FCNCA_10Q_09.30.2013
Table of Contents

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 September 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 November 7, 2013)

Table of Contents

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

2
Table of Contents

Part 1
 
Item 1.
Financial Statements (Unaudited)


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
September 30*
2013
 
December 31#
2012
 
 
(dollars in thousands, except share data)
Assets
 
 
 
 
Cash and due from banks
$
569,118

 
$
639,730

 
Overnight investments
1,354,131

 
443,180

 
Investment securities available for sale
5,161,585

 
5,226,228

 
Investment securities held to maturity
1,013

 
1,342

 
Loans held for sale
43,054

 
86,333

 
Loans and leases:
 
 
 
 
Acquired
1,188,281

 
1,809,235

 
Originated
11,884,585

 
11,576,115

 
Less allowance for loan and lease losses
237,799

 
319,018

 
Net loans and leases
12,835,067

 
13,066,332

 
Premises and equipment
868,001

 
882,768

 
Other real estate owned:
 
 
 
 
Covered under loss share agreements
58,769

 
102,577

 
Not covered under loss share agreements
40,338

 
43,513

 
Income earned not collected
46,110

 
47,666

 
Receivable from FDIC for loss share agreements
100,553

 
270,192

 
Goodwill
102,625

 
102,625

 
Other intangible assets
1,696

 
3,556

 
Other assets
329,292

 
367,610

 
Total assets
$
21,511,352

 
$
21,283,652

 
Liabilities
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
$
5,323,051

 
$
4,885,700

 
Interest-bearing
12,740,268

 
13,200,325

 
Total deposits
18,063,319

 
18,086,025

 
Short-term borrowings
604,435

 
568,505

 
Long-term obligations
510,963

 
444,921

 
Payable to FDIC for loss share agreements
107,419

 
101,641

 
Other liabilities
243,159

 
218,553

 
Total liabilities
19,529,295

 
19,419,645

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

 
8,588

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

 
1,033

 
Surplus
143,766

 
143,766

 
Retained earnings
1,924,217

 
1,792,726

 
Accumulated other comprehensive loss
(95,545
)
 
(82,106
)
 
Total shareholders’ equity
1,982,057

 
1,864,007

 
Total liabilities and shareholders’ equity
$
21,511,352

 
$
21,283,652

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

3
Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except per share data, unaudited)
Interest income
 
 
 
 
 
 
 
Loans and leases
$
182,201

 
$
226,812

 
$
579,115

 
$
696,813

Investment securities:
 
 
 
 
 
 
 
U. S. Treasury
392

 
559

 
1,355

 
1,968

Government agency
2,809

 
3,692

 
9,203

 
12,401

Mortgage-backed securities
6,415

 
4,792

 
15,500

 
8,883

Corporate bonds
—

 
278

 
—

 
2,319

State, county and municipal
2

 
6

 
10

 
30

Other
78

 
108

 
231

 
301

Total investment securities interest and dividend income
9,696

 
9,435

 
26,299

 
25,902

Overnight investments
737

 
427

 
1,750

 
1,230

Total interest income
192,634

 
236,674

 
607,164

 
723,945

Interest expense
 
 
 
 
 
 
 
Deposits
7,923

 
13,850

 
27,233

 
45,369

Short-term borrowings
744

 
1,114

 
2,128

 
4,089

Long-term obligations
4,784

 
6,354

 
14,210

 
22,747

Total interest expense
13,451

 
21,318

 
43,571

 
72,205

Net interest income
179,183

 
215,356

 
563,593

 
651,740

Provision for loan and lease losses
(7,683
)
 
17,623

 
(39,531
)
 
78,005

Net interest income after provision for loan and lease losses
186,866

 
197,733

 
603,124

 
573,735

Noninterest income
 
 
 
 
 
 
 
Cardholder services
12,791

 
11,505

 
35,887

 
33,540

Merchant services
14,887

 
13,220

 
42,619

 
38,332

Service charges on deposit accounts
15,546

 
15,549

 
45,428

 
45,456

Wealth management services
15,112

 
14,129

 
44,724

 
42,414

Fees from processing services
4,539

 
9,521

 
15,209

 
25,640

Securities gains (losses)
—

 
31

 
—

 
(11
)
Other service charges and fees
4,043

 
3,377

 
11,775

 
10,392

Mortgage income
2,277

 
1,619

 
9,734

 
4,718

Insurance commissions
2,772

 
2,568

 
8,146

 
7,562

ATM income
1,316

 
1,263

 
3,798

 
3,999

Adjustments to FDIC receivable for loss share agreements
(23,298
)
 
(16,858
)
 
(61,790
)
 
(57,788
)
Other
21,933

 
(4,082
)
 
38,896

 
1,827

Total noninterest income
71,918

 
51,842

 
194,426

 
156,081

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
76,463

 
76,675

 
228,384

 
229,145

Employee benefits
21,889

 
18,741

 
70,136

 
59,548

Occupancy expense
18,844

 
18,860

 
56,117

 
55,467

Equipment expense
18,822

 
17,983

 
56,466

 
54,147

FDIC insurance expense
2,706

 
2,016

 
7,795

 
7,739

Foreclosure-related expenses
4,287

 
7,255

 
12,059

 
27,248

Other
49,132

 
48,547

 
144,108

 
134,911

Total noninterest expense
192,143

 
190,077

 
575,065

 
568,205

Income before income taxes
66,641

 
59,498

 
222,485

 
161,611

Income taxes
25,659

 
19,974

 
82,012

 
49,009

Net income
$
40,982

 
$
39,524

 
$
140,473

 
$
112,602

Average shares outstanding
9,618,941

 
10,264,159

 
9,618,955

 
10,273,082

Net income per share
$
4.26

 
$
3.85

 
$
14.60

 
$
10.96


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

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


 
Three months ended September 30
 
Nine months ended September 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, unaudited)
Net income
$
40,982

 
$
39,524

 
$
140,473

 
$
112,602

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains and losses on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains and losses arising during period
3,470

 
14,783

 
(36,998
)
 
16,376

Deferred tax benefit (expense)
(1,177
)
 
(5,949
)
 
14,657

 
(6,582
)
Reclassification adjustment for gains included in income before income taxes
—

 
(31
)
 
—

 
(34
)
Deferred tax expense
—

 
12

 
—

 
13

Total change in unrealized gains and losses on securities, net of tax
2,293

 
8,815

 
(22,341
)
 
9,773

 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
 
 
 
 
Change in unrecognized loss on cash flow hedges
(544
)
 
(919
)
 
26

 
(2,750
)
Deferred tax benefit (expense)
214

 
364

 
(11
)
 
1,086

Reclassification adjustment for losses included in income before income taxes
831

 
769

 
2,463

 
2,294

Deferred tax benefit
(400
)
 
(304
)
 
(1,044
)
 
(906
)
Total change in unrecognized loss on cash flow hedges, net of tax
101

 
(90
)
 
1,434

 
(276
)
 
 
 
 
 
 
 
 
Change in pension obligation:
 
 
 
 
 
 
 
Reclassification adjustment for losses included in income before income taxes
4,298

 
2,788

 
12,896

 
8,368

Deferred tax benefit
(2,061
)
 
(1,092
)
 
(5,428
)
 
(3,277
)
Total change in pension obligation, net of tax
2,237

 
1,696

 
7,468

 
5,091

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
4,631

 
10,421

 
(13,439
)
 
14,588

 
 
 
 
 
 
 
 
Total comprehensive income
$
45,613

 
$
49,945

 
$
127,034

 
$
127,190

 
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

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
—

 
—

 
—

 
112,602

 
—

 
112,602

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
14,588

 
14,588

Repurchase of 15,497 shares of Class A common stock
(15
)
 
—

 
—

 
(2,520
)
 
—

 
(2,535
)
Repurchase of 12,875 shares of Class B common stock
—

 
(13
)
 
—

 
(2,401
)
 
—

 
(2,414
)
Cash dividends ($0.90 per share)
—

 
—

 
—

 
(9,245
)
 
—

 
(9,245
)
Balance at September 30, 2012
$
8,629

 
$
1,627

 
$
143,766

 
$
1,872,088

 
$
(51,986
)
 
$
1,974,124

Balance at December 31, 2012
$
8,588

 
$
1,033

 
$
143,766

 
$
1,792,726

 
$
(82,106
)
 
$
1,864,007

Net income
—

 
—

 
—

 
140,473

 
—

 
140,473

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(13,439
)
 
(13,439
)
Repurchase of 1,973 shares of Class A common stock
(2
)
 
—

 
—

 
(319
)
 
—

 
(321
)
Cash dividends ($0.90 per share)
—

 
—

 
—

 
(8,663
)
 
—

 
(8,663
)
Balance at September 30, 2013
$
8,586

 
$
1,033

 
$
143,766

 
$
1,924,217

 
$
(95,545
)
 
$
1,982,057

See accompanying Notes to Consolidated Financial Statements.


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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Nine months ended September 30
 
2013
 
2012
 
(dollars in thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
140,473

 
$
112,602

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
(39,531
)
 
78,005

Deferred tax expense (benefit)
(18,000
)
 
5,999

Change in current taxes payable
(37,737
)
 
23,051

Depreciation
52,212

 
50,685

Change in accrued interest payable
(3,302
)
 
(12,574
)
Change in income earned not collected
1,556

 
(9,349
)
Gain on sale of processing services, net
(4,085
)
 
—

Securities losses
—

 
11

Origination of loans held for sale
(323,665
)
 
(415,527
)
Proceeds from sale of loans held for sale
376,395

 
433,489

Gain on sale of loans
(9,451
)
 
(4,033
)
Net writedowns/losses on other real estate
4,574

 
31,070

Net amortization of premiums and discounts
(96,091
)
 
(90,461
)
FDIC receivable for loss share agreements
58,802

 
(15,240
)
Net change in other assets
107,757

 
26,617

Net change in other liabilities
56,440

 
5,316

Net cash provided by operating activities
266,347

 
219,661

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
364,916

 
592,015

Purchases of investment securities available for sale
(1,940,198
)
 
(4,241,879
)
Proceeds from maturities/calls of investment securities held to maturity
329

 
363

Proceeds from maturities/calls of investment securities available for sale
1,951,735

 
3,293,188

Proceeds from sales of investment securities available for sale
—

 
56

Net change in overnight investments
(910,951
)
 
(253,221
)
Cash received from the FDIC for loss share agreements
45,103

 
223,863

Proceeds from sale of other real estate
120,712

 
114,357

Additions to premises and equipment
(38,887
)
 
(73,616
)
Net cash used by investing activities
(407,241
)
 
(344,874
)
FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(529,675
)
 
(756,798
)
Net change in demand and other interest-bearing deposits
506,969

 
1,072,739

Net change in short-term borrowings
35,930

 
62,551

Repayment of long-term obligations
(3,958
)
 
(223,779
)
Origination of long-term obligations
70,000

 
—

Repurchase of common stock
(321
)
 
(4,949
)
Cash dividends paid
(8,663
)
 
(9,245
)
Net cash provided by financing activities
70,282

 
140,519

Change in cash and due from banks
(70,612
)
 
15,306

Cash and due from banks at beginning of period
639,730

 
590,801

Cash and due from banks at end of period
$
569,118

 
$
606,107

CASH PAYMENTS FOR:
 
 
 
Interest
$
46,873

 
$
84,779

Income taxes
99,398

 
35,208

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains and losses
$
(36,998
)
 
$
16,342

Change in fair value of cash flow hedge
2,489

 
(456
)
Change in pension obligation
12,896

 
8,368

Transfers of loans to other real estate
78,303

 
117,363

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

 
—


See accompanying Notes to Consolidated Financial Statements.

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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.

On August 28, 2013, BancShares' bank subsidiary, FCB and 1st Financial Services Corporation (1st Financial) announced that they had entered into a definitive merger agreement. The agreement provides for the merger of Hendersonville, N.C.-based 1st Financial and its bank subsidiary, Mountain 1st Bank & Trust Company (Mountain 1st), into FCB. The agreement has been approved by the Boards of Directors of 1st Financial, Mountain 1st and FCB. The transaction is expected to close no later than the first quarter of 2014, subject to the receipt of regulatory approvals, the approval of 1st Financial's shareholders, and other customary closing conditions. Under the terms of the agreement, cash consideration of $10,000 will be split between the U.S. Treasury, which will receive $8,000 of the cash consideration in order for 1st Financial to exit from the federal TARP program, and 1st Financial's common shareholders, who will receive $2,000.

General

These consolidated financial statements and notes are presented in accordance with 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 presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2012.

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.

During the third quarter, management reevaluated its fair value leveling methodology and the inputs utilized by the 3rd party pricing services for the current and prior periods. Management concluded that due to the reliance on significant observable inputs, the fair values of its US Treasury, Government agency, and other securities should be classified as level 2 rather than the level 1 previously disclosed. Management also concluded that its equity securities should be classified as level 2 rather than the level 1 previously disclosed due to the inactive nature of the markets in which these securities trade.

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, the consolidated results of its operations or related disclosures. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan and lease losses; determination of the fair value of financial instruments; pension plan assumptions; cash flow estimates on acquired loans; the receivable from and payable to the FDIC for loss share agreements; purchase accounting-related adjustments; and income tax assets, liabilities and expense.

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Goodwill Impairment

Annual impairment tests are conducted as of July 31 each year. Based on the July 31, 2013, impairment test, management concluded there was no indication of goodwill impairment. 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 third 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 allocation of the previously unallocated '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.
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, these factors were considered in determining the nonspecific portion of the ALLL, which was not allocated to any specific loan class.
Management believes that the methodology enhancements will improve the granularity of historical net loss data and the precision of the segment analysis. As a result of the enhanced process to determine the ALLL, management has updated the accounting policy disclosures for the ALLL and the reserve for unfunded commitments.
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 loans, and the related ALLL is 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 using 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

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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.
The quarterly ALLL evaluation process also includes a qualitative framework that 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 ALLL calculated based on historical loan loss factors when assessing changes in the factors in the qualitative framework. The adjustments to the ALLL 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 trouble debt restructures (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 September 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.

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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 the 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 expected holding 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.
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 governmental actions, including implementation of the Affordable Care Act, will fundamentally alter 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. Deterioration in demand could result in decreases in collateral values and could make repayment of the outstanding loans more difficult for customers.
Commercial mortgage, commercial and industrial and lease financing
Commercial mortgage loans, 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.

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Table of Contents

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 expected holding 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.
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 exists 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, distinct from the ALLL, and adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.


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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 provisions of this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted.
The provisions of this ASU will 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.

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. Adoption of this ASU during the third quarter of 2013 did not have a material effect on BancShares' 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 ASU is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.
The updated 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 ASU 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 adopted the methodologies prescribed by this ASU by the date required. Adoption of this ASU did not have a material effect on BancShares' financial position or results of operations. BancShares has included the required disclosures in Note L.


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Table of Contents

FASB ASU 2013-01, “Balance Sheet”
This ASU clarifies that the scope of ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, applies 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 adopted the methodologies prescribed by this ASU by the date required. Adoption of this ASU did not have a material effect on BancShares' financial position or results of operations.


Note B
Investments
The aggregate values of investment securities at September 30, 2013, and December 31, 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
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
U.S. Treasury
$
448,201

 
$
372

 
$
41

 
$
448,532

Government agency
2,583,888

 
2,320

 
1,428

 
2,584,780

Mortgage-backed securities
2,131,099

 
5,452

 
30,519

 
2,106,032

Equity securities
543

 
20,681

 
—

 
21,224

State, county and municipal
186

 
1

 
—

 
187

Other
857

 
—

 
27

 
830

Total investment securities available for sale
$
5,164,774

 
$
28,826

 
$
32,015

 
$
5,161,585

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

Investment securities held to maturity
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,013

 
$
67

 
$
—

 
$
1,080

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

 
$
133

 
$
27

 
$
1,448

 
 
 
 
 
 
 
 

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.



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Table of Contents

The following table provides the maturity distribution for non-amortizing securities. Repayments of mortgage-backed securities are dependent on the repayments of the underlying loan balances. Equity securities do not have a stated maturity date.
 
September 30, 2013
 
December 31, 2012
 
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
 
(dollars in thousands)
Investment securities available for sale
 
 
 
 
 
 
 
 
Amortizing securities maturing in:
 
 
 
 
 
 
 
 
One year or less
$
864,992

 
$
865,925

 
$
2,285,159

 
$
2,286,403

 
One through five years
2,168,080

 
2,168,344

 
1,590,608

 
1,592,923

 
Five through 10 years
60

 
60

 
898

 
880

 
Over 10 years
—

 
—

 
—

 
—

 
Mortgage-backed securities
2,131,099

 
2,106,032

 
1,315,211

 
1,329,657

 
Equity securities
543

 
21,224

 
543

 
16,365

 
Total investment securities available for sale
$
5,164,774

 
$
5,161,585

 
$
5,192,419

 
$
5,226,228

 
Investment securities held to maturity
 
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
1,013

 
$
1,080

 
$
1,342

 
$
1,448

 


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

 
$
31

 
$
—

 
$
36

Gross losses on sales of investment securities available for sale
—

 
—

 
—

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

 
—

 
—

 
(45
)
Total securities gains (losses)
$
—

 
$
31

 
$
—

 
$
(11
)


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The following table provides information regarding securities with unrealized losses as of September 30, 2013, and December 31, 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)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
51,836

 
$
41

 
$
—

 
$
—

 
$
51,836

 
$
41

Government agency
953,103

 
1,428

 
—

 
—

 
953,103

 
1,428

Mortgage-backed securities
1,820,909

 
29,712

 
27,949

 
807

 
1,848,858

 
30,519

Other
830

 
27

 
—

 
—

 
830

 
27

Total
$
2,826,678

 
$
31,208

 
$
27,949

 
$
807

 
$
2,854,627

 
$
32,015

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

Investment securities with an aggregate fair value of $27,949 have had continuous unrealized losses for more than 12 months as of September 30, 2013, with an aggregate unrealized loss of $807. These 17 investments are mortgage-backed securities. None of the unrealized losses identified as of September 30, 2013, or December 31, 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 $2,547,581 at September 30, 2013, and $2,351,072 at December 31, 2012, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.






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Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
 
(dollars in thousands)
Acquired loans
$
1,188,281

 
$
1,809,235

Originated loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
300,266

 
309,190

Commercial mortgage
6,308,192

 
6,029,435

Other commercial real estate
177,599

 
160,980

Commercial and industrial
1,009,641

 
1,038,530

Lease financing
365,967

 
330,679

Other
180,435

 
125,681

Total commercial loans
8,342,100

 
7,994,495

Noncommercial:
 
 
 
Residential mortgage
927,426

 
822,889

Revolving mortgage
2,113,240

 
2,210,133

Construction and land development
121,553

 
131,992

Consumer
380,266

 
416,606

Total noncommercial loans
3,542,485

 
3,581,620

Total originated loans and leases
11,884,585

 
11,576,115

Total loans and leases
$
13,072,866

 
$
13,385,350

 

 
September 30, 2013
 
December 31, 2012
 
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
$
23,136

 
$
70,827

 
$
93,963

 
$
71,225

 
$
166,681

 
$
237,906

Commercial mortgage
81,389

 
662,960

 
744,349

 
107,281

 
947,192

 
1,054,473

Other commercial real estate
8,713

 
42,395

 
51,108

 
35,369

 
71,750

 
107,119

Commercial and industrial
144

 
24,304

 
24,448

 
3,932

 
45,531

 
49,463

Other
—

 
1,003

 
1,003

 
—

 
1,074

 
1,074

Total commercial loans
113,382

 
801,489

 
914,871

 
217,807

 
1,232,228

 
1,450,035

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
32,389

 
199,921

 
232,310

 
48,077

 
249,849

 
297,926

Revolving mortgage
8,416

 
26,418

 
34,834

 
9,606

 
29,104

 
38,710

Construction and land development
5,145

 
192

 
5,337

 
15,136

 
5,657

 
20,793

Consumer
—

 
929

 
929

 
—

 
1,771

 
1,771

Total noncommercial loans
45,950

 
227,460

 
273,410

 
72,819

 
286,381

 
359,200

Total acquired loans
$
159,332

 
$
1,028,949

 
$
1,188,281

 
$
290,626

 
$
1,518,609

 
$
1,809,235




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Table of Contents

At September 30, 2013, $2,534,250 in originated loans were pledged to secure debt obligations, compared to $2,570,773 at December 31, 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.

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, 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 $73,701 at September 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 $21,808 at September 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.

The composition of the loans and leases outstanding at September 30, 2013, and December 31, 2012, by credit quality indicator is provided below:
 

18
Table of Contents

 
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)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
285,044

 
$
6,019,286

 
$
172,341

 
$
885,691

 
$
359,195

 
$
179,085

 
$
7,900,642

Special mention
12,060

 
125,280

 
1,241

 
17,260

 
2,664

 
1,350

 
159,855

Substandard
3,109

 
155,593

 
3,709

 
6,606

 
3,335

 
—

 
172,352

Doubtful
53

 
6,703

 
75

 
1,428

 
773

 
—

 
9,032

Ungraded
—

 
1,330

 
233

 
98,656

 
—

 
—

 
100,219

Total
$
300,266

 
$
6,308,192

 
$
177,599

 
$
1,009,641

 
$
365,967

 
$
180,435

 
$
8,342,100

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


 
Originated noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total originated noncommercial
loans
 
(dollars in thousands)
September 30, 2013
 
 
 
 
 
 
 
 
 
Current
$
900,625

 
$
2,097,658

 
$
119,395

 
$
376,237

 
$
3,493,915

30-59 days past due
11,840

 
9,921

 
1,907

 
2,502

 
26,170

60-89 days past due
3,312

 
1,556

 
85

 
1,015

 
5,968

90 days or greater past due
11,649

 
4,105

 
166

 
512

 
16,432

Total
$
927,426

 
$
2,113,240

 
$
121,553

 
$
380,266

 
$
3,542,485

December 31, 2012
 
 
 
 
 
 
 
 
 
Current
$
786,626

 
$
2,190,186

 
$
128,764

 
409,218

 
$
3,514,794

30-59 days past due
15,711

 
12,868

 
1,941

 
4,405

 
34,925

60-89 days past due
7,559

 
3,200

 
490

 
1,705

 
12,954

90 days or greater past due
12,993

 
3,879

 
797

 
1,278

 
18,947

Total
$
822,889

 
$
2,210,133

 
$
131,992

 
$
416,606

 
$
3,581,620

 

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Table of Contents

 
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
 
(dollars in thousands)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,373

 
$
308,809

 
$
22,007

 
$
7,553

 
$
145,735

 
$
26,291

 
$
139

 
$
1,468

 
$
515,375

Special mention
18,395

 
176,338

 
6,602

 
9,268

 
8,676

 
2,865

 
—

 
26

 
222,170

Substandard
62,472

 
209,383

 
13,786

 
5,908

 
57,156

 
3,329

 
4,903

 
—

 
356,937

Doubtful
8,013

 
49,165

 
8,713

 
1,502

 
2,660

 
2,349

 
295

 
—

 
72,697

Ungraded
1,710

 
654

 
—

 
217

 
18,083

 
—

 
—

 
438

 
21,102

Total
$
93,963

 
$
744,349

 
$
51,108

 
$
24,448

 
$
232,310

 
$
34,834

 
$
5,337

 
$
1,932

 
$
1,188,281

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
17,010

 
$
376,974

 
$
33,570

 
$
19,451

 
$
172,165

 
$
29,540

 
$
334

 
$
1,617

 
$
650,661

Special mention
25,734

 
259,264

 
17,518

 
12,465

 
14,863

 
1,736

 
—

 
34

 
331,614

Substandard
105,061

 
344,542

 
44,335

 
14,698

 
83,193

 
7,434

 
17,190

 
239

 
616,692

Doubtful
87,445

 
73,016

 
11,696

 
2,757

 
4,268

 
—

 
3,269

 
117

 
182,568

Ungraded
2,656

 
677

 
—

 
92

 
23,437

 
—

 
—

 
838

 
27,700

Total
$
237,906

 
$
1,054,473

 
$
107,119

 
$
49,463

 
$
297,926

 
$
38,710

 
$
20,793

 
$
2,845

 
$
1,809,235


The aging of the outstanding loans and leases, by class, at September 30, 2013, and December 31, 2012, (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 due to various grace periods that allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.


20
Table of Contents

 
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
 
(dollars in thousands)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Originated loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,755

 
$
49

 
$
562

 
$
2,366

 
$
297,900

 
$
300,266

Commercial mortgage
15,917

 
10,522

 
18,449

 
44,888

 
6,263,304

 
6,308,192