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 any credit deterioration 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 impaired and, therefore, classified as PCI loans. PCI 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, commercial 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, student loans 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, 2017 and December 31, 2016:



(Dollars in thousands)	March 31, 2017		December 31, 2016
Non-PCI loans and leases:
Commercial:
Construction and land development	$	683,415	$	649,157
Commercial mortgage	9,173,612		9,026,220
Other commercial real estate	364,862		351,291
Commercial and industrial	2,477,911		2,567,501
Lease financing	840,201		826,270
Other	321,352		340,264
Total commercial loans	13,861,353		13,760,703
Noncommercial:
Residential mortgage	2,945,361		2,889,124
Revolving mortgage	2,604,156		2,601,344
Construction and land development	218,103		231,400
Consumer	1,428,660		1,446,138
Total noncommercial loans	7,196,280		7,168,006
Total non-PCI loans and leases	21,057,633		20,928,709
PCI loans:
Commercial:
Construction and land development	26,542		20,766
Commercial mortgage	455,551		453,013
Other commercial real estate	18,723		12,645
Commercial and industrial	27,794		11,844
Other	1,244		1,702
Total commercial loans	529,854		499,970
Noncommercial:
Residential mortgage	275,904		268,777
Revolving mortgage	40,345		38,650
Consumer	2,713		1,772
Total noncommercial loans	318,962		309,199
Total PCI loans	848,816		809,169
Total loans and leases	$	21,906,449	$	21,737,878

At March 31, 2017, $75.9 million of total loans and leases were covered under shared-loss agreements with the FDIC, compared to $84.8 million at December 31, 2016. The shared-loss agreements, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.

At March 31, 2017, $8.32 billion in noncovered loans with a lendable collateral value of $5.57 billion were used to secure $660.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $4.91 billion. At December 31, 2016, $8.26 billion in noncovered loans with a lendable collateral value of $5.50 billion were used to secure $660.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $4.84 billion. At March 31, 2017, $2.66 billion in noncovered loans with a lendable collateral value of $1.98 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). There were no loans used to secure additional borrowing capacity at the FRB at December 31, 2016.

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $5.0 million and $6.7 million at March 31, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Cordia transaction was $3.7 million and $4.2 million at March 31, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases from the First Citizens Bancorporation, Inc. merger was $24.7 million and $27.4 million at March 31, 2017 and December 31, 2016, respectively. During both the three months ended March 31, 2017 and March 31, 2016, accretion income on non-PCI loans was $3.2 million.

During the first quarter of 2017, certain residential mortgage loans totaling $32.5 million were sold, resulting in a gain of $164 thousand.

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 affected 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, 2017 and December 31, 2016 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, lease financing and other commercial real estate loans.

Non-PCI loans and leases outstanding at March 31, 2017 and December 31, 2016 by credit quality indicator are provided below:



	March 31, 2017
(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	$	675,254	$	8,977,705	$	360,981	$	2,303,778	$	829,872	$	314,857	$	13,462,447
Special mention	2,144		72,007		592		23,335		3,560		1,006		102,644
Substandard	5,979		123,588		3,289		19,585		6,761		5,488		164,690
Doubtful	38		312		—		7		—		—		357
Ungraded	—		—		—		131,206		8		1		131,215
Total	$	683,415	$	9,173,612	$	364,862	$	2,477,911	$	840,201	$	321,352	$	13,861,353

	December 31, 2016
	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	$	645,232	$	8,821,439	$	347,509	$	2,402,659	$	818,008	$	335,831	$	13,370,678
Special mention	2,236		76,084		1,433		22,804		2,675		1,020		106,252
Substandard	1,683		126,863		2,349		17,870		5,415		3,413		157,593
Doubtful	6		334		—		8		—		—		348
Ungraded	—		1,500		—		124,160		172		—		125,832
Total	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	13,760,703



	March 31, 2017
	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	$	2,899,295	$	2,582,739	$	215,112	$	1,418,899	$	7,116,045
30-59 days past due	27,662		11,702		610		5,661		45,635
60-89 days past due	3,885		3,162		1,378		2,214		10,639
90 days or greater past due	14,519		6,553		1,003		1,886		23,961
Total	$	2,945,361	$	2,604,156	$	218,103	$	1,428,660	$	7,196,280

	December 31, 2016
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,839,045	$	2,576,942	$	229,106	$	1,434,658	$	7,079,751
30-59 days past due	27,760		14,290		1,139		6,775		49,964
60-89 days past due	7,039		2,698		598		2,779		13,114
90 days or greater past due	15,280		7,414		557		1,926		25,177
Total	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	7,168,006

PCI loans outstanding at March 31, 2017 and December 31, 2016 by credit quality indicator are provided below:



	March 31, 2017
(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	$	11,129	$	243,473	$	14,896	$	18,204	$	642	$	288,344
Special mention	1,509		66,969		641		2,449		—		71,568
Substandard	10,776		131,350		2,516		2,901		602		148,145
Doubtful	3,128		13,759		670		4,215		—		21,772
Ungraded	—		—		—		25		—		25
Total	$	26,542	$	455,551	$	18,723	$	27,794	$	1,244	$	529,854

	December 31, 2016
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	8,103	$	234,023	$	8,744	$	7,253	$	696	$	258,819
Special mention	950		67,848		102		620		—		69,520
Substandard	7,850		138,312		3,462		3,648		1,006		154,278
Doubtful	3,863		12,830		337		303		—		17,333
Ungraded	—		—		—		20		—		20
Total	$	20,766	$	453,013	$	12,645	$	11,844	$	1,702	$	499,970



	March 31, 2017
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	236,294	$	34,868	$	2,541	$	273,703
30-59 days past due	10,017		1,231		48		11,296
60-89 days past due	4,935		349		3		5,287
90 days or greater past due	24,658		3,897		121		28,676
Total	$	275,904	$	40,345	$	2,713	$	318,962

	December 31, 2016
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	230,065	$	33,827	$	1,637	$	265,529
30-59 days past due	9,595		618		68		10,281
60-89 days past due	6,528		268		4		6,800
90 days or greater past due	22,589		3,937		63		26,589
Total	$	268,777	$	38,650	$	1,772	$	309,199

The aging of the outstanding non-PCI loans and leases, by class, at March 31, 2017 and December 31, 2016 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, 2017
(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	$	3,897	$	2	$	102	$	4,001	$	679,414	$	683,415
Commercial mortgage	16,294		3,633		8,750		28,677		9,144,935		9,173,612
Other commercial real estate	181		172		530		883		363,979		364,862
Commercial and industrial	9,543		1,576		3,229		14,348		2,463,563		2,477,911
Lease financing	992		733		290		2,015		838,186		840,201
Residential mortgage	27,662		3,885		14,519		46,066		2,899,295		2,945,361
Revolving mortgage	11,702		3,162		6,553		21,417		2,582,739		2,604,156
Construction and land development - noncommercial	610		1,378		1,003		2,991		215,112		218,103
Consumer	5,661		2,214		1,886		9,761		1,418,899		1,428,660
Other	194		—		161		355		320,997		321,352
Total non-PCI loans and leases	$	76,736	$	16,755	$	37,023	$	130,514	$	20,927,119	$	21,057,633

	December 31, 2016
	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	$	1,845	$	39	$	286	$	2,170	$	646,987	$	649,157
Commercial mortgage	11,592		2,773		10,329		24,694		9,001,526		9,026,220
Other commercial real estate	310		—		—		310		350,981		351,291
Commercial and industrial	7,918		2,102		1,051		11,071		2,556,430		2,567,501
Lease financing	1,175		444		863		2,482		823,788		826,270
Residential mortgage	27,760		7,039		15,280		50,079		2,839,045		2,889,124
Revolving mortgage	14,290		2,698		7,414		24,402		2,576,942		2,601,344
Construction and land development - noncommercial	1,139		598		557		2,294		229,106		231,400
Consumer	6,775		2,779		1,926		11,480		1,434,658		1,446,138
Other	72		—		198		270		339,994		340,264
Total non-PCI loans and leases	$	72,876	$	18,472	$	37,904	$	129,252	$	20,799,457	$	20,928,709

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, 2017 and December 31, 2016 for non-PCI loans and leases, were as follows:



	March 31, 2017				December 31, 2016
(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	$	778	$	—	$	606	$	—
Commercial mortgage	25,709		962		26,527		482
Other commercial real estate	687		—		86		—
Commercial and industrial	4,023		584		4,275		440
Lease financing	1,281		—		359		683
Residential mortgage	36,257		191		32,470		37
Revolving mortgage	13,931		—		14,308		—
Construction and land development - noncommercial	1,315		—		1,121		—
Consumer	1,830		1,245		2,236		1,076
Other	275		—		319		—
Total non-PCI loans and leases	$	86,086	$	2,982	$	82,307	$	2,718

Purchased credit-impaired loans (PCI) loans

The following table relates to PCI loans acquired in the HCB 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 at the acquisition date.



(Dollars in thousands)
Contractually required payments	$	111,250
Cash flows expected to be collected	101,802
Fair value of loans at acquisition	85,149

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



(Dollars in thousands)
Commercial:
Construction and land development	$	7,061
Commercial mortgage	21,836
Other commercial real estate	6,404
Commercial and industrial	19,675
Total commercial loans	54,976
Noncommercial:
Residential mortgage	25,857
Revolving mortgage	3,434
Consumer	882
Total noncommercial loans	30,173
Total PCI loans	$	85,149

The following table provides changes in the carrying value of all purchased credit-impaired loans during the three months ended March 31, 2017 and March 31, 2016:



(Dollars in thousands)	2017			2016
Balance at January 1	$	809,169		$	950,516
Fair value of acquired loans	85,149			35,416
Accretion	19,351			21,398
Payments received and other changes, net	(64,853		)	(61,443		)
Balance at March 31	$	848,816		$	945,887
Unpaid principal balance at March 31	$	1,155,034		$	1,665,896

The carrying value of loans on the cost recovery method was $480 thousand at March 31, 2017 and $498 thousand at December 31, 2016. 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. Cash payments from cost recovery loans are 100 percent applied to principal. The recorded investment of PCI loans on nonaccrual status was $1.5 million and $3.5 million at March 31, 2017 and December 31, 2016, respectively.

During the three months ended March 31, 2017 and March 31, 2016, accretion income on PCI loans was $19.4 million and $21.4 million, respectively.

The following table documents changes to the amount of accretable yield for the first three months of 2017 and 2016.



(Dollars in thousands)	2017			2016
Balance at January 1	$	335,074		$	343,856
Additions from acquisitions	16,653			6,176
Accretion	(19,351		)	(21,398		)
Reclassifications from nonaccretable difference	11,277			9,905
Changes in expected cash flows that do not affect nonaccretable difference	(2,179		)	4,418
Balance at March 31	$	341,474		$	342,957

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.