	)	$	(17,859	)		(194	)		(248	)		(109	)		(3,694	)		(22,104	)
Recoveries		1,899			37		$	1,936			-			159			206			1,549			3,850
Net provision for loan losses		(5,144	)		(2,301	)	$	(7,445	)		6,899			(1,200	)		(6,420	)		603			(7,563	)
Ending balance - allowance for loan losses	$	128,936		$	66,523		$	195,459		$	116,179		$	25,173		$	42,519		$	45,030		$	424,360
Reserve for unfunded lending commitments:
Beginning balance	$	4,529		$	381		$	4,910		$	1,099		$	22,694		$	19		$	1,185		$	29,907
Provision for losses on unfunded commitments		2,642			131			2,773			439			(617	)		3			54			2,652
Ending balance - reserve for unfunded lending commitments		7,171			512			7,683			1,538			22,077			22			1,239			32,559
Total allowance for credit losses	$	136,107		$	67,035		$	203,142		$	117,717		$	47,250		$	42,541		$	46,269		$	456,919
Allowance for loan losses:
Individually evaluated	$	4,564		$	1,242		$	5,806		$	22		$	21		$	486		$	739		$	7,074
Collectively evaluated		124,372			65,281			189,653			116,157			25,152			42,033			44,291			417,286
Allowance for loan losses	$	128,936		$	66,523		$	195,459		$	116,179		$	25,173		$	42,519		$	45,030		$	424,360
Reserve for unfunded lending commitments:
Individually evaluated	$	190		$	51		$	241		$	—		$	—		$	—		$	-		$	241
Collectively evaluated		6,981			461			7,442			1,538			22,077			22			1,239			32,318
Reserve for unfunded lending commitments:	$	7,171		$	512		$	7,683		$	1,538		$	22,077		$	22		$	1,239		$	32,559
Total allowance for credit losses	$	136,107		$	67,035		$	203,142		$	117,717		$	47,250		$	42,541		$	46,269		$	456,919
Loans:
Individually evaluated	$	20,132		$	10,047		$	30,179		$	4,363		$	131		$	5,241		$	2,779		$	42,693
Collectively evaluated		10,071,210			2,785,057			12,856,267			3,406,665			1,122,010			2,483,551			1,753,673			21,622,166
Total loans	$	10,091,342		$	2,795,104		$	12,886,446		$	3,411,028		$	1,122,141		$	2,488,792		$	1,756,452		$	21,664,859

				Commercial			Total			Commercial
	Commercial			real estate-			commercial			real estate-			Construction
	non-real			owner			and			income			and land		Residential
(in thousands)	estate			occupied			industrial			producing			development		mortgages			Consumer			Total
	Three Months Ended March 31, 2020
Allowance for credit losses
Allowance for loan losses:
Beginning balance	$	106,432		$	10,977		$	117,409		$	20,869		$	9,350	$	20,331		$	23,292		$	191,251
Cumulative effect of change in accounting principle		(244	)		14,877			14,633			7,287			7,478		12,921			7,092			49,411
Charge-offs		(40,713	)		(514	)		(41,227	)		(830	)		—		(141	)		(5,540	)		(47,738	)
Recoveries		2,226			81			2,307			7			234		212			1,214			3,974
Net provision for loan losses		119,297			23,414			142,711			37,627			16,761		14,877			17,129			229,105
Ending balance - allowance for loan losses	$	186,998		$	48,835		$	235,833		$	64,960		$	33,823	$	48,200		$	43,187		$	426,003
Reserve for unfunded lending commitments:
Beginning balance	$	3,974		$	—		$	3,974		$	—		$	—	$	—		$	—		$	3,974
Cumulative effect of change in accounting principle		5,772			288			6,060			449			15,658		17			5,146			27,330
Provision for losses on unfunded commitments		5,182			289			5,471			280			13,205		—			(1,268	)		17,688
Ending balance - reserve for unfunded lending commitments		14,928			577			15,505			729			28,863		17			3,878			48,992
Total allowance for credit losses	$	201,926		$	49,412		$	251,338		$	65,689		$	62,686	$	48,217		$	47,065		$	474,995

Allowance for loan losses:
Individually evaluated for impairment	$	67,404		$	102		$	67,506		$	458		$	23	$	312		$	195		$	68,494
Collectively evaluated for impairment		119,594			48,733			168,327			64,502			33,800		47,888			42,992			357,509
Allowance for loan losses	$	186,998		$	48,835		$	235,833		$	64,960		$	33,823	$	48,200		$	43,187		$	426,003
Reserve for unfunded lending commitments:
Individually evaluated	$	7,215		$	—		$	7,215		$	—		$	—	$	—		$	—		$	7,215
Collectively evaluated		7,713			577			8,290			729			28,863		17			3,878			41,777
Reserve for unfunded lending commitments:		14,928			577			15,505			729			28,863		17			3,878			48,992
Total allowance for credit losses	$	201,926		$	49,412		$	251,338		$	65,689		$	62,686	$	48,217		$	47,065		$	474,995
Loans:
Individually evaluated for impairment	$	253,790		$	4,184		$	257,974		$	7,300		$	3,350	$	4,625		$	1,280		$	274,529
Collectively evaluated for impairment		9,067,550			2,727,136			11,794,686			3,225,483			1,095,376		2,975,360			2,150,247			21,241,152
Total loans	$	9,321,340		$	2,731,320		$	12,052,660		$	3,232,783		$	1,098,726	$	2,979,985		$	2,151,527		$	21,515,681

The calculation of the allowance for credit losses is performed using two primary approaches: a collective approach for pools of loans that have similar risk characteristics using a loss rate analysis, and a specific reserve analysis for credits individually evaluated. The allowance for credit losses was developed using multiple Moody’s macroeconomic forecasts applied to internally developed credit models for a two year reasonable and supportable period. In the calculation of the March 31, 2021 allowance, the Company weighted the March 2021 baseline economic forecast, which Moody’s defines as the “most likely outcome” based on current conditions and its view of where the economy is headed, at 65%. The March 2021 baseline scenario assumes (1) new cases of COVID-19 peaked in January 2021; (2) no new widespread business closures; (3) the $1.9 trillion American Rescue Plan Act will boost gross domestic product growth which, along with positive job numbers reported to-date, will lead to a slightly quicker recovery in the U.S. job market than included in the December 2020 forecast; and, (4) additional legislation focused on infrastructure and social benefits will be passed in the second half of 2021. The downside scenario S-2 was weighted at 35% to incorporate a reasonably possible alternative economic outcome. The S-2 scenario reflects slower economic recovery, with a delay in herd immunity until December 2021, a slower unwinding of restrictions on travel and business and smaller infrastructure and social benefits legislation impeding economic growth in the second half of 2021 and in 2022. The modest release across most portfolios during the first quarter of 2021 reflects the improvements in the economic forecast. The continued elevated allowance level is a result of uncertainty surrounding future performance as the impact of stimulus diminishes and modifications expire.

Nonaccrual loans and loans modified in troubled Debt Restructurings

The following table shows the composition of nonaccrual loans and those without an allowance for loan loss, by portfolio class.


		March 31,						December 31,
	2021							2020
(in thousands)		Total nonaccrual			Nonaccrual without allowance for loan loss			Total nonaccrual			Nonaccrual without allowance for loan loss
Commercial non-real estate	$		27,650	$		6,841	$		52,836	$		15,268
Commercial real estate - owner occupied			11,804			6,946			13,856			7,038
Total commercial and industrial			39,454			13,787			66,692			22,306
Commercial real estate - income producing			4,818			4,273			6,743			—
Construction and land development			1,689			—			2,486			1,116
Residential mortgages			40,715			1,603			40,573			1,705
Consumer			21,758			—			23,385			—
Total loans	$		108,434	$		19,663	$		139,879	$		25,127

Nonaccrual loans include nonaccruing loans modified in troubled debt restructurings (“TDRs”) of $7.2 million and $21.6 million at March 31, 2021 and December 31, 2020, respectively. Total TDRs, both accruing and nonaccruing, were $13.5 million at March 31, 2021 and $25.8 million at December 31, 2020. All TDRs are individually evaluated for credit loss. At March 31, 2021 and December 31, 2020, the Company had unfunded commitments of $0.4 million and $4.6 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 months ended March 31, 2021 and 2020. All such loans are individually evaluated for credit loss.

	Three Months Ended
($ in thousands)	March 31, 2021						March 31, 2020
			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		3	$	6,935	$	6,935		1	$	395	$	395
Commercial real estate - owner occupied		—		—		—		—		—		—
Total commercial and industrial		3		6,935		6,935		1		395		395
Commercial real estate - income producing		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Residential mortgages		1		210		210		1		256		256
Consumer		1		54		54		3		34		34
Total loans		5	$	7,199	$	7,199		5	$	685	$	685

The TDRs modified during the three months ended March 31, 2021 reflected in the table above include $1.9 million of loans with extended amortization terms or other payment concessions, and $5.3 million of loans with other modifications. The TDRs modified during the three months ended March 31, 2020 include $0.3 million of loans with extended amortization terms or other payment concessions and $0.4 million with significant covenant waivers.

One residential loan totaling $0.6 million that defaulted during the three months ended March 31, 2021 had been modified in a TDR during the twelve months prior to default. No loans that defaulted during the three months ended March 31, 2020 had been modified in a TDR during the twelve months prior to default.

The TDR disclosures above do not include loans eligible for exclusion from TDR assessment under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Loans modified under the CARES Act are reported in the aging analysis that follows based on the modified terms.

Aging Analysis

The tables below present the aging analysis of past due loans by portfolio class at March 31, 2021 and December 31, 2020.

March 31, 2021	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 still accruing
(in thousands)
Commercial non-real estate	$	7,175	$	1,484	$	24,690	$	33,349	$	10,057,993	$	10,091,342	$	4,474
Commercial real estate - owner occupied		2,777		499		9,036		12,312		2,782,792		2,795,104		—
Total commercial and industrial		9,952		1,983		33,726		45,661		12,840,785		12,886,446		4,474
Commercial real estate - income producing		914		1,441		5,426		7,781		3,403,247		3,411,028		775
Construction and land development		2,310		88		913		3,311		1,118,830		1,122,141		—
Residential mortgages		28,856		7,117		20,321		56,294		2,432,498		2,488,792		303
Consumer		6,036		1,916		11,212		19,164		1,737,288		1,756,452		1,340
Total	$	48,068	$	12,545	$	71,598	$	132,211	$	21,532,648	$	21,664,859	$	6,892

December 31, 2020	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 still accruing
(in thousands)
Commercial non-real estate	$	7,963	$	2,564	$	39,530	$	50,057	$	9,936,926	$	9,986,983	$	583
Commercial real estate - owner occupied		1,525		753		13,663		15,941		2,841,504		2,857,445		955
Total commercial and industrial		9,488		3,317		53,193		65,998		12,778,430		12,844,428		1,538
Commercial real estate - income producing		1,494		798		5,744		8,036		3,349,903		3,357,939		182
Construction and land development		4,168		284		2,001		6,453		1,058,604		1,065,057		—
Residential mortgages		29,319		9,858		27,886		67,063		2,598,149		2,665,212		912
Consumer		12,215		5,012		11,714		28,941		1,828,354		1,857,295		729
Total	$	56,684	$	19,269	$	100,538	$	176,491	$	21,613,440	$	21,789,931	$	3,361

Credit Quality Indicators

The following tables present the credit quality indicators by segment and portfolio class of loans held for investment at March 31, 2021 and December 31, 2020. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process. In addition, the Company often examines portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach.

	March 31, 2021
(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	$	9,623,336	$	2,601,254	$	12,224,590	$	3,282,794	$	1,102,030	$	16,609,414
Pass-Watch		263,754		106,179		369,933		80,597		12,056		462,586
Special Mention		56,639		19,152		75,791		4,374		5,989		86,154
Substandard		147,613		68,519		216,132		43,263		2,066		261,461
Doubtful		—		—		—		—		—		—
Total	$	10,091,342	$	2,795,104	$	12,886,446	$	3,411,028	$	1,122,141	$	17,419,615

	December 31, 2020
(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	$	9,439,264	$	2,641,423	$	12,080,687	$	3,219,155	$	1,033,060	$	16,332,902
Pass-Watch		314,739		114,358		429,097		89,968		22,820		541,885
Special Mention		79,613		46,239		125,852		5,989		5,751		137,592
Substandard		153,367		55,425		208,792		42,827		3,426		255,045
Doubtful		—		—		—		—		—		—
Total	$	9,986,983	$	2,857,445	$	12,844,428	$	3,357,939	$	1,065,057	$	17,267,424

	March 31, 2021						December 31, 2020
(in thousands)	Residential mortgage		Consumer		Total		Residential mortgage		Consumer		Total
Performing	$	2,445,620	$	1,733,630	$	4,179,250	$	2,622,422	$	1,832,885	$	4,455,307
Nonperforming		43,172		22,822		65,994		42,790		24,410		67,200
Total	$	2,488,792	$	1,756,452	$	4,245,244	$	2,665,212	$	1,857,295	$	4,522,507

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 – 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.

Vintage Analysis

The following table presents credit quality disclosures of amortized cost by class and vintage for term loans and by revolving and revolving converted to amortizing at March 31, 2021. The Company defines vintage as the later of origination, renewal or restructure date.

	Term Loans
	Amortized Cost Basis by Origination Year
		2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
Commercial Loans:
Pass		$	1,785,609	$	4,899,613	$	2,713,484	$	1,641,419	$	1,257,878	$	1,928,878	$	2,353,884	$	28,649	$	16,609,414
Pass-Watch			28,339		70,487		88,986		45,747		42,878		102,659		79,774		3,716		462,586
Special Mention			15,621		3,150		24,326		4,087		15,110		9,743		13,567		550		86,154
Substandard			9,571		73,499		41,404		20,353		47,528		34,410		33,912		784		261,461
Doubtful			—		—		—		—		—		—		—		—		—
Total Commercial Loans		$	1,839,140	$	5,046,749	$	2,868,200	$	1,711,606	$	1,363,394	$	2,075,690	$	2,481,137	$	33,699	$	17,419,615
Residential Mortgage and Consumer Loans:
Performing		$	106,606	$	410,414	$	465,522	$	369,198	$	489,147	$	1,179,718	$	1,154,507	$	4,138		4,179,250
Nonperforming			193		2,268		4,723		6,317		10,586		38,452		3,403		52		65,994
Total Consumer Loans		$	106,799	$	412,682	$	470,245	$	375,515	$	499,733	$	1,218,170	$	1,157,910	$	4,190	$	4,245,244

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 at March 31, 2021 and December 31, 2020 was $12.5 million and $17.2 million of consumer loans secured by single family residential real estate that were in process of foreclosure. In addition to the single family residential real estate loans in process of foreclosure, the Company also held $4.2 million and $3.4 million of foreclosed single family residential properties in other real estate owned at March 31, 2021 and December 31, 2020, respectively.

Loans Held for Sale

Loans held for sale is composed primarily of mortgage loans originated for sale in the secondary market.