Note 6. Loans, Allowance for Loan and Lease Losses, and Reserve for Off-Balance Sheet Credit Commitments

The following is a summary of the major categories of loans:

Loans and Leases

	September 30,			December 31,
(in thousands)	2013			2012
Commercial	$	7,126,158		$	6,211,353
Commercial real estate mortgages	3,077,183			2,739,284
Residential mortgages	4,418,231			3,962,205
Real estate construction	380,489			313,190
Home equity loans and lines of credit	681,879			711,750
Installment	152,107			142,793
Lease financing	730,086			737,720
Loans and leases, excluding covered loans	16,566,133			14,818,295
Less: Allowance for loan and lease losses	(295,947		)	(277,888		)
Loans and leases, excluding covered loans, net	16,270,186			14,540,407

Covered loans	780,072			1,031,004
Less: Allowance for loan losses	(25,882		)	(44,781		)
Covered loans, net	754,190			986,223

Total loans and leases.	$	17,346,205		$	15,849,299
Total loans and leases, net	$	17,024,376		$	15,526,630

The loan amounts above include unamortized fees, net of deferred costs, of $2.4 million and $5.9 million as of September 30, 2013 and December 31, 2012, respectively.

Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company’s lending activities are predominantly in California, and to a lesser extent, New York and Nevada, the Company has various specialty lending businesses that lend to businesses located throughout the United States of America. Excluding covered loans, at September 30, 2013, California represented 77 percent of total loans outstanding and New York and Nevada represented 8 percent and 2 percent, respectively. The remaining 13 percent of total loans outstanding represented other states. Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio and credit performance depends on the economic stability of Southern California.

Within the Company’s covered loan portfolio at September 30, 2013, the five states with the largest concentration were California (36 percent), Texas (11 percent), Nevada (8 percent), Arizona (5 percent) and Ohio (5 percent). The remaining 35 percent of total covered loans outstanding represented other states.

Covered Loans

Covered loans represent loans acquired from the FDIC that are subject to loss-sharing agreements. Covered loans were $780.1 million as of September 30, 2013 and $1.03 billion as of December 31, 2012. Covered loans, net of allowance for loan losses, were $754.2 million at September 30, 2013 and $986.2 million at December 31, 2012.

The following is a summary of the major categories of covered loans:

	September 30,			December 31,
(in thousands)	2013			2012
Commercial	$	10,015		$	10,561
Commercial real estate mortgages	719,207			931,758
Residential mortgages	5,030			5,652
Real estate construction	41,625			78,554
Home equity loans and lines of credit	3,672			3,790
Installment	523			689
Covered loans	780,072			1,031,004
Less: Allowance for loan losses	(25,882		)	(44,781		)
Covered loans, net	$	754,190		$	986,223

The following table provides information on covered loans and loss-sharing terms by acquired entity:

(in thousands)

Imperial
Capital
Bank

1st Pacific
Bank

Sun West
Bank

Nevada
Commerce
Bank

Total

Carrying value of covered loans as of:

September 30, 2013

680,427

45,123

25,948

28,574

780,072

December 31, 2012

893,031

70,240

34,803

32,930

1,031,004

Expiration date of FDIC loss sharing:

Commercial (1)

12/31/2016

6/30/2015

6/30/2016

Residential

12/31/2019

5/30/2020

4/30/2021

Termination date of FDIC loss-sharing agreements:

Commercial (1)

12/19/2017

5/8/2018

5/29/2018

6/30/2019

Residential

12/31/2019

5/30/2020

4/30/2021

(1) The Company is subject to sharing 80% of its recoveries with the FDIC up to the termination dates of the commercial loss-sharing agreements.

The Company evaluated the acquired loans from its FDIC-assisted acquisitions and concluded that all loans, with the exception of a small population of acquired loans, would be accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Loans are accounted for under ASC 310-30 when there is evidence of credit deterioration since origination and for which it is probable, at acquisition, that the Company would be unable to collect all contractually required payments. Interest income is recognized on all acquired impaired loans through accretion of the difference between the carrying amount of the loans and their expected cash flows.

The excess of cash flows expected to be collected over the carrying value of the underlying acquired impaired loans is referred to as the accretable yield. This amount is not reported in the consolidated balance sheets, but is accreted into interest income over the remaining estimated lives of the underlying pools of loans. Changes in the accretable yield for acquired impaired loans were as follows for the nine months ended September 30, 2013 and 2012:

	For the nine months ended September 30,
(in thousands)	2013			2012
Balance, beginning of period	$	295,813		$	436,374
Accretion	(48,424		)	(62,189		)
Reclassifications from (to) nonaccretable yield	26,990			(4,042		)
Disposals and other	(41,930		)	(51,854		)
Balance, end of period	$	232,449		$	318,289

The factors that most significantly affect estimates of cash flows expected to be collected, and accordingly the accretable yield balance, include: (i) changes in credit assumptions, including both credit loss amounts and timing; (ii) changes in prepayment assumptions; and (iii) changes in interest rates for variable-rate loans. Reclassifications between accretable yield and nonaccretable yield may vary from period to period as the Company periodically updates its cash flow projections. The reclassification of nonaccretable yield to accretable yield during 2013 was principally driven by positive changes in cash flows, resulting mainly from changes in credit assumptions.

The Company recorded an indemnification asset related to its FDIC-assisted acquisitions, which represents the present value of the expected reimbursement from the FDIC for expected losses on acquired loans, OREO and unfunded commitments. The FDIC indemnification asset from all FDIC-assisted acquisitions was $101.1 million at September 30, 2013 and $150.0 million at December 31, 2012.

Credit Quality on Loans and Leases, Excluding Covered Loans

Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments

The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses, reserve for off-balance sheet credit commitments and provision for credit losses. The provision is the expense recognized in the consolidated statements of income to adjust the allowance and reserve to the levels deemed appropriate by management, as determined through application of the Company’s allowance methodology procedures. The provision for credit losses reflects management’s judgment of the adequacy of the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments. It is determined through quarterly analytical reviews of the loan and commitment portfolios and consideration of such other factors as the Company’s loan and lease loss experience, trends in problem loans, concentrations of credit risk, underlying collateral values, and current economic conditions, as well as the results of the Company’s ongoing credit review process. As conditions change, the Company’s level of provisioning and the allowance for loan and lease losses and reserve for off-balance sheet credit commitments may change.

The relative significance of risk considerations used in measuring the allowance for loan and lease losses will vary by portfolio segment. For commercial loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and real estate construction loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value.

For commercial, non-homogenous loans that are not impaired, the Bank derives loss factors for each risk grade and loan type via a process that begins with estimates of probable losses inherent in the portfolio based upon various statistical analyses. The factors considered in the analysis include loan type, migration analysis, in which historical delinquency and credit loss experience is applied to the portfolio, as well as analyses that reflect current trends and conditions. Each portfolio of smaller balance homogeneous loans, including residential first mortgages, installment, revolving credit and most other consumer loans, is collectively evaluated for loss potential. The quantitative portion of the allowance for loan and lease losses is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the allowance. The qualitative portion of the allowance attempts to incorporate the risks inherent in the portfolio, economic uncertainties, competition, and regulatory requirements and other subjective factors such as changes in underwriting standards. It also considers overall portfolio indicators, including current and historical credit losses; delinquent, nonperforming and criticized loans; portfolio concentrations; trends in volumes and terms of loans; and economic trends in the broad market and in specific industries.

A portion of the allowance for loan and lease losses is attributed to impaired loans that are individually measured for impairment. This measurement considers all available evidence, including as appropriate, the probability that a specific loan will default, the expected exposure of a loan at default, an estimate of loss given default, the present value of expected future cash flows discounted using the loan’s contractual effective rate, the secondary market value of the loan and the fair value of collateral.

The allowance for loan and lease losses is decreased by the amount of charge-offs and increased by the amount of recoveries. Generally, commercial, commercial real estate and real estate construction loans are charged off when it is determined that advances to the borrower are in excess of the calculated current fair value of the collateral and if a borrower is deemed incapable of repayment of unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance pending. Consumer loans are charged-off based on delinquency, ranging from 60 days for overdrafts to 180 days for secured consumer loans, or earlier when it is determined that the loan is uncollectible due to a triggering event, such as bankruptcy, fraud or death.

The following is a summary of activity in the allowance for loan and lease losses and period-end recorded investment balances of loans evaluated for impairment, excluding covered loans, for the three and nine months ended September 30, 2013 and 2012. Activity is provided by loan portfolio segment which is consistent with the Company’s methodology for determining the allowance for loan and lease losses.

(in thousands)	Commercial (1)			Commercial Real Estate Mortgages			Residential Mortgages			Real Estate Construction			Home Equity Loans and Lines of Credit			Installment			Unallocated		Total

Three months ended September 30, 2013

Allowance for loan and lease losses:
Beginning balance	$	116,619		$	53,339		$	8,004		$	8,335		$	5,400		$	1,355		$	96,862	$	289,914
Provision (reduction) for credit losses (2)	(14,173		)	(2,829		)	5,070			(1,589		)	3,092			317			9,363		(749		)
Charge-offs	(488		)	(1,270		)	—			—			(225		)	(18		)	—		(2,001		)
Recoveries	4,863			686			40			2,945			31			218			—		8,783
Net recoveries (charge-offs)	4,375			(584		)	40			2,945			(194		)	200			—		6,782
Ending balance	$	106,821		$	49,926		$	13,114		$	9,691		$	8,298		$	1,872		$	106,225	$	295,947

Nine months ended September 30, 2013

Allowance for loan and lease losses:
Beginning balance	$	104,731		$	48,901		$	10,558		$	11,784		$	7,283		$	1,858		$	92,773	$	277,888
Provision (reduction) for credit losses (2)	(7,313		)	572			2,547			(10,386		)	946			(854		)	13,452		(1,036		)
Charge-offs	(4,719		)	(1,315		)	(106		)	(100		)	(500		)	(370		)	—		(7,110		)
Recoveries	14,122			1,768			115			8,393			569			1,238			—		26,205
Net recoveries (charge-offs)	9,403			453			9			8,293			69			868			—		19,095
Ending balance	$	106,821		$	49,926		$	13,114		$	9,691		$	8,298		$	1,872		$	106,225	$	295,947

Ending balance of allowance:
Individually evaluated for impairment	$	344		$	602		$	232		$	—		$	—		$	—		$	—	$	1,178
Collectively evaluated for impairment	106,477			49,324			12,882			9,691			8,298			1,872			106,225		294,769

Loans and leases, excluding covered loans
Ending balance of loans and leases:
Loans and leases, excluding covered loans	$	7,856,244		$	3,077,183		$	4,418,231		$	380,489		$	681,879		$	152,107		$	—	$	16,566,133
Individually evaluated for impairment	32,727			38,546			6,767			30,190			2,350			—			—		110,580
Collectively evaluated for impairment	7,823,517			3,038,637			4,411,464			350,299			679,529			152,107			—		16,455,553

(1) Includes lease financing loans.

(2) Provision for credit losses in the allowance rollforward for the three months ended September 30, 2013 includes total transfers to the reserve for off-balance sheet credit commitments of $0.7 million. Provision for credit losses in the allowance rollforward for the nine months ended September 30, 2013 includes total transfers to the reserve for off-balance sheet credit commitments of $1.0 million. There was no other provision for credit losses recognized for the three and nine months ended September 30, 2013.

(in thousands)	Commercial (1)			Commercial Real Estate Mortgages			Residential Mortgages			Real Estate Construction			Home Equity Loans and Lines of Credit			Installment			Unallocated			Total

Three months ended September 30, 2012

Allowance for loan and lease losses:
Beginning balance	$	93,981		$	49,715		$	12,490		$	14,810		$	7,656		$	1,774		$	89,108		$	269,534
Provision (reduction) for credit losses (2)	6,333			(1,298		)	1,327			(3,898		)	47			(314		)	(1,106		)	1,091
Charge-offs	(12,163		)	(444		)	(1,030		)	(310		)	(43		)	(134		)	—			(14,124		)
Recoveries	7,227			203			495			3,415			11			588			—			11,939
Net (charge-offs) recoveries	(4,936		)	(241		)	(535		)	3,105			(32		)	454			—			(2,185		)
Ending balance	$	95,378		$	48,176		$	13,282		$	14,017		$	7,671		$	1,914		$	88,002		$	268,440

Nine months ended September 30, 2012

Allowance for loan and lease losses:
Beginning balance	$	83,514		$	48,451		$	14,122		$	20,155		$	8,077		$	1,972		$	86,266		$	262,557
Provision (reduction) for credit losses (2)	3,425			(481		)	732			(4,508		)	588			(655		)	1,736			837
Charge-offs	(22,382		)	(1,318		)	(2,333		)	(9,769		)	(1,077		)	(959		)	—			(37,838		)
Recoveries	30,821			1,524			761			8,139			83			1,556			—			42,884
Net (charge-offs) recoveries	8,439			206			(1,572		)	(1,630		)	(994		)	597			—			5,046
Ending balance	$	95,378		$	48,176		$	13,282		$	14,017		$	7,671		$	1,914		$	88,002		$	268,440

Ending balance of allowance:
Individually evaluated for impairment	$	1,167		$	1,874		$	185		$	1,467		$	138		$	—		$	—		$	4,831
Collectively evaluated for impairment	94,211			46,302			13,097			12,550			7,533			1,914			88,002			263,609

Loans and leases, excluding covered loans
Ending balance of loans and leases:
Loans and leases, excluding covered loans	$	6,264,562		$	2,436,218		$	3,897,690		$	269,583		$	718,966		$	137,632		$	—		$	13,724,651
Individually evaluated for impairment	34,731			58,217			11,342			56,582			4,496			449			—			165,817
Collectively evaluated for impairment	6,229,831			2,378,001			3,886,348			213,001			714,470			137,183			—			13,558,834

(1) Includes lease financing loans.

(2) Provision for credit losses in the allowance rollforward for the three months ended September 30, 2012 includes total provision expense of $2.0 million, net of total transfers to the reserve for off-balance sheet credit commitments of $0.9 million. Provision for credit losses for the nine months ended September 30, 2012 includes total provision expense of $3.0 million, net of total transfers to the reserve for off-balance sheet credit commitments of $2.2 million.

Off-balance sheet credit exposures include loan commitments and letters of credit. The following table provides a summary of activity in the reserve for off-balance sheet credit commitments for the three and nine months ended September 30, 2013 and 2012:

	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2013		2012		2013		2012
Balance, beginning of period	$	25,124	$	24,351	$	24,837	$	23,097
Transfers from allowance for loan and lease losses	749		909		1,036		2,163
Balance, end of period	$	25,873	$	25,260	$	25,873	$	25,260

Impaired Loans and Leases

Information on impaired loans, excluding covered loans, at September 30, 2013, December 31, 2012 and September 30, 2012 is provided in the following tables:

							For the three months ended				For the nine months ended
			Unpaid				September 30, 2013				September 30, 2013
			Contractual				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
(in thousands)	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
September 30, 2013
With no related allowance recorded:
Commercial	$	25,233	$	25,488	$	—	$	26,255	$	593	$	22,584	$	1,440
Commercial real estate mortgages	33,133		37,754		—		29,977		440		33,060		1,102
Residential mortgages:
Fixed	2,031		2,155		—		2,019		33		2,860		75
Variable	3,062		3,418		—		3,670		47		4,062		116
Total residential mortgages	5,093		5,573		—		5,689		80		6,922		191
Real estate construction:
Construction	16,259		21,064		—		16,262		233		17,904		791
Land	13,931		27,092		—		14,056		224		16,506		511
Total real estate construction	30,190		48,156		—		30,318		457		34,410		1,302
Home equity loans and lines of credit	2,350		3,375		—		2,803		47		2,827		81
Installment:
Consumer	—		—		—		—		—		112		—
Total installment	—		—		—		—		—		112		—
Total with no related allowance	$	95,999	$	120,346	$	—	$	95,042	$	1,617	$	99,915	$	4,116

With an allowance recorded:
Commercial	$	7,494	$	9,168	$	344	$	7,567	$	156	$	7,556	$	513
Commercial real estate mortgages	5,413		5,810		602		10,262		45		11,018		361
Residential mortgages:
Fixed	—		—		—		—		—		116		—
Variable	1,674		1,688		232		1,684		14		842		55
Total residential mortgages	1,674		1,688		232		1,684		14		958		55
Real estate construction:
Land	—		—		—		—		—		3,213		213
Total real estate construction	—		—		—		—		—		3,213		213
Home equity loans and lines of credit	—		—		—		—		—		225		—
Total with an allowance	$	14,581	$	16,666	$	1,178	$	19,513	$	215	$	22,970	$	1,142

Total impaired loans by type:
Commercial	$	32,727	$	34,656	$	344	$	33,822	$	749	$	30,140	$	1,953
Commercial real estate mortgages	38,546		43,564		602		40,239		485		44,078		1,463
Residential mortgages	6,767		7,261		232		7,373		94		7,880		246
Real estate construction	30,190		48,156		—		30,318		457		37,623		1,515
Home equity loans and lines of credit	2,350		3,375		—		2,803		47		3,052		81
Installment	—		—		—		—		—		112		—
Total impaired loans	$	110,580	$	137,012	$	1,178	$	114,555	$	1,832	$	122,885	$	5,258

(in thousands)	Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
December 31, 2012
With no related allowance recorded:
Commercial	$	18,761	$	24,135	$	—
Commercial real estate mortgages	42,882		49,110		—
Residential mortgages:
Fixed	3,482		3,757		—
Variable	4,865		5,437		—
Total residential mortgages	8,347		9,194		—
Real estate construction:
Construction	19,762		33,267		—
Land	25,748		41,016		—
Total real estate construction	45,510		74,283		—
Home equity loans and lines of credit	3,562		4,660		—
Installment:
Consumer	449		927		—
Total installment	449		927		—
Total with no related allowance	$	119,511	$	162,309	$	—

With an allowance recorded:
Commercial	$	7,516	$	8,038	$	952
Commercial real estate mortgages	10,203		10,783		1,326
Residential mortgages:
Fixed	463		507		9
Total residential mortgages	463		507		9
Home equity loans and lines of credit	899		965		116
Total with an allowance	$	19,081	$	20,293	$	2,403

Total impaired loans by type:
Commercial	$	26,277	$	32,173	$	952
Commercial real estate mortgages	53,085		59,893		1,326
Residential mortgages	8,810		9,701		9
Real estate construction	45,510		74,283		—
Home equity loans and lines of credit	4,461		5,625		116
Installment	449		927		—
Total impaired loans	$	138,592	$	182,602	$	2,403

							For the three months ended				For the nine months ended
			Unpaid				September 30, 2012				September 30, 2012
			Contractual				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
(in thousands)	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
September 30, 2012
With no related allowance recorded:
Commercial	$	28,575	$	39,624	$	—	$	30,476	$	—	$	24,732	$	—
Commercial real estate mortgages	40,825		46,081		—		34,597		34		25,767		158
Residential mortgages:
Fixed	4,199		4,613		—		3,014		—		3,047		—
Variable	3,528		3,968		—		4,893		9		5,010		48
Total residential mortgages	7,727		8,581		—		7,907		9		8,057		48
Real estate construction:
Construction	29,446		42,870		—		34,137		245		29,189		487
Land	19,038		23,606		—		18,987		35		22,763		35
Total real estate construction	48,484		66,476		—		53,124		280		51,952		522
Home equity loans and lines of credit	3,297		4,370		—		3,252		—		4,470		—
Installment:													—
Consumer	449		927		—		500		—		552		—
Total installment	449		927		—		500		—		552		—
Lease financing	—		—		—		—		—		7		—
Total with no related allowance	$	129,357	$	166,059	$	—	$	129,856	$	323	$	115,537	$	728

With an allowance recorded:
Commercial	$	6,156	$	6,922	$	1,167	$	8,461	$	—	$	11,286	$	—
Commercial real estate mortgages	17,392		18,962		1,874		17,257		—		13,406		—
Residential mortgages:
Fixed	2,229		2,336		181		2,260		—		1,844		—
Variable	1,386		1,476		4		2,321		4		1,879		4
Total residential mortgages	3,615		3,812		185		4,581		4		3,723		4
Real estate construction:
Land	8,098		18,362		1,467		8,432		—		14,700		—
Total real estate construction	8,098		18,362		1,467		8,432		—		14,700		—
Home equity loans and lines of credit	1,199		1,406		138		1,213		—		1,166		—
Total with an allowance	$	36,460	$	49,464	$	4,831	$	39,944	$	4	$	44,281	$	4

Total impaired loans by type:
Commercial	$	34,731	$	46,546	$	1,167	$	38,937	$	—	$	36,018	$	—
Commercial real estate mortgages	58,217		65,043		1,874		51,854		34		39,173		158
Residential mortgages	11,342		12,393		185		12,488		13		11,780		52
Real estate construction	56,582		84,838		1,467		61,556		280		66,652		522
Home equity loans and lines of credit	4,496		5,776		138		4,465		—		5,636		—
Installment	449		927		—		500		—		552		—
Lease financing	—		—		—		—		—		7		—
Total impaired loans	$	165,817	$	215,523	$	4,831	$	169,800	$	327	$	159,818	$	732

Effective July 1, 2012, the Company increased the outstanding loan amount under which nonperforming loans are individually evaluated for impairment from $500,000 or greater to $1 million or greater. For borrowers with multiple loans totaling $1 million or more, this threshold is applied at the total relationship level. Loans under $1 million will be measured for impairment using historical loss factors. Loans under $1 million that were previously reported as impaired at June 30, 2012 will continue to be reported as impaired until the collection of principal and interest is no longer in doubt, or the loans are paid or charged-off. At September 30, 2013, impaired loans included $6.1 million of loans previously reported as impaired that are less than $1 million.

Impaired loans at September 30, 2013 and December 31, 2012 included $52.5 million and $48.8 million, respectively, of restructured loans that are on accrual status. With the exception of restructured loans on accrual status and a limited number of loans on cash basis nonaccrual for which the full collection of principal and interest is expected, interest income is not recognized on impaired loans until the principal balance of these loans is paid off.

Troubled Debt Restructured Loans

The following table provides a summary of loans modified in a troubled debt restructuring during the three months ended September 30, 2013 and 2012:

(in thousands)	Number of Contracts	Pre-Modification Outstanding Principal		Period-End Outstanding Principal		Financial Effects (1)
Three months ended September 30, 2013
Commercial	2	$	7,575	$	7,486	$	344
Total troubled debt restructured loans	2	$	7,575	$	7,486	$	344

Three months ended September 30, 2012
Commercial	6	$	1,624	$	1,538	$	10,528
Residential mortgages:
Fixed	3	1,578		1,078		485
Real estate construction:
Land	1	8,420		8,098		264
Home equity loans and lines of credit	1	257		149		—
Total troubled debt restructured loans	11	$	11,879	$	10,863	$	11,277

(1) Financial effects are comprised of charge-offs and specific reserves recognized on TDR loans at modification date.

The following table provides a summary of loans modified in a troubled debt restructuring during the nine months ended September 30, 2013 and 2012:

(in thousands)	Number of Contracts	Pre-Modification Outstanding Principal		Period-End Outstanding Principal		Financial Effects (1)
Nine months ended September 30, 2013
Commercial	12	$	16,258	$	13,624	$	344
Commercial real estate mortgages	1	547		533		—
Home equity loans and lines of credit	1	345		—		—
Total troubled debt restructured loans	14	$	17,150	$	14,157	$	344

Nine months ended September 30, 2012
Commercial	15	$	36,785	$	23,219	$	10,528
Commercial real estate mortgages	2	15,832		16,353		—
Residential mortgages:
Fixed	4	2,233		1,078		485
Real estate construction:
Construction	3	14,857		14,226		—
Land	1	8,420		8,098		264
Total real estate construction	4	23,277		22,324		264
Home equity loans and lines of credit	1	257		149		—
Total troubled debt restructured loans	26	$	78,384	$	63,123	$	11,277

(1) Financial effects are comprised of charge-offs and specific reserves recognized on TDR loans at modification date.

The following tables provide a summary of troubled debt restructured (“TDR”) loans that subsequently defaulted during the three and nine months ended September 30, 2013 and 2012, that had been modified as a troubled debt restructuring during the 12 months prior to their default. A TDR loan is considered to be in default when payments are 90 days or more past due.

	For three months ended September 30, 2013					For nine months ended September 30, 2013
(in thousands)	Number of Contracts	Period-End Outstanding Principal		Period-End Specific Reserve		Number of Contracts	Period-End Outstanding Principal		Period-End Specific Reserve
Commercial	—	$	—	$	—	4	$	896	$	—
Real estate construction:
Land	—	—		—		1	7,244		—
Home equity loans and lines of credit	—	—		—		1	139		—
Total loans that subsequently defaulted	—	$	—	$	—	6	$	8,279	$	—

	For three months ended September 30, 2012					For nine months ended September 30, 2012
(in thousands)	Number of Contracts	Period-End Outstanding Principal		Period-End Specific Reserve		Number of Contracts	Period-End Outstanding Principal		Period-End Specific Reserve
Commercial	1	$	688	$	—	5	$	4,581	$	277
Real estate construction:
Land	—	—		—		2	1,372		—
Total loans that subsequently defaulted	1	$	688	$	—	7	$	5,953	$	277

A restructuring constitutes a troubled debt restructuring when a lender, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Loans with pre-modification outstanding balances totaling $7.6 million and $17.2 million were modified in troubled debt restructurings during the three and nine months ended September 30, 2013, respectively. Loans with pre-modification outstanding balances totaling $11.9 million and $78.4 million were modified in troubled debt restructurings during the three and nine months ended September 30, 2012, respectively. The concessions granted in the restructurings completed in 2013 largely consisted of maturity extensions and interest rate modifications.

The unpaid principal balance of TDR loans was $69.3 million, before specific reserves of $0.9 million, at September 30, 2013 and $94.9 million, before specific reserves of $1.7 million, at December 31, 2012. The net decrease in TDR loans from the prior year-end was primarily attributable to payments received on existing TDR loans and to the removal of $15.3 million of loans that were restructured in an A/B note structure in 2012 that are no longer reported as TDRs. These decreases were partially offset by the addition of $17.2 million of loans restructured during the first nine months of 2013. Loans restructured in an A/B note restructuring are not reported as TDR loans in years after the restructuring if the restructuring agreement specifies an interest rate equal to or greater than the rate the lender was willing to accept at the time of restructuring for a new loan with comparable risk, and the loan is performing based on the terms in the restructuring agreement. In an A/B restructuring, the original note is separated into two notes where the A note represents the portion of the original loan that is expected to be fully paid, and the B note is the portion of the loan that is expected to be uncollectible. The B note is charged-off at the time of restructuring. Loans modified in troubled debt restructurings are impaired loans at the time of restructuring and subject to the same measurement criteria as all other impaired loans.

During the nine months ended September 30, 2013, four commercial loans, one real estate construction loan and one equity line of credit that had been restructured within the preceding 12 months were not performing in accordance with their modified terms. The defaults were primarily due to missed or late payments. All other TDR loans were performing in accordance with their restructured terms at September 30, 2013. As of September 30, 2013, commitments to lend additional funds on restructured loans totaled $1.3 million.

Past Due and Nonaccrual Loans and Leases

Loans are considered past due following the date when either interest or principal is contractually due and unpaid. The following tables provide a summary of past due and nonaccrual loans, excluding covered loans, at September 30, 2013 and December 31, 2012 based upon the length of time the loans have been past due:

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Nonaccrual		Total Past Due and Nonaccrual Loans		Current		Total Loans and Leases
September 30, 2013
Commercial	$	8,052	$	964	$	3	$	10,073	$	19,092	$	7,107,066	$	7,126,158
Commercial real estate mortgages	2,631		—		—		19,020		21,651		3,055,532		3,077,183
Residential mortgages:
Fixed	—		1,238		379		3,901		5,518		1,457,866		1,463,384
Variable	—		2,375		—		5,773		8,148		2,946,699		2,954,847
Total residential mortgages	—		3,613		379		9,674		13,666		4,404,565		4,418,231
Real estate construction:
Construction	—		—		—		11,553		11,553		339,138		350,691
Land	—		—		—		13,918		13,918		15,880		29,798
Total real estate construction	—		—		—		25,471		25,471		355,018		380,489
Home equity loans and lines of credit	274		—		—		5,289		5,563		676,316		681,879
Installment:
Commercial	—		—		—		—		—		379		379
Consumer	24		—		—		21		45		151,683		151,728
Total installment	24		—		—		21		45		152,062		152,107
Lease financing	—		12		1		54		67		730,019		730,086
Total	$	10,981	$	4,589	$	383	$	69,602	$	85,555	$	16,480,578	$	16,566,133

December 31, 2012
Commercial	$	6,207	$	4,219	$	602	$	9,087	$	20,115	$	6,191,238	$	6,211,353
Commercial real estate mortgages	16,968		3,249		—		33,198		53,415		2,685,869		2,739,284
Residential mortgages:
Fixed	—		1,969		379		4,902		7,250		1,458,224		1,465,474
Variable	—		—		—		4,701		4,701		2,492,030		2,496,731
Total residential mortgages	—		1,969		379		9,603		11,951		3,950,254		3,962,205
Real estate construction:
Construction	—		—		—		15,067		15,067		239,740		254,807
Land	—		859		—		25,815		26,674		31,709		58,383
Total real estate construction	—		859		—		40,882		41,741		271,449		313,190
Home equity loans and lines of credit	3,407		480		—		6,424		10,311		701,439		711,750
Installment:
Commercial	—		—		—		—		—		437		437
Consumer	58		35		—		473		566		141,790		142,356
Total installment	58		35		—		473		566		142,227		142,793
Lease financing	2,633		2		—		120		2,755		734,965		737,720
Total	$	29,273	$	10,813	$	981	$	99,787	$	140,854	$	14,677,441	$	14,818,295

Credit Quality Monitoring

The Company closely monitors and assesses credit quality and credit risk in the loan and lease portfolio on an ongoing basis. Loan risk classifications are continuously reviewed and updated. The following tables provide a summary of the loan and lease portfolio, excluding covered loans, by loan type and credit quality classification as of September 30, 2013 and December 31, 2012. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those loans that are classified as substandard or doubtful consistent with regulatory guidelines.

	September 30, 2013						December 31, 2012
(in thousands)	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	7,011,906	$	114,252	$	7,126,158	$	6,073,459	$	137,894	$	6,211,353
Commercial real estate mortgages	2,961,319		115,864		3,077,183		2,597,863		141,421		2,739,284
Residential mortgages:
Fixed	1,443,459		19,925		1,463,384		1,449,270		16,204		1,465,474
Variable	2,931,433		23,414		2,954,847		2,479,449		17,282		2,496,731
Total residential mortgages	4,374,892		43,339		4,418,231		3,928,719		33,486		3,962,205
Real estate construction:
Construction	324,908		25,783		350,691		225,577		29,230		254,807
Land	15,589		14,209		29,798		28,710		29,673		58,383
Total real estate construction	340,497		39,992		380,489		254,287		58,903		313,190
Home equity loans and lines of credit	653,349		28,530		681,879		685,011		26,739		711,750
Installment:
Commercial	379		—		379		437		—		437
Consumer	151,370		358		151,728		141,662		694		142,356
Total installment	151,749		358		152,107		142,099		694		142,793
Lease financing	727,500		2,586		730,086		733,803		3,917		737,720
Total	$	16,221,212	$	344,921	$	16,566,133	$	14,415,241	$	403,054	$	14,818,295

Credit Quality on Covered Loans

The following is a summary of activity in the allowance for losses on covered loans:

	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2013			2012			2013			2012
Balance, beginning of period	$	24,414		$	43,147		$	44,781		$	64,565
Provision for losses	2,496			18,089			461			38,848
Reduction in allowance due to loan removals	(1,028		)	(16,258		)	(19,360		)	(58,435		)
Balance, end of period	$	25,882		$	44,978		$	25,882		$	44,978

The allowance for losses on covered loans was $25.9 million, $44.8 million and $45.0 million as of September 30, 2013, December 31, 2012 and September 30, 2012, respectively. The Company recorded provision expense of $2.5 million and $0.5 million on covered loans during the three and nine months ended September 30, 2013, respectively. Provision expense was $18.1 million and $38.8 million for the three and nine months ended September 30, 2012, respectively. The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis, and may recognize provision expense or reversal of its allowance for loan losses as a result of that analysis. The provision expense or reversal of allowance on covered loans is the result of changes in expected cash flows, both amount and timing, due to loan payments and the Company’s revised loss and prepayment forecasts. The revisions of the loss forecasts were based on the results of management’s review of market conditions, the credit quality of the outstanding covered loans and the analysis of loan

performance data since the acquisition of covered loans. The allowance for losses on covered loans is reduced for any loan removals, which occur when a loan has been fully paid off, fully charged off, sold or transferred to OREO.

Covered loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. There were no covered loans that were on nonaccrual status as of September 30, 2013 and December 31, 2012.

At September 30, 2013, covered loans that were 30 to 89 days delinquent totaled $6.4 million and covered loans that were 90 days or more past due on accrual status totaled $63.1 million. At December 31, 2012, covered loans that were 30 to 89 days delinquent totaled $43.4 million and covered loans that were 90 days or more past due on accrual status totaled $112.4 million.