LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are non-PCI or PCI. For loans to be included as non-PCI, they are either originated by FCB or 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 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 subsequently recorded if there is additional credit deterioration after the acquisition date.

BancShares reports non-PCI and PCI loan portfolios separately, and the non-PCI 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 June 30, 2018 and December 31, 2017:



(Dollars in thousands)	June 30, 2018		December 31, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development	$	715,011	$	669,215
Commercial mortgage	10,278,741		9,729,022
Other commercial real estate	473,452		473,433
Commercial and industrial	3,097,541		2,730,407
Lease financing	613,377		894,801
Other	296,614		302,176
Total commercial loans	15,474,736		14,799,054
Noncommercial:
Residential mortgage	3,980,845		3,523,786
Revolving mortgage	2,604,955		2,701,525
Construction and land development	250,704		248,289
Consumer	1,552,928		1,561,173
Total noncommercial loans	8,389,432		8,034,773
Total non-PCI loans and leases	23,864,168		22,833,827
PCI loans:
Total PCI loans	674,269		762,998
Total loans and leases	$	24,538,437	$	23,596,825

At June 30, 2018, $9.08 billion in noncovered loans with a lendable collateral value of $6.22 billion were used to secure $128.7 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $6.09 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 June 30, 2018, $2.88 billion in noncovered loans with a lendable collateral value of $2.17 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 $59.0 million and $51.2 million at June 30, 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 three and six months ended June 30, 2018, total proceeds from sales of loans held for sale were $164.2 million and $302.8 million, respectively, and there were no transfers to loans held for sale from the residential mortgage portfolio for either period. For the three months ended June 30, 2017, total proceeds from sales of loans held for sale which did not include any loans transferred from the residential mortgage portfolio were $147.0 million. For the six months ended June 30, 2017, total proceeds from sales of loans held for sale were $342.1 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 $1.2 million and $1.7 million at June 30, 2018 and December 31, 2017, respectively. The unamortized discount related to purchased non-PCI loans and leases in the HomeBancorp, Guaranty Bank (Guaranty), Cordia Bancorp Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $7.0 million, $12.3 million, $1.9 million and $14.7 million, respectively, at June 30, 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 June 30, 2018 and June 30, 2017, accretion income on purchased non-PCI loans and leases was $4.1 million and $3.0 million, respectively. During the six months ended June 30, 2018 and June 30, 2017, accretion income on purchased non-PCI loans and leases was $7.0 million and $6.0 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 June 30, 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 June 30, 2018 and December 31, 2017 by credit quality indicator are provided below:



	June 30, 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	$	703,034	$	10,083,382	$	470,236	$	2,868,180	$	603,760	$	293,804	$	15,022,396
Special mention	352		88,157		1,159		35,636		3,916		1,258		130,478
Substandard	3,195		105,647		2,057		21,265		5,701		1,552		139,417
Doubtful	—		999		—		365		—		—		1,364
Ungraded	8,430		556		—		172,095		—		—		181,081
Total	$	715,011	$	10,278,741	$	473,452	$	3,097,541	$	613,377	$	296,614	$	15,474,736

	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



	June 30, 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	$	3,936,065	$	2,581,818	$	248,343	$	1,541,465	$	8,307,691
30-59 days past due	21,032		9,864		1,839		6,013		38,748
60-89 days past due	6,291		3,367		51		2,729		12,438
90 days or greater past due	17,457		9,906		471		2,721		30,555
Total	$	3,980,845	$	2,604,955	$	250,704	$	1,552,928	$	8,389,432

	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 June 30, 2018 and December 31, 2017 by credit quality indicator are provided below:



	June 30, 2018		December 31, 2017
(Dollars in thousands)	PCI commercial loans
Grade:
Pass	$	165,578	$	201,332
Special mention	58,024		63,257
Substandard	105,937		117,068
Doubtful	6,536		11,735
Ungraded	34		27
Total	$	336,109	$	393,419



	June 30, 2018		December 31, 2017
	PCI noncommercial loans
(Dollars in thousands)
Current	$	299,579	$	318,632
30-59 days past due	12,146		13,343
60-89 days past due	4,167		6,212
90 days or greater past due	22,268		31,392
Total	$	338,160	$	369,579

The aging of the outstanding non-PCI loans and leases, by class, at June 30, 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.



	June 30, 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	$	466	$	264	$	132	$	862	$	714,149	$	715,011
Commercial mortgage	10,120		5,021		5,599		20,740		10,258,001		10,278,741
Other commercial real estate	1,568		—		18		1,586		471,866		473,452
Commercial and industrial	6,445		3,743		1,155		11,343		3,086,198		3,097,541
Lease financing	3,062		1,167		951		5,180		608,197		613,377
Residential mortgage	21,032		6,291		17,457		44,780		3,936,065		3,980,845
Revolving mortgage	9,864		3,367		9,906		23,137		2,581,818		2,604,955
Construction and land development - noncommercial	1,839		51		471		2,361		248,343		250,704
Consumer	6,013		2,729		2,721		11,463		1,541,465		1,552,928
Other	42		17		—		59		296,555		296,614
Total non-PCI loans and leases	$	60,451	$	22,650	$	38,410	$	121,511	$	23,742,657	$	23,864,168

	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 June 30, 2018 and December 31, 2017 for non-PCI loans and leases, were as follows:



	June 30, 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	$	420	$	—	$	1,040	$	—
Commercial mortgage	18,457		839		22,625		397
Other commercial real estate	103		—		916		—
Commercial and industrial	3,168		319		2,884		428
Lease financing	1,755		—		1,992		—
Residential mortgage	35,173		—		38,942		—
Revolving mortgage	22,500		—		19,990		—
Construction and land development - noncommercial	1,012		—		1,989		—
Consumer	2,390		2,021		1,992		2,153
Other	77		—		164		—
Total non-PCI loans and leases	$	85,055	$	3,179	$	92,534	$	2,978

Purchased non-PCI loans and leases

The following table relates to purchased non-PCI loans acquired in the HomeBancorp transaction and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date.



(Dollars in thousands)
Contractually required payments	$	710,876
Contractual cash flows not expected to be collected	$	9,845
Fair value at acquisition date	$	550,618

The recorded fair values of purchased non-PCI loans acquired in the HomeBancorp transaction as of the acquisition date are as follows:



(Dollars in thousands)
Commercial:
Construction and land development	$	525
Commercial mortgage	188,688
Other commercial real estate	55,183
Commercial and industrial	7,931
Total commercial loans	252,327
Noncommercial:
Residential mortgage	296,273
Revolving mortgage	51
Consumer	1,967
Total noncommercial loans	298,291
Total non-PCI loans	$	550,618

Purchased credit-impaired loans

The following table relates to PCI loans acquired in the HomeBancorp transaction 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	$	26,651
Cash flows expected to be collected	$	19,697
Fair value of loans at acquisition	$	15,555

The recorded fair values of PCI loans acquired in the HomeBancorp transaction as of the acquisition date are as follows:



(Dollars in thousands)
Commercial:
Commercial mortgage	$	7,815
Commercial and industrial	423
Total commercial loans	8,238
Noncommercial:
Residential mortgage	7,317
Total noncommercial loans	7,317
Total PCI loans	$	15,555

The following table provides changes in the carrying value of all PCI loans during the six months ended June 30, 2018 and June 30, 2017:



(Dollars in thousands)	2018			2017
Balance at January 1	$	762,998		$	809,169
Fair value of acquired loans	15,555			199,682
Accretion	32,188			39,798
Payments received and other changes, net	(136,472		)	(153,786		)
Balance at June 30	$	674,269		$	894,863
Unpaid principal balance at June 30	$	1,044,148		$	1,199,358

The carrying value of loans on the cost recovery method was $2.1 million at June 30, 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 June 30, 2018 and December 31, 2017, respectively.

During the three months ended June 30, 2018 and June 30, 2017, accretion income on PCI loans was $14.2 million and $20.4 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 six months of 2018 and 2017.



(Dollars in thousands)	2018			2017
Balance at January 1	$	316,679		$	335,074
Additions from acquisitions	4,142			44,120
Accretion	(32,188		)	(39,798		)
Reclassifications from nonaccretable difference	6,899			12,328
Changes in expected cash flows that do not affect nonaccretable difference	48,988			(1,405		)
Balance at June 30	$	344,520		$	350,319