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 and 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 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 over the life of the loans. 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, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

Commercial – Commercial loan classes 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, and certain loans repurchased with government guarantees.

Noncommercial – Noncommercial loan classes 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, 2018 and December 31, 2017:



(Dollars in thousands)	March 31, 2018		December 31, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development	$	738,413	$	669,215
Commercial mortgage	9,859,136		9,729,022
Other commercial real estate	386,734		473,433
Commercial and industrial	2,695,205		2,730,407
Lease financing	910,589		894,801
Other	281,485		302,176
Total commercial loans	14,871,562		14,799,054
Noncommercial:
Residential mortgage	3,587,791		3,523,786
Revolving mortgage	2,651,648		2,701,525
Construction and land development	243,114		248,289
Consumer	1,554,025		1,561,173
Total noncommercial loans	8,036,578		8,034,773
Total non-PCI loans and leases	22,908,140		22,833,827
PCI loans:
Commercial:
Construction and land development	9,316		10,135
Commercial mortgage	325,073		358,103
Other commercial real estate	16,179		17,124
Commercial and industrial	3,732		6,374
Other	1,628		1,683
Total commercial loans	355,928		393,419
Noncommercial:
Residential mortgage	282,338		299,318
Revolving mortgage	60,388		63,908
Construction and land development	3,006		4,163
Consumer	2,177		2,190
Total noncommercial loans	347,909		369,579
Total PCI loans	703,837		762,998
Total loans and leases	$	23,611,977	$	23,596,825

At March 31, 2018, $65.5 million of total residential loans and leases were covered under shared-loss agreements with the FDIC, compared to $67.8 million at December 31, 2017. The shared-loss agreements, for their terms, protect BancShares from a substantial portion of the credit and asset quality risk that would otherwise be incurred.

At March 31, 2018, $9.11 billion in noncovered loans with a lendable collateral value of $6.26 billion were used to secure $85.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $6.17 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 March 31, 2018, $2.86 billion in noncovered loans with a lendable collateral value of $2.16 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 $46.7 million and $51.2 million at March 31, 2018 and December 31, 2017, respectively. In addition, 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 the lower of amortized cost or market. During the first quarter of 2018, total proceeds from sales of loans held for sale were $138.5 million and there were no transfers to loans held for sale from the residential mortgage portfolio. During the first quarter of 2017, total proceeds from sales of loans held for sale were $195.1 million of which $32.3 million in sales were transferred to loans held for sale from the residential mortgage portfolio, resulting in a gain of $164 thousand.

Net deferred fees on originated non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were $1.5 million and $1.7 million at March 31, 2018 and December 31, 2017, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Guaranty Bank (Guaranty), Cordia Bancorp Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $13.3 million, $2.5 million and $16.4 million, respectively, at March 31, 2018. At December 31, 2017, the unamortized discount related to purchased non-PCI loans and leases from the Guaranty, Cordia and Bancorporation acquisitions was $14.2 million, $2.7 million and $18.1 million, respectively. During the three months ended March 31, 2018 and March 31, 2017, accretion income on purchased non-PCI loans and leases was $2.9 million and $3.2 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. Commercial loans are evaluated periodically with more frequent evaluations done on 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 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 March 31, 2018 and December 31, 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.

Non-PCI loans and leases outstanding at March 31, 2018 and December 31, 2017 by credit quality indicator are provided below:



	March 31, 2018
(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	$	733,253	$	9,661,079	$	382,679	$	2,476,337	$	900,464	$	278,367	$	14,432,179
Special mention	483		81,680		1,187		37,571		3,347		1,107		125,375
Substandard	4,639		115,039		2,868		19,357		6,734		1,889		150,526
Doubtful	—		1,338		—		836		—		72		2,246
Ungraded	38		—		—		161,104		44		50		161,236
Total	$	738,413	$	9,859,136	$	386,734	$	2,695,205	$	910,589	$	281,485	$	14,871,562

	December 31, 2017
	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	$	665,197	$	9,521,019	$	468,942	$	2,511,307	$	883,779	$	298,064	$	14,348,308
Special mention	691		78,643		1,260		44,130		4,340		2,919		131,983
Substandard	3,327		128,848		3,224		18,617		6,585		1,193		161,794
Doubtful	—		262		—		385		—		—		647
Ungraded	—		250		7		155,968		97		—		156,322
Total	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	14,799,054



	March 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	$	3,542,327	$	2,628,122	$	239,107	$	1,541,749	$	7,951,305
30-59 days past due	23,833		9,364		2,885		6,935		43,017
60-89 days past due	2,429		3,636		—		2,440		8,505
90 days or greater past due	19,202		10,526		1,122		2,901		33,751
Total	$	3,587,791	$	2,651,648	$	243,114	$	1,554,025	$	8,036,578

	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

PCI loans outstanding at March 31, 2018 and December 31, 2017 by credit quality indicator are provided below:



	March 31, 2018
(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	$	3,691	$	157,187	$	12,739	$	1,642	$	254	$	175,513
Special mention	338		61,443		307		488		928		63,504
Substandard	4,231		101,734		2,615		1,492		446		110,518
Doubtful	1,056		4,709		518		81		—		6,364
Ungraded	—		—		—		29		—		29
Total	$	9,316	$	325,073	$	16,179	$	3,732	$	1,628	$	355,928

	December 31, 2017
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	1,817	$	181,353	$	13,830	$	4,057	$	275	$	201,332
Special mention	320		61,295		323		374		945		63,257
Substandard	5,792		106,807		2,163		1,843		463		117,068
Doubtful	2,206		8,648		808		73		—		11,735
Ungraded	—		—		—		27		—		27
Total	$	10,135	$	358,103	$	17,124	$	6,374	$	1,683	$	393,419



	March 31, 2018
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	249,443	$	53,885	$	2,420	$	2,095	$	307,843
30-59 days past due	9,196		1,662		19		40		10,917
60-89 days past due	1,436		851		—		—		2,287
90 days or greater past due	22,263		3,990		567		42		26,862
Total	$	282,338	$	60,388	$	3,006	$	2,177	$	347,909

	December 31, 2017
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	257,166	$	55,871	$	3,521	$	2,074	$	318,632
30-59 days past due	10,525		2,767		—		51		13,343
60-89 days past due	4,846		701		642		23		6,212
90 days or greater past due	26,781		4,569		—		42		31,392
Total	$	299,318	$	63,908	$	4,163	$	2,190	$	369,579

The aging of the outstanding non-PCI loans and leases, by class, at March 31, 2018 and December 31, 2017 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, 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:
Construction and land development - commercial	$	2,011	$	771	$	357	$	3,139	$	735,274	$	738,413
Commercial mortgage	9,813		4,738		7,058		21,609		9,837,527		9,859,136
Other commercial real estate	94		22		73		189		386,545		386,734
Commercial and industrial	8,273		1,844		1,503		11,620		2,683,585		2,695,205
Lease financing	3,677		45		1,512		5,234		905,355		910,589
Residential mortgage	23,833		2,429		19,202		45,464		3,542,327		3,587,791
Revolving mortgage	9,364		3,636		10,526		23,526		2,628,122		2,651,648
Construction and land development - noncommercial	2,885		—		1,122		4,007		239,107		243,114
Consumer	6,935		2,440		2,901		12,276		1,541,749		1,554,025
Other	46		47		129		222		281,263		281,485
Total non-PCI loans and leases	$	66,931	$	15,972	$	44,383	$	127,286	$	22,780,854	$	22,908,140

	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:
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	6,694		1,510		1,266		9,470		2,720,937		2,730,407
Lease financing	2,983		167		973		4,123		890,678		894,801
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
Other	188		6		133		327		301,849		302,176
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 March 31, 2018 and December 31, 2017 for non-PCI loans and leases, were as follows:



	March 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	$	1,059	$	—	$	1,040	$	—
Commercial mortgage	20,505		32		22,625		397
Other commercial real estate	616		—		916		—
Commercial and industrial	2,928		721		2,884		428
Lease financing	1,687		—		1,992		—
Residential mortgage	37,038		—		38,942		—
Revolving mortgage	21,421		—		19,990		—
Construction and land development - noncommercial	1,722		—		1,989		—
Consumer	2,082		2,277		1,992		2,153
Other	202		—		164		—
Total non-PCI loans and leases	$	89,260	$	3,030	$	92,534	$	2,978

The following table provides changes in the carrying value of PCI loans during the three months ended March 31, 2018 and March 31, 2017:



(Dollars in thousands)	2018			2017
Balance at January 1	$	762,998		$	809,169
Fair value of acquired loans	—			85,149
Accretion	17,973			19,351
Payments received and other changes, net	(77,134		)	(64,853		)
Balance at March 31	$	703,837		$	848,816
Unpaid principal balance at March 31	$	1,108,379		$	1,155,034

The carrying value of loans on the cost recovery method was $1.3 million at March 31, 2018 and $1.1 million at December 31, 2017. 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 $1.6 million and $624 thousand at March 31, 2018 and December 31, 2017, respectively.

During the three months ended March 31, 2018 and March 31, 2017, accretion income on PCI loans was $18.0 million and $19.4 million, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flow 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 2018 and 2017.



(Dollars in thousands)	2018			2017
Balance at January 1	$	316,679		$	335,074
Additions from acquisitions	—			16,653
Accretion	(17,973		)	(19,351		)
Reclassifications (to) from nonaccretable difference	(929		)	11,277
Changes in expected cash flows that do not affect nonaccretable difference	11,568			(2,179		)
Balance at March 31	$	309,345		$	341,474