Note D

Loans and Leases

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


	June 30, 2011		December 31, 2010		June 30, 2010
Covered loans	$	2,399,738	$	2,007,452	$	2,367,090
Noncovered loans and leases:
Commercial:
Construction and land development		407,134		338,929		492,805
Commercial mortgage		4,861,457		4,737,862		4,625,351
Other commercial real estate		148,977		149,710		157,333
Commercial and industrial		1,805,812		1,869,490		1,801,465
Lease financing		303,104		301,289		300,047
Other		170,758		182,015		186,067

Total commercial loans		7,697,242		7,579,295		7,563,068
Non-commercial:
Residential mortgage		825,610		878,792		921,346
Revolving mortgage		2,303,687		2,233,853		2,187,978
Construction and land development		145,445		192,954		135,094
Consumer		556,870		595,683		815,008

Total non-commercial loans		3,831,612		3,901,282		4,059,426

Total noncovered loans and leases		11,528,854		11,480,577		11,622,494

Total loans and leases	$	13,928,592	$	13,488,029	$	13,989,584


	June 30, 2011						December 31, 2010						June 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	$	83,844	$	254,806	$	338,650	$	102,988	$	265,432	$	368,420	$	146,418	$	429,190	$	575,608
Commercial mortgage		120,916		1,186,859		1,307,775		120,240		968,824		1,089,064		121,134		947,197		1,068,331
Other commercial real estate		35,347		138,259		173,606		34,704		175,957		210,661		35,346		197,740		233,086
Commercial and industrial		7,990		117,502		125,492		9,087		123,390		132,477		9,195		211,669		220,864
Lease financing		6		218		224		—		—		—		—		—		—
Other		—		1,675		1,675		—		1,510		1,510		72		4,739		4,811

Total commercial loans		248,103		1,699,319		1,947,422		267,019		1,535,113		1,802,132		312,165		1,790,535		2,102,700
Non-commercial:
Residential mortgage		19,635		334,398		354,033		11,026		63,469		74,495		33,853		40,144		73,997
Revolving mortgage		483		11,450		11,933		8,400		9,466		17,866		128		25,041		25,169
Construction and land development		42,056		40,121		82,177		44,260		61,545		105,805		25,838		131,812		157,650
Consumer		122		4,051		4,173		—		7,154		7,154		133		7,441		7,574

Total non-commercial loans		62,296		390,020		452,316		63,686		141,634		205,320		59,952		204,438		264,390

Total covered loans	$	310,399	$	2,089,339	$	2,399,738	$	330,705	$	1,676,747	$	2,007,452	$	372,117	$	1,994,973	$	2,367,090

At June 30, 2011, $2,346,460 in noncovered loans were pledged to secure debt obligations, compared to $3,744,067 at December 31, 2010 and $3,442,983 at June 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 a predominant feature of the majority of commercial loans and leases, an understanding of 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 risks that are not specific to individual transactions such as 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 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 June 30, 2011 relate to business credit cards and tobacco buyout loans. Tobacco buyout loans with an outstanding balance of $61,618 at June 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 June 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
June 30, 2011
Pass	$	362,202	$	4,505,768	$	134,686	$	1,590,496	$	294,134	$	170,133	$	7,057,419
Special mention		11,923		229,564		8,352		38,466		5,619		602		294,526
Substandard		32,494		116,267		5,398		27,881		3,124		—		185,164
Doubtful		515		6,435		401		804		182		—		8,337
Ungraded		—		3,423		140		148,165		45		23		151,796

Total	$	407,134	$	4,861,457	$	148,977	$	1,805,812	$	303,104	$	170,758	$	7,697,242


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
June 30, 2011
Current	$	806,439	$	2,291,153	$	143,376	$	551,606	$	3,792,574
31-60 days past due		3,376		3,500		381		2,633		9,890
61-90 days past due		2,897		1,732		1,120		1,128		6,877
Over 90 days past due		12,898		7,302		568		1,503		22,271

Total	$	825,610	$	2,303,687	$	145,445	$	556,870	$	3,831,612


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
June 30, 2011
Pass	$	57,074	$	561,871	$	60,738	$	51,519	$	218	$	266,349	$	11,307	$	5,883	$	3,987	$	1,018,946
Special mention		99,051		304,731		41,616		46,944		—		25,153		143		21,654		251		539,543
Substandard		91,247		377,263		47,081		20,832		—		45,439		483		42,395		144		624,884
Doubtful		89,761		63,775		24,171		6,197		6		8,648		—		12,245		872		205,675
Ungraded		1,517		135		—		—		—		8,444		—		—		594		10,690

Total	$	338,650	$	1,307,775	$	173,606	$	125,492	$	224	$	354,033	$	11,933	$	82,177	$	5,848	$	2,399,738


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 June 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
June 30, 2011

Noncovered loans and leases:
Construction and land development - commercial	$	876	$	763	$	3,150	$	4,789	$	402,345	$	407,134
Commercial mortgage		12,985		5,580		21,467		40,032		4,821,425		4,861,457
Other commercial real estate		270		54		586		910		148,067		148,977
Commercial and industrial		3,102		909		2,402		6,413		1,799,399		1,805,812
Lease financing		337		82		359		778		302,326		303,104
Other		—		—		—		—		170,758		170,758
Residential mortgage		3,376		2,897		12,898		19,171		806,439		825,610
Revolving mortgage		3,500		1,732		7,302		12,534		2,291,153		2,303,687
Construction and land development - non-commercial		381		1,120		568		2,069		143,376		145,445
Consumer		2,633		1,128		1,503		5,264		551,606		556,870

Total noncovered loans and leases		27,460		14,265		50,235		91,960		11,436,894		11,528,854

Covered loans:
Construction and land development - commercial		8,087		17,421		46,356		71,864		182,942		254,806
Commercial mortgage		36,054		25,562		108,136		169,752		1,017,107		1,186,859
Other commercial real estate		5,306		9,265		7,918		22,489		115,770		138,259
Commercial and industrial		4,369		3,093		11,824		19,286		98,216		117,502
Lease financing		—		—		—		—		218		218
Residential mortgage		10,148		2,952		26,961		40,061		294,337		334,398
Revolving mortgage		—		—		—		—		11,450		11,450
Construction and land development - non-commercial		—		741		16,777		17,518		22,603		40,121
Consumer and other		27		279		972		1,278		4,448		5,726

Total covered loans		63,991		59,313		218,944		342,248		1,747,091		2,089,339

Total loans and leases	$	91,451	$	73,578	$	269,179	$	434,208	$	13,183,985	$	13,618,193


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
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 June 30, 2011 and December 31, 2010 (excluding loans and leases impaired as acquisition date) is as follows:


	June 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	$	24,675	$	78	$	26,796	$	68
Commercial mortgage		30,960		2,757		32,723		4,347
Commercial and industrial		2,408		588		3,320		1,850
Lease financing		605		28		806		298
Other commercial real estate		847		1		777		80
Construction and land development - non-commercial		49		519		1,330		1,122
Residential mortgage		13,897		2,462		13,062		6,640
Revolving mortgage		—		7,282		—		2,301
Consumer		—		1,493		—		1,795

Total noncovered loans and leases	$	73,441	$	15,208	$	78,814	$	18,501

Covered loans and leases:
Construction and land development - commercial	$	69,621	$	21,309	$	20,609	$	55,503
Commercial mortgage		108,853		57,467		75,633		37,819
Other commercial real estate		22,986		6,754		7,299		15,068
Commercial and industrial		3,774		9,390		8,488		22,829
Residential mortgage		27,351		6,333		3,594		2,010
Revolving mortgage		—		—		403		190
Construction and land development - non-commercial		14,104		1,966		43,836		7,460
Consumer and other		879		649		162		824

Total covered loans and leases	$	247,568	$	103,868	$	160,024	$	141,703

Total loans and leases	$	321,231	$	119,075	$	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 six months ended June 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		99,344			660,007			412,627			1,152,134
Reductions for repayments, foreclosures and decreases in fair value		(119,650	)		(247,415	)		(115,878	)		(254,813	)

Balance, June 30	$	310,399		$	2,089,339		$	372,117		$	1,994,973


Outstanding principal balance at June 30	$	1,100,257		$	2,937,273		$	807,288		$	2,726,588

Cash flow analyses were prepared for acquired loans deemed impaired at acquisition and those analyses are used to determine the amount of accretable yield recognized on those loans.

The following table documents changes to the amount of accretable yield for the first six 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		53,426			45,523
Accretion		(122,755	)		(12,170	)
Reclassifications from nonaccretable difference		60,452			2,795
Disposals		—			(1,070	)

Balance, June 30	$	155,709		$	35,078

For loans acquired in the United Western transaction, 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	$	304,001	$	789,083
Cash flows expected to be collected		167,291		673,499
Fair value at acquisition date		99,344		660,007

The recorded values of loans acquired in the United Western transaction as of the acquisition date by loan class were as follows:


	January 21, 2011

Commercial:
Construction and land development	$	52,889
Commercial mortgage		304,769
Other commercial real estate		8,434
Commercial and industrial		75,523
Lease financing		316

Total commercial loans		441,931
Non-commercial:
Residential mortgage		260,389
Revolving mortgage		12,073
Construction and land development		39,827
Consumer		5,131

Total non-commercial loans		317,420

Total covered loans acquired	$	759,351