Loans and Allowance for Loan Losses | 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 areas and the northern, central and panhandle regions of Florida. Loans, net of unearned income, by portfolio are presented in the table below. June 30, December 31, (in thousands) 2017 2016 Commercial non-real estate $ 8,093,104 $ 7,613,917 Commercial real estate - owner occupied 2,078,332 1,906,821 Total commercial & industrial 10,171,436 9,520,738 Commercial real estate - income producing 2,401,673 2,013,890 Construction and land development 1,313,522 1,010,879 Residential mortgages 2,493,923 2,146,713 Consumer 2,093,287 2,059,931 Total loans $ 18,473,841 $ 16,752,151 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 business assets such as accounts receivable, inventory, ownership 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 C onstruction and land development loans are made to facilitate t he 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 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 schedule shows activity in the allowance for loan losses by portfolio class for the six months ended June 30, 2017 and 2016, as well as the corresponding recorded investment in loans at the end of each period. 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 Six months ended June 30, 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 — — — — (58) (86) (153) (297) Recoveries 2 93 95 — 39 19 71 224 Net provision for loan losses (46) (245) (291) (61) (148) (10) (112) (622) Decrease in FDIC loss share receivable (47) — (47) — — (2,344) (135) (2,526) Non-purchased credit impaired activity: Charge-offs (26,218) (517) (26,735) (160) (114) (690) (15,107) (42,806) Recoveries 1,816 243 2,059 398 716 262 3,475 6,910 Net provision for loan losses 14,804 1,441 16,245 (146) 343 868 14,254 31,564 Ending balance $ 137,363 $ 12,098 $ 149,461 $ 13,540 $ 7,049 $ 23,380 $ 28,435 $ 221,865 Ending balance: Allowance: Individually evaluated for impairment $ 22,758 $ 280 $ 23,038 $ 1,402 $ 1 $ 172 $ 283 $ 24,896 Amounts related to purchased credit impaired loans 395 742 1,137 192 239 12,622 942 15,132 Collectively evaluated for impairment 114,210 11,076 125,286 11,946 6,809 10,586 27,210 181,837 Total allowance $ 137,363 $ 12,098 $ 149,461 $ 13,540 $ 7,049 $ 23,380 $ 28,435 $ 221,865 Loans: Individually evaluated for impairment $ 250,256 $ 7,480 $ 257,736 $ 14,913 $ 847 $ 3,466 $ 1,053 $ 278,015 Purchased credit impaired loans 5,422 9,848 15,270 6,247 4,160 129,198 8,280 163,155 Collectively evaluated for impairment 7,837,426 2,061,004 9,898,430 2,380,513 1,308,515 2,361,259 2,083,954 18,032,671 Total loans $ 8,093,104 $ 2,078,332 $ 10,171,436 $ 2,401,673 $ 1,313,522 $ 2,493,923 $ 2,093,287 $ 18,473,841 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 Six months ended June 30, 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) (23) (8) (78) Recoveries 8 120 128 2 53 3 106 292 Net provision for loan losses 79 (170) (91) 26 (117) 1,165 (1,290) (307) Decrease in FDIC loss share receivable 39 — 39 — — (3,378) (98) (3,437) Non-purchased credit impaired activity: Charge-offs (22,212) (1,199) (23,411) (191) (592) (592) (11,268) (36,054) Recoveries 1,802 238 2,040 268 1,125 480 3,039 6,952 Net provision for loan losses 61,628 1,857 63,485 6,654 (1,087) 466 8,021 77,539 Ending balance $ 150,772 $ 10,676 $ 161,448 $ 12,799 $ 5,006 $ 23,474 $ 23,359 $ 226,086 Ending balance: Allowance: Individually evaluated for impairment $ 12,885 $ 183 $ 13,068 $ 72 $ 1 $ 167 $ 41 $ 13,349 Amounts related to purchased credit impaired loans 572 1,015 1,587 741 575 15,430 1,257 19,590 Collectively evaluated for impairment 137,315 9,478 146,793 11,986 4,430 7,877 22,061 193,147 Total allowance $ 150,772 $ 10,676 $ 161,448 $ 12,799 $ 5,006 $ 23,474 $ 23,359 $ 226,086 Loans: Individually evaluated for impairment $ 232,785 $ 5,898 $ 238,683 $ 7,803 $ 1,247 $ 1,068 $ 166 $ 248,967 Purchased credit impaired loans 10,483 15,428 25,911 10,752 8,761 151,674 12,826 209,924 Collectively evaluated for impairment 6,889,251 1,894,874 8,784,125 2,005,916 870,580 1,864,908 2,051,376 15,576,905 Total loans $ 7,132,519 $ 1,916,200 $ 9,048,719 $ 2,024,471 $ 880,588 $ 2,017,650 $ 2,064,368 $ 16,035,796 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. June 30, December 31, (in thousands) 2017 2016 Commercial non-real estate $ 167,710 $ 249,037 Commercial real estate - owner occupied 11,750 14,413 Total commercial & industrial 179,460 263,450 Commercial real estate - income producing 13,438 13,954 Construction and land development 2,821 4,550 Residential mortgages 28,158 23,665 Consumer 14,342 12,351 Total loans $ 238,219 $ 317,970 Nonaccrual loans include loans modified in troubled debt restructurings (“TDRs”) of $96.3 million and $81.9 million at June 30, 2017 and December 31, 2016, respectively. Total TDRs, both accruing and nonaccruing, were $186.8 million as of June 30, 2017 and $121.7 million at December 31, 2016. All TDRs are individually evaluated for impairment. The table below details TDRs that were modified during the six months ended June 30, 2017 and June 30, 2016 by portfolio class. Six months ended ($ in thousands) June 30, 2017 June 30, 2016 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 37 $ 92,976 $ 92,976 17 $ 57,915 $ 57,915 Commercial real estate - owner occupied 4 3,734 3,734 — — — Total commercial & industrial 41 96,710 96,710 17 57,915 57,915 Commercial real estate - income producing 5 6,486 6,486 — — — Construction and land development — — — — — — Residential mortgages 6 1,098 1,098 4 432 432 Consumer 1 40 42 — — — Total loans 53 $ 104,334 $ 104,336 21 $ 58,347 $ 58,347 The TDRs during the six months ended June 30, 2017 reflected in the table above include $28.4 million of loans with extended amortization terms or other payment concessions, $40.2 million of loans with significant covenant waivers and $35.7 million with other modifications. The TDRs during the six months ended June 30, 2016 include $31.0 million of loans with extended terms or other payment concessions and $27.3 million of other modifications. No TDRs that subsequently defaulted within twelve months of modification were recorded in the six months ended June 30, 2017 or 2016. The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at June 30, 2017 and December 31, 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. June 30, 2017 Recorded investment Recorded investment Unpaid (in thousands) without an allowance with an allowance principal balance Related allowance Commercial non-real estate $ 107,555 $ 142,701 $ 260,544 $ 22,758 Commercial real estate - owner occupied 3,514 3,966 7,570 280 Total commercial & industrial 111,069 146,667 268,114 23,038 Commercial real estate - income producing 5,678 9,235 15,349 1,402 Construction and land development 831 16 1,820 1 Residential mortgages 2,338 1,128 3,984 172 Consumer 1 1,052 1,055 283 Total loans $ 119,917 $ 158,098 $ 290,322 $ 24,896 December 31, 2016 Recorded investment Recorded investment Unpaid (in thousands) without an allowance with an allowance 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 & 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 the three and six months ended June 30, 2017 and 2016. Interest income recognized represents interest on accruing loans modified in a TDR. Three months ended June 30, 2017 June 30, 2016 Average Interest Average Interest recorded income recorded income (in thousands) investment recognized investment recognized Commercial non-real estate $ 241,122 $ 597 $ 216,907 $ 493 Commercial real estate - owner occupied 5,687 18 5,959 14 Total commercial & industrial 246,809 615 222,866 507 Commercial real estate - income producing 14,257 34 8,242 22 Construction and land development 1,219 — 7,660 — Residential mortgages 3,352 3 976 2 Consumer 1,601 3 112 1 Total loans $ 267,238 $ 655 $ 239,856 $ 532 Six months ended June 30, 2017 June 30, 2016 Average Interest Average Interest recorded income recorded income (in thousands) investment recognized investment recognized Commercial non-real estate $ 246,374 $ 934 $ 179,117 $ 847 Commercial real estate - owner occupied 5,384 22 5,836 29 Total commercial & industrial 251,758 956 184,953 876 Commercial real estate - income producing 14,372 77 9,072 43 Construction and land development 1,492 — 10,905 — Residential mortgages 3,572 5 932 4 Consumer 1,876 5 109 2 Total loans $ 273,070 $ 1,043 $ 205,971 $ 925 Aging Analysis The tables below present the age analysis of past due loans by portfolio class at June 30, 2017 and December 31, 2016. 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 June 30, 2017 past due past due past due past due Current Loans still accruing (in thousands) Commercial non-real estate $ 27,751 $ 27,974 $ 91,987 $ 147,712 $ 7,945,392 $ 8,093,104 $ 13,088 Commercial real estate - owner occupied 4,532 1,189 6,321 12,042 2,066,290 2,078,332 424 Total commercial & industrial 32,283 29,163 98,308 159,754 10,011,682 10,171,436 13,512 Commercial real estate - income producing 3,369 2,319 5,040 10,728 2,390,945 2,401,673 1,989 Construction and land development 6,250 619 1,980 8,849 1,304,673 1,313,522 — Residential mortgages 25,433 12,208 22,088 59,729 2,434,194 2,493,923 2,801 Consumer 15,764 5,843 7,600 29,207 2,064,080 2,093,287 88 Total $ 83,099 $ 50,152 $ 135,016 $ 268,267 $ 18,205,574 $ 18,473,841 $ 18,390 Recorded Greater than investment 30-59 days 60-89 days 90 days Total Total > 90 days and December 31, 2016 past due past due past due past due Current Loans still 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 & 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 $ 67,482 $ 18,968 $ 108,657 $ 195,107 $ 16,557,044 $ 16,752,151 $ 3,039 Credit Quality Indicators The following tables present the credit quality indicators by segments and portfolio class of loans at June 30, 2017 and December 31, 2016. June 30, 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 $ 6,897,989 $ 1,859,185 $ 8,757,174 $ 2,214,329 $ 1,233,082 $ 12,204,585 Pass-Watch 298,254 55,146 353,400 117,247 58,024 528,671 Special Mention 215,373 43,219 258,592 13,840 7,591 280,023 Substandard 678,032 120,782 798,814 56,247 14,825 869,886 Doubtful 3,456 — 3,456 10 — 3,466 Loss — — — — — — Total $ 8,093,104 $ 2,078,332 $ 10,171,436 $ 2,401,673 $ 1,313,522 $ 13,886,631 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 Loss — — — — — — Total $ 7,613,917 $ 1,906,821 $ 9,520,738 $ 2,013,890 $ 1,010,879 $ 12,545,507 June 30, 2017 December 31, 2016 (in thousands) Residential mortgage Consumer Total Residential mortgage Consumer Total Performing $ 2,462,964 $ 2,078,857 $ 4,541,821 $ 2,123,048 $ 2,046,757 $ 4,169,805 Nonperforming 30,959 14,430 45,389 23,665 13,174 36,839 Total $ 2,493,923 $ 2,093,287 $ 4,587,210 $ 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 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 six months ended June 30, 2017 and the year ended December 31, 2016. June 30, 2017 December 31, 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 Payments received, net (36,950) (6,258) (55,194) (11,024) Accretion 9,190 (9,190) 20,271 (20,271) Increase in expected cash flows based on actual cash flows and changes in cash flow assumptions — 4,405 — 5,358 Net transfers from nonaccretable difference to accretable yield — 5,183 — 10,135 Balance at end of period $ 163,155 $ 107,826 $ 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. In the second quarter of 2017, the Company reached an agreement with the FDIC to terminate the agreements on the remaining covered loan balances, totaling $154 million at June 30, 2017. The Company wrote down the indemnification asset by $6.6 million to the settlement amount of $3.2 million in the second quarter of 2017, with the final payment to occur in the third quarter of 2017. The following schedule shows activity in the FDIC loss share receivable for the six months ended June 30, 2017 and 2016 . June 30, June 30, (in thousands) 2017 2016 Beginning Balance $ 16,219 $ 29,868 Amortization (2,427) (3,139) Charge-offs, write-downs and other recoveries (2,442) (2,683) External expenses qualifying under loss share agreement 79 307 Adjustment due to changes in cash flow projections (2,526) (3,437) Net payments to FDIC 934 159 Write-down for termination of loss share agreement (6,603) — Ending balance $ 3,234 $ 21,075 Residential Mortgage Loans in Process of Foreclosure Included in loans are $4.2 million and $10. 1 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of June 30, 2017 and December 31, 2016, 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 $2.7 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of June 30, 2017 and December 31, 2016, respectively. |