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

Purchased loans acquired in a business combination, including loans purchased 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 generally remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.

The Company updates its cash flow projections for credit-impaired acquired loans, including loans acquired from the FDIC, on a quarterly basis. Assumptions utilized in this process include projections related to probability of default, loss severity, prepayment, extensions and recovery lag. Projections related to probability of default and prepayment are calculated utilizing a loan migration analysis. The loan migration analysis is a matrix of probability that specifies the probability of a loan pool transitioning into a particular delinquency or liquidation state given its current state at the re-measurement date. Loss severity factors are based upon industry data.

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 December 31, 2012 and 2011:



	December 31, 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	7.06	$	30,537	7.22	$	65,990
Commercial real estate - Investor Owned	6.08	57,602		6.12	75,093
Commercial real estate - Owner Occupied	6.65	47,140		6.03	63,101
Residential real estate	5.68	42,531		4.81	56,828
Total real estate loans		$	177,810		$	261,012
Commercial and industrial	6.57	22,034		6.61	36,423
Consumer & other	4.19	1,274		4.14	3,175
Portfolio Loans		$	201,118		$	300,610

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



	December 31, 2012
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial & Industrial	$	319	$	3,925	$	4,244	$	17,790	$	22,034
Real Estate:
Commercial - Owner Occupied	887		5,144		6,031		41,109		47,140
Commercial - Investor Owned	308		665		973		56,629		57,602
Construction and Land Development	36		13,532		13,568		16,969		30,537
Residential	1,232		2,907		4,139		38,392		42,531
Consumer & Other	1		2		3		1,271		1,274
Total	$	2,783	$	26,175	$	28,958	$	172,160	$	201,118



	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.

Changes in the accretable yield for purchased loans were as follows for the years ended December 31, 2012, and 2011:



(in thousands)	December 31, 2012			December 31, 2011
Balance at beginning of period	$	63,335		$	46,460
Additions	—			40,380
Accretion	(47,802		)	(23,792		)
Reclassifications from nonaccretable difference	68,817			9,137
Other	(5,582		)	(8,850		)
Balance at end of period	$	78,768		$	63,335

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. Outstanding balances on purchased loans from the FDIC were $301.2 million and $496.2 million as of December 31, 2012, and December 31, 2011, respectively. For the years ended December 31, 2012 and 2011, the Bank received payments of $91.6 million and $41.4 million, respectively, for loss share claims under the terms of the FDIC shared-loss agreements.

Due to continued favorable projections in expected cash flows, the Company now anticipates it will be required to pay the FDIC at the end of one of its loss share agreements. Accordingly, a contingent liability and related expense of $575,000 has been recorded through Other Noninterest expense. See FDIC Loss Share Receivable and Clawback Liability in Note 1 - Summary of Significant Accounting Policies for additional information.