LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans and Loans Held for Sale

Loans are summarized as follows according to major portfolio segment and specific loan class:



	December 31,
(In millions)	2017		2016

Loans held for sale	$	44	$	172
Commercial:
Commercial and industrial	$	14,003	$	13,452
Leasing	364		423
Owner-occupied	7,288		6,962
Municipal	1,271		778
Total commercial	22,926		21,615
Commercial real estate:
Construction and land development	2,021		2,019
Term	9,103		9,322
Total commercial real estate	11,124		11,341
Consumer:
Home equity credit line	2,777		2,645
1-4 family residential	6,662		5,891
Construction and other consumer real estate	597		486
Bankcard and other revolving plans	509		481
Other	185		190
Total consumer	10,730		9,693
Total loans	$	44,780	$	42,649

Loan balances are presented net of unearned income and fees, which amounted to $65 million at December 31, 2017 and $77 million at December 31, 2016.

Owner-occupied and commercial real estate loans include unamortized premiums of approximately $16 million at December 31, 2017 and $20 million at December 31, 2016.

Municipal loans generally include loans to municipalities with the debt service being repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

Land development loans included in the construction and land development loan class were $220 million at December 31, 2017, and $290 million at December 31, 2016.

Loans with a carrying value of approximately $25.6 billion at December 31, 2017 and $24.0 billion at December 31, 2016 have been pledged at the Federal Reserve and the FHLB of Des Moines as collateral for current and potential borrowings.

We sold loans totaling $0.9 billion in 2017, $1.4 billion in 2016, and $1.4 billion in 2015, that were classified as loans held for sale. The sold loans were derecognized from the balance sheet. Loans classified as loans held for sale primarily consist of conforming residential mortgages and the guaranteed portion of SBA loans. The loans are mainly sold to U.S. government agencies or participated to third parties. At times, we have continuing involvement in the transferred loans in the form of servicing rights or a guarantee from the respective issuer. Amounts added to loans held for sale during these same periods were $0.8 billion, $1.4 billion, and $1.4 billion, respectively.

The principal balance of sold loans for which we retain servicing was approximately $2.2 billion at December 31, 2017, and $2.0 billion at December 31, 2016, and $2.0 billion at December 31, 2015. Income from loans sold, excluding servicing, was $13 million in 2017, $18 million in 2016, and $18 million in 2015.

Allowance for Credit Losses

The ACL consists of the ALLL and the RULC.

Allowance for Loan and Lease Losses

The ALLL represents our estimate of probable and estimable losses inherent in the loan and lease portfolio as of the balance sheet date. Losses are charged to the ALLL when recognized. Generally, commercial and commercial real estate (“CRE”) loans are charged off or charged down when they are determined to be uncollectible in whole or in part, or when 180 days past due unless the loan is well secured and in process of collection. Consumer loans are either charged off or charged down to net realizable value no later than the month in which they become 180 days past due. Closed-end consumer loans that are not secured by residential real estate are either charged off or charged down to net realizable value no later than the month in which they become 120 days past due. We establish the amount of the ALLL by analyzing the portfolio at least quarterly, and we adjust the provision for loan losses so the ALLL is at an appropriate level at the balance sheet date.

We determine our ALLL as the best estimate within a range of estimated losses. The methodologies we use to estimate the ALLL depend upon the impairment status and loan portfolio. The methodology for impaired loans is discussed subsequently. For commercial and CRE loans with commitments greater than $1 million, we assign internal risk grades using a comprehensive loan grading system based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. The credit quality indicators discussed subsequently are based on this grading system. Estimated losses for these commercial and CRE loans are derived from a statistical analysis of our historical default and loss given default (“LGD”) experience over the period of January 2008 through the most recent full quarter.

For consumer and small commercial and CRE loans with commitments less than or equal to $1 million, we primarily use roll rate models to forecast probable inherent losses. Roll rate models measure the rate at which these loans migrate from one delinquency category to the next worse delinquency category, and eventually to loss. We estimate roll rates for these loans using recent delinquency and loss experience by segmenting our loan portfolios into separate pools based on common risk characteristics and separately calculating historical delinquency and loss experience for each pool. These roll rates are then applied to current delinquency levels to estimate probable inherent losses.

The current status and historical changes in qualitative and environmental factors may not be reflected in our quantitative models. Thus, after applying historical loss experience, as described above, we review the

quantitatively derived level of ALLL for each segment using qualitative criteria and use those criteria to determine

our qualitative estimate. We track various risk factors that influence our judgment regarding the level of the

ALLL across the portfolio segments. These factors primarily include:


•	Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices;


•	Changes in international, national, regional, and local economic and business conditions;


•	Changes in the nature and volume of the portfolio and in the terms of loans;


•	Changes in the experience, ability, and depth of lending management and other relevant staff;


•	Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;


•	Changes in the quality of the loan review system;


•	Changes in the value of underlying collateral for collateral-dependent loans;


•	The existence and effect of any concentration of credit, and changes in the level of such concentrations;


•	The effect of other external factors such as competition and legal and regulatory requirements;

The magnitude of the impact of these factors on our qualitative assessment of the ALLL changes from quarter to quarter according to changes made by management in its assessment of these factors, the extent these factors are already reflected in historic loss rates, and the extent changes in these factors diverge from one to another. We also consider the uncertainty inherent in the estimation process when evaluating the ALLL.

Reserve for Unfunded Lending Commitments

We also estimate a reserve for potential losses associated with off-balance sheet commitments, including standby letters of credit. We determine the RULC using the same procedures and methodologies that we use for the ALLL. The loss factors used in the RULC are the same as the loss factors used in the ALLL, and the qualitative adjustments used in the RULC are the same as the qualitative adjustments used in the ALLL. We adjust the Company’s unfunded lending commitments that are not unconditionally cancelable to an outstanding amount equivalent using credit conversion factors, and we apply the loss factors to the outstanding equivalents.

Changes in Allowance for Credit Losses Assumptions

During the first quarter of 2016, due to the consolidation of our separate banking charters, we enhanced our methodology to estimate the ACL on a company-wide basis. As described previously, for large commercial and CRE loans, we began estimating historic loss factors by separately calculating historic default and LGD rates, instead of directly calculating loss rates for groupings of probability of default and LGD grades using a loss migration approach. For small commercial and CRE loans, we began using roll rate models to estimate probable inherent losses. For consumer loans, we began pooling loans by current loan-to-value, where applicable. The impact of these changes was largely neutral to the total ACL at implementation.

Changes in the allowance for credit losses are summarized as follows:



	December 31, 2017
(In millions)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of year	$	420		$	116		$	31		$	567
Additions:
Provision for loan losses	23			(18		)	19			24
Deductions:
Gross loan and lease charge-offs	(118		)	(9		)	(17		)	(144		)
Recoveries	46			14			11			71
Net loan and lease (charge-offs) recoveries	(72		)	5			(6		)	(73		)
Balance at end of year	$	371		$	103		$	44		$	518
Reserve for unfunded lending commitments
Balance at beginning of year	$	54		$	11		$	—		$	65
Provision credited to earnings	(6		)	(1		)	—			(7		)
Balance at end of year	$	48		$	10		$	—		$	58
Total allowance for credit losses
Allowance for loan losses	$	371		$	103		$	44		$	518
Reserve for unfunded lending commitments	48			10			—			58
Total allowance for credit losses	$	419		$	113		$	44		$	576



	December 31, 2016
(In millions)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of year	$	454		$	114		$	38		$	606
Additions:
Provision for loan losses	93			—			—			93
Deductions:
Gross loan and lease charge-offs	(170		)	(12		)	(16		)	(198		)
Recoveries	43			14			9			66
Net loan and lease charge-offs	(127		)	2			(7		)	(132		)
Balance at end of year	$	420		$	116		$	31		$	567
Reserve for unfunded lending commitments
Balance at beginning of year	$	58		$	16		$	1		$	75
Provision credited to earnings	(4		)	(5		)	(1		)	(10		)
Balance at end of year	$	54		$	11		$	—		$	65
Total allowance for credit losses
Allowance for loan losses	$	420		$	116		$	31		$	567
Reserve for unfunded lending commitments	54			11			—			65
Total allowance for credit losses	$	474		$	127		$	31		$	632

The ALLL and outstanding loan balances according to the Company’s impairment method are summarized as follows:



	December 31, 2017
(In millions)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	26	$	1	$	4	$	31
Collectively evaluated for impairment	345		102		40		487
Purchased loans with evidence of credit deterioration	—		—		—		—
Total	$	371	$	103	$	44	$	518
Outstanding loan balances
Individually evaluated for impairment	$	314	$	69	$	76	$	459
Collectively evaluated for impairment	22,598		11,048		10,648		44,294
Purchased loans with evidence of credit deterioration	14		7		6		27
Total	$	22,926	$	11,124	$	10,730	$	44,780



	December 31, 2016
(In millions)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	56	$	3	$	6	$	65
Collectively evaluated for impairment	364		113		25		502
Purchased loans with evidence of credit deterioration	—		—		—		—
Total	$	420	$	116	$	31	$	567
Outstanding loan balances
Individually evaluated for impairment	$	466	$	78	$	75	$	619
Collectively evaluated for impairment	21,111		11,231		9,611		41,953
Purchased loans with evidence of credit deterioration	38		32		7		77
Total	$	21,615	$	11,341	$	9,693	$	42,649

Nonaccrual and Past Due Loans

Loans are generally placed on nonaccrual status when payment in full of principal and interest is not expected, or the loan is 90 days or more past due as to principal or interest, unless the loan is both well secured and in the process of collection. Factors we consider in determining whether a loan is placed on nonaccrual include delinquency status, collateral-value, borrower or guarantor financial statement information, bankruptcy status, and other information which would indicate that the full and timely collection of interest and principal is uncertain.

A nonaccrual loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement; the loan, if secured, is well secured; the borrower has paid according to the contractual terms for a minimum of six months; and analysis of the borrower indicates a reasonable assurance of the ability and willingness to maintain payments. Payments received on nonaccrual loans are applied as a reduction to the principal outstanding.

Closed-end loans with payments scheduled monthly are reported as past due when the borrower is in arrears for two or more monthly payments. Similarly, open-end credit such as charge-card plans and other revolving credit plans are reported as past due when the minimum payment has not been made for two or more billing cycles. Other multi-payment obligations (i.e., quarterly, semiannual, etc.), single payment, and demand notes are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more.

Nonaccrual loans are summarized as follows:

	December 31,
(In millions)	2017		2016

Loans held for sale	$	12	$	40
Commercial:
Commercial and industrial	$	195	$	354
Leasing	8		14
Owner-occupied	90		74
Municipal	1		1
Total commercial	294		443
Commercial real estate:
Construction and land development	4		7
Term	36		29
Total commercial real estate	40		36
Consumer:
Home equity credit line	13		11
1-4 family residential	55		36
Construction and other consumer real estate	—		2
Bankcard and other revolving plans	—		1
Other	—		—
Total consumer loans	68		50
Total	$	402	$	529

Past due loans (accruing and nonaccruing) are summarized as follows:

	December 31, 2017
(In millions)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current¹

Loans held for sale	$	44	$	—	$	—	$	—	$	44	$	—	$	12
Commercial:
Commercial and industrial	$	13,887	$	60	$	56	$	116	$	14,003	$	13	$	146
Leasing	363		1		—		1		364		—		8
Owner-occupied	7,219		29		40		69		7,288		4		49
Municipal	1,271		—		—		—		1,271		—		1
Total commercial	22,740		90		96		186		22,926		17		204
Commercial real estate:
Construction and land development	2,014		3		4		7		2,021		—		—
Term	9,079		13		11		24		9,103		2		25
Total commercial real estate	11,093		16		15		31		11,124		2		25
Consumer:
Home equity credit line	2,763		9		5		14		2,777		—		5
1-4 family residential	6,621		16		25		41		6,662		1		27
Construction and other consumer real estate	590		6		1		7		597		1		—
Bankcard and other revolving plans	506		2		1		3		509		1		—
Other	184		1		—		1		185		—		—
Total consumer loans	10,664		34		32		66		10,730		3		32
Total	$	44,497	$	140	$	143	$	283	$	44,780	$	22	$	261



	December 31, 2016
(In millions)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current¹

Loans held for sale	$	172	$	—	$	—	$	—	$	172	$	—	$	40
Commercial:
Commercial and industrial	$	13,306	$	72	$	74	$	146	$	13,452	$	10	$	287
Leasing	423		—		—		—		423		—		14
Owner-occupied	6,894		40		28		68		6,962		8		43
Municipal	778		—		—		—		778		—		1
Total commercial	21,401		112		102		214		21,615		18		345
Commercial real estate:
Construction and land development	2,010		7		2		9		2,019		1		1
Term	9,291		9		22		31		9,322		12		18
Total commercial real estate	11,301		16		24		40		11,341		13		19
Consumer:
Home equity credit line	2,635		4		6		10		2,645		1		5
1-4 family residential	5,857		12		22		34		5,891		—		11
Construction and other consumer real estate	479		3		4		7		486		3		—
Bankcard and other revolving plans	478		2		1		3		481		1		1
Other	189		1		—		1		190		—		—
Total consumer loans	9,638		22		33		55		9,693		5		17
Total	$	42,340	$	150	$	159	$	309	$	42,649	$	36	$	381


¹	Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.

Credit Quality Indicators

In addition to the past due and nonaccrual criteria, we also analyze loans using loan risk grading systems, which vary based on the size and type of credit risk exposure. The internal risk grades assigned to loans follow our definitions of Pass, Special Mention, Substandard, and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:

Pass – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered low.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well-defined weaknesses and are characterized by the distinct possibility that the Bank may sustain some loss if deficiencies are not corrected.

Doubtful – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.

We generally assign internal risk grades to commercial and CRE loans with commitments greater than $1 million based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. For these larger loans, we assign one of multiple grades within the Pass classification or one of the following four grades: Special Mention, Substandard, Doubtful, and Loss. Loss indicates that the outstanding balance has been charged off. We confirm our internal risk grades quarterly, or as soon as we identify information that affects the credit risk of the loan.

For consumer loans and certain small commercial and CRE loans with commitments less than or equal to $1 million, we generally assign internal risk grades similar to those described previously based on automated rules that depend on refreshed credit scores, payment performance, and other risk indicators. These are generally assigned either a Pass or Substandard grade and are reviewed as we identify information that might warrant a grade change.

Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality classifications are summarized as follows:



	December 31, 2017
(In millions)	Pass		Special mention		Sub- standard		Doubtful		Total loans		Total allowance

Commercial:
Commercial and industrial	$	13,001	$	395	$	606	$	1	$	14,003
Leasing	342		6		16		—		364
Owner-occupied	6,920		93		275		—		7,288
Municipal	1,257		13		1		—		1,271
Total commercial	21,520		507		898		1		22,926		$	371
Commercial real estate:
Construction and land development	2,002		15		4		—		2,021
Term	8,816		138		149		—		9,103
Total commercial real estate	10,818		153		153		—		11,124		103
Consumer:
Home equity credit line	2,759		—		18		—		2,777
1-4 family residential	6,602		—		60		—		6,662
Construction and other consumer real estate	596		—		1		—		597
Bankcard and other revolving plans	507		—		2		—		509
Other	185		—		—		—		185
Total consumer loans	10,649		—		81		—		10,730		44
Total	$	42,987	$	660	$	1,132	$	1	$	44,780	$	518



	December 31, 2016
(In millions)	Pass		Special mention		Sub- standard		Doubtful		Total loans		Total allowance

Commercial:
Commercial and industrial	$	12,185	$	266	$	998	$	3	$	13,452
Leasing	387		5		30		1		423
Owner-occupied	6,560		96		306		—		6,962
Municipal	765		7		6		—		778
Total commercial	19,897		374		1,340		4		21,615		$	420
Commercial real estate:
Construction and land development	1,942		52		25		—		2,019
Term	9,096		82		144		—		9,322
Total commercial real estate	11,038		134		169		—		11,341		116
Consumer:
Home equity credit line	2,629		—		16		—		2,645
1-4 family residential	5,851		—		40		—		5,891
Construction and other consumer real estate	482		—		4		—		486
Bankcard and other revolving plans	478		—		3		—		481
Other	189		—		1		—		190
Total consumer loans	9,629		—		64		—		9,693		31
Total	$	40,564	$	508	$	1,573	$	4	$	42,649	$	567

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. For our non-purchased credit-impaired loans, if a nonaccrual loan has a balance greater than $1 million, or if a loan is a TDR, including TDRs that subsequently default, or if the loan is no longer reported as a TDR, we individually evaluate the loan for impairment and estimate a specific reserve for the loan for all portfolio segments under applicable accounting guidance. Smaller nonaccrual loans are pooled for ALLL estimation purposes. PCI loans are included in impaired loans and are accounted for under separate accounting guidance. See subsequent discussion under Purchased Loans.

When a loan is impaired, we estimate a specific reserve for the loan based on the projected present value of the loan’s future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the loan’s underlying collateral. The process of estimating future cash flows also incorporates the same determining factors discussed previously under nonaccrual loans. When we base the impairment amount on the fair value of the loan’s underlying collateral, we generally charge-off the portion of the balance that is impaired, such that these loans do not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual are not recognized in interest income, but are applied as a reduction to the principal outstanding. The amount of interest income recognized on a cash basis during the time the loans were impaired within the years ended December 31, 2017 and 2016 was not significant.

Information on impaired loans individually evaluated is summarized as follows, including the average recorded investment and interest income recognized for the years ended December 31, 2017 and 2016:



	December 31, 2017										Year Ended December 31, 2017
(In millions)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance		Average recorded investment		Interest income recognized
(In millions)	Unpaid principal balance		with no allowance		with allowance		Total recorded investment		Related allowance		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	293	$	80	$	142	$	222	$	24	$	289	$	6
Owner-occupied	120		79		23		102		2		97		6
Municipal	1		1		—		1		—		1		—
Total commercial	414		160		165		325		26		387		12
Commercial real estate:
Construction and land development	8		4		2		6		—		8		—
Term	56		36		12		48		—		49		12
Total commercial real estate	64		40		14		54		—		57		12
Consumer:
Home equity credit line	25		13		9		22		—		21		1
1-4 family residential	67		28		29		57		4		52		1
Construction and other consumer real estate	2		1		1		2		—		2		—
Other	1		1		—		1		—		1		1
Total consumer loans	95		43		39		82		4		76		3
Total	$	573	$	243	$	218	$	461	$	30	$	520	$	27



	December 31, 2016										Year Ended December 31, 2016
(In millions)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance		Average recorded investment		Interest income recognized
			with no allowance		with allowance
Commercial:
Commercial and industrial	$	470	$	82	$	311	$	393	$	52	$	333	$	5
Owner-occupied	115		71		30		101		3		99		9
Municipal	1		1		—		1		—		1		—
Total commercial	586		154		341		495		55		433		14
Commercial real estate:
Construction and land development	22		7		6		13		—		11		2
Term	92		53		17		70		2		76		13
Total commercial real estate	114		60		23		83		2		87		15
Consumer:
Home equity credit line	24		16		7		23		—		22		1
1-4 family residential	59		27		28		55		6		57		2
Construction and other consumer real estate	3		1		2		3		—		2		—
Other	2		1		—		1		—		2		—
Total consumer loans	88		45		37		82		6		83		3
Total	$	788	$	259	$	401	$	660	$	63	$	603	$	32

Modified and Restructured Loans

Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered troubled debt restructurings (“TDRs”).

We consider many factors in determining whether to agree to a loan modification involving concessions, and seek a solution that will both minimize potential loss to the Company and attempt to help the borrower. We evaluate borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Bank is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms.

Selected information on TDRs at year-end that includes the recorded investment on an accruing and nonaccruing basis by loan class and modification type is summarized in the following schedules:



	December 31, 2017
	Recorded investment resulting from the following modification types:
(In millions)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	—	$	2	$	—	$	—	$	12	$	33	$	47
Owner-occupied	1		1		—		—		7		14		23
Total commercial	1		3		—		—		19		47		70
Commercial real estate:
Construction and land development	—		—		—		—		—		2		2
Term	6		—		—		1		—		7		14
Total commercial real estate	6		—		—		1		—		9		16
Consumer:
Home equity credit line	—		2		9		—		1		3		15
1-4 family residential	1		—		6		1		2		26		36
Construction and other consumer real estate	—		1		—		—		—		1		2
Total consumer loans	1		3		15		1		3		30		53
Total accruing	8		6		15		2		22		86		139
Nonaccruing
Commercial:
Commercial and industrial	—		3		5		2		28		24		62
Owner-occupied	1		2		—		1		1		5		10
Municipal	—		1		—		—		—		—		1
Total commercial	1		6		5		3		29		29		73
Commercial real estate:
Construction and land development	—		—		—		—		—		—		—
Term	2		—		—		—		—		3		5
Total commercial real estate	2		—		—		—		—		3		5
Consumer:
Home equity credit line	—		—		1		—		—		—		1
1-4 family residential	—		—		2		—		1		5		8
Construction and other consumer real estate	—		—		—		—		—		—		—
Total consumer loans	—		—		3		—		1		5		9
Total nonaccruing	3		6		8		3		30		37		87
Total	$	11	$	12	$	23	$	5	$	52	$	123	$	226


¹	Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.


²	Includes TDRs that resulted from a combination of any of the previous modification types.



	December 31, 2016
	Recorded investment resulting from the following modification types:
(In millions)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	—	$	19	$	—	$	—	$	—	$	28	$	47
Owner-occupied	3		—		1		—		8		10		22
Total commercial	3		19		1		—		8		38		69
Commercial real estate:
Construction and land development	—		4		—		—		—		4		8
Term	4		—		—		1		2		10		17
Total commercial real estate	4		4		—		1		2		14		25
Consumer:
Home equity credit line	—		1		10		—		—		3		14
1-4 family residential	3		1		6		—		2		30		42
Construction and other consumer real estate	—		—		—		—		—		1		1
Total consumer loans	3		2		16		—		2		34		57
Total accruing	10		25		17		1		12		86		151
Nonaccruing
Commercial:
Commercial and industrial	1		—		—		1		33		25		60
Owner-occupied	—		1		—		3		1		12		17
Municipal	—		1		—		—		—		—		1
Total commercial	1		2		—		4		34		37		78
Commercial real estate:
Construction and land development	—		—		—		—		2		—		2
Term	2		1		—		—		2		3		8
Total commercial real estate	2		1		—		—		4		3		10
Consumer:
Home equity credit line	—		—		1		—		—		1		2
1-4 family residential	—		—		2		—		1		5		8
Construction and other consumer real estate	—		—		—		2		—		—		2
Total consumer loans	—		—		3		2		1		6		12
Total nonaccruing	3		3		3		6		39		46		100
Total	$	13	$	28	$	20	$	7	$	51	$	132	$	251


¹	Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.


²	Includes TDRs that resulted from a combination of any of the previous modification types.

Unfunded lending commitments on TDRs amounted to approximately $22 million at December 31, 2017 and $14 million at December 31, 2016.

The total recorded investment of all TDRs in which interest rates were modified below market was $120 million at December 31, 2017 and $128 million at December 31, 2016, respectively. These loans are included in the previous schedule in the columns for interest rate below market and multiple modification types.

The net financial impact on interest income due to interest rate modifications below market for accruing TDRs is summarized in the following schedule:



(In millions)	2017			2016
Consumer:
1-4 family residential	$	(1	)	$	(1	)
Total consumer loans	(1		)	(1		)
Total decrease to interest income ¹	$	(1	)	$	(1	)


¹	Calculated based on the difference between the modified rate and the premodified rate applied to the recorded investment.

On an ongoing basis, we monitor the performance of all TDRs according to their restructured terms. Subsequent payment default is defined in terms of delinquency, when principal or interest payments are past due 90 days or more for commercial loans, or 60 days or more for consumer loans.

The recorded investment of accruing and nonaccruing TDRs that had a payment default during the period listed below (and are still in default at year-end) and are within 12 months or less of being modified as TDRs is as follows:



(In millions)	December 31, 2017						December 31, 2016
(In millions)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial:
Commercial and industrial	$	1	$	3	$	4	$	—	$	—	$	—
Owner-occupied	—		1		1		—		1		1
Total commercial	1		4		5		—		1		1
Consumer:
Construction and other consumer real estate	—		—		—		—		2		2
Total consumer loans	—		—		—		—		2		2
Total	$	1	$	4	$	5	$	—	$	3	$	3

Note: Total loans modified as TDRs during the 12 months previous to December 31, 2017 and 2016 were $94 million and $73 million, respectively.

At December 31, 2017 and December 31, 2016, the amount of foreclosed residential real estate property held by the Company was less than $1 million and $2 million, and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was approximately $10 million for both periods, respectively.

Concentrations of Credit Risk

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risks (whether on- or off-balance sheet) may occur when individual borrowers, groups of borrowers, or counterparties have similar economic characteristics, including industries, geographies, collateral types, sponsors, etc., and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. See Note 7 for a discussion of counterparty risk associated with the Company’s derivative transactions.

We perform an ongoing analysis of our loan portfolio to evaluate whether there is any significant exposure to any concentrations of credit risk. Based on this analysis, we believe that the loan portfolio is generally well diversified; however, there are certain significant concentrations in CRE and oil and gas-related lending. Further, we cannot guarantee that we have fully understood or mitigated all risk concentrations or correlated risks. We have adopted and adhere to concentration limits on various types of CRE lending, particularly construction and land development lending, leveraged and enterprise value lending, municipal lending, and oil and gas-related lending. All of these limits are continually monitored and revised as necessary.

Purchased Loans

Background and Accounting

We purchase loans in the ordinary course of business and account for them and the related interest income based on their performing status at the time of acquisition. PCI loans have evidence of credit deterioration at the time of acquisition and it is probable that not all contractual payments will be collected. Interest income for PCI loans is accounted for on an expected cash flow basis. Upon acquisition, in accordance with applicable accounting guidance, the acquired loans were recorded at their fair value without a corresponding ALLL. Certain acquired loans with similar characteristics such as risk exposure, type, size, etc., are grouped and accounted for in loan pools.

During 2009, CB&T and NSB acquired failed bank assets from the FDIC as receiver and entered into loss sharing

agreements (“LSAs”) with the FDIC for the acquired loans and foreclosed assets. According to the agreements, the FDIC assumes 80% of credit losses of non-single family residential loans up to a threshold specified for each acquisition, and 95% above that threshold for five years. The agreements expire after ten years, or in 2019, for single family residential loans. Subsequent to December 31, 2017, we entered into agreements with the FDIC to early-terminate the LSAs, mainly because carrying values of the acquired loans have significantly declined, and the loans have performed better than originally expected. Future losses on these loans are expected to be insignificant.

Outstanding Balances and Accretable Yield

The outstanding balances of all required payments and the related carrying amounts for PCI loans are as follows:



	December 31,
(In millions)	2017		2016

Commercial	$	25	$	49
Commercial real estate	9		51
Consumer	7		9
Outstanding balance	$	41	$	109
Carrying amount	$	27	$	77
Less ALLL	—		1
Carrying amount, net	$	27	$	76

At the time of acquisition of PCI loans, we determine the loan’s contractually required payments in excess of all cash flows expected to be collected as an amount that should not be accreted (nonaccretable difference). With respect to the cash flows expected to be collected, the portion representing the excess of the loan’s expected cash flows over our initial investment (accretable yield) is accreted into interest income on a level yield basis over the remaining expected life of the loan or pool of loans. The effects of estimated prepayments are considered in estimating the expected cash flows.

Certain PCI loans are not accounted for as previously described because the estimation of cash flows to be collected involves a high degree of uncertainty. Under these circumstances, the accounting guidance provides that interest income is recognized on a cash basis similar to the cost recovery methodology for nonaccrual loans. The net carrying amounts in the preceding schedule also include the amounts for these loans. There were no loans of this type at December 31, 2017 and December 31, 2016.

Changes in the accretable yield for PCI loans were as follows:



(In millions)	2017			2016

Balance at beginning of year	$	33		$	40
Accretion	(20		)	(24		)
Reclassification from nonaccretable difference	—			11
Disposals and other	1			6
Balance at end of year	$	14		$	33

Note: Amounts have been adjusted based on refinements to the original estimates of the accretable yield.

The primary drivers of reclassification to accretable yield from nonaccretable difference and increases in disposals and other resulted primarily from (1) changes in estimated cash flows, (2) unexpected payments on nonaccrual loans, and (3) recoveries on zero balance loans pools. See subsequent discussion under changes in cash flow estimates.

Allowance for Loan and Lease Losses Determination

For all acquired loans, the ALLL is only established for credit deterioration subsequent to the date of acquisition and represents our estimate of the inherent losses in excess of the book value of acquired loans. The ALLL for acquired loans is included in the overall ALLL in the balance sheet.

During 2017, 2016 and 2015, we adjusted the ALLL for acquired loans by recording a provision for loan losses of less than $1 million in each period. The provision is net of the ALLL reversals resulting from changes in cash flow estimates, which are discussed subsequently.

Changes in the provision for loan losses and related ALLL are driven in large part by the same factors that affect the changes in reclassification from nonaccretable difference to accretable yield, as discussed under changes in cash flow estimates.

Changes in Cash Flow Estimates

Over the life of the loan or loan pool, we continue to estimate cash flows expected to be collected. We evaluate quarterly at the balance sheet date whether the estimated present values of these loans using the effective interest rates have decreased below their carrying values. If so, we record a provision for loan losses.

For increases in carrying values that resulted from better than expected cash flows, we use such increases first to reverse any existing ALLL. During 2017, 2016, and 2015, total reversals to the ALLL, including the impact of increases in estimated cash flows, were less than $1 million in 2017, $2 million in 2016, and $4 million in 2015. When there is no current ALLL, we increase the amount of accretable yield on a prospective basis over the remaining life of the loan and recognize this increase in interest income.

The impact of increased cash flow estimates recognized in the statement of income for acquired loans with no ALLL was approximately $18 million in 2017, $19 million in 2016, and $32 million in 2015, of additional interest income.