FCNCA_10Q_9.30.2012
Table of Contents

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

For the quarterly period ended September 30, 2012
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—8,622,022 shares
Class B Common Stock—$1 Par Value—1,626,937 shares
(Number of shares outstanding, by class, as of November 9, 2012)

Table of Contents

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

2
Table of Contents

Part 1
 
Item 1.
Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
September 30*
2012
 
December 31#
2011
 
September 30*
2011
 
(thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
606,107

 
$
590,801

 
$
539,337

Overnight investments
688,196

 
434,975

 
410,002

Investment securities available for sale
5,012,041

 
4,056,423

 
3,994,825

Investment securities held to maturity
1,459

 
1,822

 
1,943

Loans held for sale
78,610

 
92,539

 
78,178

Loans and leases:
 
 
 
 
 
Covered under loss share agreements
1,897,097

 
2,362,152

 
2,557,450

Not covered under loss share agreements
11,455,233

 
11,581,637

 
11,603,526

Less allowance for loan and lease losses
276,554

 
270,144

 
254,184

Net loans and leases
13,075,776

 
13,673,645

 
13,906,792

Premises and equipment
885,757

 
854,476

 
847,372

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
116,405

 
148,599

 
160,443

Not covered under loss share agreements
45,063

 
50,399

 
48,616

Income earned not collected
51,565

 
42,216

 
43,886

Receivable from FDIC for loss share agreements
243,893

 
539,511

 
607,907

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
4,322

 
7,032

 
8,081

Other assets
261,801

 
286,430

 
265,337

Total assets
$
21,173,620

 
$
20,881,493

 
$
21,015,344

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
4,895,588

 
$
4,331,706

 
$
4,274,945

Interest-bearing
12,997,627

 
13,245,568

 
13,388,330

Total deposits
17,893,215

 
17,577,274

 
17,663,275

Short-term borrowings
677,773

 
615,222

 
600,384

Long-term obligations
472,170

 
687,599

 
744,839

Other liabilities
156,338

 
140,270

 
135,430

Total liabilities
19,199,496

 
19,020,365

 
19,143,928

Shareholders’ Equity
 
 
 
 
 
Common stock:
 
 
 
 
 
Class A - $1 par value (11,000,000 shares authorized; 8,628,810 shares issued and outstanding at September 30, 2012; 8,644,307 shares issued and outstanding at December 31, 2011; 8,669,439 shares issued and outstanding at September 30, 2011)
8,629

 
8,644

 
8,669

Class B - $1 par value (2,000,000 shares authorized; 1,626,937 shares issued and outstanding at September 30, 2012; 1,639,812 shares issued and outstanding at December 31, 2011; 1,639,812 shares issued and outstanding at September 30, 2011)
1,627

 
1,640

 
1,640

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,872,088

 
1,773,652

 
1,749,868

Accumulated other comprehensive loss
(51,986
)
 
(66,574
)
 
(32,527
)
Total shareholders’ equity
1,974,124

 
1,861,128

 
1,871,416

Total liabilities and shareholders’ equity
$
21,173,620

 
$
20,881,493

 
$
21,015,344

 
* Unaudited
# Derived from 2011 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.

3
Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2012
 
2011
 
2012
 
2011
 
(thousands, except share and per share data, unaudited)
Interest income
 
 
 
 
 
 
 
Loans and leases
$
226,812

 
$
240,493

 
$
696,813

 
$
705,677

Investment securities:
 
 
 
 
 
 
 
U. S. Treasury
559

 
1,707

 
1,968

 
7,176

Government agency
3,692

 
5,162

 
12,401

 
15,072

Residential mortgage-backed securities
4,792

 
2,366

 
8,883

 
7,123

Corporate bonds
278

 
1,971

 
2,319

 
6,266

State, county and municipal
6

 
108

 
30

 
133

Other
108

 
21

 
301

 
480

Total investment securities interest and dividend income
9,435

 
11,335

 
25,902

 
36,250

Overnight investments
427

 
351

 
1,230

 
1,056

Total interest income
236,674

 
252,179

 
723,945

 
742,983

Interest expense
 
 
 
 
 
 
 
Deposits
13,850

 
24,825

 
45,369

 
81,726

Short-term borrowings
1,114

 
1,470

 
4,089

 
4,649

Long-term obligations
6,354

 
8,697

 
22,747

 
28,059

Total interest expense
21,318

 
34,992

 
72,205

 
114,434

Net interest income
215,356

 
217,187

 
651,740

 
628,549

Provision for loan and lease losses
17,623

 
44,628

 
78,005

 
143,024

Net interest income after provision for loan and lease losses
197,733

 
172,559

 
573,735

 
485,525

Noninterest income
 
 
 
 
 
 
 
Gains on acquisitions
—

 
86,943

 
—

 
150,417

Cardholder and merchant services
24,725

 
30,801

 
71,872

 
88,124

Service charges on deposit accounts
15,549

 
16,389

 
45,456

 
47,957

Wealth management services
14,129

 
14,011

 
42,414

 
41,418

Fees from processing services
9,521

 
7,883

 
25,640

 
22,724

Securities gains (losses)
31

 
254

 
(11
)
 
(291
)
Other service charges and fees
3,377

 
6,256

 
10,392

 
18,173

Mortgage income
2,335

 
3,994

 
7,183

 
8,839

Insurance commissions
2,568

 
2,196

 
7,562

 
7,010

ATM income
1,263

 
1,453

 
3,999

 
4,413

Adjustment for FDIC receivable for loss share agreements
(16,858
)
 
(18,893
)
 
(57,788
)
 
(43,019
)
Other
(4,798
)
 
11,612

 
(638
)
 
13,363

Total noninterest income
51,842

 
162,899

 
156,081

 
359,128

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
76,675

 
77,877

 
229,145

 
229,805

Employee benefits
18,741

 
17,153

 
59,548

 
55,510

Occupancy expense
18,860

 
18,538

 
55,467

 
55,338

Equipment expense
17,983

 
17,478

 
54,147

 
52,384

FDIC insurance expense
2,016

 
2,768

 
7,739

 
13,494

Foreclosure-related expenses
8,667

 
14,558

 
29,053

 
23,793

Other
47,135

 
55,460

 
133,106

 
151,018

Total noninterest expense
190,077

 
203,832

 
568,205

 
581,342

Income before income taxes
59,498

 
131,626

 
161,611

 
263,311

Income taxes
19,974

 
50,205

 
49,009

 
98,830

Net income
$
39,524

 
$
81,421

 
$
112,602

 
$
164,481

Average shares outstanding
10,264,159

 
10,363,964

 
10,273,082

 
10,406,833

Net income per share
$
3.85

 
$
7.86

 
$
10.96

 
$
15.81

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 September 30
 
Nine Months Ended September 30
 
2012
 
2011
 
2012
 
2011
 
(thousands, unaudited)
Net income
$
39,524

 
$
81,421

 
$
112,602

 
$
164,481

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains arising during period
14,783

 
(2,753
)
 
16,376

 
5,344

Deferred tax benefit (expense)
(5,949
)
 
1,064

 
(6,582
)
 
(2,104
)
Reclassification adjustment for losses (gains) included in income before income taxes
(31
)
 
(254
)
 
(34
)
 
291

Deferred tax expense (benefit)
12

 
122

 
13

 
(93
)
Total change in unrealized gains on securities, net of tax
8,815

 
(1,821
)
 
9,773

 
3,438

 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
 
 
 
 
Change in unrecognized loss on cash flow hedges
619

 
(2,701
)
 
1,838

 
(78
)
Deferred tax benefit (expense)
(244
)
 
1,057

 
(726
)
 
31

Reclassification adjustment for gains (losses) included in income before income taxes
(769
)
 
(1,030
)
 
(2,294
)
 
(3,961
)
Deferred tax benefit (expense)
304

 
416

 
906

 
1,564

Total change in unrecognized loss on cash flow hedges, net of tax
(90
)
 
(2,258
)
 
(276
)
 
(2,444
)
 
 
 
 
 
 
 
 
Change in pension obligation:
 
 
 
 
 
 
 
Change in pension obligation
2,788

 
1,648

 
8,368

 
4,944

Deferred tax benefit (expense)
(1,092
)
 
(645
)
 
(3,277
)
 
(1,936
)
Total change in pension obligation, net of tax
1,696

 
1,003

 
5,091

 
3,008

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
10,421

 
(3,076
)
 
14,588

 
4,002

 
 
 
 
 
 
 
 
Total comprehensive income
$
49,945

 
$
78,345

 
$
127,190

 
$
168,483

 
 
 
 
 
 
 
 

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
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
—

 
—

 
—

 
164,481

 
—

 
164,481

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
4,002

 
4,002

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
168,483

Repurchase of 87,339 shares of Class A common stock
(88
)
 
—

 
—


(12,975
)
 
—

 
(13,063
)
Repurchase of 37,688 shares of Class B common stock
—

 
(38
)
 
—

 
(7,564
)
 
—

 
(7,602
)
Cash dividends ($0.90 per share)
—

 
—

 
—

 
(9,364
)
 
—

 
(9,364
)
Balance at September 30, 2011
$
8,669

 
$
1,640

 
$
143,766

 
$
1,749,868

 
$
(32,527
)
 
$
1,871,416

Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
112,602

 
—

 
112,602

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
14,588

 
14,588

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
127,190

Repurchase of 15,497 shares of Class A common stock
(15
)
 
 
 
 
 
(2,520
)
 
 
 
(2,535
)
Repurchase of 12,875 shares of Class B common stock
—

 
(13
)
 
—

 
(2,401
)
 
—

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

 
—

 
—

 
(9,245
)
 
—

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

 
$
1,627

 
$
143,766

 
$
1,872,088

 
$
(51,986
)
 
$
1,974,124

See accompanying Notes to Consolidated Financial Statements.


6
Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Nine Months Ended September 30
 
2012
 
2011
 
(thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
112,602

 
$
164,481

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

 
143,024

Deferred tax expense (benefit)
5,999

 
(36,243
)
Change in current taxes payable
23,051

 
52,970

Depreciation
50,685

 
48,883

Change in accrued interest payable
(12,574
)
 
(14,851
)
Change in income earned not collected
(9,349
)
 
46,753

Gains on acquisitions
—

 
(150,417
)
Securities losses
11

 
291

Origination of loans held for sale
(415,527
)
 
(333,860
)
Proceeds from sale of loans
433,489

 
350,855

Gain on sale of loans
(4,033
)
 
(6,240
)
Loss on sale of other real estate
1,757

 
4,410

Net accretion of premiums and discounts
(177,456
)
 
(126,315
)
FDIC receivable for loss share agreements
71,755

 
71,045

Net change in other assets
55,930

 
125,391

Net change in other liabilities
5,316

 
696

Net cash provided by operating activities
219,661

 
340,873

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
592,015

 
310,218

Purchases of investment securities available for sale
(4,241,879
)
 
(2,260,736
)
Proceeds from maturities of investment securities held to maturity
363

 
588

Proceeds from maturities of investment securities available for sale
3,293,188

 
2,848,385

Proceeds from sales of investment securities available for sale
56

 
242,023

Net change in overnight investments
(253,221
)
 
(11,612
)
Cash received from the FDIC for loss share agreements
223,863

 
239,800

Proceeds from sale of other real estate
114,357

 
57,083

Additions to premises and equipment
(73,616
)
 
(53,510
)
Net cash received from acquisitions
—

 
1,150,879

Net cash (used) provided by investing activities
(344,874
)
 
2,523,118

FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(756,798
)
 
(1,517,600
)
Net change in demand and other interest-bearing deposits
1,072,739

 
(665,750
)
Net change in short-term borrowings
62,551

 
(298,278
)
Repayment of long-term obligations
(223,779
)
 
(273,175
)
Repurchase of common stock
(4,949
)
 
(20,665
)
Cash dividends paid
(9,245
)
 
(9,364
)
Net cash provided (used) by financing activities
140,519

 
(2,784,832
)
Change in cash and due from banks
15,306

 
79,159

Cash and due from banks at beginning of period
590,801

 
460,178

Cash and due from banks at end of period
$
606,107

 
$
539,337

CASH PAYMENTS FOR:
 
 
 
Interest
$
84,779

 
$
129,285

Income taxes
35,208

 
45,825

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains
$
16,342

 
$
5,635

Change in fair value of cash flow hedge
(456
)
 
(4,039
)
Change in pension obligation
8,368

 
1,072

Transfers of loans to other real estate
117,363

 
122,471

Acquisitions:
 
 
 
Assets acquired
—

 
2,934,464

Liabilities assumed
—

 
2,784,047

Net assets acquired
—

 
150,417


See accompanying Notes to Consolidated Financial Statements.

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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 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 assigned to acquired assets are subject to refinement for 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 third quarter of 2012.
Effective April 1, 2012, BancShares elected to change the threshold above which impaired loans not considered to be troubled debt restructurings are individually evaluated for impairment. Previously, impaired loans greater than $1,000 were subject to an individual impairment analysis; effective in the second quarter of 2012, impaired loans greater than $500 were subject to such an analysis. The threshold for analysis is applied to the total lending relationship to determine the loans to be evaluated. Application of the new method resulted in a reduction in the allowance for loan and lease losses of $2,615 at June 30, 2012.
Long-Term Obligations
On July 31, 2012, BancShares redeemed the 8.05 percent junior subordinated debenture (the 1998 Debenture) issued by FCB/NC Capital Trust I (the Trust). The 1998 Debenture had a face value of $154,640 and was redeemed for $163,569, which represented 102.42 percent of the face value plus accrued interest. Redemption of the 1998 Debenture triggered the redemption of the 8.05 percent trust preferred securities (the 1998 Preferred Securities) by the Trust. The 1998 Preferred Securities had an aggregate liquidation amount of $150,000 and were redeemed for $158,661, which represented 102.42 percent of the face amount plus accrued interest. The repayment resulted in a $154,640 reduction in long-term borrowings, and the 2.42 percent prepayment penalty rate resulted in $3,630 in noninterest expense during the third quarter of 2012.
On July 15, 2012, BancShares repaid the outstanding debt obligation that related to a 2005 securitization and sale of revolving mortgage loans. The repayment resulted in a $21,565 reduction in long-term borrowings.
Recently Adopted Accounting Policies and Other Regulatory Issues
In May 2011, the Financial Accounting Standards Board (FASB) issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (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 disclosures of transfers between level 1 and level 2 and the reasons for those transfers; 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

8
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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 is required. The provisions of ASU 2011-08 are 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.
In September 2012, the FASB's Emerging Issues Task Force (EITF) ratified EITF issued EITF Issue No. 12-C Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as the Result of a Government-Assisted Acquisition of a Financial Institution (Issue 12-C). Issue 12-C requires that any indemnification asset resulting from a government-assisted transaction be subsequently measured on the same basis as the underlying loans by using the contractual limitations of the related loss share agreement. Issue 12-C is to be applied prospectively to new and earlier transactions, including the FDIC-assisted transactions involving BancShares. Issue 12-C is effective for periods ending after December 15, 2012, with early adoption permitted. BancShares adopted the provisions of Issue 12-C effective September 30, 2012 with no material impact on BancShares' financial condition, results of operations or liquidity.


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Table of Contents

Note B
Investments
The aggregate values of investment securities at September 30, 2012, December 31, 2011, and September 30, 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
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
872,411

 
$
409

 
$
30

 
$
872,790

Government agency
2,656,974

 
3,851

 
78

 
2,660,747

Corporate bonds
50,826

 
243

 
—

 
51,069

Residential mortgage-backed securities
1,387,482

 
20,622

 
333

 
1,407,771

Equity securities
841

 
18,215

 
—

 
19,056

State, county and municipal
601

 
7

 
—

 
608

Total investment securities available for sale
$
4,969,135

 
$
43,347

 
$
441

 
$
5,012,041

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

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

Investment securities held to maturity
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,459

 
$
151

 
$
27

 
$
1,583

December 31, 2011
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,822

 
$
184

 
$
26

 
$
1,980

September 30, 2011
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,943

 
$
191

 
$
26

 
$
2,108

 
 
 
 
 
 
 
 
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 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 the expected maturity distribution for residential mortgage-backed securities and the contractual maturity distribution of other investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.


10
Table of Contents

 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,206,157

 
$
2,207,677

 
$
3,238,657

 
$
3,241,415

 
$
3,398,267

 
$
3,401,530

One through five years
2,017,195

 
2,024,213

 
548,459

 
549,351

 
289,046

 
291,064

Five through 10 years
339,863

 
344,270

 
90,605

 
91,087

 
106,329

 
106,901

Over 10 years
405,079

 
416,825

 
151,198

 
159,257

 
171,414

 
179,226

Equity securities
841

 
19,056

 
939

 
15,313

 
939

 
16,104

Total investment securities available for sale
$
4,969,135

 
$
5,012,041

 
$
4,029,858

 
$
4,056,423

 
$
3,965,995

 
$
3,994,825

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
1,354

 
$
1,440

 
$
12

 
$
11

 
$
13

 
$
12

Five through 10 years
19

 
11

 
1,699

 
1,820

 
1,816

 
1,940

Over 10 years
86

 
132

 
111

 
149

 
114

 
156

Total investment securities held to maturity
$
1,459

 
$
1,583

 
$
1,822

 
$
1,980

 
$
1,943

 
$
2,108

For each period presented, securities gains (losses) include the following:
 
 
Three months ended September 30
 
Nine months ended September 30
 
2012
 
2011
 
2012
 
2011
Gross gains on sales of investment securities available for sale
$
31

 
$
375

 
$
36

 
$
531

Gross losses on sales of investment securities available for sale
—

 
(95
)
 
(2
)
 
(796
)
Other than temporary impairment loss on equity securities
—

 
(26
)
 
(45
)
 
(26
)
Total securities gains (losses)
$
31

 
$
254

 
$
(11
)
 
$
(291
)


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Table of Contents

The following table provides information regarding securities with unrealized losses as of September 30, 2012, December 31, 2011, and September 30, 2011:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
195,444

 
$
30

 
$
—

 
$
—

 
$
195,444

 
$
30

Government agency
135,927

 
78

 
502

 
—

 
136,429

 
78

Residential mortgage-backed securities
53,526

 
284

 
5,280

 
49

 
58,806

 
333

Total
$
384,897

 
$
392

 
$
5,782

 
$
49

 
$
390,679

 
$
441

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

 
$
—

 
$
18

 
$
27

 
$
18

 
$
27

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
151,269

 
30

 
—

 
—

 
151,269

 
30

Government agency
1,336,763

 
1,512

 
—

 
—

 
1,336,763

 
1,512

Residential mortgage-backed securities
59,458

 
304

 
1,380

 
42

 
60,838

 
346

State, county and municipal
—

 
—

 
10

 
1

 
10

 
1

Total
$
1,547,490

 
$
1,846

 
$
1,390

 
$
43

 
$
1,548,880

 
$
1,889

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

 
$
—

 
$
21

 
$
26

 
$
21

 
$
26

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

Investment securities with an aggregate fair value of $5,800 have had continuous unrealized losses for more than 12 months as of September 30, 2012, with an aggregate unrealized loss of $76. These 24 investments include residential mortgage-backed and government agency securities. None of the unrealized losses identified as of September 30, 2012, December 31, 2011, or 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.

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Table of Contents

Investment securities having an aggregate carrying value of $2,475,195 at September 30, 2012, $2,588,704 at December 31, 2011 and $2,563,412 at September 30, 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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Table of Contents

Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
Covered loans
$
1,897,097

 
$
2,362,152

 
$
2,557,450

Noncovered loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
319,743

 
381,163

 
416,719

Commercial mortgage
5,171,964

 
5,104,993

 
4,996,036

Other commercial real estate
158,767

 
144,771

 
144,538

Commercial and industrial
1,740,435

 
1,764,407

 
1,797,581

Lease financing
321,908

 
312,869

 
304,039

Other
131,755

 
158,369

 
158,782

Total commercial loans
7,844,572

 
7,866,572

 
7,817,695

Non-commercial:
 
 
 
 
 
Residential mortgage
814,877

 
784,118

 
816,738

Revolving mortgage
2,244,459

 
2,296,306

 
2,302,482

Construction and land development
132,352

 
137,271

 
139,185

Consumer
418,973

 
497,370

 
527,426

Total non-commercial loans
3,610,661

 
3,715,065

 
3,785,831

Total noncovered loans and leases
11,455,233

 
11,581,637

 
11,603,526

Total loans and leases
$
13,352,330

 
$
13,943,789

 
$
14,160,976

 

 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
Covered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
72,873

 
$
185,515

 
$
258,388

 
$
117,603

 
$
221,270

 
$
338,873

 
$
172,309

 
$
233,349

 
$
405,658

Commercial mortgage
103,219

 
1,005,829

 
1,109,048

 
138,465

 
1,122,124

 
1,260,589

 
125,379

 
1,184,704

 
1,310,083

Other commercial real estate
29,769

 
84,185

 
113,954

 
33,370

 
125,024

 
158,394

 
40,514

 
118,493

 
159,007

Commercial and industrial
8,767

 
51,020

 
59,787

 
27,802

 
85,640

 
113,442

 
30,611

 
106,642

 
137,253

Lease financing
—

 
—

 
—

 
—

 
57

 
57

 
—

 
162

 
162

Other
—

 
1,305

 
1,305

 
—

 
1,330

 
1,330

 
—

 
1,473

 
1,473

Total commercial loans
214,628

 
1,327,854

 
1,542,482

 
317,240

 
1,555,445

 
1,872,685

 
368,813

 
1,644,823

 
2,013,636

Non-commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
48,245

 
240,915

 
289,160

 
46,130

 
281,438

 
327,568

 
45,384

 
335,021

 
380,405

Revolving mortgage
8,787

 
28,493

 
37,280

 
15,350

 
36,202

 
51,552

 
9,939

 
29,770

 
39,709

Construction and land development
19,008

 
7,400

 
26,408

 
78,108

 
27,428

 
105,536

 
74,414

 
40,712

 
115,126

Consumer
56

 
1,711

 
1,767

 
1,477

 
3,334

 
4,811

 
1,155

 
7,419

 
8,574

Total non-commercial loans
76,096

 
278,519

 
354,615

 
141,065

 
348,402

 
489,467

 
130,892

 
412,922

 
543,814

Total covered loans
$
290,724

 
$
1,606,373

 
$
1,897,097

 
$
458,305

 
$
1,903,847

 
$
2,362,152

 
$
499,705

 
$
2,057,745

 
$
2,557,450


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Table of Contents


At September 30, 2012, $2,493,677 in noncovered loans were pledged to secure debt obligations, compared to $2,492,644 at December 31, 2011, and $2,346,113 at September 30, 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, 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

15
Table of Contents

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, disputes with first lienholders, and uncertainty regarding the customer's performance with respect to the first lien that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer
The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination 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.

16
Table of Contents

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the 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 as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.
Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full 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, 2012, relate to business credit cards and tobacco buyout loans classified as commercial and industrial loans. Business credit card loans with an outstanding balance of $78,535 at September 30, 2012, 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 $42,601 at September 30, 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.
The composition of the loans and leases outstanding at September 30, 2012, and December 31, 2011, and September 30, 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 noncovered loans and leases
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
283,804

 
$
4,846,921

 
$
148,075

 
$
1,567,505

 
$
317,545

 
$
130,768

 
$
7,294,618

Special mention
8,953

 
169,041

 
3,989

 
19,694

 
1,851

 
251

 
203,779

Substandard
25,722

 
141,461

 
6,317

 
23,049

 
1,827

 
730

 
199,106

Doubtful
940

 
12,078

 
98

 
2,553

 
583

 
—

 
16,252

Ungraded
324

 
2,463

 
288

 
127,634

 
102

 
6

 
130,817

Total
$
319,743

 
$
5,171,964

 
$
158,767

 
$
1,740,435

 
$
321,908

 
$
131,755

 
$
7,844,572

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

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