LOANS AND LEASES

Loans and leases outstanding by segment and class at December 31, 2011 and 2010 are as follows:



	2011		2010
Covered loans ⁽¹⁾	$	2,362,152	$	2,007,452
Noncovered loans and leases:
Commercial:
Construction and land development	381,163		338,929
Commercial mortgage	5,104,993		4,737,862
Other commercial real estate	144,771		149,710
Commercial and industrial	1,764,407		1,869,490
Lease financing	312,869		301,289
Other	158,369		182,015
Total commercial loans	7,866,572		7,579,295
Non-commercial:
Residential mortgage	784,118		878,792
Revolving mortgage	2,296,306		2,233,853
Construction and land development	137,271		192,954
Consumer	497,370		595,683
Total non-commercial loans	3,715,065		3,901,282
Total noncovered loans and leases	11,581,637		11,480,577
Total loans and leases	$	13,943,789	$	13,488,029


(1)	Covered loans are acquired loans subject to loss share agreements with the FDIC.



	2011						2010
	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	$	117,603	$	221,270	$	338,873	$	102,988	$	265,432	$	368,420
Commercial mortgage	138,465		1,122,124		1,260,589		120,240		968,824		1,089,064
Other commercial real estate	33,370		125,024		158,394		34,704		175,957		210,661
Commercial and industrial	27,802		85,640		113,442		9,087		123,390		132,477
Lease financing	—		57		57		—		—		—
Other	—		1,330		1,330		—		1,510		1,510
Total commercial loans	317,240		1,555,445		1,872,685		267,019		1,535,113		1,802,132
Non-commercial:
Residential mortgage	46,130		281,438		327,568		11,026		63,469		74,495
Revolving mortgage	15,350		36,202		51,552		8,400		9,466		17,866
Construction and land development	78,108		27,428		105,536		44,260		61,545		105,805
Consumer	1,477		3,334		4,811		—		7,154		7,154
Total non-commercial loans	141,065		348,402		489,467		63,686		141,634		205,320
Total covered loans	$	458,305	$	1,903,847	$	2,362,152	$	330,705	$	1,676,747	$	2,007,452

At December 31, 2011, 26.5 percent of noncovered loans and leases were to customers in medical-related fields, compared to 26.3 percent at December 31, 2010. These loans are primarily commercial mortgage loans as they are generally secured by owner-occupied commercial real estate. There were no foreign loans or loans to finance highly leveraged transactions during 2011 or 2010.

Substantially all noncovered loans and leases are to customers domiciled within BancShares’ principal market areas. The loans acquired during 2009 that are covered under loss share agreements include borrowers that are not within the principal market areas of the originating banks.

At December 31, 2011 noncovered loans totaling $2,492,644 were pledged to secure debt obligations, compared to $3,744,067 at December 31, 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 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 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 December 31, 2011 relate to business credit cards and tobacco buyout loans. Tobacco buyout loans with an outstanding balance of $63,129 at December 31, 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 December 31, 2011 and 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
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
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
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
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
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		427,996		58,351		21,914		—		70,582		9,863		72,349		1,096		787,309
Doubtful	87,936		84,871		17,030		22,862		—		13,833		3,959		14,835		982		246,308
Ungraded	3,700		1,714		—		—		—		27,895		—		—		728		34,037
Total	$	338,873	$	1,260,589	$	158,394	$	113,442	$	57	$	327,568	$	51,552	$	105,536	$	6,141	$	2,362,152
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 December 31, 2011 and 2010 (excluding loans acquired with deteriorated credit quality) 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
December 31, 2011
Noncovered loans and leases:
Construction and land development - commercial	$	2,623	$	1,494	$	2,177	$	6,294	$	374,869	$	381,163
Commercial mortgage	18,308		4,438		15,626		38,372		5,066,621		5,104,993
Other commercial real estate	657		147		561		1,365		143,406		144,771
Commercial and industrial	5,235		1,230		1,438		7,903		1,756,504		1,764,407
Lease financing	637		212		620		1,469		311,400		312,869
Other	—		—		—		—		158,369		158,369
Residential mortgage	11,790		2,686		12,529		27,005		757,113		784,118
Revolving mortgage	3,437		2,042		4,316		9,795		2,286,511		2,296,306
Construction and land development - non-commercial	798		127		572		1,497		135,774		137,271
Consumer	3,514		1,271		1,443		6,228		491,142		497,370
Total noncovered loans and leases	$	46,999	$	13,647	$	39,282	$	99,928	$	11,481,709	$	11,581,637



	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans and Leases
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

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 December 31, 2011 and December 31, 2010 (excluding loans and leases acquired with deteriorated credit quality) is as follows:



	December 31, 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	$	15,102	$	313	$	26,796	$	68
Commercial mortgage	23,748		3,107		32,723		4,347
Commercial and industrial	1,864		320		3,320		1,850
Lease financing	200		554		806		298
Other commercial real estate	1,170		—		777		80
Construction and land development - non-commercial	—		572		1,330		1,122
Residential mortgage	10,657		4,227		13,062		6,640
Revolving mortgage	—		4,306		—		2,301
Consumer	—		1,441		—		1,795
Total noncovered loans and leases	$	52,741	$	14,840	$	78,814	$	18,501

Other risk elements related to lending activities include OREO and restructured loans. BancShares held $153,330 and $106,769 in noncovered restructured loans and $50,399 and $52,842 in noncovered OREO at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, respectively, $29,534 and $41,774 of noncovered restructured loans were also on nonaccrual status. BancShares does not have any significant outstanding commitments to borrowers that have restructured existing loans to more favorable terms due to their financial difficulties.

Interest income on total nonperforming loans and leases that would have been recorded had these loans and leases been performing was $23,326, $18,519 and $4,172 respectively, during 2011, 2010 and 2009. When loans and leases are on nonaccrual status, any payments received are applied on a cash basis with all cash receipts applied first to principal and any payments received in excess of the unpaid principal balance being applied to interest. The amount of cash basis interest income recognized during 2011, 2010 and 2009 was not material.

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 years ended December 31, 2011 and 2010:



	2011						2010
	Impaired at acquisition date			All other acquired loans			Impaired at acquisition date			All other acquired loans
Balance, January 1	$	330,705		$	1,676,747		$	75,368		$	1,097,652
Fair value at acquisition date of acquired loans covered by loss share agreements	302,340			777,800			412,628			1,152,134
Reductions for repayments, foreclosures and decreases in carrying value	(174,740		)	(550,700		)	(157,291		)	(573,039		)
Balance, December 31	$	458,305		$	1,903,847		$	330,705		$	1,676,747
Outstanding principal balance, December 31	$	1,334,299		$	2,537,652		$	629,414		$	2,211,047

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 years ended December 31, 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		$	14,481
Additions for acquired loans	106,520			109,766
Accretion	(319,429		)	(181,363		)
Reclassifications from nonaccretable difference	325,013			222,772
Disposals	—			(1,070		)
Balance, December 31	$	276,690		$	164,586

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



	Impaired at acquisition date		All other acquired loans
Contractually required payments	$	746,461	$	944,898
Cash flows expected to be collected	380,849		805,811
Fair value at acquisition date	302,340		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
Commercial:
Construction and land development	$	52,889	$	106,439
Commercial mortgage	304,769		30,026
Other commercial real estate	8,434		4,807
Commercial and industrial	75,523		32,250
Lease financing	316		—
Total commercial loans	441,931		173,522
Non-commercial:
Residential mortgage	260,389		68,522
Revolving mortgage	12,073		34,363
Construction and land development	39,827		38,295
Consumer	5,131		6,087
Total non-commercial loans	317,420		147,267
Total covered loans acquired	$	759,351	$	320,789

Loans held for sale

In each period, BancShares originated much of its residential mortgage loan production through correspondent institutions. Loan sale activity for 2011, 2010 and 2009 is summarized below:



	2011		2010		2009
Loans held for sale at December 31	$	92,539	$	88,933	$	67,381
For the year ended December 31:
Loans sold	509,647		583,750		753,172
Net gain on sale of loans held for sale	8,751		8,858		8,801