Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

FCNCA_10Q_3.31.2012

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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 March 31, 2012

¨ 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—8,644,307 shares

Class B Common Stock—$1 Par Value—1,626,937 shares

(Number of shares outstanding, by class, as of May 10, 2012)

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INDEX



		Page(s)

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at March 31, 2012, December 31, 2011 and March 31, 2011	3

	Consolidated Statements of Income for the three-month periods ended March 31, 2012 and March 31, 2011	4

	Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2012 and March 31, 2011	5

	Consolidated Statements of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2012 and March 31, 2011	6

	Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2012 and March 31, 2011	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 6.	Exhibits	67

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Part 1


Item 1.	Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



	March 31* 2012			December 31# 2011			March 31* 2011
	(thousands, except share data)
Assets
Cash and due from banks	$	552,663		$	590,801		$	406,252
Overnight investments	752,334			434,975			585,286
Investment securities available for sale	4,457,739			4,056,423			4,202,016
Investment securities held to maturity	1,688			1,822			2,341
Loans held for sale	73,457			92,539			48,222
Loans and leases:
Covered under loss share agreements	2,183,869			2,362,152			2,658,134
Not covered under loss share agreements	11,489,529			11,581,637			11,392,351
Less allowance for loan and lease losses	272,500			270,144			232,597
Net loans and leases	13,400,898			13,673,645			13,817,888
Premises and equipment	864,466			854,476			839,463
Other real estate owned:
Covered under loss share agreements	142,418			148,599			137,479
Not covered under loss share agreements	48,092			50,399			49,584
Income earned not collected	52,406			42,216			98,501
Receivable from FDIC for loss share agreements	410,351			539,511			624,322
Goodwill	102,625			102,625			102,625
Other intangible assets	6,076			7,032			9,265
Other assets	278,415			286,430			244,251
Total assets	$	21,143,628		$	20,881,493		$	21,167,495
Liabilities
Deposits:
Noninterest-bearing	$	4,572,300		$	4,331,706		$	4,164,449
Interest-bearing	13,187,192			13,245,568			13,647,287
Total deposits	17,759,492			17,577,274			17,811,736
Short-term borrowings	677,993			615,222			666,417
Long-term obligations	649,818			687,599			801,081
Other liabilities	164,202			140,270			100,047
Total liabilities	19,251,505			19,020,365			19,379,281
Shareholders’ Equity
Common stock:
Class A - $1 par value (11,000,000 shares authorized; 8,644,307 shares issued and outstanding at March 31, 2012 and December 31, 2011; 8,756,778 shares issued and outstanding at March 31, 2011)	8,644			8,644			8,757
Class B - $1 par value (2,000,000 shares authorized; 1,631,424 shares issued and outstanding at March 31, 2012; 1,639,812 shares issued and outstanding at December 31, 2011; 1,677,675 shares issued and outstanding at March 31, 2011)	1,631			1,640			1,678
Surplus	143,766			143,766			143,766
Retained earnings	1,804,498			1,773,652			1,673,920
Accumulated other comprehensive loss	(66,416		)	(66,574		)	(39,907		)
Total shareholders’ equity	1,892,123			1,861,128			1,788,214
Total liabilities and shareholders’ equity	$	21,143,628		$	20,881,493		$	21,167,495

* Unaudited

# Derived from 2011 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 March 31
	2012			2011
	(thousands, except share and per share data, unaudited)
Interest income
Loans and leases	$	238,137		$	231,453
Investment securities:
U. S. Treasury	739			3,210
Government agency	4,332			5,047
Residential mortgage-backed securities	1,889			2,653
Corporate bonds	1,199			2,176
State, county and municipal	12			13
Other	131			259
Total investment securities interest and dividend income	8,302			13,358
Overnight investments	313			389
Total interest income	246,752			245,200
Interest expense
Deposits	16,472			29,820
Short-term borrowings	1,391			1,697
Long-term obligations	7,937			9,696
Total interest expense	25,800			41,213
Net interest income	220,952			203,987
Provision for loan and lease losses	30,715			44,419
Net interest income after provision for loan and lease losses	190,237			159,568
Noninterest income
Gains on acquisitions	—			63,474
Cardholder and merchant services	22,450			26,780
Service charges on deposit accounts	14,846			15,790
Wealth management services	13,755			13,288
Fees from processing services	8,562			7,246
Securities gains (losses)	(45		)	(449		)
Other service charges and fees	3,441			5,957
Mortgage income	4,611			2,315
Insurance commissions	2,756			2,534
ATM income	1,455			1,590
Adjustments for FDIC receivable for loss share agreements	(26,796		)	(10,379		)
Other	1,908			1,434
Total noninterest income	46,943			129,580
Noninterest expense
Salaries and wages	75,684			75,804
Employee benefits	20,249			19,649
Occupancy expense	18,607			18,313
Equipment expense	18,166			17,391
FDIC insurance expense	3,057			8,225
Foreclosure-related expenses	4,621			5,488
Other	42,947			45,158
Total noninterest expense	183,331			190,028
Income before income taxes	53,849			99,120
Income taxes	18,354			37,360
Net income	$	35,495		$	61,760
Average shares outstanding	10,283,842			10,434,453
Net income per share	$	3.45		$	5.92

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Comprehensive Income

First Citizens BancShares, Inc. and Subsidiaries



	Three Months Ended March 31
	2012			2011
	(thousands, unaudited)
Net income	$	35,495		$	61,760

Other comprehensive income (loss)
Unrealized gains on securities:
Change in unrealized securities gains arising during period	(2,898		)	(9,139		)
Deferred tax benefit (expense)	1,123			3,447
Reclassification adjustment for losses (gains) included in income before income taxes	—			449
Deferred tax expense (benefit)	—			(177		)
Total change in unrealized gains on securities, net of tax	(1,775		)	(5,420		)

Change in fair value of cash flow hedges:
Change in unrecognized loss on cash flow hedges	1,138			3,175
Deferred tax benefit (expense)	(450		)	(1,254		)
Reclassification adjustment for gains (losses) included in income before income taxes	(749		)	(1,458		)
Deferred tax benefit (expense)	296			576
Total change in unrecognized loss on cash flow hedges, net of tax	235			1,039

Change in pension obligation:
Change in pension obligation	2,790			1,648
Deferred tax benefit (expense)	(1,092		)	(645		)
Total change in pension obligation, net of tax	1,698			1,003

Other comprehensive income (loss)	158			(3,378		)

Total comprehensive income	$	35,653		$	58,382

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, 2010	$	8,757	$	1,678		$	143,766	$	1,615,290		$	(36,529	)	$	1,732,962
Comprehensive income:
Net income	—		—			—		61,760			—			61,760
Other comprehensive loss, net of tax	—		—			—		—			(3,378		)	(3,378		)
Total comprehensive income														58,382
Cash dividends ($0.30 per share)	—		—			—		(3,130		)	—			(3,130		)
Balance at March 31, 2011	$	8,757	$	1,678		$	143,766	$	1,673,920		$	(39,907	)	$	1,788,214
Balance at December 31, 2011	$	8,644	$	1,640		$	143,766	$	1,773,652		$	(66,574	)	$	1,861,128
Comprehensive income:
Net income	—		—			—		35,495			—			35,495
Other comprehensive income, net of tax	—		—			—		—			158			158
Total comprehensive income														35,653
Repurchase of 8,388 shares of Class B common stock	—		(9		)	—		(1,564		)	—			(1,573		)
Cash dividends ($0.30 per share)	—		—			—		(3,085		)	—			(3,085		)
Balance at March 31, 2012	$	8,644	$	1,631		$	143,766	$	1,804,498		$	(66,416	)	$	1,892,123

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	Three months ended
	March 31,
	2012			2011
	(thousands, unaudited)
OPERATING ACTIVITIES
Net income	$	35,495		$	61,760
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses	30,715			44,419
Deferred tax (benefit) expense	(5,692		)	1,155
Change in current taxes payable	22,857			30,455
Depreciation	16,620			16,114
Change in accrued interest payable	(2,233		)	(9,074		)
Change in income earned not collected	(10,190		)	(9,582		)
Gains on acquisitions	—			(63,474		)
Securities losses	45			449
Origination of loans held for sale	(135,897		)	(87,719		)
Proceeds from sale of loans	158,391			130,641
Gain on sale of loans	(3,412		)	(2,211		)
Loss on sale of other real estate	1,495			2,074
Net amortization (accretion) of premiums and discounts	(60,822		)	(34,455		)
FDIC receivable for loss share agreements	130,722			128,845
Net change in other assets	23,564			143,341
Net change in other liabilities	6,487			(14,193		)
Net cash provided by operating activities	208,145			338,545
INVESTING ACTIVITIES
Net change in loans outstanding	277,719			119,185
Purchases of investment securities available for sale	(1,681,584		)	(141,592		)
Proceeds from maturities of investment securities held to maturity	134			191
Proceeds from maturities of investment securities available for sale	1,275,014			522,893
Proceeds from sales of investment securities available for sale	—			191,697
Net change in overnight investments	(317,359		)	(186,896		)
Proceeds from sale of other real estate	23,853			18,067
Additions to premises and equipment	(26,610		)	(12,832		)
Net cash received from acquisitions	—			961,862
Net cash provided (used) by investing activities	(448,833		)	1,472,575
FINANCING ACTIVITIES
Net change in time deposits	(306,338		)	(367,974		)
Net change in demand and other interest-bearing deposits	488,556			(1,060,414		)
Net change in short-term borrowings	62,771			(217,033		)
Repayment of long-term obligations	(37,781		)	(216,495		)
Repurchase of common stock	(1,573		)	—
Cash dividends paid	(3,085		)	(3,130		)
Net cash provided (used) by financing activities	202,550			(1,865,046		)
Change in cash and due from banks	(38,138		)	(53,926		)
Cash and due from banks at beginning of period	590,801			460,178
Cash and due from banks at end of period	$	552,663		$	406,252
CASH PAYMENTS FOR:
Interest	$	28,033		$	50,287
Income taxes	84			9,100
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized securities gains (losses)	$	(2,898	)	$	(9,339	)
Change in fair value of cash flow hedge	389			1,717
Change in pension obligation	2,790			1,648
Transfers of loans to other real estate	26,840			46,929
Acquisitions:
Assets acquired	—			2,225,370
Liabilities assumed	—			2,161,896
Net assets acquired	—			63,474

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)


Note A

Accounting Policies and Basis of Presentation

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’ 2011 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2012. 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. There were no adjustments to previously reported acquisition gains during the first quarter of 2012.

Recently Adopted Accounting Policies and Other Regulatory Issues

In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 creates a uniform framework for applying fair value measurement principles for companies around the world. It eliminates differences between GAAP and International Financial Reporting Standards issued by the International Accounting Standards Board. New disclosures required by the guidance include: quantitative information about the significant unobservable inputs used for Level 3 measurements; a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; and a description of the company’s valuation processes. The updates in ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011, and all amendments are to be applied prospectively with any changes in measurements recognized in income in the period of adoption. The provisions of this update have affected BancShares' financial statement disclosures, but 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. Additionally, in December, 2011, the FASB issued Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12) which deferred the portion of ASU 2011-05 that relates to the presentation of reclassification adjustments. 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 previously utilized by BancShares. The updates in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and have been applied retrospectively. The provisions of these updates have affected BancShares' financial statement format, but had no 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

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effective for interim and annual periods beginning after December 15, 2011, although early adoption was allowed. Adoption of ASU 2011-08 has had no material impact on BancShares' financial condition, results of operations or liquidity.

Note B

Investments

The aggregate values of investment securities at March 31, 2012, December 31, 2011, and March 31, 2011 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
March 31, 2012
U. S. Treasury	$	1,065,035	$	306	$	305	$	1,065,036
Government agency	2,859,197		1,228		5,040		2,855,385
Corporate bonds	225,214		1,214		—		226,428
Residential mortgage-backed securities	282,706		8,393		191		290,908
Equity securities	894		18,049		—		18,943
State, county and municipal	1,026		14		1		1,039
Total investment securities available for sale	$	4,434,072	$	29,204	$	5,537	$	4,457,739
December 31, 2011
U. S. Treasury	$	887,041	$	808	$	30	$	887,819
Government agency	2,591,974		1,747		1,512		2,592,209
Corporate bonds	250,476		2,344		—		252,820
Residential mortgage-backed securities	298,402		9,165		346		307,221
Equity securities	939		14,374		—		15,313
State, county and municipal	1,026		16		1		1,041
Total investment securities available for sale	$	4,029,858	$	28,454	$	1,889	$	4,056,423
March 31, 2011
U. S. Treasury	$	1,464,513	$	2,691	$	234	$	1,466,970
Government agency	2,115,575		352		17,394		2,098,533
Corporate bonds	453,390		6,327		—		459,717
Residential mortgage-backed securities	152,483		3,971		532		155,922
Equity securities	965		18,656		—		19,621
State, county and municipal	1,238		19		4		1,253
Total investment securities available for sale	$	4,188,164	$	32,016	$	18,164	$	4,202,016
Investment securities held to maturity
March 31, 2012
Residential mortgage-backed securities	$	1,688	$	183	$	27	$	1,844
December 31, 2011
Residential mortgage-backed securities	$	1,822	$	184	$	26	$	1,980
March 31, 2011
Residential mortgage-backed securities	$	2,341	$	217	$	21	$	2,537

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 issued by various financial institutions under the

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Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the 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.



	March 31, 2012				December 31, 2011				March 31, 2011
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Investment securities available for sale
Maturing in:
One year or less	$	2,750,247	$	2,748,710	$	3,238,657	$	3,241,415	$	2,966,749	$	2,958,654
One through five years	1,469,876		1,469,236		548,459		549,351		895,234		895,807
Five through 10 years	67,229		67,683		90,605		91,087		21,099		21,099
Over 10 years	145,826		153,167		151,198		159,257		304,117		306,835
Equity securities	894		18,943		939		15,313		965		19,621
Total investment securities available for sale	$	4,434,072	$	4,457,739	$	4,029,858	$	4,056,423	$	4,188,164	$	4,202,016
Investment securities held to maturity
Maturing in:
One through five years	$	379	$	393	$	12	$	11	$	5	$	3
Five through 10 years	1,201		1,306		1,699		1,820		2,214		2,368
Over 10 years	108		145		111		149		122		166
Total investment securities held to maturity	$	1,688	$	1,844	$	1,822	$	1,980	$	2,341	$	2,537

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



	Three months ended March 31,
	2012			2011
Gross gains on sales of investment securities available for sale	$	—		$	156
Gross losses on sales of investment securities available for sale	—			(605		)
Other that temporary impairment loss on equity securities	(45		)	—
Total securities losses	$	(45	)	$	(449	)

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The following table provides information regarding securities with unrealized losses as of March 31, 2012 and March 31, 2011:



	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2012
Investment securities available for sale:
U. S. Treasury	$	579,673	$	305	$	—	$	—	$	579,673	$	305
Government agency	2,143,742		5,040		—		—		2,143,742		5,040
Residential mortgage-backed securities	28,595		156		1,113		35		29,708		191
State, county and municipal	127		1		10		—		137		1
Total	$	2,752,137	$	5,502	$	1,123	$	35	$	2,753,260	$	5,537
Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	20	$	27	$	20	$	27
March 31, 2011
Investment securities available for sale:
U.S. Treasury	$	200,561	$	234	$	—	$	—	$	200,561	$	234
Government agency	1,937,968		17,394		—		—		1,937,968		17,394
Residential mortgage-backed securities	33,644		503		462		29		34,106		532
State, county and municipal	528		4		10		—		538		4
Total	$	2,172,701	$	18,135	$	472	$	29	$	2,173,173	$	18,164
Investment securities held to maturity:
Residential mortgage-backed securities	$	—	$	—	$	19	$	21	$	19	$	21

Investment securities with an aggregate fair value of $1,143 have had continuous unrealized losses for more than twelve months as of March 31, 2012 with an aggregate unrealized loss of $62. These 19 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of March 31, 2012 December 31, 2011, or March 31, 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 $2,540,463 at March 31, 2012, $2,588,704 at December 31, 2011 and $2,604,467 at March 31, 2011 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 C

Loans and Leases

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



	March 31, 2012		December 31, 2011		March 31, 2011
Covered loans	$	2,183,869	$	2,362,152	$	2,658,134
Noncovered loans and leases:
Commercial:
Construction and land development	346,557		381,163		373,769
Commercial mortgage	5,127,948		5,104,993		4,763,393
Other commercial real estate	150,316		144,771		147,150
Commercial and industrial	1,739,724		1,764,407		1,792,042
Lease financing	315,704		312,869		295,994
Other	149,792		158,369		174,370
Total commercial loans	7,830,041		7,866,572		7,546,718
Non-commercial:
Residential mortgage	793,612		784,118		808,650
Revolving mortgage	2,282,138		2,296,306		2,299,668
Construction and land development	132,677		137,271		145,864
Consumer	451,061		497,370		591,451
Total non-commercial loans	3,659,488		3,715,065		3,845,633
Total noncovered loans and leases	11,489,529		11,581,637		11,392,351
Total loans and leases	$	13,673,398	$	13,943,789	$	14,050,485



	March 31, 2012						December 31, 2011						March 31, 2011
	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	$	100,736	$	209,865	$	310,601	$	117,603	$	221,270	$	338,873	$	112,271	$	290,045	$	402,316
Commercial mortgage	122,876		1,072,665		1,195,541		138,465		1,122,124		1,260,589		141,869		1,290,763		1,432,632
Other commercial real estate	31,727		113,251		144,978		33,370		125,024		158,394		36,338		126,967		163,305
Commercial and industrial	17,397		75,864		93,261		27,802		85,640		113,442		31,124		139,917		171,041
Lease financing	—		45		45		—		57		57		22		249		271
Other	—		1,283		1,283		—		1,330		1,330		—		1,729		1,729
Total commercial loans	272,736		1,472,973		1,745,709		317,240		1,555,445		1,872,685		321,624		1,849,670		2,171,294
Non-commercial:
Residential mortgage	46,905		251,633		298,538		46,130		281,438		327,568		19,846		327,547		347,393
Revolving mortgage	14,125		35,891		50,016		15,350		36,202		51,552		7,341		16,068		23,409
Construction and land development	56,722		28,833		85,555		78,108		27,428		105,536		56,829		54,596		111,425
Consumer	1,453		2,598		4,051		1,477		3,334		4,811		140		4,473		4,613
Total non-commercial loans	119,205		318,955		438,160		141,065		348,402		489,467		84,156		402,684		486,840
Total covered loans	$	391,941	$	1,791,928	$	2,183,869	$	458,305	$	1,903,847	$	2,362,152	$	405,780	$	2,252,354	$	2,658,134

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At March 31, 2012, $2,398,476 in noncovered loans were pledged to secure debt obligations, compared to $2,492,644 at December 31, 2011 and $2,376,716 at March 31, 2011.

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 is 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 credit

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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 attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some

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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 March 31, 2012 relate to business credit cards and tobacco buyout loans. Business credit card loans are subject to automatic charge off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $41,580 at March 31, 2012 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 March 31, 2012 and December 31, 2011 and March 31, 2011 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
March 31, 2012
Pass	$	303,018	$	4,744,063	$	136,776	$	1,554,112	$	309,681	$	147,767	$	7,195,417
Special mention	20,097		243,495		6,805		35,497		3,336		2,018		311,248
Substandard	21,297		130,815		6,068		27,057		2,453		—		187,690
Doubtful	1,821		6,588		365		1,676		—		—		10,450
Ungraded	324		2,987		302		121,382		234		7		125,236
Total	$	346,557	$	5,127,948	$	150,316	$	1,739,724	$	315,704	$	149,792	$	7,830,041
December 31, 2011
Pass	$	332,742	$	4,749,254	$	130,586	$	1,556,651	$	306,225	$	157,089	$	7,232,547
Special mention	18,973		220,235		5,821		36,951		4,537		1,271		287,788
Substandard	28,793		129,391		7,794		28,240		2,107		—		196,325
Doubtful	17		1,164		377		643		—		—		2,201
Ungraded	638		4,949		193		141,922		—		9		147,711
Total	$	381,163	$	5,104,993	$	144,771	$	1,764,407	$	312,869	$	158,369	$	7,866,572
March 31, 2011
Pass	$	316,395	$	4,403,652	$	133,931	$	1,571,193	$	285,699	$	173,025	$	6,883,895
Special mention	22,416		232,019		7,415		40,023		6,228		1,299		309,400
Substandard	32,864		119,229		5,271		30,992		3,796		12		192,164
Doubtful	2,094		6,004		401		1,182		271		—		9,952
Ungraded	—		2,489		132		148,652		—		34		151,307
Total	$	373,769	$	4,763,393	$	147,150	$	1,792,042	$	295,994	$	174,370	$	7,546,718



	Non-commercial noncovered loans and leases
	Residential Mortgage		Revolving Mortgage		Construction and Land Development		Consumer		Total Non-commercial Noncovered Loans
March 31, 2012
Current	$	763,411	$	2,274,091	$	130,561	$	446,421	$	3,614,484
31-60 days past due	14,001		2,349		808		1,885		19,043
61-90 days past due	2,812		1,212		446		1,028		5,498
Over 90 days past due	13,388		4,486		862		1,727		20,463
Total	$	793,612	$	2,282,138	$	132,677	$	451,061	$	3,659,488
December 31, 2011
Current	$	757,113	$	2,286,511	$	135,774	491,142		$	3,670,540
31-60 days past due	11,790		3,437		798		3,514		19,539
61-90 days past due	2,686		2,042		127		1,271		6,126
Over 90 days past due	12,529		4,316		572		1,443		18,860
Total	$	784,118	$	2,296,306	$	137,271	$	497,370	$	3,715,065
March 31, 2011
Current	$	777,982	$	2,287,726	$	142,423	$	580,544	$	3,788,675
31-60 days past due	16,439		5,462		1,116		6,911		29,928
61-90 days past due	2,207		3,285		364		2,216		8,072
Over 90 days past due	12,022		3,195		1,961		1,780		18,958
Total	$	808,650	$	2,299,668	$	145,864	$	591,451	$	3,845,633

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	Covered loans
Grade:	Construction and Land Development - Commercial		Commercial Mortgage		Other Commercial Real Estate		Commercial and Industrial		Lease Financing		Residential Mortgage		Revolving Mortgage		Construction and Land Development Non-commercial		Consumer and Other		Total Covered Loans
March 31, 2012
Pass	$	31,445	$	392,233	$	56,689	$	31,768	$	45	$	173,640	$	35,684	$	7,020	$	2,478	$	731,002
Special mention	89,243		335,020		26,736		21,376		—		18,054		802		14,263		546		506,040
Substandard	86,750		382,134		51,918		24,905		—		70,545		11,153		53,919		1,082		682,406
Doubtful	99,747		85,993		9,635		15,212		—		9,934		2,377		10,353		816		234,067
Ungraded	3,416		161		—		—		—		26,365		—		—		412		30,354
Total	$	310,601	$	1,195,541	$	144,978	$	93,261	$	45	$	298,538	$	50,016	$	85,555	$	5,334	$	2,183,869
December 31, 2011
Pass	$	29,321	$	397,526	$	49,259	$	36,409	$	57	$	189,794	$	34,164	$	4,958	$	2,393	$	743,881
Special mention	92,758		348,482		33,754		32,257		—		25,464		3,566		13,394		942		550,617
Substandard	125,158