XOTC:FCNCB First Citizens BancShares Inc (DE) Class B Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XOTC:FCNCB Fair Value Estimate
Premium
XOTC:FCNCB Consider Buying
Premium
XOTC:FCNCB Consider Selling
Premium
XOTC:FCNCB Fair Value Uncertainty
Premium
XOTC:FCNCB Economic Moat
Premium
XOTC:FCNCB Stewardship
Premium
 

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 March 31, 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 May 10, 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
 
 
March 31*
2012
 
December 31#
2011
 
March 31*
2011
 
(thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
552,663

 
$
590,801

 
$
406,252

Overnight investments
752,334

 
434,975

 
585,286

Investment securities available for sale
4,457,739

 
4,056,423

 
4,202,016

Investment securities held to maturity
1,688

 
1,822

 
2,341

Loans held for sale
73,457

 
92,539

 
48,222

Loans and leases:
 
 
 
 
 
Covered under loss share agreements
2,183,869

 
2,362,152

 
2,658,134

Not covered under loss share agreements
11,489,529

 
11,581,637

 
11,392,351

Less allowance for loan and lease losses
272,500

 
270,144

 
232,597

Net loans and leases
13,400,898

 
13,673,645

 
13,817,888

Premises and equipment
864,466

 
854,476

 
839,463

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
142,418

 
148,599

 
137,479

Not covered under loss share agreements
48,092

 
50,399

 
49,584

Income earned not collected
52,406

 
42,216

 
98,501

Receivable from FDIC for loss share agreements
410,351

 
539,511

 
624,322

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
6,076

 
7,032

 
9,265

Other assets
278,415

 
286,430

 
244,251

Total assets
$
21,143,628

 
$
20,881,493

 
$
21,167,495

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
4,572,300

 
$
4,331,706

 
$
4,164,449

Interest-bearing
13,187,192

 
13,245,568

 
13,647,287

Total deposits
17,759,492

 
17,577,274

 
17,811,736

Short-term borrowings
677,993

 
615,222

 
666,417

Long-term obligations
649,818

 
687,599

 
801,081

Other liabilities
164,202

 
140,270

 
100,047

Total liabilities
19,251,505

 
19,020,365

 
19,379,281

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

 
8,644

 
8,757

Class B - $1 par value (2,000,000 shares authorized; 1,631,424 shares issued and outstanding at March 31, 2012; 1,639,812 shares issued and outstanding at December 31, 2011; 1,677,675 shares issued and outstanding at March 31, 2011)
1,631

 
1,640

 
1,678

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,804,498

 
1,773,652

 
1,673,920

Accumulated other comprehensive loss
(66,416
)
 
(66,574
)
 
(39,907
)
Total shareholders’ equity
1,892,123

 
1,861,128

 
1,788,214

Total liabilities and shareholders’ equity
$
21,143,628

 
$
20,881,493

 
$
21,167,495

 
* Unaudited
# Derived from 2011 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.

3


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended March 31
 
2012
 
2011
 
(thousands, except share and per share data, unaudited)
Interest income
 
 
 
Loans and leases
$
238,137

 
$
231,453

Investment securities:
 
 
 
U. S. Treasury
739

 
3,210

Government agency
4,332

 
5,047

Residential mortgage-backed securities
1,889

 
2,653

Corporate bonds
1,199

 
2,176

State, county and municipal
12

 
13

Other
131

 
259

Total investment securities interest and dividend income
8,302

 
13,358

Overnight investments
313

 
389

Total interest income
246,752

 
245,200

Interest expense
 
 
 
Deposits
16,472

 
29,820

Short-term borrowings
1,391

 
1,697

Long-term obligations
7,937

 
9,696

Total interest expense
25,800

 
41,213

Net interest income
220,952

 
203,987

Provision for loan and lease losses
30,715

 
44,419

Net interest income after provision for loan and lease losses
190,237

 
159,568

Noninterest income
 
 
 
Gains on acquisitions

 
63,474

Cardholder and merchant services
22,450

 
26,780

Service charges on deposit accounts
14,846

 
15,790

Wealth management services
13,755

 
13,288

Fees from processing services
8,562

 
7,246

Securities gains (losses)
(45
)
 
(449
)
Other service charges and fees
3,441

 
5,957

Mortgage income
4,611

 
2,315

Insurance commissions
2,756

 
2,534

ATM income
1,455

 
1,590

Adjustments for FDIC receivable for loss share agreements
(26,796
)
 
(10,379
)
Other
1,908

 
1,434

Total noninterest income
46,943

 
129,580

Noninterest expense
 
 
 
Salaries and wages
75,684

 
75,804

Employee benefits
20,249

 
19,649

Occupancy expense
18,607

 
18,313

Equipment expense
18,166

 
17,391

FDIC insurance expense
3,057

 
8,225

Foreclosure-related expenses
4,621

 
5,488

Other
42,947

 
45,158

Total noninterest expense
183,331

 
190,028

Income before income taxes
53,849

 
99,120

Income taxes
18,354

 
37,360

Net income
$
35,495

 
$
61,760

Average shares outstanding
10,283,842

 
10,434,453

Net income per share
$
3.45

 
$
5.92

See accompanying Notes to Consolidated Financial Statements.

4



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

 
Three Months Ended March 31
 
2012
 
2011
 
(thousands, unaudited)
Net income
$
35,495

 
$
61,760

 
 
 
 
Other comprehensive income (loss)
 
 
 
Unrealized gains on securities:
 
 
 
Change in unrealized securities gains arising during period
(2,898
)
 
(9,139
)
Deferred tax benefit (expense)
1,123

 
3,447

Reclassification adjustment for losses (gains) included in income before income taxes

 
449

Deferred tax expense (benefit)

 
(177
)
Total change in unrealized gains on securities, net of tax
(1,775
)
 
(5,420
)
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
Change in unrecognized loss on cash flow hedges
1,138

 
3,175

Deferred tax benefit (expense)
(450
)
 
(1,254
)
Reclassification adjustment for gains (losses) included in income before income taxes
(749
)
 
(1,458
)
Deferred tax benefit (expense)
296

 
576

Total change in unrecognized loss on cash flow hedges, net of tax
235

 
1,039

 
 
 
 
Change in pension obligation:
 
 
 
Change in pension obligation
2,790

 
1,648

Deferred tax benefit (expense)
(1,092
)
 
(645
)
Total change in pension obligation, net of tax
1,698

 
1,003

 
 
 
 
Other comprehensive income (loss)
158

 
(3,378
)
 
 
 
 
Total comprehensive income
$
35,653

 
$
58,382

 
 
 
 

See accompanying Notes to Consolidated Financial Statements.


5


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

 

 

 
61,760

 

 
61,760

Other comprehensive loss, net of tax

 

 

 

 
(3,378
)
 
(3,378
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
58,382

Cash dividends ($0.30 per share)

 

 

 
(3,130
)
 

 
(3,130
)
Balance at March 31, 2011
$
8,757

 
$
1,678

 
$
143,766

 
$
1,673,920

 
$
(39,907
)
 
$
1,788,214

Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
35,495

 

 
35,495

Other comprehensive income, net of tax

 

 

 

 
158

 
158

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
35,653

Repurchase of 8,388 shares of Class B common stock

 
(9
)
 

 
(1,564
)
 

 
(1,573
)
Cash dividends ($0.30 per share)

 

 

 
(3,085
)
 

 
(3,085
)
Balance at March 31, 2012
$
8,644

 
$
1,631

 
$
143,766

 
$
1,804,498

 
$
(66,416
)
 
$
1,892,123

See accompanying Notes to Consolidated Financial Statements.


6


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
Three months ended
 
March 31,
 
2012
 
2011
 
(thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
35,495

 
$
61,760

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
30,715

 
44,419

Deferred tax (benefit) expense
(5,692
)
 
1,155

Change in current taxes payable
22,857

 
30,455

Depreciation
16,620

 
16,114

Change in accrued interest payable
(2,233
)
 
(9,074
)
Change in income earned not collected
(10,190
)
 
(9,582
)
Gains on acquisitions

 
(63,474
)
Securities losses
45

 
449

Origination of loans held for sale
(135,897
)
 
(87,719
)
Proceeds from sale of loans
158,391

 
130,641

Gain on sale of loans
(3,412
)
 
(2,211
)
Loss on sale of other real estate
1,495

 
2,074

Net amortization (accretion) of premiums and discounts
(60,822
)
 
(34,455
)
FDIC receivable for loss share agreements
130,722

 
128,845

Net change in other assets
23,564

 
143,341

Net change in other liabilities
6,487

 
(14,193
)
Net cash provided by operating activities
208,145

 
338,545

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
277,719

 
119,185

Purchases of investment securities available for sale
(1,681,584
)
 
(141,592
)
Proceeds from maturities of investment securities held to maturity
134

 
191

Proceeds from maturities of investment securities available for sale
1,275,014

 
522,893

Proceeds from sales of investment securities available for sale

 
191,697

Net change in overnight investments
(317,359
)
 
(186,896
)
Proceeds from sale of other real estate
23,853

 
18,067

Additions to premises and equipment
(26,610
)
 
(12,832
)
Net cash received from acquisitions

 
961,862

Net cash provided (used) by investing activities
(448,833
)
 
1,472,575

FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(306,338
)
 
(367,974
)
Net change in demand and other interest-bearing deposits
488,556

 
(1,060,414
)
Net change in short-term borrowings
62,771

 
(217,033
)
Repayment of long-term obligations
(37,781
)
 
(216,495
)
Repurchase of common stock
(1,573
)
 

Cash dividends paid
(3,085
)
 
(3,130
)
Net cash provided (used) by financing activities
202,550

 
(1,865,046
)
Change in cash and due from banks
(38,138
)
 
(53,926
)
Cash and due from banks at beginning of period
590,801

 
460,178

Cash and due from banks at end of period
$
552,663

 
$
406,252

CASH PAYMENTS FOR:
 
 
 
Interest
$
28,033

 
$
50,287

Income taxes
84

 
9,100

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains (losses)
$
(2,898
)
 
$
(9,339
)
Change in fair value of cash flow hedge
389

 
1,717

Change in pension obligation
2,790

 
1,648

Transfers of loans to other real estate
26,840

 
46,929

Acquisitions:
 
 
 
Assets acquired

 
2,225,370

Liabilities assumed

 
2,161,896

Net assets acquired

 
63,474


See accompanying Notes to Consolidated Financial Statements.

7


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 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. There were no adjustments to previously reported acquisition gains during the first quarter of 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

8


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 March 31, 2012December 31, 2011, and March 31, 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
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
1,065,035

 
$
306

 
$
305

 
$
1,065,036

Government agency
2,859,197

 
1,228

 
5,040

 
2,855,385

Corporate bonds
225,214

 
1,214

 

 
226,428

Residential mortgage-backed securities
282,706

 
8,393

 
191

 
290,908

Equity securities
894

 
18,049

 

 
18,943

State, county and municipal
1,026

 
14

 
1

 
1,039

Total investment securities available for sale
$
4,434,072

 
$
29,204

 
$
5,537

 
$
4,457,739

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

March 31, 2011
 
 
 
 
 
 
 
U. S. Treasury
$
1,464,513

 
$
2,691

 
$
234

 
$
1,466,970

Government agency
2,115,575

 
352

 
17,394

 
2,098,533

Corporate bonds
453,390

 
6,327

 

 
459,717

Residential mortgage-backed securities
152,483

 
3,971

 
532

 
155,922

Equity securities
965

 
18,656

 

 
19,621

State, county and municipal
1,238

 
19

 
4

 
1,253

Total investment securities available for sale
$
4,188,164

 
$
32,016

 
$
18,164

 
$
4,202,016

Investment securities held to maturity
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,688

 
$
183

 
$
27

 
$
1,844

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

 
$
184

 
$
26

 
$
1,980

March 31, 2011
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
2,341

 
$
217

 
$
21

 
$
2,537

 
 
 
 
 
 
 
 
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

9


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 maturity information for investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

 
March 31, 2012
 
December 31, 2011
 
March 31, 2011
 
Cost
 
Fair
Value
 
Cost
 
Fair
Value
 
Cost
 
Fair
Value
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,750,247

 
$
2,748,710

 
$
3,238,657

 
$
3,241,415

 
$
2,966,749

 
$
2,958,654

One through five years
1,469,876

 
1,469,236

 
548,459

 
549,351

 
895,234

 
895,807

Five through 10 years
67,229

 
67,683

 
90,605

 
91,087

 
21,099

 
21,099

Over 10 years
145,826

 
153,167

 
151,198

 
159,257

 
304,117

 
306,835

Equity securities
894

 
18,943

 
939

 
15,313

 
965

 
19,621

Total investment securities available for sale
$
4,434,072

 
$
4,457,739

 
$
4,029,858

 
$
4,056,423

 
$
4,188,164

 
$
4,202,016

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
379

 
$
393

 
$
12

 
$
11

 
$
5

 
$
3

Five through 10 years
1,201

 
1,306

 
1,699

 
1,820

 
2,214

 
2,368

Over 10 years
108

 
145

 
111

 
149

 
122

 
166

Total investment securities held to maturity
$
1,688

 
$
1,844

 
$
1,822

 
$
1,980

 
$
2,341

 
$
2,537

For each period presented, securities gains (losses) include the following:
 
 
Three months ended March 31,
 
2012
 
2011
Gross gains on sales of investment securities available for sale
$

 
$
156

Gross losses on sales of investment securities available for sale

 
(605
)
Other that temporary impairment loss on equity securities
(45
)
 

Total securities losses
$
(45
)
 
$
(449
)


10


The following table provides information regarding securities with unrealized losses as of March 31, 2012 and March 31, 2011:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
579,673

 
$
305

 
$

 
$

 
$
579,673

 
$
305

Government agency
2,143,742

 
5,040

 

 

 
2,143,742

 
5,040

Residential mortgage-backed securities
28,595

 
156

 
1,113

 
35

 
29,708

 
191

State, county and municipal
127

 
1

 
10

 

 
137

 
1

Total
$
2,752,137

 
$
5,502

 
$
1,123

 
$
35

 
$
2,753,260

 
$
5,537

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

 
$

 
$
20

 
$
27

 
$
20

 
$
27

March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
200,561

 
$
234

 
$

 
$

 
$
200,561

 
$
234

Government agency
1,937,968

 
17,394

 

 

 
1,937,968

 
17,394

Residential mortgage-backed securities
33,644

 
503

 
462

 
29

 
34,106

 
532

State, county and municipal
528

 
4

 
10

 

 
538

 
4

Total
$
2,172,701

 
$
18,135

 
$
472

 
$
29

 
$
2,173,173

 
$
18,164

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

 
$

 
$
19

 
$
21

 
$
19

 
$
21

Investment securities with an aggregate fair value of $1,143 have had continuous unrealized losses for more than twelve months as of March 31, 2012 with an aggregate unrealized loss of $62. These 19 investments include residential mortgage-backed and state, county and municipal securities. None of the unrealized losses identified as of March 31, 2012 December 31, 2011, or March 31, 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 $2,540,463 at March 31, 2012, $2,588,704 at December 31, 2011 and $2,604,467 at March 31, 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.


11


Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
March 31, 2012
 
December 31, 2011
 
March 31, 2011
Covered loans
$
2,183,869

 
$
2,362,152

 
$
2,658,134

Noncovered loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
346,557

 
381,163

 
373,769

Commercial mortgage
5,127,948

 
5,104,993

 
4,763,393

Other commercial real estate
150,316

 
144,771

 
147,150

Commercial and industrial
1,739,724

 
1,764,407

 
1,792,042

Lease financing
315,704

 
312,869

 
295,994

Other
149,792

 
158,369

 
174,370

Total commercial loans
7,830,041

 
7,866,572

 
7,546,718

Non-commercial:
 
 
 
 
 
Residential mortgage
793,612

 
784,118

 
808,650

Revolving mortgage
2,282,138

 
2,296,306

 
2,299,668

Construction and land development
132,677

 
137,271

 
145,864

Consumer
451,061

 
497,370

 
591,451

Total non-commercial loans
3,659,488

 
3,715,065

 
3,845,633

Total noncovered loans and leases
11,489,529

 
11,581,637

 
11,392,351

Total loans and leases
$
13,673,398

 
$
13,943,789

 
$
14,050,485

 

 
March 31, 2012
 
December 31, 2011
 
March 31, 2011
 
Impaired at
acquisition
date
 
All other
acquired
loans
 
Total
 
Impaired at
acquisition
date
 
All other
acquired
loans
 
Total
 
Impaired at
acquisition
date
 
All other
acquired
loans
 
Total
Covered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
100,736

 
$
209,865

 
$
310,601

 
$
117,603

 
$
221,270

 
$
338,873

 
$
112,271

 
$
290,045

 
$
402,316

Commercial mortgage
122,876

 
1,072,665

 
1,195,541

 
138,465

 
1,122,124

 
1,260,589

 
141,869

 
1,290,763

 
1,432,632

Other commercial real estate
31,727

 
113,251

 
144,978

 
33,370

 
125,024

 
158,394

 
36,338

 
126,967

 
163,305

Commercial and industrial
17,397

 
75,864

 
93,261

 
27,802

 
85,640

 
113,442

 
31,124

 
139,917

 
171,041

Lease financing

 
45

 
45

 

 
57

 
57

 
22

 
249

 
271

Other

 
1,283

 
1,283

 

 
1,330

 
1,330

 

 
1,729

 
1,729

Total commercial loans
272,736

 
1,472,973

 
1,745,709

 
317,240

 
1,555,445

 
1,872,685

 
321,624

 
1,849,670

 
2,171,294

Non-commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
46,905

 
251,633

 
298,538

 
46,130

 
281,438

 
327,568

 
19,846

 
327,547

 
347,393

Revolving mortgage
14,125

 
35,891

 
50,016

 
15,350

 
36,202

 
51,552

 
7,341

 
16,068

 
23,409

Construction and land development
56,722

 
28,833

 
85,555

 
78,108

 
27,428

 
105,536

 
56,829

 
54,596

 
111,425

Consumer
1,453

 
2,598

 
4,051

 
1,477

 
3,334

 
4,811

 
140

 
4,473

 
4,613

Total non-commercial loans
119,205

 
318,955

 
438,160

 
141,065

 
348,402

 
489,467

 
84,156

 
402,684

 
486,840

Total covered loans
$
391,941

 
$
1,791,928

 
$
2,183,869

 
$
458,305

 
$
1,903,847

 
$
2,362,152

 
$
405,780

 
$
2,252,354

 
$
2,658,134


12



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

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

13


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

14


future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful – An asset classified doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.
Loss – Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.
Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of noncovered, ungraded loans at March 31, 2012 relate to business credit cards and tobacco buyout loans. Business credit card loans are subject to automatic charge off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $41,580 at March 31, 2012 are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are to be made by the Commodity Credit Corporation which is part of the United States Department of Agriculture.
The credit quality indicators for noncovered, non-commercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.

15



The composition of the loans and leases outstanding at March 31, 2012 and December 31, 2011 and March 31, 2011 by credit quality indicator is provided below:
 
 
Commercial noncovered loans and leases
Grade:
Construction and
Land
Development
 
Commercial
Mortgage
 
Other
Commercial  Real Estate
 
Commercial  and
Industrial
 
Lease  Financing
 
Other
 
Total Commercial Loans Not
Covered by Loss Share
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
303,018

 
$
4,744,063

 
$
136,776

 
$
1,554,112

 
$
309,681

 
$
147,767

 
$
7,195,417

Special mention
20,097

 
243,495

 
6,805

 
35,497

 
3,336

 
2,018

 
311,248

Substandard
21,297

 
130,815

 
6,068

 
27,057

 
2,453

 

 
187,690

Doubtful
1,821

 
6,588

 
365

 
1,676

 

 

 
10,450

Ungraded
324

 
2,987

 
302

 
121,382

 
234

 
7

 
125,236

Total
$
346,557

 
$
5,127,948

 
$
150,316

 
$
1,739,724

 
$
315,704

 
$
149,792

 
$
7,830,041

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
332,742

 
$
4,749,254

 
$
130,586

 
$
1,556,651

 
$
306,225

 
$
157,089

 
$
7,232,547

Special mention
18,973

 
220,235

 
5,821

 
36,951

 
4,537

 
1,271

 
287,788

Substandard
28,793

 
129,391

 
7,794

 
28,240

 
2,107

 

 
196,325

Doubtful
17

 
1,164

 
377

 
643

 

 

 
2,201

Ungraded
638

 
4,949

 
193

 
141,922

 

 
9

 
147,711

Total
$
381,163

 
$
5,104,993

 
$
144,771

 
$
1,764,407

 
$
312,869

 
$
158,369

 
$
7,866,572

March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
316,395

 
$
4,403,652

 
$
133,931

 
$
1,571,193

 
$
285,699

 
$
173,025

 
$
6,883,895

Special mention
22,416

 
232,019

 
7,415

 
40,023

 
6,228

 
1,299

 
309,400

Substandard
32,864

 
119,229

 
5,271

 
30,992

 
3,796

 
12

 
192,164

Doubtful
2,094

 
6,004

 
401

 
1,182

 
271

 

 
9,952

Ungraded

 
2,489

 
132

 
148,652

 

 
34

 
151,307

Total
$
373,769

 
$
4,763,393

 
$
147,150

 
$
1,792,042

 
$
295,994

 
$
174,370

 
$
7,546,718

 
Non-commercial noncovered loans and leases
 
Residential
Mortgage
 
Revolving
Mortgage
 
Construction
and Land
Development
 
Consumer
 
Total Non-commercial
Noncovered Loans
March 31, 2012
 
 
 
 
 
 
 
 
 
Current
$
763,411

 
$
2,274,091

 
$
130,561

 
$
446,421

 
$
3,614,484

31-60 days past due
14,001

 
2,349

 
808

 
1,885

 
19,043

61-90 days past due
2,812

 
1,212

 
446

 
1,028

 
5,498

Over 90 days past due
13,388

 
4,486

 
862

 
1,727

 
20,463

Total
$
793,612

 
$
2,282,138

 
$
132,677

 
$
451,061

 
$
3,659,488

December 31, 2011
 
 
 
 
 
 
 
 
 
Current
$
757,113

 
$
2,286,511

 
$
135,774

 
491,142

 
$
3,670,540

31-60 days past due
11,790

 
3,437

 
798

 
3,514

 
19,539

61-90 days past due
2,686

 
2,042

 
127

 
1,271

 
6,126

Over 90 days past due
12,529

 
4,316

 
572

 
1,443

 
18,860

Total
$
784,118

 
$
2,296,306

 
$
137,271

 
$
497,370

 
$
3,715,065

March 31, 2011
 
 
 
 
 
 
 
 
 
Current
$
777,982

 
$
2,287,726

 
$
142,423

 
$
580,544

 
$
3,788,675

31-60 days past due
16,439

 
5,462

 
1,116

 
6,911

 
29,928

61-90 days past due
2,207

 
3,285

 
364

 
2,216

 
8,072

Over 90 days past due
12,022

 
3,195

 
1,961

 
1,780

 
18,958

Total
$
808,650

 
$
2,299,668

 
$
145,864

 
$
591,451

 
$
3,845,633

 

16


 
Covered loans
Grade:
Construction
and Land
Development -
Commercial
 
Commercial
Mortgage
 
Other
Commercial
Real Estate
 
Commercial
and
Industrial
 
Lease
Financing
 
Residential
Mortgage
 
Revolving
Mortgage
 
Construction
and Land
Development
Non-commercial
 
Consumer
and Other
 
Total Covered
Loans
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
31,445

 
$
392,233

 
$
56,689

 
$
31,768

 
$
45

 
$
173,640

 
$
35,684

 
$
7,020

 
$
2,478

 
$
731,002

Special mention
89,243

 
335,020

 
26,736

 
21,376

 

 
18,054

 
802

 
14,263

 
546

 
506,040

Substandard
86,750

 
382,134

 
51,918

 
24,905

 

 
70,545

 
11,153

 
53,919

 
1,082

 
682,406

Doubtful
99,747

 
85,993

 
9,635

 
15,212

 

 
9,934

 
2,377

 
10,353

 
816

 
234,067

Ungraded
3,416

 
161