LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased revolving, and purchased non-impaired loans. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have a discount due, at least in part, to credit quality at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered PCI loans. PCI loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the nonrevolving loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans and leases are recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk. An allowance is recorded if there is additional credit deterioration after the acquisition date.

BancShares reports PCI and non-PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

Commercial – Commercial loans include construction and land development, mortgage, other commercial real estate, commercial and industrial, lease financing and other.

Construction and land development – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise; multifamily apartments; and other commercial buildings that may be owner-occupied or income generating investments for the owner.

Commercial mortgage – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.

Other commercial real estate – Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (5 or more) residential properties.

Commercial and industrial – Commercial and industrial consists of loans or lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.

Lease financing – Lease financing consists solely of lease financing agreements for business equipment, vehicles and other assets.

Other – Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations.

Noncommercial – Noncommercial consist of residential and revolving mortgage, construction and land development, and consumer loans.

Residential mortgage – Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.

Revolving mortgage – Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.

Construction and land development – Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.

Consumer – Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements and revolving lines of credit that can be secured or unsecured, including personal credit cards.

Loans and leases outstanding included the following at September 30, 2015 and December 31, 2014:



(Dollars in thousands)	September 30, 2015		December 31, 2014
Non-PCI loans and leases:
Commercial:
Construction and land development	$	563,926	$	493,133
Commercial mortgage	8,076,946		7,552,948
Other commercial real estate	316,924		244,875
Commercial and industrial	2,211,973		1,988,934
Lease financing	691,915		571,916
Other	357,760		353,833
Total commercial loans	12,219,444		11,205,639
Noncommercial:
Residential mortgage	2,659,821		2,493,058
Revolving mortgage	2,519,972		2,561,800
Construction and land development	220,493		205,016
Consumer	1,192,012		1,117,454
Total noncommercial loans	6,592,298		6,377,328
Total non-PCI loans and leases	18,811,742		17,582,967
PCI loans:
Commercial:
Construction and land development	41,582		78,079
Commercial mortgage	568,256		577,518
Other commercial real estate	18,013		40,193
Commercial and industrial	17,023		27,254
Other	2,087		3,079
Total commercial loans	646,961		726,123
Noncommercial:
Residential mortgage	334,518		382,340
Revolving mortgage	59,695		74,109
Construction and land development	347		912
Consumer	2,543		3,014
Total noncommercial loans	397,103		460,375
Total PCI loans	1,044,064		1,186,498
Total loans and leases	$	19,855,806	$	18,769,465

At September 30, 2015, $296.5 million of total loans and leases were covered under loss share agreements, compared to $485.3 million at December 31, 2014. At the beginning of the second quarter of 2015, loss share protection expired for non-single family residential loans acquired from Sun American Bank ("SAB") and all loans acquired from First Regional Bank ("FRB"). The loan balance at September 30, 2015 for the expired agreements from SAB were $29.9 million. FRB loan balances at September 30, 2015 were insignificant. Loss share protection for Williamsburg First National Bank non-single family residential loans with a balance of $7.0 million at September 30, 2015 will expire at the beginning of the fourth quarter of 2015.

At September 30, 2015, $3.69 billion in noncovered loans with a lendable collateral value of $2.59 billion were used to secure $520.3 million in Federal Home Loan Bank ("FHLB") of Atlanta advances, resulting in additional borrowing capacity of $2.07 billion. At December 31, 2014, $3.16 billion in noncovered loans with a lendable collateral value of $2.20 billion were used to secure $240.3 million in FHLB of Atlanta advances, resulting additional borrowing capacity of $1.96 billion.

The unamortized discount related to the non-PCI loans and leases acquired in the Bancorporation merger totaled $45.1 million and $61.2 million at September 30, 2015 and December 31, 2014, respectively. During the three and nine months ended September 30, 2015, accretion income on non-PCI loans equaled $4.5 million and $15.6 million, respectively. There was no accretion income on non-PCI loans recorded for the same periods in 2014.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segment being evaluated. The credit quality indicators for non-PCI and PCI commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Each commercial loan is evaluated annually with more frequent evaluation of more severely criticized loans or leases. The credit quality indicators for non-PCI and PCI noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be effected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at September 30, 2015 and December 31, 2014 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage and other commercial real estate loans.

Non-PCI loans and leases outstanding at September 30, 2015 and December 31, 2014 by credit quality indicator are provided below:



	September 30, 2015
(Dollars in thousands)	Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	555,833	$	7,821,706	$	314,171	$	2,070,568	$	683,265	$	354,222	$	11,799,765
Special mention	5,606		107,790		285		16,812		5,161		1,828		137,482
Substandard	2,487		143,536		1,010		15,241		3,163		1,710		167,147
Doubtful	—		647		—		1,544		326		—		2,517
Ungraded	—		3,267		1,458		107,808		—		—		112,533
Total	$	563,926	$	8,076,946	$	316,924	$	2,211,973	$	691,915	$	357,760	$	12,219,444

	December 31, 2014
	Non-PCI commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	474,374	$	7,284,714	$	242,053	$	1,859,415	$	564,319	$	349,111	$	10,773,986
Special mention	13,927		129,247		909		27,683		3,205		1,384		176,355
Substandard	4,720		134,677		1,765		8,878		3,955		3,338		157,333
Doubtful	—		2,366		—		164		365		—		2,895
Ungraded	112		1,944		148		92,794		72		—		95,070
Total	$	493,133	$	7,552,948	$	244,875	$	1,988,934	$	571,916	$	353,833	$	11,205,639



	September 30, 2015
	Non-PCI noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,615,954	$	2,503,750	$	216,736	$	1,181,710	$	6,518,150
30-59 days past due	24,179		9,936		2,539		6,889		43,543
60-89 days past due	7,640		2,031		642		2,091		12,404
90 days or greater past due	12,048		4,255		576		1,322		18,201
Total	$	2,659,821	$	2,519,972	$	220,493	$	1,192,012	$	6,592,298

	December 31, 2014
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,454,797	$	2,542,807	$	202,344	$	1,110,153	$	6,310,101
30-59 days past due	23,288		11,097		1,646		4,577		40,608
60-89 days past due	6,018		2,433		824		1,619		10,894
90 days or greater past due	8,955		5,463		202		1,105		15,725
Total	$	2,493,058	$	2,561,800	$	205,016	$	1,117,454	$	6,377,328

PCI loans and leases outstanding at September 30, 2015 and December 31, 2014 by credit quality indicator are provided below:



	September 30, 2015
(Dollars in thousands)	PCI commercial loans
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	18,236	$	302,848	$	8,519	$	10,744	$	775	$	341,122
Special mention	2,250		94,955		—		1,462		—		98,667
Substandard	16,806		159,148		9,048		4,395		1,312		190,709
Doubtful	4,290		10,967		—		292		—		15,549
Ungraded	—		338		446		130		—		914
Total	$	41,582	$	568,256	$	18,013	$	17,023	$	2,087	$	646,961

	December 31, 2014
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	13,514	$	300,187	$	11,033	$	16,637	$	801	$	342,172
Special mention	6,063		98,724		16,271		4,137		—		125,195
Substandard	53,739		171,920		12,889		6,312		2,278		247,138
Doubtful	2,809		6,302		—		130		—		9,241
Ungraded	1,954		385		—		38		—		2,377
Total	$	78,079	$	577,518	$	40,193	$	27,254	$	3,079	$	726,123



	September 30, 2015
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	286,402	$	54,594	$	347	$	2,322	$	343,665
30-59 days past due	14,514		1,234		—		90		15,838
60-89 days past due	6,103		307		—		131		6,541
90 days or greater past due	27,499		3,560		—		—		31,059
Total	$	334,518	$	59,695	$	347	$	2,543	$	397,103

	December 31, 2014
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	326,589	$	68,548	$	506	$	2,582	$	398,225
30-59 days past due	11,432		1,405		—		147		12,984
60-89 days past due	10,073		345		—		25		10,443
90 days or greater past due	34,246		3,811		406		260		38,723
Total	$	382,340	$	74,109	$	912	$	3,014	$	460,375

The aging of the outstanding non-PCI loans and leases, by class, at September 30, 2015 and December 31, 2014 is provided in the table below.

The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.



	September 30, 2015
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	1,319	$	266	$	282	$	1,867	$	562,059	$	563,926
Commercial mortgage	14,587		4,897		21,416		40,900		8,036,046		8,076,946
Other commercial real estate	403		290		159		852		316,072		316,924
Commercial and industrial	5,492		961		1,328		7,781		2,204,192		2,211,973
Lease financing	398		169		310		877		691,038		691,915
Residential mortgage	24,179		7,640		12,048		43,867		2,615,954		2,659,821
Revolving mortgage	9,936		2,031		4,255		16,222		2,503,750		2,519,972
Construction and land development - noncommercial	2,539		642		576		3,757		216,736		220,493
Consumer	6,889		2,091		1,322		10,302		1,181,710		1,192,012
Other	11		—		184		195		357,565		357,760
Total non-PCI loans and leases	$	65,753	$	18,987	$	41,880	$	126,620	$	18,685,122	$	18,811,742

	December 31, 2014
	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	520	$	283	$	330	$	1,133	$	492,000	$	493,133
Commercial mortgage	11,367		4,782		8,061		24,210		7,528,738		7,552,948
Other commercial real estate	206		70		102		378		244,497		244,875
Commercial and industrial	2,843		1,545		378		4,766		1,984,168		1,988,934
Lease financing	1,631		8		2		1,641		570,275		571,916
Residential mortgage	23,288		6,018		8,955		38,261		2,454,797		2,493,058
Revolving mortgage	11,097		2,433		5,463		18,993		2,542,807		2,561,800
Construction and land development - noncommercial	1,646		824		202		2,672		202,344		205,016
Consumer	4,577		1,619		1,105		7,301		1,110,153		1,117,454
Other	146		1,966		—		2,112		351,721		353,833
Total non-PCI loans and leases	$	57,321	$	19,548	$	24,598	$	101,467	$	17,481,500	$	17,582,967

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at September 30, 2015 and December 31, 2014 for non-PCI loans, were as follows:



	September 30, 2015				December 31, 2014
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Non-PCI loans and leases:
Construction and land development - commercial	$	617	$	45	$	343	$	56
Commercial mortgage	41,607		3,353		24,720		1,003
Other commercial real estate	262		—		619		35
Commercial and industrial	6,633		502		1,741		239
Lease financing	374		—		374		2
Residential mortgage	24,911		1,444		14,242		3,191
Revolving mortgage	10,856		19		—		5,463
Construction and land development - noncommercial	875		—		—		202
Consumer	1,008		863		—		1,059
Other	133		51		1,966		—
Total non-PCI loans and leases	$	87,276	$	6,277	$	44,005	$	11,250

Purchased credit-impaired loans (PCI) loans

The following table relates to PCI loans acquired in the CCBT acquisition and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected, and the fair value of PCI loans and leases at the acquisition date.



(Dollars in thousands)
Contractually required payments	$	247,812
Cash flows expected to be collected	$	207,688
Fair value of loans at acquisition	$	154,496

The recorded fair values of PCI loans acquired in the CCBT acquisition as of the acquisition date were as follows:



(Dollars in thousands)
Commercial:
Construction and land development	$	4,116
Commercial mortgage	129,732
Other commercial real estate	3,202
Commercial and industrial	2,844
Total commercial loans	139,894
Noncommercial:
Residential mortgage	13,251
Consumer	1,351
Total noncommercial loans	14,602
Total PCI loans and leases	$	154,496

The following table provides changes in the carrying value of all purchased credit-impaired loans during the nine months ended September 30, 2015 and September 30, 2014:



(Dollars in thousands)	2015			2014
Balance at January 1	$	1,186,498		$	1,029,426
Fair value of acquired loans	154,496			316,327
Accretion	91,642			89,775
Payments received and other changes, net	(388,572		)	(439,248		)
Balance at September 30	$	1,044,064		$	996,280
Unpaid principal balance at September 30	$	1,788,136		$	1,754,882

The carrying value of loans on the cost recovery method was $6.9 million at September 30, 2015 and $33.4 million at December 31, 2014. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was $5.3 million and $33.4 million at September 30, 2015 and December 31, 2014, respectively.

For PCI loans, improved cash flow estimates and receipt of unscheduled loan payments result in the reclassification of nonaccretable difference to accretable yield. Accretable yield resulting from the improved ability to estimate future cash flows generally does not represent amounts previously identified as nonaccretable difference.

The following table documents changes to the amount of accretable yield for the first nine months of 2015 and 2014.



(Dollars in thousands)	2015			2014
Balance at January 1	$	418,160		$	439,990
Additions from acquisitions	53,192			84,295
Accretion	(91,642		)	(89,775		)
Reclassifications from nonaccretable difference	15,687			1,374
Changes in expected cash flows that do not affect nonaccretable difference	(53,458		)	(22,068		)
Balance at September 30	$	341,939		$	413,816