4. Loans

Loans outstanding as of June 30, 2013, December 31, 2012 and June 30, 2012, net of unearned income, consisted of the following:



		June 30, 2013			December 31, 2012			June 30, 2012
Originated loans (a):
Commercial		$	5,997,812		$	5,866,489		$	5,404,971
Residential mortgage		462,427			445,211			438,147
Installment		1,496,663			1,328,258			1,262,877
Home equity		845,051			806,078			766,840
Credit cards		142,319			146,387			142,586
Leases		188,353			139,236			84,507
	Total originated loans (a)	9,132,625			8,731,659			8,099,928
Allowance for originated loan losses		(98,645		)	(98,942		)	(103,849		)
	Net originated loans	$	9,033,980		$	8,632,717		$	7,996,079
Acquired loans:
Commercial		$	2,275,243		$	—		$	—
Residential mortgage		440,394			—			—
Installment		1,221,060			—			—
Home equity		322,195			—			—
	Total acquired loans	4,258,892			—			—
Allowance for acquired loan losses		—			—			—
	Net acquired loans	$	4,258,892		$	—		$	—
Covered loans:
Commercial		505,706			718,437			915,038
Residential mortgage		56,056			61,540			65,772
Installment		7,794			8,189			8,835
Home equity		106,970			117,225			129,628
Indemnification asset		83,910			113,734			152,615
	Total covered loans	760,436			1,019,125			1,271,888
Allowance for covered loan losses		(49,069		)	(43,255		)	(42,606		)
	Net covered loans	$	711,367		$	975,870		$	1,229,282
Total loans:
Commercial		$	8,778,761		$	6,584,926		$	6,320,009
Residential mortgage		958,877			506,751			503,919
Installment		2,725,517			1,336,447			1,271,712
Home equity		1,274,216			923,303			896,468
Credit cards		142,319			146,387			142,586
Leases		188,353			139,236			84,507
Indemnification asset		83,910			113,734			152,615
	Total loans	14,151,953			9,750,784			9,371,816
Total allowance for loan losses		(147,714		)	(142,197		)	(146,455		)
	Total Net loans	$	14,004,239		$	9,608,587		$	9,225,361

(a) Includes acquired FirstBank loans of $52.9 million, $54.2 million, $67.9 million as of June 30, 2013, December 31, 2012 and June 30, 2012, respectively.

The following describes the distinction between originated, acquired and covered loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated Loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance for loan losses, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the "simple-interest" method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $6.7 million, $6.5 million and $6.6 million at June 30, 2013, December 31, 2012 and June 30, 2012, respectively.

Acquired Loans

Acquired loans are those purchased in the Citizens acquisition (See Note 2 (Business Combinations) for further information). These loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing (“non-impaired acquired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration at origination and if it is probable, at acquisition, all contractually required payments will not be collected. Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting. The outstanding balance, including contractual principal, interest, fees and penalties, of all acquired loans was $4.3 billion as of June 30, 2013.

The following table presents the provisional fair value of loans acquired from Citizens as of the Acquisition Date:



	Acquired Impaired		Acquired Non-Impaired		Acquired Loans Total
Commercial
C&I	$	62,018	$	1,698,758	$	1,760,776
CRE	377,967		359,080		737,047
Construction	13,399		18,519		31,918
Total commercial	453,384		2,076,357		2,529,741
Consumer
Residential mortgages	233,005		279,735		512,740
Installment	54,377		1,165,235		1,219,612
Home equity lines	32,035		330,164		362,199
Total consumer	319,417		1,775,134		2,094,551
Total	$	772,801	$	3,851,491	$	4,624,292

The following table presents the acquired impaired and non-impaired loans receivable at the Acquisition Date:




	Acquired Impaired			Acquired Non-Impaired			Acquired Loans Total
Contractual required payments receivable	$	1,023,481		$	4,078,355		$	5,101,836
Nonaccretable difference	(121,719		)	—			(121,719		)
Expected cash flows	901,762			4,078,355			4,980,117
Accretable yield	(128,961		)	(226,864		)	(355,825		)
Carrying balance	$	772,801		$	3,851,491		$	4,624,292

The fair value estimates for acquired loans is based on expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value. In determining the Acquisition Date fair value of acquired impaired loans, and in subsequent accounting, the Corporation aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics.

The difference between the fair value of a non-impaired acquired loan and contractual amounts due at the Acquisition Date is accreted into income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments. Non-impaired acquired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio.

The excess of an acquired impaired loan's contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess of cash flows expected to be collected over the carrying amount of the acquired impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired impaired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

Over the life of acquired impaired loans, the Corporation evaluates the remaining contractual required payments receivable and estimates cash flows expected to be collected. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Date. Prepayments affect the estimated life of loans and could change the amount of interest income, and possibly principal, expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period's estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

Increases in expected cash flows of acquired impaired loans subsequent to acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for loan losses.

Covered Loans and Related Loss Share Receivable

The loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest are covered by loss sharing agreements between the FDIC and the Corporation that afford the Bank significant loss protection. These covered loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related allowance for loan losses and are accounted for as acquired impaired loans as described above. A loss share receivable was recorded at the Acquisition Date which represents the estimated fair value of reimbursement the Corporation expects to receive from the FDIC for incurred losses on certain covered loans. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. The loss share receivable continues to be measured on the same basis as the related covered loans. Deterioration in the credit quality of the covered loans (recorded as an adjustment to the covered allowance for loan losses) would immediately increase the basis of the loss share receivable, with the offset recorded through the consolidated statement of comprehensive income. Increases in the credit quality or cash flows of covered loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the loss share receivable, with such decrease being accreted into income over 1) the same period or 2) the life of the loss share agreements, whichever is shorter. Loss assumptions used in the basis of the loss share receivable are consistent with the loss assumptions used to measure the related covered loans.

Upon the determination of an incurred loss the loss share receivable will be reduced by the amount owed by the FDIC. A corresponding claim receivable is recorded in accrued interest receivable and other assets on the consolidated balance sheet until cash is received from the FDIC.

Changes in the loss share receivable associated with covered loans for the three and six months ended June 30, 2013 and 2012 were as follows:



	Three Months Ended						Six Months Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Balance at beginning of period	$	95,593		$	171,136		$	113,734		$	205,664
Accretion	(5,998		)	(8,877		)	(14,101		)	(18,534		)
Increase due to impairment	2,319			6,218			7,858			11,117
FDIC reimbursement	(5,397		)	(10,651		)	(15,947		)	(38,081		)
Covered loans paid in full	(2,607		)	(5,211		)	(7,634		)	(7,551		)
Balance at end of the period	$	83,910		$	152,615		$	83,910		$	152,615

Acquired and Covered Impaired Loans

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the three months ended June 30, 2013:



Acquired Impaired Loans	Three Months Ended
	June 30, 2013
	Accretable Yield			Carrying Amount of loans
Balance at beginning of period	$	—		$	—
Additions	128,961			772,801
Accretion	(8,560		)	8,560
Net reclassifications from non-accretable to accretable	—			—
Payments received, net	(4,107		)	(72,229		)
Disposals	—			—
Balance at end of period	$	116,294		$	709,132

A reconciliation of the contractual required payments receivable to the carrying amount of the acquired impaired loans as of June 30, 2013 is as follows:




Acquired Impaired Loans	June 30, 2013
Contractual required payments receivable	$	850,330
Nonaccretable difference	(24,904		)
Expected cash flows	825,426
Accretable yield	(116,294		)
Carrying balance	$	709,132

Changes in the carrying amount and accretable yield for covered impaired loans were as follows for the three and six months ended June 30, 2013 and 2012:



	Three Months Ended												Six Months Ended
	June 30, 2013						June 30, 2012						June 30, 2013						June 30, 2012
Covered Impaired Loans	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	102,130		$	656,670		$	161,292		$	1,043,519		$	113,288		$	762,386		$	176,736		$	1,128,978
Accretion	(17,757		)	17,757			(25,405		)	25,405			(37,271		)	37,271			(51,847		)	51,847
Net reclassifications from non-accretable to accretable	5,413			—			12,993			—			15,982			—			24,806			—
Payments received, net	—			(137,170		)	—			(104,610		)	—			(262,400		)	—			(216,511		)
Disposals	(8,027		)	—			(1,304		)	—			(10,241		)	—			(2,119		)	—
Balance at end of period	$	81,758		$	537,257		$	147,576		$	964,314		$	81,758		$	537,257		$	147,576		$	964,314

A reconciliation of the contractual required payments receivable to the carrying amount of covered impaired loans as of June 30, 2013 and 2012 is as follows:



Covered Impaired Loans	June 30, 2013			June 30, 2012
Contractual required payments receivable	$	915,421		$	1,413,526
Nonaccretable difference	(296,406		)	(301,636		)
Expected cash flows	619,015			1,111,890
Accretable yield	(81,758		)	(147,576		)
Carrying balance	$	537,257		$	964,314

The most recent quarterly evaluation of the remaining contractual required payments receivable and cash flows expected to be collected resulted in a decline in cash flow expectations of certain pools of loans and improvements in cash flow expectations in other loans and pools of loans. The decline in cash flow expectations was the result of deteriorations in risk ratings, declines in the underlying value of collateral dependent loans and actual cash flows received lower than originally expected. The improvement in cash flow expectations was the result of positive changes in risk ratings, improvements in the underlying value of collateral dependent loans and actual cash flows received higher than expected. There were no significant changes from prior periods to key assumptions used in the most recent quarterly evaluation of cash flows expected to be collected.

The decline in expected cash flows resulted in a provision for covered loan losses of $6.5 million for the three months ended June 30, 2013 compared to a provision of $9.6 million for the three months ended June 30, 2012. Provision for covered loan losses for the six months ended June 30, 2013 was $16.2 million compared to $20.5 million for the six months ended June 30, 2012. The provision for covered loan losses was partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements. (See Note 5 (Allowance for Loan losses) for further information.)

The increase in cash flows resulted in the reclassification from nonaccretable difference to accretable yield of $5.4 million during the three months ended June 30, 2013 compared to a reclassification of $13.0 million in the three months ended June 30, 2012. Reclassifications to accretable yield were $16.0 million during the six months ended June 30, 2013 and $24.8 million during the six months ended June 30, 2012. Reclassifications result in yield adjustments on loans and pools on a prospective basis to interest income. Improved cash flows expectations for loans or pools that were impaired during prior periods were recorded first as a recapture of any previously recorded impairment and then as an increase in the prospective yield. Additionally, the loss share receivable was also reduced by the guaranteed portion of the additional cash flows expected to be received, resulting in a corresponding reduction in the prospective yield of the remaining loss share receivable.

Credit Quality Disclosures

The credit quality of the Corporation's loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Corporation. These credit quality ratings are an important part of the Corporation's overall credit risk management process and evaluation of the allowance for credit losses.

Generally loans, except for certain commercial, credit card and mortgage loans, and leases on which payments are past due for 90 days are placed on nonaccrual status, unless those loans are in the process of collection and, in Management's opinion, are fully secured. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. Acquired and covered impaired loans are considered to be accruing and performing even though collection of contractual payments may be in doubt because income is accreted on the loan or loan pool.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the allowance for loan losses and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.

The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual:



As of June 30, 2013
Originated Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	732	$	587	$	3,537	$	4,856	$	3,473,334	$	3,478,190	$	10	$	9,834
CRE	7,950		2,413		11,584		21,947		2,192,910		2,214,857		1,602		18,954
Construction	523		537		430		1,490		303,275		304,765		348		147
Leases	—		—		—		—		188,353		188,353		—		—
Consumer
Installment	9,141		3,080		5,021		17,242		1,479,421		1,496,663		4,184		4,146
Home Equity Lines	1,080		1,048		1,122		3,250		841,801		845,051		710		1,841
Credit Cards	817		350		783		1,950		140,369		142,319		423		433
Residential Mortgages	13,378		3,733		7,138		24,249		438,178		462,427		4,483		10,108
Total	$	33,621	$	11,748	$	29,615	$	74,984	$	9,057,641	$	9,132,625	$	11,760	$	45,463
Acquired Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing ( c )		Loans ( c )
Commercial
C&I	$	607	$	85	$	1,914	$	2,606	$	1,157,738	$	1,160,344	$	—	$	2,245
CRE	6,731		6,875		24,775		38,381		1,059,743		1,098,124		—		494
Construction	—		—		724		724		16,051		16,775		724		—
Consumer
Installment	11,576		2,440		2,252		16,268		1,204,792		1,221,060		151		715
Home Equity Lines	4,785		1,579		2,404		8,768		313,427		322,195		—		5,396
Residential Mortgages	14,460		4,036		7,591		26,087		414,307		440,394		45		77
Total	$	38,159	$	15,015	$	39,660	$	92,834	$	4,166,058	$	4,258,892	$	920	$	8,927
Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	4,451	$	497	$	13,693	$	18,641	$	67,290	$	85,931	n/a		n/a
CRE	5,751		10,666		145,368		161,785		220,306		382,091		n/a		n/a
Construction	1,308		—		32,183		33,491		4,194		37,685		n/a		n/a
Consumer
Installment	17		54		—		71		7,723		7,794		n/a		n/a
Home Equity Lines	1,027		153		1,834		3,014		103,955		106,969		n/a		n/a
Residential Mortgages	8,760		1,538		8,090		18,388		37,668		56,056		n/a		n/a
Total	$	21,314	$	12,908	$	201,168	$	235,390	$	441,136	$	676,526	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.1 million of loans guaranteed by the U.S. government as of June 30, 2013.

(b) Excludes loss share receivable of $83.9 million as of June 30, 2013.

(c) Acquired and covered impaired loans were not classified as nonperforming assets at June 30, 2013 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.



As of December 31, 2012
Originated Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	3,814	$	1,986	$	3,571	$	9,371	$	3,297,155	$	3,306,526	$	104	$	5,255
CRE	4,181		4,530		11,535		20,246		2,204,170		2,224,416		382		15,780
Construction	981		—		597		1,578		333,969		335,547		—		731
Leases	6		—		—		6		139,230		139,236		—		—
Consumer
Installment	11,722		3,193		5,639		20,554		1,307,704		1,328,258		4,942		2,914
Home Equity Lines	1,584		880		1,227		3,691		802,387		806,078		475		1,557
Credit Cards	969		558		954		2,481		143,906		146,387		438		598
Residential Mortgages	13,291		2,488		5,231		21,010		424,201		445,211		3,076		9,852
Total	$	36,548	$	13,635	$	28,754	$	78,937	$	8,652,722	$	8,731,659	$	9,417	$	36,687


Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	931	$	981	$	24,111	$	26,023	$	102,486	$	128,509	n/a		n/a
CRE	4,130		15,019		172,444		191,593		348,002		539,595		n/a		n/a
Construction	589		7,925		34,314		42,828		7,505		50,333		n/a		n/a
Consumer
Installment	1		65		21		87		8,102		8,189		n/a		n/a
Home Equity Lines	1,528		654		2,211		4,393		112,832		117,225		n/a		n/a
Residential Mortgages	10,005		442		7,763		18,210		43,330		61,540		n/a		n/a
Total	$	17,184	$	25,086	$	240,864	$	283,134	$	622,257	$	905,391	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.4 million of loans guaranteed by the U.S. government as of December 31, 2012.

(b) Excludes loss share receivable of $113.7 million as of December 31, 2012.

(c) Covered impaired loans were not classified as nonperforming assets at December 31, 2012 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all covered impaired loans. These asset quality disclosures are, therefore, not applicable to covered impaired loans.



As of June 30, 2012
Originated Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	2,688	$	291	$	3,335	$	6,314	$	2,974,688	$	2,981,002	$	—	$	11,188
CRE	9,867		1,338		15,480		26,685		2,098,075		2,124,760		460		25,399
Construction	646		—		1,653		2,299		296,910		299,209		—		1,794
Leases	—		—		—		—		84,507		84,507		—		—
Consumer
Installment	8,338		2,889		4,738		15,965		1,246,912		1,262,877		4,384		355
Home Equity Lines	1,815		772		1,014		3,601		763,239		766,840		1		1,088
Credit Cards	783		517		772		2,072		140,514		142,586		289		502
Residential Mortgages	10,561		4,531		7,856		22,948		415,199		438,147		1,411		6,361
Total	$	34,698	$	10,338	$	34,848	$	79,884	$	8,020,044	$	8,099,928	$	6,545	$	46,687


Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	3,299	$	1,454	$	25,146	$	29,899	$	137,089	$	166,988	n/a		n/a
CRE	17,443		24,079		161,282		202,804		471,487		674,291		n/a		n/a
Construction	—		1,034		49,501		50,535		23,224		73,759		n/a		n/a
Consumer
Installment	—		615		22		637		8,198		8,835		n/a		n/a
Home Equity Lines	1,690		643		1,314		3,647		125,981		129,628		n/a		n/a
Residential Mortgages	11,452		1,571		9,509		22,532		43,240		65,772		n/a		n/a
Total	$	33,884	$	29,396	$	246,774	$	310,054	$	809,219	$	1,119,273	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.5 million of loans guaranteed by the U.S. government as of June 30, 2012.

(b) Excludes loss share receivable of $152.6 million as of June 30, 2012.

(c) Covered impaired loans were not classified as nonperforming assets at June 30, 2012 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all covered impaired loans. These asset quality disclosures are, therefore, not applicable to covered impaired loans.

Individual commercial loans are assigned credit risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware of information during a borrower’s ability to fulfill its obligation. For consumer loans, Management evaluates credit quality based on the aging status of the loan as well as by payment activity, which is presented in the above tables.

The credit-risk grading process for commercial loans is summarized as follows:

“Pass” Loans (Grades 1, 2, 3, 4) are not considered a greater than normal credit risk. Generally, the borrowers have the apparent ability to satisfy obligations to the bank, and the Corporation anticipates insignificant uncollectible amounts based on its individual loan review.

“Special-Mention” Loans (Grade 5) are commercial loans that have identified potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the institution’s credit position.

“Substandard” Loans (Grade 6) are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt pursuant to the contractual principal and interest terms. Such loans are characterized by the distinct possibility that the Corporation may sustain some loss if the deficiencies are not corrected.

“Doubtful” Loans (Grade 7) have all the weaknesses inherent in those classified as substandard, with the added characteristic that existing facts, conditions, and values make collection or liquidation in full highly improbable. Such loans are currently managed separately to determine the highest recovery alternatives.

“Loss” Loans (Grade 8) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. These loans are charged off when loss is identified.

The following tables provide a summary of commercial loans by portfolio type and the Corporation's internal credit quality rating:



As of June 30, 2013

Originated Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	40,185	$	1,250	$	—	$	12,815
Grade 2	124,748		3,859		—		709
Grade 3	721,517		297,052		19,119		36,743
Grade 4	2,483,972		1,826,543		282,034		134,834
Grade 5	41,698		32,705		1,363		3,042
Grade 6	66,070		53,448		2,249		210
Grade 7	—		—		—		—
Total	$	3,478,190	$	2,214,857	$	304,765	$	188,353

Acquired Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	107		—		—		—
Grade 3	24,511		28,509		—		—
Grade 4	1,050,350		848,214		15,558		—
Grade 5	58,399		125,154		1,217		—
Grade 6	26,977		96,247		—		—
Grade 7	—		—		—		—
Total	$	1,160,344	$	1,098,124	$	16,775	$	—

Covered Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,001		—		—		—
Grade 3	—		—		—		—
Grade 4	44,148		131,889		556		—
Grade 5	661		24,255		1,364		—
Grade 6	38,065		224,533		33,856		—
Grade 7	2,056		1,414		1,909		—
Total	$	85,931	$	382,091	$	37,685	$	—



As of December 31, 2012

Originated Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	42,211	$	—	$	—	$	13,119
Grade 2	114,480		3,138		—		179
Grade 3	661,692		254,749		17,652		20,042
Grade 4	2,408,669		1,845,686		311,271		104,037
Grade 5	44,969		53,675		3,057		1,561
Grade 6	34,505		67,168		3,567		298
Grade 7	—		—		—		—
Grade 8	—		—		—		—
Total	$	3,306,526	$	2,224,416	$	335,547	$	139,236

Covered Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,526		—		—		—
Grade 3	—		—		—		—
Grade 4	73,480		214,987		476		—
Grade 5	3,215		30,708		1,331		—
Grade 6	47,468		292,158		45,838		—
Grade 7	2,820		1,742		2,688		—
Grade 8	—		—		—		—
Total	$	128,509	$	539,595	$	50,333	$	—



As of June 30, 2012

Originated Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	41,042	$	—	$	—	$	13,141
Grade 2	94,362		3,432		—		114
Grade 3	562,886		313,337		19,800		9,372
Grade 4	2,150,162		1,647,565		268,496		61,522
Grade 5	53,427		67,758		3,885		—
Grade 6	79,123		92,668		7,028		358
Grade 7	—		—		—		—
Grade 8	—		—		—		—
Total	$	2,981,002	$	2,124,760	$	299,209	$	84,507

Covered Loans	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	36	$	—	$	—	$	—
Grade 2	2,090		—		—		—
Grade 3	90		473		—		—
Grade 4	96,675		270,278		491		—
Grade 5	6,768		51,807		595		—
Grade 6	52,396		346,058		69,851		—
Grade 7	8,933		5,675		2,822		—
Total	$	166,988	$	674,291	$	73,759	$	—