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FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2016 March (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 March 31, 2016
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—11,005,220 shares
Class B Common Stock—$1 Par Value—1,005,185 shares
(Number of shares outstanding, by class, as of May 4, 2016)


Table of Contents

INDEX
 
 
 
Page No.
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

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PART I
 
Item 1.
Financial Statements


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, unaudited)
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Cash and due from banks
$
457,758

 
$
534,086

Overnight investments
2,871,105

 
2,063,132

Investment securities available for sale
6,687,289

 
6,861,293

Investment securities held to maturity
194

 
255

Loans held for sale
66,988

 
59,766

Loans and leases
20,417,689

 
20,239,990

Allowance for loan and lease losses
(206,783
)
 
(206,216
)
Net loans and leases
20,210,906

 
20,033,774

Premises and equipment
1,127,371

 
1,135,829

Other real estate owned
65,068

 
65,559

Income earned not collected
73,518

 
70,036

FDIC loss share receivable
7,474

 
4,054

Goodwill
139,773

 
139,773

Other intangible assets
84,743

 
90,986

Other assets
403,470

 
417,391

Total assets
$
32,195,657

 
$
31,475,934

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
9,661,441

 
$
9,274,470

Interest-bearing
17,703,804

 
17,656,285

Total deposits
27,365,245

 
26,930,755

Short-term borrowings
689,236

 
594,733

Long-term obligations
779,087

 
704,155

FDIC loss share payable
128,243

 
126,453

Other liabilities
272,652

 
247,729

Total liabilities
29,234,463

 
28,603,825

Shareholders’ equity
 
 
 
Common stock:
 
 
 
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at March 31, 2016 and December 31, 2015)
11,005

 
11,005

Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 31, 2016 and December 31, 2015)
1,005

 
1,005

Surplus
658,918

 
658,918

Retained earnings
2,314,090

 
2,265,621

Accumulated other comprehensive loss
(23,824
)
 
(64,440
)
Total shareholders’ equity
2,961,194

 
2,872,109

Total liabilities and shareholders’ equity
$
32,195,657

 
$
31,475,934


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended March 31
(Dollars in thousands, except per share data, unaudited)
2016
 
2015
Interest income
 
 
 
Loans and leases
$
216,404

 
$
210,862

Investment securities and dividend income
23,042

 
19,310

Overnight investments
3,666

 
1,338

Total interest income
243,112

 
231,510

Interest expense
 
 
 
Deposits
4,659

 
5,629

Short-term borrowings
434

 
1,934

Long-term obligations
5,299

 
3,782

Total interest expense
10,392

 
11,345

Net interest income
232,720

 
220,165

Provision for loan and lease losses
4,843

 
5,792

Net interest income after provision for loan and lease losses
227,877

 
214,373

Noninterest income
 
 
 
Gain on acquisition
1,704

 
42,930

Cardholder services
19,358

 
18,401

Merchant services
21,977

 
18,880

Service charges on deposit accounts
21,850

 
22,058

Wealth management services
19,634

 
20,880

Securities gains
4,628

 
5,126

Other service charges and fees
6,989

 
5,455

Mortgage income
1,311

 
4,549

Insurance commissions
3,178

 
3,297

ATM income
1,765

 
1,664

Adjustments to FDIC loss share receivable
(2,533
)
 
(1,047
)
Other
5,421

 
8,560

Total noninterest income
105,282

 
150,753

Noninterest expense
 
 
 
Salaries and wages
103,899

 
105,471

Employee benefits
27,350

 
31,218

Occupancy expense
25,012

 
25,620

Equipment expense
22,345

 
23,541

FDIC insurance expense
4,789

 
4,271

Foreclosure-related expenses
1,731

 
2,557

Merger-related expenses
38

 
2,997

Other
66,507

 
62,491

Total noninterest expense
251,671

 
258,166

Income before income taxes
81,488

 
106,960

Income taxes
29,416

 
39,802

Net income
$
52,072

 
$
67,158

Average shares outstanding
12,010,405

 
12,010,405

Net income per share
$
4.34

 
$
5.59


See accompanying Notes to Consolidated Financial Statements.

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

 
Three months ended March 31
(Dollars in thousands, unaudited)
2016
 
2015
Net income
$
52,072

 
$
67,158

Other comprehensive income:
 
 
 
Unrealized gains on securities:
 
 
 
Change in unrealized securities gains arising during period
68,033

 
30,415

Tax effect
(26,016
)
 
(11,813
)
Reclassification adjustment for net gains realized and included in income before income taxes
(4,628
)
 
(5,126
)
Tax effect
1,770

 
1,977

Total change in unrealized gains on securities, net of tax
39,159

 
15,453

Change in fair value of cash flow hedges:
 
 
 
Change in unrecognized loss on cash flow hedges
700

 
576

Tax effect
(263
)
 
(222
)
Total change in unrecognized loss on cash flow hedges, net of tax
437

 
354

Change in pension obligation:
 
 
 
Amortization of actuarial losses and prior service cost
1,652

 
2,886

Tax effect
(632
)
 
(1,123
)
Total change in pension obligation, net of tax
1,020

 
1,763

Other comprehensive income
40,616

 
17,570

Total comprehensive income
$
92,688

 
$
84,728



See accompanying Notes to Consolidated Financial Statements.


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

 
(Dollars in thousands, unaudited)
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
Balance at December 31, 2014
$
11,005

 
$
1,005

 
$
658,918

 
$
2,069,647

 
$
(52,981
)
 
$
2,687,594

Net income

 

 

 
67,158

 

 
67,158

Other comprehensive income, net of tax

 

 

 

 
17,570

 
17,570

Cash dividends ($0.30 per share)

 

 

 
(3,603
)
 

 
(3,603
)
Balance at March 31, 2015
$
11,005

 
$
1,005

 
$
658,918

 
$
2,133,202

 
$
(35,411
)
 
$
2,768,719

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
11,005

 
$
1,005

 
$
658,918

 
$
2,265,621

 
$
(64,440
)
 
$
2,872,109

Net income

 

 

 
52,072

 

 
52,072

Other comprehensive income, net of tax

 

 

 

 
40,616

 
40,616

Cash dividends ($0.30 per share)

 

 

 
(3,603
)
 

 
(3,603
)
Balance at March 31, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,314,090

 
$
(23,824
)
 
$
2,961,194


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
Three months ended March 31
(Dollars in thousands, unaudited)
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
52,072

 
$
67,158

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
4,843

 
5,792

Deferred tax benefit
(8,806
)
 
(10,203
)
Net change in current taxes
35,678

 
15,437

Depreciation
22,053

 
21,965

Net change in accrued interest payable
324

 
176

Net increase in income earned not collected
(3,482
)
 
(5,988
)
Gain on acquisition
(1,704
)
 
(42,930
)
Securities gains
(4,628
)
 
(5,126
)
Origination of loans held for sale
(144,895
)
 
(126,547
)
Proceeds from sale of loans
140,160

 
127,203

Gain on sale of loans
(2,487
)
 
(3,468
)
Net writedowns/losses on other real estate
2,599

 
1,978

Net amortization of premiums and discounts
(12,201
)
 
(17,150
)
Amortization of intangible assets
5,586

 
5,206

Reduction in FDIC receivable for loss share agreements
4,076

 
8,092

Increase in FDIC payable for loss share agreements
1,790

 
2,110

Net change in other assets
(19,678
)
 
15,223

Net change in other liabilities
3,857

 
3,804

Net cash provided by operating activities
75,157

 
62,732

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(131,923
)
 
(168,341
)
Purchases of investment securities available for sale
(1,139,933
)
 
(626,268
)
Proceeds from maturities/calls of investment securities held to maturity
61

 
77

Proceeds from maturities/calls of investment securities available for sale
396,211

 
330,500

Proceeds from sales of investment securities available for sale
987,260

 
481,708

Net change in overnight investments
(805,699
)
 
(734,004
)
Cash paid to the FDIC for loss share agreements
(9,871
)
 
(5,762
)
Proceeds from sales of other real estate
8,202

 
22,794

Additions to premises and equipment
(13,595
)
 
(13,177
)
Business acquisition, net cash acquired
14,745

 
123,137

Net cash used by investing activities
(694,542
)
 
(589,336
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in time deposits
(84,802
)
 
(189,906
)
Net increase in demand and other interest-bearing deposits
460,086

 
545,807

Net change in short-term borrowings
92,841

 
(50,835
)
Repayment of long-term obligations
(68
)
 
(3,140
)
Origination of long-term obligations
75,000

 
120,000

Cash dividends paid

 
(3,603
)
Net cash provided by financing activities
543,057

 
418,323

Change in cash and due from banks
(76,328
)
 
(108,281
)
Cash and due from banks at beginning of period
534,086

 
604,182

Cash and due from banks at end of period
$
457,758

 
$
495,901

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
9,980

 
$
21,300

Dividends declared but not paid
3,603

 
3,603


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements


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 thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X 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 presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2015.

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 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, the consolidated results of operations or related disclosures. Material estimates that are particularly susceptible to significant change include:
Allowance for loan and lease losses
Fair value of financial instruments, including acquired assets and assumed liabilities
Pension plan assumptions
Cash flow estimates on purchased credit-impaired loans
Receivable from and payable to the FDIC for loss share agreements
Income tax assets, liabilities and expense
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
This ASU eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination and requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts must be calculated as if the accounting had been completed at the acquisition date.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. We adopted the guidance effective in the first quarter of 2016. The initial adoption did not have an impact on our consolidated financial position or consolidated results of operations.

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FASB ASU 2015-03, Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.
This ASU is effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years, and is to be applied retrospectively. We adopted the guidance effective in the first quarter of 2016. The initial adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
This ASU improves targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard places more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2016. The initial adoption did not have an impact on our consolidated financial position or consolidated results of operations.
Recently Issued Accounting Pronouncements
FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Further, the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognizes through earnings, the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new standard and will adopt the guidance during the first quarter of 2017.
FASB ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
This ASU clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. When a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.
The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We will adopt the guidance during the first quarter of 2017. BancShares does not anticipate any effect on our consolidated financial position or consolidated results of options as a result of adoption.
FASB ASU 2016-02, Leases (Topic 842)
This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely

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unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2019.
FASB ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU addresses certain aspects of recognition, measurement, presentation and disclosure. The amendments in this ASU (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair value; (3) require public business entities to use exit prices, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (4) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (5) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (6) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (7) state that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2018.
FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued a standard on the recognition of revenue from contracts with customers with the core principle being for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to improve the operability and understandability of the implementation guidance on principal versus agent considerations.
Per ASU 2015-14, Deferral of the Effective Date, this guidance was deferred and is effective for fiscal periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal periods beginning after December 15, 2016. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2018 using one of two retrospective application methods.
NOTE B - BUSINESS COMBINATIONS
North Milwaukee State Bank
On March 11, 2016, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC), as Receiver, to purchase certain assets and assume certain liabilities of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin. The acquisition provided FCB with value enhancement.

The NMSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

The fair value of the assets acquired was $52.4 million, including $35.4 million in loans and $240 thousand of identifiable intangible assets. Liabilities assumed were $60.9 million of which $59.2 million were deposits. As a result of the transaction, FCB recorded a gain on the acquisition of $1.7 million which is included in noninterest income in the Consolidated Statements of Income.


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The following table provides the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.
(Dollars in thousands)
 
As recorded by FCB
Assets
 
 
Cash and cash equivalents
 
$
4,545

Overnight investments
 
2,274

Investment securities
 
9,425

Loans
 
35,416

Other real estate owned
 
330

Intangible assets
 
240

Other assets
 
216

Total assets acquired
 
52,446

Liabilities
 
 
Deposits
 
59,206

Short-term borrowings
 
1,662

Other liabilities
 
74

Total liabilities assumed
 
60,942

Fair value of net liabilities assumed
 
(8,496
)
Cash received from FDIC
 
10,200

Gain on acquisition of NMSB
 
$
1,704

Merger-related expenses of $38 thousand were recorded in the Consolidated Statements of Income for the three months ended March 31, 2016. Loan-related interest income generated from NMSB was approximately $123 thousand since the acquisition date.
All loans resulting from the NMSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality, and are therefore accounted for as purchased credit-impaired (PCI) loans under ASC 310-30.
 
 
 
 

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NOTE C - INVESTMENTS
The amortized cost and fair value of investment securities classified as available for sale and held to maturity at March 31, 2016 and December 31, 2015, are as follows:
 
March 31, 2016
(Dollars in thousands)
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,538,907

 
$
2,308

 
$

 
$
1,541,215

Government agency
355,488

 
669

 

 
356,157

Mortgage-backed securities
4,693,313

 
37,375

 
3,406

 
4,727,282

Equity securities
50,066

 
2,314

 
285

 
52,095

Other
10,615

 

 
75

 
10,540

Total investment securities available for sale
$
6,648,389

 
$
42,666

 
$
3,766

 
$
6,687,289

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
U.S. Treasury
$
1,675,996

 
$
4

 
$
1,118

 
$
1,674,882

Government agency
498,804

 
230

 
374

 
498,660

Mortgage-backed securities
4,692,447

 
5,120

 
29,369

 
4,668,198

Equity securities
7,935

 
968

 
10

 
8,893

Other
10,615

 
45

 

 
10,660

Total investment securities available for sale
$
6,885,797

 
$
6,367

 
$
30,871

 
$
6,861,293

 
 
 
 
 
 
 
 
 
March 31, 2016
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
194

 
$
9

 
$

 
$
203

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Mortgage-backed securities
$
255

 
$
10

 
$

 
$
265


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.The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Repayments of mortgage-backed securities are dependent on the repayments of the underlying loan balances. Equity securities do not have a stated maturity date.
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
$
1,554,483

 
$
1,556,414

 
$
1,255,714

 
$
1,255,094

One through five years
339,912

 
340,958

 
919,086

 
918,448

Five through 10 years
8,500

 
8,500

 
8,500

 
8,500

Over 10 years
2,115

 
2,040

 
2,115

 
2,160

Mortgage-backed securities
4,693,313

 
4,727,282

 
4,692,447

 
4,668,198

Equity securities
50,066

 
52,095

 
7,935

 
8,893

Total investment securities available for sale
$
6,648,389

 
$
6,687,289

 
$
6,885,797

 
$
6,861,293

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
194

 
$
203

 
$
255

 
$
265


12

Table of Contents

For each period presented, securities gains (losses) included the following:
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Gross gains on sales of investment securities available for sale
$
4,933

 
$
5,135

Gross losses on sales of investment securities available for sale
(305
)
 
(9
)
Total securities gains
$
4,628

 
$
5,126


The following table provides information regarding securities with unrealized losses as of March 31, 2016 and December 31, 2015.
 
March 31, 2016
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
417,711

 
$
1,071

 
$
291,021

 
$
2,335

 
$
708,732

 
$
3,406

Equity securities
13,037

 
285

 

 

 
13,037

 
285

Other
2,040

 
75

 

 

 
2,040

 
75

Total
$
432,788

 
$
1,431

 
$
291,021

 
$
2,335

 
$
723,809

 
$
3,766

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,539,637

 
$
1,118

 
$

 
$

 
$
1,539,637

 
$
1,118

Government agency
229,436

 
374

 

 

 
229,436

 
374

Mortgage-backed securities
3,570,470

 
23,275

 
280,126

 
6,094

 
3,850,596

 
29,369

Equity securities
728

 
10

 

 

 
728

 
10

Total
$
5,340,271

 
$
24,777

 
$
280,126

 
$
6,094

 
$
5,620,397

 
$
30,871

Investment securities with an aggregate fair value of $291.0 million and $280.1 million had continuous unrealized losses for more than 12 months with a corresponding aggregate unrealized loss of $2.3 million and $6.1 million as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, all 52 of these investments are government sponsored enterprise-issued mortgage-backed securities. None of the unrealized losses identified as of March 31, 2016 or December 31, 2015 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased. 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 $4.94 billion at March 31, 2016 and $4.73 billion at December 31, 2015 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.


13

Table of Contents

NOTE D - LOANS AND LEASES
BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have a discount due, at least in part, to credit quality at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered PCI loans. PCI loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the nonrevolving loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans and leases are recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk. An allowance is recorded if there is additional credit deterioration after the acquisition date.
BancShares reports PCI and non-PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.
Commercial Commercial loans include construction and land development, mortgage, other commercial real estate, commercial and industrial, lease financing and other.

Construction and land development – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise; multifamily apartments; and other commercial buildings that may be owner-occupied or income generating investments for the owner.
Commercial mortgage – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.
Other commercial real estate – Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (5 or more) residential properties.
Commercial and industrial – Commercial and industrial consists of loans or lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.
Lease financing – Lease financing consists solely of lease financing agreements for business equipment, vehicles and other assets.
Other – Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations.

NoncommercialNoncommercial consist of residential and revolving mortgage, construction and land development, and consumer loans.

Residential mortgage – Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.
Revolving mortgage – Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.
Construction and land development – Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.
Consumer – Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements and revolving lines of credit that can be secured or unsecured, including personal credit cards.



14

Table of Contents

Loans and leases outstanding included the following at March 31, 2016 and December 31, 2015:
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
626,311

 
$
620,352

Commercial mortgage
8,353,631

 
8,274,548

Other commercial real estate
324,858

 
321,021

Commercial and industrial
2,389,946

 
2,368,958

Lease financing
751,292

 
730,778

Other
343,877

 
314,832

Total commercial loans
12,789,915

 
12,630,489

Noncommercial:
 
 
 
Residential mortgage
2,718,208

 
2,695,985

Revolving mortgage
2,521,902

 
2,523,106

Construction and land development
213,232

 
220,073

Consumer
1,228,545

 
1,219,821

Total noncommercial loans
6,681,887

 
6,658,985

Total non-PCI loans and leases
19,471,802

 
19,289,474

PCI loans:
 
 
 
Commercial:
 
 
 
Construction and land development
32,799

 
33,880

Commercial mortgage
526,776

 
525,468

Other commercial real estate
18,050

 
17,076

Commercial and industrial
14,742

 
15,182

Other
1,860

 
2,008

Total commercial loans
594,227

 
593,614

Noncommercial:
 
 
 
Residential mortgage
298,662

 
302,158

Revolving mortgage
50,574

 
52,471

Consumer
2,424

 
2,273

Total noncommercial loans
351,660

 
356,902

Total PCI loans
945,887

 
950,516

Total loans and leases
$
20,417,689

 
$
20,239,990

At March 31, 2016, $258.2 million of total loans and leases were covered under loss share agreements, compared to $272.6 million at December 31, 2015. Loss share protection for United Western Bank (UWB), Atlantic Bank & Trust (ABT) and Colorado Capital Bank (CCB) non-single family residential loans with balances of $113.7 million, $9.0 million and $2.7 million at March 31, 2016 will expire at the beginning of the second quarter of 2016, third quarter of 2016 and fourth quarter of 2016, respectively.
At March 31, 2016, $8.51 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $585.3 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $5.50 billion. At December 31, 2015, $8.58 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $510.3 million in FHLB of Atlanta advances, resulting additional borrowing capacity of $5.57 billion.

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $13.2 million and $16.6 million at March 31, 2016 and December 31, 2015, respectively. The unamortized discount related to the non-PCI loans and leases acquired in the First Citizens Bancorporation, Inc. (Bancorporation) merger was $37.9 million and $41.1 million at March 31, 2016 and December 31, 2015, respectively. During the three months ended March 31, 2016 and March 31, 2015, accretion income on non-PCI loans was $3.2 million and $5.6 million, respectively.



15

Table of Contents

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. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segment being evaluated. The credit quality indicators for non-PCI and PCI commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Each commercial loan is evaluated annually with more frequent evaluation of more severely criticized loans or leases. The credit quality indicators for non-PCI and PCI noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. 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.

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 ungraded loans at March 31, 2016 and December 31, 2015 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage and other commercial real estate loans.


16

Table of Contents

Non-PCI loans and leases outstanding at March 31, 2016 and December 31, 2015 by credit quality indicator are provided below:
 
March 31, 2016
(Dollars in thousands)
Non-PCI commercial loans and leases
Grade:
Construction  and land
development
 
Commercial
mortgage
 
Other
commercial real estate
 
Commercial  and
industrial
 
Lease financing
 
Other
 
Total non-PCI commercial loans and leases
Pass
$
622,312

 
$
8,102,908

 
$
321,375

 
$
2,241,626

 
$
744,585

 
$
341,300

 
$
12,374,106

Special mention
1,926

 
97,425

 
1,294

 
14,003

 
3,698

 
1,334

 
119,680

Substandard
2,073

 
149,651

 
1,030

 
20,070

 
2,639

 
1,243

 
176,706

Doubtful

 
458

 

 
399

 
46

 

 
903

Ungraded

 
3,189

 
1,159

 
113,848

 
324

 

 
118,520

Total
$
626,311

 
$
8,353,631

 
$
324,858

 
$
2,389,946

 
$
751,292

 
$
343,877

 
$
12,789,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Non-PCI commercial loans and leases
 
Construction  and land
development
 
Commercial
mortgage
 
Other
commercial real estate
 
Commercial  and
industrial
 
Lease financing
 
Other
 
Total non-PCI commercial loans and leases
Pass
$
611,314

 
$
8,024,831

 
$
318,187

 
$
2,219,606

 
$
719,338

 
$
311,401

 
$
12,204,677

Special mention
5,191

 
100,220

 
475

 
19,361

 
4,869

 
1,905

 
132,021

Substandard
3,847

 
146,071

 
959

 
21,322

 
6,375

 
1,526

 
180,100

Doubtful

 
599

 

 
408

 
169

 

 
1,176

Ungraded

 
2,827

 
1,400

 
108,261

 
27

 

 
112,515

Total
$
620,352

 
$
8,274,548

 
$
321,021

 
$
2,368,958

 
$
730,778

 
$
314,832

 
$
12,630,489


 
March 31, 2016
 
Non-PCI noncommercial loans and leases
(Dollars in thousands)
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total non-PCI noncommercial
loans and leases
Current
$
2,673,451

 
$
2,501,519

 
$
208,944

 
$
1,220,091

 
$
6,604,005

30-59 days past due
24,701

 
11,219

 
3,121

 
5,339

 
44,380

60-89 days past due
7,041

 
2,396

 
325

 
1,722

 
11,484

90 days or greater past due
13,015

 
6,768

 
842

 
1,393

 
22,018

Total
$
2,718,208

 
$
2,521,902

 
$
213,232

 
$
1,228,545

 
$
6,681,887

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Non-PCI noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total non-PCI noncommercial
loans and leases
Current
$
2,651,209

 
$
2,502,065

 
$
214,555

 
$
1,210,832

 
$
6,578,661

30-59 days past due
23,960

 
11,706

 
3,211

 
5,545

 
44,422

60-89 days past due
7,536

 
3,704

 
669

 
1,822

 
13,731

90 days or greater past due
13,280

 
5,631

 
1,638

 
1,622

 
22,171

Total
$
2,695,985

 
$
2,523,106

 
$
220,073

 
$
1,219,821

 
$
6,658,985




17

Table of Contents

 PCI loans outstanding at March 31, 2016 and December 31, 2015 by credit quality indicator are provided below:
 
March 31, 2016
(Dollars in thousands)
PCI commercial loans
Grade:
Construction
and land
development
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Other
 
Total PCI commercial
loans
Pass
$
12,797

 
$
261,904

 
$
8,500

 
$
8,595

 
$
623

 
$
292,419

Special mention
1,781

 
87,801

 
59

 
548

 

 
90,189

Substandard
14,056

 
159,083

 
9,081

 
4,292

 
1,237

 
187,749

Doubtful
4,165

 
17,656

 

 
1,240

 

 
23,061

Ungraded

 
332

 
410

 
67

 

 
809

Total
$
32,799

 
$
526,776

 
$
18,050

 
$
14,742

 
$
1,860

 
$
594,227

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
PCI commercial loans
 
Construction
and land
development
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Other
 
Total PCI commercial
loans
Pass
$
14,710

 
$
262,579

 
$
7,366

 
$
9,302

 
$
706

 
$
294,663

Special mention
758

 
87,870

 
60

 
937

 

 
89,625

Substandard
14,131

 
163,801

 
9,229

 
4,588

 
1,302

 
193,051

Doubtful
4,281

 
10,875

 

 
282

 

 
15,438

Ungraded

 
343

 
421

 
73

 

 
837

Total
$
33,880

 
$
525,468

 
$
17,076

 
$
15,182

 
$
2,008

 
$
593,614


 
March 31, 2016
 
PCI noncommercial loans
(Dollars in thousands)
Residential
mortgage
 
Revolving
mortgage
 
Consumer
 
Total PCI noncommercial
loans
Current
$
261,230

 
$
44,401

 
$
2,254

 
$
307,885

30-59 days past due
10,307

 
1,544

 
123

 
11,974

60-89 days past due
3,191

 
1,306

 
45

 
4,542

90 days or greater past due
23,934

 
3,323

 
2

 
27,259

Total
$
298,662

 
$
50,574

 
$
2,424

 
$
351,660

 
 
 
 
 
 
 
 
 
December 31, 2015
 
PCI noncommercial loans
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
 
Total PCI noncommercial
loans
Current
$
257,207

 
$
47,901

 
$
1,981

 
$
307,089

30-59 days past due
12,318

 
1,127

 
86

 
13,531

60-89 days past due
4,441

 
501

 
132

 
5,074

90 days or greater past due
28,192

 
2,942

 
74

 
31,208

Total
$
302,158

 
$
52,471

 
$
2,273

 
$
356,902





18

Table of Contents

The aging of the outstanding non-PCI loans and leases, by class, at March 31, 2016 and December 31, 2015 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 as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.
 
March 31, 2016
(Dollars in thousands)
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
Non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,039

 
$
9

 
$
312

 
$
1,360

 
$
624,951

 
$
626,311

Commercial mortgage
14,243

 
1,817

 
17,637

 
33,697

 
8,319,934

 
8,353,631

Other commercial real estate
1,144

 
248

 
27

 
1,419

 
323,439

 
324,858

Commercial and industrial
7,874

 
2,049

 
1,194

 
11,117

 
2,378,829

 
2,389,946

Lease financing
712

 
202

 
44

 
958

 
750,334

 
751,292

Residential mortgage
24,701

 
7,041

 
13,015

 
44,757

 
2,673,451

 
2,718,208

Revolving mortgage
11,219

 
2,396

 
6,768

 
20,383

 
2,501,519

 
2,521,902

Construction and land development - noncommercial
3,121

 
325

 
842

 
4,288

 
208,944

 
213,232

Consumer
5,339

 
1,722

 
1,393

 
8,454

 
1,220,091

 
1,228,545

Other
107

 

 
333

 
440

 
343,437

 
343,877

Total non-PCI loans and leases
$
69,499

 
$
15,809

 
$
41,565

 
$
126,873

 
$
19,344,929

 
$
19,471,802

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
Non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
987

 
$
283

 
$
463

 
$
1,733

 
$
618,619

 
$
620,352

Commercial mortgage
13,023

 
3,446

 
14,495

 
30,964

 
8,243,584

 
8,274,548

Other commercial real estate
884

 

 
142

 
1,026

 
319,995

 
321,021

Commercial and industrial
2,133

 
1,079

 
1,780

 
4,992

 
2,363,966

 
2,368,958

Lease financing
2,070

 
2

 
164

 
2,236

 
728,542

 
730,778

Residential mortgage
23,960

 
7,536

 
13,280

 
44,776

 
2,651,209

 
2,695,985

Revolving mortgage
11,706

 
3,704

 
5,631

 
21,041

 
2,502,065

 
2,523,106

Construction and land development - noncommercial
3,211

 
669

 
1,638

 
5,518

 
214,555

 
220,073

Consumer
5,545

 
1,822

 
1,622

 
8,989

 
1,210,832

 
1,219,821

Other
3

 
164

 
134

 
301

 
314,531

 
314,832

Total non-PCI loans and leases
$
63,522

 
$
18,705

 
$
39,349

 
$
121,576

 
$
19,167,898

 
$
19,289,474



19

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 March 31, 2016 and December 31, 2015 for non-PCI loans and leases, were as follows:
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
Non-PCI loans and leases:
 
 
 
 
 
 
 
Construction and land development - commercial
$
534

 
$
23

 
$
425

 
$
273

Commercial mortgage
35,861

 
2,671

 
42,116

 
242

Other commercial real estate
134

 

 
239

 

Commercial and industrial
4,127

 
680

 
6,235

 
953

Lease financing
254

 

 
389

 

Residential mortgage
31,262

 
561

 
29,977

 
838

Revolving mortgage
14,159

 

 
12,704

 

Construction and land development - noncommercial
2,224

 

 
2,164

 

Consumer
1,632

 
792

 
1,472

 
1,007

Other
268

 
155

 
133

 
2

Total non-PCI loans and leases
$
90,455

 
$
4,882

 
$
95,854

 
$
3,315

Purchased credit-impaired loans (PCI) loans
The following table relates to PCI loans acquired in the NMSB acquisition and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected, and the fair value of PCI loans and leases at the acquisition date.
(Dollars in thousands)
 
Contractually required payments
$
51,098

Cash flows expected to be collected
$
41,592

Fair value of loans at acquisition
$
35,416

The recorded fair values of PCI loans acquired in the NMSB acquisition as of the acquisition date were as follows:
(Dollars in thousands)
 
Commercial:
 
Construction and land development
$
139

Commercial mortgage
25,237

Other commercial real estate
1,479

Commercial and industrial
1,520

Total commercial loans
28,375

Noncommercial:
 
Residential mortgage
6,128

Revolving mortgage
234

Consumer
679

Total noncommercial loans
7,041

Total PCI loans and leases
$
35,416

The following table provides changes in the carrying value of all purchased credit-impaired loans during the three months ended March 31, 2016 and March 31, 2015:
(Dollars in thousands)
2016
 
2015
Balance at January 1
$
950,516

 
$
1,186,498

Fair value of acquired loans
35,416

 
154,496

Accretion
21,398

 
25,067

Payments received and other changes, net
(61,443
)
 
(113,516
)
Balance at March 31
$
945,887

 
$
1,252,545

Unpaid principal balance at March 31
$
1,665,896

 
$
2,092,936

The carrying value of loans on the cost recovery method was $1.1 million at March 31, 2016 and $5.3 million at December 31, 2015. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to

20

Table of Contents

borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was $7.3 million and $7.6 million at March 31, 2016 and December 31, 2015, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flows not related to credit improvements or deterioration do not affect the nonaccretable difference.

The following table documents changes to the amount of accretable yield for the first three months of 2016 and 2015.
(Dollars in thousands)
2016
 
2015
Balance at January 1
$
343,856

 
$
418,160

Additions from acquisitions
6,176

 
55,186

Accretion
(21,398
)
 
(25,067
)
Reclassifications from nonaccretable difference
9,905

 
1,294

Changes in expected cash flows that do not affect nonaccretable difference
4,418

 
(27,287
)
Balance at March 31
$
342,957

 
$
422,286


NOTE E - ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

The following tables present the activity in the ALLL for non-PCI loan and lease losses by loan class for the three months ended March 31, 2016 and March 31, 2015:
 
Three months ended March 31, 2016
(Dollars in thousands)
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
 
Total
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
16,288

 
$
69,896

 
$
2,168

 
$
43,116

 
$
5,524

 
$
1,855

 
$
14,105

 
$
15,971

 
$
1,485

 
$
19,496

 
$
189,904

Provision
943

 
394

 
(104
)
 
2,201

 
(282
)
 
(328
)
 
776

 
1,158

 
87

 
1,995

 
6,840

Charge-offs
(426
)
 
(90
)
 

 
(1,317
)
 

 
(71
)
 
(174
)
 
(1,036
)
 

 
(3,108
)
 
(6,222
)
Recoveries
80

 
256

 
143

 
479

 
180

 
321

 
20

 
32

 
3

 
990

 
2,504

Balance at March 31
$
16,885

 
$
70,456

 
$
2,207

 
$
44,479

 
$
5,422

 
$
1,777

 
$
14,727

 
$
16,125

 
$
1,575

 
$
19,373

 
$
193,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
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
 
Total
Balance at January 1
$
11,961

 
$
85,189

 
$
732

 
$
30,727

 
$
4,286

 
$
3,184

 
$
10,661

 
$
18,650

 
$
892

 
$
16,555

 
$
182,837

Provision
1,103

 
(3,679
)
 
458

 
7,546

 
11

 
(218
)
 
813

 
(462
)
 
118

 
2,966

 
8,656

Charge-offs
(18
)
 
(233
)
 
(169
)
 
(1,713
)
 
(15
)
 

 
(284
)
 
(793
)
 
(22
)
 
(2,783
)
 
(6,030
)
Recoveries
62

 
761

 
10

 
394

 
11

 
15

 
138

 
134

 
68

 
878

 
2,471

Balance at March 31
$
13,108

 
$
82,038

 
$
1,031

 
$
36,954

 
$
4,293

 
$
2,981

 
$
11,328

 
$
17,529

 
$
1,056

 
$
17,616

 
$
187,934



21

Table of Contents

The following tables present the allowance for non-PCI loan losses and the recorded investment in loans, by loan class, based on impairment method as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
(Dollars in thousands)
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
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
83

 
$
3,467

 
$
282

 
$
650

 
$
191

 
$
49

 
$
1,203

 
$
310

 
$
27

 
$
514

 
$
6,776

ALLL for loans and leases collectively evaluated for impairment
16,802

 
66,989

 
1,925

 
43,829

 
5,231

 
1,728

 
13,524

 
15,815

 
1,548

 
18,859

 
186,250

Total allowance for loan and lease losses
$
16,885

 
$
70,456

 
$
2,207

 
$
44,479

 
$
5,422

 
$
1,777

 
$
14,727

 
$
16,125

 
$
1,575

 
$
19,373

 
$
193,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
3,247

 
$
88,448

 
$
418

 
$
13,720

 
$
1,528

 
$
960

 
$
24,025

 
$
6,594

 
$
416

 
$
1,324

 
$
140,680

Loans and leases collectively evaluated for impairment
623,064

 
8,265,183

 
324,440

 
2,376,226

 
749,764

 
342,917

 
2,694,183

 
2,515,308

 
212,816

 
1,227,221

 
19,331,122

Total loan and leases
$
626,311

 
$
8,353,631

 
$
324,858

 
$
2,389,946

 
$
751,292

 
$
343,877

 
$
2,718,208

 
$
2,521,902

 
$
213,232

 
$
1,228,545

 
$
19,471,802

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(Dollars in thousands)
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
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
123

 
$
3,370

 
$
289

 
$
1,118

 
$
213

 
$

 
$
1,212

 
$
299

 
$
49

 
$
527

 
$
7,200

ALLL for loans and leases collectively evaluated for impairment
16,165

 
66,526

 
1,879

 
41,998

 
5,311

 
1,855

 
12,893

 
15,672

 
1,436

 
18,969

 
182,704

Total allowance for loan and lease losses
$
16,288

 
$
69,896

 
$
2,168

 
$
43,116

 
$
5,524

 
$
1,855

 
$
14,105

 
$
15,971

 
$
1,485

 
$
19,496

 
$
189,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
3,094

 
$
95,107

 
$
427

 
$
17,910

 
$
1,755

 
$
1,183

 
$
22,986

 
$
5,883

 
$
784

 
$
1,238

 
$
150,367

Loans and leases collectively evaluated for impairment
617,258

 
8,179,441

 
320,594

 
2,351,048

 
729,023

 
313,649

 
2,672,999

 
2,517,223

 
219,289

 
1,218,583

 
19,139,107

Total loan and leases
$
620,352

 
$
8,274,548

 
$
321,021

 
$
2,368,958

 
$
730,778

 
$
314,832

 
$
2,695,985

 
$
2,523,106

 
$
220,073

 
$
1,219,821

 
$
19,289,474



22

Table of Contents

The following tables show the activity in the allowance for PCI loan and lease losses by loan class for the three months ended March 31, 2016 and March 31, 2015.
 
Three months ended March 31, 2016
(Dollars in thousands)
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
PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
1,082

 
$
7,838

 
$
773

 
$
445

 
$
5,398

 
$
523

 
$

 
$
253

 
$
16,312

Provision
(349
)
 
(980
)
 
2

 
(220
)
 
(347
)
 
(108
)
 

 
5

 
(1,997
)
Charge-offs

 
(108
)
 
(5
)
 

 
(371
)
 

 

 
(74
)
 
(558
)
Recoveries

 

 

 

 

 

 

 

 

Balance at March 31
$
733

 
$
6,750

 
$
770

 
$
225

 
$
4,680

 
$
415

 
$

 
$
184

 
$
13,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
(Dollars in thousands)
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
Balance at January 1
$
150

 
$
10,135

 
$
75

 
$
1,240

 
$
5,820

 
$
3,999

 
$
183

 
$
27

 
$
21,629

Provision
191

 
(925
)
 
119

 
(1,031
)
 
(863
)
 
(655
)
 
(152
)
 
452

 
(2,864
)
Charge-offs

 
(334
)
 

 
(198
)
 
(85
)
 
(73
)
 

 
(456
)
 
(1,146
)
Recoveries

 

 

 

 

 

 

 

 

Balance at March 31
$
341

 
$
8,876

 
$
194

 
$
11

 
$
4,872

 
$
3,271

 
$
31

 
$
23

 
$
17,619



The following tables show the ending balances of PCI loans and leases and related allowance by class of loans as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
733

 
$
6,750

 
$
770

 
$
225

 
$
4,680

 
$
415

 
$
184

 
$
13,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
32,799

 
526,776

 
18,050

 
14,742

 
298,662

 
50,574

 
4,284

 
945,887

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
1,082

 
$
7,838

 
$
773

 
$
445

 
$
5,398

 
$
523

 
$
253

 
$
16,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
33,880

 
525,468

 
17,076

 
15,182

 
302,158

 
52,471

 
4,281

 
950,516

As of March 31, 2016, and December 31, 2015, $479.2 million and $469.3 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding valuation reserve was $13.8 million and $16.3 million, respectively.

23

Table of Contents

The following tables provide information on non-PCI impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group, as of March 31, 2016 and December 31, 2015 including interest income recognized in the period during which the loans and leases were considered impaired.
 
March 31, 2016
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,356

 
$
1,891

 
$
3,247

 
$
4,602

 
$
83

Commercial mortgage
37,464

 
50,984

 
88,448

 
97,320

 
3,467

Other commercial real estate
297

 
121

 
418

 
858

 
282

Commercial and industrial
5,356

 
8,364

 
13,720

 
16,692

 
650

Lease financing
1,304

 
224

 
1,528

 
1,577

 
191

Other
898

 
62

 
960

 
1,037

 
49

Residential mortgage
10,001

 
14,024

 
24,025

 
24,989

 
1,203

Revolving mortgage
1,059

 
5,535

 
6,594

 
8,049

 
310

Construction and land development - noncommercial
416

 

 
416

 
416

 
27

Consumer
962

 
362

 
1,324

 
1,401

 
514

Total non-PCI impaired loans and leases
$
59,113

 
$
81,567

 
$
140,680

 
$
156,941

 
$
6,776

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,623

 
$
1,471

 
$
3,094

 
$
4,428

 
$
123

Commercial mortgage
41,793

 
53,314

 
95,107

 
103,763

 
3,370

Other commercial real estate
305

 
122

 
427

 
863

 
289

Commercial and industrial
8,544

 
9,366

 
17,910

 
21,455

 
1,118

Lease financing
1,651

 
104

 
1,755

 
1,956

 
213

Other

 
1,183

 
1,183

 
1,260

 

Residential mortgage
10,097

 
12,889

 
22,986

 
25,043

 
1,212

Revolving mortgage
1,105

 
4,778

 
5,883

 
7,120

 
299

Construction and land development - noncommercial
693

 
91

 
784

 
784

 
49

Consumer
1,050

 
188

 
1,238

 
1,294

 
527

Total non-PCI impaired loans and leases
$
66,861

 
$
83,506

 
$
150,367

 
$
167,966

 
$
7,200


The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2016 and March 31, 2015:
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Construction and land development - commercial
$
3,164

 
$
41

 
$
3,052

 
$
35

Commercial mortgage
92,945

 
766

 
80,553

 
769

Other commercial real estate
423

 
5

 
551

 
1

Commercial and industrial
15,551

 
151

 
14,229

 
103

Lease financing
1,657

 
20

 
1,590

 
18

Other
1,072

 
14

 
1,990

 

Residential mortgage
23,500

 
172

 
15,364

 
125

Revolving mortgage
6,309

 
32

 
2,986

 
16

Construction and land development - noncommercial
556

 
6

 
658

 
7

Consumer
1,265

 
18

 
1,022

 
19

Total non-PCI impaired loans and leases
$
146,442

 
$
1,225

 
$
121,995

 
$
1,093

 
 
 
 
 
 
 
 


24

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 grant. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. In accordance with GAAP, acquired loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modifications of a PCI loan accounted for in a pool that would otherwise meet the definition of a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from the scope of TDR accounting.

The following table provides a summary of total TDRs by accrual status.
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
Accruing
 
 Nonaccruing
 
 Total
 
 Accruing
 
 Nonaccruing
 
 Total
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development -
commercial
$
3,637

 
$
268

 
$
3,905

 
$
3,624

 
$
257

 
$
3,881

Commercial mortgage
66,385

 
17,588

 
83,973

 
65,812

 
18,728

 
84,540

Other commercial real estate
1,614

 
84

 
1,698

 
1,751

 
89

 
1,840

Commercial and industrial
8,139

 
783

 
8,922

 
8,833

 
3,341

 
12,174

Lease
1,136

 
46

 
1,182

 
1,191

 
169

 
1,360

Other
960

 

 
960

 
1,183

 

 
1,183

Total commercial TDRs
81,871

 
18,769

 
100,640

 
82,394

 
22,584

 
104,978

Noncommercial
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
26,685

 
6,546

 
33,231

 
25,427

 
7,129

 
32,556

Revolving mortgage
3,624

 
2,179

 
5,803

 
3,600

 
1,705

 
5,305

Construction and land development -
noncommercial
416

 

 
416

 
784

 

 
784

Consumer and other
1,133

 
174

 
1,307

 
1,091

 
129

 
1,220

Total noncommercial TDRs
31,858

 
8,899

 
40,757

 
30,902

 
8,963

 
39,865

Total TDRs
$
113,729

 
$
27,668

 
$
141,397

 
$
113,296

 
$
31,547

 
$
144,843

The majority of TDRs are included in the special mention, substandard or doubtful grading categories. 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 $500,000 and graded substandard or lower are evaluated individually for impairment through a review of collateral values or analysis of cash flows.
The following table shows the accrual status of non-PCI and PCI TDRs.
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
Accruing TDRs:
 
 
 
PCI
$
29,410

 
$
29,231

Non-PCI
84,319

 
84,065

Total accruing TDRs
113,729

 
113,296

Nonaccruing TDRs:
 
 
 
PCI
923

 
1,420

Non-PCI
26,745

 
30,127

Total nonaccruing TDRs
27,668

 
31,547

All TDRs:
 
 
 
PCI
30,333

 
30,651

Non-PCI
111,064

 
114,192

Total TDRs
$
141,397

 
$
144,843


25

Table of Contents

The following tables provide the types of TDRs made during the three months ended March 31, 2016 and March 31, 2015, as well as a summary of loans that were modified as a TDR during the twelve months ended March 31, 2016 and March 31, 2015 that subsequently defaulted during the three months ended March 31, 2016 and March 31, 2015. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
(Dollars in thousands)
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
Non-PCI loans and leases
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
1

$
252

 
1

$
252

 

$

 

$

Commercial and industrial


 


 
1

3,796

 
1

3,796

Total interest only
1

252

 
1

252

 
1

3,796

 
1

3,796

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

404

 


 
1

220

 
1

220

Commercial mortgage
1


 


 
3

535

 


Revolving mortgage


 


 
1

10

 


Residential mortgage
1

34

 


 


 


Consumer


 


 
1

5

 


Total loan term extension
3

438

 


 
6

770

 
1

220

 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

18

 
1

18

 
2

47

 


Commercial mortgage
10

1,422

 
4

511

 
9

3,541

 
2

733

Commercial and industrial
3

12

 


 
3

172

 


Residential mortgage
46

3,288

 
13

841

 
23

708

 
2

45

Revolving mortgage


 


 
2

18

 


Construction and land development - noncommercial


 


 
2

396

 


Consumer
2

73

 


 
3

34

 


Other


 


 
1

1,950

 


Total below market interest rate
62

4,813

 
18

1,370

 
45

6,866

 
4

778

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial


 
1

16

 


 


Residential mortgage
1

144

 


 
2

68

 


Revolving mortgage
8

347

 
8

277

 
5

218

 
2

147

Consumer
7

68

 
4

59

 


 


Total discharged from bankruptcy
16

559

 
13

352

 
7

286

 
2

147

Total non-PCI restructurings
82

$
6,062

 
32

$
1,974

 
59

$
11,718

 
8

$
4,941

 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
(Dollars in thousands)
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
PCI loans
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

$
14

 

$

 

$

 

$

Commercial mortgage
3

2,016

 


 


 


Commercial and industrial


 


 


 
1

65

Residential mortgage


 


 
7

470

 


Total below market interest rate
4

2,030

 


 
7

470

 
1

65

Total PCI restructurings
4

$
2,030

 

$

 
7

$
470

 
1

$
65

 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016 and March 31, 2015, the recorded investment in TDRs subsequent to modification was not materially impacted by the modification since forgiveness of principal is not a restructuring option frequently used by BancShares.
NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in other real estate owned during the three months ended March 31, 2016 and March 31, 2015.
(Dollars in thousands)
Covered
 
Noncovered
 
Total
Balance at December 31, 2014
$
22,982

 
$
70,454

 
$
93,436

Additions
4,244

 
17,084

 
21,328

Sales
(8,970
)
 
(13,573
)
 
(22,543
)
Writedowns
(954
)
 
(1,275
)
 
(2,229
)
Balance at March 31, 2015
$
17,302

 
$
72,690

 
$
89,992

 
 
 
 
 
 
Balance at December 31, 2015
$
6,817

 
$
58,742

 
$
65,559

Additions
3,936

 
6,044

 
9,980

Additions acquired in the North Milwaukee State Bank acquisition

 
330

 
330

Sales
(523
)
 
(7,547
)
 
(8,070
)
Writedowns
(496
)
 
(2,235
)
 
(2,731
)
Balance at March 31, 2016
$
9,734

 
$
55,334

 
$
65,068

At March 31, 2016 and December 31, 2015, BancShares had $14.9 million and $16.1 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $17.6 million and $15.6 million at March 31, 2016 and December 31, 2015, respectively.


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NOTE G - FDIC LOSS SHARE RECEIVABLE

The following table provides changes in the receivable from the FDIC for the three months ended March 31, 2016 and March 31, 2015.
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Beginning balance
$
4,054

 
$
28,701

Amortization
(2,375
)
 
(5,031
)
Net cash payments to FDIC
9,871

 
5,762

Post-acquisition adjustments
(4,076
)
 
(8,092
)
Ending balance
$
7,474

 
$
21,340

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 based on the expected reimbursements for losses and the applicable loss share percentages. See Note L for information related to FCB's recorded payable to the FDIC for loss share agreements.

Amortization reflects changes in the FDIC loss share receivable due to improvements in expected cash flows that are being recognized over the remaining term of the loss share agreement. Cash payments to FDIC represent the net impact of loss share loan recoveries, charge-offs and related expenses as calculated and reported in FDIC loss share certificates. 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 ALLL related to those covered loans. At the beginning of the second, third and fourth quarters of 2016, the loss share protection will expire for non-single family residential loans acquired from UWB, ABT and CCB, respectively. At December 31, 2016, loss share protection will have expired for all non-single family residential loans and loss share protection will remain only for single family residential loans acquired with loss share agreements.

NOTE H - MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.20 billion and $2.15 billion as of March 31, 2016 and December 31, 2015, respectively.  These loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset on the Consolidated Balance Sheets and are initially recorded at fair value.

The activity of the servicing asset for the three months ended March 31, 2016 and 2015 is presented in the following table:
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Beginning balance
$
19,351

 
$
16,688

Servicing rights originated
977

 
662

Amortization
(1,268
)
 
(852
)
Valuation allowance provision
(1,874
)
 
(62
)
Ending balance
$
17,186

 
$
16,436


The following table presents the activity in the servicing asset valuation allowance for the three months ended March 31, 2016 and 2015:
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Beginning balance
$
95

 
$
850

Valuation allowance provision
1,874

 
62

Ending balance
$
1,969

 
$
912

As of March 31, 2016, the carrying value of BancShares' mortgage servicing rights was $17.2 million. Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended March 31, 2016 and 2015 were $1.4 million and $1.3 million, respectively, and are included in mortgage income in the Consolidated Statements of Income.
The amortization expense related to mortgage servicing rights, included as a reduction of mortgage income in the Consolidated Statements of Income, was $1.3 million and $852 thousand for the three months ended March 31, 2016 and 2015, respectively.

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Table of Contents

Mortgage income included an impairment of $1.9 million and $62 thousand for the three months ended March 31, 2016 and 2015, respectively.
Valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. Key economic assumptions used to value mortgage servicing rights as of March 31, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
December 31, 2015
Discount rate - conventional fixed loans
8.77
%
 
9.31
%
Discount rate - all loans excluding conventional fixed loans
9.77
%
 
10.31
%
Weighted average constant prepayment rate
13.32
%
 
11.01
%
Weighted average cost to service a loan
$
62.75

 
$
56.61


NOTE I - REPURCHASE AGREEMENTS
BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure long-term funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates BancShares to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are generally reflected as short-term borrowings on the Consolidated Balance Sheets.
BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and segregate the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements was $787.0 million and $722.0 million at March 31, 2016 and December 31, 2015, respectively.
The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 is presented in the following tables.
 
March 31, 2016
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Repurchase agreements
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
686,685

 
$

 
$

 
$
25,720

 
$
712,405

Government agency

 

 

 
4,280

 
4,280

Total borrowings
$
686,685

 
$

 
$

 
$
30,000

 
$
716,685

Gross amount of recognized liabilities for repurchase agreements
 
$
716,685

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Remaining Contractual Maturity of the Agreements
 
Overnight and continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Repurchase agreements
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
592,182

 
$

 
$

 
$
25,724

 
$
617,906

Government agency

 

 

 
4,276

 
4,276

Total borrowings
$
592,182

 
$

 
$

 
$
30,000

 
$
622,182

Gross amount of recognized liabilities for repurchase agreements
 
$
622,182


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Table of Contents

NOTE J - 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 flows 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.

ASC 820, Fair Value Measurements and Disclosures, indicates that 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 within the fair value hierarchy for an asset or liability is based on the highest 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.

Valuation adjustments, such as those pertaining to counterparty and BancShares' own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty's credit quality. As determined by BancShares management, liquidity valuation adjustments may be made to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments.

BancShares management reviews any changes to its valuation methodologies to ensure they are appropriate and justified, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:
Investment securities available for sale. U.S.Treasury, government agency, mortgage-backed securities, municipal securities and trust preferred securities are generally measured at fair value using a third party pricing service or recent comparable market transactions in similar or identical securities and are classified as level 2 instruments. Equity securities are measured at fair value using observable closing prices and the valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded on a heavily active market and as Level 2 if the observable closing price is from a less than active market.

Loans held for sale. Certain residential real estate loans are originated to be sold to investors, which are carried at fair value as BancShares elected the fair value option on loans held for sale. The fair value is based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of residential real estate loans held for sale are classified as level 2 inputs.

Net loans and leases (PCI and Non-PCI). Fair value is 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. An additional valuation adjustment is made for liquidity. The inputs used in the fair value measurements for loans and leases are considered level 3 inputs.

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. The inputs used in the fair value measurement for the FHLB stock are considered level 2 inputs.

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Table of Contents

Mortgage servicing rights. Mortgage servicing rights are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than the asset cost. The fair value of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and a model that relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage servicing rights are considered level 3 inputs.

Deposits. For non-time deposits, carrying value is a reasonable estimate of fair value. The fair value of 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 measurement 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 if available. 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 measurement 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 using current discount rates to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurement for the payable to the FDIC are considered level 3 inputs.

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. The inputs used in the fair value measurement of the interest rate swap are considered level 2 inputs.

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 March 31, 2016 and December 31, 2015. 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 that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as level 1. Overnight investments, income earned not collected, short-term borrowings and accrued interest payable are considered level 2. Lastly, the receivable from the FDIC for loss share agreements is designated as level 3.
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
457,758

 
$
457,758

 
$
534,086

 
$
534,086

Overnight investments
2,871,105

 
2,871,105

 
2,063,132

 
2,063,132

Investment securities available for sale
6,687,289

 
6,687,289

 
6,861,293

 
6,861,293

Investment securities held to maturity
194

 
203

 
255

 
265

Loans held for sale
66,988

 
66,988

 
59,766

 
59,766

Net loans and leases
20,210,906

 
19,703,240

 
20,033,774

 
19,353,325

Receivable from the FDIC for loss share agreements (1)
7,474

 
7,474

 
4,054

 
4,054

Income earned not collected
73,518

 
73,518

 
70,036

 
70,036

Federal Home Loan Bank stock
40,407

 
40,407

 
37,511

 
37,511

Mortgage servicing rights
17,186

 
17,234

 
19,351

 
19,495

Deposits
27,365,245

 
26,904,946

 
26,930,755

 
26,164,472

Short-term borrowings
689,236

 
689,236

 
594,733

 
594,733

Long-term obligations
779,087

 
808,765

 
704,155

 
718,102

Payable to the FDIC for loss share agreements
128,243

 
136,646

 
126,453

 
131,894

Accrued interest payable
6,037

 
6,037

 
5,713

 
5,713

Interest rate swap
729

 
729

 
1,429

 
1,429

(1) At March 31, 2016 and December 31, 2015, the carrying value of the FDIC receivable approximates the fair value due to the short term nature of the majority of loss share agreements.



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Table of Contents

Among BancShares' assets and liabilities, investment securities available for sale, loans held for sale and interest rates swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of March 31, 2016 and December 31, 2015.
 
March 31, 2016
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,541,215

 
$

 
$
1,541,215

 
$

Government agency
356,157

 

 
356,157

 

Mortgage-backed securities
4,727,282

 

 
4,727,282

 

Equity securities
52,095

 
7,400

 
44,695

 

Other
10,540

 

 
10,540

 

Total investment securities available for sale
$
6,687,289

 
$
7,400

 
$
6,679,889

 
$

Loans held for sale
$
66,988

 
$

 
$
66,988

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
729

 
$

 
$
729

 
$

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,674,882

 
$

 
$
1,674,882

 
$

Government agency
498,660

 

 
498,660

 

Mortgage-backed securities
4,668,198

 

 
4,668,198

 

Equity securities
8,893

 
1,668

 
7,225

 

Other
10,660

 

 
10,660

 

Total investment securities available for sale
$
6,861,293

 
$
1,668

 
$
6,859,625

 
$

Loans held for sale
$
59,766

 
$

 
$
59,766

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
1,429

 
$

 
$
1,429

 
$

There were no transfers between levels during the three months ended March 31, 2016.
Fair Value Option
BancShares has elected the fair value option for residential real estate loans held for sale. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate loans held for sale measured at fair value as of March 31, 2016 and December 31, 2015.
 
March 31, 2016
(Dollars in thousands)
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
66,988

 
$
65,350

 
$
1,638

 
 
 
 
 
 
 
December 31, 2015
 
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
59,766

 
$
58,890

 
$
876

No loans held for sale were 90 or more days past due or on nonaccrual status as of March 31, 2016 or December 31, 2015.



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Table of Contents

The changes in fair value for residential real estate loans held for sale for which we elected the fair value option are included in the table below for the three months ended March 31, 2016 and 2015.
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Gains (losses) from fair value changes on loans held for sale
$
763

 
$
430

The changes in fair value in the table above are recorded as a component of mortgage income on the Consolidated Statements of Income.
Certain other assets are adjusted to their fair value on a nonrecurring basis, including impaired loans, OREO, goodwill, which are periodically tested for impairment, and mortgage servicing rights, which are carried at the lower of amortized cost or market. Non-impaired loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value.
Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is 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. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate generally ranges between 2 and 16 percent.
OREO is measured and reported at fair value using 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. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information. OREO that has been acquired or written down in the current year is deemed to be at fair value and included in the table below.
Mortgage servicing rights are carried at the lower of cost or market and are, therefore, carried at fair value only when fair value is less than the amortized asset cost. The fair value of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of March 31, 2016 and December 31, 2015.
 
March 31, 2016
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
52,337

 
$

 
$

 
$
52,337

Other real estate not covered under loss share agreements remeasured during current year
17,278

 

 

 
17,278

Other real estate covered under loss share agreements remeasured during current year
6,247

 

 

 
6,247

Mortgage servicing rights
16,800

 

 

 
16,800

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
64,197

 
$

 
$

 
$
64,197

Other real estate not covered under loss share agreements remeasured during current year
44,571

 

 

 
44,571

Other real estate covered under loss share agreements remeasured during current year
4,403

 

 

 
4,403

Mortgage servicing rights
17,997

 

 

 
17,997

No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2015.



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Table of Contents

NOTE K - EMPLOYEE BENEFIT PLANS
BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and legacy Bancorporation employees (Bancorporation Plan). Net periodic benefit cost is a component of employee benefits expense.
BancShares Plan
For the three months ended March 31, 2016 and 2015, the components of net periodic benefit cost are as follows:
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Service cost
$
3,220

 
$
3,600

Interest cost
7,180

 
6,748

Expected return on assets
(9,159
)
 
(8,295
)
Amortization of prior service cost
52

 
53

Amortization of net actuarial loss
1,600

 
2,833

Net periodic benefit cost
$
2,893

 
$
4,939

Bancorporation Plan
For the three months ended March 31, 2016 and 2015, the components of net periodic benefit cost are as follows:
 
Three months ended March 31
(Dollars in thousands)
2016
 
2015
Service cost
$
650

 
$
933

Interest cost
1,675

 
1,628

Expected return on assets
(2,779
)
 
(2,869
)
Net periodic benefit cost
$
(454
)
 
$
(308
)
No contributions were made during the three months ended March 31, 2016 to the BancShares or Bancorporation pension plans. BancShares does not expect to make any contributions to either of the defined benefit pension plans during 2016.
NOTE L - 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 March 31, 2016, BancShares had unused commitments that were $8.08 billion, compared to $7.95 billion at December 31, 2015. Total unfunded commitments relating to investments in affordable housing projects was $58.1 million and $41.8 million at March 31, 2016 and December 31, 2015, respectively, and are included in other liabilities on BancShares' Consolidated Balance Sheets. Affordable housing project investments were $110.0 million and $85.6 million at March 31, 2016 and December 31, 2015, respectively, and are included in other assets on the Consolidated Balance Sheets.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ follows its credit policies in the issuance of standby letters of credit. At March 31, 2016 and December 31, 2015, BancShares had standby letters of credit amounting to $80.3 million and $77.9 million, 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.

Pursuant to standard representations and warranties relating to residential mortgage loan sales, contingent obligations exist for various events that may occur following the loan sale. If underwriting or documentation deficiencies are discovered at any point in the life of the loan or if the loan becomes nonperforming within 120 days of its sale, the investor may require BancShares to repurchase the loan or to repay a portion of the sale proceeds. Other liabilities included reserves of $3.0 million as of March 31, 2016 and December 31, 2015 for estimated losses arising from these standard representation and warranty provisions.

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BancShares has recorded a receivable from the FDIC totaling $7.5 million and $4.1 million as of March 31, 2016 and December 31, 2015, respectively, 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 BancShares, and disagreements may arise regarding coverage of losses, expenses and contingencies.

The loss share agreements for five FDIC-assisted transactions include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability).The clawback liability represents a 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 clawback liability is estimated by discounting estimated future payments and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant loss share agreements. As of March 31, 2016 and December 31, 2015, the estimated clawback liability was $128.2 million and $126.5 million, 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.
NOTE M - DERIVATIVES
At March 31, 2016, 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 following table provides the notional amount of the interest rate swap and the fair value of the liability as of March 31, 2016 and December 31, 2015.
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
Notional  amount
 
Estimated fair value of liability
 
Notional  amount
 
Estimated fair value of liability
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016
$
93,500

 
$
729

 
$
93,500

 
$
1,429

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 interest rate swap has a notional amount of $93.5 million, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The 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. The interest rate swap obligation did not meet the threshold to require pledged collateral to secure the obligation at March 31, 2016. At December 31, 2015, collateral with a fair value of $2.0 million was pledged to secure the existing obligation under the interest rate swap.
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, 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 statement of income. BancShares’ interest rate swap has been fully effective since inception. Therefore, changes in the fair value of the interest rate swap have had no impact on net income. For the three months ended March 31, 2016 and 2015, BancShares recognized interest expense of $743 thousand and $826 thousand, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.
BancShares monitors the credit risk of the interest rate swap counterparty.


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NOTE N - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) included the following as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
Accumulated
other
comprehensive
loss
 
Deferred
tax benefit
 
Accumulated
other
comprehensive
loss,
net of tax
Unrealized gains (losses) on investment securities available for sale, net
$
38,900

 
$
14,866

 
$
24,034

 
$
(24,504
)
 
$
(9,379
)
 
$
(15,125
)
Unrealized loss on cash flow hedge
(729
)
 
(274
)
 
(455
)
 
(1,429
)
 
(537
)
 
(892
)
Funded status of defined benefit plans
(76,767
)
 
(29,364
)
 
(47,403
)
 
(78,419
)
 
(29,996
)
 
(48,423
)
Total
$
(38,596
)
 
$
(14,772
)
 
$
(23,824
)
 
$
(104,352
)
 
$
(39,912
)
 
$
(64,440
)
The following table highlights changes in accumulated other comprehensive (loss) income by component for the three months ended March 31, 2016 and March 31, 2015:
 
Three months ended March 31, 2016
(Dollars in thousands)
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
(15,125
)
 
$
(892
)
 
$
(48,423
)
 
$
(64,440
)
Other comprehensive income before reclassifications
42,017

 
437

 

 
42,454

Amounts reclassified from accumulated other comprehensive (loss) income
(2,858
)
 

 
1,020

 
(1,838
)
Net current period other comprehensive income
39,159

 
437

 
1,020

 
40,616

Ending balance
$
24,034

 
$
(455
)
 
$
(47,403
)
 
$
(23,824
)
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
5,098

 
$
(2,664
)
 
$
(55,415
)
 
$
(52,981
)
Other comprehensive income before reclassifications
18,602

 
354

 

 
18,956

Amounts reclassified from accumulated other comprehensive (loss) income
(3,149
)
 

 
1,763

 
(1,386
)
Net current period other comprehensive income
15,453

 
354

 
1,763

 
17,570

Ending balance
$
20,551

 
$
(2,310
)
 
$
(53,652
)
 
$
(35,411
)
1 All amounts are net of tax. Amounts in parentheses indicate debits.

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The following table presents the amounts reclassified from accumulated other comprehensive (loss) income and the line item affected in the statement where net income is presented for the three months ended March 31, 2016 and March 31, 2015:
(Dollars in thousands)
 
Three months ended March 31, 2016
Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)1
 
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities
 
$
4,628

 
Securities gains
 
 
(1,770
)
 
Income taxes
 
 
$
2,858

 
Net income
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(52
)
 
Employee benefits
     Actuarial losses
 
(1,600
)
 
Employee benefits
 
 
(1,652
)
 
Employee benefits
 
 
632

 
Income taxes
 
 
$
(1,020
)
 
Net income
Total reclassifications for the period
 
$
1,838

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)1
 
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities
 
$
5,126

 
Securities gains
 
 
(1,977
)
 
Income taxes
 
 
$
3,149

 
Net income
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(53
)
 
Employee benefits
     Actuarial losses
 
(2,833
)
 
Employee benefits
 
 
(2,886
)
 
Employee benefits
 
 
1,123

 
Income taxes
 
 
$
(1,763
)
 
Net income
Total reclassifications for the period
 
$
1,386

 
 
1 Amounts in parentheses indicate debits to profit/loss.

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

Management’s discussion and analysis (MD&A) 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 along with our financial statements and related MD&A of financial condition and results of operations included in our 2015 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2016, the reclassifications had 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.
EXECUTIVE OVERVIEW
BancShares’ earnings and cash flows are primarily derived from commercial and retail banking activities. 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 bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks.

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BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB), a state-chartered bank organized under the laws of the state of North Carolina.
In March 2016, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to purchase certain assets and assume certain liabilities of North Milwaukee State Bank of Milwaukee, Wisconsin (NMSB). As a result of the NMSB transaction, FCB recorded loans with a fair value of $35.4 million and investment securities with a fair value of $9.4 million. The fair value of deposits assumed was $59.2 million. In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair value as of the acquisition date. As a result, an acquisition gain of $1.7 million was recorded in the first quarter of 2016. Per the acquisition method of accounting, these fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to closing date fair values become available.
Interest rates have presented significant challenges to commercial banks’ efforts to generate earnings and shareholder value. Management has embarked on several strategic initiatives to better position the company to counter these challenges. The initiatives focus on core revenue growth through broader products and services, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology. Additionally, we continue to pursue strategic acquisitions and mergers to expand our customer base and increase efficiency and productivity. Refer to our Form 10-K for the year ended December 31, 2015 for further discussion of our strategy.
RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS
Various external factors influence the focus of our business efforts, and the results of our operations can change significantly based on those external factors. First quarter 2016 results indicate stable labor conditions despite global economic instability in recent months as the unemployment rate remained unchanged at 5.0 percent. According to the U.S. Department of Labor, the economy added approximately 628,000 new nonfarm payroll jobs during the first quarter of 2016 and labor force participation increased. The U.S. housing market experienced a slowdown of activity as a lack of available inventory of for-sale homes constrained many markets, although the outlook remains positive as a result of solid housing demand fueled by low mortgage interest rates, economic growth and job creation.
The Federal Reserve’s Federal Open Market Committee (FOMC) indicated in the first quarter that economic activity has been expanding at a moderate pace despite global economic and financial developments in recent months. Household spending has been increasing moderately and the housing sector shows further improvement, while business fixed investment and net exports have been soft. The FOMC decided to maintain the target range for the federal funds rate and will continue to assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0 percent inflation in determining the timing and size of future adjustments to the target range. The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate in the future.
The trends in the banking industry are similar to those of the broader economy as shown in the latest national banking results from the fourth quarter of 2015. FDIC-insured institutions reported an 11.9 percent increase in net income compared to the fourth quarter of 2014. Interest-earning assets contributed to an increase in net interest income compared to a year earlier and bank average net interest margin was 3.13 percent in the fourth quarter of 2015, up slightly from 3.12 percent in the fourth quarter of 2014. Banks minimally reduced their allowance for loan losses during the fourth quarter, as quarterly loan loss provisions exceeded quarterly net charge-offs for the first time in six years.
EARNINGS PERFORMANCE SUMMARY
BancShares' consolidated net income for the first quarter of 2016 was $52.1 million, or $4.34 per share, compared to $42.7 million, or $3.56 per share, for the fourth quarter of 2015, and $67.2 million, or $5.59 per share, for the corresponding period of 2015. BancShares’ current quarter results generated an annualized return on average assets of 0.66 percent and an annualized return on average equity of 7.17 percent, compared to respective returns of 0.53 percent and 5.92 percent for the fourth quarter of 2015 and 0.90 percent and 10.00 percent for the first quarter of 2015. Net interest margin for the first quarter of 2016 was 3.18 percent, compared to 3.12 percent for the fourth quarter of 2015 and 3.18 percent for the first quarter of the prior year.
Earnings for the first quarter of 2016 included an acquisition gain of $1.7 million recognized in connection with an FDIC-assisted transaction involving certain assets and liabilities assumed of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin, acquired on March 11, 2016. The NMSB acquisition contributed $35.3 million in loans and $46.3 million in deposit balances at March 31, 2016. Earnings for the first quarter of 2015 included a $42.9 million gain on the February 13, 2015 acquisition of Capitol City Bank & Trust (CCBT).

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Key highlights in the first quarter of 2016 include:
Loans grew by $177.7 million to $20.42 billion during the first quarter of 2016, reflecting originated portfolio growth and the NMSB acquisition.
Deposits increased $434.5 million, or by 6.4 percent on an annualized basis, from December 31, 2015 primarily due to organic growth in low-cost demand deposit and savings accounts.
Net charge-offs were $4.3 million, or 0.08 percent of average loans and leases on an annualized basis, compared to $6.3 million, or 0.12 percent, during the fourth quarter of 2015.
The taxable-equivalent net interest margin increased by 6 basis points to 3.18 percent from the fourth quarter of 2015 due to originated loan growth and improvement in the overnight investment yield, partially offset by continued runoff of the purchased credit impaired (PCI) loan portfolio.
Noninterest income was $105.3 million and $99.1 million in the first quarter of 2016 and fourth quarter of 2015, respectively. The increase was driven primarily by investment securities gains of $4.6 million, lower adjustments to the FDIC receivable and the $1.7 million gain on the acquisition of NMSB in the current quarter.
BancShares remained well-capitalized under Basel III capital requirements with a Tier 1 risk-based capital ratio of 12.58 percent, common equity Tier 1 ratio of 12.58 percent, total risk-based capital ratio of 14.09 percent and leverage capital ratio of 9.00 percent at March 31, 2016.

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Table 1
Selected Quarterly Data
 
2016
 
2015
 
 
First
 
Fourth
 
Third
 
Second
 
First
 
(Dollars in thousands, except share data)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Interest income
$
243,112

 
$
241,861

 
$
249,825

 
$
246,013

 
$
231,510

 
Interest expense
10,392

 
11,142

 
10,454

 
11,363

 
11,345

 
Net interest income
232,720

 
230,719

 
239,371

 
234,650

 
220,165

 
Provision for loan and lease losses
4,843

 
7,046

 
107

 
7,719

 
5,792

 
Net interest income after provision for loan and lease losses
227,877

 
223,673

 
239,264

 
226,931

 
214,373

 
Gain on acquisition
1,704

 

 

 

 
42,930

 
Noninterest income excluding gain on acquisition
103,578

 
99,135

 
109,750

 
107,450

 
107,823

 
Noninterest expense
251,671

 
255,886

 
260,172

 
264,691

 
258,166

 
Income before income taxes
81,488

 
66,922

 
88,842

 
69,690

 
106,960

 
Income taxes
29,416

 
24,174

 
32,884

 
25,168

 
39,802

 
Net income
$
52,072

 
$
42,748

 
$
55,958

 
$
44,522

 
$
67,158

 
Net interest income, taxable equivalent
$
234,187

 
$
232,147

 
$
240,930

 
$
236,456

 
$
221,452

 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 Net income
$
4.34

 
$
3.56

 
$
4.66

 
$
3.71

 
$
5.59

 
 Cash dividends
0.30

 
0.30

 
0.30

 
0.30

 
0.30

 
 Market price at period end (Class A)
251.07

 
258.17

 
226.00

 
263.04

 
259.69

 
 Book value at period end
246.55

 
239.14

 
238.34

 
232.62

 
230.53

 
SELECTED QUARTERLY AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 Total assets
$
31,705,658

 
$
31,753,223

 
$
31,268,774

 
$
30,835,749

 
$
30,414,322

 
 Investment securities
6,510,248

 
6,731,183

 
7,275,290

 
7,149,691

 
6,889,752

 
 Loans and leases
20,349,091

 
20,059,556

 
19,761,145

 
19,354,823

 
18,922,028

 
 Interest-earning assets
29,558,629

 
29,565,715

 
29,097,839

 
28,660,246

 
28,231,923

 
 Deposits
26,998,026

 
27,029,650

 
26,719,713

 
26,342,821

 
25,833,068

 
 Long-term obligations
750,446

 
704,465

 
548,214

 
473,434

 
460,713

 
 Interest-bearing liabilities
19,067,251

 
18,933,443

 
18,911,455

 
18,933,611

 
19,171,958

 
 Shareholders' equity
$
2,920,611

 
$
2,867,177

 
$
2,823,967

 
$
2,781,648

 
$
2,724,719

 
 Shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
SELECTED QUARTER-END BALANCES
 
 
 
 
 
 
 
 
 
 Total assets
$
32,195,657

 
$
31,475,934

 
$
31,449,824

 
$
30,896,855

 
$
30,862,932

 
 Investment securities
6,687,483

 
6,861,548

 
6,690,879

 
7,350,545

 
7,045,550

 
 Loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
945,887

 
950,516

 
1,044,064

 
1,123,239

 
1,252,545

 
Non-PCI
19,471,802

 
19,289,474

 
18,811,742

 
18,396,946

 
17,844,414

 
 Deposits
27,365,245

 
26,930,755

 
26,719,375

 
26,511,896

 
26,300,830

 
 Long-term obligations
779,087

 
704,155

 
705,418

 
475,568

 
468,180

 
 Shareholders' equity
$
2,961,194

 
$
2,872,109

 
$
2,862,528

 
$
2,793,890

 
$
2,768,719

 
 Shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
SELECTED RATIOS AND OTHER DATA
 
 
 
 
 
 
 
 
 
Rate of return on average assets (annualized)
0.66

%
0.53

%
0.71

%
0.58

%
0.90

%
Rate of return on average shareholders' equity (annualized)
7.17

 
5.92

 
7.86

 
6.42

 
10.00

 
Net yield on interest-earning assets (taxable equivalent)
3.18

 
3.12

 
3.29

 
3.31

 
3.18

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
1.45

 
1.72

 
1.68

 
1.38

 
1.41

 
Non-PCI
0.99

 
0.98

 
1.00

 
1.05

 
1.05

 
Total
1.01

 
1.02

 
1.03

 
1.07

 
1.08

 
Nonperforming assets to total loans and leases and other real estate at period end:
 
 
 
 
 
 
 
 
 
 
Covered
4.74

 
3.51

 
3.72

 
4.70

 
8.42

 
Noncovered
0.74

 
0.79

 
0.77

 
0.73

 
0.77

 
Total
0.80

 
0.83

 
0.82

 
0.79

 
0.95

 
Tier 1 risk-based capital ratio
12.58

 
12.65

 
12.77

 
12.66

 
12.92

 
Common equity Tier 1 ratio
12.58

 
12.51

 
12.63

 
12.52

 
12.77

 
Total risk-based capital ratio
14.09

 
14.03

 
14.18

 
14.10

 
14.42

 
Leverage capital ratio
9.00

 
8.96

 
8.97

 
8.92

 
8.90

 
Dividend payout ratio
6.91

 
8.43

 
6.44

 
8.09

 
5.37

 
Average loans and leases to average deposits
75.37

 
74.21

 
73.96

 
73.47

 
73.25

 
Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale.


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BUSINESS COMBINATIONS
North Milwaukee State Bank
In March 2016, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of NMSB. The acquisition provided FCB with value enhancement. This is an FDIC-assisted transaction; however, it has no loss share agreement.
The NMSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.
The following table provides the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.
Table 2
North Milwaukee State Bank
(Dollars in thousands)
As recorded by FCB
Assets
 
Cash and cash equivalents
$
4,545

Overnight investments
2,274

Investment securities
9,425

Loans
35,416

Other real estate owned
330

Intangible assets
240

Other assets
216

Total assets acquired
52,446

Liabilities
 
Deposits
59,206

Short-term borrowings
1,662

Other liabilities
74

Total liabilities assumed
60,942

Fair value of net liabilities assumed
(8,496
)
Cash received from FDIC
10,200

Gain on acquisition of NMSB
$
1,704

Merger-related expenses of $38 thousand were recorded in the Consolidated Statements of Income for the first quarter of 2016. Loan-related interest income generated from NMSB was approximately $123 thousand since the acquisition date.
All loans resulting from the NMSB transaction were recognized upon acquisition date with a discount attributable, at least in part, to credit quality, and are therefore accounted for as PCI loans.
FDIC-Assisted Transactions
BancShares completed seven FDIC-assisted transactions during the period beginning in 2009 through 2015, and it acquired NMSB in its eighth such transaction during the first quarter of 2016. These transactions provided us significant growth opportunities, have continued to provide significant contributions to our results of operations and have allowed us to increase our presence in existing markets and expand our banking presence to adjacent markets. Prior to its merger into BancShares, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions: Georgian Bank of Atlanta, Georgia (acquired in 2009); Williamsburg First National Bank of Williamsburg, South Carolina (acquired in 2010); and Atlantic Bank & Trust of Charleston, South Carolina (acquired in 2011). Nine of the eleven FDIC-assisted transactions (including the three completed by Bancorporation) included loss share agreements that, for their terms, protect us from a portion of the credit and asset quality risk we would otherwise incur. The CCBT and NMSB transactions did not include a loss share agreement.

For those acquired loans with loss share agreements, generally, losses on single family residential loans are covered for ten years. All other loans are generally covered for five years. At March 31, 2016, $258.2 million of total loans and leases remain covered under loss share agreements. At the beginning of the second, third and fourth quarters of 2016, the loss share protection will expire for non-single family residential loans acquired from United Western Bank (UWB), Atlantic Bank and Trust (ABT) and Colorado Capital Bank (CCB), respectively. The loan balances at March 31, 2016 for the expiring agreements from UWB, ABT and CCB were $113.7 million, $9.0 million and $2.7 million, respectively. At December 31, 2016, loss share protection

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will have expired for all non-single family residential loans and loss share protection will remain only for single family residential loans acquired with loss share agreements. We will process all necessary filings in accordance with the agreements before expiration to collect the earned loss share receivables. Going forward, we will continue to manage these loans and loan relationships for which loss share has expired in accordance with our standard credit administration policies and procedures.
 
 
 
 
 
 
 
 
 
Table 3
Consolidated Quarter-to-Date Average Taxable-Equivalent Balance Sheets
 
Three months ended
 
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
(Dollars in thousands)
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
20,349,091


$
217,732


4.30


$
20,059,556

 
$
218,048

 
4.32

%
$
18,922,028

 
$
211,885

 
4.54

%
Investment securities:





 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
1,533,028


2,880


0.76

 
1,686,269

 
3,092

 
0.73

 
2,355,234

 
4,593

 
0.79

 
Government agency
463,597


1,031


0.89

 
599,048

 
1,282

 
0.86

 
938,356

 
1,708

 
0.73

 
Mortgage-backed securities
4,467,186


19,012


1.70

 
4,437,936

 
18,632

 
1.68

 
3,592,499

 
13,220

 
1.47

 
State, county and municipal
196


1


2.73

 

 

 

 
3,663

 
53

 
5.77

 
Other
46,241


257


2.24

 
7,930

 
205

 
10.30

 

 

 

 
Total investment securities
6,510,248


23,181


1.43

 
6,731,183

 
23,211

 
1.38

 
6,889,752

 
19,574

 
1.14

 
Overnight investments
2,699,290


3,666


0.54

 
2,774,976

 
2,030

 
0.29

 
2,420,143

 
1,338

 
0.22

 
Total interest-earning assets
29,558,629


$
244,579


3.32

%
29,565,715

 
$
243,289

 
3.27

%
28,231,923

 
$
232,797

 
3.34

%
Cash and due from banks
470,159

 
 
 
 
 
492,663

 
 
 
 
 
463,784

 
 
 
 
 
Premises and equipment
1,131,235

 
 
 
 
 
1,129,809

 
 
 
 
 
1,123,323

 
 
 
 
 
FDIC loss share receivable
8,742

 
 
 
 
 
11,773

 
 
 
 
 
28,430

 
 
 
 
 
Allowance for loan and lease losses
(206,338
)
 
 
 
 
 
(205,876
)
 
 
 
 
 
(203,389
)
 
 
 
 
 
Other real estate owned
65,616

 
 
 
 
 
65,043

 
 
 
 
 
91,729

 
 
 
 
 
Other assets
677,615

 
 
 
 
 
694,096

 
 
 
 
 
678,522

 
 
 
 
 
 Total assets
$
31,705,658

 
 
 
 
 
$
31,753,223

 
 
 
 
 
$
30,414,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
4,317,299


$
200


0.02

%
$
4,234,147

 
$
204

 
0.02

%
$
4,608,049

 
$
415

 
0.04

%
Savings
1,944,805


145


0.03

 
1,887,520

 
142

 
0.03

 
1,765,540

 
92

 
0.02

 
Money market accounts
8,335,030


1,642


0.08

 
8,175,228

 
1,605

 
0.08

 
7,821,438

 
1,641

 
0.09

 
Time deposits
3,061,333


2,672


0.35

 
3,200,354

 
2,900

 
0.36

 
3,515,525

 
3,481

 
0.40

 
Total interest-bearing deposits
17,658,467


4,659


0.11

 
17,497,249

 
4,851

 
0.11

 
17,710,552

 
5,629

 
0.13

 
Repurchase agreements
655,787


433


0.27

 
728,526

 
471

 
0.26

 
305,918

 
121

 
0.16

 
Other short-term borrowings
2,551


1


0.12

 
3,203

 
7

 
1.39

 
694,775

 
1,813

 
1.05

 
Long-term obligations
750,446


5,299


2.82

 
704,465

 
5,813

 
3.30

 
460,713

 
3,782

 
3.28

 
Total interest-bearing liabilities
19,067,251


$
10,392


0.22

 
18,933,443

 
$
11,142

 
0.23


19,171,958

 
$
11,345

 
0.24

 
Demand deposits
9,339,559

 
 
 
 
 
9,532,401

 
 
 
 
 
8,122,516

 
 
 
 
 
Other liabilities
378,237

 
 
 
 
 
420,202

 
 
 
 
 
395,129

 
 
 
 
 
Shareholders' equity
2,920,611

 
 
 
 
 
2,867,177

 
 
 
 
 
2,724,719

 
 
 
 
 
 Total liabilities and shareholders'
 equity
$
31,705,658

 
 
 
 
 
$
31,753,223

 
 
 
 
 
$
30,414,322

 
 
 
 
 
Interest rate spread




3.10

%




3.04

%




3.10

%
 


















Net interest income and net yield on interest-earning assets


$
234,187


3.18

%


$
232,147


3.12

%


$
221,452


3.18

%
Loans and leases include PCI loans, non-PCI 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 for each period and state income tax rates of 5.5 percent, 5.5 percent and 6.0 percent for the three months ended March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The taxable-equivalent adjustment was $1,467, $1,428 and $1,287 for the three months ended March 31, 2016, December 31, 2015 and March 31, 2015, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table 4
Changes in Consolidated Taxable Equivalent Net Interest Income
 
Three months ended March 31, 2016
 
 
Change from prior year period due to:
 
(Dollars in thousands)
Volume
 
Yield/Rate
 
Total Change
 
Assets
 
 
 
 
 
 
Loans and leases
$
16,623

 
$
(10,776
)
 
$
5,847

 
Investment securities:
 
 
 
 
 
 
U. S. Treasury
(1,576
)
 
(137
)
 
(1,713
)
 
Government agency
(959
)
 
282

 
(677
)
 
Mortgage-backed securities
3,470

 
2,322

 
5,792

 
State, county and municipal
(37
)
 
(15
)
 
(52
)
 
Other
257

 

 
257

 
Total investment securities
1,155

 
2,452

 
3,607

 
Overnight investments
278

 
2,050

 
2,328

 
Total interest-earning assets
$
18,056

 
$
(6,274
)
 
$
11,782

 
Liabilities
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
Checking with interest
$
(7
)
 
$
(208
)
 
$
(215
)
 
Savings
9

 
44

 
53

 
Money market accounts
155

 
(154
)
 
1

 
Time deposits
(412
)
 
(397
)
 
(809
)
 
Total interest-bearing deposits
(255
)
 
(715
)
 
(970
)
 
Repurchase agreements
184

 
128

 
312

 
Other short-term borrowings
(1,006
)
 
(806
)
 
(1,812
)
 
Long-term obligations
2,211

 
(694
)
 
1,517

 
Total interest-bearing liabilities
1,134

 
(2,087
)
 
(953
)
 
Change in net interest income
$
16,922

 
$
(4,187
)
 
$
12,735

 
The rate/volume variance is allocated equally between the changes in volume and rate.
RESULTS OF OPERATIONS
Net Interest Income and Margin
First Quarter 2016
Net interest income was $232.7 million, an increase of $12.6 million, or by 5.7 percent, from the first quarter of 2015. On a taxable-equivalent basis, net interest income was $234.2 million, an increase of $12.7 million, or 5.8 percent, from the first quarter of 2015. Loan interest income increased $5.5 million from the first quarter of 2015 as a result of originated loan growth and investment securities interest income improved by $3.7 million as proceeds from sales and maturities were reinvested into higher yielding investments. Net interest income also benefited from higher income earned on overnight investments as a result of the December 2015 increase in the federal funds rate and lower interest expense due to reduced interest-bearing deposit costs. These favorable impacts were offset by lower PCI loan accretion income resulting from PCI loan portfolio runoff. Accretion income on PCI loans was $21.4 million, compared to $25.1 million during the first quarter of 2015.
Net interest income increased $2.0 million, or by 0.9 percent, to $232.7 million from the fourth quarter of 2015. On a taxable-equivalent basis, net interest income increased $2.0 million, or by 0.9 percent, from $232.1 million during the fourth quarter of 2015. The increase in net interest income primarily resulted from higher interest income earned on excess cash held in overnight investments of $1.6 million and lower interest expense of $750 thousand due to reduced borrowing and deposit funding costs. The December 2015 increase in federal funds rate of 25 basis points contributed to higher interest income earned on overnight investments. These favorable impacts were offset by lower PCI loan accretion income resulting from PCI loan portfolio runoff. Accretion income on PCI loans was $21.4 million, compared to $22.9 million during the fourth quarter of 2015.
Accretion income on acquired loans, which is included in interest income and includes accretion income on both PCI and non-PCI loans and leases, declined by $2.2 million and $6.1 million from the fourth quarter of 2015 and the first quarter of 2015, respectively, primarily due to the continued runoff of acquired loans. Non-PCI accretion income was $3.2 million, compared to $3.9 million and $5.6 million in the fourth quarter of 2015 and first quarter of 2015, respectively. The current quarter decrease from both periods relates to the continued runoff of non-PCI loans acquired in the Bancorporation merger.

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The taxable-equivalent net interest margin increased 6 basis points to 3.18 percent in the first quarter of 2016, compared to the fourth quarter of 2015. The margin improvement was due to continued originated loan growth, improvement in investment yields and lower borrowing costs, partially offset by PCI loan portfolio runoff. The December 2015 increase in federal funds rate of 25 basis points contributed to higher interest income earned on overnight investments. The taxable equivalent net interest margin was unchanged from 3.18 percent from the same quarter in the prior year.
Average quarter-to-date interest earning assets decreased by $7.1 million since the fourth quarter of 2015, reflecting a $220.9 million decline in average investment securities and a reduction in average overnight investments of $75.7 million. These decreases were partially offset by a $289.5 million increase in average outstanding loans due to originated loan growth. Average investment securities declined as sales, maturities and paydowns exceeded purchases during the quarter. Average quarter-to-date interest earning assets increased by $1.33 billion compared to the same quarter in the prior year. Growth in average interest-earning assets was primarily funded by growth in deposits. Within interest-earning assets, loans experienced the most significant increase, primarily due to originated loan growth.
Average interest-bearing liabilities increased by $133.8 million compared to the fourth quarter of 2015, due to a $161.2 million increase in average interest-bearing deposits and a $46.0 million increase in average long-term obligations, partially offset by a $73.4 million decline in average short-term borrowings. The decline in short-term borrowings was due to a reduction in average repurchase obligations, while the increase in long-term obligations was due to the addition of $75.0 million Federal Home Loan Bank (FHLB) advances during the first quarter of 2016 to mitigate interest rate risk from long-term fixed rate loans. When compared to the same quarter in the prior year, average interest-bearing liabilities decreased $104.7 million and the rate on interest-bearing liabilities decreased 2 basis points to 0.22 percent. The decline in the rate on interest-bearing liabilities was the result of lower borrowings levels and funding costs in the first quarter of 2016.
Noninterest Income
Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. The primary sources of noninterest income have traditionally consisted of cardholder services income, merchant services income, service charges on deposit accounts and revenues derived from wealth management services. Recoveries on PCI loans that have been previously charged-off are additional sources of noninterest income. BancShares records the portion of recoveries not covered under loss share agreements as noninterest income rather than as an adjustment to the allowance for loan losses since charge-offs on PCI loans are recorded against the discount recognized on the date of acquisition versus the allowance for loan losses.

Table 5
Noninterest Income
 
Three months ended
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Gain on acquisition
$
1,704

 
$

 
$
42,930

Cardholder services
19,358

 
20,139

 
18,401

Merchant services
21,977

 
21,252

 
18,880

Service charges on deposit accounts
21,850

 
22,974

 
22,058

Wealth management services
19,634

 
18,207

 
20,880

Securities gains (losses)
4,628

 
(20
)
 
5,126

Other service charges and fees
6,989

 
6,504

 
5,455

Mortgage income
1,311

 
3,196

 
4,549

Insurance commissions
3,178

 
3,059

 
3,297

ATM income
1,765

 
1,830

 
1,664

Adjustments to FDIC receivable for loss share agreements
(2,533
)
 
(9,279
)
 
(1,047
)
Recoveries of PCI loans previously charged off
2,884

 
5,209

 
5,498

Other
2,537

 
6,064

 
3,062

Total noninterest income
$
105,282

 
$
99,135

 
$
150,753

In the first quarter of 2016, noninterest income was $105.3 million, an increase of $6.1 million from the fourth quarter of 2015. The change from the fourth quarter of 2015 was attributable to the following drivers:
Gains on sales of investment securities were $4.6 million triggered in response to changing market conditions and to better position the investment portfolio for a rising rate environment.

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Lower FDIC receivable adjustments of $6.7 million resulting from net losses on sales of covered other real estate owned (OREO) in the current quarter.
The $1.7 million gain on acquisition of NMSB in the current quarter.
Recoveries of PCI loans previously charged off declined $2.3 million.
Mortgage income declined $1.9 million due to a $1.9 million impairment charge on mortgage servicing assets driven by a decline in interest rates during the quarter.
Noninterest income excluding acquisition gains decreased by $4.2 million from the same quarter in the prior year. The decrease was primarily driven by a $3.2 million decline in mortgage income due to declines in interest rates, a $2.6 million decrease in recoveries of PCI loans previously charged-off, higher unfavorable adjustments to the FDIC receivable of $1.5 million, and a decline in wealth management income of $1.2 million. The decreases were partially offset by a $3.1 million increase in merchant income due to higher sales volumes.
Noninterest Expense
The primary components of noninterest expense are salaries and related employee benefits, occupancy costs, facilities and equipment expense and merchant processing expenses.
Table 6
Noninterest Expense
 
Three months ended
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Salaries and wages
$
103,899

 
$
105,384

 
$
105,471

Employee benefits
27,350

 
26,968

 
31,218

Occupancy expense
25,012

 
24,779

 
25,620

Equipment expense
22,345

 
23,355

 
23,541

FDIC insurance expense
4,789

 
4,585

 
4,271

Foreclosure-related expenses
1,731

 
(2,001
)
 
2,557

Merger-related expenses
38

 
2,925

 
2,997

Merchant processing expense
15,087

 
14,140

 
13,856

Processing fees paid to third parties
4,102

 
4,269

 
5,395

Card processing expense
6,084

 
6,476

 
4,941

Consultant expense
1,771

 
2,501

 
2,128

Collection expense
2,581

 
2,522

 
2,300

Advertising expense
2,055

 
4,756

 
1,913

Core deposit intangible amortization
4,318

 
4,487

 
4,955

Other
30,509

 
30,740

 
27,003

Total noninterest expense
$
251,671

 
$
255,886

 
$
258,166

Noninterest expense was $251.7 million in the first quarter of 2016, a decline of $4.2 million from the fourth quarter of 2015. The following items impacted various noninterest expense categories:
Merger-related expenses declined $2.9 million primarily due to costs associated with the Bancorporation merger.
Advertising costs decreased by $2.7 million primarily as a result of a corporate sponsorship campaign in the fourth quarter of 2015.
Personnel expenses declined $1.1 million primarily due to one additional business day in the fourth quarter of 2015 and higher deferrals of salary costs related to loan origination activity.
Equipment expense decreased $1.0 million primarily due to a reduction in depreciation and maintenance expense.
Foreclosure-related expenses increased $3.7 million primarily due to a net loss on sales of acquired OREO during the current quarter.
Noninterest expense decreased $6.5 million in the first quarter of 2016 from $258.2 million in the first quarter of 2015. The decrease was due to a decline in personnel expenses of $5.4 million related to lower pension and higher deferrals of salary costs

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for loan originations and $3.0 million decrease in merger-related expenses. These declines were partially offset by a $1.2 million increase in merchant processing and $1.1 million increase in card processing expenses due to higher sales volumes.

Income Taxes
Income tax expense was $29.4 million, $24.2 million and $39.8 million for the first quarter of 2016, fourth quarter of 2015 and first quarter of 2015, representing effective tax rates of 36.1 percent, 36.1 percent and 37.2 percent during the respective periods. The higher effective tax rate for the first quarter of 2015 was primarily attributable to increased pre-tax earnings as a result of the CCBT acquisition gain.
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 tax auditors.

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 higher levels of market risk.

We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. We avoid high-risk industry concentrations, but we do maintain a concentration of owner-occupied real estate loans to borrowers in medical and medical-related fields. Our focus on asset quality also influences the composition of our investment securities portfolio.

Interest-earning assets averaged $29.56 billion and $29.57 billion for the quarter ended March 31, 2016 and December 31, 2015, respectively. The $7.1 million decline from December 31, 2015 was due to a $296.6 million decline in investment securities and overnight investments, partially offset by a $289.5 million increase in loans and leases as a result of originated loan growth.

Investment Securities

Investment securities were $6.69 billion at March 31, 2016, compared to $6.86 billion and $7.05 billion at December 31, 2015 and March 31, 2015, respectively. The $174.0 million and $357.8 million decrease in the portfolio from December 31, 2015 and March 31, 2015, respectively, was attributable to reinvesting a portion of the proceeds from sales, maturities and calls into overnight investments pending reinvestment. The yield on overnight investments benefited from the December 2015 increase in the federal funds rate of 25 basis points.

Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of March 31, 2016, investment securities available for sale had a net pre-tax unrealized gain of $38.9 million, compared to a net pre-tax unrealized loss of $24.5 million as of December 31, 2015 and a net unrealized gain of $33.6 million as of March 31, 2015. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of March 31, 2016.

At March 31, 2016, mortgage-backed securities represented 70.7 percent of investment securities available for sale, compared to U.S. Treasury, government agency securities, equity securities and other, which represented 23.0 percent, 5.3 percent, 0.8 percent and 0.2 percent of the portfolio, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

Since December 31, 2015, cash flows from the sales, maturities and calls of U.S. Treasury and government agency securities were reinvested into mortgage-backed securities and equity securities in order to optimize earnings and manage overall risk of the investment portfolio. As a result, the carrying value of mortgage-backed securities issued by government sponsored enterprises and equity securities increased by $59.1 million and $43.2 million, respectively, while U.S. Treasury securities decreased $133.7 million and government agency securities declined $142.5 million.

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible

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with BancShares' objectives. Changes in the total balance of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand.

Table 7
Investment Securities
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
(Dollars in thousands)
 Cost
 
 Fair value
 
 Cost
 
Fair value
 
Cost
 
Fair Value
Investment securities available for sale:
 
 
 
 
 
U.S. Treasury
$
1,538,907

 
$
1,541,215

 
$
1,675,996

 
$
1,674,882

 
$
2,237,002

 
$
2,246,966

Government agency
355,488

 
356,157

 
498,804

 
498,660

 
988,563

 
990,894

Mortgage-backed securities
4,693,313

 
4,727,282

 
4,692,447

 
4,668,198

 
3,785,912

 
3,807,249

Equity securities
50,066

 
52,095

 
7,935

 
8,893

 

 

Other
10,615

 
10,540

 
10,615

 
10,660

 

 

Total investment securities available for sale
6,648,389

 
6,687,289

 
6,885,797

 
6,861,293

 
7,011,477

 
7,045,109

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
194

 
203

 
255

 
265

 
441

 
459

Total investment securities
$
6,648,583

 
$
6,687,492

 
$
6,886,052

 
$
6,861,558

 
$
7,011,918

 
$
7,045,568


Loans and Leases
Loans were $20.42 billion at March 31, 2016, a net increase of $177.7 million compared to December 31, 2015, representing growth of 3.5 percent on an annualized basis. Originated loans increased by $182.3 million primarily due to continued commercial portfolio growth. PCI loans decreased by $4.6 million, reflecting loan runoff of $39.9 million, partially offset by net loans acquired from NMSB of $35.3 million at March 31, 2016.
Non-PCI loans increased by $1.63 billion, compared to March 31, 2015, reflecting originated loan growth. PCI loans decreased by $306.7 million from March 31, 2015, due to continued pay downs in the PCI loan portfolio, offset by the contribution from the NMSB acquisition.

BancShares reports PCI and non-PCI loan portfolios separately and each portfolio is further divided into commercial and non-commercial. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics, such as commercial real estate, commercial and industrial or residential mortgage. Table 8 provides the composition of PCI and non-PCI loans and leases.

PCI Loans
The PCI portfolio includes loans acquired in a transfer, including business combinations, where there is evidence of credit
deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required
principal and interest payments. All nonrevolving loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the loans are accounted for under the guidance in ASC Topic 310-30. PCI loans and leases are valued at fair value at the date of acquisition.

PCI loans at March 31, 2016 were $945.9 million, representing 4.6 percent of total loans and leases, compared to $950.5 million and $1.25 billion at December 31, 2015 and March 31, 2015, respectively.

PCI commercial loans were $594.2 million at March 31, 2016, an increase of $613 thousand since December 31, 2015 and a decrease of $201.8 million since March 31, 2015. At March 31, 2016, PCI noncommercial loans were $351.7 million, a decrease of $5.2 million and $104.8 million since December 31, 2015 and March 31, 2015, respectively. The runoff in the PCI loan portfolio was offset by the contribution from the NMSB acquisition.


47

Table of Contents

Non-PCI Loans and Leases
The non-PCI portfolio includes loans that management has the intent and ability to hold and is reported at the principal balance
outstanding, net of deferred loan fees and costs. Non-PCI loans include originated commercial loans and leases, originated noncommercial loans, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have a discount at least in part due to credit quality at the time of acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.

Non-PCI loans at March 31, 2016 were $19.47 billion, representing 95.4 percent of total loans and leases, compared to $19.29 billion and $17.84 billion at December 31, 2015 and March 31, 2015, respectively.

The non-PCI commercial loan portfolio is composed of Commercial Mortgage, Commercial and Industrial, Construction and Land Development, Lease Financing, Other Commercial Real Estate and Other Commercial loans. Non-PCI commercial loans were $12.79 billion at March 31, 2016, an increase of $159.4 million and $1.30 billion, compared to December 31, 2015 and March 31, 2015, respectively, resulting from continued loan growth.

The non-PCI noncommercial loan portfolio is composed of Residential Mortgage, Revolving Mortgage, Consumer and Construction and Land Development loans. Non-PCI noncommercial loans were $6.68 billion at March 31, 2016, an increase of $22.9 million and $330.9 million compared to December 31, 2015 and March 31, 2015, respectively.

Table 8
Loans and Leases
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Non-PCI loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
$
626,311

 
$
620,352

 
$
608,556

Commercial mortgage
8,353,631

 
8,274,548

 
7,591,745

Other commercial real estate
324,858

 
321,021

 
262,293

Commercial and industrial
2,389,946

 
2,368,958

 
2,072,414

Lease financing
751,292

 
730,778

 
603,737

Other
343,877

 
314,832

 
354,713

Total commercial loans
12,789,915

 
12,630,489

 
11,493,458

Noncommercial:
 
 
 
 
 
Residential mortgage
2,718,208

 
2,695,985

 
2,524,549

Revolving mortgage
2,521,902

 
2,523,106

 
2,528,257

Construction and land development
213,232

 
220,073

 
170,208

Consumer
1,228,545

 
1,219,821

 
1,127,942

Total noncommercial loans
6,681,887

 
6,658,985

 
6,350,956

Total non-PCI loans and leases
19,471,802

 
19,289,474

 
17,844,414

PCI loans:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
32,799

 
33,880

 
69,944

Commercial mortgage
526,776

 
525,468

 
658,376

Other commercial real estate
18,050

 
17,076

 
40,911

Commercial and industrial
14,742

 
15,182

 
23,929

Other
1,860

 
2,008

 
2,886

Total commercial loans
594,227

 
593,614

 
796,046

Noncommercial:
 
 
 
 
 
Residential mortgage
298,662

 
302,158

 
381,691

Revolving mortgage
50,574

 
52,471

 
70,363

Construction and land development

 

 
874

Consumer
2,424

 
2,273

 
3,571

Total noncommercial loans
351,660

 
356,902

 
456,499

Total PCI loans
945,887

 
950,516

 
1,252,545

Total loans and leases
$
20,417,689

 
$
20,239,990

 
$
19,096,959




48

Table of Contents

Allowance for Loan and Lease Losses (ALLL)

The ALLL was $206.8 million at March 31, 2016, representing increases of $567 thousand and $1.2 million since December 31, 2015 and March 31, 2015, respectively. The increase in the ALLL for non-PCI loans and leases, primarily due to loan growth, offset the continued reduction in the ALLL for PCI loans due to portfolio runoff. The ALLL as a percentage of total loans and leases was 1.01 percent at March 31, 2016, compared to 1.02 percent and 1.08 percent at December 31, 2015 and March 31, 2015, respectively. The decline in the ALLL ratio from December 31, 2015 was primarily due to lower reserves on PCI loans due to runoff in the portfolio. The decline in the ALLL ratio from March 31, 2015 was due to credit quality improvements and lower reserves on PCI loans due to portfolio runoff.

At March 31, 2016, the ALLL allocated to non-PCI loans and leases was $193.0 million, or 0.99 percent of non-PCI loans and leases, compared to $189.9 million, or 0.98 percent, at December 31, 2015 and $187.9 million, or 1.05 percent, at March 31, 2015. An additional ALLL of $13.8 million relates to PCI loans at March 31, 2016, compared to $16.3 million and $17.6 million at December 31, 2015 and March 31, 2015, respectively. The ALLL on the PCI loan portfolio continues to decline consistent with the runoff of this portfolio.

The ALLL allocated to originated non-PCI loans and leases was 1.14 percent of originated non-PCI loans and leases at March 31, 2016, unchanged from December 31, 2015 and compared to 1.32 percent at March 31, 2015. Originated non-PCI loans were $16.98 billion, $16.60 billion and $14.29 billion at March 31, 2016, December 31, 2015 and March 31, 2015, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.

BancShares continues to experience improved credit quality indicators which have reduced the ALLL ratio since March 31, 2015. In the commercial non-PCI loan portfolio, credit quality improvements included low net charge-off ratios and migration of loans with higher credit risk ratings to lower ratings. The noncommercial non-PCI loan portfolio also experienced lower delinquency trends. Additionally, impaired non-PCI loan reserves have been lower due to improved cash flow and higher collateral values for impaired loans.

BancShares recorded $4.8 million net provision expense for loan and lease losses during the first quarter of 2016, compared to net provision expense of $7.0 million in the fourth quarter of 2015. The decline of $2.2 million was due to lower net charge-offs on non-PCI loans and leases and higher impairment reversals on PCI loans. Compared to the first quarter of 2015, provision expense decreased $949 thousand due primarily to lower originated loan growth, partially offset by lower impairment reversals on PCI loans. On an annualized basis, total net charge-offs as a percentage of total average loans and leases decreased during the first quarter of 2016 to 0.08 percent, compared to 0.12 percent in the fourth quarter of 2015 and 0.10 percent in the first quarter of 2015.

Provision expense for non-PCI loan and leases was $6.8 million during the first quarter of 2016, compared to $7.9 million in the fourth quarter of 2015, a decline of $1.1 million primarily due to lower loan growth and net charge-offs. Compared to the first quarter of 2015, provision expense decreased $1.8 million primarily due to lower loan growth. Net charge-offs for non-PCI loans and leases were $3.7 million during the first quarter of 2016, compared to $6.0 million and $3.6 million during the fourth quarter of 2015 and first quarter of 2015, respectively. On an annualized basis, non-PCI net charge-offs as a percentage of non-PCI average loans and leases during the first quarter of 2016 were 0.08 percent, down from 0.12 percent during the fourth quarter of 2015 and unchanged from the first quarter of 2015.

The PCI loan net provision credit was $2.0 million during the first quarter of 2016, compared to net provision credits of $903 thousand and $2.9 million for the fourth quarter of 2015 and first quarter of 2015, respectively.

Management considers the ALLL adequate to absorb estimated inherent losses that relate to loans and leases outstanding at March 31, 2016, although future adjustments 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 ALLL. Such agencies may require adjustments to the ALLL based on information available to them at the time of their examination.


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Table of Contents

Table 9
Allowance for Loan and Lease Losses Components by Loan Class
 
2016
 
2015
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Allowance for loan and lease losses at beginning of period
$
206,216

 
$
205,463

 
$
208,317

 
$
205,553

 
$
204,466

Non-PCI provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
943

 
2,393

 
1,189

 
88

 
1,103

Commercial mortgage
394

 
(4,600
)
 
(5,664
)
 
(1,878
)
 
(3,679
)
Other commercial real estate
(104
)
 
1,047

 
291

 
(227
)
 
458

Commercial and industrial
2,201

 
6,137

 
(799
)
 
4,547

 
7,546

Lease financing
(282
)
 
759

 
424

 
408

 
11

Other
(328
)
 
680

 
(58
)
 
(1,824
)
 
(218
)
Total commercial loans
2,824

 
6,416

 
(4,617
)
 
1,114

 
5,221

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
776

 
1,707

 
520

 
1,162

 
813

Revolving mortgage
1,158

 
(1,366
)
 
871

 
31

 
(462
)
Construction and land development
87

 
235

 
114

 
74

 
118

Consumer
1,995

 
957

 
450

 
6,613

 
2,966

Total noncommercial loans
4,016

 
1,533

 
1,955

 
7,880

 
3,435

Total non-PCI provision
6,840

 
7,949

 
(2,662
)
 
8,994

 
8,656

PCI provision for loan losses
(1,997
)
 
(903
)
 
2,769

 
(1,275
)
 
(2,864
)
Non-PCI Charge-offs:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
(426
)
 
(437
)
 
(336
)
 
(221
)
 
(18
)
Commercial mortgage
(90
)
 
(809
)
 
(411
)
 
(47
)
 
(233
)
Other commercial real estate

 

 

 
(9
)
 
(169
)
Commercial and industrial
(1,317
)
 
(1,137
)
 
(784
)
 
(2,318
)
 
(1,713
)
Lease financing

 
(374
)
 
(7
)
 
(6
)
 
(15
)
Other
(71
)
 

 

 

 

Total commercial loans
(1,904
)
 
(2,757
)
 
(1,538
)
 
(2,601
)
 
(2,148
)
Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
(174
)
 
(851
)
 
(394
)
 
(90
)
 
(284
)
Revolving mortgage
(1,036
)
 
(840
)
 
(677
)
 
(616
)
 
(793
)
Construction and land development

 

 

 

 
(22
)
Consumer
(3,108
)
 
(3,761
)
 
(2,409
)
 
(2,743
)
 
(2,783
)
Total noncommercial loans
(4,318
)
 
(5,452
)
 
(3,480
)
 
(3,449
)
 
(3,882
)
Total non-PCI charge-offs
(6,222
)
 
(8,209
)
 
(5,018
)
 
(6,050
)
 
(6,030
)
Non-PCI Recoveries:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
80

 
271

 
129

 
104

 
62

Commercial mortgage
256

 
150

 
794

 
323

 
761

Other commercial real estate
143

 
11

 
15

 
9

 
10

Commercial and industrial
479

 
11

 
296

 
209

 
394

Lease financing
180

 

 
16

 
11

 
11

Other
321

 

 
45

 
31

 
15

Total commercial loans
1,459

 
443

 
1,295

 
687

 
1,253

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
20

 
104

 
314

 
305

 
138

Revolving mortgage
32

 
330

 
363

 
346

 
134

Construction and land development
3

 

 
3

 
3

 
68

Consumer
990

 
1,381

 
762

 
630

 
878

Total noncommercial loans
1,045

 
1,815

 
1,442

 
1,284

 
1,218

Total non-PCI recoveries
2,504

 
2,258

 
2,737

 
1,971

 
2,471

Non-PCI loans and leases charged off, net
(3,718
)
 
(5,951
)
 
(2,281
)
 
(4,079
)
 
(3,559
)
PCI loans charged off, net
$
(558
)
 
(342
)
 
(680
)
 
(876
)
 
(1,146
)
Allowance for loan and lease losses at end of period
$
206,783

 
$
206,216

 
$
205,463

 
$
208,317

 
$
205,553

Reserve for unfunded commitments
$
407

 
$
379

 
$
411

 
$
389

 
$
404

The provision expense for commercial mortgage non-PCI loans and leases was $394 thousand for the three months ended March 31, 2016, compared to a net provision credit of $3.7 million for the same period of 2015. The increase in provision expense was primarily due to higher loan growth in 2016 compared to the prior year.
Other commercial real estate non-PCI loans and leases had a net provision credit of $104 thousand for the three months ended March 31, 2016, compared to provision expense of $458 thousand for the same period of 2015. The decline in provision was due to lower net charge-offs during the current quarter.
The provision expense for commercial and industrial non-PCI loans and leases was $2.2 million for the three months ended March 31, 2016, compared to provision expense of $7.5 million for the same period of 2015. The decrease in provision expense was due to lower loan growth and net charge-offs in 2016 compared to 2015.

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Table of Contents

Lease financing non-PCI loans and leases had a net provision credit of $282 thousand for the three months ended March 31, 2016, compared to provision expense of $11 thousand for the same period of 2015. The decrease in provision expense was due to lower net charge-offs and improved credit quality metrics during the current quarter.
The provision expense for revolving mortgage non-PCI loans and leases was $1.2 million for the three months ended March 31, 2016, compared to a net provision credit of $462 thousand for the same period of 2015. The increase in provision expense was due to higher net charge-offs in 2016.
Table 10
Allowance for Loan and Lease Losses Metrics and Ratios
 
2016
 
2015
 
 
First
 
Fourth
 
Third
 
Second
 
First
 
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
Average loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
$
939,839

 
$
996,637

 
$
1,081,497

 
$
1,173,105

 
$
1,200,484

 
Non-PCI
19,409,252

 
19,062,919

 
18,679,648

 
18,181,718

 
17,721,544

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
 
 
PCI
945,887

 
950,516

 
1,044,064

 
1,123,239

 
1,252,545

 
Non-PCI
19,471,802

 
19,289,474

 
18,811,742

 
18,396,946

 
17,844,414

 
Allowance for loan and lease losses allocated to loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
13,757

 
16,312

 
17,557

 
15,468

 
17,619

 
Non-PCI
193,026

 
189,904

 
187,906

 
192,849

 
187,934

 
Total
206,783

 
206,216

 
205,463

 
208,317

 
205,553

 
Net charge-offs (annualized) to average loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
0.24

%
0.14

%
0.25

%
0.30

%
0.39

%
Non-PCI
0.08

 
0.12

 
0.05

 
0.09

 
0.08

 
Total
0.08

 
0.12

 
0.06

 
0.10

 
0.10

 
ALLL to total loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
1.45

 
1.72

 
1.68

 
1.38

 
1.41

 
Non-PCI
0.99

 
0.98

 
1.00

 
1.05

 
1.05

 
Total
1.01

 
1.02

 
1.03

 
1.07

 
1.08

 
The ALLL as a percentage of total loans at March 31, 2016 was 1.01 percent, compared to 1.02 percent at December 31, 2015 and 1.08 percent at March 31, 2015.
The following non-GAAP reconciliation in Table 11 provides a calculation of the adjusted ALLL and the related adjusted ALLL as a percentage of total loans and leases for the periods presented. Management uses these non-GAAP financial measures to monitor performance and believes this measure provides meaningful information as the remaining unamortized discounts provide coverage for losses similar to the ALLL. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of BancShares' results or financial condition as reported under GAAP.

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Table 11
Adjusted Allowance for Loan and Lease Losses (Non-GAAP)
 
2016
 
2015
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
ALLL on non-PCI loans and leases (GAAP)
$
193,026

 
$
189,904

 
$
187,906

 
$
192,849

 
$
187,934

Unamortized discount related to non-PCI loans and leases (GAAP)
37,878

 
41,124

 
45,068

 
49,309

 
55,738

Adjusted ALLL on non-PCI loans and leases (non-GAAP)
230,904

 
231,028

 
232,974

 
242,158

 
243,672

 
 
 
 
 
 
 
 
 
 
ALLL on PCI loans (GAAP)
13,757

 
16,312

 
17,557

 
15,468

 
17,619

Unamortized discount related to PCI loans (GAAP)
140,379

 
137,819

 
154,624

 
172,962

 
196,256

Adjusted ALLL on PCI loans (non-GAAP)
154,136

 
154,131

 
172,181

 
188,430

 
213,875

 
 
 
 
 
 
 
 
 
 
Total ALLL (GAAP)
206,783

 
206,216

 
205,463

 
208,317

 
205,553

Net acquisition accounting fair value discounts on loans and leases (GAAP)
178,257

 
178,943

 
199,692

 
222,271

 
251,994

Adjusted ALLL (non-GAAP)
$
385,040

 
$
385,159

 
$
405,155

 
$
430,588

 
$
457,547

 
 
 
 
 
 
 
 
 
 
Adjusted ALLL to total loans and leases (non-GAAP):
 
 
 
 
 
 
 
 
 
Non-PCI
1.19
%
 
1.20
%
 
1.24
%
 
1.32
%
 
1.37
%
PCI
16.30

 
16.22

 
16.49

 
16.78

 
17.08

Total
1.89

 
1.90

 
2.04

 
2.21

 
2.40

The adjusted ALLL (non-GAAP), which includes the ALLL as well as remaining net acquisition fair value adjustments for acquired loans, declined to 1.89 percent of total loans and leases at March 31, 2016, from 1.90 percent and 2.40 percent of total loans and leases at December 31, 2015 and March 31, 2015, respectively. The reduction in the adjusted ALLL resulted primarily from credit quality improvements and continued accretion of acquisition accounting fair value adjustments.
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases and OREO resulting from both PCI and non-PCI loans. At March 31, 2016, BancShares’ nonperforming assets were $162.8 million, a decline of $6.2 million and $20.1 million from December 31, 2015 and March 31, 2015, respectively, related to overall reductions in OREO balances and nonaccrual loans and leases.
OREO balances have declined $491 thousand and $24.9 million since December 31, 2015 and March 31, 2015, respectively, primarily due to sales and write-downs outpacing new additions. Nonaccrual PCI loans at March 31, 2016 are down $260 thousand and $19.6 million from December 31, 2015 and March 31, 2015, respectively, due to resolutions of impaired loans. Nonaccrual non-PCI loans and leases at March 31, 2016 have declined $5.4 million from December 31, 2015 as a result of problem asset resolutions primarily in the commercial loan portfolio, while nonaccrual non-PCI loans and leases increased $24.4 million from March 31, 2015 due to the downgrade of a few large commercial mortgage relationships and an increase in residential mortgage loans being placed on nonaccrual status.
Of the $162.8 million in nonperforming assets at March 31, 2016, $12.7 million related to loans and OREO covered by loss share agreements. Covered nonperforming assets continue to decline due to the expiration of FDIC loss share agreements and loan resolutions; however, covered OREO increased $2.9 million from December 31, 2015 as a result of a large covered commercial loan relationship moving to OREO during the current quarter.

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Table 12
Nonperforming Assets
 
2016
 
2015
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Non-PCI
$
90,455

 
$
95,854

 
$
87,276

 
$
73,435

 
$
66,046

PCI
7,319

 
7,579

 
5,329

 
8,672

 
26,930

Other real estate
65,068

 
65,559

 
69,859

 
73,248

 
89,992

Total nonperforming assets
$
162,842

 
$
168,992

 
$
162,464

 
$
155,355

 
$
182,968

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Covered under loss share agreements
$
2,968

 
$
2,992

 
$
3,171

 
$
2,732

 
$
21,440

Not covered under loss share agreements
94,806

 
100,441

 
89,434

 
79,375

 
71,536

Other real estate:
 
 
 
 
 
 
 
 
 
Covered
9,734

 
6,817

 
8,152

 
12,890

 
17,302

Noncovered
55,334

 
58,742

 
61,707

 
60,358

 
72,690

Total nonperforming assets
$
162,842

 
$
168,992

 
$
162,464

 
$
155,355

 
$
182,968

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Covered
$
258,179

 
$
272,554

 
$
296,476

 
$
319,665

 
$
443,055

Noncovered
20,159,510

 
19,967,436

 
19,559,330

 
19,200,520

 
18,653,904

 
 
 
 
 
 
 
 
 
 
Accruing loans and leases 90 days or more past due
 
 
 
 
 
 
 
 
 
Non-PCI
4,882

 
3,315

 
6,277

 
4,960

 
3,089

PCI
70,398

 
73,751

 
73,539

 
81,055

 
96,041

 
 
 
 
 
 
 
 
 
 
Ratio of nonperforming assets to total loans, leases and other real estate owned:
 
 
 
 
 
 
 
 
 
Covered
4.74
%
 
3.51
%
 
3.72
%
 
4.70
%
 
8.42
%
Noncovered
0.74

 
0.79

 
0.77

 
0.73

 
0.77

Total
0.80

 
0.83

 
0.82

 
0.79

 
0.95

Troubled Debt Restructurings
Troubled debt restructurings (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. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans and leases. TDRs which are accruing at the time of restructure and continue to perform based on the restructured terms are considered performing.
Total PCI and non-PCI loans and leases classified as TDRs at March 31, 2016 were $141.4 million, compared to $144.8 million at December 31, 2015 and $157.0 million at March 31, 2015. Accruing TDRs were $113.7 million, an increase of $433 thousand and a decrease of $17.7 million from December 31, 2015 and March 31, 2015, respectively. At March 31, 2016, nonaccruing TDRs were $27.7 million, a decrease of $3.9 million and an increase of $2.1 million from December 31, 2015 and March 31, 2015, respectively. The decrease in nonaccruing TDRs from December 31, 2015 was primarily related to large payoffs in the commercial loan portfolio.

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Table of Contents

Table 13
Troubled Debt Restructurings
(Dollars in thousands)
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Accruing TDRs:
 
 
 
 
 
PCI
$
29,410

 
$
29,231

 
$
44,582

Non-PCI
84,319

 
84,065

 
86,884

Total accruing TDRs
113,729

 
113,296

 
131,466

Nonaccruing TDRs:
 
 
 
 
 
PCI
923

 
1,420

 
1,999

Non-PCI
26,745

 
30,127

 
23,526

Total nonaccruing TDRs
27,668

 
31,547

 
25,525

All TDRs:
 
 
 
 
 
PCI
30,333

 
30,651

 
46,581

Non-PCI
111,064

 
114,192

 
110,410

Total TDRs
$
141,397

 
$
144,843

 
$
156,991

INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities were $19.17 billion and $18.96 billion at March 31, 2016 and December 31, 2015, respectively. The $217.0 million increase from December 31, 2015 was due to $75.0 million of new Federal Home Loan Bank (FHLB) borrowings during the quarter, a $94.5 million increase in repurchase agreements and organic growth in interest-bearing deposits of $47.5 million. Interest-bearing liabilities decreased $54.5 million from March 31, 2015 primarily due to a $112.8 million reduction in interest-bearing deposits, subordinated debt maturities of $199.9 million, maturities of FHLB advances of $10.0 million and a $42.7 million reduction in repurchase agreements. These decreases were partially offset by $305.0 million in additional FHLB borrowings.
Deposits
At March 31, 2016, total deposits were $27.37 billion, an increase of $434.5 million, or 1.61 percent, when compared to December 31, 2015 due to organic growth in low-cost demand deposit and savings accounts. Deposits increased $1.06 billion, or by 4.0 percent, when compared to March 31, 2015, primarily the result of organic growth in demand deposit, checking with interest and savings accounts.
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 March 31, 2016, short-term borrowings were $689.2 million compared to $594.7 million and $941.9 million at December 31, 2015 and March 31, 2015, respectively. The $94.5 million increase from December 31, 2015 was due to higher activity in customer repurchase agreements. The $252.6 million decrease from March 31, 2015 was due to maturities of FHLB borrowings of $10.0 million, maturities of subordinated debt of $199.9 million and a $42.7 million reduction in customer repurchase agreements.
Long-Term Obligations
Long-term obligations were $779.1 million at March 31, 2016, up $74.9 million from December 31, 2015 primarily the result of incremental FHLB borrowings of $75.0 million during 2016 to mitigate interest rate risk from long-term fixed rate loans. Long-term obligations were up $310.9 million from March 31, 2015 primarily due to new FHLB borrowings of $305.0 million since March 31, 2015.

At March 31, 2016, December 31, 2015 and March 31, 2015, long-term obligations included $132.5 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, FCB/SC Capital Trust II, and SCB Capital Trust I, special purpose entities and grantor trusts for $128.5 million of trust preferred securities. FCB/NC Capital Trust III, FCB/SC Capital Trust II, and SCB Capital Trust I's (the Trusts) trust preferred securities mature in 2036, 2034, and 2034, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.


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Shareholders' Equity and Capital Adequacy

BancShares and FCB are required to meet minimum capital requirements imposed by regulatory authorities. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.

In accordance with accounting principles generally accepted in the United States of America (GAAP), unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive income (AOCI)within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios. In the aggregate, these items represented a net reduction in shareholders' equity of $23.8 million at March 31, 2016, compared to a net reduction of $64.4 million at December 31, 2015 and a net reduction of $35.4 million at March 31, 2015. The $40.6 million change in AOCI from December 31, 2015 was primarily driven by an increase in unrealized gains on investment securities available for sale. The $11.6 million change in AOCI from March 31, 2015 was driven by the increase in unrealized gains on investment securities available for sale and the change in the funded status of the defined benefit plans.

Table 14
Analysis of Capital Adequacy
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
Regulatory
minimum
 
Well-capitalized requirement
BancShares
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.58
%
 
12.65
%
 
12.92
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.58

 
12.51

 
12.77

 
4.50

 
6.50

Total risk-based capital
14.09

 
14.03

 
14.42

 
8.00

 
10.00

Tier 1 leverage ratio
9.00

 
8.96

 
8.90

 
4.00

 
5.00

 
 
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.35
%
 
12.64
%
 
12.88
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.35

 
12.64

 
12.88

 
4.50

 
6.50

Total risk-based capital
13.32

 
13.61

 
13.92

 
8.00

 
10.00

Tier 1 leverage ratio
8.84

 
8.95

 
8.89

 
4.00

 
5.00

Bank regulatory agencies approved regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for banking organizations. The final rules set new minimum requirements for both the quantity and quality of capital held by BancShares and included a new common equity Tier 1 capital to risk-weighted assets ratio. A new capital conservation buffer was also established and was phased in beginning January 1, 2016 at 0.625 percent of risk-weighted assets and will increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.50 percent on January 1, 2019. BancShares and FCB had capital conservation buffers above minimum risk-based capital requirements of 6.09 percent and 5.32 percent, respectively, at March 31, 2016. The buffers exceed the 0.625 percent requirement and, therefore, result in no limit on distributions.
As of March 31, 2016, BancShares continues to exceed minimum capital standards and FCB remains well-capitalized under the new rules. BancShares remained well capitalized with a leverage capital ratio of 9.00 percent, Tier 1 risk-based capital ratio of 12.58 percent, common equity Tier 1 ratio of 12.58 and total risk-based capital ratio of 14.10 percent under Basel III guidelines at March 31, 2016.
BancShares had no trust preferred capital securities included in Tier 1 capital at March 31, 2016, compared to $32.1 million at December 31, 2015. The decrease during 2016 was due to the implementation of Basel III. Effective January 1, 2015, 75 percent of our trust preferred capital securities were excluded from Tier 1 capital and the remaining 25 percent were phased out on January 1, 2016 under Basel III requirements. Trust preferred capital securities continue to be a component of total risk-based capital.

RISK MANAGEMENT
Risk is inherent in any business and, as is the case with other management functions, senior management has primary responsibility for day-to-day management of the risks we face.  The Board of Directors strive to ensure that risk management is part of the business culture and that policies and procedures for assessing, monitoring, and limiting risk are part of the daily decision-making process. The Board of Director’s role in risk oversight is an integral part of our overall enterprise risk

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management framework.  The Board of Directors administers its risk oversight function primarily through committees which may be established as separate or joint committees of the board, including a joint Risk Committee that oversees enterprise-wide risk management.
The Risk Committee structure is designed to allow for information flow and escalation of risk related issues. Among the duties and responsibilities as may be assigned from time to time by the Board of Directors, the Risk Committee is directed to monitor and advise the board regarding risk exposures, including credit, market, liquidity, operational, compliance, legal, strategic and reputational risks; review, approve and monitor adherence to risk appetite and supporting risk tolerance levels; evaluate, monitor and oversee the adequacy and effectiveness of the risk management framework; and review reports of examination by and communications from regulatory agencies, and the results of internal and third party testing, analyses and reviews, related to risks, risk management, and any other matters within the scope of the Risk Committee’s oversight responsibilities, and monitor and review management’s response to any noted issues. In addition, the Risk Committee may coordinate with the Audit Committee for the review of financial statements and related risks and other areas of joint responsibility.
The Dodd-Frank Act mandated that stress tests be developed and performed to ensure that financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. Bank holding companies with total consolidated assets between $10 billion and $50 billion, including BancShares, will undergo annual company-run stress tests. As directed by the Federal Reserve, summaries of BancShares’ results in the severely adverse stress tests are available to the public. In combination with other risk management and monitoring practices, the results of stress testing activities will be considered as part of our risk management program.

Credit risk management. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Loans and leases, other than acquired loans, were underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans were recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both acquired and originated loans 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 an adequate ALLL that accounts for losses inherent in the loan and lease portfolio.

Interest rate risk management. Interest rate risk (IRR) 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.

We assess our short term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecast net interest income assuming stable rates. Rate shock scenarios represent an instantaneous and parallel shift in rates, up or down, from a base yield curve. Due to the current low level of interest rates and competitive pressures that constrain our ability to further reduce deposit interest rates, it is unlikely that the rates on most interest-bearing liabilities can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration of low rate deposit instruments to intermediate term fixed rate instruments, such as certificates of deposit, as rates rise. Various other IRR scenarios are modeled to supplement shock scenarios. This may include interest rate ramps, changes in the shape of the yield curve and changes in the relationships of FCB rates to market rates.

Table 15
Net Interest Income Sensitivity Simulation Analysis

This table provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of March 31, 2016 and December 31, 2015.
 
Estimated increase (decrease) in net interest income
Change in interest rate (basis point)
March 31, 2016
 
December 31, 2015
+100
4.20
%
 
2.78
 %
+200
5.21

 
2.80

+300
2.01

 
(0.75
)
The change in net interest income sensitivity metrics at March 31, 2016 compared to December 31, 2015 was primarily due to a decrease in intermediate and long-term treasury and swap rates which resulted in a change to the expected deposit mix.


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Table 16
Economic Value of Equity Modeling Analysis

Long-term interest rate risk exposure is measured using the economic value of equity (EVE) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. This table presents the EVE profile as of March 31, 2016 and December 31, 2015.
 
Estimated increase (decrease) in EVE
Change in interest rate (basis point)
March 31, 2016
 
December 31, 2015
+100
5.39
%
 
3.18
 %
+200
5.25

 
1.53

+300
0.16

 
(3.92
)

The improvement in the economic value of equity metrics at March 31, 2016 compared to December 31, 2015 was primarily due a decrease in intermediate and long-term treasury and swap rates which had a favorable impact on deposits and EVE risk.

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. See Note M to the Consolidated Financial Statements, "Derivatives," for additional discussion of this interest rate swap.

Liquidity risk management. Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term deposits (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operation, legal and reputation risks that can affect an institution’s liquidity risk profile.

We utilize various limit-based measures to monitor, measure and control liquidity risk across three different types of liquidity:
Tactical liquidity measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
Structural liquidity measures the amount by which illiquid assets are supported by long-term funding; and
Contingent liquidity utilizes cash flow stress testing across three crisis scenarios to determine the adequacy of our liquidity.

We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary sources of liquidity are our retail deposit book due to the generally stable balances and low cost it offers, cash in excess of our reserve requirement at the Federal Reserve Bank and various other corresponding bank accounts and unencumbered securities, all of which were $4.24 billion at March 31, 2016 compared to $3.96 billion at December 31, 2015. Another source of available funds is advances from the FHLB of Atlanta. Outstanding FHLB advances were $595.2 million as of March 31, 2016, and we had sufficient collateral pledged to secure $5.50 billion of additional borrowings. We also maintain Federal Funds lines and other borrowing facilities which had $790.0 million of available capacity at March 31, 2016.

CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our Critical Accounting Policies as described in our 2015 Annual Report on Form 10-K.


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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.
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 March 31, 2016, BancShares’ market risk profile has not changed significantly from December 31, 2015, as discussed in the Form 10-K. 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 first quarter of 2016 that had materially affected, or is reasonably likely to materially affect, BancShares' internal control over financial reporting.

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PART II

Item 1. 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 L of BancShares' Notes to Unaudited Consolidated Financial Statements.
 
Item 1A.
Risk Factors

There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 27, 2015, the Board of Directors approved a stock trading plan that provides for the purchase of up to 200,000 shares of Registrant's Class A common stock. The shares may be purchased from time to time from November 1, 2015 through October 31, 2016. 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.
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:
May 5, 2016
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ CRAIG L. NIX
 
 
 
 
Craig L. Nix
 
 
 
 
Chief Financial Officer

60