ACQUISITION

On July 28, 2011 (the acquisition date), the Corporation acquired all the outstanding common stock of Sterling Bancshares, Inc. (Sterling), a bank holding company headquartered in Houston, Texas, in a stock-for-stock transaction. Sterling common shareholders and holders of outstanding Sterling phantom stock units received 0.2365 shares of the Corporation's common stock in exchange for each share of Sterling common stock or phantom stock unit. As a result, the Corporation issued approximately 24 million common shares with an acquisition date fair value of $793 million, based on the Corporation's closing stock price of $32.67 on July 27, 2011. Based on the merger agreement, outstanding and unexercised options to purchase Sterling common stock were converted into fully vested options to purchase common stock of the Corporation. In addition, outstanding warrants to purchase Sterling common stock were converted into warrants to purchase common stock of the Corporation. Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was $803 million. The acquisition of Sterling significantly expanded the Corporation's presence in Texas, particularly in the Houston and San Antonio areas.

The assets and liabilities of Sterling were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The purchase price allocation may change as additional information becomes available and additional analyses are completed. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date.



(dollar amounts in millions)	Initial Allocation
Fair value of consideration paid:
Common stock issued (24,283,711 shares)	$	793
Warrants issued	7
Stock options issued	3
Total consideration paid	803
Fair value of identifiable assets acquired:
Cash and cash equivalents	721
Investment securities available-for-sale	1,492
Total loans	2,093
Premises and equipment	34
Core deposit intangible	34
Accrued income and other assets	304
Total identifiable assets acquired	4,678
Fair value of liabilities assumed:
Deposits	4,029
Short-term borrowings	22
Medium- and long-term debt	262
Accrued expenses and other liabilities	47
Total liabilities assumed	4,360
Fair value of net identifiable assets acquired	318
Goodwill resulting from acquisition	$	485

Initial goodwill of $485 million was recorded after adjusting for the fair value of net identifiable assets acquired. The goodwill resulting from the acquisition represents the inherent long-term value expected from the business opportunities created from combining Sterling with the Corporation. None of the goodwill recognized will be deductible for income tax purposes. For further information regarding goodwill, refer to Note 8.

The core deposit intangible is being amortized on an accelerated basis over the estimated life, currently expected to be approximately 10 years.

The results of operations acquired in the Sterling transaction have been included in the Corporation’s financial results since July 28, 2011. The following table discloses the impact of Sterling (excluding the impact of acquisition-related merger and restructuring charges discussed below) since the acquisition date through December 31, 2011. The table also presents pro forma results had the acquisition taken place on January 1, 2010. The pro forma financial information combines the historical results of Sterling and the Corporation and includes the estimated impact of purchase accounting adjustments. The purchase accounting adjustments reflect the impact of recording the acquired loans at fair value, including the estimated accretion of the purchase discount on the loan portfolio and related adjustments to Sterling’s provision for loan losses. Accretion estimates were based on the acquisition date purchase discount on the loan portfolio, as it was not practicable to determine the amount of discount that would have been recorded based on economic conditions that existed on January 1, 2010. The pro forma results also include adjustments to reflect changes to Sterling's financial structure. The pro forma results do not include expected operating cost savings as a result of the acquisition. Further, certain expected acquisition-related merger and restructuring charges are also not reflected in the pro forma results. Pro forma results for 2011 include the acquisition-related merger and restructuring charges incurred during the period. The pro forma results are not indicative of what would have occurred had the acquisition taken place on the indicated date.



	Sterling		Pro Forma Combined
(in millions)	Actual From Acquisition Date Through		Years Ended December 31
(unaudited)	December 31, 2011		2011		2010
Total revenue (a)	$	132	$	2,544	$	2,731
Net income	55		364		346

(a) Net interest income and noninterest income.

The Corporation committed to a restructuring plan in connection with the completion of the acquisition of Sterling. The restructuring plan, which is expected to be substantially completed by December 31, 2012, is intended to streamline operations across the combined organization. The restructuring plan is expected to result in cumulative costs of approximately $115 million ($73 million, after-tax) through the end of the plan, primarily encompassing facilities and contract termination charges, systems integration and related charges, severance and other employee-related charges, and transaction-related costs. The Corporation recognized acquisition-related expenses of $75 million ($47 million after-tax) for the year ended December 31, 2011, recorded in “merger and restructuring charges” in the consolidated statements of income. Merger and restructuring charges include the incremental costs to integrate the operations of Sterling and do not reflect the costs of the fully integrated combined organization. Merger and restructuring charges comprised the following for the year ended December 31, 2011.



	Total Expected		Total Incurred To-Date
(in millions)	Per Plan		Year Ended December 31, 2011
Facilities and contract termination charges	$	55	$	16
Systems integration and related charges	27		26
Severance and other employee-related charges	25		25
Transaction costs	8		8
Total merger and restructuring charges	$	115	$	75

The following table presents the changes in restructuring reserves for the year ended December 31, 2011.



(in millions)	Year Ended December 31, 2011
Balance at beginning of period	$	—
Merger and restructuring charges	75
Payments	(49		)
Balance at December 31, 2011	$	26

In connection with the acquisition of Sterling, the Corporation acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. For further information regarding the Corporation's accounting policies for loans acquired in business combinations, refer to Note 1.

Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable that the Corporation would not be able to collect all contractual amounts due were accounted for as purchased credit-impaired (PCI). The Corporation aggregated the acquired PCI loans into pools of loans based on common risk characteristics.

The acquired PCI loan portfolio was accounted for at fair value at acquisition date as follows.



(in millions)	Acquired PCI Loans
Contractually required principal and interest (a)	$	328
Contractual cash flows not expected to be collected (nonaccretable difference)	176
Expected cash flows	152
Interest component of expected cash flows (accretable yield)	24
Fair value at acquisition	$	128

(a) Excludes loans fully charged off prior to acquisition date with no expectation of future cash flows.

The carrying amount of acquired PCI loans included in the consolidated balance sheet and the related outstanding balance at December 31, 2011 were as follows. The outstanding balance represents the total amount owed as of December 31, 2011, including accrued but unpaid interest and any amounts previously charged off. No allowance for loan losses was required on any of the acquired PCI loan pools at December 31, 2011.



(in millions)	December 31, 2011
Acquired PCI loans:
Carrying amount	$	87
Outstanding balance	234

Changes in the accretable yield for acquired PCI loans for the year ended December 31, 2011 were as follows.



(in millions)	Year Ended December 31, 2011
Balance at beginning of period	$	—
Additions	24
Reclassifications from nonaccretable	6
Disposals of loans	(1		)
Accretion	(4		)
Balance at December 31, 2011	$	25

Information regarding acquired loans not deemed credit-impaired at acquisition date was as follows.



(in millions)	Nonimpaired Loans
Contractually required principal and interest	$	2,465
Contractual cash flows not expected to be collected	208
Fair value at acquisition	$	1,965