XNAS:FCNCA First Citizens BancShares Inc (DE) Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
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—8,644,307 shares
Class B Common Stock—$1 Par Value—1,626,937 shares
(Number of shares outstanding, by class, as of August 9, 2012)



INDEX
 
 
 
Page(s)
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

2


Part 1
 
Item 1.
Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
June 30*
2012
 
December 31#
2011
 
June 30*
2011
 
(thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
571,004

 
$
590,801

 
$
537,717

Overnight investments
984,536

 
434,975

 
741,654

Investment securities available for sale
4,634,248

 
4,056,423

 
4,014,241

Investment securities held to maturity
1,578

 
1,822

 
2,098

Loans held for sale
76,374

 
92,539

 
56,004

Loans and leases:
 
 
 
 
 
Covered under loss share agreements
1,999,351

 
2,362,152

 
2,399,738

Not covered under loss share agreements
11,462,458

 
11,581,637

 
11,528,854

Less allowance for loan and lease losses
272,929

 
270,144

 
250,050

Net loans and leases
13,188,880

 
13,673,645

 
13,678,542

Premises and equipment
873,483

 
854,476

 
842,911

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
117,381

 
148,599

 
150,636

Not covered under loss share agreements
49,454

 
50,399

 
49,028

Income earned not collected
49,743

 
42,216

 
50,876

Receivable from FDIC for loss share agreements
313,978

 
539,511

 
522,507

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
5,175

 
7,032

 
8,234

Other assets
272,531

 
286,430

 
264,577

Total assets
$
21,240,990

 
$
20,881,493

 
$
21,021,650

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
4,761,369

 
$
4,331,706

 
$
4,166,886

Interest-bearing
13,040,277

 
13,245,568

 
13,496,080

Total deposits
17,801,646

 
17,577,274

 
17,662,966

Short-term borrowings
700,299

 
615,222

 
655,808

Long-term obligations
644,682

 
687,599

 
792,661

Other liabilities
164,573

 
140,270

 
100,945

Total liabilities
19,311,200

 
19,020,365

 
19,212,380

Shareholders’ Equity
 
 
 
 
 
Common stock:
 
 
 
 
 
Class A - $1 par value (11,000,000 shares authorized; 8,644,307 shares issued and outstanding at June 30, 2012 and December 31, 2011; 8,756,778 shares issued and outstanding at June 30, 2011)
8,644

 
8,644

 
8,757

Class B - $1 par value (2,000,000 shares authorized; 1,626,937 shares issued and outstanding at June 30, 2012; 1,639,812 shares issued and outstanding at December 31, 2011; 1,639,987 shares issued and outstanding at June 30, 2011)
1,627

 
1,640

 
1,640

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,838,160

 
1,773,652

 
1,684,558

Accumulated other comprehensive loss
(62,407
)
 
(66,574
)
 
(29,451
)
Total shareholders’ equity
1,929,790

 
1,861,128

 
1,809,270

Total liabilities and shareholders’ equity
$
21,240,990

 
$
20,881,493

 
$
21,021,650

 
* Unaudited
# Derived from 2011 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2012
 
2011
 
2012
 
2011
 
(thousands, except share and per share data, unaudited)
Interest income
 
 
 
 
 
 
 
Loans and leases
$
231,864

 
$
233,731

 
$
470,001

 
$
465,184

Investment securities:
 
 
 
 
 
 
 
U. S. Treasury
670

 
2,259

 
1,409

 
5,469

Government agency
4,377

 
4,863

 
8,709

 
9,910

Residential mortgage-backed securities
2,202

 
2,104

 
4,091

 
4,757

Corporate bonds
842

 
2,119

 
2,041

 
4,295

State, county and municipal
12

 
12

 
24

 
25

Other
62

 
200

 
193

 
459

Total investment securities interest and dividend income
8,165

 
11,557

 
16,467

 
24,915

Overnight investments
490

 
316

 
803

 
705

Total interest income
240,519

 
245,604

 
487,271

 
490,804

Interest expense
 
 
 
 
 
 
 
Deposits
15,047

 
27,081

 
31,519

 
56,901

Short-term borrowings
1,584

 
1,482

 
2,975

 
3,179

Long-term obligations
8,456

 
9,666

 
16,393

 
19,362

Total interest expense
25,087

 
38,229

 
50,887

 
79,442

Net interest income
215,432

 
207,375

 
436,384

 
411,362

Provision for loan and lease losses
29,667

 
53,977

 
60,382

 
98,396

Net interest income after provision for loan and lease losses
185,765

 
153,398

 
376,002

 
312,966

Noninterest income
 
 
 
 
 
 
 
Gains on acquisitions

 

 

 
63,474

Cardholder and merchant services
24,697

 
30,543

 
47,147

 
57,323

Service charges on deposit accounts
15,061

 
15,778

 
29,907

 
31,568

Wealth management services
14,530

 
14,119

 
28,285

 
27,407

Fees from processing services
7,557

 
7,595

 
16,119

 
14,841

Securities gains (losses)
3

 
(96
)
 
(42
)
 
(545
)
Other service charges and fees
3,574

 
5,960

 
7,015

 
11,917

Mortgage income
237

 
2,530

 
4,848

 
4,845

Insurance commissions
2,238

 
2,280

 
4,994

 
4,814

ATM income
1,281

 
1,370

 
2,736

 
2,960

Adjustments for FDIC receivable for loss share agreements
(14,134
)
 
(13,747
)
 
(40,930
)
 
(24,126
)
Other
2,252

 
317

 
4,160

 
1,751

Total noninterest income
57,296

 
66,649

 
104,239

 
196,229

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
76,786

 
76,124

 
152,470

 
151,928

Employee benefits
20,558

 
18,708

 
40,807

 
38,357

Occupancy expense
18,000

 
18,487

 
36,607

 
36,800

Equipment expense
17,998

 
17,515

 
36,164

 
34,906

FDIC insurance expense
2,666

 
2,501

 
5,723

 
10,726

Foreclosure-related expenses
15,765

 
3,747

 
20,386

 
9,235

Other
43,024

 
50,400

 
85,971

 
95,558

Total noninterest expense
194,797

 
187,482

 
378,128

 
377,510

Income before income taxes
48,264

 
32,565

 
102,113

 
131,685

Income taxes
10,681

 
11,265

 
29,035

 
48,625

Net income
$
37,583

 
$
21,300

 
$
73,078

 
$
83,060

Average shares outstanding
10,271,343

 
10,422,857

 
10,277,593

 
10,428,623

Net income per share
$
3.66

 
$
2.04

 
$
7.11

 
$
7.96

See accompanying Notes to Consolidated Financial Statements.

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

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2012
 
2011
 
2012
 
2011
 
(thousands, unaudited)
Net income
$
37,583

 
$
21,300

 
$
73,078

 
$
83,060

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains arising during period
4,491

 
17,236

 
1,593

 
8,097

Deferred tax benefit (expense)
(1,756
)
 
(6,615
)
 
(633
)
 
(3,168
)
Reclassification adjustment for losses (gains) included in income before income taxes
(3
)
 
96

 
(3
)
 
545

Deferred tax expense (benefit)
1

 
(38
)
 
1

 
(215
)
Total change in unrealized gains on securities, net of tax
2,733

 
10,679

 
958

 
5,259

 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
 
 
 
 
Change in unrecognized loss on cash flow hedges
81

 
(552
)
 
1,219

 
2,623

Deferred tax benefit (expense)
(32
)
 
228

 
(482
)
 
(1,026
)
Reclassification adjustment for gains (losses) included in income before income taxes
(776
)
 
(1,473
)
 
(1,525
)
 
(2,931
)
Deferred tax benefit (expense)
306

 
572

 
602

 
1,148

Total change in unrecognized loss on cash flow hedges, net of tax
(421
)
 
(1,225
)
 
(186
)
 
(186
)
 
 
 
 
 
 
 
 
Change in pension obligation:
 
 
 
 
 
 
 
Change in pension obligation
2,790

 
1,648

 
5,580

 
3,296

Deferred tax benefit (expense)
(1,093
)
 
(646
)
 
(2,185
)
 
(1,291
)
Total change in pension obligation, net of tax
1,697

 
1,002

 
3,395

 
2,005

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
4,009

 
10,456

 
4,167

 
7,078

 
 
 
 
 
 
 
 
Total comprehensive income
$
41,592

 
$
31,756

 
$
77,245

 
$
90,138

 
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.

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, 2010
$
8,757

 
$
1,678

 
$
143,766

 
$
1,615,290

 
$
(36,529
)
 
$
1,732,962

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
83,060

 

 
83,060

Other comprehensive income, net of tax

 

 

 

 
7,078

 
7,078

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
90,138

Repurchase of 37,688 shares of Class B common stock

 
(38
)
 

 
(7,537
)
 

 
(7,575
)
Cash dividends ($0.60 per share)

 

 

 
(6,255
)
 

 
(6,255
)
Balance at June 30, 2011
$
8,757

 
$
1,640

 
$
143,766

 
$
1,684,558

 
$
(29,451
)
 
$
1,809,270

Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
73,078

 

 
73,078

Other comprehensive income, net of tax

 

 

 

 
4,167

 
4,167

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
77,245

Repurchase of 12,875 shares of Class B common stock

 
(13
)
 

 
(2,401
)
 

 
(2,414
)
Cash dividends ($0.60 per share)

 

 

 
(6,169
)
 

 
(6,169
)
Balance at June 30, 2012
$
8,644

 
$
1,627

 
$
143,766

 
$
1,838,160

 
$
(62,407
)
 
$
1,929,790

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Six Months Ended June 30
 
2012
 
2011
 
(thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
73,078

 
$
83,060

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
60,382

 
98,396

Deferred tax (benefit) expense
(6,845
)
 
(17,133
)
Change in current taxes payable
26,247

 
19,774

Depreciation
33,326

 
32,408

Change in accrued interest payable
(626
)
 
(5,755
)
Change in income earned not collected
(7,527
)
 
38,043

Gains on acquisitions

 
(63,474
)
Securities losses (gains)
42

 
545

Origination of loans held for sale
(275,140
)
 
(182,184
)
Proceeds from sale of loans
294,163

 
218,533

Gain on sale of loans
(2,858
)
 
(3,420
)
Loss on sale of other real estate
453

 
1,349

Net amortization (accretion) of premiums and discounts
(117,610
)
 
(83,552
)
FDIC receivable for loss share agreements
225,461

 
239,621

Net change in other assets
56,180

 
93,818

Net change in other liabilities
4,076

 
(7,836
)
Net cash provided by operating activities
362,802

 
462,193

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
468,503

 
260,861

Purchases of investment securities available for sale
(2,914,481
)
 
(632,041
)
Proceeds from maturities of investment securities held to maturity
244

 
433

Proceeds from maturities of investment securities available for sale
2,328,204

 
1,214,988

Proceeds from sales of investment securities available for sale
56

 
191,697

Net change in overnight investments
(549,561
)
 
(343,264
)
Proceeds from sale of other real estate
78,820

 
24,748

Additions to premises and equipment
(49,253
)
 
(32,574
)
Net cash received from acquisitions

 
974,043

Net cash (used) provided by investing activities
(637,468
)
 
1,658,891

FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(528,819
)
 
(617,419
)
Net change in demand and other interest-bearing deposits
753,191

 
(959,739
)
Net change in short-term borrowings
85,077

 
(227,642
)
Repayment of long-term obligations
(45,997
)
 
(224,915
)
Repurchase of common stock
(2,414
)
 
(7,575
)
Cash dividends paid
(6,169
)
 
(6,255
)
Net cash provided (used) by financing activities
254,869

 
(2,043,545
)
Change in cash and due from banks
(19,797
)
 
77,539

Cash and due from banks at beginning of period
590,801

 
460,178

Cash and due from banks at end of period
$
571,004

 
$
537,717

CASH PAYMENTS FOR:
 
 
 
Interest
$
51,513

 
$
85,197

Income taxes
21,453

 
17,349

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains (losses)
$
1,590

 
$
8,642

Change in fair value of cash flow hedge
(306
)
 
(308
)
Change in pension obligation
5,580

 
3,296

Transfers of loans to other real estate
80,413

 
77,780

Acquisitions:
 
 
 
Assets acquired

 
2,225,370

Liabilities assumed

 
2,161,896

Net assets acquired

 
63,474


See accompanying Notes to Consolidated Financial Statements.

3


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

Accounting Policies and Basis of Presentation
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’ 2011 Form 10-K. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2012. The reclassifications have no effect on shareholders’ equity or net income as previously reported. Fair values assigned to acquired assets are subject to refinement for one year after the closing date of the transaction as additional information regarding closing date fair values becomes available. There were no adjustments to previously reported acquisition gains during the second quarter of 2012.
Effective April 1, 2012, BancShares elected to change the threshold above which impaired loans not considered to be troubled debt restructurings are individually evaluated for impairment. Previously, impaired loans greater than $1,000 were subject to an individual impairment analysis; effective in the second quarter of 2012 impaired loans greater than $500 were subject to such an analysis. The threshold for analysis is applied to the total lending relationship to determine the loans to be evaluated. The impact of this change in estimation method was a reduction in the allowance for loan and lease losses of $2,615 at June 30, 2012.
Recently Adopted Accounting Policies and Other Regulatory Issues
In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 creates a uniform framework for applying fair value measurement principles for companies around the world. It eliminates differences between GAAP and International Financial Reporting Standards issued by the International Accounting Standards Board. New disclosures required by the guidance include: quantitative information about the significant unobservable inputs used for Level 3 measurements; a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; and a description of the company’s valuation processes. The updates in ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011, and all amendments are to be applied prospectively with any changes in measurements recognized in income in the period of adoption. The provisions of this update have affected BancShares' financial statement disclosures, but 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. Additionally, in December, 2011, the FASB issued Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12) which deferred the portion of ASU 2011-05 that relates to the presentation of reclassification adjustments. 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 previously utilized by BancShares. The updates in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and have been applied retrospectively. The provisions of these updates have affected BancShares' financial statement format, but had no 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 was allowed. Adoption of ASU 2011-08 has had no material impact on BancShares' financial condition, results of operations or liquidity.

Note B
Investments
The aggregate values of investment securities at June 30, 2012December 31, 2011, and June 30, 2011 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
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
878,692

 
$
149

 
$
156

 
$
878,685

Government agency
2,976,079

 
2,684

 
565

 
2,978,198

Corporate bonds
49,987

 
459

 

 
50,446

Residential mortgage-backed securities
699,468

 
9,022

 
845

 
707,645

Equity securities
841

 
17,397

 

 
18,238

State, county and municipal
1,026

 
10

 

 
1,036

Total investment securities available for sale
$
4,606,093

 
$
29,721

 
$
1,566

 
$
4,634,248

December 31, 2011
 
 
 
 
 
 
 
U. S. Treasury
$
887,041

 
$
808

 
$
30

 
$
887,819

Government agency
2,591,974

 
1,747

 
1,512

 
2,592,209

Corporate bonds
250,476

 
2,344

 

 
252,820

Residential mortgage-backed securities
298,402

 
9,165

 
346

 
307,221

Equity securities
939

 
14,374

 

 
15,313

State, county and municipal
1,026

 
16

 
1

 
1,041

Total investment securities available for sale
$
4,029,858

 
$
28,454

 
$
1,889

 
$
4,056,423

June 30, 2011
 
 
 
 
 
 
 
U. S. Treasury
$
1,286,978

 
$
2,309

 
$
5

 
$
1,289,282

Government agency
1,904,135

 
1,848

 
1,140

 
1,904,843

Corporate bonds
461,756

 
5,258

 
43

 
466,971

Residential mortgage-backed securities
327,531

 
6,403

 
451

 
333,483

Equity securities
965

 
17,644

 

 
18,609

State, county and municipal
1,037

 
19

 
3

 
1,053

Total investment securities available for sale
$
3,982,402

 
$
33,481

 
$
1,642

 
$
4,014,241

Investment securities held to maturity
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,578

 
$
163

 
$
27

 
$
1,714

December 31, 2011
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,822

 
$
184

 
$
26

 
$
1,980

June 30, 2011
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
2,098

 
$
206

 
$
26

 
$
2,278

 
 
 
 
 
 
 
 
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 issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.
The following table provides the expected maturity distribution for residential mortgage-backed securities and the contractual maturity distribution of other investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
 
Cost
 
Fair
Value
 
Cost
 
Fair
Value
 
Cost
 
Fair
Value
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,424,304

 
$
2,425,612

 
$
3,238,657

 
$
3,241,415

 
$
3,133,235

 
$
3,140,002

One through five years
1,953,001

 
1,954,357

 
548,459

 
549,351

 
549,912

 
551,647

Five through 10 years
71,914

 
72,533

 
90,605

 
91,087

 
99,834

 
100,387

Over 10 years
156,033

 
163,508

 
151,198

 
159,257

 
198,456

 
203,596

Equity securities
841

 
18,238

 
939

 
15,313

 
965

 
18,609

Total investment securities available for sale
$
4,606,093

 
$
4,634,248

 
$
4,029,858

 
$
4,056,423

 
$
3,982,402

 
$
4,014,241

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
1,470

 
$
1,568

 
$
12

 
$
11

 
$
8

 
$
6

Five through 10 years
4

 
4

 
1,699

 
1,820

 
1,973

 
2,110

Over 10 years
104

 
142

 
111

 
149

 
117

 
162

Total investment securities held to maturity
$
1,578

 
$
1,714

 
$
1,822

 
$
1,980

 
$
2,098

 
$
2,278

For each period presented, securities gains (losses) include the following:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Gross gains on sales of investment securities available for sale
$
5

 
$

 
$
5

 
$
156

Gross losses on sales of investment securities available for sale
(2
)
 
(96
)
 
(2
)
 
(701
)
Other than temporary impairment loss on equity securities

 

 
(45
)
 

Total securities gains (losses)
$
3

 
$
(96
)
 
$
(42
)
 
$
(545
)

The following table provides information regarding securities with unrealized losses as of June 30, 2012 and June 30, 2011:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
528,579

 
$
156

 
$

 
$

 
$
528,579

 
$
156

Government agency
818,772

 
565

 

 

 
818,772

 
565

Residential mortgage-backed securities
292,053

 
808

 
1,668

 
37

 
293,721

 
845

State, county and municipal

 

 
10

 

 
10

 

Total
$
1,639,404

 
$
1,529

 
$
1,678

 
$
37

 
$
1,641,082

 
$
1,566

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$

 
$

 
$
19

 
$
27

 
$
19

 
$
27

June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
50,307

 
$
5

 
$

 
$

 
$
50,307

 
$
5

Government agency
507,210

 
1,140

 

 

 
507,210

 
1,140

Corporate bonds
9,957

 
43

 

 

 
9,957

 
43

Residential mortgage-backed securities
80,866

 
401

 
2,016

 
50

 
82,882

 
451

State, county and municipal
529

 
3

 
10

 

 
539

 
3

Total
$
648,869

 
$
1,592

 
$
2,026

 
$
50

 
$
650,895

 
$
1,642

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$

 
$

 
$
29

 
$
26

 
$
29

 
$
26

Investment securities with an aggregate fair value of $1,697 have had continuous unrealized losses for more than twelve months as of June 30, 2012 with an aggregate unrealized loss of $64. These 24 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of June 30, 2012 December 31, 2011, or June 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 $2,432,638 at June 30, 2012, $2,588,704 at December 31, 2011 and $2,684,107 at June 30, 2011 were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.


4


Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
Covered loans
$
1,999,351

 
$
2,362,152

 
$
2,399,738

Noncovered loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
329,151

 
381,163

 
407,134

Commercial mortgage
5,149,696

 
5,104,993

 
4,861,457

Other commercial real estate
162,579

 
144,771

 
148,977

Commercial and industrial
1,722,761

 
1,764,407

 
1,805,812

Lease financing
320,703

 
312,869

 
303,104

Other
140,738

 
158,369

 
170,758

Total commercial loans
7,825,628

 
7,866,572

 
7,697,242

Non-commercial:
 
 
 
 
 
Residential mortgage
809,230

 
784,118

 
825,610

Revolving mortgage
2,268,210

 
2,296,306

 
2,303,687

Construction and land development
127,726

 
137,271

 
145,445

Consumer
431,664

 
497,370

 
556,870

Total non-commercial loans
3,636,830

 
3,715,065

 
3,831,612

Total noncovered loans and leases
11,462,458

 
11,581,637

 
11,528,854

Total loans and leases
$
13,461,809

 
$
13,943,789

 
$
13,928,592

 

 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
Covered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
86,056

 
$
186,389

 
$
272,445

 
$
117,603

 
$
221,270

 
$
338,873

 
$
83,844

 
$
254,806

 
$
338,650

Commercial mortgage
121,580

 
1,021,097

 
1,142,677

 
138,465

 
1,122,124

 
1,260,589

 
120,916

 
1,186,859

 
1,307,775

Other commercial real estate
29,199

 
86,588

 
115,787

 
33,370

 
125,024

 
158,394

 
35,347

 
138,259

 
173,606

Commercial and industrial
4,771

 
61,671

 
66,442

 
27,802

 
85,640

 
113,442

 
7,990

 
117,502

 
125,492

Lease financing

 

 

 

 
57

 
57

 
6

 
218

 
224

Other

 
1,228

 
1,228

 

 
1,330

 
1,330

 

 
1,675

 
1,675

Total commercial loans
241,606

 
1,356,973

 
1,598,579

 
317,240

 
1,555,445

 
1,872,685

 
248,103

 
1,699,319

 
1,947,422

Non-commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
55,585

 
266,468

 
322,053

 
46,130

 
281,438

 
327,568

 
19,635

 
334,398

 
354,033

Revolving mortgage
8,286

 
28,824

 
37,110

 
15,350

 
36,202

 
51,552

 
483

 
11,450

 
11,933

Construction and land development
31,767

 
7,527

 
39,294

 
78,108

 
27,428

 
105,536

 
42,056

 
40,121

 
82,177

Consumer
404

 
1,911

 
2,315

 
1,477

 
3,334

 
4,811

 
122

 
4,051

 
4,173

Total non-commercial loans
96,042

 
304,730

 
400,772

 
141,065

 
348,402

 
489,467

 
62,296

 
390,020

 
452,316

Total covered loans
$
337,648

 
$
1,661,703

 
$
1,999,351

 
$
458,305

 
$
1,903,847

 
$
2,362,152

 
$
310,399

 
$
2,089,339

 
$
2,399,738


5



At June 30, 2012, $2,451,827 in noncovered loans were pledged to secure debt obligations, compared to $2,492,644 at December 31, 2011 and $2,346,460 at June 30, 2011.

Description of segment and class risks
Each portfolio segment and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among the segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.
Commercial loans and leases
Each commercial loan or lease is centrally underwritten based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower’s businesses including the experience and background of the principals is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed. Common risks to each class of commercial loans include general economic conditions within the markets BancShares serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral. Due to the concentration of loans in the medical, dental, and related fields, BancShares is susceptible to risks that legislative and governmental actions will fundamentally alter the economic structure of the medical care industry in the United States.
In addition to these common risks for the majority of commercial loans and leases, additional risks are inherent in certain classes of commercial loans and leases.
Commercial construction and land development
Commercial construction and land development loans are highly dependent on the supply and demand for commercial real estate in the markets served by BancShares as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.
Commercial mortgage, commercial and industrial and lease financing
Commercial mortgage and commercial and industrial loans and lease financing are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for the loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Other commercial real estate
Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.
Non-commercial loans
Each non-commercial loan is centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit

6


currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BancShares serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to non-commercial loans.
In addition to these common risks for the majority of non-commercial loans, additional risks are inherent in certain classes of non-commercial loans.

Revolving mortgage
Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer
The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.
Residential mortgage and non-commercial construction and land development
Residential mortgage and non-commercial construction and land development loans are made to individuals and are typically secured by 1-4 family residential property, undeveloped land, and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. Non-commercial construction and land development projects can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.
Covered loans
The risks associated with covered loans are generally consistent with the risks identified for commercial and non-commercial loans and the classes of loans within those segments. An additional risk with respect to covered loans relates to the FDIC loss share agreements, specifically the ability to receive timely and full reimbursement from the FDIC for losses and related expenses that are believed to be covered by the loss share agreements. Further, these loans were underwritten by other institutions with weaker lending standards. Therefore, there is a significant risk that the loans are not adequately supported by the paying capacity of the borrower or the values of underlying collateral at the time of origination.
Credit quality indicators
Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial loans and leases, non-commercial loans and leases, and covered loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.
The credit quality indicators for commercial loans and leases and all covered loans and leases are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:
Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some

7


future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful – An asset classified doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.
Loss – Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.
Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of noncovered, ungraded loans at June 30, 2012 relate to business credit cards and tobacco buyout loans classified as commercial and industrial loans. Business credit card loans with an outstanding balance of $75,198 at June 30, 2012 are subject to automatic charge off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $42,090 at June 30, 2012 are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are to be made by the Commodity Credit Corporation which is part of the United States Department of Agriculture.
The credit quality indicators for noncovered, non-commercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.

8



The composition of the loans and leases outstanding at June 30, 2012 and December 31, 2011 and June 30, 2011 by credit quality indicator is provided below:
 
 
Commercial noncovered loans and leases
Grade:
Construction and
Land
Development
 
Commercial
Mortgage
 
Other
Commercial  Real Estate
 
Commercial  and
Industrial
 
Lease  Financing
 
Other
 
Total Commercial Loans Not
Covered by Loss Share
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
289,974

 
$
4,775,558

 
$
149,977

 
$
1,545,409

 
$
315,119

 
$
139,722

 
$
7,215,759

Special mention
10,353

 
221,194

 
6,220

 
23,323

 
2,740

 
257

 
264,087

Substandard
27,266

 
136,390

 
5,821

 
25,525

 
1,867

 
742

 
197,611

Doubtful
1,232

 
12,202

 
265

 
2,915

 
517

 

 
17,131

Ungraded
326

 
4,352

 
296

 
125,589

 
460

 
17

 
131,040

Total
$
329,151

 
$
5,149,696

 
$
162,579

 
$
1,722,761

 
$
320,703

 
$
140,738

 
$
7,825,628

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
332,742

 
$
4,749,254

 
$
130,586

 
$
1,556,651

 
$
306,225

 
$
157,089

 
$
7,232,547

Special mention
18,973

 
220,235

 
5,821

 
36,951

 
4,537

 
1,271

 
287,788

Substandard
28,793

 
129,391

 
7,794

 
28,240

 
2,107

 

 
196,325

Doubtful
17

 
1,164

 
377

 
643

 

 

 
2,201

Ungraded
638

 
4,949

 
193

 
141,922

 

 
9

 
147,711

Total
$
381,163

 
$
5,104,993

 
$
144,771

 
$
1,764,407

 
$
312,869

 
$
158,369

 
$
7,866,572

June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
362,202

 
$
4,505,768

 
$
134,686

 
$
1,590,496

 
$
294,134

 
$
170,133

 
$
7,057,419

Special mention
11,923

 
229,564

 
8,352

 
38,466

 
5,619

 
602

 
294,526

Substandard
32,494

 
116,267

 
5,398

 
27,881

 
3,124

 

 
185,164

Doubtful
515

 
6,435

 
401

 
804

 
182

 

 
8,337

Ungraded

 
3,423

 
140

 
148,165

 
45

 
23

 
151,796

Total
$
407,134

 
$
4,861,457

 
$
148,977

 
$
1,805,812

 
$
303,104

 
$
170,758

 
$
7,697,242

 
Non-commercial noncovered loans and leases
 
Residential
Mortgage