10-Q 1 fcnca_10qx9302011.htm FORM 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________

Delaware | 56-1528994
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number)
4300 Six Forks Road, Raleigh, North Carolina | 27609
(Address of principle executive offices) | (Zip code)

(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:

Large accelerated filer | x |  | Accelerated filer | ¨
Non-accelerated filer | ¨ |  | Smaller reporting company | ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Class A Common Stock—$1 Par Value—8,669,439 shares
Class B Common Stock—$1 Par Value—1,639,812 shares
(Number of shares outstanding, by class, as of September 30, 2011)

Table of Contents
INDEX

|  | Page(s)
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements (Unaudited) |
| Consolidated Balance Sheets at September 30, 2011, December 31, 2010 and September 30, 2010 | 3
| Consolidated Statements of Income for the three- and nine- month periods ended September 30, 2011 and September 30, 2010 | 4
| Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2011 and September 30, 2010 | 5
| Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2011 and September 30, 2010 | 6
| Notes to Consolidated Financial Statements | 7
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 43
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 73
Item 4. | Controls and Procedures | 73
PART II. | OTHER INFORMATION |
Item 1A. | Risk Factors | 74
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 78
Item 6. | Exhibits | 78

2

Table of Contents
Part 1

Item 1. | Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets

| September 30* 2011 |  | December 31# 2010 |  | September 30* 2010
| (thousands, except share data)
Assets |  |  |  |  |
Cash and due from banks | $ | 539,337 |  |  | $ | 460,178 |  |  | $ | 493,786 |
Overnight investments | 410,002 |  |  | 398,390 |  |  | 1,049,158 |
Investment securities available for sale | 3,994,825 |  |  | 4,510,076 |  |  | 3,786,841 |
Investment securities held to maturity | 1,943 |  |  | 2,532 |  |  | 2,645 |
Loans held for sale | 78,178 |  |  | 88,933 |  |  | 79,853 |
Loans and leases: |  |  |  |  |
Covered under loss share agreements | 2,557,450 |  |  | 2,007,452 |  |  | 2,222,660 |
Not covered under loss share agreements | 11,603,526 |  |  | 11,480,577 |  |  | 11,545,309 |
Less allowance for loan and lease losses | 254,184 |  |  | 227,765 |  |  | 218,046 |
Net loans and leases | 13,906,792 |  |  | 13,260,264 |  |  | 13,549,923 |
Premises and equipment | 847,372 |  |  | 842,745 |  |  | 845,478 |
Other real estate owned: |  |  |  |  |
Covered under loss share agreements | 160,443 |  |  | 112,748 |  |  | 99,843 |
Not covered under loss share agreements | 48,616 |  |  | 52,842 |  |  | 47,523 |
Income earned not collected | 43,886 |  |  | 83,644 |  |  | 83,204 |
Receivable from FDIC for loss share agreements | 607,907 |  |  | 623,261 |  |  | 651,844 |
Goodwill | 102,625 |  |  | 102,625 |  |  | 102,625 |
Other intangible assets | 8,081 |  |  | 9,897 |  |  | 11,373 |
Other assets | 265,337 |  |  | 258,524 |  |  | 245,195 |
Total assets | $ | 21,015,344 |  |  | $ | 20,806,659 |  |  | $ | 21,049,291 |
Liabilities |  |  |  |  |
Deposits: |  |  |  |  |
Noninterest-bearing | $ | 4,274,945 |  |  | $ | 3,976,366 |  |  | $ | 3,859,389 |
Interest-bearing | 13,388,330 |  |  | 13,658,900 |  |  | 13,883,639 |
Total deposits | 17,663,275 |  |  | 17,635,266 |  |  | 17,743,028 |
Short-term borrowings | 600,384 |  |  | 546,597 |  |  | 652,716 |
Long-term obligations | 744,839 |  |  | 809,949 |  |  | 819,145 |
Other liabilities | 134,916 |  |  | 81,885 |  |  | 116,198 |
Total liabilities | 19,143,414 |  |  | 19,073,697 |  |  | 19,331,087 |
Shareholders’ Equity |  |  |  |  |
Common stock: |  |  |  |  |
Class A - $1 par value (8,669,439 shares issued and outstanding at September 30, 2011 8,756,778 shares issued and outstanding at December 31, 2010 and September 30, 2010) | 8,669 |  |  | 8,757 |  |  | 8,757 |
Class B - $1 par value (1,639,812 shares issued and outstanding at September 30, 2011, 1,677,675 shares issued and outstanding at December 31, 2010 and September 30, 2010) | 1,640 |  |  | 1,678 |  |  | 1,678 |
Surplus | 143,766 |  |  | 143,766 |  |  | 143,766 |
Retained earnings | 1,750,382 |  |  | 1,615,290 |  |  | 1,588,336 |
Accumulated other comprehensive loss | (32,527 | ) |  | (36,529 | ) |  | (24,333 | )
Total shareholders’ equity | 1,871,930 |  |  | 1,732,962 |  |  | 1,718,204 |
Total liabilities and shareholders’ equity | $ | 21,015,344 |  |  | $ | 20,806,659 |  |  | $ | 21,049,291 |

* Unaudited
# Derived from 2010 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
3

Table of Contents
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2011 |  | 2010 |  | 2011 |  | 2010
| (thousands, except share and per share data, unaudited)
Interest income |  |  |  |  |  |  |
Loans and leases | $ | 240,493 |  |  | $ | 264,819 |  |  | $ | 705,677 |  |  | $ | 654,434 |
Investment securities: |  |  |  |  |  |  |
U. S. Treasury | 1,707 |  |  | 5,774 |  |  | 7,176 |  |  | 20,120 |
Government agency | 5,162 |  |  | 3,632 |  |  | 15,072 |  |  | 8,887 |
Residential mortgage-backed securities | 2,366 |  |  | 1,544 |  |  | 7,123 |  |  | 4,981 |
Corporate bonds | 1,971 |  |  | 2,196 |  |  | 6,266 |  |  | 6,529 |
State, county and municipal | 108 |  |  | 14 |  |  | 133 |  |  | 62 |
Other | 21 |  |  | 77 |  |  | 480 |  |  | 159 |
Total investment securities interest and dividend income | 11,335 |  |  | 13,237 |  |  | 36,250 |  |  | 40,738 |
Overnight investments | 351 |  |  | 572 |  |  | 1,056 |  |  | 1,591 |
Total interest income | 252,179 |  |  | 278,628 |  |  | 742,983 |  |  | 696,763 |
Interest expense |  |  |  |  |  |  |
Deposits | 24,825 |  |  | 37,087 |  |  | 81,726 |  |  | 116,294 |
Short-term borrowings | 1,470 |  |  | 742 |  |  | 4,649 |  |  | 2,138 |
Long-term obligations | 8,697 |  |  | 10,859 |  |  | 28,059 |  |  | 32,493 |
Total interest expense | 34,992 |  |  | 48,688 |  |  | 114,434 |  |  | 150,925 |
Net interest income | 217,187 |  |  | 229,940 |  |  | 628,549 |  |  | 545,838 |
Provision for loan and lease losses | 44,628 |  |  | 59,873 |  |  | 143,024 |  |  | 108,629 |
Net interest income after provision for loan and lease losses | 172,559 |  |  | 170,067 |  |  | 485,525 |  |  | 437,209 |
Noninterest income |  |  |  |  |  |  |
Gain on acquisitions | 87,788 |  |  | — |  |  | 151,262 |  |  | 136,000 |
Cardholder and merchant services | 30,801 |  |  | 27,982 |  |  | 88,124 |  |  | 80,276 |
Service charges on deposit accounts | 16,389 |  |  | 18,063 |  |  | 47,957 |  |  | 56,403 |
Wealth management services | 14,011 |  |  | 12,826 |  |  | 41,418 |  |  | 38,782 |
Fees from processing services | 7,883 |  |  | 7,485 |  |  | 22,724 |  |  | 21,934 |
Securities gains (losses) | 254 |  |  | 940 |  |  | (291 | ) |  | 1,885 |
Other service charges and fees | 6,256 |  |  | 4,734 |  |  | 18,173 |  |  | 14,492 |
Mortgage income | 3,994 |  |  | 3,013 |  |  | 8,839 |  |  | 6,347 |
Insurance commissions | 2,196 |  |  | 1,980 |  |  | 7,010 |  |  | 6,580 |
ATM income | 1,453 |  |  | 1,730 |  |  | 4,413 |  |  | 5,084 |
Adjustments for FDIC receivable for loss share agreements | (18,893 | ) |  | (29,532 | ) |  | (43,019 | ) |  | (14,005 | )
Other | 11,612 |  |  | 748 |  |  | 13,363 |  |  | 762 |
Total noninterest income | 163,744 |  |  | 49,969 |  |  | 359,973 |  |  | 354,540 |
Noninterest expense |  |  |  |  |  |  |
Salaries and wages | 77,877 |  |  | 74,727 |  |  | 229,805 |  |  | 221,362 |
Employee benefits | 17,153 |  |  | 14,455 |  |  | 55,510 |  |  | 48,605 |
Occupancy expense | 18,538 |  |  | 18,353 |  |  | 55,338 |  |  | 54,706 |
Equipment expense | 17,478 |  |  | 17,251 |  |  | 52,384 |  |  | 49,670 |
FDIC insurance expense | 2,768 |  |  | 5,842 |  |  | 13,494 |  |  | 17,338 |
Foreclosure-related expenses | 14,558 |  |  | (1,271 | ) |  | 23,793 |  |  | 6,804 |
Other | 55,460 |  |  | 47,494 |  |  | 151,018 |  |  | 133,092 |
Total noninterest expense | 203,832 |  |  | 176,851 |  |  | 581,342 |  |  | 531,577 |
Income before income taxes | 132,471 |  |  | 43,185 |  |  | 264,156 |  |  | 260,172 |
Income taxes | 50,536 |  |  | 15,439 |  |  | 99,161 |  |  | 97,213 |
Net income | $ | 81,935 |  |  | $ | 27,746 |  |  | $ | 164,995 |  |  | $ | 162,959 |
Average shares outstanding | 10,363,964 |  |  | 10,434,453 |  |  | 10,406,833 |  |  | 10,434,453 |
Net income per share | $ | 7.91 |  |  | $ | 2.66 |  |  | $ | 15.85 |  |  | $ | 15.62 |

See accompanying Notes to Consolidated Financial Statements.
4

Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
First Citizens BancShares, Inc. and Subsidiaries

| Class A Common Stock |  | Class B Common Stock |  | Surplus |  | Retained Earnings |  | Accumulated Other Comprehensive Income (loss) |  | Total Shareholders’ Equity
| (thousands, except share data, unaudited)
Balance at December 31, 2009 | $ | 8,757 |  |  | $ | 1,678 |  |  | $ | 143,766 |  |  | $ | 1,429,863 |  |  | $ | (24,949 | ) |  | $ | 1,559,115 |
Adjustment resulting from adoption of a change in accounting for QSPEs and controlling financial interests effective January 1, 2010 | — |  |  | — |  |  | — |  |  | 4,904 |  |  | — |  |  | 4,904 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |
Net income | — |  |  | — |  |  | — |  |  | 162,959 |  |  | — |  |  | 162,959 |
Change in unrealized securities gains arising during period, net of $1,988 deferred tax | — |  |  | — |  |  | — |  |  | — |  |  | 5,567 |  |  | 5,567 |
Less reclassification adjustment for gains included in net income, net of $900 deferred tax benefit | — |  |  | — |  |  | — |  |  | — |  |  | (1,398 | ) |  | (1,398 | )
Change in pension liability, net of $1,178 tax benefit | — |  |  | — |  |  | — |  |  | — |  |  | 1,830 |  |  | 1,830 |
Change in unrecognized loss on cash flow hedges, net of $3,153 deferred tax benefit | — |  |  | — |  |  | — |  |  | — |  |  | (5,383 | ) |  | (5,383 | )
Total comprehensive income |  |  |  |  |  |  |  |  |  |  | 163,575 |
Cash dividends | — |  |  | — |  |  | — |  |  | (9,390 | ) |  | — |  |  | (9,390 | )
Balance at September 30, 2010 | $ | 8,757 |  |  | $ | 1,678 |  |  | $ | 143,766 |  |  | $ | 1,588,336 |  |  | $ | (24,333 | ) |  | $ | 1,718,204 |
Balance at December 31, 2010 | $ | 8,757 |  |  | $ | 1,678 |  |  | $ | 143,766 |  |  | $ | 1,615,290 |  |  | $ | (36,529 | ) |  | $ | 1,732,962 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |
Net income | — |  |  | — |  |  | — |  |  | 164,995 |  |  | — |  |  | 164,995 |
Change in unrealized securities gains arising during period, net of $2,104 deferred tax | — |  |  | — |  |  | — |  |  | — |  |  | 3,240 |  |  | 3,240 |
Reclassification adjustment for losses included in net income, net of $93 deferred tax | — |  |  | — |  |  | — |  |  | — |  |  | 198 |  |  | 198 |
Change in pension liability, net of $1,936 deferred tax | — |  |  | — |  |  | — |  |  | — |  |  | 3,008 |  |  | 3,008 |
Change in unrecognized loss on cash flow hedges, net of $1,595 deferred tax benefit | — |  |  | — |  |  | — |  |  | — |  |  | (2,444 | ) |  | (2,444 | )
Total comprehensive income |  |  |  |  |  |  |  |  |  |  | 168,997 |
Repurchase of 87,339 shares of Class A common stock | (88 | ) |  |  |  |  |  | (12,975 | ) |  |  |  | (13,063 | )
Repurchase of 37,863 shares of Class B common stock | — |  |  | (38 | ) |  | — |  |  | (7,564 | ) |  | — |  |  | (7,602 | )
Cash dividends | — |  |  | — |  |  | — |  |  | (9,364 | ) |  | — |  |  | (9,364 | )
Balance at September 30, 2011 | $ | 8,669 |  |  | $ | 1,640 |  |  | $ | 143,766 |  |  | $ | 1,750,382 |  |  | $ | (32,527 | ) |  | $ | 1,871,930 |

See accompanying Notes to Consolidated Financial Statements.
5

Table of Contents
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

| For the nine months ended
| September 30,
| 2011 |  | 2010
| (thousands, unaudited)
OPERATING ACTIVITIES |  |  |
Net income | $ | 164,995 |  |  | $ | 162,959 |
Adjustments to reconcile net income to cash provided by operating activities: |  |  |
Amortization of intangibles | 3,337 |  |  | 4,727 |
Provision for loan and lease losses | 143,024 |  |  | 108,629 |
Deferred tax (benefit) expense | (36,243 | ) |  | (82,228 | )
Change in current taxes payable | 52,970 |  |  | 2,260 |
Depreciation | 48,883 |  |  | 46,565 |
Change in accrued interest payable | (14,851 | ) |  | (4,348 | )
Change in income earned not collected | 46,753 |  |  | (14,860 | )
Gain on acquisitions | (151,262 | ) |  | (136,000 | )
Securities losses (gains) | 291 |  |  | (1,885 | )
Origination of loans held for sale | (333,860 | ) |  | (420,346 | )
Proceeds from sale of loans | 350,855 |  |  | 413,958 |
Gain on sale of loans | (6,240 | ) |  | (6,084 | )
Loss on sale of other real estate | 4,410 |  |  | 1,005 |
Net amortization (accretion) of premiums and discounts | (129,652 | ) |  | (25,868 | )
FDIC receivable for loss share agreements | 313,375 |  |  | 62,789 |
Net change in other assets | 123,791 |  |  | 67,944 |
Net change in other liabilities | 696 |  |  | 41,399 |
Net cash provided by operating activities | 581,272 |  |  | 220,616 |
INVESTING ACTIVITIES |  |  |
Net change in loans outstanding | 311,591 |  |  | 526,380 |
Purchases of investment securities available for sale | (2,260,736 | ) |  | (2,536,499 | )
Proceeds from maturities of investment securities held to maturity | 588 |  |  | 956 |
Proceeds from maturities of investment securities available for sale | 2,848,385 |  |  | 1,686,400 |
Proceeds from sales of investment securities available for sale | 242,023 |  |  | 38,384 |
Net change in overnight investments | (11,612 | ) |  | (325,898 | )
Proceeds from sale of other real estate | 57,083 |  |  | (54,961 | )
Additions to premises and equipment | (53,510 | ) |  | 75,738 |
Net cash received from acquisitions | 1,148,907 |  |  | 106,489 |
Net cash provided (used) by investing activities | 2,282,719 |  |  | (483,011 | )
FINANCING ACTIVITIES |  |  |
Net change in time deposits | (1,517,600 | ) |  | (323,859 | )
Net change in demand and other interest-bearing deposits | (665,750 | ) |  | 1,021,589 |
Net change in short-term borrowings | (298,278 | ) |  | (481,098 | )
Repayment of long-term obligations | (273,175 | ) |  | — |
Origination of long-term obligations | — |  |  | 68,697 |
Repurchase of common stock | (20,665 | ) |  | — |
Cash dividends paid | (9,364 | ) |  | (9,390 | )
Net cash provided (used) by financing activities | (2,784,832 | ) |  | 275,939 |
Change in cash and due from banks | 79,159 |  |  | 13,544 |
Cash and due from banks at beginning of period | 460,178 |  |  | 480,242 |
Cash and due from banks at end of period | $ | 539,337 |  |  | $ | 493,786 |
CASH PAYMENTS FOR: |  |  |
Interest | $ | 129,285 |  |  | $ | 155,273 |
Income taxes | 45,825 |  |  | 126,964 |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |  |  |
Unrealized securities gains | $ | 5,635 |  |  | $ | 5,529 |
Unrealized gain (loss) on cash flow hedge | 4,039 |  |  | (8,896 | )
Prepaid pension benefit |  |  |  | — |
Change in pension liability | 4,944 |  |  | 3,008 |
Transfers of loans to other real estate | 122,471 |  |  | 55,559 |
Acquisitions: |  |  |
Assets acquired | 2,935,309 |  |  | 2,291,659 |
Liabilities assumed | 2,784,047 |  |  | 2,155,861 |
Net assets acquired | 151,262 |  |  | 135,798 |

See accompanying Notes to Consolidated Financial Statements.
6

Table of Contents
First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Note A |

Accounting Policies and Other Matters
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.
In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the financial position of First Citizens BancShares, Inc. and Subsidiaries (BancShares) as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ from those estimates.
Management has evaluated subsequent events through the filing date of the Quarterly Report on Form 10-Q.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in BancShares’ 2010 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2011. The reclassifications have no effect on shareholders’ equity or net income as previously reported. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available.
FDIC-Assisted Transactions
US GAAP requires that the acquisition method of accounting be used for all business combinations, including those resulting from FDIC-assisted transactions and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.
During 2011, 2010 and 2009, BancShares’ wholly-owned subsidiary, First-Citizens Bank & Trust Company (FCB), acquired assets and assumed liabilities of six entities as noted below (collectively referred to as “the Acquisitions”) with the assistance of the Federal Deposit Insurance Corporation (FDIC), which had been appointed Receiver of each entity by its respective state banking authority.

Name of entity |  | Headquarters location |  | Date of transaction
Colorado Capital Bank (CCB) |  | Castle Rock, Colorado |  | July 8, 2011
United Western Bank (United Western) |  | Denver, Colorado |  | January 21, 2011
Sun American Bank (SAB) |  | Boca Raton, Florida |  | March 5, 2010
First Regional Bank (First Regional) |  | Los Angeles, California |  | January 29, 2010
Venture Bank (VB) |  | Lacey, Washington |  | September 11, 2009
Temecula Valley Bank (TVB) |  | Temecula, California |  | July 17, 2009

The acquired assets and assumed liabilities were recorded at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the Acquisitions. Management judgmentally assigned risk ratings to loans based on credit quality, appraisals and estimated collateral values, estimated expected cash flows, and applied appropriate liquidity and coupon discounts to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. FCB also recorded identifiable intangible assets representing the estimated values of the assumed core deposits and other customer relationships. Management used quoted or current market prices to determine the fair value of investment securities. Fair values of deposits, short-term borrowings and long-term obligations are based on current market interest rates and are inclusive of any applicable prepayment penalties.
Loans and Leases
7

Table of Contents
Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.
Loans that are classified as held for sale represent mortgage loans originated or purchased and are carried at the lower of aggregate cost or fair value. Gains and losses on sales of mortgage loans are included in mortgage income.
Acquired loans are recorded at fair value at the date of acquisition. The fair values are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included as a reduction to the carrying amount of acquired loans. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation regarding the amount and timing of such cash flows. Initial cash flow estimates are updated prospectively, and subsequent decreases to expected cash flows will generally result in recognition of an allowance by a charge to provision for loan and lease losses. Subsequent increases in expected cash flows result in either a reversal of the provision for loan and lease losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on the accretable yield.
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. Accordingly, the cost recovery method was being applied to these loans unless new information on cash flow estimates obtained in the later periods indicated subsequent improvement that would lead to the reclassification of nonaccretable difference to accretable yield. During the third quarter of 2011, estimates of the timing and amount of cash flows at TVB resulted in $50.9 million previously classified as nonaccretable difference being reclassified to accretable yield that is being accreted prospectively.
Cash flow analyses were performed on loans acquired from First Regional, SAB, and United Western on an individual loan basis in order to determine the cash flows expected to be collected. Loans from all transactions prior to CCB that were determined to be impaired at acquisition date are accruing interest under the accretion method and are thus, not reported as nonaccrual. Loans not determined to be impaired at acquisition date are monitored after acquisition and classified as nonaccrual if we are no longer able to reasonably estimate the timing and amount of cash flows expected to be collected. BancShares is accounting all acquired loans from TVB, VB, First Regional and SAB, and all non-mortgage loans acquired from United Western on a loan level.
Cash flow analyses were performed at the loan pool level for all loans acquired in the CCB transaction and mortgage loans acquired in the United Western transaction and thus, the determination of accretable yield and nonaccretable difference is made at the pool level. Each loan pool is made up of loans with similar characteristics at the date of acquisition including loan type, collateral type and performance status. Further, all loan pools that have accretable yield to be recognized in interest income are classified as accruing regardless of the status of individual loans within the pool. If it is determined that the expected cash flows from a pool of loans has decreased since acquisition, an allowance for loan losses is established.
Receivable from FDIC for Loss Share Agreements
The receivable from the FDIC for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable should the assets be sold. Fair value at acquisition was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment at the expiration of the loss share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursements from the FDIC and any applicable true-up payment owed to the FDIC for transactions that include claw-back provisions.
The FDIC receivable has been reviewed and updated prospectively as loss estimates related to covered loans and other real estate owned change, and as reimbursements are received or expected to be received from the FDIC. Post-acquisition adjustments to the FDIC receivable are charged or credited to noninterest income. Adjustments to the FDIC receivable resulting from changes in estimated cash flows are based on the reimbursement provision of the applicable loss share agreement with the FDIC. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, if aggregate loss estimates increase and extend into a different range of losses, the reimbursement rates for losses within the higher range will be at a higher rate. In other loss share agreements, higher loss estimates trigger a reduction in the reimbursement rates for losses incurred within the higher range. Changes in loss estimates may also affect the estimated payment to the FDIC for loss share agreements that include a clawback provision.
Other Real Estate Owned Covered by Loss Share Agreements
Other real estate owned (OREO) covered by loss share agreements with the FDIC is reported exclusive of
8

Table of Contents
expected reimbursement cash flows from the FDIC. Subsequent downward adjustments to the estimated recoverable value of covered OREO result in a reduction of covered OREO, a charge to other noninterest expense and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded as an adjustment to other noninterest income. OREO is presented at the estimated present value that management expects to receive when the property is sold, net of related costs of disposal. Management used appraisals of properties to determine fair values and applied additional discounts where appropriate for passage of time or, in certain cases, for subsequent events occurring after the appraisal date.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment. BancShares performs its annual impairment test as of July 31 each year. For 2011, the results of the first step of the goodwill impairment test provided no indication of potential impairment of BancShares' goodwill. Goodwill will continue to be monitored for triggering events that may indicate impairment prior to the next scheduled annual impairment test.
Recently Adopted Accounting Policies and Other Regulatory Issues
In July 2010, the FASB issued Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss (ASU 2010-20). In an effort to provide financial statement users with greater transparency about the allowance for loan and lease losses, ASU 2010-20 requires enhanced disclosures regarding the nature of credit risk inherent in the portfolio, how risk is analyzed and assessed in determining the amount of the allowance, and descriptions of any changes in the allowance calculation. The end-of-period disclosures were effective for BancShares on December 31, 2010 with the exception of disclosures related to troubled debt restructurings which became effective for interim and annual periods beginning after June 15, 2011. The disclosures related to activity during a period are effective during 2011. The provisions of ASU 2010-20 have affected disclosures regarding the allowance for loan and lease losses, but have had no impact on financial condition, results of operations or liquidity.
In April, 2011, the FASB issued A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02), which amends Subtopic 310-40 to clarify existing guidance related to a creditor’s evaluation of whether a restructuring of debt is considered a TDR. The amendments add clarification in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties. The updated guidance and related disclosure requirements are effective for financial statements issued for the first interim or annual period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 did not result in the identification of any additional troubled debt restructurings and have had no impact on BancShares' financial condition, results of operations or liquidity.
In June, 2011, the FASB issued Comprehensive Income: Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 allows financial statement issuers to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, which is the presentation method currently utilized by BancShares. The provisions of ASU 2011-05, which will be applied retrospectively for interim periods beginning after December 15, 2011, will affect BancShares' disclosure format, but will not have an impact on BancShares' financial condition, results of operations or liquidity.
In September, 2011, the FASB issued Intangibles - Goodwill and Other Intangible Assets: Testing Goodwill for Impairment (ASU 2011-08), which allows an entity the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that is it more likely than not that the fair value of a reporting unit is less than its carrying amount. Under ASU 2011-08, if, after that assessment is made, an entity determines that it is more likely than not that the carrying value of goodwill is not impaired, then the two-step impairment test is not required. However, if the entity concludes otherwise, the two-step impairment test would be required. The provisions of ASU 2011-08 are effective for interim and annual periods beginning after December 15, 2011, although early adoption is allowed. Adoption of ASU 2011-08 will have no material impact on BancShares' financial condition, results of operations or liquidity.
9

Table of Contents

Note B |

Federally Assisted Transactions
On January 21, 2011, FCB entered into an agreement with the FDIC, as Receiver, to purchase substantially all the assets and assume the majority of the liabilities of United Western at a discount of $213,000 with no deposit premium. United Western operated in Denver, Colorado, with eight branch locations in Boulder, Centennial, Cherry Creek, downtown Denver, Hampden at Interstate 25, Fort Collins, Longmont and Loveland. The Purchase and Assumption Agreement with the FDIC includes loss share agreements on the covered loans and other real estate purchased by FCB which provides protection against losses to FCB.
The loans and OREO purchased in the United Western transaction are covered by two loss share agreements between the FDIC and FCB (one for single family residential mortgage (SFR) loans and the other for all other loans and OREO excluding consumer loans). Under the loss share agreement for single family residential mortgage loans (SFRs), the FDIC will cover 80 percent of covered loan losses up to $32,489; 0 percent from $32,489 up to $57,653 and 80 percent of losses in excess of $57,653. The loss share agreement for all other non-consumer loans and OREO will cover 80 percent of covered loan and OREO losses up to $111,517; 30 percent of losses from $111,517 to $227,032; and 80 percent of losses in excess of $227,032. Consumer loans are not covered under the FDIC loss share agreements.
The SFR loss share agreement covers losses recorded during the ten years following the date of the transaction, while the term for the loss share agreement covering all other covered loans and OREO is five years. The SFR loss share agreement also covers recoveries received for ten years following the date of the transaction, while recoveries of all other covered loans and OREO will be shared with the FDIC for a five-year period. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.
The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $294,000. On March 17, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals 20 percent of the Total Intrinsic Loss Estimate, or $58,800; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($52,898); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $37,936. Current loss estimates suggest that a true-up payment of $11,827 will be paid to the FDIC during 2021.
The FDIC-assisted acquisition of United Western was accounted for under the acquisition method of accounting. The statement of net assets acquired, adjustments to the acquisition date fair values made in the second and third quarters and the resulting acquisition gain is presented in the following table. As indicated in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During this one year period, the cause of any change in cash flow estimates is considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the acquisition. Adjustments to the estimated fair values made in the second and third quarters reduced the gain by $2,034 and were based on additional information regarding the acquisition date fair values, which included updated appraisals on properties that either secure an acquired loan or are in OREO. The FDIC also repurchased 18 loans that were included in the original acquisition but which FCB had requested be excluded from the portfolio of acquired loans due to cross collateralization with other loans retained by the FDIC.
First quarter 2011 noninterest income includes an acquisition gain of $63,474 that resulted from the United Western FDIC-assisted acquisition. The gain resulted from the difference between the estimated fair value of acquired assets and assumed liabilities. During the second and third quarter of 2011, adjustments were made to the gain based on additional information regarding the acquisition date fair values. These second and third quarter adjustments were made retroactive to the first quarter of 2011, resulting in the adjusted gain of $63,474. FCB recorded a deferred tax liability for the gain of $24,856 resulting from differences between the financial statement and tax bases of assets acquired and liabilities assumed in this transaction. To the extent there are additional adjustments to the acquisition date fair values for up to one year following the acquisition, there will be additional adjustments to the gain.
10

Table of Contents

| January 21, 2011
| As recorded by United Western |  | Fair value adjustments at date of acquisition |  | Subsequent acquisition-date adjustments |  | As recorded by FCB
Assets |  |  |  |  |  |  |
Cash and due from banks | $ | 420,902 |  |  | $ | — |  |  | $ | — |  |  | $ | 420,902 |
Investment securities available for sale | 281,862 |  |  | — |  |  | — |  |  | 281,862 |
Loans covered by loss share agreements (1) | 1,034,074 |  |  | (278,913 | ) | a | 4,190 |  | i | 759,351 |
Other real estate owned covered by loss share agreements | 37,812 |  |  | (10,252 | ) | b | (1,469 | ) | i | 26,091 |
Income earned not collected | 5,275 |  |  | — |  |  | — |  |  | 5,275 |
Receivable from FDIC for loss share agreements | — |  |  | 140,285 |  | c | (2,832 | ) | i | 137,453 |
FHLB stock | 22,783 |  |  | — |  |  | — |  |  | 22,783 |
Mortgage servicing rights | 4,925 |  |  | (1,489 | ) | d | — |  |  | 3,436 |
Core deposit intangible | — |  |  | 537 |  | e | — |  |  | 537 |
Other assets | 15,421 |  |  | 109 |  | f | (991 | ) | i | 14,539 |
Total assets acquired | $ | 1,823,054 |  |  | $ | (149,723 | ) |  | $ | (1,102 | ) |  | $ | 1,672,229 |
Liabilities |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |
Noninterest-bearing | $ | 101,875 |  |  | $ | — |  |  | $ | — |  |  | $ | 101,875 |
Interest-bearing | 1,502,983 |  |  | — |  |  | — |  |  | 1,502,983 |
Total deposits | 1,604,858 |  |  | — |  |  | — |  |  | 1,604,858 |
Short-term borrowings | 336,853 |  |  | — |  |  | — |  |  | 336,853 |
Long-term obligations | 206,838 |  |  | 789 |  | g | — |  |  | 207,627 |
Deferred tax liability | 1,351 |  |  | (565 | ) | h | — |  |  | 786 |
Other liabilities | 11,772 |  |  | — |  |  | — |  |  | 11,772 |
Total liabilities assumed | 2,161,672 |  |  | 224 |  |  | — |  |  | 2,161,896 |
Excess (shortfall) of assets acquired over liabilities assumed | $ | (338,618 | ) |  |  |  |  |  |
Aggregate fair value adjustments |  |  | $ | (149,947 | ) |  | $ | (1,102 | ) |  |
Cash received from the FDIC (2) |  |  |  |  |  |  | $ | 553,141 |
Gain on acquisition of United Western |  |  |  |  |  |  | $ | 63,474 |

(1) | Excludes $11,998 in loans repurchased by FDIC during the second quarter of 2011

(2) | Cash received includes cash received from loans repurchased by the FDIC during the second quarter of 2011

Explanation of fair value adjustments
a - Adjustment reflects the fair value adjustments based on FCB’s evaluation of the acquired loan portfolio.
b - Adjustment reflects the estimated OREO losses based on FCB’s evaluation of the acquired OREO.
c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss share agreements.
d - Adjustment reflects the fair value adjustment based on evaluation of mortgage servicing rights.
e - Adjustment reflects the estimated fair value of intangible assets, which includes core deposit intangibles.
f - Adjustment reflects amount needed to adjust the carrying value of other assets to estimated fair value.
g - Adjustment reflects the amount of the prepayment penalty assessed on early payoff of long-term obligations.
h - Adjustment reflects the fair value adjustment on FCB’s evaluation of the deferred tax liability assumed in the transaction.
i - Adjustment to acquisition date fair value based on additional information received post-acquisition regarding acquisition date fair value and adjustments resulting from loans repurchased by the FDIC.
On July 8, 2011, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of CCB of Castle Rock, Colorado at a discount of $154,900, with no deposit premium.
11

Table of Contents
CCB operated in Castle Rock, Colorado, and in six branch locations in Boulder, Castle Pines, Cherry Creek, Colorado Springs, Edwards, and Parker. The Purchase and Assumption Agreement with the FDIC includes loss share agreements on the loans and OREO purchased by FCB which provide protection against losses to FCB.
The loans and OREO purchased in the CCB transaction are covered by two loss share agreements between the FDIC and FCB (one for SFR loans and the other for all other loans and OREO excluding consumer loans and CD secured loans), which afford FCB significant loss protection. Under the loss share agreements, the FDIC will cover 80 percent of combined covered losses up to $230,991; 0 percent from $230,991 up to $285,947; and 80 percent of losses in excess of $285,947.
The SFR loss share agreement covers losses recorded during the ten years following the date of the transaction, while the term for the loss share agreement covering all other covered loans and OREO is five years. The SFR loss share agreement also covers recoveries received for ten years following the date of the transaction, while recoveries of all other covered loans and OREO will be shared with the FDIC for a five-year period. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.
The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $285,708. On August 22, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals 20 percent of the Total Intrinsic Loss Estimate, or $57,142; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($38,725); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $19,295. Current loss estimates suggest that a true-up payment of $16,349 will be paid to the FDIC during 2021.
The FDIC-assisted acquisition of CCB was accounted for under the acquisition method of accounting. The statement of net assets acquired, fair value adjustments and the resulting acquisition gain is presented in the following table. As indicated in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During this one year period, the cause of any change in cash flow estimates is considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the acquisition.
Third quarter 2011 noninterest income includes an acquisition gain of $87,788 that resulted from the CCB FDIC-assisted acquisition. The gain resulted from the difference between the estimated fair value of acquired assets and assumed liabilities. FCB recorded a deferred tax liability for the gain of $34,377 resulting from differences between the financial statement and tax bases of assets acquired and liabilities assumed in this transaction. To the extent there are additional adjustments to the acquisition date fair values for up to one year following the acquisition, there will be adjustments to the gain.
12

Table of Contents

| July 8, 2011
| As recorded by CCB |  | Fair value adjustments at date of acquisition |  | As recorded by FCB
Assets |  |  |  |  |
Cash and due from banks | $ | 74,736 |  |  | $ | — |  |  | $ | 74,736 |
Investment securities available for sale | 40,187 |  |  | — |  |  | 40,187 |
Loans covered by loss share agreements | 538,369 |  |  | (216,207 | ) | a | 322,162 |
Other real estate owned covered by loss share agreements | 14,853 |  |  | (7,699 | ) | b | 7,154 |
Income earned not collected | 1,720 |  |  | — |  |  | 1,720 |
Receivable from FDIC for loss share agreements | — |  |  | 157,600 |  | c | 157,600 |
Core deposit intangible | — |  |  | 984 |  | d | 984 |
Other assets | 3,296 |  |  | — |  |  | 3,296 |
Total assets acquired | $ | 673,161 |  |  | $ | (65,322 | ) |  | $ | 607,839 |
Liabilities |  |  |  |  |
Deposits: |  |  |  |  |
Noninterest-bearing | $ | 35,862 |  |  | $ | — |  |  | $ | 35,862 |
Interest-bearing | 571,251 |  |  | (612 | ) | e | 570,639 |
Total deposits | 607,113 |  |  | (612 | ) |  | 606,501 |
Short-term borrowings | 15,008 |  |  | 204 |  | f | 15,212 |
Other liabilities | 438 |  |  | — |  |  | 438 |
Total liabilities assumed | 622,559 |  |  | (408 | ) |  | 622,151 |
Excess (shortfall) of assets acquired over liabilities assumed | $ | 50,602 |  |  |  |  |
Aggregate fair value adjustments |  |  | $ | (64,914 | ) |  |
Cash received from the FDIC |  |  |  |  | $ | 102,100 |
Gain on acquisition of CCB |  |  |  |  | $ | 87,788 |

Explanation of fair value adjustments
a - Adjustment reflects the fair value adjustments based on FCB’s evaluation of the acquired loan portfolio.
b - Adjustment reflects the estimated OREO losses based on FCB’s evaluation of the acquired OREO.
c - Adjustment reflects the estimated fair value of payments FCB will receive from the FDIC under the loss share agreements.
d - Adjustment reflects the estimated value of intangible assets, which includes core deposit intangibles.
e - Adjustment reflects the fair value of deposits assumed based on FCB's evaluation of the term deposits assumed.
f - Adjustment reflects the amount of the prepayment penalty assessed on early payoff of long-term obligations.
Results of operations for United Western and CCB prior to their respective acquisition dates are not included in the income statement.
Due to the significant amount of fair value adjustments, the resulting accretion of those fair value adjustments and the protection resulting from the FDIC loss share agreements, historical results of United Western and CCB are not relevant to BancShares’ results of operations. Therefore, no pro forma information is presented.
13

Table of Contents

Note C |

Investments
The aggregate values of investment securities at September 30, 2011, December 31, 2010, and September 30, 2010 along with unrealized gains and losses determined on an individual security basis are as follows:

| Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Investment securities available for sale |  |  |  |  |  |  |
September 30, 2011 |  |  |  |  |  |  |
U. S. Treasury | $ | 986,507 |  |  | $ | 1,427 |  |  | $ | — |  |  | $ | 987,934 |
Government agency | 2,261,000 |  |  | 2,344 |  |  | 2,435 |  |  | 2,260,909 |
Corporate bonds | 401,048 |  |  | 3,595 |  |  | — |  |  | 404,643 |
Residential mortgage-backed securities | 315,474 |  |  | 8,916 |  |  | 198 |  |  | 324,192 |
Equity securities | 939 |  |  | 15,165 |  |  | — |  |  | 16,104 |
State, county and municipal | 1,027 |  |  | 16 |  |  | — |  |  | 1,043 |
Total investment securities available for sale | $ | 3,965,995 |  |  | $ | 31,463 |  |  | $ | 2,633 |  |  | $ | 3,994,825 |
December 31, 2010 |  |  |  |  |  |  |
U. S. Treasury | $ | 1,935,666 |  |  | $ | 4,041 |  |  | $ | 307 |  |  | $ | 1,939,400 |
Government agency | 1,930,469 |  |  | 361 |  |  | 10,844 |  |  | 1,919,986 |
Corporate bonds | 479,160 |  |  | 7,498 |  |  | — |  |  | 486,658 |
Residential mortgage-backed securities | 139,291 |  |  | 4,522 |  |  | 268 |  |  | 143,545 |
Equity securities | 1,055 |  |  | 18,176 |  |  | — |  |  | 19,231 |
State, county and municipal | 1,240 |  |  | 20 |  |  | 4 |  |  | 1,256 |
Total investment securities available for sale | $ | 4,486,881 |  |  | $ | 34,618 |  |  | $ | 11,423 |  |  | $ | 4,510,076 |
September 30, 2010 |  |  |  |  |  |  |
U. S. Treasury | $ | 1,991,676 |  |  | $ | 7,259 |  |  | $ | — |  |  | $ | 1,998,935 |
Government agency | 1,120,476 |  |  | 1,840 |  |  | — |  |  | 1,122,316 |
Corporate bonds | 479,935 |  |  | 9,254 |  |  | — |  |  | 489,189 |
Residential mortgage-backed securities | 151,355 |  |  | 4,891 |  |  | 110 |  |  | 156,136 |
Equity securities | 1,132 |  |  | 17,865 |  |  | — |  |  | 18,997 |
State, county and municipal | 1,241 |  |  | 27 |  |  | — |  |  | 1,268 |
Total investment securities available for sale | $ | 3,745,815 |  |  | $ | 41,136 |  |  | $ | 110 |  |  | $ | 3,786,841 |
Investment securities held to maturity |  |  |  |  |  |  |
September 30, 2011 |  |  |  |  |  |  |
Residential mortgage-backed securities | $ | 1,943 |  |  | $ | 191 |  |  | $ | 26 |  |  | $ | 2,108 |
December 31, 2010 |  |  |  |  |  |  |
Residential mortgage-backed securities | $ | 2,532 |  |  | $ | 235 |  |  | $ | 26 |  |  | $ | 2,741 |
September 30, 2010 |  |  |  |  |  |  |
Residential mortgage-backed securities | $ | 2,645 |  |  | $ | 245 |  |  | $ | 26 |  |  | $ | 2,864 |

Investments in residential mortgage-backed securities primarily represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation.
Investments in corporate bonds represent debt securities that were issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the
14

Table of Contents
United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.
The following table provides maturity information for investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

| September 30, 2011 |  | December 31, 2010 |  | September 30, 2010
| Cost |  | Fair Value |  | Cost |  | Fair Value |  | Cost |  | Fair Value
Investment securities available for sale |  |  |  |  |  |  |  |  |  |  |
Maturing in: |  |  |  |  |  |  |  |  |  |  |
One year or less | $ | 3,398,267 |  |  | $ | 3,401,530 |  |  | $ | 3,441,185 |  |  | $ | 3,436,818 |  |  | $ | 2,559,784 |  |  | $ | 2,567,076 |
One through five years | 289,046 |  |  | 291,064 |  |  | 916,101 |  |  | 921,536 |  |  | 1,044,757 |  |  | 1,056,170 |
Five through 10 years | 106,329 |  |  | 106,901 |  |  | 1,683 |  |  | 1,710 |  |  | 1,815 |  |  | 1,841 |
Over 10 years | 171,414 |  |  | 179,226 |  |  | 126,857 |  |  | 130,781 |  |  | 138,327 |  |  | 142,757 |
Equity securities | 939 |  |  | 16,104 |  |  | 1,055 |  |  | 19,231 |  |  | 1,132 |  |  | 18,997 |
Total investment securities available for sale | $ | 3,965,995 |  |  | $ | 3,994,825 |  |  | $ | 4,486,881 |  |  | $ | 4,510,076 |  |  | $ | 3,745,815 |  |  | $ | 3,786,841 |
Investment securities held to maturity |  |  |  |  |  |  |  |  |  |  |
Maturing in: |  |  |  |  |  |  |  |  |  |  |
One through five years | $ | 13 |  |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Five through 10 years | 1,816 |  |  | 1,940 |  |  | 2,404 |  |  | 2,570 |  |  | 2,512 |  |  | 2,689 |
Over 10 years | 114 |  |  | 156 |  |  | 128 |  |  | 171 |  |  | 133 |  |  | 175 |
Total investment securities held to maturity | $ | 1,943 |  |  | $ | 2,108 |  |  | $ | 2,532 |  |  | $ | 2,741 |  |  | $ | 2,645 |  |  | $ | 2,864 |

For each period presented, securities gains (losses) include the following:

| Three months ended September 30, |  | Nine months ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
Gross gains on sales of investment securities available for sale | $ | 375 |  |  | $ | 1,167 |  |  | $ | 531 |  |  | $ | 3,803 |
Gross losses on sales of investment securities available for sale | (95 | ) |  | (1 | ) |  | (796 | ) |  | (1,506 | )
Other that temporary impairment loss on equity securities | (26 | ) |  | (226 | ) |  | (26 | ) |  | (412 | )
Total securities gains (losses) | $ | 254 |  |  | $ | 940 |  |  | $ | (291 | ) |  | $ | 1,885 |

15

Table of Contents
The following table provides information regarding securities with unrealized losses as of September 30, 2011 and September 30, 2010:

| Less than 12 months |  | 12 months or more |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
September 30, 2011 |  |  |  |  |  |  |  |  |  |  |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |
Government agency | $ | 1,051,017 |  |  | $ | 2,435 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,051,017 |  |  | $ | 2,435 |
Residential mortgage-backed securities | 25,390 |  |  | 148 |  |  | 1,675 |  |  | 50 |  |  | 27,065 |  |  | 198 |
State, county and municipal | — |  |  | — |  |  | 425 |  |  | — |  |  | 425 |  |  | — |
Total | $ | 1,076,407 |  |  | $ | 2,583 |  |  | $ | 2,100 |  |  | $ | 50 |  |  | $ | 1,078,507 |  |  | $ | 2,633 |
Investment securities held to maturity: |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities | $ | — |  |  | $ | — |  |  | $ | 22 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 26 |
September 30, 2010 |  |  |  |  |  |  |  |  |  |  |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities | 10,364 |  |  | 88 |  |  | 535 |  |  | 22 |  |  | 10,899 |  |  | 110 |
Investment securities held to maturity: |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities | $ | — |  |  | $ | — |  |  | $ | 27 |  |  | $ | 26 |  |  | $ | 27 |  |  | $ | 26 |

Investment securities with an aggregate fair value of $2,122 have had continuous unrealized losses for more than twelve months as of September 30, 2011 with an aggregate unrealized loss of $76. These 19 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of September 30, 2011 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. For all periods presented, BancShares had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.
Investment securities having an aggregate carrying value of $2,563,412 at September 30, 2011, $2,096,850 at December 31, 2010 and $2,015,500 at September 30, 2010 were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.
16

Table of Contents

Note D |

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 |

17

Table of Contents
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
18

Table of Contents
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
19

Table of Contents
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.
20

Table of Contents
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 |

21

Table of Contents

| 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 |

22

Table of Contents
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 |

23

Table of Contents
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
24

Table of Contents
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 |

25

Table of Contents

Note E |

Allowance for Loan and Lease Losses
Activity in the allowance for loan and lease losses, ending balances of loans and leases and related allowance by class of loans is summarized as follows:

| Construction and Land Development - Commercial |  | Commercial Mortgage |  | Other Commercial Real Estate |  | Commercial and Industrial |  | Lease Financing |  | Other |  | Residential Mortgage |  | Revolving Mortgage |  | Construction and Land Development - Non- commercial |  | Consumer |  | Non- specific |  | Total
Noncovered Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Three months ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at July 1 | $ | 9,692 |  |  | $ | 67,123 |  |  | $ | 2,268 |  |  | $ | 24,918 |  |  | $ | 3,358 |  |  | $ | 1,351 |  |  | $ | 7,404 |  |  | $ | 22,020 |  |  | $ | 1,324 |  |  | $ | 27,079 |  |  | $ | 14,078 |  |  | $ | 180,615 |
Charge-offs | (6,213 | ) |  | (1,184 | ) |  | — |  |  | (1,010 | ) |  | (77 | ) |  | (6 | ) |  | (1,624 | ) |  | (3,686 | ) |  | (358 | ) |  | (2,901 | ) |  | — |  |  | (17,059 | )
Recoveries | 74 |  |  | 211 |  |  | 6 |  |  | 236 |  |  | 52 |  |  | 1 |  |  | 44 |  |  | 184 |  |  | 12 |  |  | 447 |  |  | — |  |  | 1,267 |
Provision | 1,613 |  |  | 1,807 |  |  | (113 | ) |  | (70 | ) |  | (78 | ) |  | (63 | ) |  | 3,186 |  |  | 7,099 |  |  | 448 |  |  | 714 |  |  | (232 | ) |  | 14,311 |
Balance at September 30 | $ | 5,166 |  |  | $ | 67,957 |  |  | $ | 2,161 |  |  | $ | 24,074 |  |  | $ | 3,255 |  |  | $ | 1,283 |  |  | $ | 9,010 |  |  | $ | 25,617 |  |  | $ | 1,426 |  |  | $ | 25,339 |  |  | $ | 13,846 |  |  | $ | 179,134 |
Nine months ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at January 1 | $ | 10,512 |  |  | $ | 64,772 |  |  | $ | 2,200 |  |  | $ | 24,089 |  |  | $ | 3,384 |  |  | $ | 1,473 |  |  | $ | 7,009 |  |  | $ | 18,016 |  |  | $ | 1,751 |  |  | $ | 29,448 |  |  | $ | 13,863 |  |  | $ | 176,517 |
Charge-offs | (6,977 | ) |  | (3,810 | ) |  | — |  |  | (4,659 | ) |  | (341 | ) |  | (43 | ) |  | (4,026 | ) |  | (10,454 | ) |  | (1,432 | ) |  | (9,417 | ) |  | — |  |  | (41,159 | )
Recoveries | 153 |  |  | 914 |  |  | 17 |  |  | 826 |  |  | 100 |  |  | 2 |  |  | 835 |  |  | 530 |  |  | 173 |  |  | 1,272 |  |  | — |  |  | 4,822 |
Provision | 1,478 |  |  | 6,081 |  |  | (56 | ) |  | 3,818 |  |  | 112 |  |  | (149 | ) |  | 5,192 |  |  | 17,525 |  |  | 934 |  |  | 4,036 |  |  | (17 | ) |  | 38,954 |
Balance at September 30 | $ | 5,166 |  |  | $ | 67,957 |  |  | $ | 2,161 |  |  | $ | 24,074 |  |  | $ | 3,255 |  |  | $ | 1,283 |  |  | $ | 9,010 |  |  | $ | 25,617 |  |  | $ | 1,426 |  |  | $ | 25,339 |  |  | $ | 13,846 |  |  | $ | 179,134 |
ALLL for loans and leases individually evaluated for impairment | $ | 310 |  |  | $ | 4,641 |  |  | $ | 43 |  |  | $ | 433 |  |  | $ | 25 |  |  | $ | — |  |  | $ | 1,025 |  |  | $ | — |  |  | $ | 92 |  |  | $ | 45 |  |  | $ | — |  |  | $ | 6,614 |
ALLL for loans and leases collectively evaluated for impairment | 4,856 |  |  | 63,316 |  |  | 2,118 |  |  | 23,641 |  |  | 3,230 |  |  | 1,283 |  |  | 7,985 |  |  | 25,617 |  |  | 1,334 |  |  | 25,294 |  |  | — |  |  | 158,674 |
Non-specific ALLL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,846 |  |  | 13,846 |
Total allowance for loan and lease losses | $ | 5,166 |  |  | $ | 67,957 |  |  | $ | 2,161 |  |  | $ | 24,074 |  |  | $ | 3,255 |  |  | $ | 1,283 |  |  | $ | 9,010 |  |  | $ | 25,617 |  |  | $ | 1,426 |  |  | $ | 25,339 |  |  | $ | 13,846 |  |  | $ | 179,134 |
Loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases individually evaluated for impairment | $ | 22,001 |  |  | $ | 66,588 |  |  | $ | 580 |  |  | $ | 14,222 |  |  | $ | 339 |  |  | $ | — |  |  | $ | 12,033 |  |  | $ | — |  |  | $ | 2,844 |  |  | $ | 992 |  |  | $ | — |  |  | $ | 119,599 |
Loans and leases collectively evaluated for impairment | 394,718 |  |  | 4,929,448 |  |  | 143,958 |  |  | 1,783,359 |  |  | 303,700 |  |  | 158,782 |  |  | 804,705 |  |  | 2,302,482 |  |  | 136,341 |  |  | 526,434 |  |  | — |  |  | 11,483,927 |
Total loan and leases | $ | 416,719 |  |  | $ | 4,996,036 |  |  | $ | 144,538 |  |  | $ | 1,797,581 |  |  | $ | 304,039 |  |  | $ | 158,782 |  |  | $ | 816,738 |  |  | $ | 2,302,482 |  |  | $ | 139,185 |  |  | $ | 527,426 |  |  | $ | — |  |  | $ | 11,603,526 |
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ALLL for loans and leases individually evaluated for impairment | $ | 5,883 |  |  | $ | 4,601 |  |  | $ | 67 |  |  | $ | 598 |  |  | $ | 58 |  |  | $ | 7 |  |  | $ | 384 |  |  | $ | — |  |  | $ | 13 |  |  | $ | 9 |  |  | $ | — |  |  | $ | 11,620 |
ALLL for loans and leases collectively evaluated for impairment | 4,629 |  |  | 60,171 |  |  | 2,133 |  |  | 23,491 |  |  | 3,326 |  |  | 1,466 |  |  | 6,625 |  |  | 18,016 |  |  | 1,738 |  |  | 29,439 |  |  | — |  |  | 151,034 |
Non-specific ALLL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,863 |  |  | 13,863 |
Total allowance for loan and lease losses | $ | 10,512 |  |  | $ | 64,772 |  |  | $ | 2,200 |  |  | $ | 24,089 |  |  | $ | 3,384 |  |  | $ | 1,473 |  |  | $ | 7,009 |  |  | $ | 18,016 |  |  | $ | 1,751 |  |  | $ | 29,448 |  |  | $ | 13,863 |  |  | $ | 176,517 |
Loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases individually evaluated for impairment | $ | 28,327 |  |  | $ | 57,952 |  |  | $ | 964 |  |  | $ | 12,989 |  |  | $ | 693 |  |  | $ | 76 |  |  | $ | 6,162 |  |  | $ | — |  |  | $ | 514 |  |  | $ | 102 |  |  | $ | — |  |  | $ | 107,779 |
Loans and leases collectively evaluated for impairment | 310,602 |  |  | 4,679,910 |  |  | 148,746 |  |  | 1,856,501 |  |  | 300,596 |  |  | 181,939 |  |  | 872,630 |  |  | 2,233,853 |  |  | 192,440 |  |  | 595,581 |  |  | — |  |  | 11,372,798 |
Total loan and leases | $ | 338,929 |  |  | $ | 4,737,862 |  |  | $ | 149,710 |  |  | $ | 1,869,490 |  |  | $ | 301,289 |  |  | $ | 182,015 |  |  | $ | 878,792 |  |  | $ | 2,233,853 |  |  | $ | 192,954 |  |  | $ | 595,683 |  |  | — |  |  | $ | 11,480,577 |

26

Table of Contents

| 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Three months ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at July 1 | $ | 24,234 |  |  | $ | 22,093 |  |  | $ | 12,841 |  |  | $ | 1,872 |  |  | $ | — |  |  | $ | 3,653 |  |  | $ | 10 |  |  | $ | 4,720 |  |  | $ | 12 |  |  | $ | 69,435 |
Charge-offs | (10,759 | ) |  | (8,728 | ) |  | (2,686 | ) |  | (624 | ) |  | — |  |  | (1,409 | ) |  | — |  |  | (1,034 | ) |  | (15 | ) |  | (25,255 | )
Recoveries | 57 |  |  | 60 |  |  | 386 |  |  | — |  |  | — |  |  | 50 |  |  | — |  |  | — |  |  |  |  |  | 553 |
Provision | 3,500 |  |  | 16,607 |  |  | 1,879 |  |  | 5,687 |  |  | 1 |  |  | 1,878 |  |  | 122 |  |  | 584 |  |  | 59 |  |  | 30,317 |
Balance at September 30 | $ | 17,032 |  |  | $ | 30,032 |  |  | $ | 12,420 |  |  | $ | 6,935 |  |  | $ | 1 |  |  | $ | 4,172 |  |  | $ | 132 |  |  | $ | 4,270 |  |  | $ | 56 |  |  | $ | 75,050 |
Nine months ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at January 1 | $ | 20,654 |  |  | $ | 13,199 |  |  | $ | 4,148 |  |  | $ | 6,828 |  |  | $ | — |  |  | $ | 113 |  |  | $ | 676 |  |  | $ | 5,607 |  |  | $ | 23 |  |  | $ | 51,248 |
Charge-offs | (20,711 | ) |  | (32,735 | ) |  | (14,160 | ) |  | (3,067 | ) |  | — |  |  | (4,143 | ) |  | — |  |  | (6,078 | ) |  | (89 | ) |  | (80,983 | )
Recoveries | 57 |  |  | 75 |  |  | 477 |  |  | 12 |  |  | — |  |  | 94 |  |  | — |  |  | — |  |  | — |  |  | 715 |
Provision | 17,032 |  |  | 49,493 |  |  | 21,955 |  |  | 3,162 |  |  | 1 |  |  | 8,108 |  |  | (544 | ) |  | 4,741 |  |  | 122 |  |  | 104,070 |
Balance at September 30 | $ | 17,032 |  |  | $ | 30,032 |  |  | $ | 12,420 |  |  | $ | 6,935 |  |  | $ | 1 |  |  | $ | 4,172 |  |  | $ | 132 |  |  | $ | 4,270 |  |  | $ | 56 |  |  | $ | 75,050 |
ALLL for loans and leases individually evaluated for impairment | $ | 4,146 |  |  | $ | 11,989 |  |  | $ | 748 |  |  | $ | 2,247 |  |  | $ | — |  |  | $ | 1,438 |  |  | $ | — |  |  | $ | 597 |  |  | $ | — |  |  | $ | 21,165 |
ALLL for loans and leases collectively evaluated for impairment | 2,148 |  |  | 7,245 |  |  | 1,313 |  |  | 804 |  |  | 1 |  |  | 1,641 |  |  | 132 |  |  | 230 |  |  | 56 |  |  | 13,570 |
ALLL for loans and leases acquired with deteriorated credit quality | 10,738 |  |  | 10,798 |  |  | 10,359 |  |  | 3,884 |  |  | — |  |  | 1,093 |  |  | — |  |  | 3,443 |  |  | — |  |  | 40,315 |
Total allowance for loan and lease losses | $ | 17,032 |  |  | $ | 30,032 |  |  | $ | 12,420 |  |  | $ | 6,935 |  |  | $ | 1 |  |  | $ | 4,172 |  |  | $ | 132 |  |  | $ | 4,270 |  |  | $ | 56 |  |  | $ | 75,050 |
Loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases individually evaluated for impairment | $ | 81,558 |  |  | $ | 174,709 |  |  | $ | 28,535 |  |  | $ | 5,360 |  |  | $ | — |  |  | $ | 17,921 |  |  | $ | — |  |  | $ | 11,606 |  |  | $ | — |  |  | $ | 319,689 |
Loans and leases collectively evaluated for impairment | 151,791 |  |  | 1,009,995 |  |  | 89,958 |  |  | 101,282 |  |  | 162 |  |  | 317,100 |  |  | 29,770 |  |  | 29,106 |  |  | 8,892 |  |  | 1,738,056 |
Loans and leases acquired with deteriorated credit quality | 172,309 |  |  | 125,379 |  |  | 40,514 |  |  | 30,611 |  |  | — |  |  | 45,384 |  |  | 9,939 |  |  | 74,414 |  |  | 1,155 |  |  | 499,705 |
Total loan and leases | $ | 405,658 |  |  | $ | 1,310,083 |  |  | $ | 159,007 |  |  | $ | 137,253 |  |  | $ | 162 |  |  | $ | 380,405 |  |  | $ | 39,709 |  |  | $ | 115,126 |  |  | $ | 10,047 |  |  | $ | 2,557,450 |
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ALLL for loans and leases individually evaluated for impairment | $ | 5,085 |  |  | $ | 7,331 |  |  | $ | 151 |  |  | $ | 170 |  |  | $ | — |  |  | $ | 6 |  |  | $ | — |  |  | $ | 221 |  |  | $ | — |  |  | $ | 12,964 |
ALLL for loans and leases collectively evaluated for impairment | 701 |  |  | 2,613 |  |  | 549 |  |  | 363 |  |  | — |  |  | 107 |  |  | 31 |  |  | 154 |  |  | 23 |  |  | 4,541 |
ALLL for loans and leases acquired with deteriorated credit quality | 14,868 |  |  | 3,255 |  |  | 3,448 |  |  | 6,295 |  |  | — |  |  | — |  |  | 645 |  |  | 5,232 |  |  | — |  |  | 33,743 |
Total allowance for loan and lease losses | $ | 20,654 |  |  | $ | 13,199 |  |  | $ | 4,148 |  |  | $ | 6,828 |  |  | $ | — |  |  | $ | 113 |  |  | $ | 676 |  |  | $ | 5,607 |  |  | $ | 23 |  |  | $ | 51,248 |
Loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases individually evaluated for impairment | $ | 59,763 |  |  | $ | 84,841 |  |  | $ | 9,330 |  |  | $ | 8,330 |  |  | $ | — |  |  | $ | 4,743 |  |  | $ | — |  |  | $ | 42,957 |  |  | $ | — |  |  | $ | 209,964 |
Loans and leases collectively evaluated for impairment | 205,669 |  |  | 883,983 |  |  | 166,627 |  |  | 115,060 |  |  | — |  |  | 58,726 |  |  | 9,466 |  |  | 18,588 |  |  | 8,664 |  |  | 1,466,783 |
Loans and leases acquired with deteriorated credit quality | 102,988 |  |  | 120,240 |  |  | 34,704 |  |  | 9,087 |  |  | — |  |  | 11,026 |  |  | 8,400 |  |  | 44,260 |  |  | — |  |  | 330,705 |
Total loan and leases | $ | 368,420 |  |  | $ | 1,089,064 |  |  | $ | 210,661 |  |  | $ | 132,477 |  |  | $ | — |  |  | $ | 74,495 |  |  | $ | 17,866 |  |  | $ | 105,805 |  |  | $ | 8,664 |  |  | $ | 2,007,452 |

The following table provides information on noncovered impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group, including interest income recognized in the period during which the loans and leases were considered impaired.
27

Table of Contents

| With a recorded allowance |  | With no recorded allowance |  | Total |  | Related allowance recorded
September 30, 2011 |  |  |  |  |  |  |
Impaired noncovered loans and leases |  |  |  |  |  |  |
Construction and land development - commercial | $ | 4,897 |  |  | $ | 17,104 |  |  | $ | 22,001 |  |  | $ | 310 |
Commercial mortgage | 59,491 |  |  | 7,097 |  |  | 66,588 |  |  | 4,641 |
Other commercial real estate | 580 |  |  | — |  |  | 580 |  |  | 43 |
Commercial and industrial | 7,099 |  |  | 7,123 |  |  | 14,222 |  |  | 433 |
Lease financing | 339 |  |  | — |  |  | 339 |  |  | 25 |
Other | — |  |  | — |  |  | — |  |  | — |
Residential mortgage | 12,033 |  |  | — |  |  | 12,033 |  |  | 1,025 |
Construction and land development - non-commercial | 2,844 |  |  | — |  |  | 2,844 |  |  | 92 |
Consumer | 992 |  |  | — |  |  | 992 |  |  | 45 |
Total impaired noncovered loans and leases | $ | 88,275 |  |  | $ | 31,324 |  |  | $ | 119,599 |  |  | $ | 6,614 |
December 31, 2010 |  |  |  |  |  |  |
Impaired noncovered loans and leases |  |  |  |  |  |  |
Construction and land development - commercial | $ | 28,327 |  |  | $ | — |  |  | $ | 28,327 |  |  | $ | 5,883 |
Commercial mortgage | 52,658 |  |  | 5,294 |  |  | 57,952 |  |  | 4,601 |
Other commercial real estate | 964 |  |  | — |  |  | 964 |  |  | 67 |
Commercial and industrial | 11,624 |  |  | 1,365 |  |  | 12,989 |  |  | 598 |
Lease financing | 693 |  |  | — |  |  | 693 |  |  | 58 |
Other | 76 |  |  | — |  |  | 76 |  |  | 7 |
Residential mortgage | 6,162 |  |  | — |  |  | 6,162 |  |  | 384 |
Construction and land development - non-commercial | 514 |  |  | — |  |  | 514 |  |  | 13 |
Consumer | 102 |  |  | — |  |  | 102 |  |  | 9 |
Total impaired noncovered loans and leases | $ | 101,120 |  |  | $ | 6,659 |  |  | $ | 107,779 |  |  | $ | 11,620 |
September 30, 2010 |  |  |  |  |  |  |
Total impaired noncovered loans and leases | $ | 50,620 |  |  | $ | 7,348 |  |  | $ | 57,968 |  |  | $ | 9,648 |

28

Table of Contents

| Average Balance |  | Unpaid Principal Balance |  | Interest Income Recognized
Three months ended September 30, 2011 |  |  |  |  |
Noncovered impaired loans and leases: |  |  |  |  |
Construction and land development - commercial | $ | 24,311 |  |  | $ | 27,162 |  |  | $ | 5 |
Commercial mortgage | 68,436 |  |  | 66,906 |  |  | 297 |
Other commercial real estate | 1,175 |  |  | 580 |  |  | — |
Commercial and industrial | 14,142 |  |  | 14,222 |  |  | 149 |
Lease financing | 478 |  |  | 339 |  |  | 3 |
Other | — |  |  | — |  |  | — |
Residential mortgage | 11,567 |  |  | 12,033 |  |  | 100 |
Construction and land development - non-commercial | 2,703 |  |  | 2,844 |  |  | 38 |
Consumer | 993 |  |  | 992 |  |  | 2 |
Total noncovered impaired loans and leases | $ | 123,805 |  |  | $ | 125,078 |  |  | $ | 594 |
Nine months ended September 30, 2011 |  |  |  |  |
Noncovered impaired loans and leases: |  |  |  |  |
Construction and land development - commercial | $ | 27,151 |  |  | $ | 27,162 |  |  | $ | 109 |
Commercial mortgage | 66,110 |  |  | 66,906 |  |  | 1,375 |
Other commercial real estate | 1,065 |  |  | 580 |  |  | 25 |
Commercial and industrial | 12,741 |  |  | 14,222 |  |  | 372 |
Lease financing | 653 |  |  | 339 |  |  | 15 |
Other | 38 |  |  | — |  |  | — |
Residential mortgage | 9,121 |  |  | 12,033 |  |  | 276 |
Construction and land development - non-commercial | 1,608 |  |  | 2,844 |  |  | 83 |
Consumer | 547 |  |  | 992 |  |  | 12 |
Total noncovered impaired loans and leases | $ | 119,034 |  |  | $ | 125,078 |  |  | $ | 2,267 |
Year ended December 31, 2010 |  |  |  |  |
Noncovered impaired loans and leases: |  |  |  |  |
Construction and land development - commercial | $ | 19,235 |  |  | $ | 28,610 |  |  | $ | 736 |
Commercial mortgage | 25,451 |  |  | 59,760 |  |  | 2,548 |
Other commercial real estate | 353 |  |  | 964 |  |  | 42 |
Commercial and industrial | 3,420 |  |  | 11,624 |  |  | 663 |
Lease financing | 281 |  |  | 693 |  |  | 37 |
Other | 31 |  |  | 76 |  |  | 5 |
Residential mortgage | 2,314 |  |  | 6,162 |  |  | 212 |
Construction and land development - non-commercial | 182 |  |  | 514 |  |  | 56 |
Consumer | 39 |  |  | 102 |  |  | 9 |
Total noncovered impaired loans and leases | $ | 51,306 |  |  | $ | 108,505 |  |  | $ | 4,308 |

29

Table of Contents
Troubled Debt Restructurings
The following table provides the types of troubled debt restructurings made for the three and nine month periods ended September 30, 2011 as well as the loans restructured during those periods that have experienced payment default subsequent to restructuring.

| Three months ended September 30, 2011 |  | Nine months ended September 30, 2011
| All Restructurings |  | Restructurings with payment default |  | All Restructurings |  | Restructurings with payment default
| Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end
Noncovered loans |  |  |  |  |  |  |  |  |  |  |
Interest only period provided |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | 1 | $ | 268 |  |  | — | $ | — |  |  | 4 | $ | 1,160 |  |  | 1 | $ | 662 |
Commercial mortgage | 7 | 3,428 |  |  | — | — |  |  | 32 | 15,005 |  |  | 3 | 1,111 |
Commercial and industrial | 2 | 742 |  |  | — | — |  |  | 5 | 1,507 |  |  | — | — |
Lease financing | — | — |  |  | — | — |  |  | 1 | 69 |  |  | — | — |
Residential mortgage | 1 | 1,256 |  |  | — | — |  |  | 6 | 3,068 |  |  | — | — |
Construction and land development - non-commercial | 1 | 331 |  |  | — | — |  |  | 1 | 331 |  |  | — | — |
Consumer | — | — |  |  | — | — |  |  | 1 | 900 |  |  | — | — |
Total interest only | 12 | 6,025 |  |  | — | — |  |  | 50 | 22,040 |  |  | 4 | 1,773 |
Loan term extension |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | — | — |  |  | — | — |  |  | 4 | 1,428 |  |  | — | — |
Commercial mortgage | 24 | 7,810 |  |  | 2 | 375 |  |  | 47 | 19,071 |  |  | 4 | 778 |
Other commercial real estate | 1 | 54 |  |  |  |  |  | 2 | 200 |  |  | — | — |
Commercial and industrial | 9 | 745 |  |  | 2 | 63 |  |  | 22 | 9,509 |  |  | 2 | 63 |
Lease financing | 1 | 7 |  |  | — | — |  |  | 6 | 270 |  |  | — | — |
Residential mortgage | 2 | 215 |  |  | — | — |  |  | 4 | 775 |  |  | 1 | 523 |
Construction and land development - non-commercial | — | — |  |  | — | — |  |  | 1 | 395 |  |  | — | — |
Consumer | — | — |  |  | — | — |  |  | 1 | 92 |  |  | — | — |
Total loan term extension | 37 | 8,831 |  |  | 4 | 438 |  |  | 87 | 31,740 |  |  | 7 | 1,364 |
Below market interest rate |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | 1 | 234 |  |  | — | — |  |  | 5 | 1,490 |  |  | — | — |
Commercial mortgage | 7 | 3,929 |  |  | — | — |  |  | 18 | 7,566 |  |  | 3 | 555 |
Other commercial real estate | — | — |  |  | — | — |  |  | 1 | 380 |  |  | 1 | 380 |
Commercial and industrial | 1 | 66 |  |  | — | — |  |  | 4 | 508 |  |  | 1 | 29 |
Residential mortgage | 3 | 556 |  |  | — | — |  |  | 11 | 2,528 |  |  | — | — |
Construction and land development - non-commercial | — | — |  |  | — | — |  |  | 1 | 2,001 |  |  | — | — |
Total below market interest rate | 12 | 4,785 |  |  | — | — |  |  | 40 | 14,473 |  |  | 5 | 964 |
Other concession |  |  |  |  |  |  |  |  |  |  |
Commercial mortgage | — | — |  |  | — | — |  |  | 2 | 788 |  |  | 1 | 191 |
Commercial and industrial | — | — |  |  | — | — |  |  | 2 | 38 |  |  | 1 | 14 |
Total other concession | — | — |  |  | — | — |  |  | 4 | 826 |  |  | 2 | 205 |
Total noncovered restructurings | 61 | $ | 19,641 |  |  | 4 | $ | 438 |  |  | 181 | $ | 69,079 |  |  | 18 | $ | 4,306 |

30

Table of Contents

| Three months ended September 30, 2011 |  | Nine months ended September 30, 2011
| All Restructurings |  | Restructurings with payment default |  | All Restructurings |  | Restructurings with payment default
| Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end |  | Number of Loans | Recorded investment at period end
Covered loans |  |  |  |  |  |  |  |  |  |  |
Interest only period provided |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | — | $ | — |  |  | — | $ | — |  |  | 3 | $ | 6,055 |  |  | 1 | $ | 5,390 |
Commercial mortgage | 1 | 132 |  |  | — | — |  |  | 4 | 8,307 |  |  | — | — |
Residential mortgage | 1 | 4,247 |  |  | — | — |  |  | 2 | 5,335 |  |  | — | — |
Total interest only | 2 | 4,379 |  |  | — | — |  |  | 9 | 19,697 |  |  | 1 | 5,390 |
Loan term extension |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | 4 | 2,615 |  |  | 1 | 347 |  |  | 7 | 3,276 |  |  | 1 | 347 |
Commercial mortgage | 3 | 1,039 |  |  | — | — |  |  | 6 | 3,774 |  |  | — | — |
Other commercial real estate | — | — |  |  | — | — |  |  | 4 | 7,853 |  |  | — | — |
Commercial and industrial | 3 | 329 |  |  | — | — |  |  | 3 | 329 |  |  | — | — |
Residential mortgage | — | — |  |  | — | — |  |  | 4 | 1,152 |  |  | — | — |
Construction and land development - non-commercial | — | — |  |  | — | — |  |  | 1 | 2,719 |  |  | 1 | 2,719 |
Total loan term extension | 10 | 3,983 |  |  | 1 | 347 |  |  | 25 | 19,103 |  |  | 2 | 3,066 |
Below market interest rate |  |  |  |  |  |  |  |  |  |  |
Construction and land development - commercial | 7 | 8,613 |  |  | — | — |  |  | 16 | 23,628 |  |  | 1 | 1,148 |
Commercial mortgage | 5 | 6,170 |  |  | — | — |  |  | 14 | 43,182 |  |  | — | — |
Other commercial real estate | 1 | 702 |  |  | — | — |  |  | 1 | 702 |  |  | — | — |
Commercial and industrial | 6 | 2,744 |  |  | 1 | 815 |  |  | 8 | 3,268 |  |  | 1 | 815 |
Residential mortgage | 4 | 1,088 |  |  | — | — |  |  | 15 | 3,300 |  |  | 3 | 928 |
Construction and land development - non-commercial | 2 | 8,856 |  |  | — | — |  |  | 2 | 8,856 |  |  | — | — |
Total below market interest rate | 25 | 28,173 |  |  | 1 | 815 |  |  | 56 | 82,936 |  |  | 5 | 2,891 |
Other concession |  |  |  |  |  |  |  |  |  |  |
Residential mortgage | — | — |  |  | — | — |  |  | 1 | 240 |  |  | — | — |
Total other concession | — | — |  |  | — | — |  |  | 1 | 240 |  |  | — | — |
Total covered restructurings | 37 | $ | 36,535 |  |  | 2 | $ | 1,162 |  |  | 91 | $ | 121,976 |  |  | 8 | $ | 11,347 |

For the three and nine month periods ended September 30, 2011, the recorded investment in troubled debt restructurings prior to modification was not materially impacted by the modification. While we utilize many modification tools, forgiveness of principal is not a restructuring option frequently used by BancShares.
Total troubled debt restructurings at September 30, 2011 equaled $277,699, of which, $159,429 were covered and $118,270 were noncovered.
The majority of troubled debt restructurings are included in the special mention, substandard, or doubtful grading categories which results in more elevated loss expectations when determining the expected cash flows that are used to determine the allowance for loan losses associated with these loans. When a restructured loan subsequently defaults, it is evaluated and downgraded if appropriate. The more severely graded the loans, the lower the estimated expected cash flows and the greater the allowance recorded. Further, troubled debt restructurings over $1,000 and on nonaccrual status are evaluated individually for impairment through review of collateral values.
31

Table of Contents

Note F |

Receivable from FDIC for Loss Share Agreements
The following table provides changes in the receivable from the FDIC for the three and nine month periods ended September 30, 2011 and 2010:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2011 |  | 2010 |  | 2011 |  | 2010
Balance at beginning of period | $ | 522,507 |  |  | $ | 692,242 |  |  | $ | 623,261 |  |  | $ | 249,842 |
Additional receivable from acquisitions | 159,753 |  |  | (10,866 | ) |  | 295,053 |  |  | 468,429 |
Accretion of discounts and premiums, net | 1,554 |  |  | 1,252 |  |  | 2,968 |  |  | 3,638 |
Receipt of payments from FDIC | (27,872 | ) |  | — |  |  | (239,800 | ) |  | (52,422 | )
Post-acquisition and other adjustments, net | (48,035 | ) |  | (30,784 | ) |  | (73,575 | ) |  | (17,643 | )
Balance at September 30 | $ | 607,907 |  |  | $ | 651,844 |  |  | $ | 607,907 |  |  | $ | 651,844 |

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages.
Post-acquisition adjustments represent the net change in loss estimates related to covered loans and OREO as a result of changes in expected cash flows and the allowance for loan and lease losses related to covered loans. For loans covered by loss share agreements, subsequent decreases in the amount expected to be collected from the borrower or collateral liquidation result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses, and a proportional adjustment to the receivable from the FDIC for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected from the borrower or collateral liquidation result in the reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the receivable from the FDIC, or prospective adjustment to the accretable yield and the related receivable from the FDIC if no provision for loan and lease losses had been recorded previously. Other adjustments include those resulting from unexpected recoveries of amounts previously charged off. Adjustments related to acquisition date fair values, made within one year after the closing date of the respective acquisition, are reflected in the acquisition gain.
32

Table of Contents

Note G |

Estimated Fair Values
Fair value estimates are made at a specific point in time based on relevant market information and information about each financial instrument. Where information regarding the fair value of a financial instrument is publicly available, those values are used, as is the case with investment securities, residential mortgage loans and certain long-term obligations. In these cases, an open market exists in which those financial instruments are actively traded.
Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For financial instruments with a fixed interest rate, an analysis of the related cash flows is the basis for estimating fair values. The expected cash flows are discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. For financial instruments with fixed and variable rates, fair value estimates also consider the impact of liquidity discounts appropriate as of the measurement date.
Estimated fair values for certain financial assets and financial liabilities are provided in the following table:

| September 30, 2011 |  | December 31, 2010 |  | September 30, 2010
Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Cash and due from banks | $ | 539,337 |  |  | $ | 539,337 |  |  | $ | 460,178 |  |  | $ | 460,178 |  |  | $ | 493,786 |  |  | $ | 493,786 |
Overnight investments | 410,002 |  |  | 410,002 |  |  | 398,390 |  |  | 398,390 |  |  | 1,049,158 |  |  | 1,049,158 |
Investment securities available for sale | 3,994,825 |  |  | 3,994,825 |  |  | 4,510,076 |  |  | 4,510,076 |  |  | 3,786,841 |  |  | 3,786,841 |
Investment securities held to maturity | 1,943 |  |  | 2,108 |  |  | 2,532 |  |  | 2,741 |  |  | 2,645 |  |  | 2,864 |
Loans held for sale | 78,178 |  |  | 78,178 |  |  | 88,933 |  |  | 88,933 |  |  | 79,853 |  |  | 79,853 |
Loans covered by loss share agreements, net of allowance for loan and lease losses | 2,482,400 |  |  | 2,469,613 |  |  | 1,956,205 |  |  | 1,946,423 |  |  | 2,178,821 |  |  | 2,150,909 |
Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses | 11,424,392 |  |  | 11,329,623 |  |  | 11,304,059 |  |  | 10,995,653 |  |  | 11,371,102 |  |  | 10,995,807 |
Receivable from FDIC for loss share agreements | 607,907 |  |  | 610,907 |  |  | 623,261 |  |  | 624,785 |  |  | 651,844 |  |  | 654,210 |
Income earned not collected | 43,886 |  |  | 43,886 |  |  | 83,644 |  |  | 83,644 |  |  | 83,204 |  |  | 83,204 |
Stock issued by: |  |  |  |  |  |  |  |  |  |  |
Federal Home Loan Bank of Atlanta | 43,302 |  |  | 43,302 |  |  | 47,123 |  |  | 47,123 |  |  | 48,291 |  |  | 48,291 |
Federal Home Loan Bank of San Francisco | 13,605 |  |  | 13,605 |  |  | 15,490 |  |  | 15,490 |  |  | 16,135 |  |  | 16,135 |
Federal Home Loan Bank of Seattle | 4,490 |  |  | 4,490 |  |  | 4,490 |  |  | 4,490 |  |  | 4,490 |  |  | 4,490 |
Deposits | 17,663,275 |  |  | 17,712,240 |  |  | 17,635,266 |  |  | 17,695,357 |  |  | 17,743,028 |  |  | 17,808,921 |
Short-term borrowings | 600,384 |  |  | 600,384 |  |  | 546,597 |  |  | 546,597 |  |  | 652,716 |  |  | 652,716 |
Long-term obligations | 744,839 |  |  | 774,799 |  |  | 809,949 |  |  | 826,501 |  |  | 819,145 |  |  | 851,107 |
Accrued interest payable | 22,153 |  |  | 22,153 |  |  | 37,004 |  |  | 37,004 |  |  | 33,533 |  |  | 33,533 |

At September 30, 2011 and 2010, other assets include $61,397 and $68,916 of stock in various Federal Home Loan Banks (FHLB). The FHLB stock, which is redeemable only through the issuer, is carried at its par value. The investment in the FHLB stock is considered a long-term investment and its value is based on the ultimate recoverability of par value. Management has concluded that the investment in FHLB stock was not other-than-temporarily impaired for any period presented.
For off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.
Fair value represents the price that would be received to sell an asset or transfer a liability in an orderly
33

Table of Contents
transaction between market participants at the measurement date. When determining the fair value measurements BancShares considers the principal or most advantageous market in which the specific assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. As required under US GAAP, individual fair value estimates are ranked based on the relative reliability of the inputs used in the valuation. Fair values determined using level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based on level 3 inputs, which are considered to be nonobservable. BancShares recognizes transfers between levels of the fair value hierarchy at the end of the respective reporting period.
Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or market. Impaired loans, OREO, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. BancShares did not elect to voluntarily report any assets or liabilities at fair value.
For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, 2011, December 31, 2010 and September 30, 2010:
34

Table of Contents

|  |  | Fair value measurements using:
Description | Fair value |  | Quoted prices in active markets for identical assets and liabilities (Level 1 inputs) |  | Quoted prices for similar assets and liabilities (Level 2 inputs) |  | Significant unobservable inputs (Level 3 inputs)
September 30, 2011 |  |  |  |  |  |  |
Assets measured at fair value |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 987,934 |  |  | $ | 987,934 |  |  | $ | — |  |  | $ | — |
Government agency | 2,260,909 |  |  | 2,260,909 |  |  | — |  |  | — |
Corporate bonds | 404,643 |  |  | 404,643 |  |  | — |  |  | — |
Residential mortgage-backed securities | 324,192 |  |  | — |  |  | 324,192 |  |  | — |
Equity securities | 16,104 |  |  | 16,104 |  |  | — |  |  | — |
State, county, municipal | 1,043 |  |  | — |  |  | 1,043 |  |  | — |
Total | $ | 3,994,825 |  |  | $ | 3,669,590 |  |  | $ | 325,235 |  |  | $ | — |
Liabilities measured at fair value |  |  |  |  |  |  |
Interest rate swaps accounted for as cash flow hedges | $ | 13,531 |  |  | $ | — |  |  | $ | 13,531 |  |  | $ | — |
December 31, 2010 |  |  |  |  |  |  |
Assets measured at fair value |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 1,939,400 |  |  | $ | 1,939,400 |  |  | $ | — |  |  | $ | — |
Government agency | 1,919,986 |  |  | 1,919,986 |  |  | — |  |  | — |
Corporate bonds | 486,658 |  |  | 486,658 |  |  | — |  |  | — |
Residential mortgage-backed securities | 143,545 |  |  | — |  |  | 143,545 |  |  | — |
Equity securities | 19,231 |  |  | 19,231 |  |  | — |  |  | — |
State, county, municipal | 1,256 |  |  | — |  |  | 1,256 |  |  | — |
Total | $ | 4,510,076 |  |  | $ | 4,365,275 |  |  | $ | 144,801 |  |  | $ | — |
Liabilities measured at fair value |  |  |  |  |  |  |
Interest rate swaps accounted for as cash flow hedges | $ | 9,492 |  |  | $ | — |  |  | $ | 9,492 |  |  | $ | — |
September 30, 2010 |  |  |  |  |  |  |
Assets measured at fair value |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 3,121,251 |  |  | $ | 3,121,251 |  |  | $ | — |  |  | $ | — |
Government agency | — |  |  | — |  |  | — |  |  | — |
Corporate bonds | 489,189 |  |  | 489,189 |  |  | — |  |  | — |
Residential mortgage-backed securities | 156,136 |  |  | — |  |  | 156,136 |  |  | — |
Equity securities | 18,997 |  |  | 18,997 |  |  | — |  |  | — |
State, county, municipal | 1,268 |  |  | — |  |  | 1,268 |  |  | — |
Total | $ | 3,786,841 |  |  | $ | 3,629,437 |  |  | $ | 157,404 |  |  | $ | — |
Liabilities measured at fair value |  |  |  |  |  |  |
Interest rate swaps accounted for as cash flow hedges | $ | 14,263 |  |  | $ | — |  |  | $ | 14,263 |  |  | $ | — |

Prices for US Treasury securities, government agency securities, corporate bonds and equity securities are readily available in the active markets in which those securities are traded and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for mortgage-backed securities and state, county and municipal securities are obtained using the fair values of similar assets and the resulting fair values are shown in the ‘Level 2 input’ column. There were no assets or liabilities valued based on level 3 inputs at September 30, 2011, December 31, 2010 or September 30, 2010, and there were no transfers
35

Table of Contents
between Level 1 and Level 2 inputs during the nine month periods ended September 30, 2011 and 2010.
Under the terms of the existing cash flow hedge, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the 3-month LIBOR rate. The fair value of the cash flow hedge is therefore based on projected LIBOR rates for the duration of the hedge,values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument.
For those investment securities available for sale with fair values that are determined by reliance on significant nonobservable inputs, the following table identifies the factors causing the change in fair value during the first nine months of 2010:

| Investment securities available for sale with fair values based on significant nonobservable inputs
Description | 2010
Beginning balance, January 1, | $ | 1,287 |
Total gains (losses), realized or unrealized: |
Included in earnings | — |
Included in other comprehensive income | — |
Purchases, sales, issuances and settlements, net | — |
Transfers in/out of Level 3 | (1,287 | )
Ending balance, September 30 | $ | — |

There were no investment securities with fair values determined by reliance on significant nonobservable inputs during 2011.
No gains or losses were reported for the nine month periods ended September 30, 2011 and 2010 that relate to fair values estimated based on significant nonobservable inputs. The investment securities valued using level 3 inputs that were transferred out during the first quarter of 2010 result from changes in US GAAP adopted January 1, 2010 related to investments in the retained interest of a residual interest strip that resulted from an asset securitization.
Certain assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are therefore carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. For assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2011, December 31, 2010 and September 30, 2010:
36

Table of Contents

|  |  | Fair value measurements using:
Description | Fair value |  | Quoted prices in active markets for identical assets and liabilities (Level 1 inputs) |  | Quoted prices for similar assets and liabilities (Level 2 inputs) |  | Significant nonobservable inputs (Level 3 inputs)
September 30, 2011 |  |  |  |  |  |  |
Loans held for sale | $ | 78,178 |  |  | $ | — |  |  | $ | 78,178 |  |  | $ | — |
Impaired loans: |  |  |  |  |  |  |
Covered by loss share agreements | 247,361 |  |  | — |  |  | — |  |  | 247,361 |
Not covered by loss share agreements | 81,661 |  |  | — |  |  | — |  |  | 81,661 |
December 31, 2010 |  |  |  |  |  |  |
Loans held for sale | 88,933 |  |  | — |  |  | 88,933 |  |  | — |
Impaired loans: |  |  |  |  |  |  |
Covered by loss share agreements | 192,406 |  |  | — |  |  | — |  |  | 192,406 |
Not covered by loss share agreements | 89,500 |  |  | — |  |  | — |  |  | 89,500 |
September 30, 2010 |  |  |  |  |  |  |
Loans held for sale | 79,853 |  |  | — |  |  | 79,853 |  |  | — |
Impaired loans: |  |  |  |  |  |  |
Covered by loss share agreements | 142,116 |  |  | — |  |  | — |  |  | 142,116 |
Not covered by loss share agreements | 48,320 |  |  | — |  |  | — |  |  | 48,320 |

The values of loans held for sale are based on prices observed for similar pools of loans. The values of impaired loans are determined by either the collateral value or the discounted present value of the expected cash flows. No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2011, December 31, 2010 or September 30, 2010.
OREO is measured and reported at fair value using Level 3 inputs for valuations based on nonobservable criteria. During the nine month period ended September 30, 2011, foreclosures of other real estate not covered by loss share agreements totaled $30,226, all of which were valued using Level 3 inputs. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $12,380 as of September 30, 2011 incurred write-downs that totaled $2,910 during the nine month period ended September 30, 2011. Foreclosures of other real estate covered by loss share agreements totaled $92,245, all of which were valued using Level 3 inputs.
During the nine month period ended September 30, 2010, foreclosures of other real estate not covered by loss share agreements totaled $16,217, all of which were valued using Level 3 inputs. Based on updates to Level 3 inputs, noncovered OREO with a fair value of $8,025 as of September 30, 2010 incurred write-downs that totaled $2,344 during the nine month period ended September 30, 2010. Foreclosures of other real estate covered by loss share agreements totaled $39,342, all of which were valued using Level 3 inputs.
37

Table of Contents

Note H |

Employee Benefit Plans
Pension expense is a component of employee benefits expense. For the three- and nine-month periods ended September 30, 2011 and 2010, respectively, the components of pension expense are as follows:

| Three Months Ended September 30 |  | Nine months ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
Service cost | $ | 3,316 |  |  | $ | 2,760 |  |  | $ | 9,949 |  |  | $ | 9,431 |
Interest cost | 5,953 |  |  | 5,192 |  |  | 17,858 |  |  | 17,738 |
Expected return on assets | (7,178 | ) |  | (6,533 | ) |  | (21,530 | ) |  | (22,551 | )
Amortization of prior service cost | 53 |  |  | 42 |  |  | 158 |  |  | 157 |
Amortization of net actuarial loss | 1,596 |  |  | 771 |  |  | 4,786 |  |  | 2,851 |
Total pension expense | $ | 3,740 |  |  | $ | 2,232 |  |  | $ | 11,221 |  |  | $ | 7,626 |

The assumed discount rate for 2011 is 5.50 percent, the expected long-term rate of return on plan assets is 7.75 percent and the assumed rate of salary increases is 4.50 percent. For 2010 the assumed discount rate was 6.00 percent, expected long-term rate of return was 8.00 percent and the assumed rate of salary increases was 4.50 percent.
38

Table of Contents

Note I |

Commitments and Contingencies
In order to meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, standby letters of credit, and recourse obligations on mortgage loans sold. These instruments involve elements of credit, interest rate or liquidity risk.
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment including cash deposits, securities and other assets. At September 30, 2011 BancShares had unused commitments totaling $5,890,227 compared to $5,364,451 at December 31, 2010 and $5,232,955 at September 30, 2010.
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At September 30, 2011, December 31, 2010, and September 30, 2010, BancShares had standby letters of credit amounting to $57,933, $70,755 and $77,929, respectively. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients, and therefore, these letters of credit are collateralized when necessary.
Residential mortgage loans sold with limited recourse liability represent guarantees to repurchase the loans or repay a portion of the sale proceeds in the event of nonperformance by the borrower. The recourse period is generally 120 days or less. At September 30, 2011, December 31, 2010 and September 30, 2010, BancShares has loans sold with recourse outstanding of approximately $216,950, $253,347 and $256,669 respectively on these mortgage loans. Any loans that are repurchased under the recourse obligation would carry the same credit risk as mortgage loans originated by the company and would be collateralized in the same manner.
BancShares and various subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various FDIC-assisted transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
During February 2011, United Western Bank, United Western’s parent company, United Western Bancorp, and five of their directors filed a complaint in the United States District Court for the District of Columbia against the FDIC, the OTS and others, claiming that the seizure of United Western by the OTS and the subsequent appointment of the FDIC as receiver was illegal. The complaint requested the court to direct the OTS to remove the FDIC as receiver, return control of United Western to the plaintiffs, reimburse the plaintiffs for their costs and attorney fees and to award plaintiffs other relief as may be just and equitable. Neither BancShares nor FCB were named in the complaint. The defendants filed motions to dismiss all claims against them and, during June 2011, the Court dismissed all claims by the holding company and the individual directors, and it dismissed United Western Bank’s claim against the FDIC. However, the Court denied the motion to dismiss United Western Bank’s claim against the OTS, which permits that claim to proceed. It is unclear what impact, if any, the litigation will have on FCB or the assets acquired in the United Western transaction.
39

Table of Contents

Note J |

Derivatives
At September 30, 2011, BancShares had one interest rate swap that qualifies as a cash flow hedge under US GAAP. An additional interest rate swap that qualified as a cash flow hedge matured on June 30, 2011. The fair value of the derivative is included in other liabilities in the consolidated balance sheets and the net change in fair value for both derivatives is included in other liabilities in the consolidated statements of cash flows.
The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The interest rate swaps each have a notional amount of $115,000, representing the amount of variable-rate trust preferred capital securities issued during 2006. The 2006 interest rate swap hedged interest payments through June 2011 and required fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. The 2009 interest rate swap hedges interest payments from July 2011 through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of September 30, 2011, collateral with a fair value of $14,665 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.

|  |  | Estimated fair value of liability
| Notional amount for all periods |  | September 30, 2011 |  | December 31, 2010 |  | September 30, 2010
2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011 | $ | 115,000 |  |  | $ | — |  |  | $ | 2,873 |  |  | $ | 4,304 |
2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016 | 115,000 |  |  | 13,531 |  |  | 6,619 |  |  | 9,959 |
|  |  | $ | 13,531 |  |  | $ | 9,492 |  |  | $ | 14,263 |

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the nine month periods ended September 30, 2011 and 2010, BancShares recognized interest expense of $3,961 and $4,374, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.
The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the nine month periods ended September 30, 2011 and 2010.

| 2011 |  | 2010
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1 | $ | (9,492 | ) |  | $ | (5,367 | )
Other comprensive income (loss) recognized during nine month period ended September 30 | (4,039 | ) |  | (8,896 | )
Accumulated other comprehensive loss resulting from interest rate swaps as of September 30 | $ | (13,531 | ) |  | $ | (14,263 | )

BancShares monitors the credit risk of the interest rate swap counterparty.
40

Table of Contents

Note K |

Segment Disclosures
BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through a single wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank.
Prior to January 7, 2011, BancShares also offered full service banking services through another wholly-owned subsidiary, IronStone Bank (ISB), a federally-chartered thrift institution. On January 7, 2011 ISB was legally merged into FCB resulting in a single banking subsidiary of BancShares. Goodwill was evaluated for impairment at the merger date and no evidence of impairment was identified.
Prior to the merger, FCB and ISB were considered to be distinct operating segments. As a result of the merger and various organizational changes resulting from the merger, there is no longer a focus on the discrete financial measures of each entity. Therefore, BancShares now operates as one reportable segment.
41

Table of Contents

Note L |

Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) included the following as of September 30, 2011, December 31, 2010 and September 30, 2010:

| September 30, 2011 |  | December 31, 2010 |  | September 30, 2010
| Accumulated other comprehensive income (loss) |  | Deferred tax expense (benefit) |  | Accumulated other comprehensive income (loss), net of tax |  | Accumulated other comprehensive income (loss) |  | Deferred tax expense (benefit) |  | Accumulated other comprehensive income (loss), net of tax |  | Accumulated other comprehensive income (loss) |  | Deferred tax expense (benefit) |  | Accumulated other comprehensive income (loss), net of tax
Unrealized gains on investment securities available for sale | $ | 28,830 |  |  | $ | 11,340 |  |  | $ | 17,490 |  |  | $ | 23,195 |  |  | $ | 9,143 |  |  | $ | 14,052 |  |  | $ | 41,026 |  |  | $ | 15,427 |  |  | $ | 25,599 |
Funded status of defined benefit plan | (68,752 | ) |  | (26,923 | ) |  | (41,829 | ) |  | (73,696 | ) |  | (28,859 | ) |  | (44,837 | ) |  | (67,884 | ) |  | (26,583 | ) |  | (41,301 | )
Unrealized loss on cash flow hedge | (13,531 | ) |  | (5,343 | ) |  | (8,188 | ) |  | (9,492 | ) |  | (3,748 | ) |  | (5,744 | ) |  | (14,263 | ) |  | (5,632 | ) |  | (8,631 | )
Total | $ | (53,453 | ) |  | $ | (20,926 | ) |  | $ | (32,527 | ) |  | $ | (59,993 | ) |  | $ | (23,464 | ) |  | $ | (36,529 | ) |  | $ | (41,121 | ) |  | $ | (16,788 | ) |  | $ | (24,333 | )

42

Table of Contents

Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION
Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2011, the reclassifications have no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms we, us and BancShares refer to the consolidated financial position and consolidated results of operations for BancShares.
FDIC-ASSISTED TRANSACTIONS
Participation in FDIC-assisted transactions has provided significant growth opportunities for BancShares during 2011, 2010, and 2009. These transactions have allowed us to increase our presence in markets in which we presently operate, and to expand our banking presence to contiguous markets. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities have resulted in significant acquisition gains. All of the FDIC-assisted transactions completed as of September 30, 2011 include loss share agreements which protect us from a substantial portion of the credit and asset quality risk that we would otherwise incur.
Issues affecting comparability of financial statements. As estimated exposures related to the acquired assets covered by the loss share agreements change based on post-acquisition events, our adherence to accounting principles generally accepted in the United States of America (US GAAP) and accounting policy elections that we have made affect the comparability of our current results of operations to earlier periods. Adjustments affecting assets covered by loss share agreements are recorded on a gross basis. Consequential adjustments to the carrying value of the FDIC receivable that reflect the change in the estimated loss of the covered assets are recorded with an offset to noninterest income. Several of the key issues affecting comparability are as follows:

• | When post acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered by a loss share agreement is less than originally expected:

▪ | An allowance for loan and lease losses is established for the post-acquisition exposure that has emerged with a corresponding debit to provision for loan and lease losses;

▪ | The receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding credit to noninterest income;

• | When post acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered under a loss share agreement is greater than originally expected:

▪ | Any allowance for loan and lease losses that was previously established for post-acquisition exposure is reversed with a corresponding credit to provision for loan and lease losses; if no allowance was established in earlier periods, the amount of the improvement in the cash flow projection results in a reclassification from the nonaccretable difference created at the acquisition date to an accretable yield; the newly-identified accretable yield is accreted into income in future periods over the remaining life of the loan as a credit to interest income;

▪ | The receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding debit to noninterest income;

• | When actual payments received on loans are greater than initial estimates, large nonrecurring discount accretion may be recognized during a specific period; discount accretion is recognized as a credit to interest income.

• | Adjustments to the FDIC receivable resulting from changes in estimated cash flows are based on the reimbursement provision of the applicable loss share agreement with the FDIC. Adjustments to the FDIC receivable partially offset the adjustment to the asset carrying value, but the rate of the change to the FDIC receivable relative to the change in the asset carrying value is not constant. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, higher loss estimates result in higher reimbursement rates, while in other loss share

43

Table of Contents
agreements, higher loss estimates trigger a reduction in the reimbursement rates. In addition, some of the loss share agreements include clawback provisions that would require the purchaser to remit a payment to the FDIC in the event that the aggregate amount of losses is less than a loss estimate established by the FDIC. The adjustments to the FDIC receivable based on changes in loss estimates are measured based on the actual reimbursement rates and consider the impact of changes in the projected clawback payment.
Balance sheet impact. The July 2011 transaction involving Colorado Capital Bank was the sixth transaction involving BancShares since July 17, 2009. Table 1 provides information regarding the six entities from which we have acquired assets and assumed liabilities in FDIC-assisted transactions during 2011, 2010 and 2009. Adjustments to acquisition date fair values are subject to change for one year following the closing date of each respective acquisition.
44

Table of Contents
FDIC-Assisted Transactions
Table 1

|  |  |  |  | Fair value of
Entity | Date of transaction |  | # branches |  | Loans acquired |  | Deposits assumed |  | Short-term borrowings assumed |  | Long-term obligations assumed
|  |  |  |  |  |  | (thousands) |  |
Colorado Capital Bank (CCB) | July 8, 2011 |  | 6 |  |  | $ | 322,162 |  |  | $ | 606,501 |  |  | $ | 15,212 |  |  | $ | — |
United Western Bank (United Western) | January 21, 2011 |  | 8 |  |  | 759,351 |  |  | 1,604,858 |  |  | 336,853 |  |  | 207,627 |
Sun American Bank (SAB) | March 5, 2010 |  | 12 |  |  | 290,891 |  |  | 420,012 |  |  | 42,533 |  |  | 40,082 |
First Regional Bank (First Regional) | January 29, 2010 |  | 8 |  |  | 1,260,249 |  |  | 1,287,719 |  |  | 361,876 |  |  | — |
Venture Bank (VB) | September 11, 2009 |  | 18 |  |  | 456,995 |  |  | 709,091 |  |  | — |  |  | 55,618 |
Temecula Valley Bank (TVB) | July 17, 2009 |  | 11 |  |  | 855,583 |  |  | 965,431 |  |  | 79,096 |  |  | — |
Total |  |  | 63 |  |  | $ | 3,945,231 |  |  | $ | 5,593,612 |  |  | $ | 835,570 |  |  | $ | 303,327 |

US GAAP permits acquired loans to be accounted for in designated pools based on common risk characteristics. For all CCB loans and residential mortgage loans from United Western, we assigned loans to pools based on various factors including loan type, collateral type and performance status. The CCB loans had a fair value of $322.2 million at the acquisition date; the residential mortgage loans acquired from United Western had a fair value of $223.1 million at the acquisition date. All other acquired loans are not assigned to loan pools and are being accounted for at the individual loan level. The non-pool election could potentially accentuate volatility in net interest income.
Income statement impact. The six FDIC-assisted transactions created acquisition gains recognized at the time of the respective transaction. An acquisition gain of $87.8 million was recorded for the three-month period ended September 30, 2011 and no acquisition gains were recorded for the corresponding period of 2010. For the nine-month period ended September 30, 2011, acquisition gains totaled $151.3 million compared to $136.0 million during the same period of 2010. Additionally, the acquired loans, deposits and borrowings originated by the six banks have affected net interest income, provision for loan and lease losses and noninterest income. Increases to noninterest expense have resulted from incremental staffing and facility costs for the branch locations resulting from the FDIC-assisted transactions. Various fair value discounts and premiums that were previously recorded are being accreted and amortized into income over the life of the underlying asset or liability.
As previously discussed, post-acquisition changes that affect the amount of expected cash flows can result in recognition of provision for loan and lease losses or the reversal of previously-recognized provision for loan and lease losses. During the three-month and nine-month periods ended September 30, 2011 total provision for loan losses related to acquired loans equaled $30.3 million and $104.1 million respectively compared to $42.6 million and $62.5 million during the same periods of 2010. Much of the increase in the provision for loan losses in 2011 relates to post-acquisition deterioration of covered loans acquired during the first quarter of 2010.
During the three-month period ended September 30, 2011, total discount accretion for loans for which a fair value discount had been recorded, equaled $69.8 million compared to $88.1 million during the same period of 2010. During the nine-month period ended September 30, 2011, discount accretion totaled $192.6 million compared to $100.3 million during the same period of 2010.
Accretion income is generated by recognizing accretable yield over the life of acquired loans. Accretable yield is the difference in the expected cash flows and the fair value of acquired loans. The amount of accretable yield related to the loans can change if the estimated cash flows expected to be collected changes subsequent to the initial estimates. Further, the recognition of accretion income can be accelerated in the event of large unscheduled repayments, loan payoffs, other loan settlements for amounts in excess of original estimates, and various other post-acquisition events. Due to the many factors that can influence the amount of accretion income recognized in a given period, this component of net interest income is not easily predictable for future periods and impacts the comparability of interest income, net interest income, and overall results of operations.
Unscheduled prepayment of loan balances and post-acquisition deterioration of covered loans also result in adjustments to the FDIC receivable for changes in the estimated amount that would be covered under the respective loss share agreement. During the three-month and nine-month periods ended September 30, 2011, the adjustment to the FDIC receivable resulting from large unscheduled payments and other favorable adjustments exceeded the amount of the adjustment for post-acquisition deterioration, resulting in a net reduction to the FDIC receivable and a net charge of $18.9 million and $43.0 million
45

Table of Contents
respectively to noninterest income compared to a net reduction in the receivable and a corresponding reduction in noninterest income of $29.5 million and $14.0 million during the same periods of 2010. The result is a net increase in noninterest income of $10.6 million for the three-month period and a net reduction in noninterest income of $29.0 million for the nine-month period as a result of the change in these amounts.
2011 FDIC-Assisted Transactions
The FDIC-assisted acquisitions of United Western and CCB were accounted for under the acquisition method of accounting. The statements of net assets acquired, fair value adjustments and the resulting acquisition gains are presented in Table 2 and Table 3 for United Western and CCB, respectively. The purchased assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. During this one year period, the cause of any change in cash flow estimates is considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the acquisition.
United Western Bank
On January 21, 2011, First-Citizens Bank & Trust Company (FCB) entered into a Purchase and Assumption Agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of United Western, headquartered in Denver, Colorado.
Table 2 identifies the assets acquired and liabilities assumed, the fair value adjustments, the amounts recorded by FCB, and the calculation of the gain recognized.
46

Table of Contents

|  |  |  |  |  |  | Table 2 |
| January 21, 2011
| As recorded by United Western |  | Fair value adjustments at date of acquisition |  | Subsequent acquisition-date adjustments |  | As recorded by FCB
Assets |  |  |  |  |  |  |
Cash and due from banks | $ | 420,902 |  |  | $ | — |  |  | $ | — |  |  | $ | 420,902 |
Investment securities available for sale | 281,862 |  |  | — |  |  | — |  |  | 281,862 |
Loans covered by loss share agreements (1) | 1,034,074 |  |  | (278,913 | ) |  | 4,190 |  |  | 759,351 |
Other real estate owned covered by loss share agreements | 37,812 |  |  | (10,252 | ) |  | (1,469 | ) |  | 26,091 |
Income earned not collected | 5,275 |  |  | — |  |  |  |  | 5,275 |
Receivable from FDIC for loss share agreements | — |  |  | 140,285 |  |  | (2,832 | ) |  | 137,453 |
FHLB stock | 22,783 |  |  | — |  |  |  |  | 22,783 |
Mortgage servicing rights | 4,925 |  |  | (1,489 | ) |  |  |  | 3,436 |
Core deposit intangible | — |  |  | 537 |  |  |  |  | 537 |
Other assets | 15,421 |  |  | 109 |  |  | (991 | ) |  | 14,539 |
Total assets acquired | $ | 1,823,054 |  |  | $ | (149,723 | ) |  | $ | (1,102 | ) |  | $ | 1,672,229 |
Liabilities |  |  |  |  |  |  | — |
Deposits: |  |  |  |  |  |  |
Noninterest-bearing | $ | 101,875 |  |  | $ | — |  |  | $ | — |  |  | $ | 101,875 |
Interest-bearing | 1,502,983 |  |  | — |  |  | — |  |  | 1,502,983 |
Total deposits | 1,604,858 |  |  | — |  |  | — |  |  | 1,604,858 |
Short-term borrowings | 336,853 |  |  | — |  |  | — |  |  | 336,853 |
Long-term obligations | 206,838 |  |  | 789 |  |  | — |  |  | 207,627 |
Deferred tax liability | 1,351 |  |  | (565 | ) |  | — |  |  | 786 |
Other liabilities | 11,772 |  |  | — |  |  | — |  |  | 11,772 |
Total liabilities assumed | 2,161,672 |  |  | 224 |  |  | — |  |  | 2,161,896 |
Excess (shortfall) of assets acquired over liabilities assumed | $ | (338,618 | ) |  |  |  |  |  |
Aggregate fair value adjustments |  |  | $ | (149,947 | ) |  | $ | (1,102 | ) |  |
Cash received from the FDIC (2) |  |  |  |  |  |  | $ | 553,141 |
Gain on acquisition of United Western |  |  |  |  |  |  | $ | 63,474 |

(1) | Excludes $11,998 in loans repurchased by FDIC during the second quarter of 2011

(2) | Cash received includes cash received from the FDIC for loans repurchased during the second quarter of 2011

Loans and OREO purchased from United Western are covered by two loss share agreements between the FDIC and FCB (one for single family residential mortgage loans and the other for all other non-consumer loans and OREO), which afford FCB significant loss protection. Under the loss share agreement for single family residential mortgage loans (SFRs), the FDIC will cover 80 percent of covered loan losses up to $32.5 million; 0 percent from $32.5 million up to $57.7 million and 80 percent of losses in excess of $57.7 million. The loss share agreement for all other non-consumer loans and OREO will cover 80 percent of covered loan and OREO losses up to $111.5 million; 30 percent of losses from $111.5 million to $227.0 million; and 80 percent of losses in excess of $227.0 million. Losses in excess of current estimates for all other non-consumer loans and OREO are projected to be covered at a 30 percent rate until losses exceed $227.0 million. Consumer loans are not covered under the FDIC loss share agreements.
The SFR loss share agreement covers losses recorded during the ten years following the date of the transaction, while the term for the loss share agreement covering all other covered loans and OREO is five years. The SFR loss share agreement also covers recoveries received for ten years following the date of the transaction, while recoveries of all other covered loans and OREO will be shared with the FDIC for a five-year period. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.
The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $294.0 million. On March 17, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals
47

Table of Contents
20 percent of the Total Intrinsic Loss Estimate, or $58.8 million; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($52.9 million); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $37.9 million. Current loss estimates suggest that a true-up payment of $11.8 million will be paid to the FDIC during 2021.
FCB recorded a $137.5 million receivable that was based on the present value of projected amounts to be received from and paid to the FDIC under the United Western loss share agreements. Subsequent adjustments to the FDIC receivable resulting from changes in estimated cash flows will be based on the reimbursement provisions of the applicable loss share agreement with the FDIC and the appropriate reimbursement rate based on aggregate estimated losses. Once losses for United Western loans covered under the SFR loss share agreement exceed $32.5 million, the next $25.2 million of losses will have no reimbursement from the FDIC. Once losses for United Western loans covered under the loss share agreement covering all other non-consumer loans and OREO exceed $111.5 million, the next $115.5 million of losses will be reimbursed by the FDIC at a rate of 30 percent.
First quarter noninterest income included an acquisition gain of $63.5 million that resulted from the FDIC-assisted acquisition of United Western. Our operating results for the periods ended September 30, 2011 include the results of the acquired assets and liabilities for the period from January 21, 2011 through September 30, 2011.
Colorado Capital Bank
On July 8, 2011, FCB entered into an agreement with the FDIC to purchase substantially all the assets and assume the majority of the liabilities of Colorado Capital Bank (CCB) of Castle Rock, Colorado at a discount of $154.9 million, with no deposit premium. CCB operated in Castle Rock, Colorado, and in six branch locations in Boulder, Castle Pines, Cherry Creek, Colorado Springs, Edwards, and Parker. The FDIC serves as Receiver of CCB. The Purchase and Assumption Agreement with the FDIC includes loss share agreements on the loans and OREO purchased by FCB which provides protection against losses to FCB.
The loans and OREO purchased from CCB are covered by two loss share agreements between the FDIC and FCB (one for single family residential mortgage (SFR) loans and the other for all other loans and OREO excluding consumer loans and CD secured loans), which afford FCB significant loss protection. Under the loss share agreements, the FDIC will cover 80 percent of combined covered loan losses up to $231.0 million; 0 percent from $231.0 million up to $285.9 million; and 80 percent of losses in excess of $285.9 million.
The SFR loss share agreement covers losses recorded during the ten years following the date of the transaction, while the term for the loss share agreement covering all other covered loans and OREO is five years. The SFR loss share agreement also covers recoveries received for ten years following the date of the transaction, while recoveries of all other covered loans and OREO will be shared with the FDIC for a five-year period. The losses reimbursable by the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the loss share agreements.
The loss share agreements include a true-up payment in the event FCB’s losses do not reach the Total Intrinsic Loss Estimate of $285.7 million. On August 22, 2021, the true-up measurement date, FCB is required to make a true-up payment to the FDIC equal to 50 percent of the excess, if any, of the following calculation: A-(B+C+D), where (A) equals 20 percent of the Total Intrinsic Loss Estimate, or $57.1 million; (B) equals 20 percent of the Net Loss Amount; (C) equals 25 percent of the asset (discount) bid, or ($38.7 million); and (D) equals 3.5 percent of total Shared Loss Assets at Bank Closing, or $19.3 million. Current loss estimates suggest that a true-up payment of $16.3 million will be paid to the FDIC during 2021.
FCB recorded a $157.6 million receivable that was based on the present value of projected amounts to be received from and paid to the FDIC under the CCB loss share agreements. Subsequent adjustments to the FDIC receivable resulting from changes in estimated cash flows will be based on the reimbursement provisions of the applicable loss share agreement with the FDIC and the appropriate reimbursement rate based on aggregate estimated losses. Once losses for CCB loans covered under the loss share agreements exceed $231.0 million, the next $54.9 million of losses will have no reimbursement from the FDIC. Based on current projections, we anticipate losses on CCB covered assets will total $219.4 million. If additional losses exceed $11.6 million, any further losses would have no reimbursement from the FDIC until total losses exceed $285.9 million. Once total losses exceed $285.9 million, 80 percent of all additional losses will be reimbursed by the FDIC.
The statement of net assets acquired, fair value adjustments and the resulting acquisition gain is presented in Table 3.
48

Table of Contents

|  |  |  |  | Table 3 |
| July 8, 2011
| As recorded by CCB |  | Fair value adjustments at date of acquisition |  | As recorded by FCB
Assets |  |  |  |  |
Cash and due from banks | $ | 74,736 |  |  | $ | — |  |  | $ | 74,736 |
Investment securities available for sale | 40,187 |  |  | — |  |  | 40,187 |
Loans covered by loss share agreements | 538,369 |  |  | (216,207 | ) |  | 322,162 |
Other real estate owned covered by loss share agreements | 14,853 |  |  | (7,699 | ) |  | 7,154 |
Income earned not collected | 1,720 |  |  | — |  |  | 1,720 |
Receivable from FDIC for loss share agreements | — |  |  | 157,600 |  |  | 157,600 |
Core deposit intangible | — |  |  | 984 |  |  | 984 |
Other assets | 3,296 |  |  | — |  |  | 3,296 |
Total assets acquired | $ | 673,161 |  |  | $ | (65,322 | ) |  | $ | 607,839 |
Liabilities |  |  |  |  | — |
Deposits: |  |  |  |  |
Noninterest-bearing | $ | 35,862 |  |  | $ | — |  |  | $ | 35,862 |
Interest-bearing | 571,251 |  |  | (612 | ) |  | 570,639 |
Total deposits | 607,113 |  |  | (612 | ) |  | 606,501 |
Short-term borrowings | 15,008 |  |  | 204 |  |  | 15,212 |
Other liabilities | 438 |  |  | — |  |  | 438 |
Total liabilities assumed | 622,559 |  |  | (408 | ) |  | 622,151 |
Excess of assets acquired over liabilities assumed | $ | 50,602 |  |  |  |  |
Aggregate fair value adjustments |  |  | $ | (64,914 | ) |  |
Cash received from the FDIC |  |  |  |  | $ | 102,100 |
Gain on acquisition of CCB |  |  |  |  | $ | 87,788 |

Third quarter 2011 noninterest income includes an acquisition gain of $87.8 million that resulted from the CCB FDIC-assisted acquisition. The gain resulted from the difference between the estimated fair value of acquired assets and assumed liabilities. To the extent there are additional adjustments to the acquisition date fair values for up to one year following the acquisition, there will be additional adjustments to the gain.
49

Table of Contents
EXECUTIVE OVERVIEW AND PERFORMANCE SUMMARY
BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through its wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank.
Prior to January 7, 2011, BancShares also offered full service banking services through another wholly-owned subsidiary, IronStone Bank (ISB), a federally-chartered thrift institution. On January 7, 2011 ISB was legally merged into FCB resulting in a single banking subsidiary of BancShares. ISB branches continued to operate under the name IronStone Bank, a division of FCB, through October 10, 2011. Subsequent to October 10, 2011, all former ISB branches are operating as FCB branded branches. The merger is not expected to have a material impact on the consolidated financial position, results of operations or liquidity position of BancShares. The merger will result in minor expense reductions due to the elimination of various activities that were previously performed separately for both entities. The transaction will also allow liquidity to be managed more efficiently throughout the merged branch network and for the former ISB branches to increase commercial lending activities. FCB now operates branches in 17 states and the District of Columbia. Beyond the traditional branch network, we offer customer sales and service through telephone, online banking and an extensive ATM network.
BancShares’ earnings and cash flows are primarily derived from our commercial banking activities. We offer commercial and consumer loans, deposit and treasury services products, cardholder and merchant services, wealth management services as well as various other products and services typically offered by commercial banks. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets including loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment used to conduct our commercial banking business.
Various external factors influence the focus of our business efforts. Due to unprecedented asset quality challenges, capital shortages and the onset of a global economic recession, the U.S. banking industry has experienced serious financial challenges beginning in 2008 and continuing through 2011. During this time of industry-wide turmoil, while maintaining our long-standing attention to prudent banking practices, we have elected to participate in FDIC-assisted transactions involving distressed financial institutions. Participation in FDIC-assisted transactions creates opportunities to increase our business volumes in markets in which we presently operate and to expand our banking presence to additional markets which we deem demographically attractive. For each of the six FDIC-assisted transactions that we have completed as of September 30, 2011, loss share agreements protect us from a substantial portion of the asset quality risk that we would otherwise incur. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities have resulted in significant acquisition gains that have constituted a substantial portion of the equity required to fund the transactions.
Despite the recognition of significant acquisition gains, recessionary economic conditions, high rates of unemployment, new restrictions on our ability to collect certain fees from our customers, and a growing inability for some businesses and consumers to meet their debt service obligations continue to exert pressure on our core earnings and profitability. Other customers continue to repay existing debt or defer new borrowings due to lingering economic uncertainty, resulting in soft demand for loan products. However, successful pricing strategies employed in the most recent two quarters of 2011 have resulted in modest increases in certain commercial loan balances.
Real estate demand in many of our markets remains weak, resulting in continued depressed real estate prices that have adversely affected collateral values for many borrowers. In particular, the stressed residential real estate markets in Georgia and Florida adversely impacted the asset quality and profitability of the former ISB subsidiary during 2009 and to a lesser extent the results of operations during 2010. In an effort to assist customers experiencing financial difficulty, we have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing liquidity challenges or other circumstances that could affect their ability to meet debt obligations. These efforts have resulted in an increase in troubled debt restructurings during 2010 and 2011.
The demand for our deposit and treasury services products has been influenced by extraordinarily low interest rates and instability in alternative investment markets. Our balance sheet liquidity position remains strong despite our participation in FDIC-assisted transactions which creates pressure on liquidity management due to the difficulty of retaining assumed deposits at a reasonable cost.
Ongoing economic weakness continues to have a significant impact on virtually all financial institutions in the United States. Beyond the profitability pressures resulting from a weak economy, financial institutions continue to face challenges resulting from governmental efforts to stabilize the financial services industry by implementing industry reforms. In addition to the various actions previously enacted by governmental agencies and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), further changes will likely occur as the Federal government attempts to restore
50

Table of Contents
stability to the financial services sector.
One of the provisions of the Dodd-Frank Act required the Federal Reserve to adopt rules regarding the interchange fees that may be charged by banks for electronic debit transactions. The final rules provide that effective October 2011, interchange rates are required to be reduced to the promulgated limits outlined in the regulations. As a result of the interchange limits, we anticipate that our cardholder and merchant services income will decline by approximately $2.0 million during the fourth quarter of 2011 and $13.0 million during 2012.
We operate in diverse geographic markets and can increase our business volumes and profitability by offering competitive products and superior customer service. In addition to our focus on retaining customers of the six banks involved in the FDIC-assisted transactions, we continue to concentrate our marketing efforts on business owners, medical and other professionals and financially active individuals. We seek to increase fee income in wealth management, cardholder and merchant services, mortgage banking and insurance and treasury services. Leveraging on our technology investments, we also focus on opportunities to generate income by providing various processing services to other banks.
BancShares’ consolidated net income during the third quarter of 2011 equaled $81.9 million, an increase of $54.2 million from the $27.7 million earned during the corresponding period of 2010. The annualized return on average assets and equity amounted to 1.55 percent and 17.95 percent respectively, during the third quarter of 2011, compared to 0.52 percent and 6.46 percent during the same period of 2010. Net income per share during the third quarter of 2011 totaled $7.91, compared to $2.66 during the third quarter of 2010.
For the nine-month period ending September 30, 2011, net income equaled $165.0 million compared to $163.0 million earned during the same period of 2010. Return on assets and equity during 2011 equaled 1.04 percent and 12.34 percent respectively, down slightly from 1.05 percent and 13.17 percent during the nine-month period ended September 30, 2010. Net income per share equaled $15.85 during the first nine months of 2011 compared to $15.62 in the first nine months of 2010. The increase in net income in 2011 was due primarily to the gains on the United Western transaction in the first quarter of 2011 and the CCB transaction in the third quarter of 2011 with a combined after tax impact of $92.0 million or $8.84 per share compared to acquisition gains recorded in the first quarter of 2010 resulting from two FDIC-assisted transactions with an after-tax impact of $82.7 million or $7.93 per share. The net increase in consolidated net income as a result of acquisition gains was $9.3 million from the nine months ended September 30, 2010 to the comparable period of 2011. The impact of acquisition gains was offset by increases in salaries, benefits, and collection costs associated with acquired assets as well as the unfavorable net impact of the entries resulting from various post-acquisition events arising from the FDIC-assisted transactions.
Net interest income decreased $12.8 million from $229.9 million in the third quarter of 2010 to $217.2 million in 2011. This decrease is a result of a reduction in discount accretion during 2011. During the third quarter of 2011, fair value discounts on acquired loans totaling $69.8 million were accreted, compared to $88.1 million during the same period of 2010. The taxable-equivalent net yield on interest-earning assets declined by 33 basis points from 4.93 percent in the third quarter 2010 to 4.60 percent in 2011 due to the unfavorable impact of yields on acquired loans.
Year-to-date net interest income increased $82.7 million, or 15.15 percent during 2011 primarily as a result of higher accretion of discounts on acquired loans. During the nine month period ended September 30, 2011, $192.6 million in fair value discounts on acquired loans were accreted compared to $100.3 million for the comparable period of 2010. The taxable-equivalent net yield on interest-earning assets was 4.47 percent during the nine-month period ended September 30, 2011 compared to 4.02 percent for the same period of 2010. For both the third quarter and year-to-date periods, the impact of accreted loan discounts resulting from large unscheduled prepayments on acquired loans significantly impacted the taxable-equivalent net yield on interest-earning assets. Since large unscheduled prepayments are unpredictable, the yield on interest-earning assets may decline in future periods. Improvements in expected cashflows on acquired impaired loans identified during 2011 resulted in the reclassification of $128.5 million in nonaccretable difference, which will be accreted into interest income in future periods.
The provision for loan and lease losses recorded during the third quarter of 2011 equaled $44.6 million, compared to $59.9 million during the third quarter of 2010. Of the $15.2 million decrease, $12.3 million was caused by lower levels of post-acquisition deterioration of acquired loans covered by loss share agreements with the FDIC and an additional $3.0 million reduction for loans not covered by FDIC loss share agreements. During the nine months of 2011, the provision for loan and lease losses equaled $143.0 million, an increase of $34.4 million or 31.7 percent from the same period of 2010 due to an increase in post-acquisition deterioration of covered loans of $41.6 million offset by a reduction in provision for non-covered loans of $7.2 million when compared to the comparable period of 2010. The gross amount of newly-identified exposures on covered loans is recorded as provision for loan and lease losses with the FDIC receivable adjusted through an offset to noninterest income for the portion that is covered by the FDIC at the appropriate indemnification rate.
51

Table of Contents
Noninterest income increased $113.8 million in the third quarter of 2011 when compared to the third quarter of 2010 due primarily to $87.8 million in acquisition gains recorded in 2011 and adjustments to the FDIC receivable for assets covered by loss share agreements. Adjustments to the FDIC receivable resulted in a reduction of noninterest income of $18.9 million in the third quarter of 2011 compared to a reduction of $29.5 million in the third quarter of 2010. For the nine month period ended September 30, 2011 noninterest income increased $5.4 million from the comparable period of 2010. This increase was the result of a $15.3 million increase in acquisition related gains in 2011, increases in cardholder and merchant services income of $7.8 million, and higher other noninterest income of $12.6 million offset by a reduction of income from service charges on deposit accounts of $8.4 million. Additionally, a net post-acquisition improvement in covered assets during 2011 and 2010 triggered reductions in the FDIC receivable of $43.0 million and $14.0 million respectively, which were recorded as a reduction in noninterest income. Favorable changes in other various noninterest income items also contributed to the net increase in 2011.
Noninterest expense increased $27.0 million or 15.26 percent in the third quarter of 2011 and $49.8 million or 9.36 percent in the first nine months of 2011 when compared to the same period in 2010. The increases were due to higher personnel costs arising from the FDIC-assisted transactions, hardware and software expenses, foreclosure and loan collection costs and card and merchant processing.
52

Table of Contents

SELECTED QUARTERLY DATA |  |  |  |  |  |  |  | Table 4 |
| 2011 |  | 2010 |  | Nine months ended September 30
| Third |  | Second |  | First |  | Fourth |  | Third |  |  |  |  |
| Quarter |  | Quarter |  | Quarter |  | Quarter |  | Quarter |  | 2011 |  | 2010 |
| (thousands, except share data and ratios) |
SUMMARY OF OPERATIONS |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income | $ | 252,179 |  |  | $ | 245,604 |  |  | $ | 245,200 |  |  | $ | 272,605 |  |  | $ | 278,628 |  |  | $ | 742,983 |  |  | $ | 696,763 |  |
Interest expense | 34,992 |  |  | 38,229 |  |  | 41,213 |  |  | 44,200 |  |  | 48,688 |  |  | 114,434 |  |  | 150,925 |  |
Net interest income | 217,187 |  |  | 207,375 |  |  | 203,987 |  |  | 228,405 |  |  | 229,940 |  |  | 628,549 |  |  | 545,838 |  |
Provision for loan and lease losses | 44,628 |  |  | 53,977 |  |  | 44,419 |  |  | 34,890 |  |  | 59,873 |  |  | 143,024 |  |  | 108,629 |  |
Net interest income after provision for loan and lease losses | 172,559 |  |  | 153,398 |  |  | 159,568 |  |  | 193,515 |  |  | 170,067 |  |  | 485,525 |  |  | 437,209 |  |
Gains on acquisitions | 87,788 |  |  | — |  |  | 63,474 |  |  | — |  |  | — |  |  | 151,262 |  |  | 136,000 |  |
Other noninterest income | 75,956 |  |  | 66,649 |  |  | 66,106 |  |  | 51,674 |  |  | 49,969 |  |  | 208,711 |  |  | 218,540 |  |
Noninterest expense | 203,832 |  |  | 187,482 |  |  | 190,028 |  |  | 201,799 |  |  | 176,851 |  |  | 581,342 |  |  | 531,577 |  |
Income before income taxes | 132,471 |  |  | 32,565 |  |  | 99,120 |  |  | 43,390 |  |  | 43,185 |  |  | 264,156 |  |  | 260,172 |  |
Income taxes | 50,536 |  |  | 11,265 |  |  | 37,360 |  |  | 13,305 |  |  | 15,439 |  |  | 99,161 |  |  | 97,213 |  |
Net income | $ | 81,935 |  |  | $ | 21,300 |  |  | $ | 61,760 |  |  | $ | 30,085 |  |  | $ | 27,746 |  |  | $ | 164,995 |  |  | $ | 162,959 |  |
Net interest income, taxable equivalent | $ | 218,178 |  |  | $ | 208,301 |  |  | $ | 204,939 |  |  | $ | 229,362 |  |  | $ | 231,009 |  |  | $ | 631,418 |  |  | $ | 549,019 |  |
PER SHARE DATA |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income | $ | 7.91 |  |  | $ | 2.04 |  |  | $ | 5.92 |  |  | $ | 2.88 |  |  | $ | 2.66 |  |  | $ | 15.85 |  |  | $ | 15.62 |  |
Cash dividends | 0.30 |  |  | 0.30 |  |  | 0.30 |  |  | 0.30 |  |  | 0.30 |  |  | 0.90 |  |  | 0.90 |  |
Market price at period end (Class A) | 143.54 |  |  | 187.22 |  |  | 200.58 |  |  | 189.05 |  |  | 185.27 |  |  | 143.54 |  |  | 185.27 |  |
Book value at period end | 181.58 |  |  | 174.11 |  |  | 171.46 |  |  | 166.08 |  |  | 164.67 |  |  | 181.58 |  |  | 164.67 |  |
SELECTED QUARTERLY AVERAGE BALANCES |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total assets | $ | 21,157,741 |  |  | $ | 21,042,081 |  |  | $ | 21,385,014 |  |  | $ | 21,139,117 |  |  | $ | 21,164,235 |  |  | $ | 21,194,113 |  |  | $ | 20,740,796 |  |
Investment securities | 4,082,574 |  |  | 4,162,397 |  |  | 4,568,205 |  |  | 3,950,121 |  |  | 3,810,057 |  |  | 4,269,280 |  |  | 3,536,952 |  |
Loans and leases (covered and noncovered) | 14,173,224 |  |  | 14,028,109 |  |  | 13,904,054 |  |  | 13,641,062 |  |  | 13,917,278 |  |  | 14,036,103 |  |  | 13,941,556 |  |
Interest-earning assets | 18,821,838 |  |  | 18,742,282 |  |  | 19,067,378 |  |  | 18,739,336 |  |  | 18,605,130 |  |  | 18,876,255 |  |  | 18,272,392 |  |
Deposits | 17,772,429 |  |  | 17,678,210 |  |  | 18,065,652 |  |  | 17,870,665 |  |  | 17,823,807 |  |  | 17,837,690 |  |  | 17,431,667 |  |
Interest-bearing liabilities | 14,991,875 |  |  | 15,018,805 |  |  | 15,543,484 |  |  | 15,304,109 |  |  | 15,433,653 |  |  | 15,182,701 |  |  | 15,212,048 |  |
Long-term obligations | 753,685 |  |  | 797,375 |  |  | 802,720 |  |  | 825,671 |  |  | 914,938 |  |  | 784,414 |  |  | 905,187 |  |
Shareholders' equity | $ | 1,830,503 |  |  | $ | 1,803,385 |  |  | $ | 1,752,129 |  |  | $ | 1,742,740 |  |  | $ | 1,705,005 |  |  | $ | 1,794,474 |  |  | $ | 1,654,900 |  |
Shares outstanding | 10,363,964 |  |  | 10,422,857 |  |  | 10,434,453 |  |  | 10,434,453 |  |  | 10,434,453 |  |  | 10,406,833 |  |  | 10,434,453 |  |
SELECTED QUARTER-END BALANCES |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total assets | $ | 21,015,344 |  |  | $ | 21,021,650 |  |  | $ | 21,167,495 |  |  | $ | 20,806,659 |  |  | $ | 21,049,291 |  |  | $ | 21,015,344 |  |  | $ | 21,049,291 |  |
Investment securities | 3,996,768 |  |  | 4,016,339 |  |  | 4,204,357 |  |  | 4,512,608 |  |  | 3,789,486 |  |  | 3,996,768 |  |  | 3,789,486 |  |
Loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered under loss share agreements | 2,557,450 |  |  | 2,399,738 |  |  | 2,658,134 |  |  | 2,007,452 |  |  | 2,222,660 |  |  | 2,557,450 |  |  | 2,222,660 |  |
Not covered under loss share agreements | 11,603,526 |  |  | 11,528,854 |  |  | 11,392,351 |  |  | 11,480,577 |  |  | 11,545,309 |  |  | 11,603,526 |  |  | 11,545,309 |  |
Deposits | 17,663,275 |  |  | 17,662,966 |  |  | 17,811,736 |  |  | 17,635,266 |  |  | 17,743,028 |  |  | 17,663,275 |  |  | 17,743,028 |  |
Long-term obligations | 744,839 |  |  | 792,661 |  |  | 801,081 |  |  | 809,949 |  |  | 819,145 |  |  | 744,839 |  |  | 819,145 |  |
Shareholders' equity | $ | 1,871,930 |  |  | $ | 1,810,189 |  |  | $ | 1,789,133 |  |  | $ | 1,732,962 |  |  | $ | 1,718,204 |  |  | $ | 1,871,930 |  |  | $ | 1,718,204 |  |
Shares outstanding | 10,309,251 |  |  | 10,396,765 |  |  | 10,434,453 |  |  | 10,434,453 |  |  | 10,434,453 |  |  | 10,309,251 |  |  | 10,434,453 |  |
SELECTED RATIOS AND OTHER DATA |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rate of return on average assets (annualized) | 1.55 |  | % | 0.42 |  | % | 1.18 |  | % | 0.56 |  | % | 0.52 |  | % | 1.04 |  | % | 1.05 |  | %
Rate of return on average shareholders' equity (annualized) | 17.95 |  |  | 4.94 |  |  | 14.30 |  |  | 6.91 |  |  | 6.46 |  |  | 12.34 |  |  | 13.17 |  |

53

Table of Contents

Net yield on interest-earning assets (taxable equivalent) | 4.60 |  |  | 4.46 |  |  | 4.36 |  |  | 4.86 |  |  | 4.93 |  |  | 4.47 |  |  | 4.02 |  |
Allowance for loan and lease losses to total loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 2.93 |  |  | 2.89 |  |  | 2.08 |  |  | 2.55 |  |  | 1.94 |  |  | 2.93 |  |  | 1.94 |  |
Not covered by loss share agreements | 1.54 |  |  | 1.57 |  |  | 1.56 |  |  | 1.54 |  |  | 1.52 |  |  | 1.54 |  |  | 1.52 |  |
Nonperforming assets to total loans and leases and other real estate at period end: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 20.06 |  |  | 20.94 |  |  | 14.67 |  |  | 17.14 |  |  | 18.51 |  |  | 20.06 |  |  | 18.51 |  |
Not covered by loss share agreements | 1.67 |  |  | 1.81 |  |  | 1.80 |  |  | 1.71 |  |  | 1.60 |  |  | 1.67 |  |  | 1.60 |  |
Tier 1 risk-based capital ratio | 15.46 |  |  | 15.38 |  |  | 15.24 |  |  | 14.86 |  |  | 14.38 |  |  | 15.46 |  |  | 14.38 |  |
Total risk-based capital ratio | 17.33 |  |  | 17.27 |  |  | 17.32 |  |  | 16.95 |  |  | 16.45 |  |  | 17.33 |  |  | 16.45 |  |
Leverage capital ratio | 9.83 |  |  | 9.50 |  |  | 9.35 |  |  | 9.18 |  |  | 9.04 |  |  | 9.83 |  |  | 9.04 |  |
Dividend payout ratio | 3.79 |  |  | 14.68 |  |  | 5.07 |  |  | 10.42 |  |  | 11.28 |  |  | 5.68 |  |  | 5.76 |  |
Average loans and leases to average deposits | 79.75 |  |  | 79.35 |  |  | 76.96 |  |  | 76.33 |  |  | 78.08 |  |  | 78.69 |  |  | 79.98 |  |

Average loan and lease balances include nonaccrual loans and leases. See discussion of issues affecting comparability of financial statements under the caption FDIC-Assisted Transactions.
54

Table of Contents
INTEREST-EARNING ASSETS
Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate, but expose us to potentially increased levels of default.
We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures with a concentration of owner-occupied real estate loans in the medical, dental and related fields. The focus on asset quality also influences the composition of our investment securities portfolio. At September 30, 2011, the mix of our investment securities portfolio is comprised of 24.7 percent United States Treasury securities, 56.6 percent United States government agency securities, 10.1 percent corporate bonds issued under the FDIC’s Treasury Liquidity Guaranty Program and 8.2 percent residential mortgage-backed securities. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
During 2011 and 2010, changes in interest-earning assets primarily reflect the impact of assets acquired in the FDIC-assisted transactions and modest deposit growth within our legacy markets. During the third quarter of 2011, interest-earning assets averaged $18.82 billion, an increase of $216.7 million or 1.2 percent from the third quarter of 2010. Average interest-earning assets have increased over this period as a result of the acquisition of United Western and CCB offset by continued loan and deposit reductions in these, and other, acquisition markets.
Loans and leases. Due to consumer loan run-off and soft loan demand resulting from weak economic conditions, total non-covered loans declined from the third quarter of 2010 through the first quarter of 2011. However, non-covered loans increased during the second and third quarters of 2011 due to moderately improved commercial loan demand caused in part by successful pricing strategies. Total non-covered loans have increased $58.2 million from $11.55 billion at September 30, 2010 to $11.60 billion at September 30, 2011 and are up $122.9 million since December 31, 2010.
Loans covered by loss share agreements with the FDIC totaled $2.56 billion at September 30, 2011 compared to $2.01 billion at December 31, 2010 and $2.22 billion at September 30, 2010. The balance and mix of covered loans as of September 30, 2011 was impacted by the loans acquired in the United Western transaction during the first quarter of 2011 and the CCB transaction during the third quarter of 2011.
Commercial mortgage loans not covered by loss share agreements totaled $5.00 billion at September 30, 2011, 43.1 percent of noncovered loans and leases. This balance represents an increase of $258.2 million or 5.4 percent since December 31, 2010 and $299.9 million or 6.4 percent since September 30, 2010. Demand for loans secured by owner-occupied medical and professional facilities remained relatively healthy during 2010 and 2011 when compared to other lending opportunities. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
At September 30, 2011, revolving mortgage loans not covered by loss share agreements totaled $2.30 billion, representing 19.8 percent of total noncovered loans outstanding, an increase of $68.6 million or 3.1 percent since December 31, 2010 and $93.3 million or 4.2 percent compared to September 30, 2010. The growth of revolving mortgage loans from 2010 is a result of the low interest rate environment and the attractive variable rate nature of the revolving mortgage loan product.
At September 30, 2011, commercial and industrial loans not covered by loss share agreements equaled $1.80 billion or 15.5 percent of total noncovered loans and leases, a reduction of $71.9 million or 3.8 percent since December 31, 2010 and an increase of $23.2 million or 1.3 percent since September 30, 2010. Demand for commercial and industrial loans has remained sluggish as customers have generally maintained current borrowing levels.
Commercial construction and land development loans not covered by loss share agreements totaled $416.7 million or 3.6 percent of total loans at September 30, 2011, a decrease of $17.2 million or 4.0 percent since September 30, 2010. This decrease was driven by increased charge-off and foreclosure activity in the construction and land development portfolio during late 2010 as well as a reduction in originations.
Consumer loans not covered by loss share agreements totaled $527.4 million at September 30, 2011 down $239.2 million or 31.2 percent since September 30, 2010 and down $68.3 million or 11.5 percent from December 31, 2010. This decline results from our decision during 2008 to discontinue originations of automobile sales finance loans through our dealer network and the general decline in consumer borrowing in 2010 and 2011 due to recessionary economic conditions.
Residential mortgage loans not covered by loss share agreements totaled $816.7 million at September 30, 2011 down $100.7 million or 11.0 percent since September 30, 2010 and down $62.1 million or 7.1 percent from December 31, 2010. This decline is a result of the general softness in residential borrowing in 2010 and 2011 due to recessionary economic conditions and decreasing property values.
55

Table of Contents
Commercial mortgage loans covered by loss share agreements totaled $1.31 billion at September 30, 2011, representing 51.2 percent of the total covered portfolio compared to $1.09 billion or 54.3 percent of total covered loans as of December 31, 2010. Commercial construction and land development loans covered by loss share agreements totaled $405.7 million, or 15.9 percent of total covered loans at September 30, 2011, a decrease of $37.2 million from the December 31, 2010 total of $368.4 million, which represented 18.4 percent of the total covered loans. Covered residential mortgage loans totaled $380.4 million or 14.9 percent of the covered portfolio as of September 30, 2011 compared to $74.5 million or 3.7 percent of total covered loans at December 31, 2010. The changes in covered loan balances since December 31, 2010 and from September 30, 2010 are caused by the acquisitions of United Western in January 2011 and CCB in July 2011 offset by continued reductions of outstanding loans from the FDIC-assisted transactions consummated in 2009 and 2010 from foreclosure, payoffs and normal run-off.
We expect non-acquisition loan growth for the next several quarters to be limited due to the generally weak demand for loans and widespread customer desire to deleverage. Loan projections are subject to change due to further economic deterioration or improvement and other external factors.

Loans and Leases |  |  |  |  |  |  |  |  | Table 5 |  |
| 2011 |  | 2010 |
| Third Quarter |  | Second Quarter |  | First Quarter |  | Fourth Quarter |  | Third Quarter |
Covered loans | $ | 2,557,450 |  |  | $ | 2,399,738 |  |  | $ | 2,658,134 |  |  | $ | 2,007,452 |  |  | $ | 2,222,660 |  |
Noncovered loans and leases: |  |  |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |  |  |
Construction and land development | 416,719 |  |  | 407,134 |  |  | 373,769 |  |  | 338,929 |  |  | 433,954 |  |
Commercial mortgage | 4,996,036 |  |  | 4,861,457 |  |  | 4,763,393 |  |  | 4,737,862 |  |  | 4,696,183 |  |
Other commercial real estate | 144,538 |  |  | 148,977 |  |  | 147,150 |  |  | 149,710 |  |  | 155,509 |  |
Commercial and industrial | 1,797,581 |  |  | 1,805,812 |  |  | 1,792,042 |  |  | 1,869,490 |  |  | 1,774,340 |  |
Lease financing | 304,039 |  |  | 303,104 |  |  | 295,994 |  |  | 301,289 |  |  | 294,825 |  |
Other | 158,782 |  |  | 170,758 |  |  | 174,370 |  |  | 182,015 |  |  | 185,232 |  |
Total commercial loans | 7,817,695 |  |  | 7,697,242 |  |  | 7,546,718 |  |  | 7,579,295 |  |  | 7,540,043 |  |
Non-commercial: |  |  |  |  |  |  |  |  |  |
Residential mortgage | 816,738 |  |  | 825,610 |  |  | 808,650 |  |  | 878,792 |  |  | 917,415 |  |
Revolving mortgage | 2,302,482 |  |  | 2,303,687 |  |  | 2,299,668 |  |  | 2,233,853 |  |  | 2,209,149 |  |
Construction and land development | 139,185 |  |  | 145,445 |  |  | 145,864 |  |  | 192,954 |  |  | 112,116 |  |
Consumer | 527,426 |  |  | 556,870 |  |  | 591,451 |  |  | 595,683 |  |  | 766,586 |  |
Total non-commercial loans | 3,785,831 |  |  | 3,831,612 |  |  | 3,845,633 |  |  | 3,901,282 |  |  | 4,005,266 |  |
Total noncovered loans and leases | 11,603,526 |  |  | 11,528,854 |  |  | 11,392,351 |  |  | 11,480,577 |  |  | 11,545,309 |  |
Total loans and leases | $ | 14,160,976 |  |  | $ | 13,928,592 |  |  | $ | 14,050,485 |  |  | $ | 13,488,029 |  |  | $ | 13,767,969 |  |

56

Table of Contents

| 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
Loans covered by loss share agreements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 |  |  | 363,583 |  |  | 1,746,201 |  |  | 1,987,592 |
Noncommercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 noncommercial loans | 130,892 |  |  | 412,922 |  |  | 543,814 |  |  | 63,686 |  |  | 141,634 |  |  | 205,320 |  |  | 37,163 |  |  | 75,713 |  |  | 235,068 |
Total loans covered by loss share agreements | $ | 499,705 |  |  | $ | 2,057,745 |  |  | $ | 2,557,450 |  |  | $ | 330,705 |  |  | $ | 1,676,747 |  |  | $ | 2,007,452 |  |  | $ | 400,746 |  |  | $ | 1,821,914 |  |  | $ | 2,222,660 |

Investment securities. Investment securities available for sale equaled $3.99 billion at September 30, 2011, compared to $4.51 billion at December 31, 2010 and $3.79 billion at September 30, 2010. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.
Changes in the investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand.
Income on interest-earning assets. Interest income amounted to $252.2 million during the third quarter of 2011, a $26.4 million or 9.5 percent decrease from the third quarter of 2010. The reduction in interest income resulted from lower yields on loans resulting from a reduction in accretable yield recognized on acquired loans. Average interest-earning assets increased $216.7 million or 1.2 percent from $18.61 billion to $18.82 billion. The taxable-equivalent yield on interest-earning assets equaled 5.34 percent for the third quarter of 2011, compared to 5.97 percent for the corresponding period of 2010 as reflected in Table 7.
For the first nine months of 2011, interest income equaled $743.0 million, a $46.2 million or 6.6 percent increase from the first nine months of 2010 caused by higher average balances and accretable yield recognized on acquired loans. Average interest-earning assets for the first nine months of 2011 increased $603.9 million or 3.3 percent from $18.27 billion to $18.88 billion. The taxable-equivalent yield on interest-earning assets equaled 5.28 percent for the first nine months of 2011 compared to 5.12 percent for the corresponding period of 2010 as reflected in Table 8.
Loan and lease interest income for the third quarter of 2011 equaled $240.5 million, a decrease of $24.3 million from the third quarter of 2010, the combined result of lower yields resulting from a reduction in accretable yield recognized on acquired loans offset by higher average balances. Average loans and leases increased $255.9 million or 1.8 percent from the third quarter of 2010 to the third quarter of 2011. The taxable-equivalent yield was 6.75 percent during the third quarter of 2011, an 82 basis point decrease from the same period of 2010. The decreased yield resulted partially from $69.8 million of discount accreted into income during the third quarter of 2011 related to acquired loans compared to $88.1 million of discount accreted in the third quarter of 2010.
Loan and lease interest income for the first nine months of 2011 equaled $705.7 million, an increase of $51.2
57

Table of Contents
million from the first nine months of 2010 due to acquired loan discount accretion and higher yields. Average loans and leases increased $94.5 million or 0.7 percent from the first nine months of 2010 to the first nine months of 2011. The taxable-equivalent yield was 6.74 percent during the first nine months of 2011, a 45 basis point increase from the same period of 2010. The increased yield resulted partially from $192.6 million of discount accreted into income during the nine-months ended September 30, 2011 related to acquired loans compared to $100.3 million recorded in the same period of 2010.
58

Table of Contents

INVESTMENT SECURITIES |  |  |  |  |  |  |  |  |  |  |  |  |  | Table 6 |
| September 30, 2011 |  | September 30, 2010 |
|  |  |  |  | Average |  | Taxable |  |  |  |  |  | Average |  | Taxable |
|  |  | Fair |  | Maturity (1) |  | Equivalent |  |  |  | Fair |  | Maturity (1) |  | Equivalent |
| Cost |  | Value |  | (Yrs./Mos.) |  | Yield (1) |  | Cost |  | Value |  | (Yrs./Mos.) |  | Yield (1) |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U. S. Treasury: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year | $ | 961,498 |  |  | $ | 962,882 |  |  | 0/6 |  | 0.53 |  | % | $ | 1,364,271 |  |  | $ | 1,369,203 |  |  | 0/6 |  | 1.20 |  | %
One to five years | 25,009 |  |  | 25,052 |  |  | 1/1 |  | 0.34 |  |  | 627,405 |  |  | 629,732 |  |  | 1/4 |  | 0.63 |  |
Total | 986,507 |  |  | 987,934 |  |  | 0/6 |  | 0.52 |  |  | 1,991,676 |  |  | 1,998,935 |  |  | 0/9 |  | 1.02 |  |
Government agency: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year | 2,084,947 |  |  | 2,084,359 |  |  | 0/5 |  | 0.90 |  |  | 1,119,976 |  |  | 1,121,778 |  |  | 0/3 |  | 1.49 |  |
One to five years | 176,053 |  |  | 176,550 |  |  | 1/9 |  | 0.61 |  |  | 500 |  |  | 538 |  |  | 3/3 |  | 1.26 |  |
Total | 2,261,000 |  |  | 2,260,909 |  |  | 0/8 |  | 0.90 |  |  | 1,120,476 |  |  | 1,122,316 |  |  | 0/3 |  | 1.45 |  |
Residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year | 197 |  |  | 194 |  |  | 0/11 |  | 3.33 |  |  | 3 |  |  | 1 |  |  | 0/6 |  | 5.91 |  |
One to five years | 37,544 |  |  | 37,881 |  |  | 3/10 |  | 2.40 |  |  | 11,220 |  |  | 11,547 |  |  | 3/2 |  | 1.23 |  |
Five to ten years | 106,319 |  |  | 106,891 |  |  | 6/7 |  | 2.23 |  |  | 1,815 |  |  | 1,841 |  |  | 8/2 |  | 3.63 |  |
Over ten years | 171,414 |  |  | 179,226 |  |  | 25/0 |  | 4.16 |  |  | 138,317 |  |  | 142,747 |  |  | 27/1 |  | 4.82 |  |
Total | 315,474 |  |  | 324,192 |  |  | 17/4 |  | 3.30 |  |  | 151,355 |  |  | 156,136 |  |  | 25/1 |  | 4.54 |  |
State, county and municipal: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year | 543 |  |  | 543 |  |  | 0/3 |  | 4.74 |  |  | 339 |  |  | 343 |  |  | 0/7 |  | 5.01 |  |
One to five years | 474 |  |  | 490 |  |  | 1/5 |  | 4.90 |  |  | 892 |  |  | 915 |  |  | 1/10 |  | 4.66 |  |
Five to ten years | 10 |  |  | 10 |  |  | 9/2 |  | 4.97 |  |  | — |  |  | — |  |  | — |  | — |  |
Over ten years | — |  |  | — |  |  | — |  | — |  |  | 10 |  |  | 10 |  |  | 10/2 |  | 4.97 |  |
Total | 1,027 |  |  | 1,043 |  |  | 0/10 |  | 4.82 |  |  | 1,241 |  |  | 1,268 |  |  | 1/7 |  | 4.76 |  |
Corporate bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year | 351,082 |  |  | 353,552 |  |  | 0/5 |  | 1.90 |  |  | 75,195 |  |  | 75,751 |  |  | 0/8 |  | 1.26 |  |
One to five years | 49,966 |  |  | 51,091 |  |  | 1/3 |  | 2.18 |  |  | 404,740 |  |  | 413,438 |  |  | 1/7 |  | 1.92 |  |
Total | 401,048 |  |  | 404,643 |  |  | 0/7 |  | 1.94 |  |  | 479,935 |  |  | 489,189 |  |  | 1/5 |  | 1.82 |  |
Equity securities | 939 |  |  | 16,104 |  |  |  |  |  |  | 1,132 |  |  | 18,997 |  |  |  |  |  |
Total investment securities available for sale | 3,965,995 |  |  | 3,994,825 |  |  |  |  |  |  | 3,745,815 |  |  | 3,786,841 |  |  |  |  |  |
Investment securities held to maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
One to five years | 13 |  |  | 12 |  |  | 4/7 |  | 4.41 |  |  | — |  |  | — |  |  | — |  |  |
Five to ten years | 1,816 |  |  | 1,940 |  |  | 5/6 |  | 5.56 |  |  | 2,512 |  |  | 2,689 |  |  | 6/6 |  | 5.55 |  |
Over ten years | 114 |  |  | 156 |  |  | 16/6 |  | 6.56 |  |  | 133 |  |  | 175 |  |  | 17/5 |  | 6.50 |  |
Total investment securities held to maturity | 1,943 |  |  | 2,108 |  |  | 6/2 |  | 5.63 |  |  | 2,645 |  |  | 2,864 |  |  | 7/1 |  | 5.60 |  |
Total investment securities | $ | 3,967,938 |  |  | $ | 3,996,933 |  |  |  |  |  |  | $ | 3,748,460 |  |  | $ | 3,789,705 |  |  |  |  |  |

(1) | Average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities exempt from federal and/or state income taxes are stated on a taxable yield basis assuming statutory rates of 35.0 percent.

Interest income earned on the investment securities portfolio amounted to $11.3 million during the third quarter of 2011 and $13.2 million during the same period of 2010, a decrease of $1.9 million or 14.4 percent. This decrease in income is the result of lower yields offset by an increase in average balances. The taxable-equivalent yield decreased 26 basis points from 1.43 percent in the third quarter of 2010 to 1.17 percent in the third quarter of 2011. This yield reduction was caused by extraordinarily low market interest rates. We anticipate the yield on investment securities will remain at current levels until the Federal Reserve begins to raise the benchmark fed funds rates, an action that would likely lead to higher asset yields.
Interest income earned on the investment securities portfolio during the first nine months of 2011 amounted to $36.3 million, compared to $40.7 million during the same period of 2010, a decrease of $4.5 million or 11.0 percent. The taxable-equivalent yield decreased 40 basis points from 1.57 percent in the first nine months of 2010 to 1.17 percent during the same period of
59

Table of Contents
2011. The decreased interest income for the nine month period ended September 30, 2011 was attributable to low current year interest rates and the maturity and early redemption of callable securities.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits represent our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for treasury services. Certain of our long-term borrowings currently qualify as capital under guidelines established by the Federal Reserve and other banking regulators. The Dodd-Frank Act, however, contains provisions that cause $265.0 million of trust preferred capital securities to fully cease qualification as Tier 1 capital effective January 1, 2015.
Deposits. At September 30, 2011, total deposits equaled $17.66 billion, an increase of $28.0 million or 0.2 percent since December 31, 2010 and a reduction of $79.8 million or 0.4 percent since September 30, 2010. The relative stability of deposits resulted from a net reduction in assumed deposits offset by moderate increases in legacy markets. The net reduction of assumed deposits occurred despite the assumption of $2.2 billion of deposits during 2011 from the United Western and CCB FDIC-assisted transactions due to the material reduction in United Western deposits subsequent to the acquisition date totaling approximately $1.8 billion and smaller reductions in other acquisition markets. The reduction in United Western deposits was primarily the result of repricing certain products and was anticipated by BancShares.
Due to our historic focus on maintaining a significant level of free liquidity, we continue to emphasize deposit retention as a key business objective. We endeavor to retain a significant portion of non-brokered core demand and money market account balances and reasonably priced time deposits assumed in the FDIC-assisted transactions. Once economic conditions improve, our ability to satisfy customer loan demand could be constrained unless we are able to continue to generate new deposits at a reasonable cost.
Short-term borrowings At September 30, 2011, short-term borrowings totaled $600.4 million compared to $546.6 million at December 31, 2010 and $652.7 million at September 30, 2010. The increase in short term borrowings since December is primarily a result of the assumption of $95.1 million in repurchase agreements from United Western in January 2011.
Long-term obligations. Long-term obligations equaled $744.8 million at September 30, 2011, down $65.1 million from December 31, 2010 and $74.3 million from September 30, 2010. The decrease since September 30, 2010 resulted from maturities and paydowns of Federal Home Loan Bank (FHLB) obligations.
Expense on interest-bearing liabilities. Interest expense amounted to $35.0 million during the third quarter of 2011, a $13.7 million or 28.1 percent decrease from the third quarter of 2010. The reduced level of interest expense resulted from lower rates and average balances. The rate on average interest-bearing liabilities equaled 0.93 percent during the third quarter of 2011, a 32 basis point decrease from the third quarter of 2010. Average interest-bearing liabilities decreased $441.8 million or 2.9 percent from third quarter of 2010 to the third quarter of 2011 due to the run-off of deposits assumed in FDIC-assisted transactions as well as a reduction in long term obligations resulting from maturities and paydowns of FHLB borrowings.
Average interest-bearing deposits equaled $13.56 billion during the third quarter of 2011, a decrease of $398.7 million or 2.9 percent from the third quarter of 2010. Average money market accounts increased $653.1 million or 13.4 percent from the third quarter of 2010, due to the FDIC-assisted transactions and customers holding available liquidity in flexible deposit accounts. During the third quarter of 2011, time deposits averaged $5.31 billion, down $1.26 billion or 19.2 percent from the third quarter of 2010 resulting from customer preference for non-time deposits, partially offset by time deposits assumed in FDIC-assisted transactions.
For the quarters ended September 30, 2011 and September 30, 2010, short-term borrowings averaged $677.6 million and $559.4 million, respectively. The $118.2 million or 21.1 percent increase in average short-term borrowings since the third quarter of 2010 resulted primarily from the assumption of repurchase agreements from United Western.
During the first nine months of 2011, interest expense equaled $114.4 million, compared to $150.9 million during the first nine months of 2010, a 24.2 percent decrease. This decrease in expense resulted from lower rates and average interest-bearing liabilities during 2011. The rate on average interest-bearing liabilities equaled 1.01 percent during the first nine months of 2011, a 32 basis point decrease from the first nine months of 2010. Average interest-bearing liabilities decreased $29.3 million or 0.2 percent from the first nine months of 2010 to the first nine months of 2011.
NET INTEREST INCOME
Net interest income totaled $217.2 million during the third quarter of 2011, a decrease of $12.8 million million or 5.5 percent from the third quarter of 2010. The taxable-equivalent net yield on interest-earning assets equaled 4.60 percent for the third quarter of 2011, down 33 basis points from the 4.93 percent recorded for the third quarter of 2010. Lower current year net interest
60

Table of Contents
income and net yield on interest-earning assets was attributable to the negative impact of yields on acquired loans and decreased accretion of discounts on acquired loans, offset by lower deposit costs.
Net interest income for the third quarter of 2011 included $69.8 million of accretion income, compared to $88.1 million in the third quarter 2010.
Accretion income is generated by recognizing accretable yield over the life of acquired loans. Accretable yield is the difference in the expected cash flows and the fair value of acquired loans. The amount of accretable yield related to the loans can change if the estimated cash flows expected to be collected changes subsequent to the initial estimates. Further, the recognition of accretion income can be accelerated in the event of large unscheduled repayments, loan payoffs, other loan settlements for amounts in excess of original estimates, and various other post-acquisition events. Due to the many factors that can influence the amount of accretion income recognized in a given period, this component of net interest income is not predictable for future periods and impacts the comparability of interest income, net interest income, and overall results of operations.
Net interest income totaled $628.5 million during the nine month period ended September 30, 2011, an increase of $82.7 million or 15.2 percent from the same period of 2010. The taxable-equivalent net yield on interest-earning assets equaled 4.47 percent for the nine months ended September 30, 2011, up 45 basis points from the 4.02 percent recorded for the same period of 2010. Higher current year net interest income and net yield on interest-earning assets was attributable to lower deposit costs and the positive impact of yields and accretion income on acquired loans, offset by lower yields on investment securities.
Net interest income for the nine months ended September 30, 2011 included $192.6 million of accretion income compared to $100.3 million for the nine months ended September 30, 2010.
The continuing accretion of fair value discounts resulting from acquired loans will likely contribute to volatility in net interest income in future periods. Fair value discounts related to loans that have been repaid unexpectedly will be accreted into interest income at the time the loan obligation is satisfied. Unless additional uncertainty about future payments exists, discounts associated with loans that display large unscheduled payments will be recognized in interest income on an accelerated basis.
61

Table of Contents

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Three Months |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Table 7
| 2011 |  | 2010 |  | Increase (decrease) due to:
|  |  | Interest |  |  |  |  |  | Interest |  |  |  |  |  |  |  |
| Average |  | Income/ |  | Yield/ |  | Average |  | Income/ |  | Yield/ |  |  |  | Yield/ |  | Total
(thousands) | Balance |  | Expense |  | Rate |  | Balance |  | Expense |  | Rate |  | Volume |  | Rate |  | Change
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases | $ | 14,173,224 |  |  | $ | 241,134 |  |  | 6.75 |  | % | $ | 13,917,278 |  |  | $ | 265,489 |  |  | 7.57 |  | % | $ | 4,647 |  |  | $ | (29,002 | ) |  | $ | (24,355 | )
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U. S. Treasury | 1,209,817 |  |  | 1,778 |  |  | 0.65 |  |  | 1,050,580 |  |  | 3,782 |  |  | 1.46 |  |  | 366 |  |  | (2,370 | ) |  | (2,004 | )
Government agency | 2,096,524 |  |  | 5,376 |  |  | 1.05 |  |  | 2,084,139 |  |  | 6,014 |  |  | 1.15 |  |  | (37 | ) |  | (601 | ) |  | (638 | )
Residential mortgage-backed securities | 333,939 |  |  | 2,366 |  |  | 2.81 |  |  | 166,654 |  |  | 1,544 |  |  | 3.68 |  |  | 1,370 |  |  | (548 | ) |  | 822 |
Corporate bonds | 411,160 |  |  | 1,971 |  |  | 1.90 |  |  | 488,693 |  |  | 2,196 |  |  | 1.78 |  |  | (360 | ) |  | 135 |  |  | (225 | )
State, county and municipal | 11,700 |  |  | 173 |  |  | 5.87 |  |  | 1,413 |  |  | 23 |  |  | 6.46 |  |  | 160 |  |  | (10 | ) |  | 150 |
Other | 19,434 |  |  | 21 |  |  | 0.43 |  |  | 18,578 |  |  | 77 |  |  | 1.64 |  |  | 2 |  |  | (58 | ) |  | (56 | )
Total investment securities | 4,082,574 |  |  | 11,685 |  |  | 1.17 |  |  | 3,810,057 |  |  | 13,636 |  |  | 1.43 |  |  | 1,501 |  |  | (3,452 | ) |  | (1,951 | )
Overnight investments | 566,040 |  |  | 351 |  |  | 0.25 |  |  | 877,795 |  |  | 572 |  |  | 0.26 |  |  | (202 | ) |  | (19 | ) |  | (221 | )
Total interest-earning assets | $ | 18,821,838 |  |  | $ | 253,170 |  |  | 5.34 |  | % | $ | 18,605,130 |  |  | $ | 279,697 |  |  | 5.97 |  | % | $ | 5,946 |  |  | $ | (32,473 | ) |  | $ | (26,527 | )
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Checking With Interest | $ | 1,890,306 |  |  | $ | 428 |  |  | 0.09 |  | % | $ | 1,772,328 |  |  | $ | 469 |  |  | 0.10 |  | % | $ | 17 |  |  | $ | (58 | ) |  | $ | (41 | )
Savings | 837,740 |  |  | 217 |  |  | 0.10 |  |  | 744,049 |  |  | 309 |  |  | 0.16 |  |  | 29 |  |  | (121 | ) |  | (92 | )
Money market accounts | 5,519,919 |  |  | 5,158 |  |  | 0.37 |  |  | 4,866,864 |  |  | 6,427 |  |  | 0.52 |  |  | 714 |  |  | (1,983 | ) |  | (1,269 | )
Time deposits | 5,312,664 |  |  | 19,022 |  |  | 1.42 |  |  | 6,576,090 |  |  | 29,882 |  |  | 1.80 |  |  | (5,147 | ) |  | (5,713 | ) |  | (10,860 | )
Total interest-bearing deposits | 13,560,629 |  |  | 24,825 |  |  | 0.73 |  |  | 13,959,331 |  |  | 37,087 |  |  | 1.07 |  |  | (4,387 | ) |  | (7,875 | ) |  | (12,262 | )
Short-term borrowings | 677,561 |  |  | 1,470 |  |  | 0.86 |  |  | 559,384 |  |  | 742 |  |  | 0.53 |  |  | 210 |  |  | 518 |  |  | 728 |
Long-term obligations | 753,685 |  |  | 8,697 |  |  | 4.62 |  |  | 914,938 |  |  | 10,859 |  |  | 4.71 |  |  | (1,927 | ) |  | (235 | ) |  | (2,162 | )
Total interest-bearing liabilities | $ | 14,991,875 |  |  | $ | 34,992 |  |  | 0.93 |  | % | $ | 15,433,653 |  |  | $ | 48,688 |  |  | 1.25 |  | % | $ | (6,104 | ) |  | $ | (7,592 | ) |  | $ | (13,696 | )
Interest rate spread |  |  |  |  | 4.41 |  | % |  |  |  |  | 4.72 |  | % |  |  |  |  |
Net interest income and net yield |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
on interest-earning assets |  |  | $ | 218,178 |  |  | 4.60 |  | % |  |  | $ | 231,009 |  |  | 4.93 |  | % | $ | 12,050 |  |  | $ | (24,881 | ) |  | $ | (12,831 | )

Loans and leases include loans covered under loss share agreements, loans not covered under loss share agreements, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent and state income tax rates of 6.9 percent for each period. The taxable-equivalent adjustment was $991 and $1,069 for 2011 and 2010, respectively. The rate/volume variance is allocated equally between the changes in volume and rate.
62

Table of Contents

Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Table 8
| 2011 |  | 2010 |  | Increase (decrease) due to:
|  |  | Interest |  |  |  |  |  | Interest |  |  |  |  |  |  |  |
| Average |  | Income/ |  | Yield/ |  | Average |  | Income/ |  | Yield/ |  |  |  | Yield/ |  | Total
(thousands) | Balance |  | Expense |  | Rate |  | Balance |  | Expense |  | Rate |  | Volume |  | Rate |  | Change
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases | $ | 14,036,103 |  |  | $ | 707,542 |  |  | 6.74 |  | % | $ | 13,941,556 |  |  | $ | 656,377 |  |  | 6.29 |  | % | $ | 4,345 |  |  | $ | 46,820 |  |  | $ | 51,165 |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U. S. Treasury | 1,477,777 |  |  | 7,474 |  |  | 0.73 |  |  | 757,556 |  |  | 9,255 |  |  | 1.63 |  |  | 6,055 |  |  | (7,836 | ) |  | (1,781 | )
Government agency | 1,977,738 |  |  | 15,698 |  |  | 1.03 |  |  | 2,103,189 |  |  | 20,953 |  |  | 1.31 |  |  | (1,064 | ) |  | (4,191 | ) |  | (5,255 | )
Residential mortgage-backed securities | 321,214 |  |  | 7,123 |  |  | 2.96 |  |  | 165,701 |  |  | 4,981 |  |  | 4.02 |  |  | 4,066 |  |  | (1,924 | ) |  | 2,142 |
Corporate bonds | 449,774 |  |  | 6,266 |  |  | 1.86 |  |  | 487,660 |  |  | 6,529 |  |  | 1.79 |  |  | (513 | ) |  | 250 |  |  | (263 | )
State, county and municipal | 4,784 |  |  | 213 |  |  | 5.95 |  |  | 2,144 |  |  | 99 |  |  | 6.17 |  |  | 120 |  |  | (6 | ) |  | 114 |
Other | 37,993 |  |  | 480 |  |  | 1.69 |  |  | 20,702 |  |  | 159 |  |  | 1.03 |  |  | 176 |  |  | 145 |  |  | 321 |
Total investment securities | 4,269,280 |  |  | 37,254 |  |  | 1.17 |  |  | 3,536,952 |  |  | 41,976 |  |  | 1.57 |  |  | 8,840 |  |  | (13,562 | ) |  | (4,722 | )
Overnight investments | 570,872 |  |  | 1,056 |  |  | 0.25 |  |  | 793,884 |  |  | 1,591 |  |  | 0.27 |  |  | (433 | ) |  | (102 | ) |  | (535 | )
Total interest-earning assets | $ | 18,876,255 |  |  | $ | 745,852 |  |  | 5.28 |  | % | $ | 18,272,392 |  |  | $ | 699,944 |  |  | 5.12 |  | % | $ | 12,752 |  |  | $ | 33,156 |  |  | $ | 45,908 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Checking With Interest | $ | 1,919,384 |  |  | $ | 1,328 |  |  | 0.09 |  | % | $ | 1,721,525 |  |  | $ | 1,459 |  |  | 0.11 |  | % | $ | 145 |  |  | $ | (276 | ) |  | $ | (131 | )
Savings | 821,036 |  |  | 848 |  |  | 0.14 |  |  | 711,113 |  |  | 955 |  |  | 0.18 |  |  | 127 |  |  | (234 | ) |  | (107 | )
Money market accounts | 5,467,088 |  |  | 16,998 |  |  | 0.42 |  |  | 4,752,379 |  |  | 21,084 |  |  | 0.59 |  |  | 2,555 |  |  | (6,641 | ) |  | (4,086 | )
Time deposits | 5,531,428 |  |  | 62,552 |  |  | 1.51 |  |  | 6,541,980 |  |  | 92,796 |  |  | 1.90 |  |  | (12,761 | ) |  | (17,483 | ) |  | (30,244 | )
Total interest-bearing deposits | 13,738,936 |  |  | 81,726 |  |  | 0.8 |  |  | 13,726,997 |  |  | 116,294 |  |  | 1.13 |  |  | (9,934 | ) |  | (24,634 | ) |  | (34,568 | )
Short-term borrowings | 659,351 |  |  | 4,649 |  |  | 0.94 |  |  | 579,864 |  |  | 2,138 |  |  | 0.49 |  |  | 425 |  |  | 2,086 |  |  | 2,511 |
Long-term obligations | 784,414 |  |  | 28,059 |  |  | 4.78 |  |  | 905,187 |  |  | 32,493 |  |  | 4.8 |  |  | (3,621 | ) |  | (813 | ) |  | (4,434 | )
Total interest-bearing liabilities | $ | 15,182,701 |  |  | $ | 114,434 |  |  | 1.01 |  | % | $ | 15,212,048 |  |  | $ | 150,925 |  |  | 1.33 |  | % | $ | (13,130 | ) |  | $ | (23,361 | ) |  | $ | (36,491 | )
Interest rate spread |  |  |  |  | 4.27 |  | % |  |  |  |  | 3.79 |  | % |  |  |  |  |
Net interest income and net yield |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
on interest-earning assets |  |  | $ | 631,418 |  |  | 4.47 |  | % |  |  | $ | 549,019 |  |  | 4.02 |  | % | $ | 25,882 |  |  | $ | 56,517 |  |  | $ | 82,399 |

Loans and leases include loans covered under loss share agreements, loans not covered under loss share agreements, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent and state income tax rates of 6.9 percent for each period. The taxable-equivalent adjustment was $2,869 and $3,181 for 2011 and 2010, respectively. The rate/volume variance is allocated equally between the changes in volume and rate.
NONINTEREST INCOME
Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. Traditionally, the primary sources of noninterest income are cardholder and merchant services income, service charges on deposit accounts, revenues derived from wealth management services and fees from processing services. During 2011, 2010 and 2009, noninterest income has been significantly influenced by acquisition gains and the entries resulting from post-acquisition adjustments to the FDIC receivable resulting from FDIC-assisted transactions.
During the first nine months of 2011, noninterest income amounted to $360.0 million, compared to $354.5 million during the same period of 2010. The $5.4 million increase during 2011 is a result of $15.3 million in higher acquisition gains recognized in conjunction with FDIC-assisted transactions in 2011 when compared to 2010, a $7.8 million increase in cardholder and merchant services income and an improvement of $2.5 million in mortgage income. These favorable variances were partially offset by a $29.0 million reduction in income resulting from adjustments to the FDIC receivable and an $8.4 million reduction in income on
63

Table of Contents
service charges from deposit accounts.
Noninterest income for the third quarter of 2011 equaled $163.7 million compared to $50.0 million in the comparable period of 2010. This increase of $113.8 million was primarily acquisition gains of $87.8 million recorded in the third quarter of 2011, a $10.6 million favorable variance resulting from adjustments to the FDIC receivable and higher other noninterest income of $10.9 million.
Cardholder and merchant services generated $30.8 million of revenue during the third quarter of 2011, an increase of $2.8 million or 10.1 percent compared to the third quarter of 2010. This increase resulted from volume growth in merchant discount and interchange income from credit cards and Visa check cards. Interchange income derived from Visa check cards will decline beginning October 2011 due to mandated reductions in the allowable interchange rates pursuant to provisions in the Dodd-Frank Act and guidelines established by the Federal Reserve. The estimated fee reduction for the fourth quarter of 2011 amounts to approximately $2.0 million, with the estimated impact for 2012 of approximately $13.0 million.
Income from service charges on deposit accounts has declined significantly due to January 2011 changes to the order in which transactions are posted to customer accounts as well as changes to Regulation E in August 2010 that allow financial institutions to only provide overdraft services to customers who explicitly elect to use those services. Service charges on deposit accounts equaled $16.4 million and $18.1 million for the third quarter of 2011 and 2010, respectively resulting in a $1.7 million decrease. Deposit service charges for the nine month period ended September 30, 2011 have declined $8.4 million, or 15.0 percent, compared to the same period in 2010. Additional changes to how overdraft service charges are assessed were implemented in the third quarter of 2011 including establishing a daily maximum overdraft charge and implementing transaction amounts beneath which overdraft charges would be not be assessed. The estimated annual fee reduction from these changes is $1.8 million.
Other noninterest income increased $10.9 million during the third quarter of 2011 and $12.6 million for the year-to-date, primarily due to income recognized from unexpected payments related to losses previously recorded on acquired assets that were not covered under loss share agreements.
NONINTEREST EXPENSE
The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities, and equipment and software costs related to branch offices and technology. These costs are generally driven by headcount and branch count.
Noninterest expense equaled $581.3 million for the first nine months of 2011, a $49.8 million or 9.4 percent increase over the $531.6 million recorded during the same period of 2010. This increase was caused primarily by higher personnel costs, hardware and software expense, foreclosure and loan collection costs as well as external processing. Noninterest expense increased $27.0 million in the third quarter of 2011 to $203.8 million compared to $176.9 million in the third quarter of 2010 as a result of increases in personnel costs, hardware and software expense and foreclosure-related expenses offset by a reduction in FDIC deposit insurance expense.
Salaries and wages increased $3.2 million or 4.2 percent from the third quarter of 2010 to the third quarter 2011 as a result of merit increases and new positions to manage our technology infrastructure and the FDIC-assisted transactions. The year-to-date increase of $8.4 million is likewise due to new positions, substantially all of which is directly or indirectly related to the FDIC-assisted transactions.
Employee benefits expense totaled $17.2 million for the third quarter of 2011 up $2.7 million or 18.7 percent from the third quarter of 2010 caused primarily an increase in pension cost due to changes in plan actuarial assumptions and increased 401(k) expense as a result of an increase in participants. The year-to-date increase of $6.9 million is due to higher pension expense and $1.8 million in executive retirement costs recorded during the first quarter of 2011.
Occupancy expense totaled $18.5 million in the third quarter of 2011 and $55.3 million for the nine months ended September 30, 2011 compared to $18.4 million and $54.7 million for the corresponding periods of 2010. The increases are attributable to a modest increase costs in acquisition markets.
Equipment expense increased 1.3 percent in the third quarter 2011 and 5.5 percent for the nine months ended September 30, 2011 when compared to the comparable periods of 2010 caused primarily caused by higher hardware and software costs.
FDIC deposit insurance expense decreased $3.1 million in the third quarter of 2011 when compared to the same period of 2010 due to the new formula adopted by the FDIC to calculate the assessment effective April 1, 2011. The new formula alters the assessment base from deposits to total assets less equity thereby placing a larger assessment burden on banks with large levels of non-deposit funding. Our assessment amount declined due primarily to our general lack of reliance on non-deposit funding.
64

Table of Contents
Foreclosure-related expenses increased $15.8 million in the third quarter of 2011 and $17.0 million for the nine months ended September 30, 2011 when compared to the comparable periods of 2010. This increase is primarily the result of higher losses on other real estate relating to the acquisition markets.
Other expenses for the third quarter of 2011 increased $8.0 million or 16.8 percent when compared to the same period of 2010. Collection expenses for loans arising from the FDIC-assisted transactions, the majority of which are reimbursable under the FDIC loss share agreements, increased $2.3 million from the comparable three month period of 2010. Also, advertising expenses increased $862,000, debit card loyalty program expenses increased $566,000, cardholder and merchant processing costs increased $653,000 from added transaction volumes, in addition to increases in other various expense categories.
Other expenses for the nine months ended September 30, 2011 increased from the same period of 2010 by $17.9 million. This increase was the result of increase in loan collection costs of $3.6 million caused by increased costs relating to loans acquire in FDIC-assisted transactions. There were also increases in card and merchant processing costs of $3.1 million caused my increased transaction volumes, card loyalty costs of $1.8 million and external processing costs of $2.6 million. The increase in external processing costs related to deposits assumed in the United Western transaction that have since been moved to other institutions.
INCOME TAXES
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns as well as potential or pending audits or assessments by such tax auditors.
Income tax expense amounted to $99.2 million during the nine months ended September 30, 2011, compared to $97.2 million during the same period of 2010. The $1.9 million increase in income tax expense was the direct result of higher pre-tax earnings. The effective tax rates for these periods equaled 37.5 percent and 37.4 percent, respectively. Income tax expense totaled $50.5 million and $15.4 million for the third quarters of 2011 and 2010, representing effective tax rates of 38.1 percent and 35.8 percent during the respective periods. The higher effective tax rates for 2011 reflect the impact of various favorable permanent differences on the current year’s pre-tax income.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
We continually monitor the capital levels and ratios for BancShares and FCB to ensure that they comfortably exceed the minimum requirements imposed by their respective regulatory authorities and to ensure that FCB’s capital is appropriate given its growth projection and risk profile. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the financial statements. Table 9 provides information on capital adequacy for BancShares as of September 30, 2011, December 31, 2010 and September 30, 2010.
BancShares continues to exceed minimum capital standards and FCB remains well-capitalized.
The tier 2 capital of BancShares and FCB includes qualifying subordinated debt that was issued in 2005 with a scheduled maturity date of June 1, 2015. Beginning in the second quarter of 2010, the amount of this qualifying subordinated debt that is eligible tier 2 capital decreased $25.0 million per year to $75.0 million at September 30, 2011 since the scheduled maturity date is within 5 years. The amount eligible for tier 2 capital will decrease by $25.0 million each year until the scheduled maturity date. Tier 2 capital is part of total risk-based capital, reflected in Table 9.
The Dodd-Frank Act contains provisions that will gradually eliminate our ability to include $265.0 million of trust preferred capital securities in tier 1 risk-based capital. BancShares’ trust preferred capital securities that currently qualify as tier 1 capital will be phased out in equal increments of $88.3 million over a three- year term, beginning in 2013. Based on BancShares’ capital structure as of September 30, 2011, the impact of the reduction of $88.3 million would result in a tier 1 leverage capital ratio of 9.39 percent, a tier 1 risk-based capital ratio of 14.79 percent, and a total risk-based capital ratio of 16.86 percent. Elimination of the full $265 million of trust preferred capital securities from the June 30, 2011 capital structure would result in a proforma tier 1 leverage capital ratio of 8.56 percent, a tier 1 risk-based capital ratio of 13.48 percent, and a total risk-based capital ratio of 15.35 percent. BancShares and FCB would continue to remain well-capitalized under current regulatory guidelines.
65

Table of Contents

Capital Adequacy |  |  |  |  |  |  |  | Table 9 |
| Actual |  | Minimum requirement |  | Well-capitalized requirement |
| Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
|  |  |  |  | (dollars in thousands) |  |  |  |  |
September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 risk-based capital | $ | 2,070,216 |  |  | 15.46 | % | $ | 535,529 |  |  | 4.00 | % | $ | 803,293 |  |  | 6.00 | %
Total risk-based capital | 2,320,056 |  |  | 17.33 | % | 1,071,058 |  |  | 8.00 | % | 1,338,822 |  |  | 10.00 | %
Tier 1 leverage capital | 2,070,217 |  |  | 9.83 | % | 631,755 |  |  | 3.00 | % | 1,052,925 |  |  | 5.00 | %
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 risk-based capital | 1,935,559 |  |  | 14.86 | % | 520,861 |  |  | 4.00 | % | 781,291 |  |  | 6.00 | %
Total risk-based capital | 2,206,890 |  |  | 16.95 | % | 1,041,722 |  |  | 8.00 | % | 1,302,152 |  |  | 10.00 | %
Tier 1 leverage capital | 1,935,559 |  |  | 9.18 | % | 632,300 |  |  | 3.00 | % | 1,053,833 |  |  | 5.00 | %
September 30, 2010 |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 risk-based capital | 1,906,806 |  |  | 14.38 | % | 530,344 |  |  | 4.00 | % | 795,516 |  |  | 6.00 | %
Total risk-based capital | 2,180,810 |  |  | 16.45 | % | 1,060,688 |  |  | 8.00 | % | 1,325,860 |  |  | 10.00 | %
Tier 1 leverage capital | 1,906,806 |  |  | 9.04 | % | 635,343 |  |  | 3.00 | % | 1,058,906 |  |  | 5.00 | %

66

Table of Contents
RISK MANAGEMENT
In the normal course of business, BancShares is exposed to various risks. To manage the major risks that are inherent in the operation of a financial holding company and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within acceptable tolerances. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.
Our primary risk exposures are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting the amount of a loan, lease or investment when it is contractually due. Interest rate risk is the potential reduction of net interest income as a result of changes in market interest rates. Liquidity risk is the possible inability to fund obligations to depositors, creditors, investors or borrowers.
Credit risk. The maintenance of excellent asset quality is one of our key performance measures. Loans and leases not covered by loss share agreements with the FDIC are underwritten in accordance with our credit policies and procedures and are subjected to periodic ongoing reviews. Loans covered by loss share agreements with the FDIC were recorded at fair value at the time of the acquisition, and are subjected to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses for the purpose of ensuring compliance with credit policies and to closely monitor asset quality trends. The risk reviews include portfolio analysis by geographic location and horizontal reviews across industry and collateral sectors. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan and lease losses that are inherent in the loan and lease portfolio.
We maintain a well-diversified loan and lease portfolio, and seek to avoid the risk associated with large concentrations within specific geographic areas or industries. Despite our focus on diversification, several characteristics of our loan and lease portfolio subject us to notable risk. These include our concentration of real estate loans and medical-related loans. The ongoing expansion of our branch network has allowed us to mitigate our historic exposure to geographic risk concentration within North Carolina and Virginia.
We have historically carried a significant concentration of real estate secured loans. We mitigate that exposure through our underwriting policies that principally rely on adequate borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner-occupied. At September 30, 2011, loans secured by real estate not covered by loss share agreements totaled $8.82 billion or 76.0 percent of total noncovered loans and leases compared to $8.53 billion or 74.3 percent of noncovered loans and leases at December 31, 2010 and $8.52 billion or 73.8 percent at September 30, 2010.
Noncovered loans and leases to borrowers in medical, dental or related fields totaled $3.11 billion as of September 30, 2011, which represents 26.8 percent of loans and leases not covered by loss share agreements, compared to $3.02 billion or 26.3 percent of noncovered loans and leases at December 31, 2010 and $3.01 billion or 26.1 percent of noncovered loans and leases at September 30, 2010. Except for this single concentration, no other industry represented more than 10 percent of total noncovered loans and leases outstanding at September 30, 2011.
Nonperforming assets include nonaccrual loans and leases, other real estate owned (OREO) and restructured loans that are both covered and not covered by FDIC loss share agreements. At September 30, 2011, BancShares’ nonperforming assets amounted to $739.9 million or 5.2 percent of total loans and leases plus OREO, compared to $560.1 million or 4.1 percent at December 31, 2010 and $615.6 million or 4.4 percent at September 30, 2010.
Of the $739.9 million in nonperforming assets at September 30, 2011, $545.3 million is covered by FDIC loss share agreements that provide significant loss protection. Both the $179.8 million increase from December 31, 2010 and $124.4 million increase from September 30, 2010 are attributable to nonperforming assets arising from the FDIC-assisted transactions. Nonperforming assets not covered by loss share agreements declined slightly from December 31, 2010 and increased $9.0 million from September 30, 2010.
Nonperforming assets not covered by loss share agreements amounted to $194.6 million as of September 30, 2011, or 1.7 percent of noncovered loans and leases plus OREO compared to $196.7 million or 1.7 percent at December 31, 2010 and $185.7 million or 1.6 percent at September 30, 2010. The $9.0 million increase in noncovered nonperforming assets since September 30, 2010 was due to increased levels of restructured loans.
Restructured loans on accrual status not covered by loss share agreements equaled $86.4 million at September 30, 2011, compared to $65.0 million at December 31, 2010 and $53.4 million at September 30, 2010. Total covered and noncovered restructured loans as of September 30, 2011 equaled $277.7 million, $179.4 million of which are accruing and $98.3 million of which are nonaccrual. Restructured loans result from modifications selectively provided to customers experiencing cash flow difficulties in
67

Table of Contents
an effort to assist them in remaining current on their debt obligations.
OREO not covered by loss share agreements totaled $48.6 million at September 30, 2011, compared to $52.8 million at December 31, 2010 and $47.5 million at September 30, 2010. A portion of the OREO not covered by loss share agreements relates to real estate exposures in the Atlanta, Georgia and southwest Florida markets arising from residential construction activities. Both markets experienced significant over-development that has resulted in extremely weak sales of new residential units and significant declines in property values. Once acquired, OREO is periodically reviewed to ensure that the fair value of the property supports the carrying value, with write downs recorded when necessary.
At September 30, 2011, the allowance for loan and lease losses allocated to noncovered loans totaled $179.1 million or 1.54 percent of loans and leases not covered by loss share agreements, compared to $176.5 million or 1.54 percent at December 31, 2010 and $175.0 million or 1.52 percent at September 30, 2010. The increases in the allowance for noncovered loan and lease losses were due to modest deterioration in credit quality within noncovered residential mortgage loans, revolving mortgage loans, and residential construction loans offset by the chargeoff of amounts reserved for loans individually evaluated for impairment. The allowance for loans individually evaluated for impairment has declined by $5.0 million since December 31, 2010 due to large chargeoffs while the allowance for loans collectively evaluated for impairment has increased by $7.6 million due to generally higher delinquency levels. Revolving mortgage loans present increased risk due to the longer term nature of the commitments and the possibility that the financial position of borrower or the value of collateral may deteriorate significantly during the term. Delinquency levels and charge-offs on revolving mortgage loans are projected to remain elevated due to weakened collateral positions particularly for loans secured by junior collateral positions. An additional allowance of $75.1 million relates to covered loans at September 30, 2011, established as a result of post-acquisition deterioration in credit quality for covered loans. The allowance for covered loans equaled $51.2 million at December 31, 2010 and $43.0 million at September 30, 2010.
Management considers the allowance adequate to absorb estimated probable losses that relate to loans and leases outstanding at September 30, 2011, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. Such agencies may require adjustments to the allowance based on information available to them at the time of their examination.
The provision for noncovered loan and lease losses recorded during the third quarter of 2011 equaled $14.3 million, compared to $10.5 million during the fourth quarter of 2010 and $17.3 million during the third quarter of 2010. Provision expense related to covered loans totaled $30.3 million and $42.6 million during the third quarter of 2011 and 2010 respectively due to lower post-acquisition deterioration of loans determined to be impaired at acquisition date, offset by an increase in post-acquisition deterioration identified for loans not determined to be impaired at acquisition date and increased chargeoffs. The provision for covered loan and lease losses triggered corresponding adjustments to the FDIC receivable which are offset by noninterest income.
Exclusive of losses related to covered loans, net charge-offs equaled $15.8 million during the third quarter of 2011, compared to $14.4 million during the third quarter of 2010. On an annualized basis, net charge-offs represented 0.54 percent of average noncovered loans and leases during the second quarter of 2011 compared to 0.49 percent during the third quarter of 2010. Chargeoffs in 2011 included the chargeoff of $5 million that was previously reserved for on a commercial construction and land development loan offset by reductions in chagreoffs on residential construction loans and non-commercial construction loans. Net charge-offs on covered loans equaled $24.7 million in the third quarter of 2011 compared to $15.6 million recorded in the third quarter of 2010.
Table 10 provides details concerning the allowance for loan and lease losses during the past five quarters.
68

Table of Contents

Allowance for Loan and Lease Loss Experience and Risk Elements |  |  |  |  |  | Table 10 |
| 2011 |  | 2010 |  | Nine months ended September 30 |
| Third |  | Second |  | First |  | Fourth |  | Third |  |  |  |  |
(dollars in thousands; unaudited) | Quarter |  | Quarter |  | Quarter |  | Quarter |  | Quarter |  | 2011 |  | 2010 |
Allowance for loan and lease losses at beginning of period | $ | 250,050 |  |  | $ | 232,597 |  |  | $ | 227,765 |  |  | $ | 218,046 |  |  | $ | 188,169 |  |  | $ | 227,765 |  |  | $ | 172,282 |  |
Adjustment resulting from adoption of change in accounting for QSPEs and controlling financial interests effective January 1, 2010 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 681 |  |
Provision for loan and lease losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 30,317 |  |  | 41,196 |  |  | 32,557 |  |  | 24,411 |  |  | 42,597 |  |  | 104,070 |  |  | 62,461 |  |
Not covered by loss share agreements | 14,311 |  |  | 12,781 |  |  | 11,862 |  |  | 10,480 |  |  | 17,276 |  |  | 38,954 |  |  | 46,168 |  |
Net charge-offs of loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Charge-offs | (42,314 | ) |  | (38,222 | ) |  | (41,606 | ) |  | (27,134 | ) |  | (31,172 | ) |  | (122,142 | ) |  | (67,774 | ) |
Recoveries | 1,820 |  |  | 1,698 |  |  | 2,019 |  |  | 1,962 |  |  | 1,176 |  |  | 5,537 |  |  | 4,228 |  |
Net charge-offs of loans and leases | (40,494 | ) |  | (36,524 | ) |  | (39,587 | ) |  | (25,172 | ) |  | (29,996 | ) |  | (116,605 | ) |  | (63,546 | ) |
Allowance for loan and lease losses at end of period | $ | 254,184 |  |  | $ | 250,050 |  |  | $ | 232,597 |  |  | $ | 227,765 |  |  | $ | 218,046 |  |  | $ | 254,184 |  |  | $ | 218,046 |  |
Allowance for loan and lease losses at end of period allocated to loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | $ | 75,050 |  |  | $ | 69,435 |  |  | $ | 54,629 |  |  | $ | 51,248 |  |  | $ | 43,028 |  |  | $ | 75,050 |  |  | $ | 43,028 |  |
Not covered by loss share agreements | 179,134 |  |  | 180,615 |  |  | 177,968 |  |  | 176,517 |  |  | 175,018 |  |  | 179,134 |  |  | 175,018 |  |
Allowance for loan and lease losses at end of period | $ | 254,184 |  |  | $ | 250,050 |  |  | $ | 232,597 |  |  | $ | 227,765 |  |  | $ | 218,046 |  |  | $ | 254,184 |  |  | $ | 218,046 |  |
Detail of net charge-offs of loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | $ | 24,702 |  |  | $ | 26,390 |  |  | $ | 29,176 |  |  | $ | 16,192 |  |  | $ | 15,575 |  |  | $ | 80,268 |  |  | $ | 22,933 |  |
Not covered by loss share agreements | 15,792 |  |  | 10,134 |  |  | 10,411 |  |  | 8,980 |  |  | 14,421 |  |  | 36,337 |  |  | 40,613 |  |
Total net charge-offs | $ | 40,494 |  |  | $ | 36,524 |  |  | $ | 39,587 |  |  | $ | 25,172 |  |  | $ | 29,996 |  |  | $ | 116,605 |  |  | $ | 63,546 |  |
Reserve for unfunded commitments | $ | 7,962 |  |  | $ | 7,854 |  |  | $ | 7,512 |  |  | $ | 7,246 |  |  | $ | 7,623 |  |  | $ | 7,962 |  |  | $ | 7,623 |  |
Average loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 2,500,807 |  |  | 2,490,964 |  |  | 2,464,277 |  |  | 2,096,312 |  |  | 2,257,888 |  |  | 2,458,184 |  |  | 2,278,198 |  |
Not covered by loss share agreements | 11,672,417 |  |  | 11,537,145 |  |  | 11,439,777 |  |  | 11,544,750 |  |  | 11,659,390 |  |  | 11,508,223 |  |  | 11,675,699 |  |
Loans and leases at period-end: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss sharing agreements | 2,557,450 |  |  | 2,399,738 |  |  | 2,628,409 |  |  | 2,007,452 |  |  | 2,222,660 |  |  | 2,557,450 |  |  | 2,222,660 |  |
Not covered by loss sharing agreements | 11,603,526 |  |  | 11,528,854 |  |  | 11,425,312 |  |  | 11,480,577 |  |  | 11,545,309 |  |  | 11,603,526 |  |  | 11,545,309 |  |
Risk Elements |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nonaccrual loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | $ | 291,890 |  |  | $ | 267,333 |  |  | $ | 223,617 |  |  | $ | 194,315 |  |  | $ | 264,653 |  |  | $ | 291,890 |  |  | $ | 264,653 |  |
Not covered by loss share agreements | 59,603 |  |  | 73,441 |  |  | 79,856 |  |  | 78,814 |  |  | 84,753 |  |  | 59,603 |  |  | 84,753 |  |
Other real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 160,443 |  |  | 150,636 |  |  | 137,479 |  |  | 112,748 |  |  | 99,843 |  |  | 160,443 |  |  | 99,843 |  |
Not covered by loss share agreements | 48,616 |  |  | 49,028 |  |  | 49,584 |  |  | 52,842 |  |  | 47,524 |  |  | 48,616 |  |  | 47,524 |  |
Troubled debt restructurings: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 92,987 |  |  | 61,880 |  |  | 44,603 |  |  | 56,398 |  |  | 65,417 |  |  | 92,987 |  |  | 65,417 |  |
Not covered by loss share agreements | 86,406 |  |  | 86,929 |  |  | 77,376 |  |  | 64,995 |  |  | 53,374 |  |  | 86,406 |  |  | 53,374 |  |
Total nonperforming assets | $ | 739,945 |  |  | $ | 689,247 |  |  | $ | 612,515 |  |  | $ | 560,112 |  |  | $ | 615,564 |  |  | $ | 739,945 |  |  | $ | 615,564 |  |
Nonperforming assets covered by loss share agreements | $ | 545,320 |  |  | $ | 479,849 |  |  | $ | 405,699 |  |  | $ | 363,461 |  |  | $ | 429,913 |  |  | $ | 545,320 |  |  | $ | 429,913 |  |
Nonperforming assets not covered by loss share agreements | 194,625 |  |  | 209,398 |  |  | 206,816 |  |  | 196,651 |  |  | 185,651 |  |  | 194,625 |  |  | 185,651 |  |
Total nonperforming assets | $ | 739,945 |  |  | $ | 689,247 |  |  | $ | 612,515 |  |  | $ | 560,112 |  |  | $ | 615,564 |  |  | 739,945 |  |  | $ | 615,564 |  |
Ratios |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (annualized) to average loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 3.92 |  | % | 4.25 |  | % | 4.80 |  | % | 3.13 |  | % | 2.80 |  | % | 4.37 |  | % | 1.35 |  | %
Not covered by loss share agreements | 0.54 |  |  | 0.35 |  |  | 0.37 |  |  | 0.31 |  |  | 0.49 |  |  | 0.42 |  |  | 0.47 |  |
Allowance for loan and lease losses to total loans and leases: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 2.93 |  |  | 2.89 |  |  | 2.08 |  |  | 2.55 |  |  | 1.94 |  |  | 2.93 |  |  | 1.94 |  |
Not covered by loss share agreements | 1.54 |  |  | 1.57 |  |  | 1.56 |  |  | 1.54 |  |  | 1.52 |  |  | 1.54 |  |  | 1.52 |  |
Nonperforming assets to total loans and leases plus other real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Covered by loss share agreements | 20.06 |  |  | 18.81 |  |  | 14.67 |  |  | 17.14 |  |  | 18.51 |  |  | 20.06 |  |  | 18.51 |  |
Not covered by loss share agreements | 1.67 |  |  | 1.81 |  |  | 1.80 |  |  | 1.71 |  |  | 1.60 |  |  | 1.67 |  |  | 1.60 |  |
Total | 5.15 |  |  | 4.88 |  |  | 4.30 |  |  | 4.10 |  |  | 4.42 |  |  | 5.15 |  |  | 4.42 |  |

69

Table of Contents
Interest rate risk. Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.
We assess our interest rate risk by simulating future amounts of net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Due to the existence of contractual floors on loans, competitive pressures that constrain our ability to reduce deposit interest rates, and the extremely low current level of interest rates, it is highly unlikely that the rates on most interest-earning assets and interest-bearing liabilities can decline from current levels. In our current simulations, we do not calculate rate shocks, rate ramps or market value of equity for declining rate scenarios, and assume that the prime rate will not move below the September 30, 2011 rate of 3.25 percent. Our rate ramp simulations indicate that net interest income will increase by 4.8 percent to 8.2 percent depending upon the speed and magnitude that rates increase. Our projections do not incorporate assumptions of likely customer migration of short-term deposit instruments to long-term, higher rate instruments as rates rise. Such transfer would dampen the majority of the calculated favorable changes. We also utilize the market value of equity as a tool in measuring and managing interest rate risk. The market value of equity is estimated to decline to 7.9 percent when rates increase immediately by 200 basis points, down approximately 160 basis points versus the market of equity calculated with rates stable.
We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk. However, during 2006, we entered into an interest rate swap to synthetically convert the variable rate on $115.0 million of junior subordinated debentures to a fixed rate of 7.125 percent for a period of five years. This swap matured on June 30, 2011. During 2009, we entered into a second interest rate swap covering the period from June 2011 to June 2016 at a fixed interest rate of 5.50 percent. Both of the interest rate swaps qualified as hedges under US GAAP.
Liquidity risk. Liquidity risk results from the mismatching of asset and liability cash flows and the potential inability to secure adequate amounts of funding from traditional sources of liquidity. We manage this risk by structuring our balance sheet prudently and by maintaining various borrowing resources to fund potential cash needs. We have historically maintained a strong focus on liquidity, and have traditionally relied on our deposit base as our primary liquidity source. Short-term borrowings resulting from commercial treasury customers are also a recurring source of liquidity, although the majority of those borrowings must be collateralized thereby potentially restricting the use of the resulting liquidity. Through our deposit and treasury services pricing strategies, we have the ability to stimulate or curtail liability growth.
Exclusive of deposits assumed in the FDIC-assisted transactions, deposits increased moderately from the third quarter of 2010 to the third quarter of 2011 due to an improved domestic savings rate and a desire by customers to seek safety from uncertain investment instruments.
We occasionally utilize borrowings from the Federal Home Loan Bank of Atlanta as an alternative source of liquidity, and to assist in matching the maturities of longer dated interest-earning assets. At September 30, 2011, we had sufficient collateral pledged to provide access to $892.4 million of additional borrowings. Additionally, we maintain federal funds lines of credit and other borrowing facilities. At September 30, 2011, BancShares had contingent access to $400.0 million in unsecured borrowings through its various sources.
Once we have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight investments and investment securities available for sale. Net of amounts pledged for various purposes, the amount of such immediately available balance sheet liquidity approximated $1.47 billion at September 30, 2011 compared to $2.73 billion at December 31, 2010 and $2.68 billion at September 30, 2010. The significant decline in available balance sheet liquidity during 2011 resulted from a material run-off in institutional deposits assumed from United Western and material reductions in deposits assumed at CCB.
SEGMENT REPORTING
BancShares is a financial holding company headquartered in Raleigh, North Carolina that offers full-service banking through a single wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank.
Prior to January 7, 2011, BancShares also offered full service banking services through another wholly-owned subsidiary, IronStone Bank (ISB), a federally-chartered thrift institution. On January 7, 2011 ISB was legally merged into FCB resulting in a single banking subsidiary of BancShares. Therefore, BancShares no longer has multiple reportable segments.
70

Table of Contents
LEGAL PROCEEDINGS
BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
CURRENT ACCOUNTING AND REGULATORY ISSUES
In July, 2010, the FASB issued Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss (ASU 2010-20). In an effort to provide financial statement users with greater transparency about the allowance for loan and lease losses, ASU 2010-20 requires enhanced disclosures regarding the nature of credit risk inherent in the portfolio and how risk is analyzed and assessed in determining the amount of the allowance. Changes in the allowance will also require disclosure. The end-of-period disclosures are effective for BancShares on December 31, 2010 with the exception of disclosures related to troubled debt restructurings that are effective for interim and annual periods beginning after June 15, 2011. The disclosures related to activity during a period are effective during 2011. The provisions of ASU 2010-20 have affected disclosures regarding the allowance for loan and lease losses and troubled debt restructurings, but will have no material impact on financial condition, results of operations or liquidity.
In April, 2011, the FASB issued A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). In an effort to increase comparability, ASU 2011-02 seeks to clarify when a creditor has granted a concession in a modification and whether a borrower is experiencing financial difficulty. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 have not had a material impact on the financial condition, results of operations or liquidity of BancShares.
In June, 2011, the FASB issued Comprehensive Income: Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 allows financial statement issuers to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, which is the presentation method currently utilized by BancShares. The provisions of ASU 2011-05, which will be applied retrospectively for interim periods beginning after December 15, 2011, will affect BancShares' disclosure format, but will not have an impact on BancShares' financial condition, results of operations or liquidity.
In September, 2011, the FASB issued Intangibles - Goodwill and Other Intangible Assets: Testing Goodwill for Impairment (ASU 2011-08), which allows an entity the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that is it more likely than not that the fair value of a reporting unit is less than its carrying amount. Under ASU 2011-08, if, after that assessment is made, an entity determines that it is more likely than not that the carrying value of goodwill is not impaired, then the two-step impairment test is not required. However, if the entity concludes otherwise, the two-step impairment test would be required. The provisions of ASU 2011-08 are effective for interim and annual periods beginning after December 15, 2011, although early adoption is allowed. Adoption of ASU 2011-08 is not expected to have a material impact on BancShares' financial condition, results of operations or liquidity.
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act will result in expansive changes in many areas affecting the financial services industry in general and BancShares in particular. The legislation provides broad economic oversight, consumer financial services protection, investor protection, rating agency reform and derivative regulatory reform. Various corporate governance requirements will result in expanded proxy disclosures and shareholder rights. Additional provisions address the mortgage industry in an effort to strengthen lending practices. Deposit insurance reform has resulted in permanent FDIC protection for up to $250,000 of deposits and will require the FDIC’s Deposit Insurance Fund to maintain 1.35 percent of insured deposits with the burden for closing the shortfall falling to banks with more than $10.0 billion in assets.
In response to the legislation, the formula used to calculate the FDIC insurance assessment paid by each FDIC-insured institution was significantly altered. The new formula was effective April 1, 2011 and changes the assessment base from deposits to total assets less equity, thereby placing a larger assessment burden on banks with large levels of non-deposit funding. The new assessment formula also considers the level of subprime and leveraged loans, risk factors that will potentially result in incremental insurance costs. This new reporting requirement will require BancShares to implement process and system changes to accurately identify and report these assets.
The legislation also imposes new regulatory capital requirements for banks that will result in the disallowance of qualified trust preferred capital securities as tier 1 capital beginning in 2013. This legislation requires the reduction in tier 1 capital by the amount of qualified trust preferred capital securities in equal increments over a three year period beginning in 2013. BancShares
71

Table of Contents
has $265.0 million in trust preferred capital securities that is currently outstanding and included as tier 1 capital. The elimination of $88.3 million from tier 1 capital will be required in each year over the three year period beginning in 2013.
On June 29, 2011 the Board of Governors of the Federal Reserve System issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The issuance of this rule was required by the Dodd-Frank Act. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The Federal Reserve also approved an interim final rule that allows for an upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim final rule. The provisions of this rule are effective on October 1, 2011 and it is expected to have a negative impact on BancShares noninterest income in periods following implementation.
Due to the breadth of the impact of the new legislation and the pending issuance of regulations implementing the legislation, we are unable to estimate the impact of complying with the various provisions.
Although it is likely that further regulatory actions will arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the FDIC-assisted transactions, and other developments or changes in our business that we do not expect.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.
72

Table of Contents

Item 3. | Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of September 30, 2011, BancShares’ market risk profile has not changed significantly from December 31, 2010. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4. | Controls and Procedures

BancShares’ management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective to provide reasonable assurance that BancShares is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.
BancShares is constantly monitoring and improving internal controls over financial reporting but no change in BancShares’ internal control over financial reporting occurred during the third quarter of 2011 that had materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.
73

Table of Contents
PART II

Item 1A. | Risk Factors

The risks and uncertainties that management believes are material are described below. Before making an investment decision, these risks and uncertainties should be carefully considered together with all of the other information included or incorporated herein by reference. The risks listed are not the only risks that BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem to be material could also have a material, adverse impact on our financial condition, the results of our operations, or our business. If this were to occur, the market price of our common stock could decline significantly.
Unfavorable economic conditions could adversely affect our business
Our business is highly affected by national, regional and local economic conditions. These conditions cannot be predicted or controlled, and may have a material impact on our operations and financial condition. Unfavorable economic developments including increases in unemployment rates, decreases in real estate values, rapid changes in interest rates, higher loan default and bankruptcy rates, and various other factors could weaken the national economy as well as the economies of specific communities that we serve. Weakness in our market areas, continuation or deepening of current unfavorable economic conditions, or a prolonged recovery could depress our earnings and financial condition because borrowers may not be able to repay their loans, collateral values may fall, and loans that are currently performing may become impaired. Additionally, downgrades to the credit ratings of the issuers of securities held in our investment securities portfolio could result in a reduction of the fair value of our investments.
Instability in real estate markets may create significant credit costs
Disruption in residential housing markets including reduced sales activity and falling market prices have adversely affected collateral values and customer demand, particularly with respect to our operations in southern California, Atlanta, Georgia and southwest Florida. With a significant percentage of total loans secured by real estate, instability in residential and commercial real estate markets could result in higher credit losses if customers default on loans that, as a result of lower property values, are no longer adequately collateralized. The weak real estate markets could also affect our ability to sell real estate acquired through foreclosure.
Accretion of fair value discounts arising from our FDIC-assisted transactions may result in volatile interest income and net interest income
Fair value discounts that are recorded at the time an asset is acquired are accreted into interest income based on accounting principles generally accepted in the United States of America. The rate at which those discounts are accreted is unpredictable, the result of various factors including unscheduled prepayments and credit quality improvements that result in a reclassification from nonaccretable to accretable with prospective accretion into interest income. The discount accretion may result in significant volatility in interest income and net interest income.
To the extent that the changes in interest income and net interest income are attributable to improvements in credit quality of loans covered under loss share agreements, there will generally be a proportionate adjustment to the FDIC receivable that will be offset by an entry to noninterest income.
Reimbursements under loss share agreements are subject to FDIC oversight
With respect to the 2011, 2010 and 2009 acquisitions, the exposures to prospective losses on certain assets are covered under loss share agreements with the FDIC. These loss share agreements impose certain obligations on us that, in the event of noncompliance, could result in the delay or disallowance of some or all of our rights under those agreements. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed for noncompliance.
We are subject to extensive oversight and regulation that continues to change
We and FCB are subject to extensive federal and state banking laws and regulations. These laws and regulations focus on the protection of depositors, federal deposit insurance funds, and the banking system as a whole rather than the protection of security holders. Federal and state banking regulators possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums, increased expenses, reductions in fee income and limitations on activities that could have a material adverse effect on our results of operations.
The Dodd-Frank Act instituted significant changes to the overall regulatory framework for financial institutions
74

Table of Contents
including BancShares and FCB. Many of the specific provisions of the bill have yet to be fully implemented, and the impact on us cannot be accurately predicted until regulations are enacted. The Dodd-Frank Act will likely cause a decline in certain revenues that are significant to our overall financial performance, create additional compliance costs, and eliminate a portion of our tier 1 capital beginning January 1, 2013.
We encounter significant competition
We compete with other banks and specialized financial service providers in our market areas. Our primary competitors include local, regional and national banks and savings associations, credit unions, commercial finance companies, various wealth management providers, independent and captive insurance agencies, mortgage companies and non-bank providers of financial services over the Internet. Some of our larger competitors, including banks that have a significant presence in our market areas, have the capacity to offer products and services we do not offer. Some of our competitors operate in a regulatory environment that is significantly less stringent than the one in which we operate, or are not subject to income taxation. The fierce competitive pressure that we face tends to reduce pricing for many of our products and services to levels that are marginally profitable.
Our financial condition could be adversely affected by the soundness of other financial institutions
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to numerous financial service providers, including banks, brokers and dealers in securities and other institutional clients. Transactions with other financial institutions expose us to credit risk in the event of default of the counterparty. In addition, our credit risk may be exacerbated when collateral we hold cannot be liquidated at a price sufficient to recover the full amount of the credit. These types of losses could materially and adversely affect our results of operations.
Natural disasters and other catastrophes could affect our ability to operate
The occurrence of catastrophic events including weather-related events such as hurricanes, tropical storms, floods, or windstorms, as well as earthquakes, pandemic disease, fires and other catastrophes could adversely affect our financial condition and results of operations. In addition to natural catastrophic events, man-made events, such as acts of terror and governmental response to acts of terror, could adversely affect general economic conditions, which could have a material impact on our results of operations.
Unpredictable natural and other disasters could have an adverse effect if those events materially disrupt our operations or affect customers’ access to the financial services we offer. Although we carry insurance to mitigate our exposure to certain catastrophic events, catastrophic events could nevertheless adversely affect our results of operations.
We are subject to interest rate risk
Our results of operations and cash flows are highly dependent upon our net interest income. Interest rates are sensitive to economic and market conditions that are beyond our control including the actions of the Federal Reserve’s Federal Open Market Committee. Changes in monetary policy could influence our interest income and interest expense as well as the fair value of our financial assets and liabilities. If the changes in interest rates on our interest-earning assets are not roughly equal to the changes in interest rates paid on our interest-bearing liabilities, our net interest income and therefore our net income could be adversely impacted.
Even though we maintain what we believe to be an adequate interest rate risk monitoring system, the forecasts of future net interest income in the system may be inaccurate. The shape of the yield curve may change differently than we forecasted, and we cannot accurately predict changes in interest rates or actions by the Federal Open Market Committee that may have a direct impact on market interest rates.
Our current level of free liquidity may come under pressure
Our core deposit base represents our primary source of liquidity, and we normally have the ability to stimulate deposit growth through our reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we would need access to noncore liquidity sources such as brokered deposits, overnight and other short-term or long-term borrowings. While we maintain access to noncore funding sources, we are dependent on the availability of collateral, the counterparty’s willingness to lend to us, and their liquidity capacity.
Operational risks continue to increase
Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways including
75

Table of Contents
security and data breaches, employee fraud, customer fraud, and control lapses in bank operations and information technology. Our dependence on automated systems, including the automated systems used by other entities and third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are also subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, legal actions, and noncompliance with various laws and regulations.
We continue to encounter technological change
The financial services industry continues to experience an increase in technological complexity required to provide a competitive array of products and services to customers. Our future success depends in part on our ability to satisfactorily invest in and address our technology infrastructure to ensure that we are able to satisfactorily and efficiently provide products and services that meet the needs of our customers. Several of our principal competitors are much larger than we are, and thus have substantially greater resources to invest in their technological capabilities and infrastructure. We may not be able to satisfactorily address our technology needs in a timely and cost-effective manner, which could lead to a material adverse impact on our business, financial condition, and financial results of operations.
We rely on external vendors
Third party vendors provide key components of our business infrastructure including certain data processing and information services. Failures of these third parties to provide services for any reason could adversely affect our ability to deliver products and services to our customers. We maintain a robust control environment designed to monitor vendor risks including the financial stability of critical vendors. While we believe that our control environment is adequate, the failure of a critical external vendor could disrupt our business and cause us to incur significant expense.
We are subject to litigation risks
We face litigation risks as principal and fiduciary from customers, employees, vendors, federal and state regulatory agencies, and other parties who seek to assert single or class action liabilities against us. The frequency of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm. Although we carry insurance to mitigate our exposure to certain litigation risks, litigation could nevertheless adversely affect our results of operations.
We use accounting estimates in the preparation of our financial statements
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. Significant estimates include the fair value of acquired assets, allowance for loan and lease losses and the receivable from the FDIC for loss share agreements. Due to the uncertainty of the circumstances relating to these estimates, we may experience more adverse outcomes than originally estimated. The allowance for loan and lease losses may need to be significantly increased. The actual losses or expenses on loans or the losses or expenses not covered under the FDIC agreements may differ from the recorded amounts resulting in charges that could materially affect our results of operations.
Accounting standards may change
The Financial Accounting Standards Board and the Securities and Exchange Commission periodically modify the standards that govern the preparation of our financial statements. In addition, there is continuing interest among standard-setters to converge key provisions of US GAAP with international accounting standards. The nature of these changes is not predictable, and could impact how we record transactions in our financial statements, which could lead to material changes in assets, liabilities, shareholders’ equity, revenues, expenses and net income. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative adjustment to retained earnings. The application of new accounting rules or standards could require us to implement costly technology changes.
Deposit insurance premiums could increase further causing added pressure on our earnings
Deposit insurance premiums payable to the FDIC are highly dependent on the risk rating determined by external regulators and the level of risk assets at each depository institution. Significant changes in these factors could result in a material increase in our insurance premiums.
76

Table of Contents
Integration of our FDIC-assisted acquisitions may be disruptive, and we have no assurance that future acquisitions will be approved
We must receive federal and state regulatory approvals before we can acquire a bank or bank holding company or acquire assets and assume liabilities of failed banks from the FDIC. Prior to granting approval, bank regulators consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects including current and projected capital ratios, the competence, experience and integrity of management, compliance with laws, regulations, contracts and agreements and the convenience and needs of the communities to be served, including the record of compliance under the Community Reinvestment Act. We cannot be certain when or if required regulatory approvals will be granted or what conditions may be imposed by the approving authority.
In addition to the risks related to regulatory approvals, complications in the conversion of operating systems, data processing systems and products may result in the loss of customers, damage to our reputation, operational problems, one-time costs currently not anticipated, or reduced cost savings resulting from a merger or acquisition. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of our businesses or the businesses of the acquired company or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.
The acquisition gain that we have recorded in our financial statements is subject to adjustment
The acquisition gains recorded during 2011 are preliminary and subject to revision for a period of one year following the acquisition dates. Adjustments to the gains may be recorded based on additional information received after the acquisition date that affected the acquisition date fair values of assets acquired and liabilities assumed. Further downward adjustments in values of assets acquired or increases in values of liabilities assumed on the date of acquisition would lower the acquisition gain.
Our access to capital is limited and could impact our future growth
Based on existing capital levels, BancShares and FCB maintain well-capitalized ratios under current leverage and risk-based capital standards including the impact of the FDIC-assisted acquisitions. Historically, our primary capital sources have been retained earnings and debt issued through both private and public markets including trust preferred securities and subordinated debt. The Dodd-Frank Act contains provisions that will eliminate our ability to include $265.0 million of trust preferred securities in tier 1 risk-based capital beginning January 1, 2013 with total elimination on January 1, 2015. The inability to include the trust preferred securities in tier 1 risk-based capital may lead us to redeem a portion or all of the securities prior to their scheduled maturity dates. Since we have not historically raised capital through new issues of our common stock, replacement of the tier 1 capital will be difficult. A lack of access to tier 1 capital could limit our ability to consummate additional acquisitions, make new loans, meet our existing lending commitments, and could potentially affect our liquidity and capital adequacy.
The major rating agencies regularly evaluate our creditworthiness and assign credit ratings to our debt and FCB’s debt. The ratings of the agencies are based on a number of factors, some of which are outside of our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions generally affecting the financial services industry. In light of the difficulties currently confronting the financial services industry, there can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding. Long-term debt ratings also affect deposit insurance premiums, and a reduction in FCB’s ratings would increase premiums and expense.
The market price of our stock may be volatile
Although publicly traded, our common stock has substantially less liquidity than other large publicly traded financial services companies as well as other companies listed on the NASDAQ National Market System. A relatively small percentage of our common stock is actively traded with average daily volume during 2011 of approximately 10,600 shares. This low liquidity increases the price volatility of our stock which may make it difficult for our shareholders to sell or buy our common stock when they deem a transaction is warranted at a price that they believe is attractive.
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors including expectations of operating results, actual operating results, actions of institutional shareholders, speculation in the press or the investment community, market perception of acquisitions, rating agency upgrades or downgrades, stock prices of other companies that are similar to us, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry.
BancShares relies on dividends from FCB
77

Table of Contents
As a financial holding company, BancShares is a separate legal entity from FCB and receives substantially all of its revenue and cash flow from dividends paid by FCB. The cash flow from these dividends is the primary source which allows BancShares to pay dividends on its common stock and interest and principal on its debt obligations. North Carolina state law limits the amount of dividends that FCB may pay to BancShares. In the event that FCB is unable to pay dividends to BancShares for an extended period of time, BancShares may not be able to service its debt obligations or pay dividends on its common stock.
The value of our goodwill may decline
As of September 30, 2011, we had $102.6 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, and the impairment test compares the estimated fair value of a reporting unit with its net book value. A significant decline in our expected future cash flows, a significant adverse change in the business climate, or a sustained decline in the price of our common stock may result in a write-off of impaired goodwill. Such write-off could have a significant impact on our results of operations, but would not impact our capital ratios as such ratios are calculated using tangible capital amounts.

Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds

PURCHASES OF COMMON STOCK
In January 2011 the Board of Directors of First Citizens BancShares, Inc. (BOD) authorized the purchase of up to 50,000 shares of Class B common stock during the period from the date of the resolution through December 31, 2011, to be made in one or more privately negotiated transactions. After the repurchase of 37,688 shares in June 2011, an additional 12,312 shares remain eligible to purchase under this authorization. There are currently no planned or pending purchases.
Further, the BOD approved a stock trading plan (“the Plan”) on July 8, 2011. The Plan provides for the repurchase of up to 100,000 shares of BancShares’ Class A common stock, and up to 25,000 shares of its Class B common stock from time to time through June 30, 2012. Additionally, on October 8, 2011, the BOD authorized the purchase of an additional 100,000 shares of BancShares' Class A common stock under the Plan.
The following table provides the shares of Class A common stock repurchased by BancShares during the three months ended September 30, 2011 as well as shares that may be purchased under publicly announced plans.

Period | Total number of shares purchases |  | Average price paid per share |  | Total number of shares purchased as part of publicly announced plans or programs |  | Maximum number of shares that may yet be purchased under the plans or programs
Repurchases from July 1, 2011 through July 31, 2011 | — |  |  | $ | — |  |  | — |  |  | — |
Repurchases from August 1, 2011 through August 31, 2011 | 43,515 |  |  | 150.31 |  |  | 43,515 |  |  | — |
Repurchases from September 1, 2011 through September 30, 2011 | 43,824 |  |  | 148.71 |  |  | 43,824 |  |  | — |
Total | 87,339 |  |  | $ | 149.51 |  |  | 87,339 |  |  | 12,661 |

The following table provides the shares of Class B common stock repurchased by BancShares during the three months ended September 30, 2011 as well as shares that may be purchased under publicly announced plans.

Period | Total number of shares purchases |  | Average price paid per share |  | Total number of shares purchased as part of publicly announced plans or programs |  | Maximum number of shares that may yet be purchased under the plans or programs
Repurchases from July 1, 2011 through July 31, 2011 | — |  |  | $ | — |  |  | — |  |  | — |
Repurchases from August 1, 2011 through August 31, 2011 | 175 |  |  | 153.00 |  |  | 175 |  |  | — |
Repurchases from September 1, 2011 through September 30, 2011 | — |  |  | — |  |  | — |  |  | — |
Total | 175 |  |  | $ | 153.00 |  |  | 175 |  |  | 24,825 |

Item 6. | Exhibits

78

Table of Contents

31.1 | Certification of Chief Executive Officer
31.2 | Certification of Chief Financial Officer
32.1 | Certification of Chief Executive Officer
32.2 | Certification of Chief Financial Officer
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema
101.CAL | XBRL Taxonomy Extension Calculation Linkbase
101.DEF | XBRL Taxonomy Extension Definition Linkbase
101.LAB | XBRL Taxonomy Extension Label Linkbase
101.PRE | XBRL Taxonomy Extension Presentation Linkbase

79

Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 9, 2011 | FIRST CITIZENS BANCSHARES, INC.
| (Registrant)
| By: |  | /s/ KENNETH A. BLACK
| Kenneth A. Black
| Vice President, Treasurer and Chief Financial Officer

80