NOTE 2 –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, subject to payment of cash in lieu of fractional 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. The fair value of total consideration paid to acquire Sterling was approximately $803 million. The Corporation incurred $5 million of pre-integration and transaction costs prior to the acquisition closing date that are included in "merger and restructuring charges" in the consolidated statements of income. However, the assets acquired and liabilities assumed from Sterling, the consideration paid to acquire Sterling, and the results of Sterling's operations are not reflected in consolidated financial statements as of and for the three- and six-month periods ended June 30, 2011. The acquisition of Sterling significantly expands the Corporation's presence in Texas, particularly in the Houston and San Antonio areas, and gives the Corporation the ability to leverage additional marketing capacity to offer a wide array of products through a larger distribution network, particularly to middle market and small business companies.

The assets and liabilities of Sterling were recorded on the consolidated balance sheets at estimated fair value as of the acquisition date. The initial accounting for the acquisition was incomplete at the time these financial statements were issued. The following purchase price allocation is preliminary and may change as additional information becomes available and additional analyses are completed. Preliminary initial goodwill of $469 million was recorded after adjusting for the preliminary fair value of net identifiable assets acquired.


(in millions)	Initial Allocation
Fair value of consideration paid:
Common stock issued (a)	$	793
Warrants issued		7
Stock options issued		3
Cash in lieu of fractional shares (a)

Total consideration paid		803

Fair value of identifiable assets acquired:
Cash and cash equivalents		730
Investment securities available-for-sale		1,527
Total loans		2,109
Premises and equipment		35
Core deposit intangible		41
Accrued income and other assets		288

Total identifiable assets acquired		4,730

Fair value of liabilities assumed:
Deposits		4,076
Short-term borrowings		20
Medium- and long-term debt		262
Accrued expenses and other liabilities		38

Total liabilities assumed		4,396

Fair value of net identifiable assets acquired		334

Goodwill resulting from acquistion	$	469

(a)	Due to the limited time since the acquisition date, the number of shares of common stock issued and the amount of cash paid in lieu of fractional shares has yet to be determined. The fair value of common stock issued includes the fair value of any potential fractional shares.

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. Due to the limited time since the acquisition date, the allocation of the preliminary goodwill attributable to the acquisition of Sterling to the Corporation's business segments was incomplete at the time these financial statements were issued. Additionally, the pro forma revenues and net income of the combined entity are yet to be determined. This information will be included in the Corporation's Form 10-Q for the period ending September 30, 2011.

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

In conjunction with the Sterling acquisition, the acquired impaired loan portfolio was accounted for at preliminary fair value as follows.


(In millions)	Impaired Loans
Contractually required principal and interest	$	322
Contractual cash flows not expected to be collected (nonaccretable difference)		165

Expected cash flows		157
Interest component of expected cash flows (accretable yield)		26

Estimated fair value at acquisition	$	131

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


(In millions)	Nonimpaired Loans
Contractually required principal and interest	$	2,468
Contractual cash flows not expected to be collected		206
Estimated fair value at acquisition		1,978

Loans acquired in the Sterling acquisition were initially recorded at fair value with no separate allowance for loan losses. The Corporation reviewed the loans at acquisition to determine which loans should be considered purchased impaired loans and aggregated the impaired loans into pools of loans based on common risk characteristics. The Corporation defined impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date.

The Corporation estimated the total cash flows expected to be collected from the pools of loans, which includes undiscounted expected principal and interest. The excess of the total cash flows expected to be collected over the fair value of the related loans represents the accretable yield, which is recognized as interest income on a level-yield basis over the life of the related loans. The difference between the undiscounted contractual principal and interest and the total cash flows expected to be collected is the nonaccretable difference, which reflects the impact of estimated credit losses and other factors. Subsequent decreases in the expected cash flows will require the Corporation to evaluate the need for additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loan pools.

For acquired loans not deemed impaired at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. Subsequent to the acquisition date, methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans; however, a provision for loan losses will be recorded only to the extent the required allowance exceeds any remaining credit discounts.