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FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2013 June (Form 10-Q)

Table of Contents

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 June 30, 2013
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—8,586,058 shares
Class B Common Stock—$1 Par Value—1,032,883 shares
(Number of shares outstanding, by class, as of August 7, 2013)


Table of Contents

INDEX
 
 
 
Page(s)
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

2

Table of Contents

Part 1
 
Item 1.
Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
June 30*
2013
 
December 31#
2012
 
June 30*
2012
 
(dollars in thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
542,645

 
$
639,730

 
$
571,004

Overnight investments
1,039,925

 
443,180

 
984,536

Investment securities available for sale
5,184,976

 
5,226,228

 
4,634,248

Investment securities held to maturity
1,130

 
1,342

 
1,578

Loans held for sale
62,497

 
86,333

 
76,374

Loans and leases:
 
 
 
 
 
Acquired
1,443,336

 
1,809,235

 
1,999,351

Originated
11,655,469

 
11,576,115

 
11,462,458

Less allowance for loan and lease losses
258,316

 
319,018

 
272,929

Net loans and leases
12,840,489

 
13,066,332

 
13,188,880

Premises and equipment
872,477

 
882,768

 
873,483

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
84,833

 
102,577

 
117,381

Not covered under loss share agreements
36,942

 
43,513

 
49,454

Income earned not collected
45,567

 
47,666

 
49,743

Receivable from FDIC for loss share agreements
158,013

 
270,192

 
405,626

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
2,266

 
3,556

 
5,175

Other assets
334,437

 
367,610

 
272,531

Total assets
$
21,308,822

 
$
21,283,652

 
$
21,332,638

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
5,151,378

 
$
4,885,700

 
$
4,761,369

Interest-bearing
12,866,637

 
13,200,325

 
13,040,277

Total deposits
18,018,015

 
18,086,025

 
17,801,646

Short-term borrowings
581,937

 
568,505

 
700,299

Long-term obligations
443,313

 
444,921

 
644,682

Payable to FDIC for loss share agreements
101,652

 
101,641

 
91,648

Other liabilities
224,575

 
218,553

 
164,573

Total liabilities
19,369,492

 
19,419,645

 
19,402,848

Shareholders’ Equity
 
 
 
 
 
Common stock:
 
 
 
 
 
Class A - $1 par value (11,000,000 shares authorized; 8,586,058 shares issued and outstanding at June 30, 2013; 8,588,031 shares issued and outstanding at December 31, 2012; 8,644,307 shares issued and outstanding at June 30, 2012)
8,586

 
8,588

 
8,644

Class B - $1 par value (2,000,000 shares authorized; 1,032,883 shares issued and outstanding at June 30, 2013; 1,032,883 shares issued and outstanding at December 31, 2012; 1,626,937 shares issued and outstanding at June 30, 2012)
1,033

 
1,033

 
1,627

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,886,121

 
1,792,726

 
1,838,160

Accumulated other comprehensive loss
(100,176
)
 
(82,106
)
 
(62,407
)
Total shareholders’ equity
1,939,330

 
1,864,007

 
1,929,790

Total liabilities and shareholders’ equity
$
21,308,822

 
$
21,283,652

 
$
21,332,638

 * Unaudited
# Derived from 2012 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.

3

Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except per share data, unaudited)
Interest income
 
 
 
 
 
 
 
Loans and leases
$
185,151

 
$
231,864

 
$
396,914

 
$
470,001

Investment securities:
 
 
 
 
 
 
 
U. S. Treasury
467

 
670

 
963

 
1,409

Government agency
3,068

 
4,377

 
6,394

 
8,709

Mortgage-backed securities
4,506

 
2,202

 
9,085

 
4,091

Corporate bonds

 
842

 

 
2,041

State, county and municipal
2

 
12

 
8

 
24

Other
76

 
62

 
153

 
193

Total investment securities interest and dividend income
8,119

 
8,165

 
16,603

 
16,467

Overnight investments
656

 
490

 
1,013

 
803

Total interest income
193,926

 
240,519

 
414,530

 
487,271

Interest expense
 
 
 
 
 
 
 
Deposits
8,997

 
15,047

 
19,310

 
31,519

Short-term borrowings
680

 
1,584

 
1,384

 
2,975

Long-term obligations
4,721

 
8,456

 
9,426

 
16,393

Total interest expense
14,398

 
25,087

 
30,120

 
50,887

Net interest income
179,528

 
215,432

 
384,410

 
436,384

Provision for loan and lease losses
(13,242
)
 
29,667

 
(31,848
)
 
60,382

Net interest income after provision for loan and lease losses
192,770

 
185,765

 
416,258

 
376,002

Noninterest income
 
 
 
 
 
 
 
Cardholder and merchant services
27,271

 
24,697

 
50,828

 
47,147

Service charges on deposit accounts
14,883

 
15,061

 
29,882

 
29,907

Wealth management services
15,097

 
14,530

 
29,612

 
28,285

Fees from processing services
5,051

 
7,557

 
10,670

 
16,119

Securities gains (losses)

 
3

 

 
(42
)
Other service charges and fees
3,966

 
3,574

 
7,732

 
7,015

Mortgage income
3,669

 
175

 
7,457

 
3,099

Insurance commissions
2,394

 
2,238

 
5,374

 
4,994

ATM income
1,314

 
1,281

 
2,482

 
2,736

Adjustments to FDIC receivable for loss share agreements
(14,439
)
 
(14,134
)
 
(38,492
)
 
(40,930
)
Other
5,789

 
2,314

 
16,963

 
5,909

Total noninterest income
64,995

 
57,296

 
122,508

 
104,239

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
75,802

 
76,786

 
151,921

 
152,470

Employee benefits
23,228

 
20,558

 
48,247

 
40,807

Occupancy expense
18,464

 
18,000

 
37,273

 
36,607

Equipment expense
18,698

 
17,998

 
37,644

 
36,164

FDIC insurance expense
2,423

 
2,666

 
5,089

 
5,723

Foreclosure-related expenses
3,467

 
15,389

 
7,772

 
19,993

Other
46,485

 
43,400

 
94,976

 
86,364

Total noninterest expense
188,567

 
194,797

 
382,922

 
378,128

Income before income taxes
69,198

 
48,264

 
155,844

 
102,113

Income taxes
25,292

 
10,681

 
56,353

 
29,035

Net income
$
43,906

 
$
37,583

 
$
99,491

 
$
73,078

Average shares outstanding
9,618,941

 
10,271,343

 
9,618,963

 
10,277,593

Net income per share
$
4.56

 
$
3.66

 
$
10.34

 
$
7.11


See accompanying Notes to Consolidated Financial Statements.

4

Table of Contents

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


 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, unaudited)
Net income
$
43,906

 
$
37,583

 
$
99,491

 
$
73,078

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains and losses on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains and losses arising during period
(38,992
)
 
4,491

 
(40,468
)
 
1,593

Deferred tax benefit (expense)
15,269

 
(1,756
)
 
15,834

 
(633
)
Reclassification adjustment for gains included in income before income taxes

 
(3
)
 

 
(3
)
Deferred tax expense (benefit)

 
1

 

 
1

Total change in unrealized gains and losses on securities, net of tax
(23,723
)
 
2,733

 
(24,634
)
 
958

 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
 
 
 
 
Change in unrecognized loss on cash flow hedges
569

 
(1,473
)
 
570

 
(1,831
)
Deferred tax benefit (expense)
(225
)
 
582

 
(225
)
 
722

Reclassification adjustment for losses included in income before income taxes
819

 
776

 
1,632

 
1,525

Deferred tax benefit
(323
)
 
(306
)
 
(644
)
 
(602
)
Total change in unrecognized loss on cash flow hedges, net of tax
840

 
(421
)
 
1,333

 
(186
)
 
 
 
 
 
 
 
 
Change in pension obligation:
 
 
 
 
 
 
 
Reclassification adjustment for losses included in income before income taxes
4,294

 
2,790

 
8,598

 
5,580

Deferred tax benefit
(1,682
)
 
(1,093
)
 
(3,367
)
 
(2,185
)
Total change in pension obligation, net of tax
2,612

 
1,697

 
5,231

 
3,395

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(20,271
)
 
4,009

 
(18,070
)
 
4,167

 
 
 
 
 
 
 
 
Total comprehensive income
$
23,635

 
$
41,592

 
$
81,421

 
$
77,245

 
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.


5

Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity

 
 
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
(dollars in thousands, except share data, unaudited)
Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Net income

 

 

 
73,078

 

 
73,078

Other comprehensive income, net of tax

 

 

 

 
4,167

 
4,167

Repurchase of 12,875 shares of Class B common stock

 
(13
)
 

 
(2,401
)
 

 
(2,414
)
Cash dividends ($0.60 per share)

 

 

 
(6,169
)
 

 
(6,169
)
Balance at June 30, 2012
$
8,644

 
$
1,627

 
$
143,766

 
$
1,838,160

 
$
(62,407
)
 
$
1,929,790

Balance at December 31, 2012
$
8,588

 
$
1,033

 
$
143,766

 
$
1,792,726

 
$
(82,106
)
 
$
1,864,007

Net income

 

 

 
99,491

 

 
99,491

Other comprehensive loss, net of tax

 

 

 

 
(18,070
)
 
(18,070
)
Repurchase of 1,973 shares of Class A common stock
(2
)
 

 

 
(319
)
 

 
(321
)
Cash dividends ($0.60 per share)

 

 

 
(5,777
)
 

 
(5,777
)
Balance at June 30, 2013
$
8,586

 
$
1,033

 
$
143,766

 
$
1,886,121

 
$
(100,176
)
 
$
1,939,330

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Six months ended June 30
 
2013
 
2012
 
(dollars in thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
99,491

 
$
73,078

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
(31,848
)
 
60,382

Deferred tax expense (benefit)
2,360

 
(6,845
)
Change in current taxes payable
(20,649
)
 
26,247

Depreciation
35,545

 
33,326

Change in accrued interest payable
(145
)
 
(626
)
Change in income earned not collected
2,099

 
(7,527
)
Gain on sale of processing services, net
(4,085
)
 

Securities losses

 
42

Origination of loans held for sale
(223,128
)
 
(275,140
)
Proceeds from sale of loans held for sale
254,087

 
294,163

Gain on sale of loans
(7,123
)
 
(2,858
)
Loss on sale of other real estate
1,480

 
453

Net amortization of premiums and discounts
(74,175
)
 
(57,163
)
FDIC receivable for loss share agreements
20,464

 
(27,084
)
Net change in other assets
68,587

 
56,180

Net change in other liabilities
24,346

 
4,076

Net cash provided by operating activities
147,306

 
170,704

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
325,057

 
468,503

Purchases of investment securities available for sale
(1,375,766
)
 
(2,914,481
)
Proceeds from maturities/calls of investment securities held to maturity
212

 
244

Proceeds from maturities/calls of investment securities available for sale
1,365,287

 
2,328,204

Proceeds from sales of investment securities available for sale

 
56

Net change in overnight investments
(596,745
)
 
(549,561
)
Cash received from the FDIC for loss share agreements
46,534

 
192,098

Proceeds from sale of other real estate
80,010

 
78,820

Additions to premises and equipment
(26,696
)
 
(49,253
)
Net cash used by investing activities
(182,107
)
 
(445,370
)
FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(390,329
)
 
(528,819
)
Net change in demand and other interest-bearing deposits
322,319

 
753,191

Net change in short-term borrowings
13,432

 
85,077

Repayment of long-term obligations
(1,608
)
 
(45,997
)
Repurchase of common stock
(321
)
 
(2,414
)
Cash dividends paid
(5,777
)
 
(6,169
)
Net cash (used) provided by financing activities
(62,284
)
 
254,869

Change in cash and due from banks
(97,085
)
 
(19,797
)
Cash and due from banks at beginning of period
639,730

 
590,801

Cash and due from banks at end of period
$
542,645

 
$
571,004

CASH PAYMENTS FOR:
 
 
 
Interest
$
30,265

 
$
51,513

Income taxes
75,917

 
21,453

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains and losses
$
(40,468
)
 
$
1,590

Change in fair value of cash flow hedge
2,202

 
(306
)
Change in pension obligation
8,598

 
5,580

Transfers of loans to other real estate
57,175

 
80,413

Reclassification of reserve for unfunded commitments to allowance for loan and lease losses
7,368

 


See accompanying Notes to Consolidated Financial Statements.

7

Table of Contents

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


First Citizens BancShares, Inc. (BancShares) is a financial holding company organized under the laws of Delaware and conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (FCB), which is headquartered in Raleigh, North Carolina.

General

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The information contained in the financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2012, should be referred to in connection with these unaudited interim consolidated financial statements.

BancShares evaluates all subsequent events prior to filing this Form 10-Q.

Reclassifications

In certain instances, amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported cash flows, shareholders' equity or net income.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position and/or consolidated results of operations and related disclosures. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan and lease losses, determination of fair value for financial instruments, pension plan assumptions, cash flow estimates on acquired loans receivable and payable from/to the FDIC for loss share agreements, purchase accounting related adjustments and income tax assets, liabilities and expense.

Goodwill Impairment

Annual impairment tests are conducted as of July 31 each year. Based on the third quarter 2012 impairment test, management concluded there was no impairment of goodwill. In addition to the annual testing requirement, impairment tests are performed if various other events occur including significant adverse changes in the business climate, considering various qualitative and quantitative factors to determine whether impairment exists. There were no such events during the second quarter of 2013.

Critical Accounting Policies Update

As discussed below, during the second quarter of 2013, BancShares implemented enhancements to the process to estimate the allowance for loan and lease losses (ALLL) and the reserve for unfunded commitments. Through detailed analysis of historical loss data, the process enhancements enabled reallocation of the 'nonspecific' ALLL and a portion of the reserve for unfunded loan commitments to specific loan classes.  The enhanced ALLL estimates implicitly include the risk of draws on open lines within each loan class. The remaining reserve for unfunded commitments relates to irrevocable commitments, such as letters of credit and financial guarantees. Other than the modifications described above, the enhancements to the methodology had no material impact on the ALLL.


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Table of Contents


For originated commercial loans and leases, BancShares increased the granularity of the historical net loss data used to develop the applicable loss rates by utilizing information that further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, BancShares incorporated specific loan class and delinquency status trends into the loss rates. Prior to the second quarter of 2013, management applied a general reserve methodology that estimated commercial loan allowances based upon loss rates by credit grade with the loss rates derived in part from migration analysis among grades and noncommercial allowances based upon loss rates derived primarily from historical losses.

Management also developed an enhanced qualitative framework for considering economic conditions, loan concentrations and other relevant factors at a loan class level. Prior to the second quarter of 2013, the nonspecific portion of the ALLL was not allocated to any specific loan class. This nonspecific portion reflected management's best estimate of the risks inherent in the calculation of the overall ALLL based upon economic conditions, loan concentrations and other relevant factors.
Management believes that the methodology enhancements will improve the granularity of historical net loss data and the precision of the segment analysis. Updated accounting policy disclosures for the ALLL and the reserve for unfunded commitments follow.

Allowance for Loan and Lease Losses
The ALLL represents management's best estimate of probable credit losses within the loan and lease portfolio at the balance sheet date. Management determines the ALLL based on an ongoing evaluation. This evaluation is inherently subjective because it requires material estimates, including the amount and timing of cash flows expected to be received on acquired loans. Those estimates are susceptible to significant change. Adjustments to the ALLL are recorded with a corresponding entry to provision for loan and lease losses. Loan and lease balances deemed to be uncollectible are charged off against the ALLL. Recoveries of amounts previously charged off are credited to the ALLL.
Accounting standards require the presentation of certain information at the portfolio segment level, which represents the level at which an entity develops and documents a systematic methodology to determine its ALLL. BancShares evaluates its loan and lease portfolio using three portfolio segments: originated commercial, originated noncommercial and acquired. The originated commercial segment includes commercial construction and land development, commercial mortgage, commercial and industrial, lease financing and other commercial real estate, and the related ALLL was calculated based on a risk-based approach as reflected in credit grades assigned to commercial segment loans. The originated noncommercial segment includes noncommercial construction and land development, residential mortgage, revolving mortgage and consumer loans, and the associated ALLL was determined based on a delinquency-based approach. The ALLL for acquired loans was determined based on the expected cash flows approach.
BancShares' methodology for calculating the ALLL includes estimating a general allowance for pools of loans and specific allocations for significant individual credits. The general allowance is based on net historical loan loss experience for homogeneous groups of loans with similar risk characteristics and performance trends. The general allowance estimate also contains qualitative components that allow management to adjust reserves based on historical loan loss experience for changes in the economic environment, portfolio trends and other factors. The specific allowance component is determined when management believes that the collectability of an individually reviewed loan has been impaired and a loss is probable. The fair value of impaired loans is based on the present value of expected cash flows, market prices of the loans, if available, or the value of the underlying collateral. Expected cash flows are discounted at the loans' effective interest rates.
The general allowance considers probable, incurred losses that are inherent within the loan portfolio but have not been specifically identified. Loans are divided into segments for analysis based in part on the risk profile inherent in each segment. Loans are further segmented into classes to appropriately recognize changes in inherent risk. A primary component of determining the general allowance for performing and classified loans not analyzed specifically is the actual loss history of the various classes. Loan loss factors based on historical experience may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio at the balance sheet date. For originated commercial loans and leases, management incorporates historical net loss data to develop the applicable loan loss factors by utilizing information that further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, management incorporates specific loan class and delinquency status trends into the loan loss factors. Loan loss factors may be adjusted quarterly based on changes in the level of historical net charge-offs and model adjustment parameter updates by management, such as the number of periods included in the calculation of loss factors, loss severity and portfolio attrition.

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The quarterly ALLL evaluation process also includes a qualitative framework which considers economic conditions, composition of the loan portfolio, trends in delinquent and nonperforming loans, historical loss experience by categories of loans, concentrations of credit, changes in lending policies and underwriting standards, regulatory exam results and other factors indicative of potential losses remaining in the portfolio. Management may adjust the reserves calculated based on historical loan loss factors when assessing changes in the factors in the qualitative framework. The adjustments to reserves for the qualitative framework are based on economic data, data analysis of portfolio trends and management judgment. These adjustments are specific to the loan class level. Prior to the second quarter of 2013, a portion of the allowance for loan and lease losses was not allocated to any specific class of loans. This nonspecific portion reflected management's best estimate of the elements of imprecision and estimation risk inherent in the calculation of the overall allowance.
A loan is considered to be impaired under ASC Topic 310 Receivables when, based upon current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan. Originated impaired loans are placed on nonaccrual status. Originated loan relationships rated substandard or worse that are greater than or equal to $500 are reviewed for potential impairment on a quarterly basis. Loans classified as TDRs are also reviewed for potential impairment. Specific valuation allowances are established or partial charge-offs are recorded on impaired loans for the difference between the loan amount and the estimated fair value.

Management continuously monitors and actively manages the credit quality of the entire loan portfolio and adjusts the ALLL to an appropriate level. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and general loss estimates based upon the most recent information available. Future adjustments to the ALLL may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review BancShares' ALLL. Such agencies may require the recognition of adjustments to the ALLL based on their judgments of information available to them at the time of their examination. Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of June 30, 2013.

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 and the related ALLL. Management has identified the most significant risks as described below that are generally similar among the segments and classes. While the list is not exhaustive, it provides a description of the risks management has determined are the most significant.
Originated 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 business, 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.
The significant majority of relationships in the originated commercial segment are assigned credit risk grades based upon an assessment of conditions that affect the borrower's ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers' financial information, payment history, credit documentation, public information and other information specific to each borrower. Credit risk grades are reviewed annually, or at any point management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Our risk grading standards are described in Note C.
The impairment assessment and determination of the related specific reserve for each impaired loan is based on a loan's characteristics. Impairment measurement for loans that are not collateral dependent is based on the present value of expected cash flows discounted at the loan's effective interest rate. Specific valuation allowances are established or partial charge-offs are recorded for the difference between the loan amount and the estimated fair value. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs as well as the total hold period, is used to calculate an anticipated fair value.
General reserves for collective impairment are based on estimated incurred losses related to non-impaired commercial loans and leases as of the balance sheet date. Incurred loss estimates for the originated commercial segment are based on average loss rates, which are estimated using historical experience and current risk mix as indicated by the risk grading process. Incurred loss estimates may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends including credit quality, concentrations, aging of the portfolio and significant policy and underwriting changes.

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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 the originated commercial segment, additional risks are inherent in certain classes of originated 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.
Originated Noncommercial Loans and Leases
Each originated noncommercial 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 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.
The ALLL for the originated noncommercial segment is primarily calculated on a pool basis using a delinquency-based approach. Estimates of incurred losses are based on historical loss experience and the current risk mix as indicated by prevailing delinquency rates. These estimates may be adjusted through a qualitative assessment to reflect current economic conditions, portfolio trends and other factors. The remaining portion of the ALLL related to the originated noncommercial segment results from loans that are deemed impaired. The impairment assessment and determination of the related specific reserve for each impaired loan is based on a loan's characteristics. Impairment measurement for loans that are not collateral dependent is based on the present value of expected cash flows discounted at the loan's effective interest rate. Specific valuation allowances are established or partial charge-offs are recorded for the difference between the loan amount and the estimated fair value. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs as well as the total hold period, is used to calculate an anticipated fair value.
Common risks to each class of noncommercial 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 noncommercial loans.
In addition to these common risks for the majority of noncommercial loans, additional risks are inherent in certain classes of noncommercial loans.

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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, disputes with first lienholders and uncertainty regarding the customer's performance with respect to the first lien 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, potentially in excess of principal balances.
Residential mortgage and noncommercial construction and land development
Residential mortgage and noncommercial 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. Noncommercial 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.
Acquired loans
The risks associated with acquired loans are generally consistent with the risks identified for commercial and noncommercial originated loans and the classes of loans within those segments. However, these loans were underwritten by other institutions with weaker lending standards. Additionally, in some cases, collateral for acquired loans is located in regions that have experienced profound erosion of real estate values. Therefore, there is a significant risk that acquired loans are not adequately supported by borrower cash flow or the values of underlying collateral.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probable losses related to unfunded lending commitments, such as letters of credit and financial guarantees. The reserve is calculated in a manner similar to the loans evaluated collectively for impairment, considering the likelihood that the available credit will be utilized as well as the exposure to default. The reserve for unfunded commitments is presented within other liabilities on the consolidated balance sheets separately from the ALLL and adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.

Recent Accounting and Regulatory Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU ) 2013-11, “Income Taxes (Topic 740)”

This ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require BancShares to use, and BancShares does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.
The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted.
The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. BancShares will adopt this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

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FASB ASU 2013-10, “Derivatives and Hedging (Topic 815)"

This ASU permits the use of the Fed Funds Effective Swap Rate (OIS) by BancShares as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to United States Treasury (UST) and London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges.
The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. BancShares will adopt this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-04, “Liabilities”

This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.
The guidance requires BancShares to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.
The amendments in this update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. BancShares will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

This ASU requires BancShares to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, BancShares is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.
For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations. BancShares has included the required disclosures in Note L.

FASB ASU 2013-01, “Balance Sheet”

This ASU's objective is to clarify that the scope of ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement.
BancShares is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The effective date is the same as the effective date of Update 2011-11. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.



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Note B
Investments
The aggregate values of investment securities at June 30, 2013December 31, 2012, and June 30, 2012, along with unrealized gains and losses determined on an individual security basis are as follows:
 
 
Cost
 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
 
(dollars in thousands)
Investment securities available for sale
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
U. S. Treasury
$
598,625

 
$
248

 
$
207

 
$
598,666

Government agency
2,725,227

 
1,531

 
5,379

 
2,721,379

Mortgage-backed securities
1,866,204

 
4,931

 
27,812

 
1,843,323

Equity securities
543

 
20,050

 

 
20,593

State, county and municipal
186

 
1

 

 
187

Other
850

 
1

 
23

 
828

Total investment securities available for sale
$
5,191,635

 
$
26,762

 
$
33,421

 
$
5,184,976

December 31, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
823,241

 
$
403

 
$
12

 
$
823,632

Government agency
3,052,040

 
3,501

 
337

 
3,055,204

Mortgage-backed securities
1,315,211

 
14,787

 
341

 
1,329,657

Equity securities
543

 
15,822

 

 
16,365

State, county and municipal
546

 
4

 

 
550

Other
838

 

 
18

 
820

Total investment securities available for sale
$
5,192,419

 
$
34,517

 
$
708

 
$
5,226,228

June 30, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
878,692

 
$
149

 
$
156

 
$
878,685

Government agency
2,976,079

 
2,684

 
565

 
2,978,198

Corporate bonds
49,987

 
459

 

 
50,446

Mortgage-backed securities
699,468

 
9,022

 
845

 
707,645

Equity securities
841

 
17,397

 

 
18,238

State, county and municipal
1,026

 
10

 

 
1,036

Total investment securities available for sale
$
4,606,093

 
$
29,721

 
$
1,566

 
$
4,634,248

Investment securities held to maturity
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,130

 
$
97

 
$
27

 
$
1,200

December 31, 2012
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,342

 
$
133

 
$
27

 
$
1,448

June 30, 2012
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,578

 
$
163

 
$
27

 
$
1,714

 
 
 
 
 
 
 
 

Investments in 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 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.


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The following table provides the expected maturity distribution for mortgage-backed securities and the contractual maturity distribution of other investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
(dollars in thousands)
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,139,800

 
$
2,137,724

 
$
2,288,556

 
$
2,289,859

 
$
2,424,304

 
$
2,425,612

One through five years
2,255,416

 
2,243,828

 
2,323,222

 
2,329,207

 
1,953,001

 
1,954,357

Five through 10 years
337,666

 
331,321

 
194,398

 
196,371

 
71,914

 
72,533

Over 10 years
458,210

 
451,510

 
385,700

 
394,426

 
156,033

 
163,508

Equity securities
543

 
20,593

 
543

 
16,365

 
841

 
18,238

Total investment securities available for sale
$
5,191,635

 
$
5,184,976

 
$
5,192,419

 
$
5,226,228

 
$
4,606,093

 
$
4,634,248

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
1,040

 
$
1,074

 
$
1,242

 
$
1,309

 
$
1,470

 
$
1,568

Five through 10 years
14

 
6

 
18

 
11

 
4

 
4

Over 10 years
76

 
120

 
82

 
128

 
104

 
142

Total investment securities held to maturity
$
1,130

 
$
1,200

 
$
1,342

 
$
1,448

 
$
1,578

 
$
1,714



For each period presented, securities gains (losses) include the following:
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Gross gains on sales of investment securities available for sale
$

 
$
5

 
$

 
$
5

Gross losses on sales of investment securities available for sale

 
(2
)
 

 
(2
)
Other than temporary impairment loss on equity securities

 

 

 
(45
)
Total securities gains (losses)
$

 
$
3

 
$

 
$
(42
)


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The following table provides information regarding securities with unrealized losses as of June 30, 2013, December 31, 2012, and June 30, 2012:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
76,846

 
$
207

 
$

 
$

 
$
76,846

 
$
207

Government agency
1,656,424

 
5,379

 

 

 
1,656,424

 
5,379

Mortgage-backed securities
1,481,083

 
26,961

 
31,766

 
851

 
1,512,849

 
27,812

Other
828

 
23

 

 

 
828

 
23

Total
$
3,215,181

 
$
32,570

 
$
31,766

 
$
851

 
$
3,246,947

 
$
33,421

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$

 
$
15

 
$
27

 
$
15

 
$
27

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
120,045

 
$
12

 
$

 
$

 
$
120,045

 
$
12

Government agency
407,498

 
337

 

 

 
407,498

 
337

Mortgage-backed securities
135,880

 
214

 
9,433

 
127

 
145,313

 
341

Other
820

 
18

 

 

 
820

 
18

Total
$
664,243

 
$
581

 
$
9,433

 
$
127

 
$
673,676

 
$
708

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$

 
$
17

 
$
27

 
$
17

 
$
27

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
528,579

 
$
156

 
$

 
$

 
$
528,579

 
$
156

Government agency
818,772

 
565

 

 

 
818,772

 
565

Mortgage-backed securities
292,053

 
808

 
1,668

 
37

 
293,721

 
845

State, county and municipal

 

 
10

 

 
10

 

Total
$
1,639,404

 
$
1,529

 
$
1,678

 
$
37

 
$
1,641,082

 
$
1,566

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$

 
$
19

 
$
27

 
$
19

 
$
27

Investment securities with an aggregate fair value of $31,781 have had continuous unrealized losses for more than 12 months as of June 30, 2013, with an aggregate unrealized loss of $878. These 31 investments are mortgage-backed securities. None of the unrealized losses identified as of June 30, 2013, December 31, 2012, or June 30, 2012, 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 $2,425,876 at June 30, 2013, $2,351,072 at December 31, 2012, and $2,432,638 at June 30, 2012, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.





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Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
(dollars in thousands)
Acquired loans
$
1,443,336

 
$
1,809,235

 
$
1,999,351

Originated loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
305,789

 
309,190

 
329,151

Commercial mortgage
6,135,068

 
6,029,435

 
5,883,116

Other commercial real estate
176,031

 
160,980

 
162,579

Commercial and industrial
997,504

 
1,038,530

 
989,341

Lease financing
352,818

 
330,679

 
320,703

Other
172,861

 
125,681

 
140,738

Total commercial loans
8,140,071

 
7,994,495

 
7,825,628

Noncommercial:
 
 
 
 
 
Residential mortgage
884,020

 
822,889

 
809,230

Revolving mortgage
2,123,814

 
2,210,133

 
2,268,210

Construction and land development
119,253

 
131,992

 
127,726

Consumer
388,311

 
416,606

 
431,664

Total noncommercial loans
3,515,398

 
3,581,620

 
3,636,830

Total originated loans and leases
11,655,469

 
11,576,115

 
11,462,458

Total loans and leases
$
13,098,805

 
$
13,385,350

 
$
13,461,809

 


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Table of Contents

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
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
 
(dollars in thousands)
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
41,572

 
$
119,161

 
$
160,733

 
$
71,225

 
$
166,681

 
$
237,906

 
$
86,056

 
$
186,389

 
$
272,445

Commercial mortgage
90,910

 
768,128

 
859,038

 
107,281

 
947,192

 
1,054,473

 
121,580

 
1,021,097

 
1,142,677

Other commercial real estate
23,716

 
58,188

 
81,904

 
35,369

 
71,750

 
107,119

 
29,199

 
86,588

 
115,787

Commercial and industrial
6,429

 
30,907

 
37,336

 
3,932

 
45,531

 
49,463

 
4,771

 
61,671

 
66,442

Other

 
1,018

 
1,018

 

 
1,074

 
1,074

 

 
1,228

 
1,228

Total commercial loans
162,627

 
977,402

 
1,140,029

 
217,807

 
1,232,228

 
1,450,035

 
241,606

 
1,356,973

 
1,598,579

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
36,740

 
220,232

 
256,972

 
48,077

 
249,849

 
297,926

 
55,585

 
266,468

 
322,053

Revolving mortgage
9,493

 
26,660

 
36,153

 
9,606

 
29,104

 
38,710

 
8,286

 
28,824

 
37,110

Construction and land development
8,616

 
393

 
9,009

 
15,136

 
5,657

 
20,793

 
31,767

 
7,527

 
39,294

Consumer

 
1,173

 
1,173

 

 
1,771

 
1,771

 
404

 
1,911

 
2,315

Total noncommercial loans
54,849

 
248,458

 
303,307

 
72,819

 
286,381

 
359,200

 
96,042

 
304,730

 
400,772

Total acquired loans
$
217,476

 
$
1,225,860

 
$
1,443,336

 
$
290,626

 
$
1,518,609

 
$
1,809,235

 
$
337,648

 
$
1,661,703

 
$
1,999,351



At June 30, 2013, $2,520,435 in originated loans were pledged to secure debt obligations, compared to $2,570,773 at December 31, 2012, and $2,451,827 at June 30, 2012.

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. Originated commercial loans and leases, originated noncommercial loans and leases and acquired 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 originated commercial loans and leases and all acquired 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 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 borrower 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.


18

Table of Contents

Doubtful – An asset classified as 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 as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. 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 charge-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 originated, ungraded loans at June 30, 2013, relate to business credit cards and tobacco buyout loans classified as commercial and industrial loans. Business credit card loans with an outstanding balance of $78,178 at June 30, 2013, 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 $21,556 at June 30, 2013, 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 made by the Commodity Credit Corporation, which is part of the United States Department of Agriculture.

The credit quality indicators for originated, noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.


19

Table of Contents

The composition of the loans and leases outstanding at June 30, 2013, December 31, 2012, and June 30, 2012, by credit quality indicator is provided below:
 
 
Originated commercial loans and leases
Grade:
Construction  and land
development
 
Commercial
mortgage
 
Other
commercial real estate
 
Commercial  and
industrial
 
Lease financing
 
Other
 
Total originated commercial loans and leases
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
283,342

 
$
5,833,551

 
$
170,071

 
$
874,336

 
$
345,443

 
$
171,332

 
$
7,678,075

Special mention
12,567

 
132,787

 
1,529

 
8,047

 
2,625

 
1,529

 
159,084

Substandard
9,827

 
157,689

 
4,125

 
12,025

 
4,000

 

 
187,666

Doubtful
53

 
9,048

 
80

 
2,156

 
750

 

 
12,087

Ungraded

 
1,993

 
226

 
100,940

 

 

 
103,159

Total
$
305,789

 
$
6,135,068

 
$
176,031

 
$
997,504

 
$
352,818

 
$
172,861

 
$
8,140,071

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
274,480

 
$
5,688,541

 
$
151,549

 
$
894,998

 
$
325,626

 
$
124,083

 
$
7,459,277

Special mention
14,666

 
166,882

 
2,812

 
13,275

 
1,601

 
837

 
200,073

Substandard
18,761

 
157,966

 
5,038

 
12,073

 
1,663

 
756

 
196,257

Doubtful
952

 
13,475

 
98

 
1,040

 
771

 

 
16,336

Ungraded
331

 
2,571

 
1,483

 
117,144

 
1,018

 
5

 
122,552

Total
$
309,190

 
$
6,029,435

 
$
160,980

 
$
1,038,530

 
$
330,679

 
$
125,681

 
$
7,994,495

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
289,974

 
$
5,488,595

 
$
149,977

 
$
832,372

 
$
315,119

 
$
139,722

 
$
7,215,759

Special mention
10,353

 
227,233

 
6,220

 
17,284

 
2,740

 
257

 
264,087

Substandard
27,266

 
146,806

 
5,821

 
15,109

 
1,867

 
742

 
197,611

Doubtful
1,232

 
13,660

 
265

 
1,457

 
517

 

 
17,131

Ungraded
326

 
6,822

 
296

 
123,119

 
460

 
17

 
131,040

Total
$
329,151

 
$
5,883,116

 
$
162,579

 
$
989,341

 
$
320,703

 
$
140,738

 
$
7,825,628


 
Originated noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total originated noncommercial
loans
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
Current
$
854,345

 
$
2,110,414

 
$
117,618

 
$
385,053

 
$
3,467,430

30-59 days past due
14,626

 
7,587

 
630

 
1,774

 
24,617

60-89 days past due
2,427

 
2,134

 
8

 
847

 
5,416

90 days or greater past due
12,622

 
3,679

 
997

 
637

 
17,935

Total
$
884,020

 
$
2,123,814

 
$
119,253

 
$
388,311

 
$
3,515,398

December 31, 2012
 
 
 
 
 
 
 
 
 
Current
$
786,626

 
$
2,190,186

 
$
128,764

 
409,218

 
$
3,514,794

30-59 days past due
15,711

 
12,868

 
1,941

 
4,405

 
34,925

60-89 days past due
7,559

 
3,200

 
490

 
1,705

 
12,954

90 days or greater past due
12,993

 
3,879

 
797

 
1,278

 
18,947

Total
$
822,889

 
$
2,210,133

 
$
131,992

 
$
416,606

 
$
3,581,620

June 30, 2012
 
 
 
 
 
 
 
 
 
Current
$
781,632

 
$
2,251,428

 
$
125,096

 
$
427,223

 
$
3,585,379

30-59 days past due
12,601

 
10,131

 
1,352

 
1,993

 
26,077

60-89 days past due
3,659

 
2,460

 
447

 
975

 
7,541

90 days or greater past due
11,338

 
4,191

 
831

 
1,473

 
17,833

Total
$
809,230

 
$
2,268,210

 
$
127,726

 
$
431,664

 
$
3,636,830

 

20

Table of Contents

 
Acquired loans
Grade:
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total acquired
loans
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
7,420

 
$
325,651

 
$
27,159

 
$
13,304

 
$
155,204

 
$
26,156

 
$
239

 
$
1,473

 
$
556,606

Special mention
23,189

 
197,890

 
6,472

 
11,446

 
12,073

 
1,951

 

 
25

 
253,046

Substandard
71,631

 
272,830

 
41,314

 
6,860

 
67,769

 
7,644

 
7,476

 
240

 
475,764

Doubtful
56,566

 
62,006

 
6,959

 
5,500

 
2,832

 
402

 
1,294

 

 
135,559

Ungraded
1,927

 
661

 

 
226

 
19,094

 

 

 
453

 
22,361

Total
$
160,733

 
$
859,038

 
$
81,904

 
$
37,336

 
$
256,972

 
$
36,153

 
$
9,009

 
$
2,191

 
$
1,443,336

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
17,010

 
$
376,974

 
$
33,570

 
$
19,451

 
$
172,165

 
$
29,540

 
$
334

 
$
1,617

 
$
650,661

Special mention
25,734

 
259,264

 
17,518

 
12,465

 
14,863

 
1,736

 

 
34

 
331,614

Substandard
105,061

 
344,542

 
44,335

 
14,698

 
83,193

 
7,434

 
17,190

 
239

 
616,692

Doubtful
87,445

 
73,016

 
11,696

 
2,757

 
4,268

 

 
3,269

 
117

 
182,568

Ungraded
2,656

 
677

 

 
92

 
23,437

 

 

 
838

 
27,700

Total
$
237,906

 
$
1,054,473

 
$
107,119

 
$
49,463

 
$
297,926

 
$
38,710

 
$
20,793

 
$
2,845

 
$
1,809,235

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
20,662

 
$
358,287

 
$
36,459

 
$
25,280

 
$
187,317

 
$
28,528

 
$
137

 
$
1,629

 
$
658,299

Special mention
79,987

 
331,659

 
23,293

 
16,969

 
16,602

 
1,748

 
2,428

 
267

 
472,953

Substandard
73,179

 
372,528

 
46,465

 
15,630

 
79,239

 
6,834

 
30,190

 
709

 
624,774

Doubtful
95,354

 
77,679

 
9,570

 
8,449

 
15,702

 

 
6,539

 
553

 
213,846

Ungraded
3,263

 
2,524

 

 
114

 
23,193

 

 

 
385

 
29,479

Total
$
272,445

 
$
1,142,677

 
$
115,787

 
$
66,442

 
$
322,053

 
$
37,110

 
$
39,294

 
$
3,543

 
$
1,999,351



21

Table of Contents

The aging of the outstanding loans and leases, by class, at June 30, 2013, December 31, 2012, and June 30, 2012, (excluding loans and leases acquired with deteriorated credit quality) is provided in the table below. The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current due to various grace periods that allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.

 
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Originated loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
552

 
$
248

 
$
6,961

 
$
7,761

 
$
298,028

 
$
305,789

Commercial mortgage
20,970

 
2,156

 
17,236

 
40,362

 
6,094,706

 
6,135,068

Other commercial real estate
112

 
107

 
265

 
484

 
175,547

 
176,031

Commercial and industrial
2,532

 
2,495

 
375

 
5,402

 
992,102

 
997,504

Lease financing
512

 

 
265

 
777

 
352,041

 
352,818

Other
25

 

 

 
25

 
172,836

 
172,861

Residential mortgage
14,626

 
2,427

 
12,622

 
29,675

 
854,345

 
884,020

Revolving mortgage
7,587

 
2,134

 
3,679

 
13,400

 
2,110,414

 
2,123,814

Construction and land development - noncommercial
630

 
8

 
997

 
1,635

 
117,618

 
119,253

Consumer
1,774

 
847

 
637

 
3,258

 
385,053

 
388,311

Total originated loans and leases
$
49,320

 
$
10,422

 
$
43,037

 
$
102,779

 
$
11,552,690

 
$
11,655,469

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Originated loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
927

 
$

 
$
7,878

 
$
8,805

 
$
300,385

 
$
309,190

Commercial mortgage
21,075

 
3,987

 
20,318

 
45,380

 
5,984,055

 
6,029,435

Other commercial real estate
387

 
1,240

 
1,034

 
2,661

 
158,319

 
160,980

Commercial and industrial
6,205

 
1,288

 
1,614

 
9,107

 
1,029,423

 
1,038,530

Lease financing
991

 
138

 
621

 
1,750

 
328,929

 
330,679

Other
18

 
13

 

 
31

 
125,650

 
125,681

Residential mortgage
15,711

 
7,559

 
12,993

 
36,263

 
786,626

 
822,889

Revolving mortgage
12,868

 
3,200

 
3,879

 
19,947

 
2,190,186

 
2,210,133

Construction and land development - noncommercial
1,941

 
490

 
797

 
3,228

 
128,764

 
131,992

Consumer
4,405

 
1,705

 
1,278

 
7,388

 
409,218

 
416,606

Total originated loans and leases
$
64,528

 
$
19,620

 
$
50,412

 
$
134,560

 
$
11,441,555

 
$
11,576,115

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Originated loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,430

 
$
463

 
$
8,663

 
$
10,556

 
$
318,595

 
$
329,151

Commercial mortgage
15,830

 
5,171

 
16,832

 
37,833

 
5,845,283

 
5,883,116

Other commercial real estate
284

 
68

 
551

 
903

 
161,676

 
162,579

Commercial and industrial
2,528

 
882

 
2,153

 
5,563

 
983,778

 
989,341

Lease financing
305

 
4

 
530

 
839

 
319,864

 
320,703

Other
100

 

 

 
100

 
140,638

 
140,738

Residential mortgage
12,601

 
3,659

 
11,338

 
27,598

 
781,632

 
809,230

Revolving mortgage
10,131

 
2,460

 
4,191

 
16,782

 
2,251,428

 
2,268,210

Construction and land development - noncommercial
1,352

 
447

 
831

 
2,630

 
125,096

 
127,726

Consumer
1,993

 
975

 
1,473

 
4,441

 
427,223

 
431,664

Total originated loans and leases
$
46,554

 
$
14,129

 
$
46,562

 
$
107,245

 
$
11,355,213

 
$
11,462,458



22

Table of Contents

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at June 30, 2013, December 31, 2012, and June 30, 2012, (excluding loans and leases acquired with deteriorated credit quality) are as follows:
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
(dollars in thousands)
Originated loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
6,967

 
$
86

 
$
14,930

 
$
541

 
$
8,602

 
$
449

Commercial mortgage
43,457

 
1,361

 
50,532

 
1,671

 
39,896

 
3,279

Commercial and industrial
4,348

 
149

 
6,972

 
466

 
7,314

 
323

Lease financing
951

 
169

 
1,075

 

 
651

 
13

Other commercial real estate
1,822

 

 
2,319

 

 
578

 
186

Construction and land development - noncommercial
840

 
624

 
668

 
111

 
741

 
535

Residential mortgage
10,714

 
4,493

 
12,603

 
3,337

 
11,232

 
2,807

Revolving mortgage

 
3,677

 

 
3,877

 

 
4,182

Consumer
34

 
628

 
746

 
1,269

 
392

 
1,133

Total originated loans and leases
$
69,133

 
$
11,187

 
$
89,845

 
$
11,272

 
$
69,406

 
$
12,907

Acquired Loans
The following table provides changes in the carrying value of acquired loans impaired at acquisition date and all other acquired loans during the six months ended June 30, 2013, and 2012:
 
 
2013
 
2012
 
Impaired at
acquisition
date
 
All other
acquired loans
 
Impaired at
acquisition
date
 
All other
acquired loans
 
(dollars in thousands)
Balance, January 1
$
290,626

 
$
1,518,609

 
$
458,305

 
$
1,903,847

Reductions for repayments, foreclosures and changes in carrying value, net of accretion
(73,150
)
 
(292,749
)
 
(120,657
)
 
(242,144
)
Balance, June 30
$
217,476

 
$
1,225,860

 
$
337,648

 
$
1,661,703

Outstanding principal balance at June 30
$
784,657

 
$
1,671,690

 
$
1,156,145

 
$
2,293,228


The carrying value of loans on the cost recovery method was $46,892 at June 30, 2013, $74,479 at December 31, 2012, and $166,138 at June 30, 2012. Prior to the third quarter of 2012, the cost recovery method was being applied to nonperforming loans acquired from four of the six FDIC-assisted transactions. During the third and fourth quarters of 2012, those loans were installed on an automated acquired loan accounting system that estimated cash flows for all loans. Based on these improved cash flow estimates, loans that were previously accounted for under the cost recovery method began to accrete yield. The cost recovery method continues to be applied to loans when the timing of the cash flows is no longer reasonably estimable due to subsequent nonperformance by the borrower or uncertainty in the ultimate disposition of the asset.

For acquired loans, improved cash flow estimates and receipt of unscheduled loan payments result in the reclassification of nonaccretable difference to accretable yield. During the third and fourth quarters of 2012, the improved ability to estimate cash flows due to expanded use of an acquired loan accounting system also contributed to significant increases in accretable yield. Accretable yield resulting from the improved ability to estimate future cash flows generally does not represent amounts previously identified as nonaccretable difference.


23

Table of Contents

The following table documents changes to the amount of accretable yield for the first six months of 2013 and 2012. Other, net includes reclassifications from nonaccretable difference to accretable yield and changes to accretable yield attributable to revised cash flow estimates.
 
2013
 
2012
 
(dollars in thousands)
Balance, January 1
$
539,564

 
$
276,690

Accretion
(131,909
)
 
(125,791
)
Disposals
(4,634
)
 

Other, net
119,185

 
186,908

Balance, June 30
$
522,206

 
$
337,807



Note D
Allowance for Loan and Lease Losses
Activity in the allowance for loan and lease losses, ending balances of loans and leases and related allowance by class of loans is summarized as follows:
 
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial
 
Lease
financing
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-
commercial
 
Consumer
 
Non-
specific
 
Total
 
(dollars in thousands)
Originated Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
6,031

 
$
80,229

 
$
2,059

 
$
14,050

 
$
3,521

 
$
1,175

 
$
3,836

 
$
25,185

 
$
1,721

 
$
25,389

 
$
15,850

 
$
179,046

Reclassification (1)
5,141

 
27,421

 
(815
)
 
7,551

 
(253
)
 
(1,288
)
 
5,717

 
(9,838
)
 
(478
)
 
(10,018
)
 
(15,772
)
 
7,368

Charge-offs
(1,540
)
 
(869
)
 
(72
)
 
(2,246
)
 
(92
)
 
(6
)
 
(1,268
)
 
(3,066
)
 
(245
)
 
(5,157
)
 

 
(14,561
)
Recoveries
638

 
499

 
36

 
657

 
19

 
3

 
100

 
378

 
79

 
1,273

 

 
3,682

Provision
1,462

 
(2,438
)
 
(151
)
 
(703
)
 
1,797

 
476

 
1,611

 
2,338

 
(357
)
 
2,290

 
(78
)
 
6,247

Balance at June 30
$
11,732

 
$
104,842

 
$
1,057

 
$
19,309

 
$
4,992

 
$
360

 
$
9,996

 
$
14,997

 
$
720

 
$
13,777

 
$

 
$
181,782

Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
5,467

 
$
67,486

 
$
2,169

 
$
23,723

 
$
3,288

 
$
1,315

 
$
8,879

 
$
27,045

 
$
1,427

 
$
25,962

 
$
14,122

 
$
180,883

Charge-offs
(9,221
)
 
(4,020
)
 
(254
)
 
(3,046
)
 
(335
)
 
(28
)
 
(2,290
)
 
(6,271
)
 
(675
)
 
(5,285
)
 

 
(31,425
)
Recoveries
269

 
1,008

 

 
437

 
48

 
4

 
312

 
414

 
152

 
929

 

 
3,573

Provision
8,541

 
17,099

 
498

 
(6,806
)
 
514

 
(108
)
 
738

 
5,512

 
911

 
3,382

 
1,820

 
32,101

Balance at June 30
$
5,056

 
$
81,573

 
$
2,413

 
$
14,308

 
$
3,515

 
$
1,183

 
$
7,639

 
$
26,700

 
$
1,815

 
$
24,988

 
$
15,942

 
$
185,132

Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1
$
4,311

 
$
82,119

 
$
1,915

 
$
13,661

 
$
3,543

 
$
1,490

 
$
3,790

 
$
24,499

 
$
1,419

 
$
24,027

 
$
15,772

 
$
176,546

Reclassification (1)
5,141

 
27,421

 
(815
)
 
7,551

 
(253
)
 
(1,288
)
 
5,717

 
(9,838
)
 
(478
)
 
(10,018
)
 
(15,772
)
 
7,368

Charge-offs
(1,286
)
 
(213
)
 
(18
)
 
(988
)
 
(92
)
 

 
(450
)
 
(878
)
 

 
(2,569
)
 

 
(6,494
)
Recoveries
270

 
491

 
26

 
288

 
19

 
3

 
61

 
307

 
23

 
643

 

 
2,131

Provision
3,296

 
(4,976
)
 
(51
)
 
(1,203
)
 
1,775

 
155

 
878

 
907

 
(244
)
 
1,694

 

 
2,231

Balance at June 30
$
11,732

 
$
104,842

 
$
1,057

 
$
19,309

 
$
4,992

 
$
360

 
$
9,996

 
$
14,997

 
$
720

 
$
13,777

 
$

 
$
181,782

Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1
$
6,608

 
$
72,155

 
$
2,248

 
$
24,246

 
$
3,320

 
$
1,281

 
$
9,107

 
$
26,911

 
$
1,397

 
$
24,288

 
$
14,822

 
$
186,383

Charge-offs
(3,492
)
 
(1,556
)
 
(112
)
 
(1,599
)
 
(144
)
 
(28
)
 
(1,255
)
 
(3,331
)
 

 
(2,277
)
 

 
(13,794
)
Recoveries
228

 
12

 

 
187

 
18

 

 
269

 
198

 
145

 
497

 

 
1,554

Provision
1,712

 
10,962

 
277

 
(8,526
)
 
321

 
(70
)
 
(482
)
 
2,922

 
273

 
2,480

 
1,120

 
10,989

Balance at June 30
$
5,056

 
$
81,573

 
$
2,413

 
$
14,308

 
$
3,515

 
$
1,183

 
$
7,639

 
$
26,700

 
$
1,815

 
$
24,988

 
$
15,942

 
$
185,132


(1) Reclassification results from enhancements to the ALLL calculation during the second quarter of 2013 that resulted in the allocation of $15,772 previously designated as 'non-specific' to other loan classes and the absorption of $7,368 of the reserve for unfunded commitments related to unfunded, revocable loan commitments into the ALLL. Further discussion is contained in Note A.

24

Table of Contents

 
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial
 
Lease
financing
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-commercial
 
Consumer
 
Non-
specific
 
Total
 
(dollars in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
977

 
$
8,687

 
$
115

 
$
2,286

 
$
376

 
$

 
$
1,073

 
$
895

 
$
41

 
$
132

 
$

 
$
14,582

ALLL for loans and leases collectively evaluated for impairment
10,755

 
96,155

 
942

 
17,023

 
4,616

 
360

 
8,923

 
14,102

 
679

 
13,645

 

 
167,200

Total allowance for loan and lease losses
$
11,732

 
$
104,842

 
$
1,057

 
$
19,309

 
$
4,992

 
$
360

 
$
9,996

 
$
14,997

 
$
720

 
$
13,777

 
$

 
$
181,782

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
2,469

 
$
11,697

 
$
298

 
$
2,133

 
$
202

 
$
53

 
$
959

 
$
1

 
$
287

 
$
256

 
$

 
$
18,355

ALLL for loans and leases collectively evaluated for impairment
3,562

 
68,532

 
1,761

 
11,917

 
3,319

 
1,122

 
2,877

 
25,184

 
1,434

 
25,133

 

 
144,841

Nonspecific ALLL

 

 

 

 

 

 

 

 

 

 
15,850

 
15,850

Total allowance for loan and lease losses
$
6,031

 
$
80,229

 
$
2,059

 
$
14,050

 
$
3,521

 
$
1,175

 
$
3,836

 
$
25,185

 
$
1,721

 
$
25,389

 
$
15,850

 
$
179,046

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
1,621

 
$
9,745

 
$
498

 
$
2,318

 
$
70

 
$

 
$
1,451

 
$
51

 
$
205

 
$
253

 
$

 
$
16,212

ALLL for loans and leases collectively evaluated for impairment
3,435

 
71,828

 
1,915

 
11,990

 
3,445

 
1,183

 
6,188

 
26,649

 
1,610

 
24,735

 

 
152,978

Nonspecific ALLL

 

 

 

 

 

 

 

 

 

 
15,942

 
15,942

Total allowance for loan and lease losses
$
5,056

 
$
81,573

 
$
2,413

 
$
14,308

 
$
3,515

 
$
1,183

 
$
7,639

 
$
26,700

 
$
1,815

 
$
24,988

 
$
15,942

 
$
185,132

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
8,921

 
$
127,628

 
$
2,887

 
$
12,004

 
$
724

 
$

 
$
16,151

 
$
6,972

 
$
910

 
$
1,419

 
$

 
$
177,616

Loans and leases collectively evaluated for impairment
296,868

 
6,007,440

 
173,144

 
985,500

 
352,094

 
172,861

 
867,869

 
2,116,842

 
118,343

 
386,892

 

 
11,477,853

Total loan and leases
$
305,789

 
$
6,135,068

 
$
176,031

 
$
997,504

 
$
352,818

 
$
172,861

 
$
884,020

 
$
2,123,814

 
$
119,253

 
$
388,311

 
$

 
$
11,655,469

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
17,075

 
$
133,804

 
$
3,375

 
$
22,619

 
$
804

 
$
707

 
$
15,836

 
$
4,203

 
$
1,321

 
$
2,509

 
$

 
$
202,253

Loans and leases collectively evaluated for impairment
292,115

 
5,895,631

 
157,605

 
1,015,911

 
329,875

 
124,974

 
807,053

 
2,205,930

 
130,671

 
414,097

 

 
11,373,862

Total loan and leases
$
309,190

 
$
6,029,435

 
$
160,980

 
$
1,038,530

 
$
330,679

 
$
125,681

 
$
822,889

 
$
2,210,133

 
$
131,992

 
$
416,606

 
$

 
$
11,576,115

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
28,230

 
$
139,235

 
$
4,919

 
$
18,754

 
$
354

 
$
742

 
$
19,305

 
$
3,594

 
$
3,458

 
$
3,108

 
$

 
$
221,699

Loans and leases collectively evaluated for impairment
300,921

 
5,743,881

 
157,660

 
970,587

 
320,349

 
139,996

 
789,925

 
2,264,616

 
124,268

 
428,556

 

 
11,240,759

Total loan and leases
$
329,151

 
$
5,883,116

 
$
162,579

 
$
989,341

 
$
320,703

 
$
140,738

 
$
809,230

 
$
2,268,210

 
$
127,726

 
$
431,664

 
$

 
$
11,462,458


25

Table of Contents


 
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Lease
financing
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
 
(dollars in thousands)
Acquired Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
31,186

 
$
50,275

 
$
11,234

 
$
8,897

 
$

 
$
19,837

 
$
9,754

 
$
8,287

 
$
502

 
$
139,972

Charge-offs
(5,359
)
 
(12,081
)
 
(931
)
 
(2,257
)
 

 
(1,115
)
 
(350
)
 
(3,218
)
 
(32
)
 
(25,343
)
Recoveries

 

 

 

 

 

 

 

 

 

Provision
(18,238
)
 
(4,606
)
 
(5,707
)
 
(704
)
 

 
(1,450
)
 
(3,373
)
 
(3,837
)
 
(180
)
 
(38,095
)
Balance at June 30
$
7,589

 
$
33,588

 
$
4,596

 
$
5,936

 
$

 
$
17,272

 
$
6,031

 
$
1,232

 
$
290

 
$
76,534

Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
16,693

 
$
39,557

 
$
16,862

 
$
5,500

 
$
13

 
$
5,433

 
$
77

 
$
4,652

 
$
474

 
$
89,261

Charge-offs
(5,026
)
 
(15,393
)
 
(796
)
 
(6,016
)
 

 
(2,612
)
 

 
(9
)
 
(35
)
 
(29,887
)
Recoveries

 

 

 

 

 
142

 

 

 

 
142

Provision
4,316

 
11,827

 
(6,872
)
 
15,240

 
(13
)
 
2,612

 
2,471

 
(863
)
 
(437
)
 
28,281

Balance at June 30
$
15,983

 
$
35,991

 
$
9,194

 
$
14,724

 
$

 
$
5,575

 
$
2,548

 
$
3,780

 
$
2

 
$
87,797

Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1
$
13,306

 
$
38,293

 
$
5,172

 
$
11,876

 
$

 
$
17,603

 
$
7,135

 
$
2,756

 
$
332

 
$
96,473

Charge-offs
(626
)
 
(2,183
)
 

 
(1,004
)
 

 
(386
)
 
(235
)
 

 
(32
)
 
(4,466
)
Recoveries

 

 

 

 

 

 

 

 

 

Provision
(5,091
)
 
(2,522
)
 
(576
)
 
(4,936
)
 

 
55

 
(869
)
 
(1,524
)
 
(10
)
 
(15,473
)
Balance at June 30
$
7,589

 
$
33,588

 
$
4,596

 
$
5,936

 
$

 
$
17,272

 
$
6,031

 
$
1,232

 
$
290

 
$
76,534

Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1
$
12,736

 
$
39,744

 
$
11,150

 
$
13,728

 
$
3

 
$
4,732

 
$
1,027

 
$
2,720

 
$
277

 
$
86,117

Charge-offs
(3,639
)
 
(9,182
)
 
(796
)
 
(2,827
)
 

 
(657
)
 

 
(9
)
 
(30
)
 
(17,140
)
Recoveries

 

 

 

 

 
142

 

 

 

 
142

Provision
6,886

 
5,429

 
(1,160
)
 
3,823

 
(3
)
 
1,358

 
1,521

 
1,069

 
(245
)
 
18,678

Balance at June 30
$
15,983

 
$
35,991

 
$
9,194

 
$
14,724

 
$

 
$
5,575

 
$
2,548

 
$
3,780

 
$
2

 
$
87,797

Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
$
7,589

 
$
33,588

 
$
4,596

 
$
5,936

 
$

 
$
17,272

 
$
6,031

 
$
1,232

 
$
290

 
$
76,534

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
31,186

 
50,275

 
11,234

 
8,897

 

 
19,837

 
9,754

 
8,287

 
502

 
139,972

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
15,983

 
35,991

 
9,194

 
14,724

 

 
5,575

 
2,548

 
3,780

 
2

 
87,797

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
160,733

 
859,038

 
81,904

 
37,336

 

 
256,972

 
36,153

 
9,009

 
2,191

 
1,443,336

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
237,906

 
1,054,473

 
107,119

 
49,463

 

 
297,926

 
38,710

 
20,793

 
2,845

 
1,809,235

June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
272,445

 
1,142,677

 
115,787

 
66,442

 

 
322,053

 
37,110

 
39,294

 
3,543

 
1,999,351





26

Table of Contents


The following tables provide information on originated impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group, including interest income recognized in the period during which the loans and leases were considered impaired.
 
 
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
Impaired originated loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
8,572

 
$
349

 
$
8,921

 
$
9,921

 
$
976

Commercial mortgage
71,663

 
55,965

 
127,628

 
129,522

 
8,687

Other commercial real estate
1,239

 
1,648

 
2,887

 
2,887

 
115

Commercial and industrial
7,031

 
4,973

 
12,004

 
12,004

 
2,286

Lease financing
724

 

 
724

 
724

 
376

Residential mortgage
9,129

 
7,022

 
16,151

 
16,531

 
1,073

Revolving mortgage
4,183

 
2,790

 
6,973

 
6,973

 
895

Construction and land development - noncommercial
441

 
469

 
910

 
910

 
41

Consumer
1,418

 

 
1,418

 
1,418

 
132

Total impaired originated loans and leases
$
104,400

 
$
73,216

 
$
177,616

 
$
180,890

 
$
14,581

December 31, 2012
 
 
 
 
 
 
 
 
 
Impaired originated loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
5,941

 
$
10,116

 
$
16,057

 
$
31,879

 
$
2,340

Commercial mortgage
39,648

 
72,160

 
111,808

 
123,964

 
10,628

Other commercial real estate
1,425

 
1,823

 
3,248

 
3,348

 
279

Commercial and industrial
7,429

 
11,371

 
18,800

 
9,583

 
1,949

Lease financing
665

 
81

 
746

 
746

 
194

Other

 
707

 
707

 
707

 
53

Residential mortgage
9,346

 
4,240

 
13,586

 
13,978

 
832

Revolving mortgage
1,238

 
2,965

 
4,203

 
4,203

 
1

Construction and land development - noncommercial
1,162

 
158

 
1,320

 
1,321

 
287

Consumer
1,609

 
900

 
2,509

 
2,509

 
256

Total impaired originated loans and leases
$
68,463

 
$
104,521

 
$
172,984

 
$
192,238

 
$
16,819

June 30, 2012
 
 
 
 
 
 
 
 
 
Impaired originated loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
8,700

 
$
18,473

 
$
27,173

 
$
44,157

 
$
1,555

Commercial mortgage
64,016

 
53,951

 
117,967

 
128,526

 
8,811

Other commercial real estate
1,218

 
2,491

 
3,709

 
3,871

 
435

Commercial and industrial
5,923

 
8,004

 
13,927

 
7,005

 
2,070

Lease financing
292

 

 
292

 
292

 
66

Other

 
742

 
742

 
742

 

Residential mortgage
13,076

 
4,844

 
17,920

 
18,355

 
1,380

Revolving mortgage
1,240

 
2,354

 
3,594

 
3,594

 
51

Construction and land development - noncommercial
1,311

 
2,147

 
3,458

 
3,458

 
205

Consumer
1,915

 
1,193

 
3,108

 
3,109

 
253

Total impaired originated loans and leases
$
97,691

 
$
94,199

 
$
191,890

 
$
213,109

 
$
14,826


At June 30, 2013, acquired loans that have had an adverse change in expected cash flows since the date of acquisition equaled $631,801, for which $76,534 in related allowance for loan losses has been recorded.


27

Table of Contents

 
YTD
Average
Balance
 
YTD Interest Income Recognized
 
(dollars in thousands)
Six months ended June 30, 2013
 
 
 
Originated impaired loans and leases:
 
 
 
Construction and land development - commercial
$
8,899

 
$
213

Commercial mortgage
103,032

 
2,838

Other commercial real estate
3,028

 
82

Commercial and industrial
14,465

 
406

Lease financing
408

 
14

Other

 

Residential mortgage
15,003

 
412

Revolving mortgage
6,390

 
72

Construction and land development - noncommercial
783

 
25

Consumer
1,611

 
29

Total originated impaired loans and leases
$
153,619

 
$
4,091

Three months ended June 30, 2013
 
 
 
Originated impaired loans and leases:
 
 
 
Construction and land development - commercial
$
8,541

 
$
101

Commercial mortgage
102,356

 
1,413

Other commercial real estate
2,647

 
37

Commercial and industrial
10,298

 
139

Lease financing
531

 
9

Other

 

Residential mortgage
13,855

 
184

Revolving mortgage
6,976

 
47

Construction and land development - noncommercial
913

 
13

Consumer
1,587

 
25

Total originated impaired loans and leases
$
147,704

 
$
1,968

Six months ended June 30, 2012
 
 
 
Originated impaired loans and leases:
 
 
 
Construction and land development - commercial
$
27,118

 
$
283

Commercial mortgage
92,357

 
1,414

Other commercial real estate
3,140

 
48

Commercial and industrial
14,135

 
120

Lease financing
339

 
4

Other
124

 
13

Residential mortgage
15,298

 
234

Revolving mortgage
1,956

 
20

Construction and land development - noncommercial
3,518

 
50

Consumer
1,735

 
7

Total originated impaired loans and leases
$
159,720

 
$
2,193

Three months ended June 30, 2012
 
 
 
Originated impaired loans and leases:
 
 
 
Construction and land development - commercial
$
26,616

 
$
249

Commercial mortgage
106,563

 
1,062

Other commercial real estate
3,268

 
48

Commercial and industrial
9,644

 
66

Lease financing
343

 
3

Other
243

 
13

Residential mortgage
19,607

 
154

Revolving mortgage
3,917

 
20

Construction and land development - noncommercial
2,529

 
31

Consumer
1,957

 
6

Total originated impaired loans and leases
$
174,687

 
$
1,652

 
 
 
 



28

Table of Contents

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (TDRs). In general, the modification or restructuring of a loan is considered a TDR if, for economic reasons or legal reasons related to a borrower's financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. In accordance with GAAP, loans acquired under ASC 310-30 are not initially considered to be TDRs. The following table provides a summary of total TDRs by accrual status.

 
June 30, 2013
 
June 30, 2012
 
Accruing
 
 Nonaccruing
 
 Total
 
 Accruing
 
 Nonaccruing
 
 Total
 
(dollars in thousands)
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
30,659

 
$
15,329

 
$
45,988

 
$
42,662

 
$
14,575

 
$
57,237

Commercial mortgage
135,953

 
35,433

 
171,386

 
138,081

 
50,831

 
188,912

Other commercial real estate
8,103

 
1,260

 
9,363

 
5,752

 
444

 
6,196

Commercial and industrial
9,290

 
3,517

 
12,807

 
8,222

 
7,118

 
15,340

Lease
60

 

 
60

 
244

 

 
244

Total commercial loans
184,065

 
55,539

 
239,604

 
194,961

 
72,968

 
267,929

Noncommercial
 
 
 
 
 
 
 
 
 
 
 
Residential
27,120

 
5,820

 
32,940

 
24,181

 
8,365

 
32,546

Revolving mortgage
2,728

 

 
2,728

 
49

 

 
49

Construction and land development - noncommercial
441

 
469

 
910

 
4,592

 

 
4,592

Consumer and other
1,419

 

 
1,419

 
2,925

 

 
2,925

Total noncommercial loans
31,708

 
6,289

 
37,997

 
31,747

 
8,365

 
40,112

Total loans
$
215,773

 
$
61,828

 
$
277,601

 
$
226,708

 
$
81,333

 
$
308,041


Total troubled debt restructurings at June 30, 2013, equaled $277,601, of which $158,494 were acquired and $119,107 were originated. TDRs at December 31, 2012, totaled $333,170, which consisted of $193,207 acquired and $139,963 that were originated. At June 30, 2012, total TDRs were $308,041 of which $158,627 were acquired and $149,411 were originated.

The majority of TDRs are included in the special mention, substandard or doubtful grading categories, which results in more elevated loss expectations when determining the expected cash flows that are used to determine the allowance for loan losses associated with these loans. When a restructured loan subsequently defaults, it is evaluated and downgraded if appropriate. The more severely graded the loan, the lower the estimated expected cash flows and the greater the allowance recorded. Further, TDRs over $500 and graded substandard or lower are evaluated individually for impairment through review of collateral values.


29

Table of Contents

The following tables provide the types of TDRs made during the three months ended June 30, 2013, and 2012, as well as a summary of loans that were modified as a TDR during the 12 months ended June 30, 2013, and 2012 that subsequently defaulted during the three months ended June 30, 2013, and 2012.

.
 
Three months ended June 30, 2013
 
Three months ended June 30, 2012
 
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
 
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
 
(dollars in thousands)
 
Originated loans
 
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$

 
$

 
2
$
316

 
$

 
Commercial mortgage
1
71

 

 
5
3,108

 
1
109

 
Other commercial real estate
1
100

 

 

 

 
Total interest only
2
171

 

 
7
3,424

 
1
109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
1
253

 

 
Commercial mortgage
1
242

 
1
223

 
17
4,873

 
2
1,495

 
Other commercial real estate

 

 
2
963

 

 
Commercial and industrial

 
1
22

 
3
320

 
1
71

 
Residential mortgage

 
1
106

 
2
153

 

 
Construction and land development - noncommercial

 

 

 

 
Consumer
1
46

 

 
4
241

 

 
Total loan term extension
2
288

 
3
351

 
29
6,803

 
3
1,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
7
2,035

 

 
1
1,453

 

 
Commercial and industrial
3
831

 

 
3
116

 

 
Other commercial real estate
3
753

 

 

 

 
Residential mortgage
6
885

 
1
99

 
7
1,429

 
1
378

 
Revolving mortgage
1
99

 

 
1
49

 

 
Construction & land development - noncommercial
2
521

 

 

 

 
Consumer

 

 
1
10

 

 
Total below market interest rate
22
5,124

 
1
99

 
13
3,057

 
1
378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2
87

 

 

 
 
Revolving mortgage
9
727

 

 

 
 
Total discharged from bankruptcy
11
814

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other concession
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage

 

 
1
775

 

 
Commercial and industrial

 

 
1
387

 

 
Total other concession

 

 
2
1,162

 

 
Total originated restructurings
37
$
6,397

 
4
$
450

 
51
$
14,446

 
5
$
2,053

 


30

Table of Contents

 
Three months ended June 30, 2013
 
Three months ended June 30, 2012
 
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
 
 
Number of loans
Recorded investment at period end
 
Number of loans
Recorded investment at period end
 
Number of loans
Recorded investment at period end
 
Number of loans
Recorded investment at period end
 
 
(dollars in thousands)
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$

 
1
$
104

 
$

 
$

 
Commercial mortgage
$

 
1
$
1,699

 
1
$
8,752

 
$

 
Commercial and industrial

 

 
1
971

 

 
Residential mortgage
1
134

 

 
1
100

 
1
4,508

 
Total interest only
1
134

 
2
1,803

 
3
9,823

 
1
4,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
7
2,468

 
3
1,502

 
Commercial mortgage

 

 
1
1,240

 

 
Commercial and industrial

 

 
1
23

 
1
110

 
Residential mortgage

 

 

 
3
735

 
Total loan term extension

 

 
9
3,731

 
7
2,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
1
74

 
3
3,670

 
Commercial mortgage
1
813

 

 
4
2,832

 
2
3,565

 
Other commercial real estate

 

 
2
1,720

 

 
Commercial and industrial

 

 
1
502

 

 
Residential mortgage
2
997

 
1
224

 
3
619

 
3
1,691

 
Construction and land development - non-commercial

 

 

 
1
276

 
Total below market interest rate
3
1,810

 
1
224

 
11
5,747

 
9
9,202

 
Total acquired restructurings
4
$
1,944

 
3
$
2,027

 
23
$
19,301

 
17
$
16,057

 

For the three months ended June 30, 2013, the recorded investment in troubled debt restructurings subsequent to modification was not materially impacted by the modification since forgiveness of principal is not a restructuring option frequently used by BancShares.


31

Table of Contents

The following tables provide the types of TDRs made during the six months ended June 30, 2013, and 2012, as well as a summary of loans that were modified as a TDR during the 12 months ended June 30, 2013 and 2012 that subsequently defaulted during the six months ended June 30, 2013 and 2012.

 
Six months ended June 30, 2013
 
Six months ended June 30, 2012
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
(dollars in thousands)
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$

 
$

 
2
$
316

 
$

Commercial mortgage
8
3,406

 

 
9
3,741

 
1
109

Other commercial real estate
1
100

 

 

 

Residential mortgage
1
630

 

 
1
341

 

Total interest only
10
4,136

 

 
12
4,398

 
1
109

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
2
7,514

 

Commercial mortgage
5
1,972

 
1
223

 
35
12,404

 
5
2,389

Other commercial real estate

 

 
3
1,345

 

Commercial and industrial
1
229

 
1
22

 
8
886

 
1
71

Lease financing

 

 
3
178

 

Residential mortgage
3
51

 
1
106

 
5
447

 
1
164

Construction and land development - noncommercial

 

 
1
1,701

 
1
394

Consumer
1
46

 

 
5
1,142

 

Total loan term extension
10
2,298

 
3
351

 
62
25,617

 
8
3,018

 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1
224

 

 
1
230

 

Commercial mortgage
12
5,819

 

 
3
3,376

 
1
118

Commercial and industrial
4
846

 

 
4
879

 

Other commercial real estate
3
753

 

 

 

Residential mortgage
14
1,579

 
1
99

 
9
1,858

 
1
378

Revolving mortgage
1
99

 

 
1
49

 

Construction & land development - noncommercial
2
521

 

 

 

Consumer
3
235

 

 
2
12

 

Total below market interest rate
40
10,076

 
1
99

 
20
6,404

 
2
496

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
3
352

 

 

 

Revolving mortgage
30
2,383

 
3
93

 

 

Total discharged from bankruptcy
33
2,735

 
3
93

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Other concession
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage

 

 
2
943

 

Residential mortgage

 

 
1
387

 

Total other concession

 

 
3
1,330

 

Total originated restructurings
93
$
19,245

 
7
$
543

 
97
$
37,749

 
11
$
3,623



32

Table of Contents

 
Six months ended June 30, 2013
 
Six months ended June 30, 2012
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
(dollars in thousands)
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$

 
1
$
104

 
1
$
135

 
$

Commercial mortgage
1
290

 
2
1,989

 
1
8,752

 

Commercial and industrial

 

 
1
971

 

Residential mortgage
2
177

 

 
1
100

 
1
4,507

Total interest only
3
467

 
3
2,093

 
4
9,958

 
1
4,507

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
9
4,850

 
4
3,721

Commercial mortgage

 

 
2
1,705

 

Commercial and industrial

 

 
1
23

 
1
110

Residential mortgage
1
199

 


 
1
52

 
4
908

Total loan term extension
1
199

 

 
13
6,630

 
9
4,739

 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
4
3,331

 

 
8
665

 
6
5,684

Commercial mortgage
5
11,871

 
3
3,145

 
9
10,240

 
8
7,029

Other commercial real estate

 

 
2
1,720

 

Commercial and industrial
2
435

 

 
3
644

 
2
142

Residential mortgage
7
2,484

 
3
931

 
8
1,134

 
3
1,691

Construction and land development - noncommercial

 

 
1
276

 
2
1,875

Total below market interest rate
18
18,121

 
6
4,076

 
31
14,679

 
21
16,421

 
 
 
 
 
 
 
 
 
 
 
 
Total acquired restructurings
22
$
18,787

 
9
$
6,169

 
48
$
31,267

 
31
$
25,667




Note E
Other Real Estate Owned

The following table explains changes in other real estate owned during the six months ended June 30, 2013, and 2012.

 
Covered
 
Noncovered
 
Total
 
(dollars in thousands)
Balance at December 31, 2011
$
148,599

 
$
50,399

 
$
198,998

Additions
61,630

 
18,783

 
80,413

Sales
(81,589
)
 
(16,616
)
 
(98,205
)
Writedowns
(11,259
)
 
(3,112
)
 
(14,371
)
Balance at June 30, 2012
$
117,381

 
$
49,454

 
$
166,835

Balance at December 31, 2012
$
102,577

 
$
43,513

 
$
146,090

Additions
41,315

 
16,615

 
57,930

Sales
(53,676
)
 
(21,026
)
 
(74,702
)
Writedowns
(5,383
)
 
(2,160
)
 
(7,543
)
Balance at June 30, 2013
$
84,833

 
$
36,942

 
$
121,775




33

Table of Contents


Note F
Receivable from the FDIC for Loss Share Agreements

The following table provides changes in the receivable from the FDIC for the three-month and six-month periods ended June 30, 2013, and 2012.
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Balance at beginning of period
$
195,942

 
$
492,384

 
$
270,192

 
$
617,377

Accretion of discounts and premiums, net
(19,069
)
 
(26,674
)
 
(45,181
)
 
(46,737
)
Receipt of payments from FDIC
(4,015
)
 
(68,894
)
 
(46,534
)
 
(192,098
)
Post-acquisition and other adjustments, net
(14,845
)
 
8,810

 
(20,464
)
 
27,084

Balance at end of period
$
158,013

 
$
405,626

 
$
158,013

 
$
405,626


The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value at the acquisition date using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. See Note J for information related to BancShares' recorded payable to the FDIC for loss share agreements.

Post-acquisition adjustments represent the net change in loss estimates related to acquired loans and covered OREO as a result of changes in expected cash flows and the allowance for loan and lease losses related to those covered loans. For loans covered by loss share agreements, subsequent decreases in the amount expected to be collected from the borrower or collateral liquidation result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses and a proportional adjustment to the receivable from the FDIC for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected from the borrower or collateral liquidation result in the reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the receivable from the FDIC, or prospective adjustment to the accretable yield and the related receivable from the FDIC if no provision for loan and lease losses had been recorded previously. Other adjustments include those resulting from unexpected recoveries of amounts previously charged off.

Note G
Estimated Fair Values

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, BancShares has made estimates using discounted cash flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares could realize in a current market exchange.

Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 values are based on quoted prices for identical instruments in active markets.
Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 values are generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.


34

Table of Contents

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:

Investment securities. Investment securities are measured based on quoted market prices, when available. For certain mortgage-backed securities and state, county and municipal securities, fair values are determined using broker prices based on recent sales of similar securities. The inputs used in the fair value measurement of investment securities are considered level 1 or level 2 inputs. The details of investment securities available for sale and the corresponding level of inputs are provided in the table of assets measured at fair value on a recurring basis.

Loans held for sale. Fair value for loans held for sale is generally based on market prices for loans with similar characteristics or external valuations. The inputs used in the fair value measurements for loans held for sale are considered level 2 inputs.

Loans and leases. For variable rate loans, carrying value is a reasonable estimate of fair value. For fixed rate loans, fair values are estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. Additional valuation adjustments are made for liquidity and credit risk. The inputs used in the fair value measurements for loans and leases are considered level 3 inputs.

Receivable from the FDIC for loss share agreements. Fair value is estimated based on discounted future cash flows using current discount rates. Due to post-acquisition improvements in expected losses, significant portions of the FDIC receivable will be recovered through amortization of the receivable over the remaining life of the loss share agreement rather than by cash flows from the FDIC. The estimated amounts to be amortized in future periods have no fair value. The inputs used in the fair value measurements for the FDIC receivable are considered level 3 inputs. The FDIC loss share agreements are not transferable and, accordingly, there is no market for this receivable.

FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par.

Preferred stock issued under the TARP program. Preferred securities issued under the Troubled Asset Recovery Program are recorded at cost and are evaluated quarterly for impairment based on the ultimate recoverability of the purchase price. The fair value of these securities is derived from a third-party proprietary model that is considered to be a level 3 input.

Deposits. For non-time deposits and variable rate time deposits, carrying value is a reasonable estimate of fair value. The fair value of fixed rate time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The inputs used in the fair value measurements for deposits are considered level 2 inputs.    

Long-term obligations. For fixed rate trust preferred securities, the fair values are determined based on recent trades of the actual security. For other long-term obligations, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurements for long-term obligations are considered level 2 inputs.

Payable to the FDIC for loss share agreements. The fair value of the payable to the FDIC for loss share agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the loss share agreements. Cash flows are discounted to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurements for the payable to the FDIC are considered level 3 inputs. See Note J for more information on the payable to the FDIC.

Interest Rate Swap. Under the terms of the existing cash flow hedge, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the three-month LIBOR rate. The fair value of the cash flow hedge is, therefore, based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. If the fair value of the swap is a net asset, the risk of default by the counterparty is considered in the determination of fair value and is considered a level 3 input. The inputs used in the fair value measurements of the interest rate swap are considered level 2 inputs.


35

Table of Contents

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.
 
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of June 30, 2013, December 31, 2012, and June 30, 2012. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk relating to them that would cause the fair value to differ from the carrying value.
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
(dollars in thousands)
Cash and due from banks
$
542,645

 
$
542,645

 
$
639,730

 
$
639,730

 
$
571,004

 
$
571,004

Overnight investments
1,039,925

 
1,039,925

 
443,180

 
443,180

 
984,536

 
984,536

Investment securities available for sale
5,184,976

 
5,184,976

 
5,226,228

 
5,226,228

 
4,634,248

 
4,634,248

Investment securities held to maturity
1,130

 
1,200

 
1,342

 
1,448

 
1,578

 
1,714

Loans held for sale
62,497

 
64,262

 
86,333

 
87,654

 
76,374

 
78,139

Acquired loans, net of allowance for loan and lease losses
1,366,802

 
1,339,466

 
1,669,263

 
1,635,878

 
1,911,554

 
1,873,323

Originated loans, net of allowance for loan and lease losses
11,473,687

 
11,317,282

 
11,397,069

 
11,238,597

 
11,277,326

 
11,200,523

Receivable from the FDIC for loss share agreements (1)
158,013

 
71,353

 
270,192

 
100,161

 
405,626

 
297,963

Income earned not collected
45,567

 
45,567

 
47,666

 
47,666

 
49,743

 
49,743

Stock issued by:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank of Atlanta
28,788

 
28,788

 
36,139

 
36,139

 
38,105

 
38,105

Federal Home Loan Bank of San Francisco
8,061

 
8,061

 
10,107

 
10,107

 
11,746

 
11,746

Federal Home Loan Bank of Seattle
4,330

 
4,330

 
4,410

 
4,410

 
4,490

 
4,490

Preferred stock
41,665

 
42,898

 
40,768

 
40,793

 

 

Deposits
18,018,015

 
18,049,241

 
18,086,025

 
18,126,893

 
17,801,646

 
17,854,346

Short-term borrowings
581,937

 
581,937

 
568,505

 
568,505

 
700,299

 
700,299

Long-term obligations
443,313

 
463,244

 
444,921

 
472,642

 
644,682

 
677,372

Payable to the FDIC for loss share agreements
101,652

 
117,891

 
101,641

 
125,065

 
91,648

 
110,373

Accrued interest payable
9,208

 
9,208

 
9,353

 
9,353

 
23,093

 
23,093

Interest rate swap
8,196

 
8,196

 
10,398

 
10,398

 
11,020

 
11,020


(1) The fair value of the FDIC receivable excludes receivable related to accretable yield to be amortized in prospective periods.

Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or fair value. Impaired loans, OREO, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. BancShares did not elect to voluntarily report any assets or liabilities at fair value.

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Table of Contents

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2013December 31, 2012, and June 30, 2012:
 
 
 
 
Fair value measurements using:
Description
Fair value
 

Level 1
 

Level 2
 

Level 3
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
598,666

 
$
598,666

 
$

 
$

Government agency
2,721,379

 
2,721,379

 

 

Mortgage-backed securities
1,843,323

 

 
1,843,323

 

Equity securities
20,593

 
20,593

 

 

State, county, municipal
187

 

 
187

 

Other
828

 
828

 

 

Total
$
5,184,976

 
$
3,340,638

 
$
1,843,510

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
8,196

 
$

 
$
8,196

 
$

December 31, 2012
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
823,632

 
$
823,632

 
$

 
$

Government agency
3,055,204

 
3,055,204

 

 

Mortgage-backed securities
1,329,657

 

 
1,329,657

 

Equity securities
16,365

 
16,365

 

 

State, county, municipal
550

 

 
550

 

Other
820

 
820

 

 

Total
$
5,226,228

 
$
3,895,201

 
$
1,330,207

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
10,398

 
$

 
$
10,398

 
$

June 30, 2012
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
878,685

 
$
878,685

 
$

 
$

Government agency
2,978,198

 
2,978,198

 

 

Corporate bonds
50,446

 
50,446

 

 

Mortgage-backed securities
707,645

 

 
707,645

 

Equity securities
18,238

 
18,238

 

 

State, county, municipal
1,036

 

 
1,036

 

Total
$
4,634,248

 
$
3,925,567

 
$
708,681

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
11,020

 
$

 
$
11,020

 
$



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Table of Contents

Prices for US Treasury securities, government agency securities, corporate bonds and equity securities are readily available in the active markets in which those securities are traded and the resulting fair values are derived from level 1 inputs. Prices for mortgage-backed securities and state, county and municipal securities are obtained using the fair values of similar
assets, which are deemed to be level 2 inputs. There were no assets or liabilities valued on a recurring basis using level 3 inputs at June 30, 2013December 31, 2012, or June 30, 2012, and there were no transfers between level 1 and level 2 categories during the six months ended June 30, 2013, and 2012.

Certain financial assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are, therefore, carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. Noncovered OREO that has been recently remeasured is deemed to be at fair value. For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2013December 31, 2012, and June 30, 2012.
 
 
 
 
Fair value measurements using:
Description
Fair value
 

Level 1
 

Level 2
 

Level 3
 
(dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
Loans held for sale
$
42,084

 
$

 
$
42,084

 
$

Originated impaired loans
42,940

 

 

 
42,940

Other real estate not covered under loss share agreements remeasured during current year
534

 

 

 
534

December 31, 2012
 
 
 
 
 
 
 
Loans held for sale
65,244

 

 
65,244

 

Originated impaired loans
51,644

 

 

 
51,644

Other real estate not covered under loss share agreements remeasured during current year
21,113

 

 

 
21,113

June 30, 2012
 
 
 
 
 
 
 
Loans held for sale
49,277

 

 
49,277

 

Originated impaired loans
82,865

 

 

 
82,865

Other real estate not covered under loss share agreements remeasured during current year
12,893

 

 

 
12,893


The value of loans held for sale are generally based on market prices for loans with similar characteristics or external valuations.

The value of impaired loans are determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Impaired loans are assigned to an asset manager and monitored monthly for significant changes since the last valuation. If significant changes are noted, the asset manager orders a new valuation or adjusts the valuation accordingly. Expected cash flows are determined using expected loss rates developed from historic experience for loans with similar risk characteristics.

OREO is measured and reported at fair value using level 3 inputs for valuations based on unobservable criteria. The values of OREO are determined by collateral valuations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.

No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2013December 31, 2012, or June 30, 2012.

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Table of Contents



Note H
Employee Benefit Plans
Pension expense is a component of employee benefits expense. For the three-month and six-month periods ended June 30, 2013, and 2012 the components of pension expense are as follows:
 
 
Three months ended June 30
 
Six months ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Service cost
$
4,261

 
$
3,548

 
$
8,483

 
$
6,375

Interest cost
6,409

 
5,646

 
12,304

 
10,142

Expected return on assets
(7,474
)
 
(6,755
)
 
(14,405
)
 
(12,134
)
Amortization of prior service cost
53

 
53

 
105

 
106

Amortization of net actuarial loss
4,241

 
2,737

 
8,493

 
5,474

Total pension expense
$
7,490

 
$
5,229

 
$
14,980

 
$
9,963

The assumed discount rate for 2013 is 4.00 percent, the expected long-term rate of return on plan assets is 7.25 percent and the assumed rate of salary increases is 4.00 percent. For 2012 the assumed discount rate was 4.75 percent, expected long-term rate of return was 7.50 percent and the assumed rate of salary increases was 4.00 percent.

Note I
Income Taxes

Income tax expense totaled $25,292 and $10,681 for the second quarters of 2013 and 2012, representing effective tax rates of 36.6 percent and 22.1 percent during the respective periods. For the first six months of 2013, income tax expense totaled $56,353 compared to $29,035 during 2012. The effective tax rates for the six-month periods equals 36.2 percent and 28.4 percent, respectively.

The lower effective tax rates for the second quarter and first six months of 2012 primarily result from recognition of a $6,449 credit to income tax expense resulting from the favorable outcome of state tax audits for the period 2008-2010, net of additional federal taxes.

    
Note J
Commitments and Contingencies

To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, standby letters of credit and recourse obligations on mortgage loans sold. These instruments involve elements of credit, interest rate or liquidity risk.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets. At June 30, 2013, BancShares had unused commitments totaling $5,737,199 compared to $5,467,998 at December 31, 2012, and $5,801,224 at June 30, 2012.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. To minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At June 30, 2013December 31, 2012, and June 30, 2012, BancShares had standby letters of credit amounting to $58,745, $63,085 and $61,869, respectively. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.


39

Table of Contents

Residential mortgage loans are sold with standard representations and warranties relating to documentation and underwriting requirements for the loans. If deficiencies are discovered at any point in the life of the loan, the investor may require BancShares to repurchase the loan. As of June 30, 2013, December 31, 2012, and June 30, 2012, other liabilities included a reserve of $3,916, $4,065 and $2,849, respectively, for estimated losses arising from the repurchase of loans under these provisions.

In addition to standard representations and warranties, residential mortgage loans sold with limited recourse liability represent guarantees to repurchase the loans or repay a portion of the sale proceeds in the event of nonperformance by the borrower. The recourse period is generally 120 days or fewer after sale. At June 30, 2013December 31, 2012, and June 30, 2012, BancShares has sold loans of approximately $217,402, $205,888 and $191,421, respectively, for which the recourse period had not yet elapsed. At June 30, 2013, December 31, 2012, and June 30, 2012, $63,168, $97,706 and $104,321, respectively, represent loans that would require repurchase in the event of nonperformance by the borrower. Any loans that are repurchased under the recourse obligation will carry the same credit risk as mortgage loans originated by the company and will be collateralized in the same manner.

BancShares has recorded a receivable from the FDIC for the expected reimbursement of losses on assets covered under the various loss share agreements. These loss share agreements impose certain obligations on us that, in the event of noncompliance, could result in the delay or disallowance of some or all of our rights under those agreements. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed for noncompliance. The loss share agreements are subject to interpretation by both the FDIC and FCB, and disagreements may arise regarding coverage of losses, expenses and contingencies.

The loss share agreements for four FDIC-assisted transactions include provisions related to contingent payments commonly known as "clawback liability," which may be owed to the FDIC at the termination of the agreements. The FDIC clawback liability represents an estimated payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The FDIC clawback liability is estimated by discounting estimated future payments and is recorded in the Consolidated Balance Sheets as a payable to the FDIC for loss share agreements. As of June 30, 2013, December 31, 2012, and June 30, 2012, the clawback liability was $101,652, $101,641 and $91,648, respectively.

BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various FDIC-assisted transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
On February 18, 2011, United Western Bank, United Western Bank's parent company, United Western Bancorp, and five of their directors filed a complaint in the United States District Court for the District of Columbia against the Office of Thrift Supervision (OTS), its Acting Director and the FDIC in its corporate and receivership capacities, alleging that the seizure of United Western Bank by the OTS and the subsequent appointment of the FDIC as receiver were illegal. The complaint requested the court to direct the OTS to remove the FDIC as receiver and return control of United Western Bank to the plaintiffs. Neither BancShares nor FCB was named as a party. In June 2011, the Court dismissed all plaintiffs other than United Western Bank and dismissed the FDIC in both capacities, leaving United Western Bank and the OTS and its Acting Director as the only parties. In July 2011, following passage of the Dodd-Frank Act, the Office of the Comptroller of the Currency (OCC) and the Acting Comptroller were substituted for the OTS and its Acting Director as the only defendants. On March 5, 2013, the court entered a final, appealable order denying United Western Bank's Motion for Summary Judgment and granting OCC's and the Comptroller's Motion for Summary Judgment. On April 26, 2013, United Western Bank filed its Notice of Appeal to the U.S. Court of Appeals for the District of Columbia. On June 20, 2013, United Western Bank filed a Motion for the Voluntary Dismissal of its appeal. The Motion was granted and the appeal was dismissed on July 3, 2013.
During March 2012, FCB received communications from the US Small Business Administration (SBA) asserting that the SBA is entitled to receive a share of amounts paid or to be paid by the FDIC to FCB relating to certain specific SBA-guaranteed loans pursuant to the loss share agreement between FCB and the FDIC applicable to Temecula Valley Bank. FCB disputes the validity of the SBA claims and is pursuing administrative relief through the SBA. During the second quarter, SBA advised that it will no longer pursue this claim.



40

Table of Contents

Note K
Derivatives

At June 30, 2013, BancShares had an interest rate swap entered into during 2011 that qualifies as a cash flow hedge under GAAP. For all periods presented, the fair value of the outstanding derivative is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in the consolidated statements of cash flows under the caption net change in other liabilities.

The interest rate swap is used for interest rate risk management purposes and converts variable-rate exposure on outstanding debt to a fixed rate. The 2011 interest rate swap has a notional amount of $93,500, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The 2011 interest rate swap hedges interest payments through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above the three-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. Settlement of the swap occurs quarterly. As of June 30, 2013, collateral with a fair value of $9,655 was pledged to secure the existing obligation under the interest rate swap.


 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Notional  amount
 
Estimated fair value of liability
 
Notional  amount
 
Estimated fair value of liability
 
Notional  amount
 
Estimated fair value of liability
 
(dollars in thousands)
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016
$
93,500

 
$
8,196

 
$
93,500

 
$
10,398

 
$
93,500

 
$
11,020


For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income (loss), while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the three-month periods ended June 30, 2013, and 2012, BancShares recognized interest expense of $819 and $776, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness. For the six-month periods ended June 30, 2013, and 2012, BancShares recognized interest expense of $1,632 and $1,525, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.

The estimated net amount in accumulated other comprehensive loss at June 30, 2013, that is expected to be reclassified into earnings within the next 12 months is a net after-tax loss of $1,962.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the six-month periods ended June 30, 2013, and 2012.
 
2013
 
2012
 
(dollars in thousands)
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1
$
(10,398
)
 
$
(10,714
)
Other comprehensive income (loss) recognized during the six month period ended June 30
2,202

 
(306
)
Accumulated other comprehensive loss resulting from interest rate swaps as of June 30
$
(8,196
)
 
$
(11,020
)
BancShares monitors the credit risk of the interest rate swap counterparty.



41

Table of Contents

Note L
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following as of June 30, 2013December 31, 2012, and June 30, 2012:
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
(dollars in thousands)
Unrealized (losses) gains on investment securities available for sale
$
(6,659
)
 
$
(2,542
)
 
$
(4,117
)
 
$
33,809

 
$
13,292

 
$
20,517

 
$
28,155

 
$
11,082

 
$
17,073

Funded status of defined benefit plan
(149,736
)
 
(58,636
)
 
(91,100
)
 
(158,334
)
 
(62,003
)
 
(96,331
)
 
(119,676
)
 
(46,865
)
 
(72,811
)
Unrealized loss on cash flow hedge
(8,196
)
 
(3,237
)
 
(4,959
)
 
(10,398
)
 
(4,106
)
 
(6,292
)
 
(11,020
)
 
(4,351
)
 
(6,669
)
Total
$
(164,591
)
 
$
(64,415
)
 
$
(100,176
)
 
$
(134,923
)
 
$
(52,817
)
 
$
(82,106
)
 
$
(102,541
)
 
$
(40,134
)
 
$
(62,407
)

 
 
Gains and losses on cash flow hedges1
 
Unrealized gains and losses on available-for-sale securities1
 
Defined benefit pension items1
 
Total
 
 
(dollars in thousands)
Three months ended June 30, 2013
 
 
 
 
 
 
 
 
Beginning balance
 
$
(5,799
)
 
$
19,606

 
$
(93,712
)
 
$
(79,905
)
Other comprehensive income (loss) before reclassifications
 
344

 
(23,723
)
 

 
(23,379
)
Amounts reclassified from accumulated other comprehensive income
 
496

 

 
2,612

 
3,108

Net current period other comprehensive income (loss)
 
840

 
(23,723
)
 
2,612

 
(20,271
)
Ending balance
 
$
(4,959
)
 
$
(4,117
)
 
$
(91,100
)
 
$
(100,176
)
Three months ended June 30, 2012
 
 
 
 
 
 
 
 
Beginning balance
 
$
(6,248
)
 
$
14,340

 
$
(74,508
)
 
$
(66,416
)
Other comprehensive income before reclassifications
 
(891
)
 
2,735

 

 
1,844

Amounts reclassified from accumulated other comprehensive (loss) income
 
470

 
(2
)
 
1,697

 
2,165

Net current period other comprehensive (loss) income
 
(421
)
 
2,733

 
1,697

 
4,009

Ending balance
 
$
(6,669
)
 
$
17,073

 
$
(72,811
)
 
$
(62,407
)
Six months ended June 30, 2013
 
 
 
 
 
 
 
 
Beginning balance
 
$
(6,292
)
 
$
20,517

 
$
(96,331
)
 
$
(82,106
)
Other comprehensive income (loss)before reclassifications
 
345

 
(24,634
)
 

 
(24,289
)
Amounts reclassified from accumulated other comprehensive income
 
988

 

 
5,231

 
6,219

Net current period other comprehensive income (loss)
 
1,333

 
(24,634
)
 
5,231

 
(18,070
)
Ending balance
 
$
(4,959
)
 
$
(4,117
)
 
$
(91,100
)
 
$
(100,176
)
Six months ended June 30, 2012
 
 
 
 
 
 
 
 
Beginning balance
 
$
(6,483
)
 
$
16,115

 
$
(76,206
)
 
$
(66,574
)
Other comprehensive (loss) income before reclassifications
 
(1,109
)
 
960

 

 
(149
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
923

 
(2
)
 
3,395

 
4,316

Net current period other comprehensive (loss) income
 
(186
)
 
958

 
3,395

 
4,167

Ending balance
 
$
(6,669
)
 
$
17,073

 
$
(72,811
)
 
$
(62,407
)
1 All amounts are net of tax. Amounts in parentheses indicate debits.

42

Table of Contents

Details about accumulated other comprehensive loss
 
Amount reclassified from accumulated other comprehensive income1
 
Affected line item in the statement where net income is presented
 
 
(dollars in thousands)
 
 
Three months ended June 30, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate swap contracts
 
$
(819
)
 
Long-term obligations
 
 
323

 
Income taxes
 
 
$
(496
)
 
Net of tax
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
$

 
Securities gains (losses)
 
 

 
Income taxes
 
 
$

 
Net of tax
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(53
)
 
Employee benefits
     Actuarial gains
 
(4,241
)
 
Employee benefits
 
 
(4,294
)
 
Total before taxes
 
 
1,682

 
Income taxes
 
 
$
(2,612
)
 
Net of tax
Total reclassifications for the period
 
$
(3,108
)
 
 
 
 
 
 
 
Three months ended June 30, 2012
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate swap contracts
 
$
(776
)
 
Long-term obligations
 
 
306

 
Income taxes
 
 
$
(470
)
 
Net of tax
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
$
3

 
Securities gains (losses)
 
 
(1
)
 
Income taxes
 
 
$
2

 
Net of tax
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(52
)
 
Employee benefits
     Actuarial gains
 
(2,738
)
 
Employee benefits
 
 
(2,790
)
 
Total before taxes
 
 
1,093

 
Income taxes
 
 
$
(1,697
)
 
Net of tax
Total reclassifications for the period
 
$
(2,165
)
 
 
1 Amounts in parentheses indicate debits to profit/loss.


43

Table of Contents

Details about accumulated other comprehensive loss
 
Amount reclassified from accumulated other comprehensive loss1
 
Affected line item in the statement where net income is presented
 
 
(dollars in thousands)
 
 
Six months ended June 30, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate swap contracts
 
$
(1,632
)
 
Long-term obligations
 
 
644

 
Income taxes
 
 
$
(988
)
 
Net of tax
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
$

 
Securities gains (losses)
 
 

 
Income taxes
 
 
$

 
Net of tax
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(105
)
 
Employee benefits
     Actuarial gains
 
(8,493
)
 
Employee benefits
 
 
(8,598
)
 
Total before taxes
 
 
3,367

 
Income taxes
 
 
$
(5,231
)
 
Net of tax
Total reclassifications for the period
 
$
(6,219
)
 
 
 
 
 
 
 
Six months ended June 30, 2012
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate swap contracts
 
$
(1,525
)
 
Long-term obligations
 
 
602

 
Income taxes
 
 
$
(923
)
 
Net of tax
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
$
3

 
Securities gains (losses)
 
 
(1
)
 
Income taxes
 
 
$
2

 
Net of tax
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(105
)
 
Employee benefits
     Actuarial gains
 
(5,475
)
 
Employee benefits
 
 
(5,580
)
 
Total before taxes
 
 
2,185

 
Income taxes
 
 
$
(3,395
)
 
Net of tax
Total reclassifications for the period
 
$
(4,316
)
 
 
1 Amounts in parentheses indicate debits to profit/loss.







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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2013, the reclassifications have no material effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms "we," "us" and "BancShares" refer to the consolidated financial position and consolidated results of operations for BancShares.

BancShares is a financial holding company headquartered in Raleigh, North Carolina, that offers full-service banking through its wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB). FCB is a state-chartered bank organized under the laws of the state of North Carolina. As of August 7, 2013, FCB operated 407 branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, Florida, Georgia, Texas, Arizona, New Mexico, Oregon, Colorado, Oklahoma, Kansas, Missouri, and Washington, DC.



EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

BancShares’ earnings and cash flows are primarily derived from our commercial banking activities. We offer commercial and consumer loans, deposit and treasury services products, cardholder and merchant services, wealth management services, as well as various other products and services typically offered by commercial banks. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in the bank premises, hardware, software, furniture and equipment used to conduct our commercial banking business.

Various external factors influence the focus of our business efforts. Since 2008, asset quality challenges, capital adequacy problems and weak economic conditions have resulted in unfavorable conditions for organic growth. However, during this period of industry-wide turmoil, we participated in six FDIC-assisted transactions involving distressed financial institutions. Participation in FDIC-assisted transactions provided opportunities to increase our business volumes in existing markets and to expand our banking presence to adjacent markets that we deemed demographically attractive.

Under accounting principles generally accepted in the United States of America (GAAP), acquired assets and assumed liabilities are initially recorded at fair value, and fair value discounts and premiums are accreted or amortized to earnings over the life of the underlying asset or liability. In addition, post-acquisition deterioration results in an adjustment to the allowance for loan and lease losses. For each of the six FDIC-assisted transactions, loss share agreements protect us from a substantial portion of the asset quality risk that we would otherwise incur. The estimated receivable and payable related to those loss share agreements are measured and recorded in the financial statements and are adjusted for changes in the estimated cash flows to be derived from the covered assets. The amortization and accretion of premiums and discounts, the recognition of post-acquisition improvement and deterioration and the related accounting for the indemnification asset may result in significant income statement volatility. In some periods, the net impact may be favorable, while, in other periods, the net impact may be unfavorable.

Various other factors have had an unfavorable impact on income during the past two years. Low interest rates and competitive loan and deposit pricing has led to very narrow interest margins. Further, legislatively-imposed restrictions on our ability to collect various fees have adversely affected noninterest income. While distressed customers continue to experience difficulty meeting their debt service obligations, other customers have intentionally avoided new debt due to economic uncertainty, while other customers continued to repay existing debt.

Although improved when compared to prior years, real estate demand in many of our markets remains weak, resulting in depressed real estate prices that continue to affect collateral values. As a result, when customer cash flow is inadequate to avoid default, losses may occur when collateral is sold. Exposure to declining real estate values have caused some loans secured by a second mortgage to become effectively unsecured.


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In an effort to assist customers experiencing financial difficulty, we have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing liquidity challenges or other circumstances that could affect their ability to meet debt obligations. The majority of the modifications we provide are to customers that are currently performing under existing terms but may be unable to do so in the near future without a modification.

Investment securities available for sale have declined marginally in 2013. The primary driver has been a decline in the fair value of the portfolio which is now in an unrealized loss position compared to an unrealized gain at December 31, 2012. Proceeds from called securities are being reinvested into similar type products.

Loans outstanding, excluding loans held for sale, have declined slightly from December 31, 2012. The decline reflects the continuing amortization of the acquired loan portfolio partially offset by originated loan growth.

Deposit balances have remained stable in total, although during 2013, time deposits have declined while demand deposits have grown. The demand for our treasury services products has been adversely influenced by extraordinarily low interest rates. As a whole, our balance sheet liquidity position remains strong.

Financial institutions continue efforts to implement various legislative and governmental reforms intended to stabilize the financial services industry and provide added consumer protection. In addition to actions previously enacted by governmental agencies and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), further regulatory changes will likely occur. The Basel III capital requirements were approved by the Bank regulatory agencies in July 2013.

BancShares’ consolidated net income during the second quarter of 2013 equaled $43.9 million, an increase of $6.3 million from the $37.6 million earned during the corresponding period of 2012. The annualized return on average assets and equity amounted to 0.83 percent and 9.13 percent, respectively, during the second quarter of 2013, compared to 0.71 percent and 7.93 percent during the same period of 2012. Net income per share during the second quarter of 2013 totaled $4.56, compared to $3.66 during the second quarter of 2012. The increase in net income in 2013 was due to a reduction in the provision for loan and lease losses, higher noninterest income and lower noninterest expense, partially offset by lower net interest income.

For the six months ended June 30, 2013, net income amounted to $99.5 million, compared to $73.1 million earned during the same period of 2012. Return on assets and equity during 2013 equaled 0.95 percent and 10.55 percent respectively, down from 0.70 percent and 7.79 percent during the six-month period ended June 30, 2012. Net income per share equaled $10.34 during the first six months of 2013, compared to $7.11 in the first six months of 2012. Significant items favorably affecting 2013 earnings include a significant reduction in provision for loan and lease losses, a reduction in foreclosure-related expenses and gains recognized on the sale of our processing service relationships. Partially offsetting the benefit of these items were lower net interest income and higher income tax expense.

Net interest income decreased $35.9 million from $215.4 million in the second quarter of 2012 to $179.5 million in 2013, primarily due to the impact of lower asset yields and acquired loan shrinkage and a decrease in the taxable-equivalent yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets decreased 84 basis points from the second quarter of 2012 to 3.74 percent. Year-to-date net interest income decreased $52.0 million, or 11.9 percent, during 2013. The net yield on interest-earning assets was 4.04 percent during the six months ended June 30, 2013, compared to 4.69 percent for the same period of 2012. For both the second quarter and year-to-date periods, accreted loan discounts resulting from unscheduled payments on acquired loans significantly impacted the taxable-equivalent net yield on interest-earning assets. Since unscheduled payments are unpredictable, the yield on interest-earning assets may demonstrate volatility, but accretion income will generally decrease in future periods as acquired loan balances continue to decline.

We recorded a $13.2 million credit to provision for loan and lease losses during the second quarter of 2013, compared to provision expense of $29.7 million during the second quarter of 2012. The credit to provision expense related to acquired loans totaled $15.5 million during the second quarter of 2013, compared to provision expense of $18.7 million during the second quarter of 2012, a $34.2 million favorable change. The significant reduction in provision expense for acquired loans resulted from lower current impairment and unexpected payoffs of acquired loans for which an allowance had previously been established.

During the first six months of 2013, we recorded a credit to the provision for loan and lease losses of $31.8, a decrease of $92.2 million from the same period of 2012. The decrease was caused by a reversal of previously-recognized impairment and lower post-acquisition deterioration of acquired loans. We recorded a $38.1 million credit to acquired loan provision expense for the six months ended June 30, 2013, compared to provision expense of $28.3 million during the same time period in 2012.


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Provision expense for originated loans totaled $2.2 million during the second quarter of 2013 compared to $11.0 million during the second quarter of 2012, a reduction of $8.8 million, resulting from lower charge-offs and credit quality improvements in the originated commercial loan portfolio. Provision expense for originated loans totaled $6.2 million for the six months ended June 30, 2013, compared to $32.1 million during the same time period in 2012.

Noninterest income increased $7.7 million in the second quarter of 2013 when compared to the second quarter of 2012, due to improved merchant and mortgage income. For the six-month period ended June 30, 2013, noninterest income increased $18.3 million from the comparable period of 2012 primarily resulting from the sale of a large portion of our client bank processing service relationships and improved mortgage income.

Noninterest expense decreased $6.2 million, or 3.2 percent, in the second quarter of 2013 and increased $4.8 million, or 1.3 percent for the six months ended June 30, 2013, when compared to the same period in 2012. The second quarter decrease resulted from lower foreclosure-related expenses, partially offset by higher employee benefit expense. The year-to-date increase results from higher employee benefit expense, processing fees paid to third parties and fixed asset impairments resulting from the sale of our client bank processing service relationships.

Income tax expense in the second quarter of 2013 totaled $25.3 million compared to $10.7 million for the same period of 2012,
representing effective tax rates of 36.6 percent and 22.1 percent during the respective periods. The change in the effective tax rate for the second quarter of 2013 results from a $6.4 million credit to income tax expense recorded during the second quarter of 2012, the result of state tax audits for the period 2008-2010, net of additional federal taxes.

CRITICAL ACCOUNTING POLICIES UPDATES
Allowance for loan and lease losses. The allowance for loan and lease losses (ALLL) reflects the estimated losses resulting from the inability of our customers to make required loan and lease payments. The ALLL is based on management's evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets.
Prior to the second quarter of 2013, management applied a methodology that included allowances assigned to specific impaired commercial loans and leases, general commercial loan allowances based upon estimated loss rates by credit grade with the loss rates derived in part from migration analysis among grades, general noncommercial allowances based upon estimated loss rates derived primarily from historical losses, and a nonspecific allowance based upon economic conditions, loan concentrations and other relevant factors.
During the second quarter of 2013, we implemented enhancements to our modeling methodology for estimating the general reserve component of the ALLL. Specifically for the originated commercial loans and leases segment, we refined our modeling methodology by increasing the granularity of the historical net loss data used to develop the applicable loss rates by utilizing information which further considers the class of the commercial loan and associated risk rating. For the originated noncommercial segment, we refined our modeling methodology to incorporate specific loan classes and delinquency status trends into the loss rates. The enhanced ALLL estimates implicitly include the risk of draws on open lines within each loan class.  Management has also further enhanced a qualitative framework for considering economic conditions, loan concentrations and other relevant factors at a loan class level. We believe that the methodology enhancements will improve the granularity of historical net loss data and precision of our segment analysis. These enhancements resulted in certain reallocations between segments, allocation of the nonspecific allowance to specific loan classes, and a reallocation of a portion of the reserve for unfunded commitments into the ALLL. Other than these modifications, the enhancements to the methodology had no material impact on the ALLL.
Acquired loans are recorded at fair value at acquisition date. Amounts deemed uncollectible at acquisition date become part of the fair value calculation and are excluded from the ALLL. Following acquisition, we routinely review acquired loans to determine if changes in estimated cash flows have occurred. Subsequent decreases in the amount expected to be collected may result in a provision for loan and lease losses with a corresponding increase in the ALLL. Subsequent increases in the amount expected to be collected result in a reversal of any previously recorded provision for loan and lease losses and related ALLL, if any, or prospective adjustment to the accretable yield if no provision for loan and lease losses had been recorded. Proportional adjustments are also recorded to the FDIC receivable for acquired loans covered by loss share agreements.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and recognizes an adequate provision to maintain the allowance at an appropriate level. Specific allowances for impaired loans are determined by

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analyzing estimated cash flows discounted at a loan's original rate or collateral values in situations where we believe repayment is dependent on collateral liquidation. Substantially all impaired loans are collateralized by real property.
Management considers the established allowance adequate to absorb losses that relate to loans and leases outstanding at June 30, 2013, although future additions may be necessary based on changes in economic conditions, collateral values, erosion of the borrower's access to liquidity and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. These agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated and additions to the allowance may be required.
There were no material updates to other critical accounting policies.




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Table 1
SELECTED QUARTERLY DATA
 
2013
 
2012
 
Six months ended June 30
 
 
Second
 
First
 
Fourth
 
Third
 
 Second
 
 
 
 
 
 
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
2013
 
2012
 
 
(dollars in thousands, except share data)
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
193,926

 
$
220,604

 
$
280,891

 
$
236,674

 
$
240,519

 
$
414,530

 
$
487,271

 
Interest expense
14,398

 
15,722

 
17,943

 
21,318

 
25,087

 
30,120

 
50,887

 
Net interest income
179,528

 
204,882

 
262,948

 
215,356

 
215,432

 
384,410

 
436,384

 
Provision for loan and lease losses
(13,242
)
 
(18,606
)
 
64,880

 
17,623

 
29,667

 
(31,848
)
 
60,382

 
Net interest income after provision for loan and lease losses
192,770

 
223,488

 
198,068

 
197,733

 
185,765

 
416,258

 
376,002

 
Noninterest income
64,995

 
57,513

 
33,219

 
51,842

 
57,296

 
122,508

 
104,239

 
Noninterest expense
188,567

 
194,355

 
198,728

 
190,077

 
194,797

 
382,922

 
378,128

 
Income before income taxes
69,198

 
86,646

 
32,559

 
59,498

 
48,264

 
155,844

 
102,113

 
Income taxes
25,292

 
31,061

 
10,813

 
19,974

 
10,681

 
56,353

 
29,035

 
Net income
$
43,906

 
$
55,585

 
$
21,746

 
$
39,524

 
$
37,583

 
$
99,491

 
$
73,078

 
Net interest income, taxable equivalent
$
180,188

 
$
205,553

 
$
263,635

 
$
216,069

 
$
216,194

 
$
385,743

 
$
437,960

 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income
$
4.56

 
$
5.78

 
$
2.15

 
$
3.85

 
$
3.66

 
$
10.34

 
$
7.11

 
 Cash dividends
0.30

 
0.30

 
0.30

 
0.30

 
0.30

 
0.60

 
0.60

 
 Market price at period end (Class A)
192.05

 
182.70

 
163.50

 
162.90

 
166.65

 
192.05

 
166.65

 
 Book value at period end
201.62

 
199.46

 
193.75

 
192.49

 
187.88

 
201.62

 
187.88

 
SELECTED PERIOD AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,224,412

 
$
21,150,143

 
$
21,245,425

 
$
21,075,174

 
$
21,198,910

 
$
21,187,274

 
$
21,073,341

 
 Investment securities
5,162,893

 
5,196,930

 
5,169,159

 
4,888,047

 
4,598,141

 
5,179,818

 
4,369,649

 
 Loans and leases (acquired and originated)
13,167,580

 
13,289,828

 
13,357,928

 
13,451,164

 
13,612,114

 
13,228,367

 
13,718,532

 
 Interest-earning assets
19,332,679

 
19,180,308

 
19,273,850

 
19,059,474

 
18,983,321

 
19,256,916

 
18,785,636

 
 Deposits
17,908,705

 
17,922,665

 
17,983,033

 
17,755,974

 
17,667,221

 
18,014,058

 
17,583,164

 
 Interest-bearing liabilities
13,958,137

 
14,140,511

 
14,109,359

 
14,188,609

 
14,418,509

 
14,048,820

 
14,448,704

 
 Long-term obligations
443,804

 
444,539

 
447,600

 
524,313

 
646,854

 
444,170

 
664,460

 
 Shareholders' equity
$
1,929,621

 
$
1,877,445

 
$
1,951,874

 
$
1,945,263

 
$
1,906,884

 
$
1,902,217

 
$
1,887,695

 
 Shares outstanding
9,618,941

 
9,618,985

 
10,159,262

 
10,264,159

 
10,271,343

 
9,618,963

 
10,277,593

 
SELECTED PERIOD-END BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,308,822

 
$
21,351,012

 
$
21,283,652

 
$
21,173,620

 
$
21,332,638

 
$
21,308,822

 
$
21,332,638

 
 Investment securities
5,186,106

 
5,280,907

 
5,227,570

 
5,013,500

 
4,635,826

 
5,186,106

 
4,635,826

 
 Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
1,443,336

 
1,621,327

 
1,809,235

 
1,897,097

 
1,999,351

 
1,443,336

 
1,999,351

 
Originated
11,655,469

 
11,509,080

 
11,576,115

 
11,455,233

 
11,462,458

 
11,655,469

 
11,462,458

 
 Deposits
18,018,015

 
18,064,921

 
18,086,025

 
17,893,215

 
17,801,646

 
18,018,015

 
17,801,646

 
 Long-term obligations
443,313

 
444,252

 
444,921

 
472,170

 
644,682

 
443,313

 
644,682

 
 Shareholders' equity
$
1,939,330

 
$
1,918,581

 
$
1,864,007

 
$
1,974,124

 
$
1,929,790

 
$
1,939,330

 
$
1,929,790

 
 Shares outstanding
9,618,941

 
9,618,941

 
9,620,914

 
10,255,747

 
10,271,244

 
9,618,941

 
10,271,244

 
SELECTED RATIOS AND OTHER DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 Rate of return on average assets (annualized)
0.83

%
1.07

%
0.41

%
0.75

%
0.71

%
0.95

%
0.70

%
Rate of return on average shareholders' equity (annualized)
9.13

 
12.01

 
4.43

 
8.08

 
7.93

 
10.55

 
7.79

 
Net yield on interest-earning assets (taxable equivalent)
3.74

 
4.35

 
5.44

 
4.51

 
4.58

 
4.04

 
4.69

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
5.30

 
5.95

 
7.74

 
4.77

 
4.39

 
5.30

 
4.39

 
Originated
1.56

 
1.53

 
1.55

 
1.62

 
1.62

 
1.56

 
1.62

 
Nonperforming assets to total loans and leases and other real estate at period end:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
8.62

 
8.46

 
9.26

 
12.87

 
18.37

 
8.62

 
18.37

 
Originated
0.91

 
1.10

 
1.15

 
1.05

 
1.03

 
0.91

 
1.03

 
Tier 1 risk-based capital ratio
14.91

 
14.50

 
14.27

 
15.08

 
15.97

 
14.91

 
15.97

 
Total risk-based capital ratio
16.41

 
16.19

 
15.95

 
16.76

 
17.66

 
16.41

 
17.66

 
Leverage capital ratio
9.68

 
9.36

 
9.22

 
9.67

 
10.21

 
9.68

 
10.21

 
Dividend payout ratio
6.58

 
5.19

 
13.95

 
7.79

 
8.20

 
5.80

 
8.44

 
Average loans and leases to average deposits
73.53

 
74.15

 
74.28

 
75.76

 
77.05

 
73.43

 
78.02

 
Average loan and lease balances include nonaccrual loans and leases. See discussion of issues affecting comparability of financial statements under the caption FDIC-Assisted Transactions.


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FDIC-ASSISTED TRANSACTIONS

FDIC-assisted transactions provided significant growth opportunities for BancShares from 2009 through 2011. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to contiguous markets. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities resulted in significant acquisition gains recorded at the time of each acquisition. All of the FDIC-assisted transactions include loss share agreements that protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.

Balance sheet impact. Table 2 summarizes the balance sheet impact of the six FDIC-assisted transactions consummated during 2011, 2010 and 2009.

Table 2
FDIC-ASSISTED TRANSACTIONS
 
 
 
Fair value of
 
Entity
Date of  transaction
 
Loans  acquired
 
Deposits
assumed
 
 
 
 
(dollars in thousands)
 
Colorado Capital Bank (CCB)
July 8, 2011
 
$
320,789

 
$
606,501

 
United Western Bank (United Western)
January 21, 2011
 
759,351

 
1,604,858

 
Sun American Bank (SAB)
March 5, 2010
 
290,891

 
420,012

 
First Regional Bank (First Regional)
January 29, 2010
 
1,260,249

 
1,287,719

 
Venture Bank (VB)
September 11, 2009
 
456,995

 
709,091

 
Temecula Valley Bank (TVB)
July 17, 2009
 
855,583

 
965,431

 
Total
 
 
$
3,943,858

 
$
5,593,612

 
Carrying value of acquired loans as of June 30, 2013
 
 
$
1,443,336

 
 
 


Income statement impact. Various fair value discounts and premiums that were previously recorded for acquired assets and assumed liabilities are being accreted and amortized into income over the life of the underlying asset or liability. Noninterest expense increased due to incremental staffing, facility costs for the branch locations, collection and foreclosure-related expenses resulting from the FDIC-assisted transactions. No acquisition gains were recorded during the six-month periods ended June 30, 2013 and June 30, 2012.

During the three-month period ended June 30, 2013, we recorded a credit to provision expense for acquired loans totaling $15.5 million compared to provision expense of $18.7 million during the same period of 2012. Total provision for loan losses related to acquired loans for the six-month period ended June 30, 2013, decreased by $66.4 million from the same period of 2012. The decrease in the provision for acquired loan losses in 2013 is the result of lower post-acquisition deterioration of acquired loans, and unexpected payoffs of acquired loans for which an allowance had previously been established.

The amount of accretable yield related to acquired loans changes when the estimated cash flows expected to be collected changes. The recognition of accretion income may be accelerated in the event of unscheduled repayments for amounts in excess of current estimates and various other post-acquisition events. Due to the many factors that can influence the amount of accretion income recognized in a given period, this component of net interest income is not easily predictable for future periods and impacts the comparability of interest income, net interest income and overall results of operations. During the three-month period ended June 30, 2013, accretion income for loans for which a fair value discount had been recorded equaled $52.0 million, compared to $79.9 million during the first quarter of 2013 and $60.9 million during the second quarter of 2012. Discount accretion on acquired loans equaled $131.9 million for the six-month period ended June 30, 2013, compared to $125.8 million during the same period of 2012.

Post-acquisition improvements that affect accretion income, as well as post-acquisition credit-related deterioration of acquired loans, also result in adjustments to the FDIC receivable for changes in the estimated amount that would be covered under the respective loss share agreement. While accretion income is recognized prospectively over the remaining life of the loan, the adjustment to the FDIC receivable is recognized over the shorter of the remaining life of the loan or the remaining term of the

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applicable loss share agreement. As a result, the recognition of accretion income may occur over a longer period than the related income statement impact of the adjustment to the FDIC receivable. During the three- and six-month periods ended June 30, 2013, the net adjustment to the FDIC receivable for post-acquisition improvements and deterioration in acquired assets resulted in a net reduction to the FDIC receivable and noninterest income of $14.4 million and $38.5 million, respectively, compared to a net reduction in the receivable and a corresponding reduction in noninterest income of $14.1 million and $40.9 million during the same periods of 2012.

The various terms of each loss share agreement and the components of the receivable from the FDIC is provided in Table 3. The carrying value as of June 30, 2013, excludes estimated obligations to the FDIC under any applicable clawback provisions.

As of June 30, 2013, the FDIC receivable included $71.4 million we expect to receive through reimbursements from the FDIC and $86.7 million we expect to recover through prospective amortization of the asset arising from post-acquisition improvements in the related loans. The timing of expected losses on acquired assets is monitored by management to ensure the losses will occur during the respective loss share terms. When projected losses are expected to occur after expiration of the applicable loss share agreement, the FDIC receivable is adjusted to reflect the forfeiture of loss share protection.

Acquisition accounting and issues affecting comparability of financial statements. As estimated exposures related to the acquired assets covered by the loss share agreements change based on post-acquisition events, our adherence to GAAP and accounting policy elections that we have made affect the comparability of our current results of operations to earlier periods. Several of the key issues affecting comparability are as follows:
When post-acquisition events suggest that the amount of cash flows we will ultimately receive for an acquired loan is less than originally expected:
An allowance for loan and lease losses is established for the post-acquisition exposure that has emerged with a corresponding charge to provision for loan and lease losses;
If the expected loss is projected to occur during the relevant loss share period, the FDIC receivable is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding increase to noninterest income;
When post-acquisition events suggest that the amount of cash flows we will ultimately receive for an acquired loan is greater than originally expected:
Any allowance for loan and lease losses that was previously established for post-acquisition exposure is reversed with a corresponding reduction to provision for loan and lease losses; if no allowance was established in earlier periods, the amount of the improvement in the cash flow projection results in a reclassification from the nonaccretable difference created at the acquisition date to an accretable yield; the newly-identified accretable yield is accreted into income over the remaining life of the loan as a credit to interest income;
The FDIC receivable is adjusted immediately for reversals of previously recognized impairment and prospectively for reclassifications from nonaccretable difference to reflect the indemnified portion of the post-acquisition change in exposure; a corresponding reduction in noninterest income is also recorded immediately for reversals of previously established allowances or for reclassifications from nonaccretable difference, over the shorter of the remaining life of the related loan or loss share agreements;
When actual payments received on acquired loans are greater than initial estimates, large nonrecurring discount accretion or reductions in the allowance for loan and lease losses may be recognized during a specific period; discount accretion is recognized as an increase to interest income; reductions in the allowance for loan and lease losses are recorded with a reduction in the provision for loan and lease losses;
Adjustments to the FDIC receivable resulting from changes in estimated cash flows for acquired loans are based on the reimbursement provision of the applicable loss share agreement with the FDIC. Adjustments to the FDIC receivable partially offset the adjustment to the acquired loan carrying value, but the rate of the change to the FDIC receivable relative to the change in the acquired loan carrying value is not constant. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, higher loss estimates result in higher reimbursement rates, while in other loss share agreements, higher loss estimates trigger a reduction in the reimbursement rates. In addition, some of the loss share agreements include clawback provisions that require the purchaser to remit a payment to the FDIC in the event that the aggregate amount of losses is less than a loss estimate established by the FDIC. The adjustments to the FDIC receivable based on changes in loss estimates are measured based on the actual reimbursement rates and consider the impact of changes in the projected clawback payment. Table 3 provides details on the various reimbursement rates for each loss share agreement.

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Table 3
LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS

 
Fair value at acquisition date
Losses/expenses incurred through 6/30/2013
Cumulative amount reimbursed by FDIC through 6/30/2013
Carrying value at
June 30, 2013
Current portion of receivable due from (to) FDIC for 6/30/2013 filings
Receivable related to accretable yield as of 6/30/2013
 
Receivable from FDIC
Payable to FDIC
Entity
 
(dollars in thousands)
TVB - combined losses
$
103,558

$
191,448

$

$
28,418

$

$

$
18,229

VB - combined losses
138,963

153,424

123,994

(378
)

(1,255
)
(1,247
)
First Regional - combined losses
378,695

305,124

217,259

46,214

68,689

(6,614
)
31,611

SAB - combined losses
89,734

90,785

72,653

17,076

1,627

(25
)
10,133

United Western
 
 
 
 
 
 
 
Non-single family residential losses
112,672

110,726

87,031

20,872

16,656

1,763

11,374

Single family residential losses
24,781

3,417

2,617

11,356


116

1,865

CCB - combined losses
155,070

181,580

140,858

34,455

14,680

4,584

14,695

Total
$
1,003,473

$
1,036,504

$
644,412

$
158,013

$
101,652

$
(1,431
)
$
86,660

 
 
 
 
 
 
 
 
Each FDIC-assisted transaction has a separate loss share agreement for Single-Family Residential loans (SFR) and non-Single-Family Residential loans (NSFR).
For TVB, combined losses are covered at 0 percent up to $193.3 million, 80 percent for losses between $193.3 million and $464.0 million, and 95 percent for losses above $464.0 million.
For VB, combined losses are covered at 80 percent up to $235.0 million and 95 percent for losses above $235.0 million.
For FRB, combined losses are covered at 0 percent up to $41.8 million, 80 percent for losses between $41.8 million and $1.02 billion, and 95 percent for losses above $1.02 billion.
For SAB, combined losses are covered at 80 percent up to $99.0 million and 95 percent for losses above $99.0 million.
For United Western SFR loans, losses are covered at 80 percent up to $32.5 million, 0 percent between $32.5 million and $57.7 million, and 80 percent for losses above $57.7 million.
For United Western NSFR loans, losses are covered at 80 percent up to $111.5 million, 30 percent between $111.5 million and $227.0 million, and 80 percent for losses above $227.0 million.
For CCB, combined losses are covered at 80 percent up to $231.0 million, 0 percent between $231.0 million and $285.9 million, and 80 percent for losses above $285.9 million.
 
 
 
 
 
 
 
 
Fair value at acquisition date represents the initial fair value of the receivable from FDIC, excluding the payable to FDIC. Receivable related to accretable yield represents balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period.




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INTEREST-EARNING ASSETS

Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to potentially higher levels of default.

We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures with a concentration of owner-occupied real estate loans in the medical and related fields. The focus on asset quality also influences the composition of our investment securities portfolio. At June 30, 2013, government agency securities represented 52.5 percent of our investment securities available for sale, compared to mortgage-backed securities and U.S. Treasury securities, which represented 35.6 percent and 11.5 percent, respectively. The balance of the available-for-sale portfolio includes common stock of other financial institutions and state, county and municipal securities. Overnight investments are selectively made with the Federal Reserve Bank and other financial institutions.

The average balance for both the second quarter and year-to-date 2013, were $19.33 billion and $19.26 billion, respectively, compared to $18.98 billion and $18.79 billion for the same periods in 2012. The increases of $349.4 million and $471.3 million , or 1.8 percent and 2.5 percent, were due to higher levels of investment securities and overnight investments offset, in part, by lower loan and leases.

Loans and leases. Originated loans increased $193.0 million from $11.46 billion at June 30, 2012, to $11.66 billion at June 30, 2013, and $79.4 million since December 31, 2012. Acquired loans totaled $1.44 billion at June 30, 2013, compared to $1.81 billion at December 31, 2012, and $2.00 billion at June 30, 2012. Originated loan demand improved during the second quarter of 2013, while acquired loan balances continue to decline due to repayments and charge-offs. Table 4 provides the composition of acquired and originated loan and leases.

Originated commercial mortgage loans totaled $6.14 billion at June 30, 2013, 52.6 percent of originated loans and leases. The June 30, 2013, balance increased $105.6 million or 1.8 percent since December 31, 2012, and $252.0 million or 4.3 percent since June 30, 2012. The growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

At June 30, 2013, originated revolving mortgage loans totaled $2.12 billion, representing 18.2 percent of total originated loans outstanding, a decrease of $86.3 million or 3.9 percent since December 31, 2012, and $144.4 million or 6.4 percent compared to June 30, 2012. The reduction in revolving mortgage loans from 2012 is a result of a reduced emphasis on this class of lending resulting from eroded collateral values.

Originated residential mortgage loans totaled $884.0 million at June 30, 2013, up $74.8 million or 9.2 percent since June 30, 2012, and up $61.1 million or 7.4 percent from December 31, 2012. While the majority of residential mortgage loans that we originated in 2012 and 2013 were sold to investors, other loans were retained in the loan portfolio principally due to the nonconforming characteristics of the retained loans.

At June 30, 2013, originated commercial and industrial loans equaled $1.00 billion or 8.6 percent of total originated loans and leases, a reduction of $41.0 million or 4.0 percent since December 31, 2012, and $8.2 million or 0.8 percent since June 30, 2012. In addition to our historical preference for loans secured by real estate, weak economic conditions continue to limit our ability to originate commercial and industrial loans that meet our underwriting standards.

Originated commercial construction and land development loans totaled $305.8 million or 2.6 percent of total originated loans at June 30, 2013, a decrease of $23.4 million or 7.1 percent since June 30, 2012. The continuing decline reflects lower demand and our limited appetite for construction lending. Our originated construction and land development portfolio does not include significant exposure to builders to acquire, develop or construct homes in large tracts of real estate. Most of the construction portfolio relates to borrowers in North Carolina and Virginia where real estate values have declined less severely than other markets in which we operate.

Originated consumer loans totaled $388.3 million at June 30, 2013, down $43.4 million or 10.0 percent since June 30, 2012, and down $28.3 million or 6.8 percent from December 31, 2012. This decline is the result of the general contraction in consumer borrowing in 2013 and 2012 due to weak customer demand and continued run-off in our automobile sales finance portfolio.




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Table 4
LOANS AND LEASES                                                

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
 
(dollars in thousands)
 
Acquired loans
$
1,443,336

 
$
1,809,235

 
$
1,999,351

 
Originated loans and leases:
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
Construction and land development
305,789

 
309,190

 
329,151

 
Commercial mortgage
6,135,068

 
6,029,435

 
5,149,696

 
Other commercial real estate
176,031

 
160,980

 
162,579

 
Commercial and industrial
997,504

 
1,038,530

 
1,722,761

 
Lease financing
352,818

 
330,679

 
320,703

 
Other
172,861

 
125,681

 
140,738

 
Total commercial loans
8,140,071

 
7,994,495

 
7,825,628

 
Noncommercial:
 
 
 
 
 
 
Residential mortgage
884,020

 
822,889

 
809,230

 
Revolving mortgage
2,123,814

 
2,210,133

 
2,268,210

 
Construction and land development
119,253

 
131,992

 
127,726

 
Consumer
388,311

 
416,606

 
431,664

 
Total noncommercial loans
3,515,398

 
3,581,620

 
3,636,830

 
Total originated loans and leases
11,655,469

 
11,576,115

 
11,462,458

 
Total loans and leases
$
13,098,805

 
$
13,385,350

 
$
13,461,809

 
 
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
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
 
(dollars in thousands)
Acquired loans:
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
41,572

 
$
119,161

 
$
160,733

 
$
71,225

 
$
166,681

 
$
237,906

 
$
86,056

 
$
186,389

 
$
272,445

Commercial mortgage
90,910

 
768,128

 
859,038

 
107,281

 
947,192

 
1,054,473

 
121,580

 
1,021,097

 
1,142,677

Other commercial real estate
23,716

 
58,188

 
81,904

 
35,369

 
71,750

 
107,119

 
29,199

 
86,588

 
115,787

Commercial and industrial
6,429

 
30,907

 
37,336

 
3,932

 
45,531

 
49,463

 
4,771

 
61,671

 
66,442

Other

 
1,018

 
1,018

 

 
1,074

 
1,074

 

 
1,228

 
1,228

Total commercial loans
162,627

 
977,402

 
1,140,029

 
217,807

 
1,232,228

 
1,450,035

 
241,606

 
1,356,973

 
1,598,579

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
36,740

 
220,232

 
256,972

 
48,077

 
249,849

 
297,926

 
55,585

 
266,468

 
322,053

Revolving mortgage
9,493

 
26,660

 
36,153

 
9,606

 
29,104

 
38,710

 
8,286

 
28,824

 
37,110

Construction and land development
8,616

 
393

 
9,009

 
15,136

 
5,657

 
20,793

 
31,767

 
7,527

 
39,294

Consumer

 
1,173

 
1,173

 

 
1,771

 
1,771

 
404

 
1,911

 
2,315

Total noncommercial loans
54,849

 
248,458

 
303,307

 
72,819

 
286,381

 
359,200

 
96,042

 
304,730

 
400,772

Total acquired loans
$
217,476

 
$
1,225,860

 
$
1,443,336

 
$
290,626

 
$
1,518,609

 
$
1,809,235

 
$
337,648

 
$
1,661,703

 
$
1,999,351


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Acquired commercial mortgage loans totaled $859.0 million at June 30, 2013, representing 59.5 percent of the total acquired portfolio compared to $1.05 billion at December 31, 2012, and $1.14 billion at June 30, 2012. Acquired commercial construction and land development loans amounted to $160.7 million, or 11.1 percent of total acquired loans at June 30, 2013, a decrease of $77.2 million from December 31, 2012, and $111.7 million from June 30, 2012. Acquired residential mortgage loans totaled $257.0 million or 17.8 percent of the acquired portfolio as of June 30, 2013, compared to $297.9 million or 16.5 percent of total acquired loans at December 31, 2012, and $322.1 million or 16.1 percent of total acquired loans at June 30, 2012. The changes in acquired loan balances since December 31, 2012, and from June 30, 2012, reflect continued reductions of outstanding loans from the FDIC-assisted transactions from payments, charge-offs and foreclosure.

Although originated loan growth displayed some improvement during the second quarter of 2013, economic conditions remain tenuous. As a result, we expect originated loan growth to remain sluggish for the rest of 2013. Loan growth projections are subject to change due to further economic deterioration or improvement and other external factors.

Investment securities. Investment securities available for sale equaled $5.18 billion at June 30, 2013, compared to $5.23 billion at December 31, 2012, and $4.63 billion at June 30, 2012. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Changes in the amount of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand. Details of investment securities at June 30, 2013, December 31, 2012, and June 30, 2012, are provided in Table 5.




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Table 5
INVESTMENT SECURITIES

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
 
 
 
 
 
Average maturity (1)
 
Taxable equivalent
 
 
 
 
 
 
 
 
 
 
 Cost
 
 Fair value
 
(Yrs./mos.)
 
yield (1)
 
 Cost
 
Fair value
 
Cost
 
Fair value
 
 Investment securities available for sale:
(dollars in thousands)
 
 U. S. Treasury:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
$
299,961

 
$
300,103

 
0/4
 
0.27

%
$
576,101

 
$
576,393

 
$
628,714

 
$
628,702

 
 One to five years
298,664

 
298,563

 
1/7
 
0.29

 
247,140

 
247,239

 
249,978

 
249,983

 
 Total
598,625

 
598,666

 
0/11
 
0.28

 
823,241

 
823,632

 
878,692

 
878,685

 
 Government agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
1,838,125

 
1,835,890

 
0/6
 
0.42

 
1,708,572

 
1,709,520

 
1,744,572

 
1,745,424

 
 One to five years
887,102

 
885,489

 
2/0
 
0.42

 
1,343,468

 
1,345,684

 
1,231,507

 
1,232,774

 
 Total
2,725,227

 
2,721,379

 
1/0
 
0.42

 
3,052,040

 
3,055,204

 
2,976,079

 
2,978,198

 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
1,588

 
1,604

 
0/9
 
2.81

 
3,397

 
3,456

 
430

 
429

 
 One to five years
1,069,650

 
1,059,776

 
3/2
 
1.21

 
732,614

 
736,284

 
471,516

 
471,600

 
 Five to ten years
336,756

 
330,433

 
7/8
 
1.62

 
193,500

 
195,491

 
71,904

 
72,523

 
 Over ten years
458,210

 
451,510

 
17/11
 
2.61

 
385,700

 
394,426

 
155,618

 
163,093

 
 Total
1,866,204

 
1,843,323

 
7/7
 
1.63

 
1,315,211

 
1,329,657

 
699,468

 
707,645

 
 State, county and municipal:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
126

 
127

 
0/8
 
5.97

 
486

 
490

 
601

 
611

 
 One to five years

 

 
 

 

 

 

 

 
 Five to ten years
60

 
60

 
5/5
 
4.75

 
60

 
60

 
10

 
10

 
 Over ten years

 

 
 

 

 

 
415

 
415

 
 Total
186

 
187

 
2/2
 
5.58

 
546

 
550

 
1,026

 
1,036

 
 Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year

 

 
 

 

 

 
49,987

 
50,446

 
 Total

 

 
 

 

 

 
49,987

 
50,446

 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Five to ten years
850

 
828

 
5/0
 
7.58

 
838

 
820

 

 

 
 Equity securities
543

 
20,593

 
 
 
 
 
543

 
16,365

 
841

 
18,238

 
 Total investment securities available for sale
5,191,635

 
5,184,976

 
 
 
 
 
5,192,419

 
5,226,228

 
4,606,093

 
4,634,248

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 One to five years
1,040

 
1,074

 
3/9
 
5.59

 
1,242

 
1,309

 
1,470

 
1,568

 
 Five to ten years
14

 
6

 
9/3
 
4.30

 
18

 
11

 
4

 
4

 
 Over ten years
76

 
120

 
15/9
 
7.13

 
82

 
128

 
104

 
142

 
 Total investment securities held to maturity
1,130

 
1,200

 
4/8
 
5.67

 
1,342

 
1,448

 
1,578

 
1,714

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total investment securities
$
5,192,765

 
$
5,186,176

 
 
 
 
 
$
5,193,761

 
$
5,227,676

 
$
4,607,671

 
$
4,635,962

 

(1)
Average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities exempt from federal and/or state income taxes are stated on a taxable yield basis assuming statutory rates of 35.0 percent.




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Table of Contents


INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Deposits represent our primary funding source, although we have the ability to utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for treasury services. Interest-bearing liabilities totaled $13.89 billion as of June 30, 2013, down $493.4 million from June 30, 2012, due to continued customer migration of balances in interest-bearing accounts to demand deposit accounts, the continued reductions in deposits assumed in FDIC-assisted transactions, maturities of FHLB borrowings and the 2012 redemption of trust preferred securities.

Deposits. At June 30, 2013, total deposits equaled $18.02 billion, a decrease of $68.0 million since December 31, 2012, and an increase of $216.4 million or 1.2 percent since June 30, 2012. The increase resulted from growth in legacy markets, partially offset by a reduction in acquired deposits.

Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe that traditional bank deposit products remain an attractive option for many customers, but as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost.

Short-term borrowings. At June 30, 2013, short-term borrowings totaled $581.9 million compared to $568.5 million at December 31, 2012, and $700.3 million at June 30, 2012. The increase in short-term borrowings since December 31, 2012, is due to higher customer balances in our business and treasury services sweep products.

Long-term obligations. Long-term obligations equaled $443.3 million at June 30, 2013, down $201.4 million from June 30, 2012. The decrease since June 30, 2012, resulted from the early redemption of trust preferred securities in July 2012, repayment of debt obligations related to a prior revolving mortgage loan securitization and maturities of FHLB obligations.

At June 30, 2013, and December 31, 2012, long-term obligations included $96.4 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, a special purpose entity and the grantor trust for $93.5 million of trust preferred securities. FCB/NC Capital Trust III's trust preferred securities mature in 2036 and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of FCB/NC Capital Trust III. The proceeds from the trust preferred securities were used to purchase the junior subordinated debentures issued by BancShares.

At June 30, 2012, long-term obligations included $251.7 million in junior subordinated debentures representing obligations to two special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust III (the Capital Trusts). The Capital Trusts were the grantor trusts for $243.5 million of trust preferred securities outstanding as of June 30, 2012. The proceeds from the trust preferred securities were used to purchase the junior subordinated debentures issued by BancShares. The $150.0 million in trust preferred securities issued by FCB/NC Capital Trust I were redeemed in whole in July 2012. BancShares has guaranteed all obligations of the Capital Trusts.


NET INTEREST INCOME

Interest income amounted to $193.9 million during the second quarter of 2013, a $46.6 million or 19.4 percent decrease from the second quarter of 2012. The decrease in interest income resulted from lower asset yields and a significant shift in asset composition resulting from a large reduction in average loans, offset by higher investment securities. Average interest-earning assets increased $349.4 million or 1.8 percent to $19.33 billion. The taxable-equivalent yield on interest-earning assets equaled 4.04 percent for the second quarter of 2013, compared to 5.11 percent for the corresponding period of 2012 as reflected in Table 6. For the six months ended June 30, 2013, interest income amounted to $414.5 million, a decrease of $72.7 million or 14.9 percent as compared to the same time period in 2012. Interest-earning assets averaged $19.26 billion, during the first six months of 2013, an increase of $471.3 million or 2.5 percent over the same period of 2012.

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Interest income earned from loans and leases totaled $185.2 million during the second quarter of 2013, a $46.7 million or 20.1 percent reduction when compared to the same period of 2012, the combined result of a 121 basis point decline in the taxable-equivalent loan yield and a $444.5 million reduction in average loans and leases. The taxable-equivalent yield on loans during the second quarter of 2013 was 5.66 percent compared to 6.48 percent during the first quarter of 2013 and 6.87 percent during the second quarter of 2012. Loan yields are down for originated loans due to general market pricing conditions. Acquired loan yields remain erratic due to unscheduled payments. Accretion income on acquired loans totaled $52.0 million during the second quarter of 2013 compared to $79.9 million during the first quarter of 2013 and $60.9 million during the second quarter of 2012. The recognition of accretion income on acquired loans is significantly influenced by differences between initial cash flow estimates and changes to those estimates that evolve in subsequent periods. Acquired loan accretion income in future periods will remain volatile but is likely to decrease as the balance of acquired loans continues to decline.
Year-to-date interest income from loans and leases decreased $73.1 million, or 15.6 percent, from $470.0 million at June 30, 2012, to $396.9 million at June 30, 2013. The decline is the combined result of an 84 basis-point decrease in the taxable-equivalent loan yield and a $490.2 million reduction in average loans and leases since June 30, 2012. Accretion income for the six months ended June 30, 2013, was $131.9 million compared to $125.8 million for the same period in 2012.
Interest income earned on the investment securities portfolio totaled $8.1 million during the second quarter of 2013 compared to $8.2 million during the same period of 2012. This decrease in income is the net result of lower yields offset by an increase in average balances. The taxable-equivalent yield decreased 9 basis points from 0.73 percent in the second quarter of 2012 to 0.64 percent in the second quarter of 2013. For the six-month period ended June 30, 2013, interest income earned on the investment securities portfolio decreased by $136 and the taxable-equivalent yield decreased 13 basis points from the comparable period of 2012. These yield reductions were caused by significantly lower reinvestment rates on new securities compared to maturing and called securities. We anticipate the yield on investment securities will generally remain at current low levels until the Federal Reserve begins to raise the benchmark fed funds rates, an action that would likely lead to higher asset yields.
Interest expense amounted to $14.4 million during the second quarter of 2013, a $10.7 million or 42.6 percent decrease from the second quarter of 2012. The reduced level of interest expense resulted from lower rates and average balances. The rate on average interest-bearing liabilities equaled 0.41 percent during the second quarter of 2013, a 29 basis point decrease from the second quarter of 2012. Average interest-bearing liabilities decreased $460.4 million or 3.2 percent from the second quarter of 2012 to the second quarter of 2013 due to the run-off of deposits acquired in FDIC-assisted transactions and a reduction in long-term obligations resulting from the early redemption of trust preferred securities and maturities of FHLB borrowings.
For the six-month period ending June 30, 2013, interest expense decreased $20.8 million to $30.1 million from $50.9 million at June 30, 2012. This 40.8 percent decrease was the result of a 28 basis point decrease in the rate and a $399.9 million decrease in average interest-bearing liabilities from June 30, 2012, also the result of acquired deposit run-off and the early redemption of trust preferred securities.
Average interest-bearing deposits equaled $12.92 billion during the second quarter of 2013, a decrease of $151.4 million or 1.2 percent from the second quarter of 2012. Average money market accounts increased $391.7 million or 6.6 percent from the second quarter of 2012, due to customers holding available liquidity in flexible deposit accounts. During the second quarter of 2013, time deposits averaged $3.29 billion, down $926.4 million or 22.0 percent from the second quarter of 2012, resulting from customer preference for non-time deposits.
For the six-month period ending June 30, 2013, average interest-bearing deposits equaled $13.03 billion, a decrease of $90.4 million, or 0.7 percent from the same period of 2012. Time deposits decreased $973.1 million, with partially offsetting increases in checking with interest, savings and money market accounts.
For the quarters ended June 30, 2013, and June 30, 2012, short-term borrowings averaged $589.9 million and $695.8 million, respectively. The $106.0 million or 15.2 percent decrease in average short-term borrowings since the second quarter of 2012 is the result of maturities of FHLB debt during 2012. Year-to-date short-term borrowings decreased $89.2 million to $574.9 million from $664.1 million at June 30, 2012, also driven by FHLB debt maturities during 2012.
Net interest income totaled $179.5 million during the second quarter of 2013, a decrease of $35.9 million or 16.7 percent from the second quarter of 2012. Lower current year net interest income and net yield on interest-earning assets resulted from lower asset yields and acquired loan shrinkage. During 2013 and 2012, growth in investment securities and reductions in average loans have caused the taxable-equivalent net yield on interest-earning assets to decline to 3.74 percent for the second quarter, down 84 basis points from the 4.58 percent recorded for the second quarter of 2012. Net interest income for the second quarter of 2013 included $131.9 million of accretion income, compared to $125.8 million in the second quarter of 2012.

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Net interest income during the second quarter of 2013 represented a decrease of $35.9 million, or 16.7 percent, when compared to the $215.4 million recorded during the second quarter of 2012, primarily due to lower asset yields. The taxable-equivalent net yield on interest-earning assets for the second quarter of 2013 declined 84 basis points from the 4.58 percent recorded during the same period of 2012. A significant factor in the net interest income reduction was accretion income, which declined $6.1 million in the second quarter of 2013 when compared to $125.8 million of accretion income earned in the second quarter of 2012.
Net interest income for the six-month period ending June 30, 2013, totaled $384.4 million, a $52.0 million or 11.9 percent decrease from the same period of 2012. The year-to-date taxable-equivalent net yield on interest-earning assets decreased 65 basis points to 4.04 percent from 4.69, primarily the result of lower asset yields.
The continuing accretion of fair value discounts resulting from acquired loans will contribute to volatility in net interest income in future periods. Factors affecting the amount of accretion include unscheduled loan payments, changes in estimated cash flows and impairment. During 2012, many of the loans previously accounted for under the cost recovery method were transferred to an acquired loan accounting system and are now accreting yield. Fair value discounts related to non-pooled loans that have been repaid unexpectedly are accreted into interest income at the time the loan obligation is satisfied.


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Table 6
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Three Months

 
2013
 
2012
 
Increase (decrease) due to:
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
 
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
 
 
Yield/
 
Total
 
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Volume
 
Rate
 
Change
 
(dollars in thousands)
Assets
 
Loans and leases
$
13,167,580

 
$
185,661

 
5.66

%
$
13,612,114

 
$
232,408

 
6.87

%
$
(6,649
)
 
$
(40,098
)
 
$
(46,747
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
681,893

 
486

 
0.29

 
1,010,146

 
698

 
0.28

 
(233
)
 
21

 
(212
)
Government agency
2,947,308

 
3,197

 
0.43

 
2,973,130

 
4,559

 
0.61

 
(32
)
 
(1,330
)
 
(1,362
)
Mortgage-backed securities
1,512,268

 
4,506

 
1.20

 
418,390

 
2,202

 
2.12

 
4,523

 
(2,219
)
 
2,304

Corporate bonds

 

 

 
175,997

 
842

 
1.91

 
(421
)
 
(421
)
 
(842
)
State, county and municipal
187

 
4

 
8.58

 
1,038

 
19

 
7.36

 
(17
)
 
2

 
(15
)
Other
21,237

 
76

 
1.44

 
19,440

 
62

 
1.28

 
6

 
8

 
14

Total investment securities
5,162,893

 
8,269

 
0.64

 
4,598,141

 
8,382

 
0.73

 
3,826

 
(3,939
)
 
(113
)
Overnight investments
1,002,206

 
656

 
0.26

 
773,066

 
491

 
0.26

 
157

 
8

 
165

Total interest-earning assets
19,332,679

 
$
194,586

 
4.04

%
18,983,321

 
$
241,281

 
5.11

%
$
(2,666
)
 
$
(44,029
)
 
$
(46,695
)
Cash and due from banks
482,821

 
 
 
 
 
516,494

 
 
 
 
 
 
 
 
 
 
Premises and equipment
873,503

 
 
 
 
 
871,439

 
 
 
 
 
 
 
 
 
 
Receivable from FDIC for loss share agreements
182,766

 
 
 
 
 
481,134

 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
(264,978
)
 
 
 
 
 
(273,098
)
 
 
 
 
 
 
 
 
 
 
Other real estate owned
128,152

 
 
 
 
 
178,440

 
 
 
 
 
 
 
 
 
 
Other assets
489,469

 
 
 
 
 
441,180

 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,224,412

 
 
 
 
 
$
21,198,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking With Interest
$
2,378,178

 
$
166

 
0.03

%
$
2,088,120

 
$
336

 
0.06

%
$
15

 
$
(185
)
 
$
(170
)
Savings
965,801

 
120

 
0.05

 
872,501

 
108

 
0.05

 
12

 

 
12

Money market accounts
6,295,031

 
2,490

 
0.16

 
5,903,330

 
4,245

 
0.29

 
221

 
(1,976
)
 
(1,755
)
Time deposits
3,285,435

 
6,221

 
0.76

 
4,211,857

 
10,358

 
0.99

 
(2,004
)
 
(2,133
)
 
(4,137
)
Total interest-bearing deposits
12,924,445

 
8,997

 
0.32

 
13,075,808

 
15,047

 
0.46

 
(1,756
)
 
(4,294
)
 
(6,050
)
Short-term borrowings
589,888

 
680

 
0.46

 
695,847

 
1,584

 
0.92

 
(175
)
 
(729
)
 
(904
)
Long-term obligations
443,804

 
4,721

 
4.26

 
646,854

 
8,456

 
5.23

 
(2,411
)
 
(1,324
)
 
(3,735
)
Total interest-bearing liabilities
13,958,137

 
$
14,398

 
0.41

%
14,418,509

 
$
25,087

 
0.70

%
$
(4,342
)
 
$
(6,347
)
 
$
(10,689
)
Demand deposits
4,984,260

 
 
 
 
 
4,591,413

 
 
 
 
 
 
 
 
 
 
Other liabilities
352,394

 
 
 
 
 
282,104

 
 
 
 
 
 
 
 
 
 
Shareholders' equity
1,929,621

 
 
 
 
 
1,906,884

 
 
 
 
 
 
 
 
 
 
 Total liabilities and shareholders' equity
$
21,224,412

 
 
 
 
 
$
21,198,910

 
 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
 
 
3.63

%
 
 
 
 
4.41

%
 
 
 
 
 
Net interest income and net yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on interest-earning assets
 
 
$
180,188

 
3.74

%
 
 
$
216,194

 
4.58

%
$
1,676

 
$
(37,682
)
 
$
(36,006
)
Loans and leases include acquired loans, originated loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent and state income tax rates of 6.9 percent for each period. The taxable-equivalent adjustment was $660 and $762 for 2013 and 2012, respectively. The rate/volume variance is allocated equally between the changes in volume and rate.




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Table 7
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Year to Date

 
2013
 
2012
 
Increase (decrease) due to:
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
 
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
 
 
Yield/
 
Total
(thousands)
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Volume
 
Rate
 
Change
 
(dollars in thousands)
Assets
 
Loans and leases
$
13,228,367

 
$
397,932

 
6.07

%
$
13,718,532

 
$
471,142

 
6.91

%
$
(16,431
)
 
$
(56,779
)
 
$
(73,210
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
742,511

 
1,004

 
0.27

 
987,080

 
1,468

 
0.30

 
(340
)
 
(124
)
 
(464
)
Government agency
3,021,622

 
6,663

 
0.44

 
2,792,214

 
9,071

 
0.65

 
(285
)
 
(2,123
)
 
(2,408
)
Mortgage-backed securities
1,396,026

 
9,085

 
1.31

 
360,085

 
4,091

 
2.28

 
9,219

 
(4,225
)
 
4,994

Corporate bonds

 

 

 
211,835

 
2,041

 
1.93

 
(1,021
)
 
(1,020
)
 
(2,041
)
State, county and municipal
367

 
13

 
7.14

 
1,039

 
38

 
7.35

 
(24
)
 
(1
)
 
(25
)
Other
19,292

 
153

 
1.60

 
17,396

 
193

 
2.23

 
18

 
(58
)
 
(40
)
Total investment securities
5,179,818

 
16,918

 
0.65

 
4,369,649

 
16,902

 
0.78

 
7,567

 
(7,551
)
 
16

Overnight investments
848,731

 
1,013

 
0.24

 
697,455

 
803

 
0.23

 
174

 
36

 
210

Total interest-earning assets
19,256,916

 
$
415,863

 
4.36

%
18,785,636

 
$
488,847

 
5.23

%
$
(8,690
)
 
$
(64,294
)
 
$
(72,984
)
Cash and due from banks
495,548

 
 
 
 
 
525,012

 
 
 
 
 
 
 
 
 
 
Premises and equipment
877,242

 
 
 
 
 
867,897

 
 
 
 
 
 
 
 
 
 
Receivable from FDIC for loss share agreements
208,575

 
 
 
 
 
526,713

 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
(273,927
)
 
 
 
 
 
(271,541
)
 
 
 
 
 
 
 
 
 
 
Other real estate owned
139,448

 
 
 
 
 
188,154

 
 
 
 
 
 
 
 
 
 
Other assets
483,472

 
 
 
 
 
451,470

 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,187,274

 
 
 
 
 
$
21,073,341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking With Interest
$
2,331,192

 
$
309

 
0.03

%
$
2,069,003

 
$
675

 
0.07

%
$
68

 
$
(434
)
 
$
(366
)
Savings
947,246

 
234

 
0.05

 
854,500

 
221

 
0.05

 
18

 
(5
)
 
13

Money market accounts
6,378,644

 
5,675

 
0.18

 
5,850,825

 
8,517

 
0.29

 
554

 
(3,396
)
 
(2,842
)
Time deposits
3,372,716

 
13,092

 
0.78

 
4,345,820

 
22,106

 
1.02

 
(4,382
)
 
(4,632
)
 
(9,014
)
Total interest-bearing deposits
13,029,798

 
19,310

 
0.30

 
13,120,148

 
31,519

 
0.48

 
(3,742
)
 
(8,467
)
 
(12,209
)
Short-term borrowings
574,852

 
1,384

 
0.49

 
664,096

 
2,975

 
0.90

 
(320
)
 
(1,271
)
 
(1,591
)
Long-term obligations
444,170

 
9,426

 
4.24

 
664,460

 
16,393

 
4.93

 
(4,268
)
 
(2,699
)
 
(6,967
)
Total interest-bearing liabilities
14,048,820

 
$
30,120

 
0.43

%
14,448,704

 
$
50,887

 
0.71

%
$
(8,330
)
 
$
(12,437
)
 
$
(20,767
)
Demand deposits
4,984,260

 
 
 
 
 
4,463,016

 
 
 
 
 
 
 
 
 
 
Other liabilities
251,977

 
 
 
 
 
273,926

 
 
 
 
 
 
 
 
 
 
Shareholders' equity
1,902,217

 
 
 
 
 
1,887,695

 
 
 
 
 
 
 
 
 
 
 Total liabilities and shareholders' equity
$
21,187,274

 
 
 
 
 
$
21,073,341

 
 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
 
 
3.93

%
 
 
 
 
4.52

%
 
 
 
 
 
Net interest income and net yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   on interest-earning assets
 
 
$
385,743

 
4.04

%
 
 
$
437,960

 
4.69

%
$
(360
)
 
$
(51,857
)
 
$
(52,217
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases include acquired loans, originated loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent and state income tax rates of 6.9 percent for each period. The taxable-equivalent adjustment was $1,333 and $1,576 for 2013 and 2012, respectively. The rate/volume variance is allocated equally between the changes in volume and rate.



NONINTEREST INCOME

The primary sources of noninterest income have traditionally consisted of cardholder and merchant services income, service charges on deposit accounts and revenues derived from wealth management services. During 2013 and 2012, noninterest income has been significantly influenced by post-acquisition adjustments to the FDIC receivable resulting from the FDIC-assisted transactions.


Table 8
NONINTEREST INCOME

 
Three months ended June 30
 
Six months ended June 30
 
Three-month change
 
 Six-month change
 
 
2013
 
2012
 
2013
 
2012
 
$
 
%
 
$
 
%
 
 
(dollars in thousands)
 
Cardholder and merchant services
$
27,271

 
$
24,697

 
$
50,828

 
$
47,147

 
$
2,574

 
10.42

%
$
3,681

 
7.81

%
Service charges on deposit accounts
14,883

 
15,061

 
29,882

 
29,907

 
(178
)
 
(1.18
)
 
(25
)
 
(0.08
)
 
Wealth management services
15,097

 
14,530

 
29,612

 
28,285

 
567

 
3.90

 
1,327

 
4.69

 
Fees from processing services
5,051

 
7,557

 
10,670

 
16,119

 
(2,506
)
 
(33.16
)
 
(5,449
)
 
(33.80
)
 
Securities gains (losses)

 
3

 

 
(42
)
 
(3
)
 
(100.00
)
 
42

 
(100.00
)
 
Other service charges and fees
3,966

 
3,574

 
7,732

 
7,015

 
392

 
10.97

 
717

 
10.22

 
Mortgage income
3,669

 
175

 
7,457

 
3,099

 
3,494

 
(a)

 
4,358

 
(a)

 
Insurance commissions
2,394

 
2,238

 
5,374

 
4,994

 
156

 
6.97

 
380

 
7.61

 
ATM income
1,314

 
1,281

 
2,482

 
2,736

 
33

 
2.58

 
(254
)
 
(9.28
)
 
Adjustments to FDIC receivable for loss share agreements
(14,439
)
 
(14,134
)
 
(38,492
)
 
(40,930
)
 
(305
)
 
2.16

 
2,438

 
(5.96
)
 
Other
5,789

 
2,314

 
16,963

 
5,909

 
3,475

 
(a)

 
11,054

 
(a)

 
Total noninterest income
$
64,995

 
$
57,296

 
$
122,508

 
$
104,239

 
$
7,699

 
13.44

 
$
18,269

 
17.53

 
(a) not meaningful

During the first six months of 2013, noninterest income amounted to $122.5 million, compared to $104.2 million during the same period of 2012. The $18.3 million increase during 2013 includes a gain recorded on the sale of various processing service relationships, improved mortgage income and higher cardholder and merchant services income.
Noninterest income for the second quarter of 2013 equaled $65.0 million, compared to $57.3 million in the comparable period of 2012. This increase of $7.7 million was caused by improved cardholder and merchant services income, increased recoveries on acquired loans and higher mortgage income.

Year-to-date other noninterest income includes $7.5 million generated from the sale of our rights and most of our obligations under various service agreements with client banks, some of which are Related Persons as discussed in our 2012 Form 10-K. Net of asset impairments and severance costs recorded in conjunction with the sale that are included in noninterest expense, we recorded a net gain of $5.5 million. We will continue to provide processing services to First Citizens Bank and Trust Company, Inc. (FCB-SC), a Related Person and our largest client bank.

The gain recorded during the first quarter was partially offset by a reduction in the fees from processing services, which declined $5.4 million or 33.8 percent during the first six months of 2013 when compared to 2012. Fees from processing services totaled $5.1 million during the second quarter of 2013, compared to $7.6 million during the second quarter of 2012. The large reduction will continue in future periods. Fees from processing services generated by all banks other than FCB-SC totaled $19.2 million during 2012.


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Table of Contents

Mortgage income equaled $3.7 million and $175,000 for the second quarters of 2013 and 2012, respectively, a $3.5 million increase from 2012. The large increase reflects the 2012 impact of creating a reserve for estimated recourse obligations for originated loans that were sold.

Cardholder and merchant services generated $27.3 million during the second quarter of 2013, an increase of $2.6 million or 10.4 percent compared to the second quarter of 2012, the result of higher merchant volume and more favorable pricing. Income from wealth management services totaled $15.1 million during the second quarter of 2013, compared to $14.5 million during the second quarter of 2012, an increase of $0.6 million or 3.9 percent due to favorable market conditions.

Changes in the FDIC receivable resulting from post-acquisition improvement and deterioration of covered assets is generally offset by an adjustment to noninterest income. Increases in the FDIC receivable for deterioration in covered assets has a favorable impact on noninterest income, while reductions in the FDIC receivable for improvements in covered assets has an unfavorable impact on noninterest income. As a result of adjustments to the FDIC receivable, noninterest income was reduced by $14.4 million during the second quarter of 2013, compared to $14.1 million during the second quarter of 2012. For each period, the reductions in noninterest income primarily resulted from writedowns of the FDIC receivable resulting from net improvements in estimated cash flows related to assets covered by loss share agreements.


NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs for our branch offices and our technology and operations infrastructure.

Table 9
NONINTEREST EXPENSE

 
Three months ended June 30
 
Six months ended June 30
 
Three-month change
 
 Six-month change
 
 
2013
 
2012
 
2013
 
2012
 
$
 
%
 
$
 
%
 
 
(dollars in thousands)
Salaries and wages
$
75,802

 
$
76,786

 
$
151,921

 
$
152,470

 
$
(984
)
 
(1.28
)
%
$
(549
)
 
(0.36
)
%
Employee benefits
23,228

 
20,558

 
48,247

 
40,807

 
2,670

 
12.99

 
7,440

 
18.23

 
Occupancy expense
18,464

 
18,000

 
37,273

 
36,607

 
464

 
2.58

 
666

 
1.82

 
Equipment expense
18,698

 
17,998

 
37,644

 
36,164

 
700

 
3.89

 
1,480

 
4.09

 
FDIC insurance expense
2,423

 
2,666

 
5,089

 
5,723

 
(243
)
 
(9.11
)
 
(634
)
 
(11.08
)
 
Foreclosure-related expenses
3,467

 
15,389

 
7,772

 
19,993

 
(11,922
)
 
(77.47
)
 
(12,221
)
 
(61.13
)
 
Collection
5,104

 
5,142

 
10,379

 
11,081

 
(38
)
 
(0.74
)
 
(702
)
 
(6.34
)
 
Processing fees paid to third parties
3,846

 
3,577

 
8,227

 
6,726

 
269

 
7.52

 
1,501

 
22.32

 
Consultant
2,465

 
1,286

 
4,091

 
1,887

 
1,179

 
91.68

 
2,204

 
(a)

 
Advertising
1,107

 
723

 
1,405

 
2,086

 
384

 
53.11

 
(681
)
 
(32.65
)
 
Other
33,963

 
32,672

 
70,874

 
64,584

 
1,291

 
3.95

 
6,290

 
9.74

 
Total noninterest expense
$
188,567

 
$
194,797

 
$
382,922

 
$
378,128

 
$
(6,230
)
 
(3.20
)
 
$
4,794

 
1.27

 
(a) not meaningful

Noninterest expense equaled $382.9 million for the first six months of 2013, a $4.8 million or 1.3 percent increase from the $378.1 million recorded during the same period of 2012. During 2013, noninterest expense included a $7.4 million increase in employee benefits expense due to an increase in pension expense resulting from applying a lower discount rate during 2013. Employee health costs also increased during 2013. Higher personnel-related costs were offset by lower foreclosure-related expenses. Other noninterest expense for 2013 includes higher cardholder processing and consultant expenses, and $1.4 million of fixed asset writedowns that resulted from the sale of service agreements with client banks. The writedowns related to prior technology investments that became impaired as a result of that transaction.


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Table of Contents

Noninterest expense decreased $6.2 million in the second quarter of 2013 to $188.6 million compared to $194.8 million in the second quarter of 2012, the net result of lower foreclosure-related expenses and higher pension expense.

Foreclosure-related expenses decreased $11.9 million, or 77.5 percent, in the second quarter and $12.2 million, or 61.1 percent, year-to-date, as compared to the same periods in 2012, due to a decrease in foreclosure activity arising from the FDIC-assisted transactions. Foreclosure-related expenses include costs to maintain foreclosed property, write-downs following foreclosure and gains or losses recognized at the time of sale. Foreclosure-related expenses associated with acquired other real estate owned (OREO) are generally reimbursable under the FDIC loss share agreements.

Equipment expense increased $1.5 million or 4.1 percent during 2013 due to higher software costs. Equipment expenses will increase in future periods as we continue an effort to update our core technology systems and related business processes. As each phase of the project is completed, we anticipate that equipment expense, including depreciation expense for software and hardware investments and related maintenance expense, will increase. The project will also require facility-related investments, which will result in higher occupancy costs in future periods. The project began in 2013 and will continue until 2016 with total costs estimated to exceed $100.0 million.


INCOME TAXES

We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.

Income tax expense totaled $25.3 million and $10.7 million for the second quarters of 2013 and 2012, representing effective tax rates of 36.6 percent and 22.1 percent during the respective periods. For the first six months of 2013, income tax expense totaled $56.4 million compared to $29.0 million during 2012, reflecting effective tax rates of 36.2 percent and 28.4 percent during the respective periods.

The increase in the effective tax rates for 2013 primarily results from recognition of a $6.4 million credit to income tax expense during the second quarter of 2012 resulting from the favorable outcome of state tax audits for the period 2008-2010, net of additional federal taxes.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they comfortably exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate, given growth projections, risk profile and potential changes in the regulatory environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements. Table 10 provides information on capital adequacy for BancShares as of June 30, 2013December 31, 2012, and June 30, 2012.

Table 10
ANALYSIS OF CAPITAL ADEQUACY
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Regulatory
minimum
 
Well-capitalized requirement
 
(dollars in thousands)
 
 
 
 
Tier 1 capital
$
2,045,264

 
$
1,949,985

 
$
2,143,496

 
 
 
 
Tier 2 capital
206,130

 
229,385

 
226,503

 
 
 
 
Total capital
$
2,251,394

 
$
2,179,370

 
$
2,369,999

 
 
 
 
Risk-adjusted assets
$
13,718,707

 
$
13,663,353

 
$
13,422,294

 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 capital
14.91
%
 
14.27
%
 
15.97
%
 
4.00
%
 
6.00
%
Total capital
16.41

 
15.95

 
17.66

 
8.00

 
10.00

Tier 1 leverage ratio
9.68

 
9.22

 
10.21

 
3.00

 
5.00



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BancShares continues to exceed minimum capital standards and FCB remains well-capitalized.
    
During 2012, our board granted authority to purchase up to 100,000 and 25,000 shares of Class A and Class B common stock, respectively, through June 30, 2013. During 2012, we purchased and retired 56,276 shares of Class A common stock and 100 shares of Class B common stock pursuant to the July 1, 2012, board authorization. During 2013, BancShares purchased and retired 1,973 shares of Class A common stock pursuant to the existing authorization. Authority to purchase shares under the 2012 stock purchase plan expired on June 30, 2013.

During the second quarter of 2013, our board granted authority to purchase up to 100,000 and 25,000 shares of Class A and Class B common stock, respectively, beginning on July 1, 2013, and continuing through June 30, 2014.

BancShares had $93.5 million of trust preferred capital securities included in tier 1 capital at June 30, 2013, and December 31, 2012, compared to $243.5 million at June 30, 2012. Due to Dodd-Frank provisions that will eliminate trust preferred capital securities from tier 1 capital, excessive liquidity and the high coupon rate, BancShares redeemed $150.0 million of trust preferred securities on July 31, 2012.

Beginning January 1, 2015, 75 percent of our trust preferred capital securities will be excluded from tier 1 capital, with the remaining 25 percent phased out January 1, 2016. Elimination of all trust preferred capital securities from the June 30, 2013, capital structure would result in a proforma tier 1 leverage capital ratio of 9.23 percent, a tier 1 risk-based capital ratio of 14.23 percent, and a total risk-based capital ratio of 15.73 percent. On a proforma basis assuming disallowance of all trust preferred capital securities, BancShares and FCB continue to remain well-capitalized under current regulatory guidelines.

Tier 2 capital of BancShares and FCB includes qualifying subordinated debt that was issued in 2005 with a scheduled maturity date of June 1, 2015. Under current regulatory guidelines, when subordinated debt is within five years of its scheduled maturity date, issuers must discount the amount included in tier 2 capital by 20 percent for each year until the debt matures. The amount of subordinated debt that qualifies as tier 2 capital totaled $25.0 million as of June 30, 2013, compared to $50.0 million at June 30, 2012. Subordinated debt will be completely removed from tier 2 capital in the second quarter of 2014, one year prior to the scheduled maturity of the subordinated debt. Tier 2 capital is part of total risk-based capital, reflected in Table 10.

In July 2013, Bank regulatory agencies approved new global regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and exposure. When fully phased-in (January 2019), the rule includes a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets, totaling 7 percent. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent.

Additionally, trust preferred securities and cumulative preferred securities are required to be phased out of tier 1 capital by 2016. The inclusion of accumulated other comprehensive income in tier 1 common equity, as described in the proposed rules, is only applicable for institutions larger than $50 billion in assets.

We continue to monitor Basel III developments and remain committed to managing our capital levels in a prudent manner. BancShares' tier 1 common equity ratio based on the current tier 1 capital and risk-weighted assets calculations, excluding trust preferred securities, is 14.23 percent at June 30, 2013, compared to the fully phased-in Federal Reserve standards of 7.00 percent. Tier 1 common equity ratio is calculated in Table 10.

Table 10
TIER 1 COMMON EQUITY

 
June 30, 2013
 
(dollars in thousands)
Tier 1 capital
$
2,045,264

Less: restricted core capital
93,500

Tier 1 common equity
$
1,951,764

Risk-adjusted assets
$
13,718,707

 
 
Tier 1 common equity ratio
14.23
%


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Under GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are reflected as adjustments to accumulated other comprehensive income within shareholder's equity. In the aggregate, these items represented a net reduction in shareholders' equity of $100.2 million at June 30, 2013, compared to $82.1 million at December 31, 2012, and $62.4 million at June 30, 2012. The $18.1 million reduction in AOCI from December 31, 2012, resulted from a reduction in unrealized gains on investment securities available for sale arising due to interest rate changes during 2013. The $37.8 million reduction in AOCI from June 30, 2012, reflects the combined impact of lower unrealized gains on investment securities available for sale and an unfavorable change in the funded status of the pension plan.


GOODWILL IMPAIRMENT

GAAP requires that we perform an impairment test each year to determine if goodwill is impaired. Annual impairment tests are conducted as of July 31 each year. We performed the annual goodwill impairment test during the third quarter of 2012 and there was no impairment of goodwill.

In addition to the annual testing requirement, we are required to test goodwill for impairment if various other events occur, including significant adverse changes in the business climate. The test considers various qualitative and quantitative factors to determine whether impairment exists. As of June 30, 2013, the book value of our common stock was $201.62, compared to a market price of $192.05. If the stock price deteriorates further or remains below book value for a sustained period, subsequent impairment tests may determine that goodwill impairment exists. An impairment charge could have a significant impact on our consolidated income statement. However, a goodwill impairment charge would not impact our capital ratios as those ratios are calculated using tangible capital amounts.


RISK MANAGEMENT

Effective risk management is critical to our success. The most significant risks we confront are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loan, lease and investment assets. Interest rate risk results from changes in interest rates which may impact the re-pricing of assets and liabilities in different amounts or at different dates. Liquidity risk is the risk that we will be unable to fund obligations to loan customers, depositors or other creditors. To manage these risks as well as other risks that are inherent in our operation and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within appropriate ranges. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.

In response to the requirements of the Dodd-Frank Act, federal regulators released final stress testing rules on October 9, 2012. The annual stress test is a component of a broader stress testing framework that was finalized in late 2012. Implementation of the annual stress testing requirement has been delayed until September 30, 2013, for institutions, such as BancShares, with total assets of $10.00 billion to $50.00 billion. Through the stress testing program that has been implemented, BancShares and FCB satisfactorily comply with the 2012 stress testing regulations as well as guidance for ongoing bank-level stress testing published in May 2012. The results of the stress testing activities will be considered in combination with other risk management and monitoring practices to maintain an effective risk management program.

The Dodd-Frank Act also required that banks with total assets in excess of $10.00 billion establish an enterprise-wide risk committee consisting of members of its board of directors. At its July 2013 meeting, the board of directors established a Risk Committee that will provide oversight of enterprise-wide risk management. The Risk Committee will establish risk appetite and supporting tolerances for credit, market and operational risk and ensure risk is managed within those tolerances, monitor compliance with laws and regulations, review the investment securities portfolio to ensure that portfolio returns are managed within market risk tolerance, and monitor our legal activity and associated risk.

Credit risk management. The maintenance of excellent asset quality has historically been one of our key performance measures. Loans and leases not acquired by loss share agreements with the FDIC were underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Loans acquired by loss share agreements with the FDIC were recorded at fair value at the date of the acquisition and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses to ensure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan and lease losses that are inherent in the loan and lease portfolio.

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We maintain a well-diversified loan and lease portfolio and seek to minimize the risk associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to significant risk, such as our concentrations of real estate secured loans, revolving mortgage loans and medical-related loans.

We have historically carried a significant concentration of real estate secured loans. Within our originated loan portfolio, we mitigate that exposure through our underwriting policies that primarily rely on borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner occupied. At June 30, 2013, originated loans secured by real estate totaled $9.74 billion or 83.6 percent of total originated loans and leases compared to $9.66 billion or 83.5 percent of originated loans and leases at December 31, 2012, and $9.58 billion or 83.6 percent at June 30, 2012.

Among real estate secured loans, our revolving mortgage loans present a heightened risk due to long commitment periods during which the financial position of individual borrowers or collateral values may deteriorate significantly. In addition, a large percentage of our revolving mortgage loans are secured by junior liens. Substantial declines in collateral values could cause junior lien positions to become effectively unsecured. Revolving mortgage loans secured by real estate amounted to $2.12 billion, or 18.2 percent of originated loans at June 30, 2013, compared to $2.21 billion or 19.1 percent at December 31, 2012, and $2.27 billion or 19.8 percent at June 30, 2012.

Except for loans acquired in FDIC-assisted transactions, we have not acquired revolving mortgages in the secondary market nor have we originated these loans to customers outside of our market areas. All originated revolving mortgage loans were underwritten by us based on our standard lending criteria. The revolving mortgage loan portfolio consists largely of variable rate lines of credit which allow customer draws during the entire contractual period of the line of credit, typically 15 years. Approximately 85 percent of outstanding balances at June 30, 2013, require interest-only payments, while the remaining require monthly payments equal to 1.5 percent of the outstanding balance. Approximately 91.0 percent of the revolving mortgage portfolio relates to properties in North Carolina and Virginia. Approximately 34.0 percent of the loan balances outstanding are secured by senior collateral positions while the remaining 66.0 percent are secured by junior liens.

Due to higher default risk resulting from financial strain facing our borrowers and lower collateral values, during 2012, we engaged a third party to obtain credit quality data on certain of our junior lien revolving mortgage loans. After gathering information on current lien position and delinquency status for both our junior lien position and the related senior lien, we considered whether the new data indicated that changes in loss estimates were required. The lien positions obtained by the third party closely matched the data in our loan systems that we had used to calculate the allowance for loan and lease losses. In addition, the data collected indicated that 97.0 percent of the sampled junior liens that were current as to payment status on the junior lien were also current on the related senior lien. Only 1.4 percent of the sampled junior liens had senior liens with more severe delinquency status compared to the related junior lien. Management concluded the credit quality and the probability of default of the senior liens was generally consistent with our junior lien historical results. The allowance for our revolving mortgage loans is calculated using estimated loss rates based on historical loss experience and the current risk mix as indicated by prevailing delinquency rates with primary consideration placed on losses sustained in recent periods.  When considering future losses, we apply subjective adjustments to actual prior losses if we believe we may experience different levels of losses in future periods due to the various risks applicable to revolving mortgage loans including junior lien positions, trends in real estate valuations and potentially higher interest rates.

Originated loans and leases to borrowers in medical, dental or related fields totaled $3.21 billion as of June 30, 2013, which represents 27.5 percent of originated loans and leases, compared to $3.02 billion or 26.1 percent of originated loans and leases at December 31, 2012, and $3.14 billion or 27.4 percent of originated loans and leases at June 30, 2012. The credit risk of this industry concentration is mitigated through our underwriting policies that emphasize reliance on adequate borrower cash flow rather than underlying collateral value and our preference for financing secured by owner-occupied real property. Except for this single concentration, no other industry represented more than 10 percent of total originated loans and leases outstanding at June 30, 2013.

Nonperforming assets include nonaccrual loans and leases and OREO resulting from both acquired and originated loans. The accrual of interest on originated loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Originated loans and leases are returned to accrual status when both principal and interest are current and the asset is determined to be performing in accordance with the terms of the loan instrument. Accretion of income for acquired loans is discontinued when we are unable to estimate the amount or timing of cash flows. This designation may be made at acquisition date or subsequent to acquisition date, including at maturity when no formal repayment plan has been established.

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Acquired loans may begin or resume accretion of income if information becomes available that allows us to estimate the amount or timing of future cash flows. See Table 11 for details on nonperforming assets and other risk elements.

At June 30, 2013, BancShares’ nonperforming assets amounted to $237.8 million or 1.8 percent of total loans and leases plus OREO, compared to $310.4 million or 2.3 percent at December 31, 2012, and $507.6 million or 3.7 percent at June 30, 2012. Of the $237.8 million in nonperforming assets at June 30, 2013, $131.7 million related to acquired loans while the remaining $106.1 million resulted from originated loans. Nonperforming assets from originated loans represented 0.9 percent of originated loans, leases and OREO at June 30, 2013, compared to 1.0 percent at June 30, 2012.

Acquired nonaccrual loans equaled $46.9 million as of June 30, 2013, compared to $74.5 million at December 31, 2012, and $271.4 million at June 30, 2012. The reduction in acquired nonaccrual loans as of June 30, 2013, results primarily from the late 2012 deployment of the acquired loan accounting system for four of the FDIC-assisted transactions, which resulted in accretion income being recognized on loans previously classified as nonaccrual and accounted for under the cost recovery method. Utilization of the acquired loan accounting system has improved our ability to forecast both the timing and the amount of cash flows on acquired loans, allowing us to accrete income on more of these assets under existing accounting standards. Originated nonaccrual loans decreased $20.7 million from December 31, 2012, to $69.1 million at June 30, 2013, the combined result of decreases in commercial mortgage and commercial construction and land development loans.

OREO includes foreclosed property and branch facilities that we have closed but not sold. Noncovered OREO totaled $36.9 million at June 30, 2013, compared to $43.5 million at December 31, 2012, and $49.5 million at June 30, 2012. At June 30, 2013, construction and land development properties including vacant land for development represented 42.7 percent of OREO. Vacant land values experienced an especially steep decline during the economic slowdown due to a significant drop in demand, and values may continue to decline if demand remains weak.

Once acquired, net book values of OREO are reviewed at least annually to evaluate if write-downs are required. Real estate appraisals are reviewed by the appraisal review department to ensure the quality of the appraised value in the report. The level of review is dependent on the value and type of the collateral, with higher value and more complex properties receiving a more detailed review. In a market of declining property values, as we have experienced in recent years, we utilize resources in addition to appraisals to obtain the most current market value. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information. Decisions regarding write-downs are based on factors that include appraisals, broker opinions, previous offers received on the property, market conditions and the number of days the property has been on the market.

At June 30, 2013, the allowance for loan and lease losses allocated to originated loans totaled $181.8 million or 1.56 percent of originated loans and leases, compared to $179.0 million or 1.53 percent at December 31, 2012, and $185.1 million or 1.62 percent at June 30, 2012. The June 30, 2013, allowance included the increase resulting from model enhancement that absorbed the reserve for unfunded commitments into the allowance. The allowance for loans individually evaluated for impairment has increased by $1.6 million since June 30, 2012, primarily due to a lower threshold used to identify impaired loans and reductions in collateral values.

An additional allowance of $76.5 million relates to acquired loans at June 30, 2013, established as a result of post-acquisition deterioration in credit quality for acquired loans. The allowance for acquired loans equaled $87.8 million at June 30, 2012. The allowance for acquired loans has decreased since June 30, 2012, due to reversal of previously recorded credit- and timing-related impairment, partially offset by newly-identified impairment.

Management considers the allowance adequate to absorb estimated probable losses that relate to loans and leases outstanding at June 30, 2013, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. Such agencies may require adjustments to the allowance based on information available to them at the time of their examination.


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The provision for originated loan and lease losses recorded during the second quarter of 2013 equaled $2.2 million, compared to $11.0 million during the second quarter of 2012. The reduction in provision for originated loans and leases was primarily the result of reduced loss estimates, lower charge-offs and lower provisions for loans between $500,000 and $1.0 million now individually evaluated for impairment.

During the second quarter of 2013, we recorded a credit to provision expense of $15.5 million for acquired loans compared to provision expense of $18.7 million recorded during the second quarter of 2012. The favorable change compared to the prior periods resulted from the reversal of previously-identified post-acquisition deterioration of acquired loans resulting from changes in estimates or payoffs. The increased provision expense recognized during the fourth quarter of 2012 primarily related to newly-identified impairment, including credit-related impairment and timing-related impairment resulting from changes in the projected loss dates. To the extent deterioration is covered by a loss share agreement, we also record a corresponding adjustment to the FDIC receivable with an offset to noninterest income for the covered credit-related portion at the appropriate indemnification rate. Impairment related to the timing of cash flows does not trigger adjustments to the FDIC receivable. Due to the imprecision of actual results when compared to prior estimates, the amount of acquired loan provision expense is subject to significant volatility. That volatility is even more significant due to our limited use of loan pools for accounting purposes.

Exclusive of losses related to acquired loans, net charge-offs equaled $4.4 million during the second quarter of 2013, compared to $12.2 million during the second quarter of 2012. On an annualized basis, net charge-offs represented 0.15 percent of average originated loans and leases during the second quarter of 2013 compared to 0.43 percent during the second quarter of 2012. Net charge-offs on acquired loans equaled $4.5 million in the second quarter of 2013 compared to $17.0 million recorded in the second quarter of 2012. Loss estimates for most acquired loans are made at the individual loan level using loan-specific information. Therefore, fluctuations in charge-off levels on acquired loans are not necessarily indicative of future performance of other acquired loans.

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Table 11 provides details concerning the allowance for loan and lease losses during the past five quarters.

Table 11
ALLOWANCE FOR LOAN AND LEASE LOSS (ALLL) EXPERIENCE AND RISK ELEMENTS
 
2013
 
2012
 
Six months ended June 30
 
 
Second
 
First
 
Fourth
 
Third
 
 Second
 
 
 
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
2013
 
2012
 
 
(dollars in thousands)
ALLL at beginning of period
$
273,019

 
$
319,018

 
$
276,554

 
$
272,929

 
$
272,500

 
$
319,018

 
$
270,144

 
Reclassification of reserve for unfunded commitments to ALLL (1)
7,368

 

 

 

 

 
7,368

 

 
Provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
(15,473
)
 
(22,622
)
 
62,332

 
10,226

 
18,678

 
(38,095
)
 
28,281

 
Originated loans
2,231

 
4,016

 
2,548

 
7,397

 
10,989

 
6,247

 
32,101

 
Net charge-offs of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(10,960
)
 
(28,944
)
 
(23,969
)
 
(15,196
)
 
(30,934
)
 
(39,904
)
 
(61,312
)
 
Recoveries
2,131

 
1,551

 
1,553

 
1,198

 
1,696

 
3,682

 
3,715

 
Net charge-offs of loans and leases
(8,829
)
 
(27,393
)
 
(22,416
)
 
(13,998
)
 
(29,238
)
 
(36,222
)
 
(57,597
)
 
ALLL at end of period
$
258,316

 
$
273,019

 
$
319,018

 
$
276,554

 
$
272,929

 
$
258,316

 
$
272,929

 
ALLL at end of period allocated to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
$
76,534

 
$
96,473

 
$
139,972

 
$
90,507

 
$
87,797

 
$
76,534

 
$
87,797

 
Originated
181,782

 
176,546

 
179,046

 
186,047

 
185,132

 
181,782

 
185,132

 
ALLL at end of period
$
258,316

 
$
273,019

 
$
319,018

 
$
276,554

 
$
272,929

 
$
258,316

 
$
272,929

 
Net charge-offs of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
$
4,466

 
$
20,877

 
$
12,867

 
$
7,516

 
$
16,998

 
$
25,343

 
$
29,745

 
Originated
4,363

 
6,516

 
9,549

 
6,482

 
12,240

 
10,879

 
27,852

 
Total net charge-offs
$
8,829

 
$
27,393

 
$
22,416

 
$
13,998

 
$
29,238

 
$
36,222

 
$
57,597

 
Reserve for unfunded commitments (1)
$
376

 
$
7,744

 
$
7,692

 
$
7,999

 
$
7,869

 
$
376

 
$
7,869

 
Average loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
$
1,535,796

 
$
1,697,776

 
$
1,825,491

 
$
1,916,305

 
$
2,076,199

 
$
1,616,348

 
$
2,167,436

 
Originated
11,631,784

 
11,592,052

 
11,532,437

 
11,534,859

 
11,535,335

 
11,612,019

 
11,551,096

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
1,443,336

 
1,621,327

 
1,809,235

 
1,897,097

 
1,999,351

 
1,443,336

 
1,999,351

 
Originated
11,655,469

 
11,509,080

 
11,576,115

 
11,455,233

 
11,462,458

 
11,655,469

 
11,462,458

 
Risk Elements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
$
46,892

 
$
43,882

 
$
74,479

 
$
142,696

 
$
271,381

 
$
46,892

 
$
271,381

 
Originated
69,133

 
82,583

 
89,845

 
75,255

 
69,406

 
69,133

 
69,406

 
Other real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Covered under loss share agreements
84,833

 
101,901

 
102,577

 
116,405

 
117,381

 
84,833

 
117,381

 
Not covered under loss share agreements
36,942

 
44,828

 
43,513

 
45,063

 
49,454

 
36,942

 
49,454

 
 Total nonperforming assets
$
237,800

 
$
273,194

 
$
310,414

 
$
379,419

 
$
507,622

 
$
237,800

 
$
507,622

 
 Nonperforming assets acquired
$
131,725

 
$
145,783

 
$
177,056

 
$
259,101

 
$
388,762

 
$
131,725

 
$
388,762

 
 Nonperforming assets originated
106,075

 
127,411

 
133,358

 
120,318

 
118,860

 
106,075

 
118,860

 
 Total nonperforming assets
$
237,800

 
$
273,194

 
$
310,414

 
$
379,419

 
$
507,622

 
$
237,800

 
$
507,622

 
Accruing loans and leases greater than 90 days past due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
$
253,935

 
$
278,687

 
$
281,000

 
$
248,573

 
$
254,580

 
$
253,935

 
$
254,580

 
Originated
11,187

 
12,301

 
11,272

 
14,071

 
12,907

 
11,187

 
12,907

 
Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs (annualized) to average loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
1.17

%
4.99

%
2.80

%
1.56

%
3.29

%
3.16

%
2.76

%
Originated
0.15

 
0.23

 
0.33

 
0.22

 
0.43

 
0.19

 
0.48

 
ALLL to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
5.30

 
5.95

 
7.74

 
4.77

 
4.39

 
5.30

 
4.39

 
Originated
1.56

 
1.53

 
1.55

 
1.62

 
1.62

 
1.56

 
1.62

 
Nonperforming assets to total loans and leases plus other real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired
8.62

 
8.46

 
9.26

 
12.87

 
18.37

 
8.62

 
18.37

 
Originated
0.91

 
1.10

 
1.15

 
1.05

 
1.03

 
0.91

 
1.03

 
Total
1.80

 
2.06

 
2.29

 
2.81

 
3.72

 
1.80

 
3.72

 
(1) During the second quarter of 2013, BancShares modified the ALLL model and the methodology for estimating losses on unfunded commitments. As a result of these modifications, $7.4 million of the balance previously reported as a reserve of unfunded commitments was reclassified to the ALLL.

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Originated restructured loans (TDRs) that are performing under their modified terms equaled $84.6 million at June 30, 2013, compared to $89.1 million at December 31, 2012, and $109.6 million at June 30, 2012. Total acquired and originated restructured loans as of June 30, 2013, equaled $277.6 million, $215.8 million of which are performing under their modified terms. TDRs are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. These modifications are typically executed only when customers are current on their payment obligation and we believe the modification will result in avoidance of default. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as risk elements within nonaccrual loans and leases in Table 11. Table 11 does not include performing TDRs, which are accruing interest based on the restructured terms. Table 12 provides details on performing and nonperforming TDRs as of June 30, 2013, December 31, 2012, and June 30, 2012.

Table 12
TROUBLED DEBT RESTRUCTURINGS
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
 
(dollars in thousands)
Accruing TDRs:
 
 
Acquired
$
131,156

 
$
164,256

 
$
117,058

 
Originated
84,617

 
89,133

 
109,648

 
Total accruing TDRs
215,773

 
253,389

 
226,706

 
Nonaccruing TDRs:
 
 
 
 
 
 
Acquired
27,338

 
28,951

 
41,569

 
Originated
34,490

 
50,830

 
39,763

 
Total nonaccruing TDRs
61,828

 
79,781

 
81,332

 
All TDRs:
 
 
 
 
 
 
Acquired
158,494

 
193,207

 
158,627

 
Originated
119,107

 
139,963

 
149,411

 
Total TDRs
$
277,601

 
$
333,170

 
$
308,038

 

Interest rate risk management. Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.

We assess our interest rate risk by simulating future amounts of net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Certain variable rate products, including revolving mortgage loans, have interest rate floors. Due to the existence of contractual floors on loans, competitive pressures that constrain our ability to reduce deposit interest rates and the extraordinarily low current level of interest rates, it is highly unlikely that the rates on most interest-earning assets and interest-bearing liabilities can decline materially from current levels. In our simulations, we do not calculate rate shocks, rate ramps or market value of equity for declining rate scenarios and assume the prime interest rate will not move below the June 30, 2013, rate of 3.25 percent. Our rate shock simulations indicate that, over a 24-month period, net interest income will increase by 5.0 percent, 3.5 percent and 0.7 percent with rates rising 200- and 300- and 400-basis points respectively. Our shock projections incorporate assumptions of likely customer migration of short-term deposit instruments to long-term, higher-rate instruments as rates rise. We also utilize the market value of equity as a tool in measuring and managing interest rate risk. As of June 30, 2013, the market value of equity calculated with 200-, 300- and 400-basis point immediate increases in interest rates equal 9.7 percent, 9.2 percent and 8.6 percent, respectively. The projected market value of equity under a stable rate scenario equals 10.22 percent.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk. However, we have entered into an interest rate swap to synthetically convert the variable rate on $93.5 million of junior subordinated debentures to a fixed rate of 5.50 percent through June 2016. The interest rate swap qualifies as a hedge under GAAP.


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Liquidity risk management. Liquidity risk results from the mismatching of asset and liability cash flows and the potential inability to secure adequate amounts of funding from traditional sources of liquidity at a reasonable cost. We manage this risk by structuring our balance sheet prudently and by maintaining various noncore funding sources to fund potential cash needs. Our primary source of funds has historically been our large retail and commercial customer base, which continues to provide a stable base of core deposits. Core deposits are our largest and most cost-effective source of funding. We also maintain access to various types of noncore funding, including advances from the FHLB of Atlanta, federal funds arrangements with correspondent banks, brokered and CDARS deposits and a line of credit from a correspondent bank. Short-term borrowings resulting from commercial treasury customers are also a recurring source of liquidity, although the majority of those borrowings must be collateralized, thereby potentially restricting the use of the resulting liquidity.

We project our liquidity levels in the normal course of business as well as in conditions that might give rise to significant stress on our current liquidity and contingent sources of liquidity through noncore funding. We endeavor to estimate the impact of on and off-balance sheet arrangements and commitments that may impact liquidity. We monitor various financial and liquidity metrics, perform liquidity stress testing and have documented contingency funding plans that would be invoked if conditions warranted. Sources of noncore funding include available cash reserves, the ability to sell, pledge or borrow against unpledged investment securities and available borrowing capacity at the FHLB of Atlanta and the Federal Reserve discount window.

One of our principal sources of noncore funding is advances from the FHLB of Atlanta. Outstanding FHLB advances equaled $205.3 million as of June 30, 2013, and we had sufficient collateral pledged to secure $1.15 billion of additional borrowings. Additionally, we maintain federal funds lines of credit and other borrowing facilities. At June 30, 2013, BancShares had contingent access to $550.0 million in unsecured borrowings through its various sources.

Free liquidity includes cash on deposit at various banks, overnight investments and the unpledged portion of investment securities available for sale. Free liquidity totaled $3.68 billion at June 30, 2013, compared to $2.82 billion at December 31, 2012, and $2.66 billion at June 30, 2012.

LEGAL PROCEEDINGS

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

Additional information relating to legal proceedings is set forth in Note J of BancShares' Notes to Unaudited Consolidated Financial Statements.

CURRENT ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU ) 2013-11, “Income Taxes (Topic 740)”

This ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require BancShares to use, and BancShares does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.
The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted.
The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. BancShares will adopt this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

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FASB ASU 2013-10, “Derivatives and Hedging (Topic 815)"

This ASU permits the use of the Fed Funds Effective Swap Rate (OIS) by BancShares as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges.
The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. BancShares will adopt this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-04, “Liabilities”

This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.
The guidance requires BancShares to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.
The amendments in this update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. BancShares will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

FASB ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

This ASU requires BancShares to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, BancShares is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.
For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations. BancShares has included the required disclosures in Note L.

FASB ASU 2013-01, “Balance Sheet”

This ASU's objective is to clarify that the scope of ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement.
BancShares is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The effective date is the same as the effective date of Update 2011-11. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.


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REGULATORY ISSUES

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has resulted in expansive changes in many areas affecting the financial services industry in general and BancShares in particular. The legislation provides broad economic oversight, consumer financial services protection, investor protection, rating agency reform, and derivative regulatory reform. Various corporate governance requirements have resulted in expanded proxy
disclosures and shareholder rights. Additional provisions address the mortgage industry in an effort to strengthen lending practices. Deposit insurance reform has resulted in permanent FDIC protection for up to $250,000 of deposits and requires the FDIC’s Deposit Insurance Fund to maintain 1.35 percent of insured deposits with the burden for closing the shortfall falling to banks with more than $10.00 billion in assets.

In response to the Dodd-Frank Act, the formula used to calculate the FDIC insurance assessment paid by each FDIC-insured institution was significantly altered. The new formula was effective April 1, 2011, and changes the assessment base from deposits to total assets less equity, thereby placing a larger assessment burden on banks with large levels of non-deposit funding. The new assessment formula also considers the level of higher-risk consumer loans and higher-risk commercial and industrial loans and securities, risk factors that will potentially result in incremental insurance costs. The FDIC recently finalized their definitions of these higher-risk assets and reporting of these assets under the new definitions is effective beginning April 1, 2013. This new reporting requirement requires BancShares to implement process and system changes to identify and report these higher-risk assets.

The Dodd-Frank Act also imposes new regulatory capital requirements for banks that will result in the disallowance of qualified trust preferred capital securities as tier 1 capital. As of June 30, 2013, BancShares had $93.5 million in trust preferred capital securities that were outstanding and included as tier 1 capital. Based on the Inter-Agency Capital Rule Notice, 75 percent, or $46.7 million of BancShares' trust preferred capital securities will be excluded from tier 1 capital beginning January 1, 2015, with the remaining 25 percent, or $15.6 million excluded beginning January 1, 2016.

Management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

FORWARD-LOOKING STATEMENTS

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.

Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the FDIC-assisted transactions, and other developments or changes in our business that we do not expect.
Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.


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Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of June 30, 2013, BancShares’ market risk profile has not changed significantly from December 31, 2012. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4.
Controls and Procedures

BancShares' management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares' disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.

No change in BancShares' internal control over financial reporting occurred during the second quarter of 2013 that had materially affected or is reasonably likely to materially affect, BancShares' internal control over financial reporting.

    

  




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PART II
 
Item 1A.
Risk Factors

The risks and uncertainties that management believes are material are described below. The risks listed are not the only risks that BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem to be material could also have a material adverse impact on our financial condition, the results of our operations or our business. If this were to occur, the market price of our common stock could decline significantly.
 
Unfavorable economic conditions could continue to adversely affect our business
 
Our business is highly affected by national, regional and local economic conditions. These conditions cannot be predicted or controlled and may have a material impact on our operations and financial condition. Unfavorable economic developments beginning in 2008 have resulted in negative effects on the business, risk profile, financial condition and results of operations of financial institutions in the United States, including BancShares and FCB. Unfavorable economic conditions could further weaken the national economy further as well as the economies of communities that we serve. Further economic deterioration in our market areas could depress our earnings and have an adverse impact on our financial condition and capital adequacy.
 
Weakness in real estate markets and exposure to junior liens have adversely impacted our business and our results of operations and may continue to do so
 
Real property collateral values have declined due to continuing weaknesses in real estate sales activity. That risk, coupled with delinquencies and losses on various loan products caused by high rates of unemployment and underemployment, has resulted in losses on loans that, while adequately collateralized at the time of origination, are no longer fully secured. Our continuing exposure to under-collateralization is concentrated in our non-commercial revolving mortgage loan portfolio. Approximately two-thirds of the revolving mortgage portfolio is secured by junior lien positions and lower real estate values for collateral underlying these loans has, in many cases, caused the outstanding balance of the senior lien to exceed the value of the collateral, resulting in a junior lien loan that is in effect unsecured. A large portion of our losses within the revolving mortgage portfolio has arisen from junior lien loans due to inadequate collateral values.

Further declines in collateral values, unfavorable economic conditions and sustained high rates of unemployment could result in greater delinquency, write-downs or charge-offs in future periods, which could have a material adverse impact on our results of operations and capital adequacy.

Accounting for acquired assets may result in earnings volatility
     
Fair value discounts that are recorded at the time an asset is acquired are accreted into interest income based on accounting principles generally accepted in the United States of America. The rate at which those discounts are accreted is unpredictable, the result of various factors including unscheduled prepayments and credit quality improvements that result in a reclassification from nonaccretable difference to accretable yield that is prospectively included in interest income. Post-acquisition deterioration results in the recognition of provision expense and allowance for loan and lease losses. Additionally, the income statement impact of adjustments to the indemnification asset may occur over a shorter period of time than the adjustments to the covered assets.

Fair value discount accretion, post-acquisition impairment and adjustments to the indemnification asset may result in significant volatility in our earnings. Volatility in earnings could unfavorably influence investor interest in our common stock thereby depressing the market value of our stock and the market capitalization of our company.
 
 

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Reimbursements under loss share agreements are subject to FDIC oversight and interpretation and contractual term limitations
 
The FDIC-assisted transactions completed during 2011, 2010 and 2009 include significant protection to FCB from the exposures to prospective losses on certain assets that are covered under loss share agreements with the FDIC. Loans and leases covered under loss share agreements represent 11.0 percent of total loans and leases as of June 30, 2013. The loss share agreements impose certain obligations on us, including obligations to manage covered assets in a manner consistent with prudent business practices and in accordance with the procedures and practices that we customarily use for assets that are not covered by loss share agreements. Based on projected losses as of June 30, 2013, we expect to receive cash payments from the FDIC totaling $71.4 million over the remaining lives of the respective loss share agreements, exclusive of estimated amounts we will owe the FDIC for settlement of the clawback obligations. We are also required to report detailed loan level information and file requests for reimbursement of covered losses and expenses on a quarterly basis. In the event of noncompliance, delay or disallowance of some or all of our rights under those agreements could occur, including the denial of reimbursement for losses and related collection costs.

The loss share agreements are subject to differing interpretations by the FDIC and FCB and disagreements may arise regarding coverage of losses, expenses and contingencies. Additionally, losses that are currently projected to occur during the loss share term may not occur until after the expiration of the applicable agreement and those losses could have a material impact on results of operations in future periods. The carrying value of the FDIC receivable includes only those losses that we project to occur during the loss share period and for which we believe we will receive reimbursement from the FDIC at the applicable reimbursement rate.

We are subject to extensive oversight and regulation that continues to change
 
We and FCB are subject to extensive federal and state banking laws and regulations. These laws and regulations primarily focus on the protection of depositors, federal deposit insurance funds and the banking system as a whole rather than the protection of security holders. Federal and state banking regulators possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums, increased expenses, reductions in fee income and limitations on activities that could have a material adverse effect on our results of operations.

The Dodd-Frank Act instituted significant changes to the overall regulatory framework for financial institutions, including the creation of the Consumer Financial Protection Bureau that will impact BancShares and FCB. Additionally, trust preferred securities that currently qualify as tier 1 capital will be fully disallowed by January 1, 2016.

In September 2010, the Basel Committee on Banking Supervision announced new global regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and exposure.

In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules for United States banking organizations. The proposed rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock and an effective floor for tier 1 common equity of 7.00 percent. Final rules were issued during July 2013. While we have estimated the impact that the proposed rules would have on our capital ratios, we are evaluating the impact of the final rules.
 
We encounter significant competition
 
We compete with other banks and specialized financial service providers in our market areas. Our primary competitors include local, regional and national banks credit unions, commercial finance companies, various wealth management providers, independent and captive insurance agencies, mortgage companies and non-bank providers of financial services. Some of our larger competitors, including banks that have a significant presence in our market areas, have the capacity to offer products and services we do not offer. Some of our competitors operate in a regulatory environment that is less stringent than the one in which we operate, or are not subject to federal and state income taxes. The fierce competitive pressure that we face adversely affects pricing for many of our products and services.

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Our financial condition could be adversely affected by the soundness of other financial institutions

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to numerous financial service providers, including banks, brokers and dealers in securities and other financial service providers. Transactions with other financial institutions expose us to credit risk in the event of default of the counterparty.
 
Natural disasters and other catastrophes could affect our ability to operate
 
The occurrence of catastrophic events, including weather-related events such as hurricanes, tropical storms, floods or windstorms, as well as earthquakes, pandemic disease, fires and other catastrophes, could adversely affect our financial condition and results of operations. In addition to natural catastrophic events, man-made events, such as acts of terror and governmental response to acts of terror, could adversely affect general economic conditions, which could have a material impact on our results of operations.
 
Unpredictable natural and other disasters could have an adverse effect if those events materially disrupt our operations or affect customers’ access to the financial services we offer. Although we carry insurance to mitigate our exposure to certain catastrophic events, catastrophic events could nevertheless adversely affect our results of operations.
 
We are subject to interest rate risk
 
Our results of operations and cash flows are highly dependent upon our net interest income. Interest rates are sensitive to economic and market conditions that are beyond our control, including the actions of the Federal Reserve Board’s Federal Open Market Committee. Changes in monetary policy could influence our interest income and interest expense as well as the fair value of our financial assets and liabilities. If changes in interest rates on our interest-earning assets are not equal to the changes in interest rates on our interest-bearing liabilities, our net interest income and, therefore, our net income could be adversely impacted.
 
Even though we maintain what we believe to be an adequate interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. The shape of the yield curve may change differently than we forecasted, and we cannot accurately predict changes in interest rates or actions by the Federal Open Market Committee that may have a direct impact on market interest rates.
 
Our current level of balance sheet liquidity may come under pressure
 
Our deposit base represents our primary source of core funding and balance sheet liquidity. We normally have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we would need access to noncore funding such as borrowings from the Federal Home Loan Bank and the Federal Reserve, fed funds purchased and brokered deposits. While we maintain access to noncore funding sources, we are dependent on the availability of collateral, the counterparty’s willingness to lend to us and their liquidity capacity.
 
We face significant operational risks in our businesses
 
Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways, including employee fraud, customer fraud and control lapses in bank operations and information technology. Our dependence on our employees, automated systems and those systems maintained by third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, legal actions and noncompliance with various laws and regulations.
 
Our business could suffer if we fail to attract and retain skilled employees

FCB's success depends primarily on its ability to attract and retain key employees. Competition is intense for employees who we believe will be successful in developing and attracting new business and/or managing critical support functions for FCB. Our historical avoidance of annual cash incentives, incentive stock awards or long-term incentive awards creates unique challenges to our attraction and retention of key employees. We may not be able to hire the best employees or retain them for an adequate period of time after their hire date.


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We are subject to information security risks

We maintain and transmit large amounts of sensitive information electronically, including personal and financial information of our customers. In addition to our own systems, we also rely on external vendors to provide certain services and are, therefore, exposed to their information security risk. While we seek to mitigate internal and external information security risks, the volume of business conducted through electronic devices continues to grow, and our computer systems and network infrastructure, as well as the systems of external vendors and customers, present security risks and could be susceptible to hacking or identity theft.

We are also subject to risks arising from recurring distributed denial of service attacks, which arise from both domestic and international sources and seek to obtain customer information for fraudulent purposes or, in some cases, to disrupt business activities. Information security risks could result in reputational damage and lead to a material adverse impact on our business, financial condition and financial results of operations.

We continue to encounter technological change for which we expect to incur significant expense
 
The financial services industry continues to experience an increase in technological complexity required to provide a competitive array of products and services to customers. Our future success requires that we maintain technology and associated facilities that will support our ability to provide products and services that satisfactorily meet the banking and other financial needs of our customers. During the past two years, we have closely examined the state of our core technology systems and related business processes and determined that significant investments are required. The project to modernize our systems and associated facilities and reduce operational risk began in 2013 with phased implementation through 2016. The magnitude and scope of this project is significant with total costs estimated to exceed $100 million. If the project objectives are not achieved or if the cost of the project is materially in excess of the estimate, our business, financial condition and financial results could be adversely impacted.
    
We rely on external vendors
 
Third party vendors provide key components of our business infrastructure, including certain data processing and information services. A number of our vendors are large national entities with dominant market presence in their respective fields, and their services could be difficult to quickly replace in the event of failure or other interruption in service. Failures of certain vendors to provide services for any reason could adversely affect our ability to deliver products and services to our customers. External vendors also present information security risk. We monitor vendor risks, including the financial stability of critical vendors. The failure of a critical external vendor could disrupt our business and cause us to incur significant expense.
 
We are subject to litigation risks that may be uninsured
 
We face litigation risks as principal and fiduciary from customers, employees, vendors, federal and state regulatory agencies and other parties who may seek to assert single or class action liabilities against us. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm. Although we carry insurance to mitigate our exposure to certain litigation risks, litigation could, nevertheless, adversely affect our results of operations.
 
We use accounting estimates in the preparation of our financial statements
 
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. Significant estimates include the allowance for loan and lease losses, the fair values of acquired loans and OREO at acquisition date and cash flow projections in subsequent periods, and the related receivable from the FDIC for loss share agreements. Due to the uncertainty of the circumstances relating to these estimates, we may experience more adverse outcomes than originally estimated. The allowance for loan and lease losses may need to be significantly increased based on future events. The actual losses or expenses on loans or the losses or expenses not covered under the FDIC agreements may differ from the recorded amounts, resulting in charges that could materially affect our results of operations.
 

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Accounting standards may change
 
The Financial Accounting Standards Board and the Securities and Exchange Commission periodically modify the standards that govern the preparation of our financial statements. The nature of these changes is not predictable and could impact how we record transactions in our financial statements, which could lead to material changes in assets, liabilities, shareholders’ equity, revenues, expenses and net income. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously-reported financial results or a cumulative adjustment to retained earnings. The application of new accounting rules or standards could require us to implement costly technology changes.
 
Our access to capital is limited which could impact our future growth
 
Based on existing capital levels, BancShares and FCB maintain well-capitalized ratios under current leverage and risk-based capital standards. Historically, our primary capital sources have been retained earnings and debt issued through both private and public markets including trust preferred securities and subordinated debt. Effective January 1, 2013, provisions of the Dodd-Frank Act eliminated one-third of our trust preferred securities from tier 1 risk-based capital with total elimination on January 1, 2015. The inability to include the trust preferred securities in tier 1 risk-based capital may lead us to redeem a portion or all of the securities prior to their scheduled maturity date. Since we have not historically raised capital through new issues of our common stock, absent additional acquisition gains our ability to raise additional tier 1 capital is limited to issuance of perpetual preferred stock. A lack of ready access to adequate amounts of tier 1 capital could limit our ability to consummate additional acquisitions, make new loans, meet our existing lending commitments and could potentially affect our liquidity and capital adequacy.
 
The major rating agencies regularly evaluate our creditworthiness and assign credit ratings to our debt and the debt of FCB. The ratings of the agencies are based on a number of factors, some of which are outside of our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions generally affecting the financial services industry. Considering the difficulties that continue to confront the financial services industry, there can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding.
 
The market price of our stock may be volatile
 
Although publicly traded, our common stock has substantially less liquidity and public float than other large publicly traded financial services companies as well as average companies listed on the NASDAQ National Market System. This low liquidity increases the price volatility of our stock and could make it difficult for our shareholders to sell or buy our common stock at a price that they believe is attractive.
 
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors including expectations of operating results, actual operating results, actions of institutional shareholders, speculation in the press or the investment community, market perception of acquisitions, rating agency upgrades or downgrades, stock prices of other companies that are similar to us, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry.
 
BancShares relies on dividends from FCB
 
As a financial holding company, BancShares is a separate legal entity from FCB and receives considerable revenue and cash flow from dividends paid by FCB. The cash flow from these dividends is the primary source which allows BancShares to pay dividends on its common stock and interest and principal on its debt obligations. North Carolina state law limits the amount of dividends that FCB may pay to BancShares. In the event that FCB is unable to pay dividends to BancShares for an extended period of time, BancShares may not be able to service its debt obligations or pay dividends on its common stock.
 
Our recorded goodwill may become impaired

As of June 30, 2013, we had $102.6 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, and the impairment test compares the estimated fair value of a reporting unit with its net book value. We also test goodwill for impairment when certain events occur, such as a significant decline in our expected future cash flows, a significant adverse change in the business climate, or a sustained decline in the price of our common stock. These

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tests may result in a write-off of goodwill deemed to be impaired, which could have a significant impact on our results of
operations, but would not impact our capital ratios since capital ratios are calculated using tangible capital amounts. Although the book value per share of our Class A common stock as of June 30, 2013, was $201.62 compared to a market value of $192.05, we do not believe that this represents a sustained decline in the price of our common stock, and, as of June 30, 2013, no impairment of goodwill had been recorded.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
PURCHASES OF COMMON STOCK
On June 18, 2012, the Board of Directors approved a stock trading plan that provides for the purchase of up to 100,000 shares of Registrant's Class A common stock and up to 25,000 shares of Registrant's Class B common stock. The shares may be purchased from time to time from July 1, 2012, through June 30, 2013. The board's action approving share purchases does not obligate BancShares to acquire any particular amount of shares, and purchases may be suspended or discontinued at any time. Any shares of stock that are purchased will be canceled.
The following tables provide the shares of Class A and Class B common stock purchased by BancShares during the three months ended June 30, 2013, as well as shares that may be purchased under publicly announced plans. Authority to purchase shares under the plan approved during 2012 expired on June 30, 2013.
 
Class A common stock
Total number of shares purchases
 
Average price paid
per share
 
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
Maximum number
of shares that may
yet be purchased
under the plans or
programs
Repurchases from April 1, 2013, through April 30, 2013

 
$

 

 
41,751

Repurchases from May 1, 2013, through May 31, 2013

 

 

 
41,751

Repurchases from June 1, 2013, through June 30, 2013

 

 

 

Total

 
$

 

 


Class B common stock
 
 
 
 
 
 
 
Repurchases from April 1, 2013, through April 30, 2013

 
$

 

 
24,900

Repurchases from May 1, 2013, through May 31, 2013

 

 

 
24,900

Repurchases from June 1, 2013, through June 30, 2013

 

 

 

Total

 
$

 

 



During the second quarter of 2013, the Board of Directors approved a stock trading plan that provides for the purchase of up to 100,000 shares of Registrant's Class A common stock and up to 25,000 shares of Registrant's Class B common stock. The shares may be purchased from time to time from July 1, 2013, through June 30, 2014. The board's action approving share purchases does not obligate BancShares to acquire any particular amount of shares, and purchases may be suspended or discontinued at any time. Any shares of stock that are purchased will be canceled.

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Item 6.
Exhibits

 
 
31.1
Certification of Chief Executive Officer (filed herewith)
 
 
31.2
Certification of Chief Financial Officer (filed herewith)
 
 
32.1
Certification of Chief Executive Officer (filed herewith)
 
 
32.2
Certification of Chief Financial Officer (filed herewith)
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
August 7, 2013
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ GLENN D. MCCOY
 
 
 
 
Glenn D. McCoy
 
 
 
 
Vice President and Chief Financial Officer

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