LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans and Loans Held for Sale

Loans are summarized as follows according to major portfolio segment and specific loan class:



(In thousands)	March 31, 2015		December 31, 2014

Loans held for sale	$	128,946	$	132,504

Commercial:
Commercial and industrial	$	13,264,092	$	13,162,955
Leasing	407,137		408,974
Owner occupied	7,309,639		7,351,548
Municipal	555,122		520,887
Total commercial	21,535,990		21,444,364
Commercial real estate:
Construction and land development	2,044,641		1,986,408
Term	8,088,430		8,126,600
Total commercial real estate	10,133,071		10,113,008
Consumer:
Home equity credit line	2,314,806		2,321,150
1-4 family residential	5,212,963		5,200,882
Construction and other consumer real estate	373,335		370,542
Bankcard and other revolving plans	406,723		401,352
Other	203,226		212,360
Total consumer	8,511,053		8,506,286
Total loans	$	40,180,114	$	40,063,658

Loan balances are presented net of unearned income and fees, which amounted to $142.8 million at March 31, 2015 and $144.7 million at December 31, 2014.

Owner occupied and commercial real estate (“CRE”) loans include unamortized premiums of approximately $33.7 million at March 31, 2015 and $36.5 million at December 31, 2014.

Municipal loans generally include loans to municipalities with the debt service being repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

Land development loans included in the construction and land development loan class were $462.7 million at March 31, 2015 and $484.9 million at December 31, 2014.

Loans with a carrying value of approximately $22.6 billion at March 31, 2015 and $22.5 billion at December 31, 2014 have been pledged at the Federal Reserve and various Federal Home Loan Banks (“FHLBs”) as collateral for current and potential borrowings. Note 8 presents the balance of FHLB advances made to the Company against this pledged collateral.

We sold loans with a carrying value of $300.4 million and $337.6 million for the three months ended March 31, 2015 and 2014, respectively, that were classified as loans held for sale. The sold loans were derecognized from the balance sheet. Loans classified as loans held for sale primarily consist of conforming residential mortgages and the guaranteed portion of SBA loans. The principal balance of sold loans for which we retain servicing was approximately $1.2 billion at both March 31, 2015 and December 31, 2014.

Amounts added to loans held for sale during these periods were $309.7 million and $295.5 million, respectively. Income from loans sold, excluding servicing, for these same periods was $4.6 million and $3.5 million.

Since 2009, CB&T and NSB have had loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”), which provided indemnification for credit losses of acquired loans and foreclosed assets up to specified thresholds. The last of the agreements for commercial loans, which comprised the major portion of the acquired portfolio, expired as of September 30, 2014. The agreements for 1-4 family residential loans will expire in 2019. In previous periods, the FDIC-supported loan balances were presented separately in this footnote and in other disclosures, and included purchased credit-impaired (“PCI”) loans, as subsequently discussed in Purchased Loans. Due to declining balances, for all periods presented herein, the FDIC-supported/PCI loans have been reclassified to their respective loan segments and classes.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) consists of the allowance for loan and lease losses (“ALLL”) (also referred to as the allowance for loan losses) and the reserve for unfunded lending commitments (“RULC”).

Allowance for Loan and Lease Losses

The ALLL represents our estimate of probable and estimable losses inherent in the loan and lease portfolio as of the balance sheet date. Losses are charged to the ALLL when recognized. Generally, commercial loans are charged off or charged down when they are determined to be uncollectible in whole or in part, or when 180 days past due unless the loan is well secured and in the process of collection. Consumer loans are either charged off or charged down to net realizable value no later than the month in which they become 180 days past due. Closed-end consumer loans that are not secured by residential real estate are either charged off or charged down to net realizable value no later than the month in which they become 120 days past due. We establish the amount of the ALLL by analyzing the portfolio at least quarterly, and we adjust the provision for loan losses so the ALLL is at an appropriate level at the balance sheet date.

We determine our ALLL as the best estimate within a range of estimated losses. The methodologies we use to estimate the ALLL depend upon the impairment status and portfolio segment of the loan. The methodology for impaired loans is discussed subsequently. For the commercial and CRE segments, we use a comprehensive loan grading system to assign probability of default (“PD”) and loss given default (“LGD”) grades to each loan. The credit quality indicators discussed subsequently are based on this grading system. In addition, loan officers utilize their experience and judgment in assigning PD and LGD grades, subject to confirmation of the PD and LGD by either credit risk or credit examination. We create groupings of these grades for each subsidiary bank and loan class and calculate historic loss rates using a loss migration analysis that attributes historic realized losses to these loan grade groupings over the period of January 2008 through the most recent full quarter.

For the consumer loan segment, we use roll rate models to forecast probable inherent losses. Roll rate models measure the rate at which consumer loans migrate from one delinquency category to the next worse delinquency category, and eventually to loss. We estimate roll rates for consumer loans using recent delinquency and loss experience by segmenting our consumer loan portfolio into separate pools based on common risk characteristics and separately calculating historical delinquency and loss experience for each pool. These roll rates are then applied to current delinquency levels to estimate probable inherent losses. Roll rates incorporate housing market trends inasmuch as these trends manifest themselves in charge-offs and delinquencies. In addition, our qualitative and environmental factors discussed subsequently incorporate the most recent housing market trends.

The current status and historical changes in qualitative and environmental factors may not be reflected in our quantitative models. Thus, after applying historical loss experience, as described above, we review the quantitatively derived level of ALLL for each segment using qualitative criteria and use those criteria to determine our estimate within the range. We track various risk factors that influence our judgment regarding the level of the ALLL across the portfolio segments. These factors primarily include:


•	Asset quality trends


•	Risk management and loan administration practices


•	Risk identification practices


•	Effect of changes in the nature and volume of the portfolio


•	Existence and effect of any portfolio concentrations


•	National economic and business conditions


•	Regional and local economic and business conditions


•	Data availability and applicability


•	Effects of other external factors

The magnitude of the impact of these factors on our qualitative assessment of the ALLL changes from quarter to quarter according to changes made by management in its assessment of these factors, the extent these factors are already reflected in historic loss rates, and the extent changes in these factors diverge from one to another. We also consider the uncertainty inherent in the estimation process when evaluating the ALLL.

Reserve for Unfunded Lending Commitments

We also estimate a reserve for potential losses associated with off-balance sheet commitments, including standby letters of credit. We determine the RULC using the same procedures and methodologies that we use for the ALLL. The loss factors used in the RULC are the same as the loss factors used in the ALLL, and the qualitative adjustments used in the RULC are the same as the qualitative adjustments used in the ALLL. We adjust the Company’s unfunded lending commitments that are not unconditionally cancelable to an outstanding amount equivalent using credit conversion factors, and we apply the loss factors to the outstanding equivalents.

Changes in the allowance for credit losses are summarized as follows:

	Three Months Ended March 31, 2015
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses:
Balance at beginning of period	$	412,514		$	145,009		$	47,140		$	604,663
Additions:
Provision for loan losses	24,934			(26,887		)	459			(1,494		)
Adjustment for FDIC-supported/PCI loans	(38		)							(38		)
Deductions:
Gross loan and lease charge-offs	(15,951		)	(626		)	(3,611		)	(20,188		)
Recoveries	20,613			14,119			2,338			37,070
Net loan and lease charge-offs	4,662			13,493			(1,273		)	16,882
Balance at end of period	$	442,072		$	131,615		$	46,326		$	620,013

Reserve for unfunded lending commitments:
Balance at beginning of period	$	58,931		$	21,517		$	628		$	81,076
Provision charged (credited) to earnings	3,844			(2,580		)	(53		)	1,211
Balance at end of period	$	62,775		$	18,937		$	575		$	82,287

Total allowance for credit losses at end of period:
Allowance for loan losses	$	442,072		$	131,615		$	46,326		$	620,013
Reserve for unfunded lending commitments	62,775			18,937			575			82,287
Total allowance for credit losses	$	504,847		$	150,552		$	46,901		$	702,300



	Three Months Ended March 31, 2014
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses:
Balance at beginning of period	$	469,213		$	216,012		$	61,066		$	746,291
Additions:
Provision for loan losses	11,260			(2,891		)	(8,979		)	(610		)
Adjustment for FDIC-supported/PCI loans	(781		)	—			(36		)	(817		)
Deductions:
Gross loan and lease charge-offs	(9,796		)	(7,854		)	(3,145		)	(20,795		)
Recoveries	7,805			2,882			2,197			12,884
Net loan and lease charge-offs	(1,991		)	(4,972		)	(948		)	(7,911		)
Balance at end of period	$	477,701		$	208,149		$	51,103		$	736,953

Reserve for unfunded lending commitments:
Balance at beginning of period	$	48,345		$	37,485		$	3,875		$	89,705
Provision charged (credited) to earnings	1,525			(2,212		)	(325		)	(1,012		)
Balance at end of period	$	49,870		$	35,273		$	3,550		$	88,693

Total allowance for credit losses at end of period:
Allowance for loan losses	$	477,701		$	208,149		$	51,103		$	736,953
Reserve for unfunded lending commitments	49,870			35,273			3,550			88,693
Total allowance for credit losses	$	527,571		$	243,422		$	54,653		$	825,646

The ALLL and outstanding loan balances according to the Company’s impairment method are summarized as follows:

	March 31, 2015
(In thousands)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	38,382	$	5,326	$	9,437	$	53,145
Collectively evaluated for impairment	402,597		126,231		36,602		565,430
Purchased loans with evidence of credit deterioration	1,093		58		287		1,438
Total	$	442,072	$	131,615	$	46,326	$	620,013

Outstanding loan balances:
Individually evaluated for impairment	$	305,678	$	141,470	$	88,073	$	535,221
Collectively evaluated for impairment	21,156,592		9,917,574		8,407,837		39,482,003
Purchased loans with evidence of credit deterioration	73,720		74,027		15,143		162,890
Total	$	21,535,990	$	10,133,071	$	8,511,053	$	40,180,114



	December 31, 2014
(In thousands)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	28,627	$	4,027	$	9,059	$	41,713
Collectively evaluated for impairment	382,552		140,090		37,508		560,150
Purchased loans with evidence of credit deterioration	1,335		892		573		2,800
Total	$	412,514	$	145,009	$	47,140	$	604,663

Outstanding loan balances:
Individually evaluated for impairment	$	259,207	$	167,435	$	95,267	$	521,909
Collectively evaluated for impairment	21,105,217		9,861,862		8,395,371		39,362,450
Purchased loans with evidence of credit deterioration	79,940		83,711		15,648		179,299
Total	$	21,444,364	$	10,113,008	$	8,506,286	$	40,063,658

Nonaccrual and Past Due Loans

Loans are generally placed on nonaccrual status when payment in full of principal and interest is not expected, or the loan is 90 days or more past due as to principal or interest, unless the loan is both well secured and in the process of collection. Factors we consider in determining whether a loan is placed on nonaccrual include delinquency status, collateral value, borrower or guarantor financial statement information, bankruptcy status, and other information which would indicate that the full and timely collection of interest and principal is uncertain.

A nonaccrual loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement; the loan, if secured, is well secured; the borrower has paid according to the contractual terms for a minimum of six months; and analysis of the borrower indicates a reasonable assurance of the ability and willingness to maintain payments. Payments received on nonaccrual loans are applied as a reduction to the principal outstanding.

Closed-end loans with payments scheduled monthly are reported as past due when the borrower is in arrears for two or more monthly payments. Similarly, open-end credit such as charge-card plans and other revolving credit plans are reported as past due when the minimum payment has not been made for two or more billing cycles. Other multi-payment obligations (i.e., quarterly, semiannual, etc.), single payment, and demand notes are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more.

Nonaccrual loans are summarized as follows:

(In thousands)	March 31, 2015		December 31, 2014

Commercial:
Commercial and industrial	$	163,499	$	105,591
Leasing	247		295
Owner occupied	97,609		87,243
Municipal	1,027		1,056
Total commercial	262,382		194,185
Commercial real estate:
Construction and land development	22,101		23,880
Term	37,517		25,107
Total commercial real estate	59,618		48,987
Consumer:
Home equity credit line	10,337		11,430
1-4 family residential	48,078		49,861
Construction and other consumer real estate	1,301		1,735
Bankcard and other revolving plans	318		196
Other	32		254
Total consumer loans	60,066		63,476
Total	$	382,066	$	306,648

Past due loans (accruing and nonaccruing) are summarized as follows:

	March 31, 2015
(In thousands)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current ¹

Commercial:
Commercial and industrial	$	13,182,403	$	42,881	$	38,808	$	81,689	$	13,264,092	$	2,969	$	109,978
Leasing	406,902		208		27		235		407,137		—		197
Owner occupied	7,222,254		44,380		43,005		87,385		7,309,639		2,247		40,515
Municipal	553,002		2,120		—		2,120		555,122		—		1,027
Total commercial	21,364,561		89,589		81,840		171,429		21,535,990		5,216		151,717
Commercial real estate:
Construction and land development	2,027,240		4,114		13,287		17,401		2,044,641		2,590		11,338
Term	8,038,106		17,208		33,116		50,324		8,088,430		21,910		23,398
Total commercial real estate	10,065,346		21,322		46,403		67,725		10,133,071		24,500		34,736
Consumer:
Home equity credit line	2,302,583		4,522		7,701		12,223		2,314,806		—		1,103
1-4 family residential	5,181,356		12,780		18,827		31,607		5,212,963		268		22,781
Construction and other consumer real estate	361,483		10,682		1,170		11,852		373,335		556		664
Bankcard and other revolving plans	402,775		2,859		1,089		3,948		406,723		951		98
Other	202,276		889		61		950		203,226		61		27
Total consumer loans	8,450,473		31,732		28,848		60,580		8,511,053		1,836		24,673
Total	$	39,880,380	$	142,643	$	157,091	$	299,734	$	40,180,114	$	31,552	$	211,126



	December 31, 2014
(In thousands)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current ¹

Commercial:
Commercial and industrial	$	13,092,731	$	28,295	$	41,929	$	70,224	$	13,162,955	$	4,677	$	64,385
Leasing	408,724		225		25		250		408,974		—		270
Owner occupied	7,275,842		29,182		46,524		75,706		7,351,548		3,334		39,649
Municipal	520,887		—		—		—		520,887		—		1,056
Total commercial	21,298,184		57,702		88,478		146,180		21,444,364		8,011		105,360
Commercial real estate:
Construction and land development	1,972,206		2,711		11,491		14,202		1,986,408		92		12,481
Term	8,082,940		14,415		29,245		43,660		8,126,600		19,700		13,787
Total commercial real estate	10,055,146		17,126		40,736		57,862		10,113,008		19,792		26,268
Consumer:
Home equity credit line	2,309,967		4,503		6,680		11,183		2,321,150		1		1,779
1-4 family residential	5,163,610		12,416		24,856		37,272		5,200,882		318		20,599
Construction and other consumer real estate	359,723		9,675		1,144		10,819		370,542		160		608
Bankcard and other revolving plans	397,882		2,425		1,045		3,470		401,352		946		80
Other	211,560		644		156		800		212,360		—		84
Total consumer loans	8,442,742		29,663		33,881		63,544		8,506,286		1,425		23,150
Total	$	39,796,072	$	104,491	$	163,095	$	267,586	$	40,063,658	$	29,228	$	154,778


¹	Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.

Credit Quality Indicators

In addition to the past due and nonaccrual criteria, we also analyze loans using loan risk grading systems, which vary based on the size and type of credit risk exposure. The internal risk grades assigned to loans follow our definitions of Pass, Special Mention, Substandard, and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:

Pass – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date.

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well-defined weaknesses and are characterized by the distinct possibility that the bank may sustain some loss if deficiencies are not corrected.

Doubtful – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.

We generally assign internal risk grades to commercial and CRE loans with commitments equal to or greater than $750,000 based on financial and statistical models, individual credit analysis, and loan officer judgment. For these larger loans, we assign one of multiple grades within the Pass classification or one of the following four grades: Special Mention, Substandard, Doubtful, and Loss. Loss indicates that the outstanding balance has been charged off. We confirm our internal risk grades quarterly, or as soon as we identify information that affects the credit risk of the loan.

For consumer loans or certain small commercial loans with commitments equal to or less than $750,000, we generally assign internal risk grades similar to those described previously based on automated rules that depend on refreshed credit scores, payment performance, and other risk indicators. These are generally assigned either a Pass or Substandard grade and are reviewed as we identify information that might warrant a grade change.

Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality indicators are summarized as follows:



	March 31, 2015
(In thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total loans		Total allowance
Commercial:
Commercial and industrial	$	12,342,163	$	325,604	$	587,272	$	9,053	$	13,264,092
Leasing	388,843		11,656		6,638		—		407,137
Owner occupied	6,851,794		111,853		345,992		—		7,309,639
Municipal	552,874		1,221		1,027		—		555,122
Total commercial	20,135,674		450,334		940,929		9,053		21,535,990		$	442,072
Commercial real estate:
Construction and land development	1,994,072		8,515		42,054		—		2,044,641
Term	7,827,313		68,890		187,799		4,428		8,088,430
Total commercial real estate	9,821,385		77,405		229,853		4,428		10,133,071		131,615
Consumer:
Home equity credit line	2,298,505		—		16,301		—		2,314,806
1-4 family residential	5,149,513		—		63,450		—		5,212,963
Construction and other consumer real estate	370,817		—		2,518		—		373,335
Bankcard and other revolving plans	404,826		—		1,897		—		406,723
Other	202,909		—		317		—		203,226
Total consumer loans	8,426,570		—		84,483		—		8,511,053		46,326
Total	$	38,383,629	$	527,739	$	1,255,265	$	13,481	$	40,180,114	$	620,013



	December 31, 2014
(In thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total loans		Total allowance
Commercial:
Commercial and industrial	$	12,515,846	$	209,215	$	426,002	$	11,892	$	13,162,955
Leasing	399,032		4,868		5,074		—		408,974
Owner occupied	6,844,310		168,423		338,815		—		7,351,548
Municipal	518,513		1,318		1,056		—		520,887
Total commercial	20,277,701		383,824		770,947		11,892		21,444,364		$	412,514
Commercial real estate:
Construction and land development	1,925,685		8,464		52,259		—		1,986,408
Term	7,802,571		96,347		223,324		4,358		8,126,600
Total commercial real estate	9,728,256		104,811		275,583		4,358		10,113,008		145,009
Consumer:
Home equity credit line	2,304,352		—		16,798		—		2,321,150
1-4 family residential	5,138,660		—		62,222		—		5,200,882
Construction and other consumer real estate	367,932		—		2,610		—		370,542
Bankcard and other revolving plans	399,446		—		1,906		—		401,352
Other	211,811		—		549		—		212,360
Total consumer loans	8,422,201		—		84,085		—		8,506,286		47,140
Total	$	38,428,158	$	488,635	$	1,130,615	$	16,250	$	40,063,658	$	604,663

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. For our non-purchased credit-impaired loans, if a nonaccrual loan has a balance greater than $1 million, or if a loan is a troubled debt restructuring (“TDR”), including TDRs that subsequently default, or if the loan is no longer reported as a TDR, we individually evaluate the loan for impairment and estimate a specific reserve for the loan for all portfolio segments under applicable accounting guidance. Smaller nonaccrual loans are pooled for ALLL estimation purposes. PCI loans are included in impaired loans and are accounted for under separate accounting guidance. See subsequent discussion under Purchased Loans.

When a loan is impaired, we estimate a specific reserve for the loan based on the projected present value of the loan’s future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the loan’s underlying collateral. The process of estimating future cash flows also incorporates the same determining factors discussed previously under nonaccrual loans. When we base the impairment amount on the fair value of the loan’s underlying collateral, we generally charge off the portion of the balance that is impaired, such that these loans do not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual are not recognized in interest income, but are applied as a reduction to the principal outstanding. The amount of interest income recognized on a cash basis during the time the loans were impaired within the three months ended March 31, 2015 and 2014 was not significant.

Information on impaired loans individually evaluated is summarized as follows, including the average recorded investment and interest income recognized for the three months ended March 31, 2015 and 2014:



	March 31, 2015
(In thousands)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance
			with no allowance		with allowance
Commercial:
Commercial and industrial	$	223,938	$	34,260	$	147,353	$	181,613	$	30,899
Owner occupied	202,999		102,672		73,403		176,075		7,341
Municipal	1,505		1,027		—		1,027		—
Total commercial	428,442		137,959		220,756		358,715		38,240
Commercial real estate:
Construction and land development	55,316		12,565		25,897		38,462		1,293
Term	180,822		116,700		30,231		146,931		3,550
Total commercial real estate	236,138		129,265		56,128		185,393		4,843
Consumer:
Home equity credit line	29,149		14,491		11,288		25,779		189
1-4 family residential	80,023		30,356		36,681		67,037		8,885
Construction and other consumer real estate	3,498		1,310		1,246		2,556		187
Bankcard and other revolving plans	—		—		—		—		—
Other	5,825		—		4,674		4,674		95
Total consumer loans	118,495		46,157		53,889		100,046		9,356
Total	$	783,075	$	313,381	$	330,773	$	644,154	$	52,439



	December 31, 2014
(In thousands)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance
			with no allowance		with allowance
Commercial:
Commercial and industrial	$	185,520	$	43,257	$	103,565	$	146,822	$	22,852
Owner occupied	198,231		83,179		86,382		169,561		6,087
Municipal	1,535		1,056		—		1,056		—
Total commercial	385,286		127,492		189,947		317,439		28,939
Commercial real estate:
Construction and land development	60,993		16,500		26,977		43,477		1,773
Term	203,788		96,351		63,740		160,091		2,345
Total commercial real estate	264,781		112,851		90,717		203,568		4,118
Consumer:
Home equity credit line	30,209		14,798		11,883		26,681		437
1-4 family residential	86,575		37,096		35,831		72,927		8,494
Construction and other consumer real estate	3,902		1,449		1,410		2,859		233
Bankcard and other revolving plans	—		—		—		—		—
Other	6,580		—		5,254		5,254		133
Total consumer loans	127,266		53,343		54,378		107,721		9,297
Total	$	777,333	$	293,686	$	335,042	$	628,728	$	42,354



	Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	160,013	$	1,451	$	188,191	$	2,591
Owner occupied	177,568		4,092		237,902		4,758
Municipal	1,033		—		—		—
Total commercial	338,614		5,543		426,093		7,349
Commercial real estate:
Construction and land development	38,736		569		66,772		3,538
Term	143,496		5,008		293,802		14,183
Total commercial real estate	182,232		5,577		360,574		17,721
Consumer:
Home equity credit line	25,386		413		25,224		402
1-4 family residential	66,711		510		83,241		540
Construction and other consumer real estate	2,560		42		3,490		38
Bankcard and other revolving plans	2		100		10		1
Other	4,748		285		8,595		494
Total consumer loans	99,407		1,350		120,560		1,475
Total	$	620,253	$	12,470	$	907,227	$	26,545

Modified and Restructured Loans

Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered TDRs.

We consider many factors in determining whether to agree to a loan modification involving concessions, and seek a solution that will both minimize potential loss to the Company and attempt to help the borrower. We evaluate borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the bank is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms.

Selected information on TDRs that includes the recorded investment on an accruing and nonaccruing basis by loan class and modification type is summarized in the following schedules:



	March 31, 2015
	Recorded investment resulting from the following modification types:
(In thousands)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	2,509	$	3,462	$	17	$	464	$	151	$	21,929	$	28,532
Owner occupied	19,744		1,092		952		1,241		10,845		17,167		51,041
Total commercial	22,253		4,554		969		1,705		10,996		39,096		79,573
Commercial real estate:
Construction and land development	—		—		—		—		510		13,712		14,222
Term	7,238		1,019		176		973		2,289		32,729		44,424
Total commercial real estate	7,238		1,019		176		973		2,799		46,441		58,646
Consumer:
Home equity credit line	741		84		10,968		—		164		1,623		13,580
1-4 family residential	2,402		366		7,073		442		1,381		33,676		45,340
Construction and other consumer real estate	284		416		—		—		—		1,226		1,926
Total consumer loans	3,427		866		18,041		442		1,545		36,525		60,846
Total accruing	32,918		6,439		19,186		3,120		15,340		122,062		199,065
Nonaccruing
Commercial:
Commercial and industrial	322		515		—		3,310		6,951		25,035		36,133
Owner occupied	2,328		1,163		—		833		2,525		11,027		17,876
Municipal	—		1,027		—		—		—		—		1,027
Total commercial	2,650		2,705		—		4,143		9,476		36,062		55,036
Commercial real estate:
Construction and land development	10,901		66		—		93		3,249		7,667		21,976
Term	2,780		—		865		2,170		—		9,901		15,716
Total commercial real estate	13,681		66		865		2,263		3,249		17,568		37,692
Consumer:
Home equity credit line	—		—		713		203		—		150		1,066
1-4 family residential	207		227		2,245		185		3,601		9,699		16,164
Construction and other consumer real estate	—		243		—		76		—		87		406
Total consumer loans	207		470		2,958		464		3,601		9,936		17,636
Total nonaccruing	16,538		3,241		3,823		6,870		16,326		63,566		110,364
Total	$	49,456	$	9,680	$	23,009	$	9,990	$	31,666	$	185,628	$	309,429



	December 31, 2014
	Recorded investment resulting from the following modification types:
(In thousands)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	2,611	$	6,509	$	18	$	3,203	$	3,855	$	34,585	$	50,781
Owner occupied	19,981		1,124		960		1,251		10,960		17,505		51,781
Total commercial	22,592		7,633		978		4,454		14,815		52,090		102,562
Commercial real estate:
Construction and land development	—		—		—		—		521		19,854		20,375
Term	7,328		9,027		179		3,153		2,546		39,007		61,240
Total commercial real estate	7,328		9,027		179		3,153		3,067		58,861		81,615
Consumer:
Home equity credit line	742		70		11,320		—		166		1,281		13,579
1-4 family residential	2,425		552		6,828		446		753		34,719		45,723
Construction and other consumer real estate	290		422		42		90		—		1,227		2,071
Total consumer loans	3,457		1,044		18,190		536		919		37,227		61,373
Total accruing	33,377		17,704		19,347		8,143		18,801		148,178		245,550
Nonaccruing
Commercial:
Commercial and industrial	442		576		—		611		5,199		20,410		27,238
Owner occupied	2,714		1,219		—		883		2,852		12,040		19,708
Municipal	—		1,056		—		—		—		—		1,056
Total commercial	3,156		2,851		—		1,494		8,051		32,450		48,002
Commercial real estate:
Construction and land development	11,080		68		—		93		3,300		6,427		20,968
Term	2,851		—		—		—		277		4,607		7,735
Total commercial real estate	13,931		68		—		93		3,577		11,034		28,703
Consumer:
Home equity credit line	—		—		420		203		—		399		1,022
1-4 family residential	3,378		1,029		1,951		191		3,527		9,413		19,489
Construction and other consumer real estate	—		463		—		—		—		100		563
Total consumer loans	3,378		1,492		2,371		394		3,527		9,912		21,074
Total nonaccruing	20,465		4,411		2,371		1,981		15,155		53,396		97,779
Total	$	53,842	$	22,115	$	21,718	$	10,124	$	33,956	$	201,574	$	343,329


¹	Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.


²	Includes TDRs that resulted from a combination of any of the previous modification types.

Unfunded lending commitments on TDRs amounted to approximately $7.5 million at March 31, 2015 and $6.1 million at December 31, 2014.

The total recorded investment of all TDRs in which interest rates were modified below market was $198.6 million at March 31, 2015 and $219.3 million at December 31, 2014. These loans are included in the previous schedule in the columns for interest rate below market and multiple modification types.

The net financial impact on interest income due to interest rate modifications below market for accruing TDRs is summarized in the following schedule:



	Three Months Ended March 31,
(In thousands)	2015			2014
Commercial:
Commercial and industrial	$	(57	)	$	18
Owner occupied	(112		)	(142		)
Total commercial	(169		)	(124		)
Commercial real estate:
Construction and land development	(37		)	(56		)
Term	(109		)	(148		)
Total commercial real estate	(146		)	(204		)
Consumer:
Home equity credit line	(1		)	(2		)
1-4 family residential	(271		)	(300		)
Construction and other consumer real estate	(7		)	(9		)
Total consumer loans	(279		)	(311		)
Total decrease to interest income¹	$	(594	)	$	(639	)

¹Calculated based on the difference between the modified rate and the premodified rate applied to the recorded investment.

On an ongoing basis, we monitor the performance of all TDRs according to their restructured terms. Subsequent payment default is defined in terms of delinquency, when principal or interest payments are past due 90 days or more for commercial loans, or 60 days or more for consumer loans.

The recorded investment of accruing and nonaccruing TDRs that had a payment default during the period listed below (and are still in default at period end) and are within 12 months or less of being modified as TDRs is as follows:



	Three Months Ended March 31, 2015						Three Months Ended March 31, 2014
(In thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial:
Commercial and industrial	$	—	$	44	$	44	$	—	$	—	$	—
Owner occupied	—		986		986		—		—		—
Total commercial	—		1,030		1,030		—		—		—
Commercial real estate:
Construction and land development	—		1,284		1,284		—		—		—
Term	—		—		—		—		84		84
Total commercial real estate	—		1,284		1,284		—		84		84
Consumer:
Home equity credit line	—		—		—		—		217		217
1-4 family residential	110		—		110		—		—		—
Construction and other consumer real estate	—		—		—		—		26		26
Total consumer loans	110		—		110		—		243		243
Total	$	110	$	2,314	$	2,424	$	—	$	327	$	327

Note: Total loans modified as TDRs during the 12 months previous to March 31, 2015 and 2014 were $74.5 million and $142.4 million, respectively.

As of March 31, 2015, the amount of foreclosed residential real estate property held by the Company was approximately $4.8 million, and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was approximately $10.5 million.

Concentrations of Credit Risk

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risks (whether on- or off-balance sheet) may occur when individual borrowers, groups of borrowers, or counterparties have similar economic characteristics, including industries, geographies, collateral types, sponsors, etc., and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. See Note 7 for a discussion of counterparty risk associated with the Company’s derivative transactions.

We perform an ongoing analysis of our loan portfolio to evaluate whether there is any significant exposure to any concentrations of credit risk. Based on this analysis, we believe that the loan portfolio is generally well diversified; however, there are certain significant concentrations in CRE and energy-related lending. Further, we cannot guarantee that we have fully understood or mitigated all risk concentrations or correlated risks. We have adopted and adhere to concentration limits on various types of CRE lending, particularly construction and land development lending, leveraged and enterprise value lending, municipal lending, and energy-related lending. All of these limits are continually monitored and revised as necessary.

Purchased Loans

Background and Accounting

We purchase loans in the ordinary course of business and account for them and the related interest income based on their performing status at the time of acquisition. PCI loans have evidence of credit deterioration at the time of acquisition and it is probable that not all contractual payments will be collected. Interest income for PCI loans is accounted for on an expected cash flow basis. Certain other loans acquired by the Company that are not credit-impaired include loans with revolving privileges and are excluded from the PCI tabular disclosures following. Interest income for these loans is accounted for on a contractual cash flow basis. Upon acquisition, in accordance with applicable accounting guidance, the acquired loans were recorded at their fair value without a corresponding ALLL. Certain acquired loans with similar characteristics such as risk exposure, type, size, etc., are grouped and accounted for in loan pools.

Outstanding Balances and Accretable Yield

The outstanding balances of all required payments and the related carrying amounts for PCI loans are as follows:



(In thousands)	March 31, 2015		December 31, 2014

Commercial	$	96,157	$	104,942
Commercial real estate	105,234		118,217
Consumer	17,129		17,910
Outstanding balance	$	218,520	$	241,069

Carrying amount	$	162,890	$	179,299
Less ALLL	1,438		2,800
Carrying amount, net	$	161,452	$	176,499

At the time of acquisition of PCI loans, we determine the loan’s contractually required payments in excess of all cash flows expected to be collected as an amount that should not be accreted (nonaccretable difference). With respect to the cash flows expected to be collected, the portion representing the excess of the loan’s expected cash flows over our initial investment (accretable yield) is accreted into interest income on a level yield basis over the remaining expected life of the loan or pool of loans. The effects of estimated prepayments are considered in estimating the expected cash flows.

Certain PCI loans are not accounted for as previously described because the estimation of cash flows to be collected involves a high degree of uncertainty. Under these circumstances, the accounting guidance provides that interest income is recognized on a cash basis similar to the cost recovery methodology for nonaccrual loans. The net carrying amounts in the preceding schedule also include the amounts for these loans, which were not significant at March 31, 2015 and were $5.3 million at December 31, 2014.

Changes in the accretable yield for PCI loans were as follows:



(In thousands)	Three Months Ended March 31,
(In thousands)	2015			2014

Balance at beginning of period	$	45,055		$	77,528
Accretion	(9,583		)	(22,307		)
Reclassification from nonaccretable difference	13,281			8,920
Disposals and other	2,178			1,624
Balance at end of period	$	50,931		$	65,765

Note: Amounts have been adjusted based on refinements to the original estimates of the accretable yield.

The primary drivers of reclassification to accretable yield from nonaccretable difference and increases in disposals and other resulted primarily from (1) changes in estimated cash flows, (2) unexpected payments on nonaccrual loans, and (3) recoveries on zero balance loans pools. See subsequent discussion under changes in cash flow estimates.

ALLL Determination

For all acquired loans, the ALLL is only established for credit deterioration subsequent to the date of acquisition and represents our estimate of the inherent losses in excess of the book value of acquired loans. The ALLL for acquired loans is included in the overall ALLL in the balance sheet.

During the three months ended March 31, 2015, and 2014, we adjusted the ALLL for acquired loans by recording a negative provision for loan losses of $(0.8) million and $(2.7) million, respectively. The provision is net of the ALLL reversals discussed subsequently.

Changes in the provision for loan losses and related ALLL are driven in large part by the same factors that affect the changes in reclassification from nonaccretable difference to accretable yield, as discussed under changes in cash flow estimates.

Changes in Cash Flow Estimates

Over the life of the loan or loan pool, we continue to estimate cash flows expected to be collected. We evaluate quarterly at the balance sheet date whether the estimated present values of these loans using the effective interest rates have decreased below their carrying values. If so, we record a provision for loan losses.

For increases in carrying values that resulted from better-than-expected cash flows, we use such increases first to reverse any existing ALLL. During the three months ended March 31, total reversals to the ALLL, including the impact of increases in estimated cash flows, were $1.4 million in 2015 and $2.9 million in 2014, respectively. When there is no current ALLL, we increase the amount of accretable yield on a prospective basis over the remaining life of the loan and recognize this increase in interest income. Changes that increase cash flows have been due primarily to (1) the enhanced economic status of borrowers compared to original evaluations, (2) improvements in the Southern California market where the majority of these loans were originated, and (3) efforts by our credit officers and loan workout professionals to resolve problem loans.

For the three months ended March 31, the impact of increased cash flow estimates recognized in the statement of income for acquired loans with no ALLL was approximately $7.4 million in 2015 and $18.5 million in 2014, respectively, of additional interest income.