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 buildings 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 residential farms and other improvements) and multifamily (5 or more) residential properties.

Commercial and industrial – Commercial and industrial consists of loans or 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 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 consist of residential and revolving mortgage, construction and land development, and consumer loans.

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 September 30, 2014 and December 31, 2013:



(Dollars in thousands)	September 30, 2014		December 31, 2013
Acquired loans
Commercial:
Construction and land development	$	59,808	$	78,915
Commercial mortgage	579,435		642,891
Other commercial real estate	36,043		41,381
Commercial and industrial	25,813		17,254
Other	1,662		866
Total commercial loans	702,761		781,307
Noncommercial:
Residential mortgage	240,681		213,851
Revolving mortgage	50,048		30,834
Construction and land development	1,144		2,583
Consumer	1,646		851
Total noncommercial loans	293,519		248,119
Total acquired loans	996,280		1,029,426
Originated loans and leases:
Commercial:
Construction and land development	382,775		319,847
Commercial mortgage	6,475,366		6,362,490
Other commercial real estate	177,681		178,754
Commercial and industrial	1,359,945		1,081,158
Lease financing	443,318		381,763
Other	213,224		175,336
Total commercial loans	9,052,309		8,499,348
Noncommercial:
Residential mortgage	1,141,049		982,421
Revolving mortgage	2,120,167		2,113,285
Construction and land development	117,209		122,792
Consumer	375,777		386,452
Total noncommercial loans	3,754,202		3,604,950
Total originated loans and leases	12,806,511		12,104,298
Total loans and leases	$	13,802,791	$	13,133,724

At September 30, 2014, $467.9 million in acquired loans were covered under loss share agreements, compared to $1.03 billion at December 31, 2013. The remaining acquired loans at September 30, 2014 are primarily related to loans from the 1st Financial merger or with expired loss share agreements. The loss share protection expired 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 balances at September 30, 2014 for the expired agreements from TVB and VB are $191.7 million and $64.4 million, respectively. During the first quarter of 2015, the loss share protection will expire for non-single family residential loans acquired from Sun American Bank (SAB) and all loans acquired from First Regional Bank (FRB). The acquired loan balance at September 30, 2014 for the agreements from SAB and FRB are $50.8 million and $80.3 million, respectively. We will process all necessary filings in accordance with the agreements before expiration to collect the earned loss share receivables.

At September 30, 2014, $2.70 billion in originated loans with a lendable collateral value of $1.47 billion are used to secure $240.3 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $1.23 billion, compared to $2.56 billion in originated loans with a lendable collateral value of $1.38 billion used to secure $240.3 million in FHLB of Atlanta advances, resulting additional borrowing capacity of $1.14 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 developed through a review of individual borrowers on an ongoing basis. 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 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 September 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 September 30, 2014, ungraded also includes $91.5 million of loans resulting from the 1st Financial merger.

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



	September 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	$	371,835	$	6,218,527	$	174,039	$	1,253,945	$	434,915	$	213,184	$	8,666,445
Special mention	6,028		112,342		889		19,804		4,783		—		143,846
Substandard	4,912		140,703		2,590		5,461		3,204		40		156,910
Doubtful	—		2,494		—		19		399		—		2,912
Ungraded	—		1,300		163		80,716		17		—		82,196
Total	$	382,775	$	6,475,366	$	177,681	$	1,359,945	$	443,318	$	213,224	$	9,052,309

	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



	September 30, 2014
	Originated noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total originated noncommercial loans
Current	$	1,111,371	$	2,104,212	$	116,377	$	372,348	$	3,704,308
30-59 days past due	18,528		8,941		458		2,045		29,972
60-89 days past due	3,380		2,064		117		828		6,389
90 days or greater past due	7,770		4,950		257		556		13,533
Total	$	1,141,049	$	2,120,167	$	117,209	$	375,777	$	3,754,202

	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 September 30, 2014 and December 31, 2013 by credit quality indicator are provided below:



	September 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	$	7,883	$	318,221	$	11,249	$	20,208	$	131,302	$	22,811	$	70	$	1,416	$	513,160
Special mention	5,669		103,276		16,005		2,685		4,148		3,396		—		—		135,179
Substandard	40,876		144,810		8,789		2,767		32,636		2,588		50		240		232,756
Doubtful	2,766		12,737		—		153		771		965		294		—		17,686
Ungraded	2,614		391		—		—		71,824		20,288		730		1,652		97,499
Total	$	59,808	$	579,435	$	36,043	$	25,813	$	240,681	$	50,048	$	1,144	$	3,308	$	996,280

	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 September 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.



	September 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	$	379	$	13	$	313	$	705	$	382,070	$	382,775
Commercial mortgage	11,337		4,536		11,009		26,882		6,448,484		6,475,366
Other commercial real estate	808		67		—		875		176,806		177,681
Commercial and industrial	5,366		634		845		6,845		1,353,100		1,359,945
Lease financing	527		322		513		1,362		441,956		443,318
Other	—		—		—		—		213,224		213,224
Residential mortgage	18,528		3,380		7,770		29,678		1,111,371		1,141,049
Revolving mortgage	8,941		2,064		4,950		15,955		2,104,212		2,120,167
Construction and land development - noncommercial	458		117		257		832		116,377		117,209
Consumer	2,045		828		556		3,429		372,348		375,777
Total originated loans and leases	$	48,389	$	11,961	$	26,213	$	86,563	$	12,719,948	$	12,806,511

	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 September 30, 2014 and December 31, 2013 (excluding acquired loans and leases) are as follows:



	September 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	$	258	$	110	$	544	$	—
Other commercial real estate	1,401		—		1,610		—
Commercial mortgage	30,279		2,160		33,529		1,113
Commercial and industrial	1,696		111		1,428		294
Lease financing	410		513		832		—
Residential mortgage	13,713		1,870		14,701		1,998
Revolving mortgage	—		4,950		—		4,450
Construction and land development - noncommercial	—		257		457		256
Consumer	21		556		69		673
Total originated loans and leases	$	47,778	$	10,527	$	53,170	$	8,784

Acquired Loans

The following table provides changes in the recorded investment of acquired loans during the nine months ended September 30, 2014 and September 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	89,775			179,792
Payments received and other changes, net	(439,248		)	(800,746		)
Balance at September 30	$	996,280		$	1,188,281
Unpaid principal balance at September 30	$	1,754,882		$	2,082,873

The recorded investment of acquired loans on the cost recovery method was $36.8 million at September 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 of 2014. 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 nine months of 2014 and 2013.



(Dollars in thousands)	2014			2013
Balance at January 1	$	439,990		$	539,564
Additions	84,295			—
Accretion	(89,775		)	(179,792		)
Reclassifications from nonaccretable difference	1,374			61,689
Changes in expected cash flows that do not affect nonaccretable difference	(22,068		)	45,611
Balance at September 30	$	413,816		$	467,072