4. Loans

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



		December 31, 2013			December 31, 2012
Originated loans (a):
Commercial		$	6,648,279		$	5,866,489
Residential mortgage		529,253			445,211
Installment		1,727,925			1,328,258
Home equity		920,066			806,078
Credit cards		148,313			146,387
Leases		239,551			139,236
	Total originated loans (a)	10,213,387			8,731,659
Allowance for originated loan losses		(96,484		)	(98,942		)
	Net originated loans	$	10,116,903		$	8,632,717
Acquired loans:
Commercial		$	1,725,970		$	—
Residential mortgage		470,652			—
Installment		1,004,569			—
Home equity		294,424			—
	Total acquired loans	3,495,615			—
Allowance for acquired loan losses		(741		)	—
	Net acquired loans	$	3,494,874		$	—
Covered loans:
Commercial		375,860			718,437
Residential mortgage		50,679			61,540
Installment		6,162			8,189
Home equity		97,442			117,225
Loss share receivable		61,827			113,734
	Total covered loans	591,970			1,019,125
Allowance for covered loan losses		(44,027		)	(43,255		)
	Net covered loans	$	547,943		$	975,870
Total loans:
Commercial		$	8,750,109		$	6,584,926
Residential mortgage		1,050,584			506,751
Installment		2,738,656			1,336,447
Home equity		1,311,932			923,303
Credit cards		148,313			146,387
Leases		239,551			139,236
Loss share receivable		61,827			113,734
	Total loans	14,300,972			9,750,784
Total allowance for loan losses		(141,252		)	(142,197		)
	Total Net loans	$	14,159,720		$	9,608,587

(a) Includes acquired FirstBank loans of $49.2 million and $54.2 million as of December 31, 2013 and 2012, respectively.

The Corporation makes loans to officers on the same terms and conditions as made available to all employees and to directors on substantially the same terms and conditions as transactions with other parties. An analysis of loan activity with related parties for the years ended December 31, 2013, 2012 and 2011 is summarized as follows:



	Year Ended December 31,
	2013			2012			2011
Aggregate amount at beginning of year	$	16,578		$	15,629		$	15,723
New loans	11,507			3,500			2,458
Repayments	(4,374		)	(2,739		)	(2,552		)
Changes in directors and their affiliations	825			188			—
Aggregate amount at end of year	$	24,536		$	16,578		$	15,629

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 ALLL, 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 $6.6 million and $6.5 million at December 31, 2013 and 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 ALLL. The acquired loans were segregated as of the Acquisition Date between those considered to be performing (acquired nonimpaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration 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.

Total outstanding acquired impaired loans as of December 31, 2013 were $817.6 million. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the year end December 31, 2013:



	Year Ended
	December 31, 2013
Acquired Impaired Loans	Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	—		$	—
Additions due to Citizens acquisition on April 12, 2013	131,558			819,715
Accretion	(27,144		)	27,144
Net reclassifications from nonaccretable to accretable	46,361			—
Payments received, net	—			(245,859		)
Disposals	(14,129		)	—
Balance at end of period	$	136,646		$	601,000

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 ALLL and are accounted for as acquired impaired loans. 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.

Changes in the loss share receivable associated with covered loans for the years ended December 31, 2013 and 2012, respectively, were as follows:



	Year Ended
Loss Share Receivable	December 31, 2013			December 31, 2012
Balance at beginning of period	$	113,734		$	205,664
Amortization	(24,307		)	(34,903		)
Increase due to impairment on covered loans	10,790			14,728
FDIC reimbursement	(27,234		)	(58,099		)
Covered loans paid in full	(11,156		)	(13,656		)
Balance at end of period	$	61,827		$	113,734

Total outstanding covered impaired loans were $756.1 million and $1.2 billion as of December 31, 2013 and 2012, respectively. Changes in the carrying amount and accretable yield for covered impaired loans were as follows for the years ended December 31, 2013 and 2012:



	Year Ended December 31,
	2013						2012
Covered Impaired Loans	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	113,288		$	762,386		$	176,736		$	1,128,978
Accretion	(64,528		)	64,528			(96,748		)	96,748
Net reclassifications from nonaccretable to accretable	34,965			—			38,177			—
Payments received, net	—			(423,222		)	—			(463,340		)
Disposals	(16,442		)	—			(4,877		)	—
Balance at end of period	$	67,283		$	403,692		$	113,288		$	762,386

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 continues to be accreted on the loan pool as long as expected cash flows are reasonably estimable.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the ALLL 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 December 31, 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	$	8,941	$	994	$	10,622	$	20,557	$	4,119,010	$	4,139,567	$	151	$	11,323
CRE	4,507		2,400		9,688		16,595		2,153,192		2,169,787		460		14,229
Construction	351		21		66		438		338,487		338,925		—		122
Leases	902		—		—		902		238,649		239,551		—		—
Consumer
Installment	15,433		4,050		4,462		23,945		1,703,980		1,727,925		3,735		3,681
Home equity lines	1,864		918		965		3,747		916,319		920,066		418		1,819
Credit cards	729		471		735		1,935		146,378		148,313		404		558
Residential mortgages	19,858		2,072		9,350		31,280		497,973		529,253		6,008		10,471
Total	$	52,585	$	10,926	$	35,888	$	99,399	$	10,113,988	$	10,213,387	$	11,176	$	42,203
Acquired Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing		Loans
Commercial
C&I	$	1,295	$	862	$	3,744	$	5,901	$	788,178	$	794,079	$	40	$	795
CRE	5,603		5,281		26,366		37,250		881,395		918,645		403		651
Construction	2,675		—		—		2,675		10,571		13,246		—		—
Consumer
Installment	14,528		4,076		3,354		21,958		982,611		1,004,569		2,263		679
Home equity lines	4,774		1,933		3,606		10,313		284,111		294,424		1,039		1,300
Residential Mortgages	3,918		1,426		8,063		13,407		457,245		470,652		403		582
Total	$	32,793	$	13,578	$	45,133	$	91,504	$	3,404,111	$	3,495,615	$	4,148	$	4,007
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	$	836	$	1,489	$	12,957	$	15,282	$	60,955	$	76,237
CRE	2,855		3,443		103,077		109,375		164,219		273,594
Construction	2,191		1,917		20,388		24,496		1,533		26,029
Consumer
Installment	33		—		—		33		6,130		6,163
Home equity lines	544		1,467		1,651		3,662		93,780		97,442
Residential mortgages	7,463		1,565		5,165		14,193		36,485		50,678
Total	$	13,922	$	9,881	$	143,238	$	167,041	$	363,102	$	530,143

(a) Installment loans 90 days or more past due and accruing include $2.1 million of loans guaranteed by the U.S. government as of December 31, 2013.

(b) Excludes loss share receivable of $61.8 million as of December 31, 2013.

(c) Acquired impaired loans were not classified as nonperforming assets at December 31, 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 impaired loans. These asset quality disclosures are, therefore, not applicable to acquired 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) Acquired 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 acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired 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 December 31, 2013
Originated Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	34,909	$	241	$	—	$	9,271
Grade 2	108,709		3,730		—		2,900
Grade 3	802,624		315,150		25,632		54,446
Grade 4	3,133,177		1,759,201		306,795		167,022
Grade 5	30,116		46,483		267		5,750
Grade 6	30,032		44,982		6,231		162
Grade 7	—		—		—		—
Total	$	4,139,567	$	2,169,787	$	338,925	$	239,551
Acquired Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,741		703		—		—
Grade 3	79,634		29,224		—		—
Grade 4	643,495		722,307		13,246		—
Grade 5	46,807		93,499		—		—
Grade 6	22,402		72,912		—		—
Grade 7	—		—		—		—
Total	$	794,079	$	918,645	$	13,246	$	—
Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	968		—		—		—
Grade 3	—		—		—		—
Grade 4	41,115		113,863		601		—
Grade 5	427		6,219		—		—
Grade 6	31,621		153,318		23,208		—
Grade 7	2,106		194		2,220		—
Total	$	76,237	$	273,594	$	26,029	$	—



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	—		—		—		—
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		—
Total	$	128,509	$	539,595	$	50,333	$	—