FCNCA_10Q_9.30.2011 (A)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q/A
____________________________________________________
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
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Class A Common Stock—$1 Par Value—8,669,439 shares
Class B Common Stock—$1 Par Value—1,639,812 shares
(Number of shares outstanding, by class, as of September 30, 2011)

Table of Contents

Explanatory Note
This Form 10-Q/A is being filed by First Citizens BancShares (the “Company”) as an Amendment to its Quarterly Report on Form 10-Q for the period ended September 30, 2011 (the “Original Form 10-Q”) to correct the period ended date of the report as referenced in the certifications required by Exchange Act Rule 13a-14(b) or 15d-14(b) which are attached as Exhibits 32.1 and 32.2. Those certifications in the Original Form 10-Q inadvertently reflected the period ended dates as June 30, 2011 rather than September 30, 2011. No other information contained in the Original Form 10-Q is being amended.
Except as stated herein, no other revisions are being made in the Company's Original Form 10-Q.

This Form 10-Q/A does not reflect events occurring after the filing of the Company's Original Form 10-Q on November 9, 2011, and no attempt has been made in this Form 10-Q/A to modify or update other disclosures as presented in the Original Form 10-Q.


Table of Contents

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

3

Table of Contents

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.

4

Table of Contents

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.

5

Table of Contents

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.

6

Table of Contents

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.

7

Table of Contents

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

8

Table of Contents

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

9

Table of Contents

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.
        


10

Table of Contents

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.

11

Table of Contents

 
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.

12

Table of Contents

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 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 $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.


13

Table of Contents

 
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.


14

Table of Contents

Note C

Investments
The aggregate values of investment securities at September 30, 2011December 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

15

Table of Contents

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



16

Table of Contents

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.


17

Table of Contents

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


18

Table of Contents


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

19

Table of Contents

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

20

Table of Contents

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.

21

Table of Contents


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