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 non-impaired loans, purchased leases and certain purchased revolving credit. 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 March 31, 2016 and December 31, 2015:



(Dollars in thousands)	March 31, 2016		December 31, 2015
Non-PCI loans and leases:
Commercial:
Construction and land development	$	626,311	$	620,352
Commercial mortgage	8,353,631		8,274,548
Other commercial real estate	324,858		321,021
Commercial and industrial	2,389,946		2,368,958
Lease financing	751,292		730,778
Other	343,877		314,832
Total commercial loans	12,789,915		12,630,489
Noncommercial:
Residential mortgage	2,718,208		2,695,985
Revolving mortgage	2,521,902		2,523,106
Construction and land development	213,232		220,073
Consumer	1,228,545		1,219,821
Total noncommercial loans	6,681,887		6,658,985
Total non-PCI loans and leases	19,471,802		19,289,474
PCI loans:
Commercial:
Construction and land development	32,799		33,880
Commercial mortgage	526,776		525,468
Other commercial real estate	18,050		17,076
Commercial and industrial	14,742		15,182
Other	1,860		2,008
Total commercial loans	594,227		593,614
Noncommercial:
Residential mortgage	298,662		302,158
Revolving mortgage	50,574		52,471
Consumer	2,424		2,273
Total noncommercial loans	351,660		356,902
Total PCI loans	945,887		950,516
Total loans and leases	$	20,417,689	$	20,239,990

At March 31, 2016, $258.2 million of total loans and leases were covered under loss share agreements, compared to $272.6 million at December 31, 2015. Loss share protection for United Western Bank (UWB), Atlantic Bank & Trust (ABT) and Colorado Capital Bank (CCB) non-single family residential loans with balances of $113.7 million, $9.0 million and $2.7 million at March 31, 2016 will expire at the beginning of the second quarter of 2016, third quarter of 2016 and fourth quarter of 2016, respectively.

At March 31, 2016, $8.51 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $585.3 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $5.50 billion. At December 31, 2015, $8.58 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $510.3 million in FHLB of Atlanta advances, resulting additional borrowing capacity of $5.57 billion.

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $13.2 million and $16.6 million at March 31, 2016 and December 31, 2015, respectively. The unamortized discount related to the non-PCI loans and leases acquired in the First Citizens Bancorporation, Inc. (Bancorporation) merger was $37.9 million and $41.1 million at March 31, 2016 and December 31, 2015, respectively. During the three months ended March 31, 2016 and March 31, 2015, accretion income on non-PCI loans was $3.2 million and $5.6 million, respectively.

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 March 31, 2016 and December 31, 2015 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 March 31, 2016 and December 31, 2015 by credit quality indicator are provided below:



	March 31, 2016
(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	$	622,312	$	8,102,908	$	321,375	$	2,241,626	$	744,585	$	341,300	$	12,374,106
Special mention	1,926		97,425		1,294		14,003		3,698		1,334		119,680
Substandard	2,073		149,651		1,030		20,070		2,639		1,243		176,706
Doubtful	—		458		—		399		46		—		903
Ungraded	—		3,189		1,159		113,848		324		—		118,520
Total	$	626,311	$	8,353,631	$	324,858	$	2,389,946	$	751,292	$	343,877	$	12,789,915

	December 31, 2015
	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	$	611,314	$	8,024,831	$	318,187	$	2,219,606	$	719,338	$	311,401	$	12,204,677
Special mention	5,191		100,220		475		19,361		4,869		1,905		132,021
Substandard	3,847		146,071		959		21,322		6,375		1,526		180,100
Doubtful	—		599		—		408		169		—		1,176
Ungraded	—		2,827		1,400		108,261		27		—		112,515
Total	$	620,352	$	8,274,548	$	321,021	$	2,368,958	$	730,778	$	314,832	$	12,630,489



	March 31, 2016
	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	$	2,673,451	$	2,501,519	$	208,944	$	1,220,091	$	6,604,005
30-59 days past due	24,701		11,219		3,121		5,339		44,380
60-89 days past due	7,041		2,396		325		1,722		11,484
90 days or greater past due	13,015		6,768		842		1,393		22,018
Total	$	2,718,208	$	2,521,902	$	213,232	$	1,228,545	$	6,681,887

	December 31, 2015
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,651,209	$	2,502,065	$	214,555	$	1,210,832	$	6,578,661
30-59 days past due	23,960		11,706		3,211		5,545		44,422
60-89 days past due	7,536		3,704		669		1,822		13,731
90 days or greater past due	13,280		5,631		1,638		1,622		22,171
Total	$	2,695,985	$	2,523,106	$	220,073	$	1,219,821	$	6,658,985

PCI loans outstanding at March 31, 2016 and December 31, 2015 by credit quality indicator are provided below:



	March 31, 2016
(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	$	12,797	$	261,904	$	8,500	$	8,595	$	623	$	292,419
Special mention	1,781		87,801		59		548		—		90,189
Substandard	14,056		159,083		9,081		4,292		1,237		187,749
Doubtful	4,165		17,656		—		1,240		—		23,061
Ungraded	—		332		410		67		—		809
Total	$	32,799	$	526,776	$	18,050	$	14,742	$	1,860	$	594,227

	December 31, 2015
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	14,710	$	262,579	$	7,366	$	9,302	$	706	$	294,663
Special mention	758		87,870		60		937		—		89,625
Substandard	14,131		163,801		9,229		4,588		1,302		193,051
Doubtful	4,281		10,875		—		282		—		15,438
Ungraded	—		343		421		73		—		837
Total	$	33,880	$	525,468	$	17,076	$	15,182	$	2,008	$	593,614



	March 31, 2016
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	261,230	$	44,401	$	2,254	$	307,885
30-59 days past due	10,307		1,544		123		11,974
60-89 days past due	3,191		1,306		45		4,542
90 days or greater past due	23,934		3,323		2		27,259
Total	$	298,662	$	50,574	$	2,424	$	351,660

	December 31, 2015
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	257,207	$	47,901	$	1,981	$	307,089
30-59 days past due	12,318		1,127		86		13,531
60-89 days past due	4,441		501		132		5,074
90 days or greater past due	28,192		2,942		74		31,208
Total	$	302,158	$	52,471	$	2,273	$	356,902

The aging of the outstanding non-PCI loans and leases, by class, at March 31, 2016 and December 31, 2015 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.



	March 31, 2016
(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	$	1,039	$	9	$	312	$	1,360	$	624,951	$	626,311
Commercial mortgage	14,243		1,817		17,637		33,697		8,319,934		8,353,631
Other commercial real estate	1,144		248		27		1,419		323,439		324,858
Commercial and industrial	7,874		2,049		1,194		11,117		2,378,829		2,389,946
Lease financing	712		202		44		958		750,334		751,292
Residential mortgage	24,701		7,041		13,015		44,757		2,673,451		2,718,208
Revolving mortgage	11,219		2,396		6,768		20,383		2,501,519		2,521,902
Construction and land development - noncommercial	3,121		325		842		4,288		208,944		213,232
Consumer	5,339		1,722		1,393		8,454		1,220,091		1,228,545
Other	107		—		333		440		343,437		343,877
Total non-PCI loans and leases	$	69,499	$	15,809	$	41,565	$	126,873	$	19,344,929	$	19,471,802

	December 31, 2015
	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	$	987	$	283	$	463	$	1,733	$	618,619	$	620,352
Commercial mortgage	13,023		3,446		14,495		30,964		8,243,584		8,274,548
Other commercial real estate	884		—		142		1,026		319,995		321,021
Commercial and industrial	2,133		1,079		1,780		4,992		2,363,966		2,368,958
Lease financing	2,070		2		164		2,236		728,542		730,778
Residential mortgage	23,960		7,536		13,280		44,776		2,651,209		2,695,985
Revolving mortgage	11,706		3,704		5,631		21,041		2,502,065		2,523,106
Construction and land development - noncommercial	3,211		669		1,638		5,518		214,555		220,073
Consumer	5,545		1,822		1,622		8,989		1,210,832		1,219,821
Other	3		164		134		301		314,531		314,832
Total non-PCI loans and leases	$	63,522	$	18,705	$	39,349	$	121,576	$	19,167,898	$	19,289,474

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 March 31, 2016 and December 31, 2015 for non-PCI loans and leases, were as follows:



	March 31, 2016				December 31, 2015
(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	$	534	$	23	$	425	$	273
Commercial mortgage	35,861		2,671		42,116		242
Other commercial real estate	134		—		239		—
Commercial and industrial	4,127		680		6,235		953
Lease financing	254		—		389		—
Residential mortgage	31,262		561		29,977		838
Revolving mortgage	14,159		—		12,704		—
Construction and land development - noncommercial	2,224		—		2,164		—
Consumer	1,632		792		1,472		1,007
Other	268		155		133		2
Total non-PCI loans and leases	$	90,455	$	4,882	$	95,854	$	3,315

Purchased credit-impaired loans (PCI) loans

The following table relates to PCI loans acquired in the NMSB 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	$	51,098
Cash flows expected to be collected	$	41,592
Fair value of loans at acquisition	$	35,416

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



(Dollars in thousands)
Commercial:
Construction and land development	$	139
Commercial mortgage	25,237
Other commercial real estate	1,479
Commercial and industrial	1,520
Total commercial loans	28,375
Noncommercial:
Residential mortgage	6,128
Revolving mortgage	234
Consumer	679
Total noncommercial loans	7,041
Total PCI loans and leases	$	35,416

The following table provides changes in the carrying value of all purchased credit-impaired loans during the three months ended March 31, 2016 and March 31, 2015:



(Dollars in thousands)	2016			2015
Balance at January 1	$	950,516		$	1,186,498
Fair value of acquired loans	35,416			154,496
Accretion	21,398			25,067
Payments received and other changes, net	(61,443		)	(113,516		)
Balance at March 31	$	945,887		$	1,252,545
Unpaid principal balance at March 31	$	1,665,896		$	2,092,936

The carrying value of loans on the cost recovery method was $1.1 million at March 31, 2016 and $5.3 million at December 31, 2015. 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 $7.3 million and $7.6 million at March 31, 2016 and December 31, 2015, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flows not related to credit improvements or deterioration do not affect the nonaccretable difference.

The following table documents changes to the amount of accretable yield for the first three months of 2016 and 2015.



(Dollars in thousands)	2016			2015
Balance at January 1	$	343,856		$	418,160
Additions from acquisitions	6,176			55,186
Accretion	(21,398		)	(25,067		)
Reclassifications from nonaccretable difference	9,905			1,294
Changes in expected cash flows that do not affect nonaccretable difference	4,418			(27,287		)
Balance at March 31	$	342,957		$	422,286