PORTFOLIO LOANS COVERED BY LOSS SHARE ("Covered loans")

Purchased loans acquired in our FDIC-assisted transactions, are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income, prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.

Inputs to the determination of expected cash flows include contractual cash flows, cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix. The transition matrix is a matrix of probability values that specifies the probability of a loan pool transitioning into a loss given its delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) at the remeasurement date. Loss severity factors are based upon industry data along with actual charge-off data within the loan pools and recovery lags are based upon industry data along with experience with the collateral within the loan pools.

Covered loans are also subject to the Company’s internal and external credit review and are risk rated using the same criteria as loans originated by the Company. However, risk ratings are not always a clear indicator of the Company's losses on acquired loans as a majority of the losses are recoverable from the FDIC under the loss-sharing agreements.

Below is a summary of Covered loans by category at September 30, 2012, and December 31, 2011:



	September 30, 2012			December 31, 2011
(in thousands)	Weighted- Average Risk Rating	Recorded Investment Covered Loans		Weighted- Average Risk Rating	Recorded Investment Covered Loans
Real Estate Loans:
Construction and Land Development	7.13	$	38,620	7.22	$	65,990
Commercial real estate - Investor Owned	6.00	64,287		6.12	75,093
Commercial real estate - Owner Occupied	6.60	44,307		6.03	63,101
Residential real estate	5.67	46,426		4.81	56,828
Total real estate loans		$	193,640		$	261,012
Commercial and industrial	6.93	26,209		6.61	36,423
Consumer & other	4.33	1,584		4.14	3,175
Portfolio Loans		$	221,433		$	300,610

Outstanding balances on purchased loans from the FDIC were $338.2 million and $496.2 million as of September 30, 2012, and December 31, 2011, respectively.

Below is a summary of the activity in the allowance for loan losses for Covered loans at September 30, 2012, and

September 30, 2011:



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2012			2011			2012			2011
Balance at beginning of period	$	1,889		$	—		$	1,635		$	—
Provision charged to expense	10,889			2,672			13,380			2,947
Loans charged off	(1,627		)	(103		)	(3,689		)	(378		)
Recoveries	10			—			16			—
Other	(59		)	—			(240		)	—
Balance at end of period	$	11,102		$	2,569		$	11,102		$	2,569

The aging of the recorded investment in past due Covered loans by portfolio class and category at September 30, 2012, and December 31, 2011, is shown below.



	September 30, 2012
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial & Industrial	$	3,325	$	4,378	$	7,703	$	18,506	$	26,209
Real Estate:
Commercial - Owner Occupied	—		6,590		6,590		37,717		44,307
Commercial - Investor Owned	375		2,180		2,555		61,732		64,287
Construction and Land Development	1,884		21,830		23,714		14,906		38,620
Residential	609		2,634		3,243		43,183		46,426
Consumer & Other	11		2		13		1,571		1,584
Total	$	6,204	$	37,614	$	43,818	$	177,615	$	221,433



	December 31, 2011
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial & Industrial	$	879	$	9,867	$	10,746	$	25,677	$	36,423
Real Estate:
Commercial - Owner Occupied	1,438		9,684		11,122		51,979		63,101
Commercial - Investor Owned	2,530		7,021		9,551		65,542		75,093
Construction and Land Development	2,842		28,745		31,587		34,403		65,990
Residential	1,634		3,341		4,975		51,853		56,828
Consumer & Other	236		7		243		2,932		3,175
Total	$	9,559	$	58,665	$	68,224	$	232,386	$	300,610

The accretable yield is accreted into interest income over the estimated life of the acquired loans using the effective

yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.

Changes in the accretable yield for purchased loans were as follows for the nine months ended September 30, 2012, and 2011:



(in thousands)	September 30, 2012			September 30, 2011
Balance at beginning of period	$	63,335		$	46,460
Additions	—			40,380
Accretion	(36,225		)	(15,337		)
Reclassifications from nonaccretable difference	74,758			5,160
Other	(6,423		)	(34,228		)
Balance at end of period	$	95,445		$	42,435

Other changes in the accretable yield include the impact of cash flow timing estimates, changes in variable interest rates, and other non-credit related adjustments. For the three months ended and nine months ended September 30, 2012, the Bank received payments of $15.2 million and $85.2 million, respectively, for loss share claims under the terms of the FDIC shared-loss agreements.