LOANS AND LEASES

BancShares reports acquired and originated loan portfolios separately, and each portfolio is further divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

Commercial – Commercial loans include construction and land development, mortgage, other commercial real estate, commercial and industrial, lease financing and other.

Construction and land development – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise, multifamily apartments and other commercial building that may be owner-occupied or income generating investments for the owner.

Commercial mortgage – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.

Other commercial real estate – Other commercial real estate consists of loans secured by farmland (including farm residential and other improvements) and multifamily (5 or more) residential properties.

Commercial and industrial – Commercial and industrial loans consists of lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.

Lease financing – Lease financing consists solely of lease financing agreements.

Other – Other loans consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations.

Noncommercial – Noncommercial loans consist of residential and revolving mortgage, construction and land development, and consumer.

Residential mortgage – Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.

Revolving mortgage – Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.

Construction and land development – Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.

Consumer – Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements and revolving lines of credit that can be secured or unsecured, including personal credit cards.

Loans and leases outstanding include the following at June 30, 2014 and December 31, 2013:



(Dollars in thousands)	June 30, 2014		December 31, 2013
Acquired loans
Commercial:
Construction and land development	$	80,827	$	78,915
Commercial mortgage	637,481		642,891
Other commercial real estate	34,688		41,381
Commercial and industrial	33,851		17,254
Other	1,270		866
Total commercial loans	788,117		781,307
Noncommercial:
Residential mortgage	270,688		213,851
Revolving mortgage	20,129		30,834
Construction and land development	28,759		2,583
Consumer	2,240		851
Total noncommercial loans	321,816		248,119
Total acquired loans	1,109,933		1,029,426
Originated loans and leases:
Commercial:
Construction and land development	342,021		319,847
Commercial mortgage	6,367,096		6,362,490
Other commercial real estate	178,899		178,754
Commercial and industrial	1,292,213		1,081,158
Lease financing	413,422		381,763
Other	131,051		175,336
Total commercial loans	8,724,702		8,499,348
Noncommercial:
Residential mortgage	1,071,089		982,421
Revolving mortgage	2,122,675		2,113,285
Construction and land development	119,420		122,792
Consumer	377,137		386,452
Total noncommercial loans	3,690,321		3,604,950
Total originated loans and leases	12,415,023		12,104,298
Total loans and leases	$	13,524,956	$	13,133,724

At June 30, 2014, $816.3 million in acquired loans were covered under loss share agreements, compared to $1.03 billion at December 31, 2013. The remaining acquired loans as of June 30, 2014 are primarily from the 1st Financial merger. The loss share protection will expire for non-single family residential loans acquired from Temecula Valley Bank (TVB) and Venture Bank (VB) during the third quarter of 2014. The acquired loan balance at June 30, 2014 for the expiring agreements from TVB and VB is $195.4 million and $73.3 million, respectively.

At June 30, 2014, $2.65 billion in originated loans were pledged to secure debt obligations, compared to $2.56 billion at December 31, 2013.

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 unique characteristics relative to each loan segment being evaluated.

The credit quality indicators for commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Each commercial loan is evaluated annually with more frequent evaluation of more severely criticized loans or leases. The credit quality indicators for noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. Acquired loans are bifurcated into commercial and noncommercial segments and credit quality indicators are assigned in the same manner as the originated portfolio. 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 one in which repayment is considered highly likely and there are no observable weaknesses in the asset. Such an asset does not meet any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to 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, 2014 and December 31, 2013 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage loans and other commercial real estate loans. As of December 31, 2013, ungraded loans also included tobacco buyout loans classified as commercial and industrial loans. Final payment from the Commodity Credit Corporation was received during January 2014 for tobacco buyout loans held by FCB. As of June 30, 2014, ungraded also includes $94.7 million of loans resulting from the 1st Financial merger.

Originated loans and leases outstanding at June 30, 2014 and December 31, 2013 by credit quality indicator are provided below:



	June 30, 2014
(Dollars in thousands)	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
Pass	$	330,946	$	6,102,219	$	175,413	$	1,178,124	$	405,495	$	130,997	$	8,323,194
Special mention	7,901		121,824		1,370		25,606		4,324		8		161,033
Substandard	3,174		138,451		1,966		6,474		3,122		46		153,233
Doubtful	—		3,296		—		460		481		—		4,237
Ungraded	—		1,306		150		81,549		—		—		83,005
Total	$	342,021	$	6,367,096	$	178,899	$	1,292,213	$	413,422	$	131,051	$	8,724,702

	December 31, 2013
	Originated commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total originated commercial loans and leases
Pass	$	308,231	$	6,094,505	$	174,913	$	964,840	$	375,371	$	174,314	$	8,092,174
Special mention	8,620		119,515		1,362		14,686		2,160		982		147,325
Substandard	2,944		141,913		2,216		6,352		3,491		40		156,956
Doubtful	52		5,159		75		144		592		—		6,022
Ungraded	—		1,398		188		95,136		149		—		96,871
Total	$	319,847	$	6,362,490	$	178,754	$	1,081,158	$	381,763	$	175,336	$	8,499,348



	June 30, 2014
	Originated noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total originated noncommercial loans
Current	$	1,047,270	$	2,107,889	$	118,078	$	373,579	$	3,646,816
30-59 days past due	11,219		7,690		949		1,949		21,807
60-89 days past due	4,693		2,434		229		843		8,199
90 days or greater past due	7,907		4,662		164		766		13,499
Total	$	1,071,089	$	2,122,675	$	119,420	$	377,137	$	3,690,321

	December 31, 2013
	Originated noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total originated noncommercial loans
Current	$	955,300	$	2,095,480	$	121,026	$	382,710	$	3,554,516
30-59 days past due	12,885		10,977		1,193		2,114		27,169
60-89 days past due	4,658		2,378		317		955		8,308
90 days or greater past due	9,578		4,450		256		673		14,957
Total	$	982,421	$	2,113,285	$	122,792	$	386,452	$	3,604,950

Acquired loans and leases outstanding at June 30, 2014 and December 31, 2013 by credit quality indicator are provided below:



	June 30, 2014
(Dollars in thousands)	Acquired loans
Grade:	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Construction and land development - noncommercial		Consumer and other		Total acquired loans
Pass	$	14,193	$	349,009	$	11,422	$	26,313	$	138,836	$	15,238	$	112	$	1,469	$	556,592
Special mention	10,957		106,582		16,014		3,869		5,543		2,375		—		—		145,340
Substandard	49,746		148,880		7,252		3,221		44,396		1,696		1,237		2		256,430
Doubtful	2,214		32,503		—		431		1,401		612		295		—		37,456
Ungraded	3,717		507		—		17		80,512		208		27,115		2,039		114,115
Total	$	80,827	$	637,481	$	34,688	$	33,851	$	270,688	$	20,129	$	28,759	$	3,510	$	1,109,933

	December 31, 2013
	Acquired loans
	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Construction and land development - noncommercial		Consumer and other		Total acquired loans
Pass	$	2,619	$	296,824	$	22,225	$	8,021	$	135,326	$	26,322	$	149	$	1,345	$	492,831
Special mention	15,530		125,295		3,431		2,585		6,301		2,608		—		—		155,750
Substandard	52,228		179,657		7,012		5,225		52,774		1,013		2,139		—		300,048
Doubtful	7,436		40,471		8,713		1,257		2,058		891		295		—		61,121
Ungraded	1,102		644		—		166		17,392		—		—		372		19,676
Total	$	78,915	$	642,891	$	41,381	$	17,254	$	213,851	$	30,834	$	2,583	$	1,717	$	1,029,426

The aging of the outstanding loans and leases, by class, at June 30, 2014 and December 31, 2013 (excluding loans and leases acquired with deteriorated credit quality) is provided in the table below.

The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.



	June 30, 2014
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Originated loans and leases:
Construction and land development - commercial	$	657	$	40	$	462	$	1,159	$	340,862	$	342,021
Commercial mortgage	11,755		3,089		10,501		25,345		6,341,751		6,367,096
Other commercial real estate	149		—		52		201		178,698		178,899
Commercial and industrial	5,459		805		593		6,857		1,285,356		1,292,213
Lease financing	1,110		8		97		1,215		412,207		413,422
Other	343		—		—		343		130,708		131,051
Residential mortgage	11,219		4,693		7,907		23,819		1,047,270		1,071,089
Revolving mortgage	7,690		2,434		4,662		14,786		2,107,889		2,122,675
Construction and land development - noncommercial	949		229		164		1,342		118,078		119,420
Consumer	1,949		843		766		3,558		373,579		377,137
Total originated loans and leases	$	41,280	$	12,141	$	25,204	$	78,625	$	12,336,398	$	12,415,023

	December 31, 2013
	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Originated loans and leases:
Construction and land development - commercial	$	1,603	$	9	$	457	$	2,069	$	317,778	$	319,847
Commercial mortgage	11,131		3,601		14,407		29,139		6,333,351		6,362,490
Other commercial real estate	139		210		470		819		177,935		178,754
Commercial and industrial	3,336		682		436		4,454		1,076,704		1,081,158
Lease financing	789		1,341		101		2,231		379,532		381,763
Other	—		85		—		85		175,251		175,336
Residential mortgage	12,885		4,658		9,578		27,121		955,300		982,421
Revolving mortgage	10,977		2,378		4,450		17,805		2,095,480		2,113,285
Construction and land development - noncommercial	1,193		317		256		1,766		121,026		122,792
Consumer	2,114		955		673		3,742		382,710		386,452
Total originated loans and leases	$	44,167	$	14,236	$	30,828	$	89,231	$	12,015,067	$	12,104,298

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at June 30, 2014 and December 31, 2013 (excluding acquired loans and leases) are as follows:



	June 30, 2014				December 31, 2013
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Originated loans and leases:
Construction and land development - commercial	$	659	$	—	$	544	$	—
Other commercial real estate	1,385		41		1,610		—
Commercial mortgage	28,591		1,802		33,529		1,113
Commercial and industrial	1,367		502		1,428		294
Lease financing	624		5		832		—
Residential mortgage	13,836		1,930		14,701		1,998
Revolving mortgage	—		4,662		—		4,450
Construction and land development - noncommercial	—		164		457		256
Consumer	23		766		69		673
Total originated loans and leases	$	46,485	$	9,872	$	53,170	$	8,784

Acquired Loans

The following table provides changes in the recorded investment of acquired loans during the six months ended June 30, 2014 and June 30, 2013:



(Dollars in thousands)	2014			2013
Balance at January 1	$	1,029,426		$	1,809,235
Fair value of acquired loans	316,327			—
Accretion	60,660			131,909
Payments received and other changes, net	(296,480		)	(497,808		)
Balance at June 30	$	1,109,933		$	1,443,336
Outstanding principal balance at June 30	$	1,888,475		$	2,456,347

The recorded investment of acquired loans on the cost recovery method was $54.0 million at June 30, 2014 and $28.5 million at December 31, 2013. This increase is primarily driven by one large acquired loan relationship that was moved to cost recovery during the first quarter. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the timing and amount of ultimate disposition of the asset.

The following table documents changes to the amount of accretable yield for the first six months of 2014 and 2013.



(Dollars in thousands)	2014			2013
Balance at January 1	$	439,990		$	539,564
Additions	84,295			—
Accretion	(60,660		)	(131,909		)
Reclassifications from nonaccretable difference	9,992			72,149
Changes in expected cash flows that do not affect nonaccretable difference	(17,126		)	42,402
Balance at June 30	$	456,491		$	522,206