Loans and Leases

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



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



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

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

Description of segment and class risks

Each portfolio segment and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among the segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

Commercial loans and leases

Each commercial loan or lease is centrally underwritten based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower’s businesses including the experience and background of the principals is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed. Common risks to each class of commercial loans include general economic conditions within the markets BancShares serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral. Due to the concentration of loans in the medical, dental, and related fields, BancShares is susceptible to risks that legislative and governmental actions will fundamentally alter the economic structure of the medical care industry in the United States.

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

Commercial construction and land development

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

Commercial mortgage, commercial and industrial and lease financing

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

Other commercial real estate

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

Non-commercial loans

Each non-commercial loan is centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BancShares serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to non-commercial loans.

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

Revolving mortgage

Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.

Consumer

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

Residential mortgage and non-commercial construction and land development

Residential mortgage and non-commercial construction and land development loans are made to individuals and are typically secured by 1-4 family residential property, undeveloped land, and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. Non-commercial construction and land development projects can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.

Covered loans

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

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial loans and leases, non-commercial loans and leases, and covered loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.

The credit quality indicators for commercial loans and leases and all covered loans and leases are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.

Loss – Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of noncovered, ungraded loans at September 30, 2011 relate to business credit cards and tobacco buyout loans. Tobacco buyout loans with an outstanding balance of $62,373 at September 30, 2011 are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are to be made by the Commodity Credit Corporation which is part of the United States Department of Agriculture.

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

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



	Commercial noncovered loans and leases
Grade:	Construction and Land Development		Commercial Mortgage		Other Commercial Real Estate		Commercial and Industrial		Lease Financing		Other		Total Commercial Loans Not Covered by Loss Share
September 30, 2011
Pass	$	371,906	$	4,632,698	$	130,591	$	1,585,106	$	296,420	$	157,742	$	7,174,463
Special mention	18,431		232,537		8,672		38,844		4,765		1,020		304,269
Substandard	26,249		123,968		4,629		27,700		2,854		—		185,400
Doubtful	133		4,307		401		270		—		—		5,111
Ungraded	—		2,526		245		145,661		—		20		148,452
Total	$	416,719	$	4,996,036	$	144,538	$	1,797,581	$	304,039	$	158,782	$	7,817,695
December 31, 2010
Pass	$	285,988	$	4,390,634	$	137,570	$	1,633,775	$	291,476	$	181,044	$	6,920,487
Special mention	20,957		229,581		6,531		42,639		6,888		846		307,442
Substandard	29,714		108,239		5,103		24,686		2,496		90		170,328
Doubtful	2,270		7,928		401		748		414		—		11,761
Ungraded	—		1,480		105		167,642		15		35		169,277
Total	$	338,929	$	4,737,862	$	149,710	$	1,869,490	$	301,289	$	182,015	$	7,579,295



	Non-commercial noncovered loans and leases
	Residential Mortgage		Revolving Mortgage		Construction and Land Development		Consumer		Total Non- commercial Noncovered Loans
September 30, 2011
Current	$	795,578	$	2,291,490	$	134,467	$	522,155	$	3,743,690
31-60 days past due	2,303		3,987		4,204		2,369		12,863
61-90 days past due	3,022		924		—		1,361		5,307
Over 90 days past due	15,835		6,081		514		1,541		23,971
Total	$	816,738	$	2,302,482	$	139,185	$	527,426	$	3,785,831
December 31, 2010
Current	$	840,328	$	2,226,427	$	187,918	579,227		$	3,833,900
31-60 days past due	13,051		3,682		1,445		12,798		30,976
61-90 days past due	4,762		1,424		548		2,611		9,345
Over 90 days past due	20,651		2,320		3,043		1,047		27,061
Total	$	878,792	$	2,233,853	$	192,954	$	595,683	$	3,901,282



	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
September 30, 2011
Pass	$	43,851	$	486,673	$	48,460	$	46,898	$	162	$	226,160	$	15,547	$	7,791	$	4,147	$	879,689
Special mention	97,960		342,876		24,951		34,894		—		25,686		316		23,955		577		551,215
Substandard	134,126		395,806		55,083		31,213		—		68,289		6,930		60,957		797		753,201
Doubtful	125,766		81,984		30,513		24,248		—		11,129		1,690		22,422		1,122		298,874
Ungraded	3,955		2,744		—		—		—		49,141		15,226		1		3,404		74,471
Total	$	405,658	$	1,310,083	$	159,007	$	137,253	$	162	$	380,405	$	39,709	$	115,126	$	10,047	$	2,557,450
December 31, 2010
Pass	$	98,449	$	430,526	$	77,162	$	46,450	$	—	$	39,492	$	5,051	$	—	$	6,296	$	703,426
Special mention	90,203		261,273		40,756		36,566		—		17,041		3,630		3,549		1,231		454,249
Substandard	79,631		326,036		65,896		41,936		—		11,609		3,462		67,594		691		596,855
Doubtful	100,137		71,175		26,847		7,525		—		6,353		1,837		34,662		438		248,974
Ungraded	—		54		—		—		—		—		3,886		—		8		3,948
Total	$	368,420	$	1,089,064	$	210,661	$	132,477	$	—	$	74,495	$	17,866	$	105,805	$	8,664	$	2,007,452

The aging of the outstanding loans and leases, by class, at September 30, 2011 and December 31, 2010 (excluding loans impaired at acquisition date) is provided in the table below. The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal have not been paid. Loans and leases 30 days or less past due are considered current due to certain grace periods that allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.



	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans and Leases
September 30, 2011
Noncovered loans and leases:
Construction and land development - commercial	$	1,506	$	131	$	2,089	$	3,726	$	412,993	$	416,719
Commercial mortgage	13,381		3,765		16,838		33,984		4,962,052		4,996,036
Other commercial real estate	93		—		965		1,058		143,480		144,538
Commercial and industrial	1,417		1,092		1,548		4,057		1,793,524		1,797,581
Lease financing	879		180		96		1,155		302,884		304,039
Other	18		—		—		18		158,764		158,782
Residential mortgage	2,303		3,022		15,835		21,160		795,578		816,738
Revolving mortgage	3,987		924		6,081		10,992		2,291,490		2,302,482
Construction and land development - non-commercial	4,204		—		514		4,718		134,467		139,185
Consumer	2,369		1,361		1,541		5,271		522,155		527,426
Total noncovered loans and leases	30,157		10,475		45,507		86,139		11,517,387		11,603,526
Covered loans:
Construction and land development - commercial	9,248		7,246		33,566		50,060		183,289		233,349
Commercial mortgage	23,027		20,511		81,292		124,830		1,059,874		1,184,704
Other commercial real estate	4,891		—		6,360		11,251		107,242		118,493
Commercial and industrial	3,145		1,687		5,138		9,970		96,672		106,642
Lease financing	—		—		—		—		162		162
Residential mortgage	3,598		1,937		26,301		31,836		303,185		335,021
Revolving mortgage	404		—		—		404		29,366		29,770
Construction and land development - non-commercial	—		814		13,781		14,595		26,117		40,712
Consumer and other	245		154		1,139		1,538		7,354		8,892
Total covered loans	44,558		32,349		167,577		244,484		1,813,261		2,057,745
Total loans and leases	$	74,715	$	42,824	$	213,084	$	330,623	$	13,330,648	$	13,661,271
December 31, 2010
Noncovered loans and leases:
Construction and land development - commercial	$	3,047	$	6,092	$	4,208	$	13,347	$	325,582	$	338,929
Commercial mortgage	22,913		7,521		20,425		50,859		4,687,003		4,737,862
Other commercial real estate	35		290		621		946		148,764		149,710
Commercial and industrial	4,434		1,473		3,744		9,651		1,859,839		1,869,490
Lease financing	2,266		141		630		3,037		298,252		301,289
Other	40		75		—		115		181,900		182,015
Residential mortgage	13,051		4,762		20,651		38,464		840,328		878,792
Revolving mortgage	3,682		1,424		2,320		7,426		2,226,427		2,233,853
Construction and land development - non-commercial	1,445		548		3,043		5,036		187,918		192,954
Consumer	12,798		2,611		1,047		16,456		579,227		595,683
Total noncovered loans and leases	63,711		24,937		56,689		145,337		11,335,240		11,480,577
Covered loans:
Construction and land development - commercial	64,372		8,985		73,997		147,354		118,078		265,432
Commercial mortgage	43,570		20,308		88,525		152,403		816,421		968,824
Other commercial real estate	15,008		2,477		20,453		37,938		138,019		175,957
Commercial and industrial	9,267		5,899		28,780		43,946		79,444		123,390
Lease financing	—		—		—		—		—		—
Residential mortgage	4,459		1,352		3,979		9,790		53,679		63,469
Revolving mortgage	382		—		337		719		8,747		9,466
Construction and land development - non-commercial	7,701		—		36,412		44,113		17,432		61,545
Consumer and other	430		1,649		978		3,057		5,607		8,664
Total covered loans	145,189		40,670		253,461		439,320		1,237,427		1,676,747
Total loans and leases	$	208,900	$	65,607	$	310,150	$	584,657	$	12,572,667	$	13,157,324

The recorded investment, by class, in loans and leases on nonaccrual status and loans and leases greater than 90 days past due and still accruing at September 30, 2011 and December 31, 2010 (excluding loans and leases impaired as acquisition date) is as follows:



	September 30, 2011				December 31, 2010
	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Noncovered loans and leases:
Construction and land development - commercial	$	18,569	$	418	$	26,796	$	68
Commercial mortgage	25,993		2,390		32,723		4,347
Commercial and industrial	1,792		380		3,320		1,850
Lease financing	83		17		806		298
Other commercial real estate	1,217		—		777		80
Construction and land development - non-commercial	—		514		1,330		1,122
Residential mortgage	11,949		6,604		13,062		6,640
Revolving mortgage	—		6,066		—		2,301
Consumer	—		1,498		—		1,795
Total noncovered loans and leases	$	59,603	$	17,887	$	78,814	$	18,501
Covered loans and leases:
Construction and land development - commercial	$	54,101	$	15,163	$	20,609	$	55,503
Commercial mortgage	158,345		13,379		75,633		37,819
Other commercial real estate	27,468		5,522		7,299		15,068
Commercial and industrial	8,467		212		8,488		22,829
Residential mortgage	29,308		5,604		3,594		2,010
Revolving mortgage	—		—		403		190
Construction and land development - non-commercial	13,239		542		43,836		7,460
Consumer and other	961		860		162		824
Total covered loans and leases	$	291,889	$	41,282	$	160,024	$	141,703
Total loans and leases	$	351,492	$	59,169	$	238,838	$	160,204

Acquired Loans

When the fair values of covered loans were established, certain loans were identified as impaired. The following table provides changes in the carrying value of acquired loans during the nine months ended September 30, 2011 and 2010:



	2011						2010
	Impaired at acquisition date			All other acquired loans			Impaired as acquisition date			All other acquired loans
Balance, January 1	$	330,705		$	1,676,747		$	75,368		$	1,097,652
Fair value of acquired loans covered by loss share agreements	303,713			777,800			412,627			1,138,513
Reductions for repayments, foreclosures and decreases in fair value	(134,713		)	(396,802		)	(87,249		)	(414,251		)
Balance, September 30	$	499,705		$	2,057,745		$	400,746		$	1,821,914
Outstanding principal balance at September 30	$	1,943,770		$	2,705,324		$	742,010		$	2,535,003

The timing and amounts of cash flow analyses were prepared at the acquisition dates for all acquired loans deemed impaired at acquisition except loans acquired in the VB and TVB transactions where the timing of cash flows was not estimated and those analyses are used to determine the amount of accretable yield recognized on those loans. Subsequent changes in cash flow estimates result in changes to the amount of accretable yield to be recognized. BancShares did not initially estimate the timing of cash flows for loans acquired in the TVB or VB transactions at the dates of the acquisitions and, therefore, the cost recovery method was being applied to these loans unless cash flow estimates in the later periods indicated subsequent improvement that would lead to the recognition of accretable yield.

The following table documents changes to the amount of accretable yield for the first nine months of 2011 and 2010. For acquired loans, improved cash flow estimates and receipt of unscheduled loan payments result in the reclassification of nonaccretable yield to accretable yield.



	2011			2010
Balance, January 1	$	164,586		$	—
Additions	79,526			63,908
Accretion	(192,556		)	(100,299		)
Reclassifications from nonaccretable difference	128,535			157,097
Disposals	—			(1,070		)
Balance, September 30	$	180,091		$	119,636

For loans acquired in the United Western and CCB transactions, the contractually required payments including principal and interest, expected cash flows to be collected and fair values as of the acquisition date were as follows:



	Impaired at Acquisition Date		All Other Acquired Loans
Contractually required payments	$	746,461	$	944,898
Cash flows expected to be collected	384,098		805,811
Fair value at acquisition date	303,713		777,800

The recorded fair values of loans acquired in the United Western and CCB transactions as of their respective acquisition dates by loan class were as follows:



	United Western		CCB
	January 21, 2011		July 8, 2011
Commercial:
Construction and land development	$	52,889	$	113,519
Commercial mortgage	304,769		31,370
Other commercial real estate	8,434		4,931
Commercial and industrial	75,523		39,213
Lease financing	316
Total commercial loans	441,931		189,033
Non-commercial:
Residential mortgage	260,389		64,742
Revolving mortgage	12,073		29,332
Construction and land development	39,827		33,461
Consumer	5,131		5,594
Total non-commercial loans	317,420		133,129
Total covered loans acquired	$	759,351	$	322,162