10-Q 1 fcnca_10qx06302013.htm 10-Q FCNCA_10Q_06.30.2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2013
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Class A Common Stock—$1 Par Value—8,586,058 shares
Class B Common Stock—$1 Par Value—1,032,883 shares
(Number of shares outstanding, by class, as of August 7, 2013)


INDEX
 
 
 
Page(s)
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

2

Part 1
 
Item 1.
Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
June 30*
2013
 
December 31#
2012
 
June 30*
2012
 
(dollars in thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
542,645

 
$
639,730

 
$
571,004

Overnight investments
1,039,925

 
443,180

 
984,536

Investment securities available for sale
5,184,976

 
5,226,228

 
4,634,248

Investment securities held to maturity
1,130

 
1,342

 
1,578

Loans held for sale
62,497

 
86,333

 
76,374

Loans and leases:
 
 
 
 
 
Acquired
1,443,336

 
1,809,235

 
1,999,351

Originated
11,655,469

 
11,576,115

 
11,462,458

Less allowance for loan and lease losses
258,316

 
319,018

 
272,929

Net loans and leases
12,840,489

 
13,066,332

 
13,188,880

Premises and equipment
872,477

 
882,768

 
873,483

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
84,833

 
102,577

 
117,381

Not covered under loss share agreements
36,942

 
43,513

 
49,454

Income earned not collected
45,567

 
47,666

 
49,743

Receivable from FDIC for loss share agreements
158,013

 
270,192

 
405,626

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
2,266

 
3,556

 
5,175

Other assets
334,437

 
367,610

 
272,531

Total assets
$
21,308,822

 
$
21,283,652

 
$
21,332,638

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
5,151,378

 
$
4,885,700

 
$
4,761,369

Interest-bearing
12,866,637

 
13,200,325

 
13,040,277

Total deposits
18,018,015

 
18,086,025

 
17,801,646

Short-term borrowings
581,937

 
568,505

 
700,299

Long-term obligations
443,313

 
444,921

 
644,682

Payable to FDIC for loss share agreements
101,652

 
101,641

 
91,648

Other liabilities
224,575

 
218,553

 
164,573

Total liabilities
19,369,492

 
19,419,645

 
19,402,848

Shareholders’ Equity
 
 
 
 
 
Common stock:
 
 
 
 
 
Class A - $1 par value (11,000,000 shares authorized; 8,586,058 shares issued and outstanding at June 30, 2013; 8,588,031 shares issued and outstanding at December 31, 2012; 8,644,307 shares issued and outstanding at June 30, 2012)
8,586

 
8,588

 
8,644

Class B - $1 par value (2,000,000 shares authorized; 1,032,883 shares issued and outstanding at June 30, 2013; 1,032,883 shares issued and outstanding at December 31, 2012; 1,626,937 shares issued and outstanding at June 30, 2012)
1,033

 
1,033

 
1,627

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,886,121

 
1,792,726

 
1,838,160

Accumulated other comprehensive loss
(100,176
)
 
(82,106
)
 
(62,407
)
Total shareholders’ equity
1,939,330

 
1,864,007

 
1,929,790

Total liabilities and shareholders’ equity
$
21,308,822

 
$
21,283,652

 
$
21,332,638

 * Unaudited
# Derived from 2012 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.

3

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except per share data, unaudited)
Interest income
 
 
 
 
 
 
 
Loans and leases
$
185,151

 
$
231,864

 
$
396,914

 
$
470,001

Investment securities:
 
 
 
 
 
 
 
U. S. Treasury
467

 
670

 
963

 
1,409

Government agency
3,068

 
4,377

 
6,394

 
8,709

Mortgage-backed securities
4,506

 
2,202

 
9,085

 
4,091

Corporate bonds
—

 
842

 
—

 
2,041

State, county and municipal
2

 
12

 
8

 
24

Other
76

 
62

 
153

 
193

Total investment securities interest and dividend income
8,119

 
8,165

 
16,603

 
16,467

Overnight investments
656

 
490

 
1,013

 
803

Total interest income
193,926

 
240,519

 
414,530

 
487,271

Interest expense
 
 
 
 
 
 
 
Deposits
8,997

 
15,047

 
19,310

 
31,519

Short-term borrowings
680

 
1,584

 
1,384

 
2,975

Long-term obligations
4,721

 
8,456

 
9,426

 
16,393

Total interest expense
14,398

 
25,087

 
30,120

 
50,887

Net interest income
179,528

 
215,432

 
384,410

 
436,384

Provision for loan and lease losses
(13,242
)
 
29,667

 
(31,848
)
 
60,382

Net interest income after provision for loan and lease losses
192,770

 
185,765

 
416,258

 
376,002

Noninterest income
 
 
 
 
 
 
 
Cardholder and merchant services
27,271

 
24,697

 
50,828

 
47,147

Service charges on deposit accounts
14,883

 
15,061

 
29,882

 
29,907

Wealth management services
15,097

 
14,530

 
29,612

 
28,285

Fees from processing services
5,051

 
7,557

 
10,670

 
16,119

Securities gains (losses)
—

 
3

 
—

 
(42
)
Other service charges and fees
3,966

 
3,574

 
7,732

 
7,015

Mortgage income
3,669

 
175

 
7,457

 
3,099

Insurance commissions
2,394

 
2,238

 
5,374

 
4,994

ATM income
1,314

 
1,281

 
2,482

 
2,736

Adjustments to FDIC receivable for loss share agreements
(14,439
)
 
(14,134
)
 
(38,492
)
 
(40,930
)
Other
5,789

 
2,314

 
16,963

 
5,909

Total noninterest income
64,995

 
57,296

 
122,508

 
104,239

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
75,802

 
76,786

 
151,921

 
152,470

Employee benefits
23,228

 
20,558

 
48,247

 
40,807

Occupancy expense
18,464

 
18,000

 
37,273

 
36,607

Equipment expense
18,698

 
17,998

 
37,644

 
36,164

FDIC insurance expense
2,423

 
2,666

 
5,089

 
5,723

Foreclosure-related expenses
3,467

 
15,389

 
7,772

 
19,993

Other
46,485

 
43,400

 
94,976

 
86,364

Total noninterest expense
188,567

 
194,797

 
382,922

 
378,128

Income before income taxes
69,198

 
48,264

 
155,844

 
102,113

Income taxes
25,292

 
10,681

 
56,353

 
29,035

Net income
$
43,906

 
$
37,583

 
$
99,491

 
$
73,078

Average shares outstanding
9,618,941

 
10,271,343

 
9,618,963

 
10,277,593

Net income per share
$
4.56

 
$
3.66

 
$
10.34

 
$
7.11


See accompanying Notes to Consolidated Financial Statements.

4

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income


 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, unaudited)
Net income
$
43,906

 
$
37,583

 
$
99,491

 
$
73,078

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains and losses on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains and losses arising during period
(38,992
)
 
4,491

 
(40,468
)
 
1,593

Deferred tax benefit (expense)
15,269

 
(1,756
)
 
15,834

 
(633
)
Reclassification adjustment for gains included in income before income taxes
—

 
(3
)
 
—

 
(3
)
Deferred tax expense (benefit)
—

 
1

 
—

 
1

Total change in unrealized gains and losses on securities, net of tax
(23,723
)
 
2,733

 
(24,634
)
 
958

 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
 
 
 
 
Change in unrecognized loss on cash flow hedges
569

 
(1,473
)
 
570

 
(1,831
)
Deferred tax benefit (expense)
(225
)
 
582

 
(225
)
 
722

Reclassification adjustment for losses included in income before income taxes
819

 
776

 
1,632

 
1,525

Deferred tax benefit
(323
)
 
(306
)
 
(644
)
 
(602
)
Total change in unrecognized loss on cash flow hedges, net of tax
840

 
(421
)
 
1,333

 
(186
)
 
 
 
 
 
 
 
 
Change in pension obligation:
 
 
 
 
 
 
 
Reclassification adjustment for losses included in income before income taxes
4,294

 
2,790

 
8,598

 
5,580

Deferred tax benefit
(1,682
)
 
(1,093
)
 
(3,367
)
 
(2,185
)
Total change in pension obligation, net of tax
2,612

 
1,697

 
5,231

 
3,395

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(20,271
)
 
4,009

 
(18,070
)
 
4,167

 
 
 
 
 
 
 
 
Total comprehensive income
$
23,635

 
$
41,592

 
$
81,421

 
$
77,245

 
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.


5

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity

 
 
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
(dollars in thousands, except share data, unaudited)
Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Net income
—

 
—

 
—

 
73,078

 
—

 
73,078

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
4,167

 
4,167

Repurchase of 12,875 shares of Class B common stock
—

 
(13
)
 
—

 
(2,401
)
 
—

 
(2,414
)
Cash dividends ($0.60 per share)
—

 
—

 
—

 
(6,169
)
 
—

 
(6,169
)
Balance at June 30, 2012
$
8,644

 
$
1,627

 
$
143,766

 
$
1,838,160

 
$
(62,407
)
 
$
1,929,790

Balance at December 31, 2012
$
8,588

 
$
1,033

 
$
143,766

 
$
1,792,726

 
$
(82,106
)
 
$
1,864,007

Net income
—

 
—

 
—

 
99,491

 
—

 
99,491

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(18,070
)
 
(18,070
)
Repurchase of 1,973 shares of Class A common stock
(2
)
 
—

 
—

 
(319
)
 
—

 
(321
)
Cash dividends ($0.60 per share)
—

 
—

 
—

 
(5,777
)
 
—

 
(5,777
)
Balance at June 30, 2013
$
8,586

 
$
1,033

 
$
143,766

 
$
1,886,121

 
$
(100,176
)
 
$
1,939,330

See accompanying Notes to Consolidated Financial Statements.


6

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Six months ended June 30
 
2013
 
2012
 
(dollars in thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
99,491

 
$
73,078

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
(31,848
)
 
60,382

Deferred tax expense (benefit)
2,360

 
(6,845
)
Change in current taxes payable
(20,649
)
 
26,247

Depreciation
35,545

 
33,326

Change in accrued interest payable
(145
)
 
(626
)
Change in income earned not collected
2,099

 
(7,527
)
Gain on sale of processing services, net
(4,085
)
 
—

Securities losses
—

 
42

Origination of loans held for sale
(223,128
)
 
(275,140
)
Proceeds from sale of loans held for sale
254,087

 
294,163

Gain on sale of loans
(7,123
)
 
(2,858
)
Loss on sale of other real estate
1,480

 
453

Net amortization of premiums and discounts
(74,175
)
 
(57,163
)
FDIC receivable for loss share agreements
20,464

 
(27,084
)
Net change in other assets
68,587

 
56,180

Net change in other liabilities
24,346

 
4,076

Net cash provided by operating activities
147,306

 
170,704

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
325,057

 
468,503

Purchases of investment securities available for sale
(1,375,766
)
 
(2,914,481
)
Proceeds from maturities/calls of investment securities held to maturity
212

 
244

Proceeds from maturities/calls of investment securities available for sale
1,365,287

 
2,328,204

Proceeds from sales of investment securities available for sale
—

 
56

Net change in overnight investments
(596,745
)
 
(549,561
)
Cash received from the FDIC for loss share agreements
46,534

 
192,098

Proceeds from sale of other real estate
80,010

 
78,820

Additions to premises and equipment
(26,696
)
 
(49,253
)
Net cash used by investing activities
(182,107
)
 
(445,370
)
FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(390,329
)
 
(528,819
)
Net change in demand and other interest-bearing deposits
322,319

 
753,191

Net change in short-term borrowings
13,432

 
85,077

Repayment of long-term obligations
(1,608
)
 
(45,997
)
Repurchase of common stock
(321
)
 
(2,414
)
Cash dividends paid
(5,777
)
 
(6,169
)
Net cash (used) provided by financing activities
(62,284
)
 
254,869

Change in cash and due from banks
(97,085
)
 
(19,797
)
Cash and due from banks at beginning of period
639,730

 
590,801

Cash and due from banks at end of period
$
542,645

 
$
571,004

CASH PAYMENTS FOR:
 
 
 
Interest
$
30,265

 
$
51,513

Income taxes
75,917

 
21,453

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains and losses
$
(40,468
)
 
$
1,590

Change in fair value of cash flow hedge
2,202

 
(306
)
Change in pension obligation
8,598

 
5,580

Transfers of loans to other real estate
57,175

 
80,413

Reclassification of reserve for unfunded commitments to allowance for loan and lease losses
7,368

 
—


See accompanying Notes to Consolidated Financial Statements.

7

First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note A

Accounting Policies and Basis of Presentation


First Citizens BancShares, Inc. (BancShares) is a financial holding company organized under the laws of Delaware and conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (FCB), which is headquartered in Raleigh, North Carolina.

General

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The information contained in the financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2012, should be referred to in connection with these unaudited interim consolidated financial statements.

BancShares evaluates all subsequent events prior to filing this Form 10-Q.

Reclassifications

In certain instances, amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported cash flows, shareholders' equity or net income.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position and/or consolidated results of operations and related disclosures. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan and lease losses, determination of fair value for financial instruments, pension plan assumptions, cash flow estimates on acquired loans receivable and payable from/to the FDIC for loss share agreements, purchase accounting related adjustments and income tax assets, liabilities and expense.

Goodwill Impairment

Annual impairment tests are conducted as of July 31 each year. Based on the third quarter 2012 impairment test, management concluded there was no impairment of goodwill. In addition to the annual testing requirement, impairment tests are performed if various other events occur including significant adverse changes in the business climate, considering various qualitative and quantitative factors to determine whether impairment exists. There were no such events during the second quarter of 2013.

Critical Accounting Policies Update

As discussed below, during the second quarter of 2013, BancShares implemented enhancements to the process to estimate the allowance for loan and lease losses (ALLL) and the reserve for unfunded commitments. Through detailed analysis of historical loss data, the process enhancements enabled reallocation of the 'nonspecific' ALLL and a portion of the reserve for unfunded loan commitments to specific loan classes.  The enhanced ALLL estimates implicitly include the risk of draws on open lines within each loan class. The remaining reserve for unfunded commitments relates to irrevocable commitments, such as letters of credit and financial guarantees. Other than the modifications described above, the enhancements to the methodology had no material impact on the ALLL.


8


For originated commercial loans and leases, BancShares increased the granularity of the historical net loss data used to develop the applicable loss rates by utilizing information that further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, BancShares incorporated specific loan class and delinquency status trends into the loss rates. Prior to the second quarter of 2013, management applied a general reserve methodology that estimated commercial loan allowances based upon loss rates by credit grade with the loss rates derived in part from migration analysis among grades and noncommercial allowances based upon loss rates derived primarily from historical losses.

Management also developed an enhanced qualitative framework for considering economic conditions, loan concentrations and other relevant factors at a loan class level. Prior to the second quarter of 2013, the nonspecific portion of the ALLL was not allocated to any specific loan class. This nonspecific portion reflected management's best estimate of the risks inherent in the calculation of the overall ALLL based upon economic conditions, loan concentrations and other relevant factors.
Management believes that the methodology enhancements will improve the granularity of historical net loss data and the precision of the segment analysis. Updated accounting policy disclosures for the ALLL and the reserve for unfunded commitments follow.

Allowance for Loan and Lease Losses
The ALLL represents management's best estimate of probable credit losses within the loan and lease portfolio at the balance sheet date. Management determines the ALLL based on an ongoing evaluation. This evaluation is inherently subjective because it requires material estimates, including the amount and timing of cash flows expected to be received on acquired loans. Those estimates are susceptible to significant change. Adjustments to the ALLL are recorded with a corresponding entry to provision for loan and lease losses. Loan and lease balances deemed to be uncollectible are charged off against the ALLL. Recoveries of amounts previously charged off are credited to the ALLL.
Accounting standards require the presentation of certain information at the portfolio segment level, which represents the level at which an entity develops and documents a systematic methodology to determine its ALLL. BancShares evaluates its loan and lease portfolio using three portfolio segments: originated commercial, originated noncommercial and acquired. The originated commercial segment includes commercial construction and land development, commercial mortgage, commercial and industrial, lease financing and other commercial real estate, and the related ALLL was calculated based on a risk-based approach as reflected in credit grades assigned to commercial segment loans. The originated noncommercial segment includes noncommercial construction and land development, residential mortgage, revolving mortgage and consumer loans, and the associated ALLL was determined based on a delinquency-based approach. The ALLL for acquired loans was determined based on the expected cash flows approach.
BancShares' methodology for calculating the ALLL includes estimating a general allowance for pools of loans and specific allocations for significant individual credits. The general allowance is based on net historical loan loss experience for homogeneous groups of loans with similar risk characteristics and performance trends. The general allowance estimate also contains qualitative components that allow management to adjust reserves based on historical loan loss experience for changes in the economic environment, portfolio trends and other factors. The specific allowance component is determined when management believes that the collectability of an individually reviewed loan has been impaired and a loss is probable. The fair value of impaired loans is based on the present value of expected cash flows, market prices of the loans, if available, or the value of the underlying collateral. Expected cash flows are discounted at the loans' effective interest rates.
The general allowance considers probable, incurred losses that are inherent within the loan portfolio but have not been specifically identified. Loans are divided into segments for analysis based in part on the risk profile inherent in each segment. Loans are further segmented into classes to appropriately recognize changes in inherent risk. A primary component of determining the general allowance for performing and classified loans not analyzed specifically is the actual loss history of the various classes. Loan loss factors based on historical experience may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio at the balance sheet date. For originated commercial loans and leases, management incorporates historical net loss data to develop the applicable loan loss factors by utilizing information that further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, management incorporates specific loan class and delinquency status trends into the loan loss factors. Loan loss factors may be adjusted quarterly based on changes in the level of historical net charge-offs and model adjustment parameter updates by management, such as the number of periods included in the calculation of loss factors, loss severity and portfolio attrition.

9

The quarterly ALLL evaluation process also includes a qualitative framework which considers economic conditions, composition of the loan portfolio, trends in delinquent and nonperforming loans, historical loss experience by categories of loans, concentrations of credit, changes in lending policies and underwriting standards, regulatory exam results and other factors indicative of potential losses remaining in the portfolio. Management may adjust the reserves calculated based on historical loan loss factors when assessing changes in the factors in the qualitative framework. The adjustments to reserves for the qualitative framework are based on economic data, data analysis of portfolio trends and management judgment. These adjustments are specific to the loan class level. Prior to the second quarter of 2013, a portion of the allowance for loan and lease losses was not allocated to any specific class of loans. This nonspecific portion reflected management's best estimate of the elements of imprecision and estimation risk inherent in the calculation of the overall allowance.
A loan is considered to be impaired under ASC Topic 310 Receivables when, based upon current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan. Originated impaired loans are placed on nonaccrual status. Originated loan relationships rated substandard or worse that are greater than or equal to $500 are reviewed for potential impairment on a quarterly basis. Loans classified as TDRs are also reviewed for potential impairment. Specific valuation allowances are established or partial charge-offs are recorded on impaired loans for the difference between the loan amount and the estimated fair value.

Management continuously monitors and actively manages the credit quality of the entire loan portfolio and adjusts the ALLL to an appropriate level. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and general loss estimates based upon the most recent information available. Future adjustments to the ALLL may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review BancShares' ALLL. Such agencies may require the recognition of adjustments to the ALLL based on their judgments of information available to them at the time of their examination. Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of June 30, 2013.

Each portfolio segment and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan and lease portfolio and the related ALLL. Management has identified the most significant risks as described below that are generally similar among the segments and classes. While the list is not exhaustive, it provides a description of the risks management has determined are the most significant.
Originated Commercial Loans and Leases
Each commercial loan or lease is centrally underwritten based primarily upon the customer's ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower's business, including the experience and background of the principals, is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed.
The significant majority of relationships in the originated commercial segment are assigned credit risk grades based upon an assessment of conditions that affect the borrower's ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers' financial information, payment history, credit documentation, public information and other information specific to each borrower. Credit risk grades are reviewed annually, or at any point management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Our risk grading standards are described in Note C.
The impairment assessment and determination of the related specific reserve for each impaired loan is based on a loan's characteristics. Impairment measurement for loans that are not collateral dependent is based on the present value of expected cash flows discounted at the loan's effective interest rate. Specific valuation allowances are established or partial charge-offs are recorded for the difference between the loan amount and the estimated fair value. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs as well as the total hold period, is used to calculate an anticipated fair value.
General reserves for collective impairment are based on estimated incurred losses related to non-impaired commercial loans and leases as of the balance sheet date. Incurred loss estimates for the originated commercial segment are based on average loss rates, which are estimated using historical experience and current risk mix as indicated by the risk grading process. Incurred loss estimates may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends including credit quality, concentrations, aging of the portfolio and significant policy and underwriting changes.

10

Common risks to each class of commercial loans include general economic conditions within the markets BancShares serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status and reductions in the value of collateral. Due to the concentration of loans in the medical, dental and related fields, BancShares is susceptible to risks that legislative and governmental actions will fundamentally alter the economic structure of the medical care industry in the United States.
In addition to these common risks for the majority of the originated commercial segment, additional risks are inherent in certain classes of originated commercial loans and leases.
Commercial construction and land development
Commercial construction and land development loans are highly dependent on the supply and demand for commercial real estate in the markets served by BancShares as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.
Commercial mortgage, commercial and industrial and lease financing
Commercial mortgage and commercial and industrial loans and lease financing are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer's business results are significantly unfavorable versus the original projections, the ability for the loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Other commercial real estate
Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.
Originated Noncommercial Loans and Leases
Each originated noncommercial loan is centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated.
The ALLL for the originated noncommercial segment is primarily calculated on a pool basis using a delinquency-based approach. Estimates of incurred losses are based on historical loss experience and the current risk mix as indicated by prevailing delinquency rates. These estimates may be adjusted through a qualitative assessment to reflect current economic conditions, portfolio trends and other factors. The remaining portion of the ALLL related to the originated noncommercial segment results from loans that are deemed impaired. The impairment assessment and determination of the related specific reserve for each impaired loan is based on a loan's characteristics. Impairment measurement for loans that are not collateral dependent is based on the present value of expected cash flows discounted at the loan's effective interest rate. Specific valuation allowances are established or partial charge-offs are recorded for the difference between the loan amount and the estimated fair value. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs as well as the total hold period, is used to calculate an anticipated fair value.
Common risks to each class of noncommercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BancShares serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to noncommercial loans.
In addition to these common risks for the majority of noncommercial loans, additional risks are inherent in certain classes of noncommercial loans.

11

Revolving mortgage
Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies, disputes with first lienholders and uncertainty regarding the customer's performance with respect to the first lien that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer
The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination, potentially in excess of principal balances.
Residential mortgage and noncommercial construction and land development
Residential mortgage and noncommercial construction and land development loans are made to individuals and are typically secured by 1-4 family residential property, undeveloped land and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Noncommercial construction and land development projects can experience delays in completion and cost overruns that exceed the borrower's financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.
Acquired loans
The risks associated with acquired loans are generally consistent with the risks identified for commercial and noncommercial originated loans and the classes of loans within those segments. However, these loans were underwritten by other institutions with weaker lending standards. Additionally, in some cases, collateral for acquired loans is located in regions that have experienced profound erosion of real estate values. Therefore, there is a significant risk that acquired loans are not adequately supported by borrower cash flow or the values of underlying collateral.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probable losses related to unfunded lending commitments, such as letters of credit and financial guarantees. The reserve is calculated in a manner similar to the loans evaluated collectively for impairment, considering the likelihood that the available credit will be utilized as well as the exposure to default. The reserve for unfunded commitments is presented within other liabilities on the consolidated balance sheets separately from the ALLL and adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.

Recent Accounting and Regulatory Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU ) 2013-11, “Income Taxes (Topic 740)”

This ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require BancShares to use, and BancShares does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.
The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted.
The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. BancShares will adopt this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

12


FASB ASU 2013-10, “Derivatives and Hedging (Topic 815)"

This ASU permits the use of the Fed Funds Effective Swap Rate (OIS) by BancShares as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to United States Treasury (UST) and London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges.
The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. BancShares will adopt this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-04, “Liabilities”

This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.
The guidance requires BancShares to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.
The amendments in this update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. BancShares will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

This ASU requires BancShares to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, BancShares is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.
For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations. BancShares has included the required disclosures in Note L.

FASB ASU 2013-01, “Balance Sheet”

This ASU's objective is to clarify that the scope of ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement.
BancShares is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The effective date is the same as the effective date of Update 2011-11. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.



13

Note B
Investments
The aggregate values of investment securities at June 30, 2013, December 31, 2012, and June 30, 2012, along with unrealized gains and losses determined on an individual security basis are as follows:
 
 
Cost
 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
 
(dollars in thousands)
Investment securities available for sale
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
U. S. Treasury
$
598,625

 
$
248

 
$
207

 
$
598,666

Government agency
2,725,227

 
1,531

 
5,379

 
2,721,379

Mortgage-backed securities
1,866,204

 
4,931

 
27,812

 
1,843,323

Equity securities
543

 
20,050

 
—

 
20,593

State, county and municipal
186

 
1

 
—

 
187

Other
850

 
1

 
23

 
828

Total investment securities available for sale
$
5,191,635

 
$
26,762

 
$
33,421

 
$
5,184,976

December 31, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
823,241

 
$
403

 
$
12

 
$
823,632

Government agency
3,052,040

 
3,501

 
337

 
3,055,204

Mortgage-backed securities
1,315,211

 
14,787

 
341

 
1,329,657

Equity securities
543

 
15,822

 
—

 
16,365

State, county and municipal
546

 
4

 
—

 
550

Other
838

 
—

 
18

 
820

Total investment securities available for sale
$
5,192,419

 
$
34,517

 
$
708

 
$
5,226,228

June 30, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
878,692

 
$
149

 
$
156

 
$
878,685

Government agency
2,976,079

 
2,684

 
565

 
2,978,198

Corporate bonds
49,987

 
459

 
—

 
50,446

Mortgage-backed securities
699,468

 
9,022

 
845

 
707,645

Equity securities
841

 
17,397

 
—

 
18,238

State, county and municipal
1,026

 
10

 
—

 
1,036

Total investment securities available for sale
$
4,606,093

 
$
29,721

 
$
1,566

 
$
4,634,248

Investment securities held to maturity
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,130

 
$
97

 
$
27

 
$
1,200

December 31, 2012
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,342

 
$
133

 
$
27

 
$
1,448

June 30, 2012
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,578

 
$
163

 
$
27

 
$
1,714

 
 
 
 
 
 
 
 

Investments in mortgage-backed securities primarily represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

Investments in corporate bonds represent debt securities issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.


14

The following table provides the expected maturity distribution for mortgage-backed securities and the contractual maturity distribution of other investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
(dollars in thousands)
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,139,800

 
$
2,137,724

 
$
2,288,556

 
$
2,289,859

 
$
2,424,304

 
$
2,425,612

One through five years
2,255,416

 
2,243,828

 
2,323,222

 
2,329,207

 
1,953,001

 
1,954,357

Five through 10 years
337,666

 
331,321

 
194,398

 
196,371

 
71,914

 
72,533

Over 10 years
458,210

 
451,510

 
385,700

 
394,426

 
156,033

 
163,508

Equity securities
543

 
20,593

 
543

 
16,365

 
841

 
18,238

Total investment securities available for sale
$
5,191,635

 
$
5,184,976

 
$
5,192,419

 
$
5,226,228

 
$
4,606,093

 
$
4,634,248

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
1,040

 
$
1,074

 
$
1,242

 
$
1,309

 
$
1,470

 
$
1,568

Five through 10 years
14

 
6

 
18

 
11

 
4

 
4

Over 10 years
76

 
120

 
82

 
128

 
104

 
142

Total investment securities held to maturity
$
1,130

 
$
1,200

 
$
1,342

 
$
1,448

 
$
1,578

 
$
1,714



For each period presented, securities gains (losses) include the following:
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Gross gains on sales of investment securities available for sale
$
—

 
$
5

 
$
—

 
$
5

Gross losses on sales of investment securities available for sale
—

 
(2
)
 
—

 
(2
)
Other than temporary impairment loss on equity securities
—

 
—

 
—

 
(45
)
Total securities gains (losses)
$
—

 
$
3

 
$
—

 
$
(42
)


15

The following table provides information regarding securities with unrealized losses as of June 30, 2013, December 31, 2012, and June 30, 2012:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
76,846

 
$
207

 
$
—

 
$
—

 
$
76,846

 
$
207

Government agency
1,656,424

 
5,379

 
—

 
—

 
1,656,424

 
5,379

Mortgage-backed securities
1,481,083

 
26,961

 
31,766

 
851

 
1,512,849

 
27,812

Other
828

 
23

 
—

 
—

 
828

 
23

Total
$
3,215,181

 
$
32,570

 
$
31,766

 
$
851

 
$
3,246,947

 
$
33,421

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
$
—

 
$
15

 
$
27

 
$
15

 
$
27

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
120,045

 
$
12

 
$
—

 
$
—

 
$
120,045

 
$
12

Government agency
407,498

 
337

 
—

 
—

 
407,498

 
337

Mortgage-backed securities
135,880

 
214

 
9,433

 
127

 
145,313

 
341

Other
820

 
18

 
—

 
—

 
820

 
18

Total
$
664,243

 
$
581

 
$
9,433

 
$
127

 
$
673,676

 
$
708

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
$
—

 
$
17

 
$
27

 
$
17

 
$
27

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
528,579

 
$
156

 
$
—

 
$
—

 
$
528,579

 
$
156

Government agency
818,772

 
565

 
—

 
—

 
818,772

 
565

Mortgage-backed securities
292,053

 
808

 
1,668

 
37

 
293,721

 
845

State, county and municipal
—

 
—

 
10

 
—

 
10

 
—

Total
$
1,639,404

 
$
1,529

 
$
1,678

 
$
37

 
$
1,641,082

 
$
1,566

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
$
—

 
$
19

 
$
27

 
$
19

 
$
27

Investment securities with an aggregate fair value of $31,781 have had continuous unrealized losses for more than 12 months as of June 30, 2013, with an aggregate unrealized loss of $878. These 31 investments are mortgage-backed securities. None of the unrealized losses identified as of June 30, 2013, December 31, 2012, or June 30, 2012, relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. For all periods presented, BancShares had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.
Investment securities having an aggregate carrying value of $2,425,876 at June 30, 2013, $2,351,072 at December 31, 2012, and $2,432,638 at June 30, 2012, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.





16


Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
(dollars in thousands)
Acquired loans
$
1,443,336

 
$
1,809,235

 
$
1,999,351

Originated loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
305,789

 
309,190

 
329,151

Commercial mortgage
6,135,068

 
6,029,435

 
5,883,116

Other commercial real estate
176,031

 
160,980

 
162,579

Commercial and industrial
997,504

 
1,038,530

 
989,341

Lease financing
352,818

 
330,679

 
320,703

Other
172,861

 
125,681

 
140,738

Total commercial loans
8,140,071

 
7,994,495

 
7,825,628

Noncommercial:
 
 
 
 
 
Residential mortgage
884,020

 
822,889

 
809,230

Revolving mortgage
2,123,814

 
2,210,133

 
2,268,210

Construction and land development
119,253

 
131,992

 
127,726

Consumer
388,311

 
416,606

 
431,664

Total noncommercial loans
3,515,398

 
3,581,620

 
3,636,830

Total originated loans and leases
11,655,469

 
11,576,115

 
11,462,458

Total loans and leases
$
13,098,805

 
$
13,385,350

 
$
13,461,809

 


17

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Impaired at
acquisition
date
 
All other
acquired loans
 
Total
 
Impaired at
acquisition
date
 
All other
acquired loans
 
Total
 
Impaired at
acquisition
date
 
All other
acquired loans
 
Total
 
(dollars in thousands)
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
41,572

 
$
119,161

 
$
160,733

 
$
71,225

 
$
166,681

 
$
237,906

 
$
86,056

 
$
186,389

 
$
272,445

Commercial mortgage
90,910

 
768,128

 
859,038

 
107,281

 
947,192

 
1,054,473

 
121,580

 
1,021,097

 
1,142,677

Other commercial real estate
23,716

 
58,188

 
81,904

 
35,369

 
71,750

 
107,119

 
29,199

 
86,588

 
115,787

Commercial and industrial
6,429

 
30,907

 
37,336

 
3,932

 
45,531

 
49,463

 
4,771

 
61,671

 
66,442

Other
—

 
1,018

 
1,018

 
—

 
1,074

 
1,074

 
—

 
1,228

 
1,228

Total commercial loans
162,627

 
977,402

 
1,140,029

 
217,807

 
1,232,228

 
1,450,035

 
241,606

 
1,356,973

 
1,598,579

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
36,740

 
220,232

 
256,972

 
48,077

 
249,849

 
297,926

 
55,585

 
266,468

 
322,053

Revolving mortgage
9,493

 
26,660

 
36,153

 
9,606

 
29,104

 
38,710

 
8,286

 
28,824

 
37,110

Construction and land development
8,616

 
393

 
9,009

 
15,136

 
5,657

 
20,793

 
31,767

 
7,527

 
39,294

Consumer
—

 
1,173

 
1,173

 
—

 
1,771

 
1,771

 
404

 
1,911

 
2,315

Total noncommercial loans
54,849

 
248,458

 
303,307

 
72,819

 
286,381

 
359,200

 
96,042

 
304,730

 
400,772

Total acquired loans
$
217,476

 
$
1,225,860

 
$
1,443,336

 
$
290,626

 
$
1,518,609

 
$
1,809,235

 
$
337,648

 
$
1,661,703

 
$
1,999,351



At June 30, 2013, $2,520,435 in originated loans were pledged to secure debt obligations, compared to $2,570,773 at December 31, 2012, and $2,451,827 at June 30, 2012.

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. Originated commercial loans and leases, originated noncommercial loans and leases and acquired loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.

The credit quality indicators for originated commercial loans and leases and all acquired loans and leases are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. 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.


18

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 no 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 effected 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 originated, ungraded loans at June 30, 2013, relate to business credit cards and tobacco buyout loans classified as commercial and industrial loans. Business credit card loans with an outstanding balance of $78,178 at June 30, 2013, are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $21,556 at June 30, 2013, are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are made by the Commodity Credit Corporation, which is part of the United States Department of Agriculture.

The credit quality indicators for originated, noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.


19

The composition of the loans and leases outstanding at June 30, 2013, December 31, 2012, and June 30, 2012, by credit quality indicator is provided below:
 
 
Originated commercial loans and leases
Grade:
Construction  and land
development
 
Commercial
mortgage
 
Other
commercial real estate
 
Commercial  and
industrial
 
Lease financing
 
Other
 
Total originated commercial loans and leases
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
283,342

 
$
5,833,551

 
$
170,071

 
$
874,336

 
$
345,443

 
$
171,332

 
$
7,678,075

Special mention
12,567

 
132,787

 
1,529

 
8,047

 
2,625

 
1,529

 
159,084

Substandard
9,827

 
157,689

 
4,125

 
12,025

 
4,000

 
—

 
187,666

Doubtful
53

 
9,048

 
80

 
2,156

 
750

 
—

 
12,087

Ungraded
—

 
1,993

 
226

 
100,940

 
—

 
—

 
103,159

Total
$
305,789

 
$
6,135,068

 
$
176,031

 
$
997,504

 
$
352,818

 
$
172,861

 
$
8,140,071

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
274,480

 
$
5,688,541

 
$
151,549

 
$
894,998

 
$
325,626

 
$
124,083

 
$
7,459,277

Special mention
14,666

 
166,882

 
2,812

 
13,275

 
1,601

 
837

 
200,073

Substandard
18,761

 
157,966

 
5,038

 
12,073

 
1,663

 
756

 
196,257

Doubtful
952

 
13,475

 
98

 
1,040

 
771

 
—

 
16,336

Ungraded
331

 
2,571

 
1,483

 
117,144

 
1,018

 
5

 
122,552

Total
$
309,190

 
$
6,029,435

 
$
160,980

 
$
1,038,530

 
$
330,679

 
$
125,681

 
$
7,994,495

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
289,974

 
$
5,488,595

 
$
149,977

 
$
832,372

 
$
315,119

 
$
139,722

 
$
7,215,759

Special mention
10,353

 
227,233

 
6,220

 
17,284

 
2,740

 
257

 
264,087

Substandard
27,266

 
146,806

 
5,821

 
15,109

 
1,867

 
742

 
197,611

Doubtful
1,232

 
13,660

 
265

 
1,457

 
517

 
—

 
17,131

Ungraded
326

 
6,822