LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are non-PCI or PCI. Loans that are originated by BancShares and loans that are performing under their contractual obligations at acquisition are classified as Non-PCI. Loans that reflect credit deterioration since origination such that it is probable at acquisition that BancShares will be unable to collect all contractually required payments are classified as PCI. Additionally, acquired loans are recorded at fair value at the date of acquisition, with no corresponding allowance for loan and lease losses. See Note A for additional information on non-PCI and PCI loans and leases.

Loans and leases outstanding include the following at December 31, 2018 and 2017:



(Dollars in thousands)	December 31, 2018		December 31, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development	$	757,854	$	669,215
Commercial mortgage	10,717,234		9,729,022
Other commercial real estate	426,985		473,433
Commercial and industrial and leases	3,938,730		3,625,208
Other	296,424		302,176
Total commercial loans	16,137,227		14,799,054
Noncommercial:
Residential mortgage	4,265,687		3,523,786
Revolving mortgage	2,542,975		2,701,525
Construction and land development	257,030		248,289
Consumer	1,713,781		1,561,173
Total noncommercial loans	8,779,473		8,034,773
Total non-PCI loans and leases	24,916,700		22,833,827
PCI loans:
Total PCI loans	606,576		762,998
Total loans and leases	$	25,523,276	$	23,596,825

At December 31, 2018, $9.12 billion in noncovered loans with a lendable collateral value of $6.36 billion were used to secure $175.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.18 billion. At December 31, 2017, $8.75 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $835.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $5.24 billion.

At December 31, 2018, $2.94 billion in noncovered loans with a lendable collateral value of $2.19 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). At December 31, 2017, $2.77 billion in noncovered loans with a lendable collateral value of $2.08 billion were used to secure additional borrowing capacity at the FRB.

Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. Loans held for sale totaled $45.5 million and $51.2 million at December 31, 2018 and 2017, respectively. We may change our strategy for certain portfolio loans and sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.

During 2018, total proceeds from sales of residential mortgage loans were $618.1 million of which $608.5 million related to sales of loans held for sale. The remaining $9.6 million related to sales of portfolio loans, which were sold at par. During 2017, total proceeds from sales of residential mortgage loans were $823.5 million, of which $660.8 million related to sales of loans held for sale. The remaining $162.6 million related to sales of portfolio loans, which resulted in a gain of $1.0 million.

Net deferred fees on originated non-PCI loans and leases, including unearned income as well as unamortized costs, were $79 thousand and $1.7 million at December 31, 2018 and December 31, 2017, respectively. The unamortized discounts related to purchased non-PCI loans in the Capital Commerce, HomeBancorp, Guaranty, Cordia Bancorp, Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions were $3.1 million, $6.3 million, $10.8 million, $1.4 million and $12.0 million at December 31, 2018, respectively. At December 31, 2017, the unamortized discounts related to purchased non-PCI loans and leases from the Guaranty, Cordia and Bancorporation acquisitions were $14.2 million, $2.7 million and $18.1 million, respectively. During the years ended December 31, 2018 and December 31, 2017, accretion income on purchased non-PCI loans and leases was $12.8 million and $13.6 million, respectively.

Loans and leases to borrowers in medical, dental or related fields were $4.98 billion as of December 31, 2018, which represents 19.5 percent of total loans and leases, compared to $4.86 billion or 20.6 percent of total loans and leases at December 31, 2017. The credit risk of this industry concentration is mitigated through our underwriting policies, which emphasize reliance on adequate borrower cash flow, rather than underlying collateral value, and our preference for financing secured by owner-occupied real property. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2018.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segments 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. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. The indicators as of the date presented are based on the most recent assessment performed and are defined below:

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 any 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 December 31, 2018 and 2017, 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.

The credit quality indicators for non-PCI and PCI noncommercial loans are based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases.

The composition of the loans and leases outstanding at December 31, 2018 and December 31, 2017, by credit quality indicator are provided below:



	December 31, 2018
	Non-PCI commercial loans and leases
(Dollars in thousands)	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Total non-PCI commercial loans and leases
Pass	$	753,985	$	10,507,687	$	422,500	$	3,778,797	$	294,700	$	15,757,669
Special mention	1,369		114,219		3,193		54,814		1,105		174,700
Substandard	2,500		92,743		1,292		30,688		619		127,842
Doubtful	—		—		—		354		—		354
Ungraded	—		2,585		—		74,077		—		76,662
Total	$	757,854	$	10,717,234	$	426,985	$	3,938,730	$	296,424	$	16,137,227

	December 31, 2017
	Non-PCI commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Total non-PCI commercial loans and leases
Pass	$	665,197	$	9,521,019	$	468,942	$	3,395,086	$	298,064	$	14,348,308
Special mention	691		78,643		1,260		48,470		2,919		131,983
Substandard	3,327		128,848		3,224		25,202		1,193		161,794
Doubtful	—		262		—		385		—		647
Ungraded	—		250		7		156,065		—		156,322
Total	$	669,215	$	9,729,022	$	473,433	$	3,625,208	$	302,176	$	14,799,054



	December 31, 2018
	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	$	4,214,783	$	2,514,269	$	254,837	$	1,696,321	$	8,680,210
30-59 days past due	28,239		12,585		581		10,035		51,440
60-89 days past due	7,357		4,490		21		3,904		15,772
90 days or greater past due	15,308		11,631		1,591		3,521		32,051
Total	$	4,265,687	$	2,542,975	$	257,030	$	1,713,781	$	8,779,473

	December 31, 2017
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	3,465,935	$	2,674,390	$	239,648	$	1,546,473	$	7,926,446
30-59 days past due	27,886		13,428		7,154		8,812		57,280
60-89 days past due	8,064		3,485		108		2,893		14,550
90 days or greater past due	21,901		10,222		1,379		2,995		36,497
Total	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	8,034,773



	December 31, 2018		December 31, 2017
(Dollars in thousands)	PCI commercial loans
Pass	$	141,922	$	201,332
Special mention	48,475		63,257
Substandard	101,447		117,068
Doubtful	4,828		11,735
Ungraded	—		27
Total	$	296,672	$	393,419



	December 31, 2018		December 31, 2017
(Dollars in thousands)	PCI noncommercial loans
Current	$	268,280	$	318,632
30-89 days past due	11,155		13,343
60-89 days past due	7,708		6,212
90 days or greater past due	22,761		31,392
Total	$	309,904	$	369,579

The aging of the outstanding non-PCI loans and leases, by class, at December 31, 2018, and December 31, 2017 are provided in the tables below. 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.



	December 31, 2018
(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:
Commercial:
Construction and land development - commercial	$	516	$	9	$	444	$	969	$	756,885	$	757,854
Commercial mortgage	14,200		2,066		3,237		19,503		10,697,731		10,717,234
Other commercial real estate	91		76		300		467		426,518		426,985
Commercial and industrial and leases	9,655		1,759		2,892		14,306		3,924,424		3,938,730
Other	285		—		89		374		296,050		296,424
Total commercial loans	24,747		3,910		6,962		35,619		16,101,608		16,137,227
Noncommercial:
Residential mortgage	28,239		7,357		15,308		50,904		4,214,783		4,265,687
Revolving mortgage	12,585		4,490		11,631		28,706		2,514,269		2,542,975
Construction and land development - noncommercial	581		21		1,591		2,193		254,837		257,030
Consumer	10,035		3,904		3,521		17,460		1,696,321		1,713,781
Total noncommercial loans	51,440		15,772		32,051		99,263		8,680,210		8,779,473
Total non-PCI loans and leases	$	76,187	$	19,682	$	39,013	$	134,882	$	24,781,818	$	24,916,700

	December 31, 2017
	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:
Commercial:
Construction and land development - commercial	$	491	$	442	$	357	$	1,290	$	667,925	$	669,215
Commercial mortgage	12,288		2,375		6,490		21,153		9,707,869		9,729,022
Other commercial real estate	107		—		75		182		473,251		473,433
Commercial and industrial and leases	9,677		1,677		2,239		13,593		3,611,615		3,625,208
Other	188		6		133		327		301,849		302,176
Total commercial loans	22,751		4,500		9,294		36,545		14,762,509		14,799,054
Noncommercial:
Residential mortgage	27,886		8,064		21,901		57,851		3,465,935		3,523,786
Revolving mortgage	13,428		3,485		10,222		27,135		2,674,390		2,701,525
Construction and land development - noncommercial	7,154		108		1,379		8,641		239,648		248,289
Consumer	8,812		2,893		2,995		14,700		1,546,473		1,561,173
Total noncommercial loans	57,280		14,550		36,497		108,327		7,926,446		8,034,773
Total non-PCI loans and leases	$	80,031	$	19,050	$	45,791	$	144,872	$	22,688,955	22,833,827

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 December 31, 2018 and December 31, 2017 for non-PCI loans and leases, were as follows:



	December 31, 2018				December 31, 2017
(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	$	666	$	—	$	1,040	$	—
Commercial mortgage	12,594		—		22,625		397
Other commercial real estate	366		—		916		—
Commercial and industrial and leases	4,624		808		4,876		428
Residential mortgage	35,662		—		38,942		—
Revolving mortgage	25,563		—		19,990		—
Construction and land development - noncommercial	1,823		—		1,989		—
Consumer	2,969		2,080		1,992		2,153
Other	279		—		164		—
Total non-PCI loans and leases	$	84,546	$	2,888	$	92,534	$	2,978

Purchased non-PCI loans and leases

The following table relates to purchased non-PCI loans acquired in the Palmetto Heritage, Capital Commerce and HomeBancorp transactions in 2018 and the Guaranty transaction in 2017. The table summarizes the contractually required payments, which include principal and interest, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date.



(Dollars in thousands)	Palmetto Heritage		Capital Commerce		HomeBancorp		Guaranty
Contractually required payments	$	142,413	$	198,568	$	710,876	$	703,916
Contractual cash flows not expected to be collected	—		5,427		9,845		16,073
Fair value at acquisition date	131,283		173,354		550,618		574,553

The recorded fair values of purchased non-PCI loans acquired in the Palmetto Heritage, Capital Commerce and HomeBancorp transactions in 2018 and the Guaranty transaction in 2017 as of their respective acquisition date were as follows:



(Dollars in thousands)	Palmetto Heritage		Capital Commerce		HomeBancorp		Guaranty
Commercial:
Construction and land development	$	13,186	$	10,299	$	525	$	—
Commercial mortgage	29,225		57,049		188,688		850
Other commercial real estate	753		6,370		55,183		—
Commercial and industrial and leases	8,153		34,301		7,931		583
Other	1,039		—		—		183,816
Total commercial loans and leases	52,356		108,019		252,327		185,249
Noncommercial:
Residential mortgage	59,076		50,630		296,273		309,612
Revolving mortgage	6,175		2,552		51		54,780
Construction and land development	11,103		11,173		—		—
Consumer	2,573		980		1,967		24,912
Total noncommercial loans and leases	78,927		65,335		298,291		389,304
Total non-PCI loans	$	131,283	$	173,354	$	550,618	$	574,553

PCI loans

The following table relates to PCI loans acquired in the Palmetto Heritage, Capital Commerce and HomeBancorp transactions in 2018 and the Guaranty and HCB transactions in 2017. The table 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 respective acquisition dates.



(Dollars in thousands)	Palmetto Heritage		Capital Commerce		HomeBancorp		Guaranty		HCB
Contractually required payments	$	4,783	$	13,871	$	26,651	$	158,456	$	111,250
Cash flows expected to be collected	4,112		11,814		19,697		142,000		101,802
Fair value of loans at acquisition	3,863		10,772		15,555		114,533		85,149

The recorded fair values of PCI loans acquired in the Palmetto Heritage, Capital Commerce and HomeBancorp transactions in 2018 and the Guaranty and HCB transactions in 2017 as of their respective acquisition date were as follows:



(Dollars in thousands)	Palmetto Heritage		Capital Commerce		HomeBancorp		Guaranty		HCB
Commercial:
Construction and land development	$	212	$	1,482	$	—	$	55	$	7,061
Commercial mortgage	1,053		1,846		7,815		644		21,836
Other commercial real estate	—		—		—		—		6,404
Commercial and industrial	372		922		423		2		19,675
Total commercial loans	1,637		4,250		8,238		701		54,976
Noncommercial:
Residential mortgage	2,226		6,503		7,317		80,475		25,857
Revolving mortgage	—		—		—		33,319		3,434
Construction and land development	—		—		—		26		—
Consumer	—		19		—		12		882
Total noncommercial loans	2,226		6,522		7,317		113,832		30,173
Total PCI loans	$	3,863	$	10,772	$	15,555	$	114,533	$	85,149

The following table provides changes in the carrying value of all PCI loans during the years ended December 31, 2018 and 2017:



(Dollars in thousands)	2018			2017			2016
Balance at January 1	$	762,998		$	809,169		$	950,516
Fair value of PCI loans acquired during the year	30,190			199,682			80,690
Accretion	61,502			76,594			76,565
Payments received and other changes, net	(248,114		)	(322,447		)	(298,602		)
Balance at December 31	$	606,576		$	762,998		$	809,169
Unpaid principal balance at December 31	$	960,457		$	1,175,441		$	1,266,395

The carrying value of PCI loans on the cost recovery method was $3.3 million at December 31, 2018, and $1.1 million at December 31, 2017. The recorded investment of PCI loans on nonaccrual status was $1.3 million and $624 thousand at December 31, 2018, and December 31, 2017, respectively.

During the years ended December 31, 2018, and December 31, 2017, accretion income on PCI loans was $61.5 million and $76.6 million, 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 summarizes changes to the amount of accretable yield for 2018 and 2017.



(Dollars in thousands)	2018			2017			2016
Balance at January 1	$	316,679		$	335,074		$	343,856
Additions from acquisitions	6,393			44,120			12,488
Accretion	(61,502		)	(76,594		)	(76,565		)
Reclassifications from nonaccretable difference	5,980			18,901			29,931
Changes in expected cash flows that do not affect nonaccretable difference	45,344			(4,822		)	25,364
Balance at December 31	$	312,894		$	316,679		$	335,074