Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

FCNCA_10Q_9.30.2011

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, 2011

¨ 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—8,669,439 shares

Class B Common Stock—$1 Par Value—1,639,812 shares

(Number of shares outstanding, by class, as of September 30, 2011)

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INDEX



		Page(s)

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at September 30, 2011, December 31, 2010 and September 30, 2010	3

	Consolidated Statements of Income for the three- and nine- month periods ended September 30, 2011 and September 30, 2010	4

	Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2011 and September 30, 2010	5

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2011 and September 30, 2010	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	73

Item 4.	Controls and Procedures	73

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	74

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 6.	Exhibits	78

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Part 1


Item 1.	Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



	September 30* 2011			December 31# 2010			September 30* 2010
	(thousands, except share data)
Assets
Cash and due from banks	$	539,337		$	460,178		$	493,786
Overnight investments	410,002			398,390			1,049,158
Investment securities available for sale	3,994,825			4,510,076			3,786,841
Investment securities held to maturity	1,943			2,532			2,645
Loans held for sale	78,178			88,933			79,853
Loans and leases:
Covered under loss share agreements	2,557,450			2,007,452			2,222,660
Not covered under loss share agreements	11,603,526			11,480,577			11,545,309
Less allowance for loan and lease losses	254,184			227,765			218,046
Net loans and leases	13,906,792			13,260,264			13,549,923
Premises and equipment	847,372			842,745			845,478
Other real estate owned:
Covered under loss share agreements	160,443			112,748			99,843
Not covered under loss share agreements	48,616			52,842			47,523
Income earned not collected	43,886			83,644			83,204
Receivable from FDIC for loss share agreements	607,907			623,261			651,844
Goodwill	102,625			102,625			102,625
Other intangible assets	8,081			9,897			11,373
Other assets	265,337			258,524			245,195
Total assets	$	21,015,344		$	20,806,659		$	21,049,291
Liabilities
Deposits:
Noninterest-bearing	$	4,274,945		$	3,976,366		$	3,859,389
Interest-bearing	13,388,330			13,658,900			13,883,639
Total deposits	17,663,275			17,635,266			17,743,028
Short-term borrowings	600,384			546,597			652,716
Long-term obligations	744,839			809,949			819,145
Other liabilities	134,916			81,885			116,198
Total liabilities	19,143,414			19,073,697			19,331,087
Shareholders’ Equity
Common stock:
Class A - $1 par value (8,669,439 shares issued and outstanding at September 30, 2011 8,756,778 shares issued and outstanding at December 31, 2010 and September 30, 2010)	8,669			8,757			8,757
Class B - $1 par value (1,639,812 shares issued and outstanding at September 30, 2011, 1,677,675 shares issued and outstanding at December 31, 2010 and September 30, 2010)	1,640			1,678			1,678
Surplus	143,766			143,766			143,766
Retained earnings	1,750,382			1,615,290			1,588,336
Accumulated other comprehensive loss	(32,527		)	(36,529		)	(24,333		)
Total shareholders’ equity	1,871,930			1,732,962			1,718,204
Total liabilities and shareholders’ equity	$	21,015,344		$	20,806,659		$	21,049,291

* Unaudited

# Derived from 2010 Annual Report on Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income



	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(thousands, except share and per share data, unaudited)
Interest income
Loans and leases	$	240,493		$	264,819		$	705,677		$	654,434
Investment securities:
U. S. Treasury	1,707			5,774			7,176			20,120
Government agency	5,162			3,632			15,072			8,887
Residential mortgage-backed securities	2,366			1,544			7,123			4,981
Corporate bonds	1,971			2,196			6,266			6,529
State, county and municipal	108			14			133			62
Other	21			77			480			159
Total investment securities interest and dividend income	11,335			13,237			36,250			40,738
Overnight investments	351			572			1,056			1,591
Total interest income	252,179			278,628			742,983			696,763
Interest expense
Deposits	24,825			37,087			81,726			116,294
Short-term borrowings	1,470			742			4,649			2,138
Long-term obligations	8,697			10,859			28,059			32,493
Total interest expense	34,992			48,688			114,434			150,925
Net interest income	217,187			229,940			628,549			545,838
Provision for loan and lease losses	44,628			59,873			143,024			108,629
Net interest income after provision for loan and lease losses	172,559			170,067			485,525			437,209
Noninterest income
Gain on acquisitions	87,788			—			151,262			136,000
Cardholder and merchant services	30,801			27,982			88,124			80,276
Service charges on deposit accounts	16,389			18,063			47,957			56,403
Wealth management services	14,011			12,826			41,418			38,782
Fees from processing services	7,883			7,485			22,724			21,934
Securities gains (losses)	254			940			(291		)	1,885
Other service charges and fees	6,256			4,734			18,173			14,492
Mortgage income	3,994			3,013			8,839			6,347
Insurance commissions	2,196			1,980			7,010			6,580
ATM income	1,453			1,730			4,413			5,084
Adjustments for FDIC receivable for loss share agreements	(18,893		)	(29,532		)	(43,019		)	(14,005		)
Other	11,612			748			13,363			762
Total noninterest income	163,744			49,969			359,973			354,540
Noninterest expense
Salaries and wages	77,877			74,727			229,805			221,362
Employee benefits	17,153			14,455			55,510			48,605
Occupancy expense	18,538			18,353			55,338			54,706
Equipment expense	17,478			17,251			52,384			49,670
FDIC insurance expense	2,768			5,842			13,494			17,338
Foreclosure-related expenses	14,558			(1,271		)	23,793			6,804
Other	55,460			47,494			151,018			133,092
Total noninterest expense	203,832			176,851			581,342			531,577
Income before income taxes	132,471			43,185			264,156			260,172
Income taxes	50,536			15,439			99,161			97,213
Net income	$	81,935		$	27,746		$	164,995		$	162,959
Average shares outstanding	10,363,964			10,434,453			10,406,833			10,434,453
Net income per share	$	7.91		$	2.66		$	15.85		$	15.62

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

First Citizens BancShares, Inc. and Subsidiaries



	Class A Common Stock			Class B Common Stock			Surplus		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	(thousands, except share data, unaudited)
Balance at December 31, 2009	$	8,757		$	1,678		$	143,766	$	1,429,863		$	(24,949	)	$	1,559,115
Adjustment resulting from adoption of a change in accounting for QSPEs and controlling financial interests effective January 1, 2010	—			—			—		4,904			—			4,904
Comprehensive income:
Net income	—			—			—		162,959			—			162,959
Change in unrealized securities gains arising during period, net of $1,988 deferred tax	—			—			—		—			5,567			5,567
Less reclassification adjustment for gains included in net income, net of $900 deferred tax benefit	—			—			—		—			(1,398		)	(1,398		)
Change in pension liability, net of $1,178 tax benefit	—			—			—		—			1,830			1,830
Change in unrecognized loss on cash flow hedges, net of $3,153 deferred tax benefit	—			—			—		—			(5,383		)	(5,383		)
Total comprehensive income															163,575
Cash dividends	—			—			—		(9,390		)	—			(9,390		)
Balance at September 30, 2010	$	8,757		$	1,678		$	143,766	$	1,588,336		$	(24,333	)	$	1,718,204
Balance at December 31, 2010	$	8,757		$	1,678		$	143,766	$	1,615,290		$	(36,529	)	$	1,732,962
Comprehensive income:
Net income	—			—			—		164,995			—			164,995
Change in unrealized securities gains arising during period, net of $2,104 deferred tax	—			—			—		—			3,240			3,240
Reclassification adjustment for losses included in net income, net of $93 deferred tax	—			—			—		—			198			198
Change in pension liability, net of $1,936 deferred tax	—			—			—		—			3,008			3,008
Change in unrecognized loss on cash flow hedges, net of $1,595 deferred tax benefit	—			—			—		—			(2,444		)	(2,444		)
Total comprehensive income															168,997
Repurchase of 87,339 shares of Class A common stock	(88		)						(12,975		)				(13,063		)
Repurchase of 37,863 shares of Class B common stock	—			(38		)	—		(7,564		)	—			(7,602		)
Cash dividends	—			—			—		(9,364		)	—			(9,364		)
Balance at September 30, 2011	$	8,669		$	1,640		$	143,766	$	1,750,382		$	(32,527	)	$	1,871,930

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	For the nine months ended
	September 30,
	2011			2010
	(thousands, unaudited)
OPERATING ACTIVITIES
Net income	$	164,995		$	162,959
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles	3,337			4,727
Provision for loan and lease losses	143,024			108,629
Deferred tax (benefit) expense	(36,243		)	(82,228		)
Change in current taxes payable	52,970			2,260
Depreciation	48,883			46,565
Change in accrued interest payable	(14,851		)	(4,348		)
Change in income earned not collected	46,753			(14,860		)
Gain on acquisitions	(151,262		)	(136,000		)
Securities losses (gains)	291			(1,885		)
Origination of loans held for sale	(333,860		)	(420,346		)
Proceeds from sale of loans	350,855			413,958
Gain on sale of loans	(6,240		)	(6,084		)
Loss on sale of other real estate	4,410			1,005
Net amortization (accretion) of premiums and discounts	(129,652		)	(25,868		)
FDIC receivable for loss share agreements	313,375			62,789
Net change in other assets	123,791			67,944
Net change in other liabilities	696			41,399
Net cash provided by operating activities	581,272			220,616
INVESTING ACTIVITIES
Net change in loans outstanding	311,591			526,380
Purchases of investment securities available for sale	(2,260,736		)	(2,536,499		)
Proceeds from maturities of investment securities held to maturity	588			956
Proceeds from maturities of investment securities available for sale	2,848,385			1,686,400
Proceeds from sales of investment securities available for sale	242,023			38,384
Net change in overnight investments	(11,612		)	(325,898		)
Proceeds from sale of other real estate	57,083			(54,961		)
Additions to premises and equipment	(53,510		)	75,738
Net cash received from acquisitions	1,148,907			106,489
Net cash provided (used) by investing activities	2,282,719			(483,011		)
FINANCING ACTIVITIES
Net change in time deposits	(1,517,600		)	(323,859		)
Net change in demand and other interest-bearing deposits	(665,750		)	1,021,589
Net change in short-term borrowings	(298,278		)	(481,098		)
Repayment of long-term obligations	(273,175		)	—
Origination of long-term obligations	—			68,697
Repurchase of common stock	(20,665		)	—
Cash dividends paid	(9,364		)	(9,390		)
Net cash provided (used) by financing activities	(2,784,832		)	275,939
Change in cash and due from banks	79,159			13,544
Cash and due from banks at beginning of period	460,178			480,242
Cash and due from banks at end of period	$	539,337		$	493,786
CASH PAYMENTS FOR:
Interest	$	129,285		$	155,273
Income taxes	45,825			126,964
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains	$	5,635		$	5,529
Unrealized gain (loss) on cash flow hedge	4,039			(8,896		)
Prepaid pension benefit				—
Change in pension liability	4,944			3,008
Transfers of loans to other real estate	122,471			55,559
Acquisitions:
Assets acquired	2,935,309			2,291,659
Liabilities assumed	2,784,047			2,155,861
Net assets acquired	151,262			135,798

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 Other Matters

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.

In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. and Subsidiaries (BancShares) as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ from those estimates.

Management has evaluated subsequent events through the filing date of the Quarterly Report on Form 10-Q.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in BancShares’ 2010 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2011. The reclassifications have no effect on shareholders’ equity or net income as previously reported. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available.

FDIC-Assisted Transactions

US GAAP requires that the acquisition method of accounting be used for all business combinations, including those resulting from FDIC-assisted transactions and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

During 2011, 2010 and 2009, BancShares’ wholly-owned subsidiary, First-Citizens Bank & Trust Company (FCB), acquired assets and assumed liabilities of six entities as noted below (collectively referred to as “the Acquisitions”) with the assistance of the Federal Deposit Insurance Corporation (FDIC), which had been appointed Receiver of each entity by its respective state banking authority.



Name of entity	Headquarters location	Date of transaction
Colorado Capital Bank (CCB)	Castle Rock, Colorado	July 8, 2011
United Western Bank (United Western)	Denver, Colorado	January 21, 2011
Sun American Bank (SAB)	Boca Raton, Florida	March 5, 2010
First Regional Bank (First Regional)	Los Angeles, California	January 29, 2010
Venture Bank (VB)	Lacey, Washington	September 11, 2009
Temecula Valley Bank (TVB)	Temecula, California	July 17, 2009

The acquired assets and assumed liabilities were recorded at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the Acquisitions. Management judgmentally assigned risk ratings to loans based on credit quality, appraisals and estimated collateral values, estimated expected cash flows, and applied appropriate liquidity and coupon discounts to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. FCB also recorded identifiable intangible assets representing the estimated values of the assumed core deposits and other customer relationships. Management used quoted or current market prices to determine the fair value of investment securities. Fair values of deposits, short-term borrowings and long-term obligations are based on current market interest rates and are inclusive of any applicable prepayment penalties.

Loans and Leases

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Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.

Loans that are classified as held for sale represent mortgage loans originated or purchased and are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgage loans are included in mortgage income.

Acquired loans are recorded at fair value at the date of acquisition. The fair values are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included as a reduction to the carrying amount of acquired loans. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation regarding the amount and timing of such cash flows. Initial cash flow estimates are updated prospectively, and subsequent decreases to expected cash flows will generally result in recognition of an allowance by a charge to provision for loan and lease losses. Subsequent increases in expected cash flows result in either a reversal of the provision for loan and lease losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on the accretable yield.

BancShares did not initially estimate the timing of cash flows for loans acquired in the TVB or VB transactions at the dates of the acquisitions. Accordingly, the cost recovery method was being applied to these loans unless new information on cash flow estimates obtained in the later periods indicated subsequent improvement that would lead to the reclassification of nonaccretable difference to accretable yield. During the third quarter of 2011, estimates of the timing and amount of cash flows at TVB resulted in $50.9 million previously classified as nonaccretable difference being reclassified to accretable yield that is being accreted prospectively.

Cash flow analyses were performed on loans acquired from First Regional, SAB, and United Western on an individual loan basis in order to determine the cash flows expected to be collected. Loans from all transactions prior to CCB that were determined to be impaired at acquisition date are accruing interest under the accretion method and are thus, not reported as nonaccrual. Loans not determined to be impaired at acquisition date are monitored after acquisition and classified as nonaccrual if we are no longer able to reasonably estimate the timing and amount of cash flows expected to be collected. BancShares is accounting all acquired loans from TVB, VB, First Regional and SAB, and all non-mortgage loans acquired from United Western on a loan level.

Cash flow analyses were performed at the loan pool level for all loans acquired in the CCB transaction and mortgage loans acquired in the United Western transaction and thus, the determination of accretable yield and nonaccretable difference is made at the pool level. Each loan pool is made up of loans with similar characteristics at the date of acquisition including loan type, collateral type and performance status. Further, all loan pools that have accretable yield to be recognized in interest income are classified as accruing regardless of the status of individual loans within the pool. If it is determined that the expected cash flows from a pool of loans has decreased since acquisition, an allowance for loan losses is established.

Receivable from FDIC for Loss Share Agreements

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable should the assets be sold. Fair value at acquisition was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment at the expiration of the loss share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursements from the FDIC and any applicable true-up payment owed to the FDIC for transactions that include claw-back provisions.

The FDIC receivable has been reviewed and updated prospectively as loss estimates related to covered loans and other real estate owned change, and as reimbursements are received or expected to be received from the FDIC. Post-acquisition adjustments to the FDIC receivable are charged or credited to noninterest income. Adjustments to the FDIC receivable resulting from changes in estimated cash flows are based on the reimbursement provision of the applicable loss share agreement with the FDIC. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, if aggregate loss estimates increase and extend into a different range of losses, the reimbursement rates for losses within the higher range will be at a higher rate. In other loss share agreements, higher loss estimates trigger a reduction in the reimbursement rates for losses incurred within the higher range. Changes in loss estimates may also affect the estimated payment to the FDIC for loss share agreements that include a clawback provision.

Other Real Estate Owned Covered by Loss Share Agreements

Other real estate owned (OREO) covered by loss share agreements with the FDIC is reported exclusive of

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expected reimbursement cash flows from the FDIC. Subsequent downward adjustments to the estimated recoverable value of covered OREO result in a reduction of covered OREO, a charge to other noninterest expense and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded as an adjustment to other noninterest income. OREO is presented at the estimated present value that management expects to receive when the property is sold, net of related costs of disposal. Management used appraisals of properties to determine fair values and applied additional discounts where appropriate for passage of time or, in certain cases, for subsequent events occurring after the appraisal date.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment. BancShares performs its annual impairment test as of July 31 each year. For 2011, the results of the first step of the goodwill impairment test provided no indication of potential impairment of BancShares' goodwill. Goodwill will continue to be monitored for triggering events that may indicate impairment prior to the next scheduled annual impairment test.

Recently Adopted Accounting Policies and Other Regulatory Issues

In July 2010, the FASB issued Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss (ASU 2010-20). In an effort to provide financial statement users with greater transparency about the allowance for loan and lease losses, ASU 2010-20 requires enhanced disclosures regarding the nature of credit risk inherent in the portfolio, how risk is analyzed and assessed in determining the amount of the allowance, and descriptions of any changes in the allowance calculation. The end-of-period disclosures were effective for BancShares on December 31, 2010 with the exception of disclosures related to troubled debt restructurings which became effective for interim and annual periods beginning after June 15, 2011. The disclosures related to activity during a period are effective during 2011. The provisions of ASU 2010-20 have affected disclosures regarding the allowance for loan and lease losses, but have had no impact on financial condition, results of operations or liquidity.

In April, 2011, the FASB issued A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02), which amends Subtopic 310-40 to clarify existing guidance related to a creditor’s evaluation of whether a restructuring of debt is considered a TDR. The amendments add clarification in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties. The updated guidance and related disclosure requirements are effective for financial statements issued for the first interim or annual period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 did not result in the identification of any additional troubled debt restructurings and have had no impact on BancShares' financial condition, results of operations or liquidity.

In June, 2011, the FASB issued Comprehensive Income: Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 allows financial statement issuers to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, which is the presentation method currently utilized by BancShares. The provisions of ASU 2011-05, which will be applied retrospectively for interim periods beginning after December 15, 2011, will affect BancShares' disclosure format, but will not have an impact on BancShares' financial condition, results of operations or liquidity.

In September, 2011, the FASB issued Intangibles - Goodwill and Other Intangible Assets: Testing Goodwill for Impairment (ASU 2011-08), which allows an entity the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that is it more likely than not that the fair value of a reporting unit is less than its carrying amount. Under ASU 2011-08, if, after that assessment is made, an entity determines that it is more likely than not that the carrying value of goodwill is not impaired, then the two-step impairment test is not required. However, if the entity concludes otherwise, the two-step impairment test would be required. The provisions of ASU 2011-08 are effective for interim and annual periods beginning after December 15, 2011, although early adoption is allowed. Adoption of ASU 2011-08 will have no material impact on BancShares' financial condition, results of operations or liquidity.

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Note B

Federally Assisted Transactions

On January 21, 2011, FCB entered into an agreement with the FDIC, as Receiver, to purchase substantially all the assets and assume the majority of the liabilities of United Western at a discount of $213,000 with no deposit premium. United Western operated in Denver, Colorado, with eight branch locations in Boulder, Centennial, Cherry Creek, downtown Denver, Hampden at Interstate 25, Fort Collins, Longmont and Loveland. The Purchase and Assumption Agreement with the FDIC includes loss share agreements on the covered loans and other real estate purchased by FCB which provides protection against losses to FCB.

The loans and OREO purchased in the United Western transaction are covered by two loss share agreements between the FDIC and FCB (one for single family residential mortgage (SFR) loans and the other for all other loans and OREO excluding consumer loans). Under the loss share agreement for single family residential mortgage loans (SFRs), the FDIC will cover 80 percent of covered loan losses up to $32,489; 0 percent from $32,489 up to $57,653 and 80 percent of losses in excess of $57,653. The loss share agreement for all other non-consumer loans and OREO will cover 80 percent of covered loan and OREO losses up to $111,517; 30 percent of losses from $111,517 to $227,032; and 80 percent of losses in excess of $227,032. Consumer loans are not covered under the FDIC loss share agreements.

The SFR loss share agreement covers losses recorded during the ten years following the date of the transaction, while the term for the loss share agreement covering all other covered loans and OREO is five years. The SFR loss share agreement also covers recoveries received for ten years following the date of the transaction, while recoveries of all other covered loans and OREO will be shared with the FDIC for a five-year period. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.

The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $294,000. On March 17, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals 20 percent of the Total Intrinsic Loss Estimate, or $58,800; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($52,898); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $37,936. Current loss estimates suggest that a true-up payment of $11,827 will be paid to the FDIC during 2021.

The FDIC-assisted acquisition of United Western was accounted for under the acquisition method of accounting. The statement of net assets acquired, adjustments to the acquisition date fair values made in the second and third quarters and the resulting acquisition gain is presented in the following table. As indicated in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During this one year period, the cause of any change in cash flow estimates is considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the acquisition. Adjustments to the estimated fair values made in the second and third quarters reduced the gain by $2,034 and were based on additional information regarding the acquisition date fair values, which included updated appraisals on properties that either secure an acquired loan or are in OREO. The FDIC also repurchased 18 loans that were included in the original acquisition but which FCB had requested be excluded from the portfolio of acquired loans due to cross collateralization with other loans retained by the FDIC.

First quarter 2011 noninterest income includes an acquisition gain of $63,474 that resulted from the United Western FDIC-assisted acquisition. The gain resulted from the difference between the estimated fair value of acquired assets and assumed liabilities. During the second and third quarter of 2011, adjustments were made to the gain based on additional information regarding the acquisition date fair values. These second and third quarter adjustments were made retroactive to the first quarter of 2011, resulting in the adjusted gain of $63,474. FCB recorded a deferred tax liability for the gain of $24,856 resulting from differences between the financial statement and tax bases of assets acquired and liabilities assumed in this transaction. To the extent there are additional adjustments to the acquisition date fair values for up to one year following the acquisition, there will be additional adjustments to the gain.

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	January 21, 2011
	As recorded by United Western			Fair value adjustments at date of acquisition				Subsequent acquisition-date adjustments				As recorded by FCB
Assets
Cash and due from banks	$	420,902		$	—			$	—			$	420,902
Investment securities available for sale	281,862			—				—				281,862
Loans covered by loss share agreements (1)	1,034,074			(278,913		)	a	4,190			i	759,351
Other real estate owned covered by loss share agreements	37,812			(10,252		)	b	(1,469		)	i	26,091
Income earned not collected	5,275			—				—				5,275
Receivable from FDIC for loss share agreements	—			140,285			c	(2,832		)	i	137,453
FHLB stock	22,783			—				—				22,783
Mortgage servicing rights	4,925			(1,489		)	d	—				3,436
Core deposit intangible	—			537			e	—				537
Other assets	15,421			109			f	(991		)	i	14,539
Total assets acquired	$	1,823,054		$	(149,723	)		$	(1,102	)		$	1,672,229
Liabilities
Deposits:
Noninterest-bearing	$	101,875		$	—			$	—			$	101,875
Interest-bearing	1,502,983			—				—				1,502,983
Total deposits	1,604,858			—				—				1,604,858
Short-term borrowings	336,853			—				—				336,853
Long-term obligations	206,838			789			g	—				207,627
Deferred tax liability	1,351			(565		)	h	—				786
Other liabilities	11,772			—				—				11,772
Total liabilities assumed	2,161,672			224				—				2,161,896
Excess (shortfall) of assets acquired over liabilities assumed	$	(338,618	)
Aggregate fair value adjustments				$	(149,947	)		$	(1,102	)
Cash received from the FDIC (2)												$	553,141
Gain on acquisition of United Western												$	63,474


(1)	Excludes $11,998 in loans repurchased by FDIC during the second quarter of 2011


(2)	Cash received includes cash received from loans repurchased by the FDIC during the second quarter of 2011

Explanation of fair value adjustments

a - Adjustment reflects the fair value adjustments based on FCB’s evaluation of the acquired loan portfolio.

b - Adjustment reflects the estimated OREO losses based on FCB’s evaluation of the acquired OREO.

c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss share agreements.

d - Adjustment reflects the fair value adjustment based on evaluation of mortgage servicing rights.

e - Adjustment reflects the estimated fair value of intangible assets, which includes core deposit intangibles.

f - Adjustment reflects amount needed to adjust the carrying value of other assets to estimated fair value.

g - Adjustment reflects the amount of the prepayment penalty assessed on early payoff of long-term obligations.

h - Adjustment reflects the fair value adjustment on FCB’s evaluation of the deferred tax liability assumed in the transaction.

i - Adjustment to acquisition date fair value based on additional information received post-acquisition regarding acquisition date fair value and adjustments resulting from loans repurchased by the FDIC.

On July 8, 2011, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of CCB of Castle Rock, Colorado at a discount of $154,900, with no deposit premium.

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CCB operated in Castle Rock, Colorado, and in six branch locations in Boulder, Castle Pines, Cherry Creek, Colorado Springs, Edwards, and Parker. The Purchase and Assumption Agreement with the FDIC includes loss share agreements on the loans and OREO purchased by FCB which provide protection against losses to FCB.

The loans and OREO purchased in the CCB transaction are covered by two loss share agreements between the FDIC and FCB (one for SFR loans and the other for all other loans and OREO excluding consumer loans and CD secured loans), which afford FCB significant loss protection. Under the loss share agreements, the FDIC will cover 80 percent of combined covered losses up to $230,991; 0 percent from $230,991 up to $285,947; and 80 percent of losses in excess of $285,947.

The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $285,708. On August 22, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals 20 percent of the Total Intrinsic Loss Estimate, or $57,142; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($38,725); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $19,295. Current loss estimates suggest that a true-up payment of $16,349 will be paid to the FDIC during 2021.

The FDIC-assisted acquisition of CCB was accounted for under the acquisition method of accounting. The statement of net assets acquired, fair value adjustments and the resulting acquisition gain is presented in the following table. As indicated in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During this one year period, the cause of any change in cash flow estimates is considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the acquisition.

Third quarter 2011 noninterest income includes an acquisition gain of $87,788 that resulted from the CCB FDIC-assisted acquisition. The gain resulted from the difference between the estimated fair value of acquired assets and assumed liabilities. FCB recorded a deferred tax liability for the gain of $34,377 resulting from differences between the financial statement and tax bases of assets acquired and liabilities assumed in this transaction. To the extent there are additional adjustments to the acquisition date fair values for up to one year following the acquisition, there will be adjustments to the gain.

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	July 8, 2011
	As recorded by CCB		Fair value adjustments at date of acquisition				As recorded by FCB
Assets
Cash and due from banks	$	74,736	$	—			$	74,736
Investment securities available for sale	40,187		—				40,187
Loans covered by loss share agreements	538,369		(216,207		)	a	322,162
Other real estate owned covered by loss share agreements	14,853		(7,699		)	b	7,154
Income earned not collected	1,720		—				1,720
Receivable from FDIC for loss share agreements	—		157,600			c	157,600
Core deposit intangible	—		984			d	984
Other assets	3,296		—				3,296
Total assets acquired	$	673,161	$	(65,322	)		$	607,839
Liabilities
Deposits:
Noninterest-bearing	$	35,862	$	—			$	35,862
Interest-bearing	571,251		(612		)	e	570,639
Total deposits	607,113		(612		)		606,501
Short-term borrowings	15,008		204			f	15,212
Other liabilities	438		—				438
Total liabilities assumed	622,559		(408		)		622,151
Excess (shortfall) of assets acquired over liabilities assumed	$	50,602
Aggregate fair value adjustments			$	(64,914	)
Cash received from the FDIC							$	102,100
Gain on acquisition of CCB							$	87,788

Explanation of fair value adjustments

a - Adjustment reflects the fair value adjustments based on FCB’s evaluation of the acquired loan portfolio.

b - Adjustment reflects the estimated OREO losses based on FCB’s evaluation of the acquired OREO.

c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss share agreements.

d - Adjustment reflects the estimated value of intangible assets, which includes core deposit intangibles.

e - Adjustment reflects the fair value of deposits assumed based on FCB's evaluation of the term deposits assumed.

f - Adjustment reflects the amount of the prepayment penalty assessed on early payoff of long-term obligations.

Results of operations for United Western and CCB prior to their respective acquisition dates are not included in the income statement.

Due to the significant amount of fair value adjustments, the resulting accretion of those fair value adjustments and the protection resulting from the FDIC loss share agreements, historical results of United Western and CCB are not relevant to BancShares’ results of operations. Therefore, no pro forma information is presented.

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Note C

Investments

The aggregate values of investment securities at September 30, 2011, December 31, 2010, and September 30, 2010 along with unrealized gains and losses determined on an individual security basis are as follows:



	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale
September 30, 2011
U. S. Treasury	$	986,507	$	1,427	$	—	$	987,934
Government agency	2,261,000		2,344		2,435		2,260,909
Corporate bonds	401,048		3,595		—		404,643
Residential mortgage-backed securities	315,474		8,916		198		324,192
Equity securities	939		15,165		—		16,104
State, county and municipal	1,027		16		—		1,043
Total investment securities available for sale	$	3,965,995	$	31,463	$	2,633	$	3,994,825
December 31, 2010
U. S. Treasury	$	1,935,666	$	4,041	$	307	$	1,939,400
Government agency	1,930,469		361		10,844		1,919,986
Corporate bonds	479,160		7,498		—		486,658
Residential mortgage-backed securities	139,291		4,522		268		143,545
Equity securities	1,055		18,176		—		19,231
State, county and municipal	1,240		20		4		1,256
Total investment securities available for sale	$	4,486,881	$	34,618	$	11,423	$	4,510,076
September 30, 2010
U. S. Treasury	$	1,991,676	$	7,259	$	—	$	1,998,935
Government agency	1,120,476		1,840		—		1,122,316
Corporate bonds	479,935		9,254		—		489,189
Residential mortgage-backed securities	151,355		4,891		110		156,136
Equity securities	1,132		17,865		—		18,997
State, county and municipal	1,241		27		—		1,268
Total investment securities available for sale	$	3,745,815	$	41,136	$	110	$	3,786,841
Investment securities held to maturity
September 30, 2011
Residential mortgage-backed securities	$	1,943	$	191	$	26	$	2,108
December 31, 2010
Residential mortgage-backed securities	$	2,532	$	235	$	26	$	2,741
September 30, 2010
Residential mortgage-backed securities	$	2,645	$	245	$	26	$	2,864

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

Investments in corporate bonds represent debt securities that were issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the

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United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.

The following table provides maturity information for investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.



	September 30, 2011				December 31, 2010				September 30, 2010
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	3,398,267	$	3,401,530	$	3,441,185	$	3,436,818	$	2,559,784	$	2,567,076
One through five years	289,046		291,064		916,101		921,536		1,044,757		1,056,170
Five through 10 years	106,329		106,901		1,683		1,710		1,815		1,841
Over 10 years	171,414		179,226		126,857		130,781		138,327		142,757
Equity securities	939		16,104		1,055		19,231		1,132		18,997
Total investment securities available for sale	$	3,965,995	$	3,994,825	$	4,486,881	$	4,510,076	$	3,745,815	$	3,786,841
Investment securities held to maturity
Maturing in:
One through five years	$	13	$	12	$	—	$	—	$	—	$	—
Five through 10 years	1,816		1,940		2,404		2,570		2,512		2,689
Over 10 years	114		156		128		171		133		175
Total investment securities held to maturity	$	1,943	$	2,108	$	2,532	$	2,741	$	2,645	$	2,864

For each period presented, securities gains (losses) include the following:



	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Gross gains on sales of investment securities available for sale	$	375		$	1,167		$	531		$	3,803
Gross losses on sales of investment securities available for sale	(95		)	(1		)	(796		)	(1,506		)
Other that temporary impairment loss on equity securities	(26		)	(226		)	(26		)	(412		)
Total securities gains (losses)	$	254		$	940		$	(291	)	$	1,885

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The following table provides information regarding securities with unrealized losses as of September 30, 2011 and September 30, 2010:



	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2011
Investment securities available for sale:
Government agency	$	1,051,017	$	2,435	$	—	$	—	$	1,051,017	$	2,435
Residential mortgage-backed securities	25,390		148		1,675		50		27,065		198
State, county and municipal	—		—		425		—		425		—
Total	$	1,076,407	$	2,583	$	2,100	$	50	$	1,078,507	$	2,633
Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	22	$	26	$	22	$	26
September 30, 2010
Investment securities available for sale:
Residential mortgage-backed securities	10,364		88		535		22		10,899		110
Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	27	$	26	$	27	$	26

Investment securities with an aggregate fair value of $2,122 have had continuous unrealized losses for more than twelve months as of September 30, 2011 with an aggregate unrealized loss of $76. These 19 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of September 30, 2011 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 $2,563,412 at September 30, 2011, $2,096,850 at December 31, 2010 and $2,015,500 at September 30, 2010 were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.

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Note D

Loans and Leases

Loans and leases outstanding include the following as of the dates indicated:



	September 30, 2011		December 31, 2010		September 30, 2010
Covered loans	$	2,557,450	$	2,007,452	$	2,222,660
Noncovered loans and leases:
Commercial:
Construction and land development	416,719		338,929		433,954
Commercial mortgage	4,996,036		4,737,862		4,696,183
Other commercial real estate	144,538		149,710		155,509
Commercial and industrial	1,797,581		1,869,490		1,774,340
Lease financing	304,039		301,289		294,825
Other	158,782		182,015		185,232
Total commercial loans	7,817,695		7,579,295		7,540,043
Non-commercial:
Residential mortgage	816,738		878,792		917,415
Revolving mortgage	2,302,482		2,233,853		2,209,149
Construction and land development	139,185		192,954		112,116
Consumer	527,426		595,683		766,586
Total non-commercial loans	3,785,831		3,901,282		4,005,266
Total noncovered loans and leases	11,603,526		11,480,577		11,545,309
Total loans and leases	$	14,160,976	$	13,488,029	$	13,767,969



	September 30, 2011						December 31, 2010						September 30, 2010
	Impaired at acquisition date		All other acquired loans		Total		Impaired at acquisition date		All other acquired loans		Total		Impaired at acquisition date		All other acquired loans		Total
Covered loans:
Commercial:
Construction and land development	$	172,309	$	233,349	$	405,658	$	102,988	$	265,432	$	368,420	$	136,736	$	312,063	$	448,799
Commercial mortgage	125,379		1,184,704		1,310,083		120,240		968,824		1,089,064		132,049		999,134		1,131,183
Other commercial real estate	40,514		118,493		159,007		34,704		175,957		210,661		43,023		177,001		220,024
Commercial and industrial	30,611		106,642		137,253		9,087		123,390		132,477		14,400		168,505		182,905
Lease financing	—		162		162		—		—		—		—		—		—
Other	—		1,473		1,473		—		1,510		1,510		147		4,534		4,681
Total commercial loans	368,813		1,644,823		2,013,636		267,019		1,535,113		1,802,132		326,355		1,661,237		1,987,592
Non-commercial:
Residential mortgage	45,384		335,021		380,405		11,026		63,469		74,495		36,933		45,836		82,769
Revolving mortgage	9,939		29,770		39,709		8,400		9,466		17,866		114		23,025		23,139
Construction and land development	74,414		40,712		115,126		44,260		61,545		105,805		37,228		84,964		122,192
Consumer	1,155		7,419		8,574		—		7,154		7,154		116		6,852		6,968
Total non-commercial loans	130,892		412,922		543,814		63,686		141,634		205,320		74,391		160,677		235,068
Total covered loans	$	499,705	$	2,057,745	$	2,557,450	$	330,705	$	1,676,747	$	2,007,452	$	400,746	$	1,821,914	$	2,222,660

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At September 30, 2011, $2,346,113 in noncovered loans were pledged to secure debt obligations, compared to $3,744,067 at December 31, 2010 and $3,697,003 at September 30, 2010.

Description of segment and class risks

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. Management has identified the most significant risks as described below which are generally similar among the segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

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 businesses 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. Common risks to each class of commercial loans include general economic conditions within the markets BancShares serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral. Due to the concentration of loans in the medical, dental, and related fields, BancShares is susceptible to risks that legislative and governmental actions will fundamentally alter the economic structure of the medical care industry in the United States.

In addition to these common risks for the majority of commercial loans and leases, additional risks are inherent in certain classes of commercial loans and leases.

Commercial construction and land development

Commercial construction and land development loans are highly dependent on the supply and demand for commercial real estate in the markets served by BancShares as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Commercial mortgage, commercial and industrial and lease financing

Commercial mortgage and commercial and industrial loans and lease financing are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for the loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.

Other commercial real estate

Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

Non-commercial loans

Each non-commercial 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

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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. Common risks to each class of non-commercial 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 non-commercial loans.

In addition to these common risks for the majority of non-commercial loans, additional risks are inherent in certain classes of non-commercial 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 and disputes with first lienholders 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 in excess of principal repayment.

Residential mortgage and non-commercial construction and land development

Residential mortgage and non-commercial 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. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. Non-commercial 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.

Covered loans

The risks associated with covered loans are generally consistent with the risks identified for commercial and non-commercial loans and the classes of loans within those segments. An additional risk with respect to covered loans relates to the FDIC loss share agreements, specifically the ability to receive timely and full reimbursement from the FDIC for losses and related expenses that are believed to be covered by the loss share agreements. Further, these loans were underwritten by other institutions with weaker lending standards. Therefore, there is a significant risk that the loans are not adequately supported by the paying capacity of the borrower or the values of underlying collateral at the time of origination.

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. Commercial loans and leases, non-commercial loans and leases, and covered 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 commercial loans and leases and all covered 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

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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 obligor 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 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 loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. 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 write-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 noncovered, ungraded loans at September 30, 2011 relate to business credit cards and tobacco buyout loans. Tobacco buyout loans with an outstanding balance of $62,373 at September 30, 2011 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 to be made by the Commodity Credit Corporation which is part of the United States Department of Agriculture.

The credit quality indicators for noncovered, non-commercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.

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The composition of the loans and leases outstanding at September 30, 2011 and December 31, 2010 by credit quality indicator is provided below:



	Commercial noncovered loans and leases
Grade:	Construction and Land Development		Commercial Mortgage		Other Commercial Real Estate		Commercial and Industrial		Lease Financing		Other		Total Commercial Loans Not Covered by Loss Share
September 30, 2011
Pass	$	371,906	$	4,632,698	$	130,591	$	1,585,106	$	296,420	$	157,742	$	7,174,463
Special mention	18,431		232,537		8,672		38,844		4,765		1,020		304,269
Substandard	26,249		123,968		4,629		27,700		2,854		—		185,400
Doubtful	133		4,307		401		270		—		—		5,111
Ungraded	—		2,526		245		145,661		—		20		148,452
Total	$	416,719	$	4,996,036	$	144,538	$	1,797,581