Loans and Leases

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



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



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

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

Description of segment and class risks

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

Commercial loans and leases

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

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

Commercial construction and land development

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

Commercial mortgage, commercial and industrial and lease financing

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

Other commercial real estate

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

Non-commercial loans

Each non-commercial loan is centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit 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 March 31, 2012 relate to business credit cards and tobacco buyout loans. Business credit card loans are subject to automatic charge off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $41,580 at March 31, 2012 are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are to be made by the Commodity Credit Corporation which is part of the United States Department of Agriculture.

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

The composition of the loans and leases outstanding at March 31, 2012 and December 31, 2011 and March 31, 2011 by credit quality indicator is provided below:



	Commercial noncovered loans and leases
Grade:	Construction and Land Development		Commercial Mortgage		Other Commercial Real Estate		Commercial and Industrial		Lease Financing		Other		Total Commercial Loans Not Covered by Loss Share
March 31, 2012
Pass	$	303,018	$	4,744,063	$	136,776	$	1,554,112	$	309,681	$	147,767	$	7,195,417
Special mention	20,097		243,495		6,805		35,497		3,336		2,018		311,248
Substandard	21,297		130,815		6,068		27,057		2,453		—		187,690
Doubtful	1,821		6,588		365		1,676		—		—		10,450
Ungraded	324		2,987		302		121,382		234		7		125,236
Total	$	346,557	$	5,127,948	$	150,316	$	1,739,724	$	315,704	$	149,792	$	7,830,041
December 31, 2011
Pass	$	332,742	$	4,749,254	$	130,586	$	1,556,651	$	306,225	$	157,089	$	7,232,547
Special mention	18,973		220,235		5,821		36,951		4,537		1,271		287,788
Substandard	28,793		129,391		7,794		28,240		2,107		—		196,325
Doubtful	17		1,164		377		643		—		—		2,201
Ungraded	638		4,949		193		141,922		—		9		147,711
Total	$	381,163	$	5,104,993	$	144,771	$	1,764,407	$	312,869	$	158,369	$	7,866,572
March 31, 2011
Pass	$	316,395	$	4,403,652	$	133,931	$	1,571,193	$	285,699	$	173,025	$	6,883,895
Special mention	22,416		232,019		7,415		40,023		6,228		1,299		309,400
Substandard	32,864		119,229		5,271		30,992		3,796		12		192,164
Doubtful	2,094		6,004		401		1,182		271		—		9,952
Ungraded	—		2,489		132		148,652		—		34		151,307
Total	$	373,769	$	4,763,393	$	147,150	$	1,792,042	$	295,994	$	174,370	$	7,546,718



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



	Covered loans
Grade:	Construction and Land Development - Commercial		Commercial Mortgage		Other Commercial Real Estate		Commercial and Industrial		Lease Financing		Residential Mortgage		Revolving Mortgage		Construction and Land Development Non-commercial		Consumer and Other		Total Covered Loans
March 31, 2012
Pass	$	31,445	$	392,233	$	56,689	$	31,768	$	45	$	173,640	$	35,684	$	7,020	$	2,478	$	731,002
Special mention	89,243		335,020		26,736		21,376		—		18,054		802		14,263		546		506,040
Substandard	86,750		382,134		51,918		24,905		—		70,545		11,153		53,919		1,082		682,406
Doubtful	99,747		85,993		9,635		15,212		—		9,934		2,377		10,353		816		234,067
Ungraded	3,416		161		—		—		—		26,365		—		—		412		30,354
Total	$	310,601	$	1,195,541	$	144,978	$	93,261	$	45	$	298,538	$	50,016	$	85,555	$	5,334	$	2,183,869
December 31, 2011
Pass	$	29,321	$	397,526	$	49,259	$	36,409	$	57	$	189,794	$	34,164	$	4,958	$	2,393	$	743,881
Special mention	92,758		348,482		33,754		32,257		—		25,464		3,566		13,394		942		550,617
Substandard	125,158		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
March 31, 2011
Pass	$	76,319	$	574,681	$	60,238	$	49,260	$	2	$	42,014	$	5,000	$	4,217	$	3,927	$	815,658
Special mention	112,999		339,385		31,218		49,511		—		36,430		2,225		23,127		247		595,142
Substandard	109,509		356,396		46,393		48,081		—		27,761		5,509		66,829		324		660,802
Doubtful	98,757		62,984		24,833		3,795		22		7,484		1,966		17,252		1,047		218,140
Ungraded	4,732		99,186		623		20,394		247		233,704		8,709		—		797		368,392
Total	$	402,316	$	1,432,632	$	163,305	$	171,041	$	271	$	347,393	$	23,409	$	111,425	$	6,342	$	2,658,134

The aging of the outstanding loans and leases, by class, at March 31, 2012, December 31, 2011 and March 31, 2011 (excluding loans and leases 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
March 31, 2012
Noncovered loans and leases:
Construction and land development - commercial	$	2,030	$	1,366	$	3,288	$	6,684	$	339,873	$	346,557
Commercial mortgage	27,947		6,548		13,939		48,434		5,079,514		5,127,948
Other commercial real estate	787		43		193		1,023		149,293		150,316
Commercial and industrial	5,522		1,006		1,754		8,282		1,731,442		1,739,724
Lease financing	824		99		1,269		2,192		313,512		315,704
Other	—		—		—		—		149,792		149,792
Residential mortgage	14,001		2,812		13,388		30,201		763,411		793,612
Revolving mortgage	2,349		1,212		4,486		8,047		2,274,091		2,282,138
Construction and land development - non-commercial	808		446		862		2,116		130,561		132,677
Consumer	1,885		1,028		1,727		4,640		446,421		451,061
Total noncovered loans and leases	$	56,153	$	14,560	$	40,906	$	111,619	$	11,377,910	$	11,489,529
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
March 31, 2011
Noncovered loans and leases:
Construction and land development - commercial	$	2,006	$	116	$	3,572	$	5,694	$	368,075	$	373,769
Commercial mortgage	21,304		4,576		19,091		44,971		4,718,422		4,763,393
Other commercial real estate	860		147		585		1,592		145,558		147,150
Commercial and industrial	5,016		1,110		4,700		10,826		1,781,216		1,792,042
Lease financing	841		269		864		1,974		294,020		295,994
Other	2		—		—		2		174,368		174,370
Residential mortgage	16,439		2,207		12,022		30,668		777,982		808,650
Revolving mortgage	5,462		3,285		3,195		11,942		2,287,726		2,299,668
Construction and land development - non-commercial	1,116		364		1,961		3,441		142,423		145,864
Consumer	6,911		2,216		1,780		10,907		580,544		591,451
Total noncovered loans and leases	$	59,957	$	14,290	$	47,770	$	122,017	$	11,270,334	$	11,392,351

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 March 31, 2012, December 31, 2011, and March 31, 2011 (excluding loans and leases acquired with deteriorated credit quality) is as follows:



	March 31, 2012				December 31, 2011				March 31, 2011
	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		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	$	11,995	$	182	$	15,102	$	313	$	25,789	$	658
Commercial mortgage	31,222		1,180		23,748		3,107		33,428		1,929
Commercial and industrial	8,148		599		1,864		320		4,583		683
Lease financing	146		1,268		200		554		1,115		65
Other commercial real estate	783		—		1,170		—		871		—
Construction and land development - non-commercial	—		862		—		572		1,140		1,139
Residential mortgage	14,069		3,542		10,657		4,227		12,932		1,646
Revolving mortgage	—		4,467		—		4,306		—		3,189
Consumer	—		1,728		—		1,441		—		1,769
Total noncovered loans and leases	$	66,363	$	13,828	$	52,741	$	14,840	$	79,858	$	11,078

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 three months ended March 31, 2012 and 2011:



	2012						2011
	Impaired at acquisition date			All other acquired loans			Impaired as acquisition date			All other acquired loans
Balance, January 1	$	458,305		$	1,903,847		$	330,705		$	1,676,747
Fair value of acquired loans covered by loss share agreements	—			—			120,670			646,489
Reductions for repayments, foreclosures and decreases in fair value	(66,364		)	(111,919		)	(45,595		)	(70,882		)
Balance, March 31	$	391,941		$	1,791,928		$	405,780		$	2,252,354
Outstanding principal balance at March 31	$	1,222,862		$	2,395,860		$	1,011,908		$	2,908,609

Analyses of the timing and amounts of cash flows were prepared at the acquisition dates for all acquired loans deemed impaired at acquisition except loans acquired in the Venture Bank (VB) and Temecula Valley Bank (TVB) transactions 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. The timing of cash flows for nonperforming loans acquired in the VB and TVB transactions were not estimated due to relative unfamiliarity with the markets in which the collateral was located, inexperience with the type of borrowers, and general uncertainty of the time required for disposition of the assets. These factors were alleviated to a large degree in later transactions where prior experience provided the ability to make reasonable estimates as to the timing of future cash flows.

The cost recovery method is being applied for the nonperforming loans acquired from the TVB and VB transactions unless cash flow estimates in the later periods indicated subsequent improvement that would lead to the recognition of accretable yield. The cost recovery method is also being applied to loans from other transactions where the timing of the cash flows is no longer reasonably estimable due to subsequent nonperformance by the borrower or uncertainty in the ultimate disposition of the asset. The remaining carrying value of loans on the cost recovery method was $171,951 at March 31, 2012, $200,819 at December 31, 2011 and $202,873 at March 31, 2011.

The following table documents changes to the amount of accretable yield for the first three months of 2012 and 2011. For acquired loans, improved cash flow estimates and receipt of unscheduled loan payments result in the reclassification of nonaccretable difference to accretable yield.



	2012			2011
Balance, January 1	$	276,690		$	164,586
Additions	—			57,998
Accretion	(64,896		)	(51,694		)
Reclassifications from nonaccretable difference	73,150			40,752
Disposals	—			—
Balance, March 31	$	284,944		$	211,642