FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2019 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________

FORM 10-Q

____________________________________________________

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019

☐ 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 /DE/

(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)

____________________________________________________

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:



Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, Par Value $1	FCNCA	NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934.

Class B Common Stock, Par Value $1

(Title of class)

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 ☒ 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 ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Class A Common Stock—10,105,120 shares

Class B Common Stock—1,005,185 shares

(Number of shares outstanding, by class, as of August 2, 2019)

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INDEX



		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Unaudited)	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6

	Consolidated Statements of Cash Flows (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 6.	Exhibits	61

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PART I


Item 1.	Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



(Dollars in thousands, unaudited)	June 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	284,147		$	327,440
Overnight investments	1,640,264			797,406
Investment in marketable equity securities (cost of $80,542 at June 30, 2019 and $73,809 at December 31, 2018)	111,489			92,599
Investment securities available for sale (cost of $4,362,725 at June 30, 2019 and $4,607,117 at December 31, 2018)	4,366,041			4,557,110
Investment securities held to maturity (fair value of $2,285,283 at June 30, 2019 and $2,201,502 at December 31, 2018)	2,218,048			2,184,653
Loans held for sale	52,837			45,505
Loans and leases	26,728,237			25,523,276
Allowance for loan and lease losses	(226,583		)	(223,712		)
Net loans and leases	26,501,654			25,299,564
Premises and equipment	1,213,296			1,204,179
Other real estate owned	46,236			48,030
Income earned not collected	115,303			109,903
Goodwill	296,764			236,347
Other intangible assets	69,575			72,298
Other assets	739,440			433,595
Total assets	$	37,655,094		$	35,408,629
Liabilities
Deposits:
Noninterest-bearing	$	12,950,394		$	11,882,670
Interest-bearing	19,769,277			18,789,790
Total deposits	32,719,671			30,672,460
Securities sold under customer repurchase agreements	544,527			543,936
Federal Home Loan Bank borrowings	197,131			193,556
Subordinated debentures	154,277			140,741
Other borrowings	18,446			13,921
FDIC shared-loss payable	108,892			105,618
Other liabilities	337,537			249,443
Total liabilities	34,080,481			31,919,675
Shareholders’ equity
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 10,174,720 and 10,623,220 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)	10,175			10,623
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at June 30, 2019 and December 31, 2018)	1,005			1,005
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018)	—			—
Surplus	303,880			493,962
Retained earnings	3,440,284			3,218,551
Accumulated other comprehensive loss	(180,731		)	(235,187		)
Total shareholders’ equity	3,574,613			3,488,954
Total liabilities and shareholders’ equity	$	37,655,094		$	35,408,629

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income



	Three months ended June 30				Six months ended June 30
(Dollars in thousands, except per share data, unaudited)	2019		2018		2019		2018
Interest income
Loans and leases	$	303,233	$	261,086	$	594,155	$	513,068
Investment securities interest and dividend income	40,209		37,179		79,821		72,199
Overnight investments	7,279		5,612		13,669		11,211
Total interest income	350,721		303,877		687,645		596,478
Interest expense
Deposits	19,158		4,521		32,084		8,277
Securities sold under customer repurchase agreements	515		373		974		777
Federal Home Loan Bank borrowings	1,586		852		2,871		3,236
Subordinated debentures	1,952		1,653		3,624		3,094
Other borrowings	162		259		272		438
Total interest expense	23,373		7,658		39,825		15,822
Net interest income	327,348		296,219		647,820		580,656
Provision for loan and lease losses	5,198		8,438		16,948		16,043
Net interest income after provision for loan and lease losses	322,150		287,781		630,872		564,613
Noninterest income
Cardholder services, net	18,479		14,925		35,112		29,707
Merchant services, net	6,455		6,478		12,290		12,655
Service charges on deposit accounts	25,790		25,952		50,855		52,495
Wealth management services	24,573		25,515		49,574		49,084
Securities gains, net	5,719		—		5,719		—
Marketable equity securities gains, net	3,144		4,440		14,472		5,411
Other service charges and fees	8,164		7,756		15,586		15,236
Mortgage income	5,038		4,703		8,696		8,940
Insurance commissions	2,854		2,940		6,145		6,716
ATM income	1,625		2,217		3,136		4,388
Gain on extinguishment of debt	—		—		—		25,814
Other	5,034		6,001		8,953		13,165
Total noninterest income	106,875		100,927		210,538		223,611
Noninterest expense
Salaries and wages	136,526		129,841		268,947		259,044
Employee benefits	30,197		29,715		62,732		61,806
Occupancy expense	26,886		26,100		54,647		54,054
Equipment expense	28,489		25,167		55,229		50,141
Processing fees paid to third parties	6,641		7,890		13,730		16,086
FDIC insurance expense	2,757		5,492		5,417		11,225
Collection and foreclosure-related expenses	3,659		3,974		6,681		8,120
Merger-related expenses	4,084		2,412		5,803		3,010
Other	34,158		35,402		67,868		70,570
Total noninterest expense	273,397		265,993		541,054		534,056
Income before income taxes	155,628		122,715		300,356		254,168
Income taxes	36,269		29,424		69,638		60,646
Net income	$	119,359	$	93,291	$	230,718	$	193,522
Weighted average shares outstanding	11,286,520		12,010,405		11,402,122		12,010,405
Net income per share	$	10.56	$	7.77	$	20.23	$	16.11

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 June 30						Six months ended June 30
(Dollars in thousands, unaudited)	2019			2018			2019			2018
Net income	$	119,359		$	93,291		$	230,718		$	193,522
Other comprehensive income (loss)
Unrealized gains on securities available for sale:
Change in unrealized gains on securities available for sale arising during period	30,971			82,789			59,042			4,154
Tax effect	(7,123		)	(19,042		)	(13,579		)	(954		)
Reclassification adjustment for gains included in income before income taxes	(5,719		)	—			(5,719		)	—
Tax effect	1,315			—			1,315			—
Total change in unrealized gains on securities available for sale, net of tax	19,444			63,747			41,059			3,200
Unrealized losses on securities available for sale transferred to held to maturity:
Unrealized losses on securities available for sale transferred to held to maturity	—			(109,507		)	—			(109,507		)
Tax effect	—			25,186			—			25,186
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity	5,947			4,473			11,909			4,473
Tax effect	(1,368		)	(1,028		)	(2,739		)	(1,028		)
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax	4,579			(80,876		)	9,170			(80,876		)
Change in pension obligation:
Amortization of actuarial losses and prior service cost	2,735			3,654			5,490			6,991
Tax effect	(629		)	(840		)	(1,263		)	(1,608		)
Total change in pension obligation, net of tax	2,106			2,814			4,227			5,383
Other comprehensive income (loss)	26,129			(14,315		)	54,456			(72,293		)
Total comprehensive income	$	145,488		$	78,976		$	285,174		$	121,229

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



	Three months ended June 30
(Dollars in thousands, unaudited)	Class A Common Stock			Class B Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at March 31, 2018	$	11,005		$	1,005	$	658,918		$	2,931,509		$	(230,323	)	$	3,372,114
Net income	—			—		—			93,291			—			93,291
Other comprehensive loss, net of tax	—			—		—			—			(14,315		)	(14,315		)
Cash dividends declared ($0.35 per share)
Class A common stock	—			—		—			(3,852		)	—			(3,852		)
Class B common stock	—			—		—			(352		)	—			(352		)
Balance at June 30, 2018	$	11,005		$	1,005	$	658,918		$	3,020,596		$	(244,638	)	$	3,446,886

Balance at March 31, 2019	$	10,380		$	1,005	$	393,449		$	3,325,335		$	(206,860	)	$	3,523,309
Net income	—			—		—			119,359			—			119,359
Other comprehensive income, net of tax	—			—		—			—			26,129			26,129
Repurchase of 205,500 shares of Class A common stock	(205		)	—		(89,569		)	—			—			(89,774		)
Cash dividends declared ($0.40 per share)
Class A common stock	—			—		—			(4,008		)	—			(4,008		)
Class B common stock	—			—		—			(402		)	—			(402		)
Balance at June 30, 2019	$	10,175		$	1,005	$	303,880		$	3,440,284		$	(180,731	)	$	3,574,613



	Six months ended June 30
(Dollars in thousands, unaudited)	Class A Common Stock			Class B Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2017	$	11,005		$	1,005	$	658,918		$	2,785,430		$	(122,294	)	$	3,334,064
Cumulative effect of adoption of ASU 2016-01	—			—		—			18,715			(18,715		)	—
Cumulative effect of adoption of ASU 2018-02	—			—		—			31,336			(31,336		)	—
Net income	—			—		—			193,522			—			193,522
Other comprehensive loss, net of tax	—			—		—			—			(72,293		)	(72,293		)
Cash dividends declared ($0.70 per share)
Class A common stock	—			—		—			(7,703		)	—			(7,703		)
Class B common stock	—			—		—			(704		)	—			(704		)
Balance at June 30, 2018	$	11,005		$	1,005	$	658,918		$	3,020,596		$	(244,638	)	$	3,446,886

Balance at December 31, 2018	$	10,623		$	1,005	$	493,962		$	3,218,551		$	(235,187	)	$	3,488,954
Net income	—			—		—			230,718			—			230,718
Other comprehensive income, net of tax	—			—		—			—			54,456			54,456
Repurchase of 448,500 shares of Class A common stock	(448		)	—		(190,082		)	—			—			(190,530		)
Cash dividends declared ($0.80 per share)
Class A common stock	—			—		—			(8,181		)	—			(8,181		)
Class B common stock	—			—		—			(804		)	—			(804		)
Balance at June 30, 2019	$	10,175		$	1,005	$	303,880		$	3,440,284		$	(180,731	)	$	3,574,613

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	Six months ended June 30
(Dollars in thousands, unaudited)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	230,718		$	193,522
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses	16,948			16,043
Deferred tax expense (benefit)	5,126			(2,835		)
Net change in current taxes	(23,826		)	(16,609		)
Depreciation	50,574			47,343
Net increase (decrease) in accrued interest payable	10,485			(2,043		)
Net increase in income earned not collected	(1,747		)	(1,601		)
Securities gains, net	(5,719		)	—
Marketable equity securities gains, net	(14,472		)	(5,411		)
Gain on extinguishment of debt	—			(25,814		)
Origination of loans held for sale	(328,481		)	(304,580		)
Proceeds from sale of loans held for sale	326,640			302,766
Gain on sale of loans held for sale	(6,096		)	(5,610		)
Gain on sale of portfolio loans	(299		)	—
Net write-downs/losses on other real estate	1,417			2,698
Losses on premises and equipment	716			991
Net accretion of premiums and discounts	(19,765		)	(17,240		)
Amortization of intangible assets	12,019			11,562
Net change in FDIC payable for shared-loss agreements	3,274			2,145
Net change in mortgage servicing rights	(2,283		)	(2,630		)
Net change in other assets	(13,091		)	313,265
Net change in other liabilities	(22,373		)	14,998
Net cash provided by operating activities	219,765			520,960
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding	(168,572		)	(360,764		)
Purchases of investment securities available for sale	(1,553,876		)	(920,357		)
Purchases of investment securities held to maturity	(183,288		)	—
Purchases of marketable equity securities	(14,108		)	(2,818		)
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity	190,644			78,384
Proceeds from maturities, calls, and principal repayments of investment securities available for sale	1,061,895			797,739
Proceeds from sales of investment securities available for sale	610,787			119,273
Proceeds from sales of marketable equity securities	10,694			8,493
Net (increase) decrease in overnight investments	(840,371		)	175,009
Proceeds from sales of portfolio loans	24,247			—
Proceeds from sales of other real estate	11,884			15,769
Proceeds from sales of premises and equipment	75			198
Purchases of premises and equipment	(54,873		)	(60,594		)
Business acquisitions, net of cash acquired	(73,792		)	(106,298		)
Net cash used in investing activities	(978,654		)	(255,966		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits	291,930			(181,889		)
Net increase in demand and other interest-bearing deposits	762,021			704,909
Net decrease in short-term borrowings	(109,109		)	(201,303		)
Repayment of long-term obligations	(33,008		)	(653,929		)
Repurchase of common stock	(186,995		)	—
Cash dividends paid	(9,243		)	(8,407		)
Net cash provided by (used in) financing activities	715,596			(340,619		)
Change in cash and due from banks	(43,293		)	(75,625		)
Cash and due from banks at beginning of period	327,440			336,150
Cash and due from banks at end of period	$	284,147		$	260,525
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	$	5,710		$	11,868
Dividends declared but not paid	4,410			4,204
Unsettled maturities of investment securities	150,122			—
Unsettled purchases of investment securities	1,126			—
Reclassification of portfolio loans to loans held for sale	23,948			—
Reclassification of loans held for sale to portfolio	605			—
Transfers of premises and equipment to other real estate	2,184			—
Transfer of investment securities available for sale to held to maturity	—			2,486,761
Unsettled common stock repurchases	3,535			—
Initial recognition of operating lease assets	70,652			—
Initial recognition of operating lease liabilities	71,793			—

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 notes to consolidated financial statements included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2018.

Reclassifications

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

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. The estimates that BancShares considers significant are the allowance for loan and lease losses, fair value measurements, Federal Deposit Insurance Corporation (FDIC) shared-loss payable, pension plan assumptions, goodwill and other intangible assets, and income taxes.

Share Repurchases

In October 2018, BancShares' Board of Directors (Board) authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period November 1, 2018 through October 31, 2019. The authorization does not obligate BancShares to repurchase any particular amount of shares, and repurchases may be suspended or discontinued at any time. During the second quarter of 2019, BancShares repurchased 205,500 shares of Class A common stock for $89.8 million at an average cost per share of $436.81. During the first six months of 2019, BancShares repurchased a total of 448,500 shares of Class A common stock for $190.5 million at an average cost per share of $424.77. As of June 30, 2019, a total of 630,500 shares have been repurchased under the current Board authority. There were no share repurchases made during the comparable periods in 2018.

In April 2019, the Board authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period July 1, 2019 through June 30, 2020. This authorization was effective July 1, 2019 and supersedes the authorization approved in October 2018. Under this authorization and subsequent to quarter-end through August 2, 2019, BancShares repurchased an additional 69,600 shares of Class A common stock for $31.7 million at an average cost per share of $455.94.

Recently Adopted Accounting Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (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 prior standards and this ASU is the requirement for lessees to recognize all lease contracts on their balance sheet. This ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the previous 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 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.

We adopted this standard, as of January 1, 2019, using the effective date method that allows for entities to initially apply the new leases standard at the adoption date. In addition, we made several policy elections permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification. We determined that most renewal options would not be reasonably determinable in estimating the expected lease term.

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We made the policy election available under Topic 842 to combine lease and non-lease components and applied this practical expedient to leases in effect prior to the date of adoption. We will continue to apply the practical expedient to all leases entered into going forward.

The adoption of the new standard had an impact on our Consolidated Balance Sheet as of January 1, 2019, with the recording of operating Right-of-Use (ROU) assets and operating lease liabilities of $70.7 million and $71.8 million, respectively. The operating lease liability includes a $1.1 million fair value adjustment for leases assumed in the acquisition of HomeBancorp, Inc. (HomeBancorp). In addition, at the adoption date we had finance lease ROU assets and finance lease liabilities, previously classified as capital leases, of $9.1 million and $8.3 million, respectively. The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings at commencement. The Company has no related party lease agreements. This ASU did not have a material impact on our Consolidated Statements of Income. See Note N in the Consolidated Financial Statements for additional disclosures.

Recently Issued Accounting Pronouncements

FASB ASU 2018-15 - Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (1) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (2) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement (3) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element (4) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. BancShares adopted this standard effective July 1, 2019 on a prospective basis. BancShares is currently evaluating the impact of this ASU adoption, but does not anticipate a material impact on our Consolidated Financial Statements.

FASB ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020. Early adoption is permitted for all entities. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2021.

FASB ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public business entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2020.

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FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.

This ASU will be effective for BancShares' annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We expect to adopt the guidance for our annual impairment test in fiscal year 2020. BancShares does not anticipate any impact to our consolidated financial position or consolidated results of operations as a result of the adoption.

FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

This ASU introduces a new credit loss methodology which requires earlier recognition of credit losses, replacing multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.

For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities. A cross-functional team co-led by Corporate Finance and Risk Management is in place to implement the new standard. We have completed preliminary current expected credit losses (CECL) accounting interpretations, and continue to refine and test our models, estimation techniques, data, operational processes and controls to be used in preparing CECL loss estimates. During the remainder of 2019, we expect to address any gaps in our interpretations, including review of subsequent ASUs announced by the FASB regarding Topic 326, methodology, data and operational processes based upon our reviews and tests. BancShares continues to evaluate the impact of this standard on its consolidated financial statements but the magnitude of this impact has not been determined. The final impact will be dependent on, among other items, loan portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts in place at that time.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. BancShares will adopt the guidance in the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.

NOTE B - BUSINESS COMBINATIONS

Entegra Financial Corp.

On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment.The total transaction value is estimated to be approximately $219.8 million. The transaction is anticipated to close during the fourth quarter of 2019, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. As of June 30, 2019, Entegra reported $1.66 billion in consolidated assets, $1.25 billion in deposits and $1.09 billion in loans.

First South Bancorp, Inc.

On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp, Inc. (First South Bancorp) and its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of $1.15 per share was paid to the shareholders of First South Bancorp for each share of common stock, totaling approximately $37.5 million. The merger allows FCB to expand its presence in South Carolina.

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The First South Bancorp 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 $239.2 million, including $162.8 million in non-purchased credit impaired (non-PCI) loans, $16.4 million in purchased credit impaired (PCI) loans and $2.3 million in a core deposit intangible. Liabilities assumed were $215.6 million, of which $207.6 million were deposits. As a result of the transaction, FCB recorded $13.9 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.

Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were separated into loans with evidence of credit deterioration, which are accounted for under ASC 310-30 (PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (non-PCI loans).

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:



(Dollars in thousands)	As recorded by FCB
Purchase price			$	37,486
Assets
Cash and due from banks	$	4,633
Overnight investments	3,188
Investment securities	23,512
Loans	179,243
Premises and equipment	4,944
Other real estate owned	1,567
Income earned not collected	604
Intangible assets	2,268
Other assets	19,192
Total assets acquired	239,151
Liabilities
Deposits	207,556
Borrowings	5,155
Other liabilities	2,850
Total liabilities assumed	$	215,561
Fair value of net assets acquired			23,590
Goodwill recorded for First South Bancorp			$	13,896

Merger-related expenses of $1.2 million and $1.4 million were recorded in the Consolidated Statements of Income for the three and six months ended June 30, 2019, respectively. Loan-related interest income generated from First South Bancorp was approximately $1.7 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.

Biscayne Bancshares, Inc.

On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (Biscayne Bancshares) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 per share was paid to the shareholders of Biscayne Bancshares for each share of common stock, totaling approximately $118.9 million. The merger will allow FCB to expand its presence in Florida and enhance banking efforts in South Florida.

The Biscayne Bancshares 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 $1.03 billion, including $850.4 million in non-purchased credit impaired (non-PCI) loans, $13.0 million in purchased credit impaired (PCI) loans and $4.7 million in a core deposit intangible. Liabilities assumed were $956.8 million, of which $786.5 million were deposits. As a result of the transaction, FCB recorded $46.5 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.

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The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:



(Dollars in thousands)	As recorded by FCB
Purchase price			$	118,949
Assets
Cash and due from banks	$	78,010
Overnight investments	306
Investment securities held to maturity	34,539
Loans	863,384
Premises and equipment	1,533
Other real estate owned	2,046
Income earned not collected	3,049
Intangible assets	4,745
Other assets	41,572
Total assets acquired	1,029,184
Liabilities
Deposits	786,512
Borrowings	157,415
Other liabilities	12,829
Total liabilities assumed	$	956,756
Fair value of net assets acquired			72,428
Goodwill recorded for Biscayne Bancshares			$	46,521

Merger-related expenses of $2.2 million and $3.0 million were recorded in the Consolidated Statements of Income for the three and six months ended June 30, 2019, respectively. Loan-related interest income generated from Biscayne Bancshares was approximately $11.5 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.

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NOTE C - INVESTMENTS

The amortized cost and fair value of investment securities at June 30, 2019 and December 31, 2018, were as follows:



	June 30, 2019
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	946,859	$	1,625	$	82	$	948,402
Government agency	533,269		1,724		189		534,804
Mortgage-backed securities	2,734,696		7,420		8,418		2,733,698
Corporate bonds	147,901		1,591		355		149,137
Total investment securities available for sale	4,362,725		12,360		9,044		4,366,041
Investment in marketable equity securities	80,542		31,163		216		111,489
Investment securities held to maturity
Mortgage-backed securities	2,182,500		67,235		—		2,249,735
Other	35,548		—		—		35,548
Total investment securities held to maturity	2,218,048		67,235		—		2,285,283
Total investment securities	$	6,661,315	$	110,758	$	9,260	$	6,762,813

	December 31, 2018
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,249,243	$	633	$	2,166	$	1,247,710
Government agency	257,252		222		639		256,835
Mortgage-backed securities	2,956,793		5,309		52,763		2,909,339
Corporate bonds	143,829		261		864		143,226
Total investment securities available for sale	4,607,117		6,425		56,432		4,557,110
Investment in marketable equity securities	73,809		19,010		220		92,599
Investment securities held to maturity
Mortgage-backed securities	2,184,653		17,339		490		2,201,502
Total investment securities	$	6,865,579	$	42,774	$	57,142	$	6,851,211

Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Investments in government agency securities represent securities issued by the United States Small Business Administration. Investments in corporate bonds and marketable equity securities represent positions in securities of other financial institutions. Other available for sale investments include trust preferred securities of financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions, acquired in the Biscayne Bancshares acquisition. BancShares also holds approximately 298,000 shares of Visa Class B common stock. BancShares' Visa Class B shares are not considered to have a readily determinable fair value and are included in the Consolidated Balance Sheet with no fair value.

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The following table provides the amortized cost and fair value by contractual maturity for investment securities available for sale and held to 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, while repayments of certain corporate bonds are subject to call provisions that can be exercised by the issuer at their discretion.



	June 30, 2019				December 31, 2018
(Dollars in thousands)	Cost		Fair value		Cost		Fair value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	897,407	$	898,632	$	1,049,253	$	1,047,380
One through five years	54,935		55,320		205,526		205,805
Five through 10 years	138,484		139,462		134,370		133,626
Over 10 years	3,934		4,125		3,923		4,125
Government agency	533,269		534,804		257,252		256,835
Mortgage-backed securities	2,734,696		2,733,698		2,956,793		2,909,339
Total investment securities available for sale	$	4,362,725	$	4,366,041	$	4,607,117	$	4,557,110
Investment securities held to maturity
Non-amortizing securities maturing in:
One year or less	34,550		34,550		—		—
One through five years	998		998		—		—
Mortgage-backed securities	2,182,500		2,249,735		2,184,653		2,201,502
Total investment securities held to maturity	$	2,218,048	$	2,285,283	$	2,184,653	$	2,201,502

There were gross gains of $5.7 million on sales of investment securities available for sale for the three and six months ended June 30, 2019. There were no gross losses on sales of investment securities available for sale during this period. There were no gross gains or losses on sales of investment securities available for sale for the six months ended June 30, 2018.

The following table provides the realized and unrealized gains on marketable equity securities for the three and six months ended June 30, 2019:



	Three months ended June 30				Six months ended June 30
(Dollars in thousands)	2019		2018		2019		2018
Marketable equity securities gains, net	$	3,144	$	4,440	$	14,472	$	5,411
Less net gains recognized on marketable equity securities sold	2,271		139		2,315		235
Unrealized gains recognized on marketable equity securities held	$	873	$	4,301	$	12,157	$	5,176

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The following table provides information regarding securities with unrealized losses as of June 30, 2019 and December 31, 2018:



	June 30, 2019
	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
U.S. Treasury	$	—	$	—	$	150,248	$	82	$	150,248	$	82
Government agency	39,456		25		58,879		164		98,335		189
Mortgage-backed securities	109,521		288		1,448,894		8,130		1,558,415		8,418
Corporate bonds	31,090		222		7,560		133		38,650		355
Total	$	180,067	$	535	$	1,665,581	$	8,509	$	1,845,648	$	9,044

	December 31, 2018
	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
U.S. Treasury	$	248,983	$	113	$	848,622	$	2,053	$	1,097,605	$	2,166
Government agency	115,273		601		2,310		38		117,583		639
Mortgage-backed securities	262,204		2,387		1,940,695		50,376		2,202,899		52,763
Corporate bonds	79,066		842		5,000		22		84,066		864
Total	$	705,526	$	3,943	$	2,796,627	$	52,489	$	3,502,153	$	56,432
Investment securities held to maturity
Mortgage-backed securities	$	5,111	$	181	$	10,131	$	309	$	15,242	$	490

As of June 30, 2019, there were 200 investment securities available for sale that had continuous losses for more than 12 months of which 197 were government sponsored enterprise-issued mortgage-backed securities or government agency securities, one was a U.S. Treasury security and two were corporate bonds.

None of the unrealized losses identified as of June 30, 2019 or December 31, 2018 relate to the marketability of the securities or the issuers' ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the debt securities were purchased. BancShares has 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.

Debt securities having an aggregate carrying value of $3.75 billion at June 30, 2019 and $4.03 billion at December 31, 2018 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

NOTE D - LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are non-purchased credit impaired (Non-PCI) or purchased credit impaired (PCI). Loans that were originated by FCB, as well as loans that are performing under their contractual obligations at acquisition, are classified as Non-PCI. Loans that reflect credit deterioration since origination, such that it is probable at acquisition that FCB will be unable to collect all contractually required payments, are classified as PCI. Additionally, at the date of acquisition, all acquired loans are recorded at fair value with no corresponding allowance for loan and lease losses.

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Loans and leases outstanding included the following at June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019		December 31, 2018
Non-PCI loans and leases:
Commercial:
Construction and land development	$	719,534	$	757,854
Commercial mortgage	11,336,684		10,717,234
Other commercial real estate	506,760		426,985
Commercial and industrial and leases	3,980,504		3,938,730
Other	301,346		296,424
Total commercial loans	16,844,828		16,137,227
Noncommercial:
Residential mortgage	4,790,636		4,265,687
Revolving mortgage	2,470,653		2,542,975
Construction and land development	315,071		257,030
Consumer	1,755,602		1,713,781
Total noncommercial loans	9,331,962		8,779,473
Total non-PCI loans and leases	26,176,790		24,916,700
PCI loans:
Total PCI loans	551,447		606,576
Total loans and leases	$	26,728,237	$	25,523,276

At June 30, 2019, $9.16 billion in non-PCI loans with a lendable collateral value of $6.45 billion were used to secure $183.7 million in Federal Home Loan Bank (FHLB) of Atlanta advances and $13.5 million in FHLB of Chicago advances, resulting in additional borrowing capacity of $6.26 billion. At December 31, 2018, $9.12 billion in non-PCI loans with a lendable collateral value of $6.36 billion were used to secure $175.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.18 billion.

At June 30, 2019, $2.73 billion in non-PCI loans with a lendable collateral value of $2.09 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). At December 31, 2018, $2.94 billion in non-PCI loans with a lendable collateral value of $2.19 billion were used to secure additional borrowing capacity at the FRB.

Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. In addition, we may change our strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value. Since December 31, 2018, $23.9 million in portfolio loans were transfered to held for sale and subsequently sold. Loans held for sale totaled $52.8 million and $45.5 million at June 30, 2019 and December 31, 2018, respectively.

Net deferred fees on non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were $0.5 million and $0.1 million at June 30, 2019 and December 31, 2018, respectively. The net unamortized discount related to purchased non-PCI loans and leases was $35.7 million at June 30, 2019 and $33.3 million at December 31, 2018. During the three months ended June 30, 2019 and June 30, 2018, accretion income on purchased non-PCI loans and leases was $3.3 million and $4.1 million, respectively. During the six months ended June 30, 2019 and June 30, 2018, accretion income on purchased non-PCI loans and leases was $6.5 million and $7.0 million, respectively.

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Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segments 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. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. Commercial credit cards are included in the Commercial and industrial and leases segment, but are not specifically graded as with other commercial loans. The indicators as of the date presented are based on the most recent assessment performed and are defined below:

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 any 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 affected 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 June 30, 2019 and December 31, 2018 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, lease financing and other commercial real estate loans.

The credit quality indicators for non-PCI and PCI noncommercial loans are based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases.

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Non-PCI loans and leases outstanding at June 30, 2019 and December 31, 2018 by credit quality indicator are provided below:



	June 30, 2019
(Dollars in thousands)	Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Total non-PCI commercial loans and leases
Pass	$	716,068	$	11,093,853	$	502,168	$	3,825,956	$	300,335	$	16,438,380
Special mention	1,016		111,721		3,575		46,960		470		163,742
Substandard	2,450		131,110		1,017		38,080		541		173,198
Doubtful	—		—		—		96		—		96
Ungraded	—		—		—		69,412		—		69,412
Total	$	719,534	$	11,336,684	$	506,760	$	3,980,504	$	301,346	$	16,844,828

	December 31, 2018
(Dollars in thousands)	Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Total non-PCI commercial loans and leases
Pass	$	753,985	$	10,507,687	$	422,500	$	3,778,797	$	294,700	$	15,757,669
Special mention	1,369		114,219		3,193		54,814		1,105		174,700
Substandard	2,500		92,743		1,292		30,688		619		127,842
Doubtful	—		—		—		354		—		354
Ungraded	—		2,585		—		74,077		—		76,662
Total	$	757,854	$	10,717,234	$	426,985	$	3,938,730	$	296,424	$	16,137,227



	June 30, 2019
	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	$	4,736,063	$	2,444,047	$	312,985	$	1,740,946	$	9,234,041
30-59 days past due	26,250		14,044		255		8,645		49,194
60-89 days past due	13,109		3,207		214		3,099		19,629
90 days or greater past due	15,214		9,355		1,617		2,912		29,098
Total	$	4,790,636	$	2,470,653	$	315,071	$	1,755,602	$	9,331,962

	December 31, 2018
	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	$	4,214,783	$	2,514,269	$	254,837	$	1,696,321	$	8,680,210
30-59 days past due	28,239		12,585		581		10,035		51,440
60-89 days past due	7,357		4,490		21		3,904		15,772
90 days or greater past due	15,308		11,631		1,591		3,521		32,051
Total	$	4,265,687	$	2,542,975	$	257,030	$	1,713,781	$	8,779,473

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PCI loans outstanding at June 30, 2019 and December 31, 2018 by credit quality indicator are provided below:



	June 30, 2019		December 31, 2018
(Dollars in thousands)	PCI commercial Loans
Grade:
Pass	$	138,300	$	141,922
Special mention	44,324		48,475
Substandard	90,019		101,447
Doubtful	2,994		4,828
Total	$	275,637	$	296,672



	June 30, 2019		December 31, 2018
(Dollars in thousands)	PCI noncommercial Loans
Current	$	244,196	$	268,280
30-59 days past due	8,691		11,155
60-89 days past due	4,763		7,708
90 days or greater past due	18,160		22,761
Total	$	275,810	$	309,904

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The aging of the outstanding non-PCI loans and leases, by class, at June 30, 2019 and December 31, 2018 are provided in the tables below. Loans and leases past due 30 days or less 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.



	June 30, 2019
(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:
Commercial:
Construction and land development	$	1,468	$	1,757	$	1,563	$	4,788	$	714,746	$	719,534
Commercial mortgage	14,025		9,073		7,213		30,311		11,306,373		11,336,684
Other commercial real estate	—		698		—		698		506,062		506,760
Commercial and industrial and leases	13,227		3,196		3,860		20,283		3,960,221		3,980,504
Other	68		5		—		73		301,273		301,346
Total commercial loans	28,788		14,729		12,636		56,153		16,788,675		16,844,828
Noncommercial:
Residential mortgage	26,250		13,109		15,214		54,573		4,736,063		4,790,636
Revolving mortgage	14,044		3,207		9,355		26,606		2,444,047		2,470,653
Construction and land development	255		214		1,617		2,086		312,985		315,071
Consumer	8,645		3,099		2,912		14,656		1,740,946		1,755,602
Total noncommercial loans	49,194		19,629		29,098		97,921		9,234,041		9,331,962
Total non-PCI loans and leases	$	77,982	$	34,358	$	41,734	$	154,074	$	26,022,716	$	26,176,790

	December 31, 2018
(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:
Commercial:
Construction and land development	$	516	$	9	$	444	$	969	$	756,885	$	757,854
Commercial mortgage	14,200		2,066		3,237		19,503		10,697,731		10,717,234
Other commercial real estate	91		76		300		467		426,518		426,985
Commercial and industrial and leases	9,655		1,759		2,892		14,306		3,924,424		3,938,730
Other	285		—		89		374		296,050		296,424
Total commercial loans	24,747		3,910		6,962		35,619		16,101,608		16,137,227
Noncommercial:
Residential mortgage	28,239		7,357		15,308		50,904		4,214,783		4,265,687
Revolving mortgage	12,585		4,490		11,631		28,706		2,514,269		2,542,975
Construction and land development	581		21		1,591		2,193		254,837		257,030
Consumer	10,035		3,904		3,521		17,460		1,696,321		1,713,781
Total noncommercial loans	51,440		15,772		32,051		99,263		8,680,210		8,779,473
Total non-PCI loans and leases	$	76,187	$	19,682	$	39,013	$	134,882	$	24,781,818	$	24,916,700

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The recorded investment, by class, in non-PCI loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at June 30, 2019 and December 31, 2018, were as follows:



	June 30, 2019				December 31, 2018
(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
Commercial:
Construction and land development	$	1,634	$	—	$	666	$	—
Commercial mortgage	20,859		440		12,594		—
Commercial and industrial and leases	5,944		703		4,624		808
Other commercial real estate	179		—		366		—
Other	230		—		279		—
Total commercial loans	28,846		1,143		18,529		808
Noncommercial:
Construction and land development	1,786		—		1,823		—
Residential mortgage	43,467		297		35,662		—
Revolving mortgage	24,145		34		25,563		—
Consumer	2,457		1,994		2,969		2,080
Total noncommercial loans	71,855		2,325		66,017		2,080
Total non-PCI loans and leases	$	100,701	$	3,468	$	84,546	$	2,888

Purchased non-PCI loans and leases

The following table relates to purchased non-PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date:



(Dollars in thousands)	Biscayne Bancshares		First South Bancorp
Contractually required payments	$	1,078,854	$	175,465
Fair value at acquisition date	850,352		162,845

The recorded fair values of purchased non-PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions as of the acquisition date are as follows:



(Dollars in thousands)	Biscayne Bancshares		First South Bancorp
Commercial:
Construction and land development	$	15,647	$	8,663
Commercial mortgage	203,605		74,713
Other commercial real estate	98,107		7,509
Commercial and industrial and leases	28,135		40,208
Total commercial loans	345,494		131,093
Noncommercial:
Residential mortgage	405,419		24,641
Revolving mortgage	54,081		2,162
Construction and land development	31,668		3,552
Consumer	13,690		1,397
Total noncommercial loans	504,858		31,752
Total non-PCI loans	$	850,352	$	162,845

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Purchased credit-impaired loans

The following table relates to PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected and the fair value of PCI loans at the acquisition date:



(Dollars in thousands)	Biscayne Bancshares		First South Bancorp
Contractually required payments	$	19,720	$	23,389
Contractual cash flows expected to be collected	16,815		21,392
Fair value at acquisition date	13,032		16,398

The recorded fair values of PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions as of the acquisition date are as follows:



(Dollars in thousands)	Biscayne Bancshares		First South Bancorp
Commercial:
Construction and land development	$	—	$	1,233
Commercial mortgage	7,589		9,355
Commercial and industrial and leases	1,660		1,202
Total commercial loans	9,249		11,790
Noncommercial:
Residential mortgage	3,783		4,591
Construction and land development	—		17
Total noncommercial loans	3,783		4,608
Total PCI loans	$	13,032	$	16,398

The following table provides changes in the carrying value of all PCI loans during the six months ended June 30, 2019 and June 30, 2018:



(Dollars in thousands)	2019			2018
Balance at January 1	$	606,576		$	762,998
Fair value of acquired loans	29,430			15,555
Accretion	29,648			32,188
Payments received and other changes, net	(114,207		)	(136,472		)
Balance at June 30	$	551,447		$	674,269
Unpaid principal balance at June 30	$	805,754		$	1,044,148

The carrying value of PCI loans on the cost recovery method was $3.3 million at both June 30, 2019 and December 31, 2018. The cost recovery method is applied to loans when the timing of future cash flows cannot be reasonably estimated due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was $4.3 million and $1.3 million at June 30, 2019 and December 31, 2018, respectively. The remaining discount on PCI loans was $93.0 million and $95.5 million at June 30, 2019 and December 31, 2018, respectively.

During the three months ended June 30, 2019 and June 30, 2018, accretion income on PCI loans was $11.9 million and $14.2 million, respectively. During the six months ended June 30, 2019 and June 30, 2018, accretion income on PCI loans was $29.6 million and $32.2 million, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flow 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 six months of 2019 and 2018:



(Dollars in thousands)	2019			2018
Balance at January 1	$	312,894		$	316,679
Additions from Biscayne Bancshares and First South Bancorp acquisitions	8,777			—
Additions from Homebancorp acquisition	—			4,142
Accretion	(29,648		)	(32,188		)
Reclassifications from nonaccretable difference	3,695			6,899
Changes in expected cash flows that do not affect nonaccretable difference	(15,682		)	48,988
Balance at June 30	$	280,036		$	344,520

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

Activity in the allowance for non-PCI loan and lease losses by class of loans is summarized as follows:



	Three months ended June 30, 2019
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial and leases			Other			Residential mortgage			Revolving mortgage			Construction and land development - non - commercial			Consumer			Total
Non-PCI Loans
Allowance for loan and lease losses:
Balance at April 1	$	37,476		$	45,281		$	2,399		$	57,025		$	2,167		$	16,987		$	21,495		$	2,473		$	34,492		$	219,795
Provision (credits)	(5,544		)	3,714			(57		)	2,699			(174		)	371			(328		)	277			4,877			5,835
Charge-offs	(28		)	(89		)	—			(3,422		)	(31		)	(478		)	(493		)	—			(6,061		)	(10,602		)
Recoveries	40			56			—			599			221			52			447			—			1,797			3,212
Balance at June 30	$	31,944		$	48,962		$	2,342		$	56,901		$	2,183		$	16,932		$	21,121		$	2,750		$	35,105		$	218,240

	Three months ended June 30, 2018
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial and leases			Other			Residential mortgage			Revolving mortgage			Construction and land development - non - commercial			Consumer			Total
Balance at April 1	$	26,718		$	43,833		$	3,423		$	59,317		$	4,842		$	16,489		$	22,104		$	3,913		$	30,181		$	210,820
Provision (credits)	(3,139		)	866			468			3,791			(114		)	1,492			289			50			4,574			8,277
Charge-offs	(8		)	(459		)	(69		)	(2,439		)	(38		)	(289		)	(1,027		)	(37		)	(5,312		)	(9,678		)
Recoveries	93			225			1			642			1			110			520			101			1,330			3,023
Balance at June 30	$	23,664		$	44,465		$	3,823		$	61,311		$	4,691		$	17,802		$	21,886		$	4,027		$	30,773		$	212,442

	Six months ended June 30, 2019
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial and leases			Other			Residential mortgage			Revolving mortgage			Construction and land development - non - commercial			Consumer			Total
Balance at January 1	$	35,270		$	43,451		$	2,481		$	55,620		$	2,221		$	15,472		$	21,862		$	2,350		$	35,841		$	214,568
Provision (credits)	(3,425		)	6,085			(140		)	5,424			(672		)	1,879			(119		)	400			8,317			17,749
Charge-offs	(72		)	(850		)	—			(5,280		)	(31		)	(644		)	(1,456		)	—			(12,423		)	(20,756		)
Recoveries	171			276			1			1,137			665			225			834			—			3,370			6,679
Balance at June 30	$	31,944		$	48,962		$	2,342		$	56,901		$	2,183		$	16,932		$	21,121		$	2,750		$	35,105		$	218,240

	Six months ended June 30, 2018
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial and leases			Other			Residential mortgage			Revolving mortgage			Construction and land development - non - commercial			Consumer			Total
Balance at January 1	$	24,470		$	45,005		$	4,571		$	59,824		$	4,689		$	15,706		$	22,436		$	3,962		$	31,204		$	211,867
Provision (credits)	(914		)	(499		)	(825		)	4,353			—			3,004			755			157			7,497			13,528
Charge-offs	(8		)	(505		)	(69		)	(4,768		)	(41		)	(1,095		)	(2,019		)	(219		)	(10,567		)	(19,291		)
Recoveries	116			464			146			1,902			43			187			714			127			2,639			6,338
Balance at June 30	$	23,664		$	44,465		$	3,823		$	61,311		$	4,691		$	17,802		$	21,886		$	4,027		$	30,773		$	212,442

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The following tables present the allowance and recorded investment in loans and leases by class of loans, as well as the associated impairment method at June 30, 2019 and December 31, 2018:



	June 30, 2019
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Residential mortgage		Revolving mortgage		Construction and land development - non- commercial		Consumer		Total
Non-PCI Loans
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	196	$	3,042	$	11	$	1,422	$	104	$	2,566	$	2,704	$	82	$	971	$	11,098
ALLL for loans and leases collectively evaluated for impairment	31,748		45,920		2,331		55,479		2,079		14,366		18,417		2,668		34,134		207,142
Total allowance for loan and lease losses	$	31,944	$	48,962	$	2,342	$	56,901	$	2,183	$	16,932	$	21,121	$	2,750	$	35,105	$	218,240

Loans and leases:
Loans and leases individually evaluated for impairment	$	2,078	$	62,270	$	506	$	12,161	$	315	$	53,137	$	30,040	$	3,059	$	3,107	$	166,673
Loans and leases collectively evaluated for impairment	717,456		11,274,414		506,254		3,968,343		301,031		4,737,499		2,440,613		312,012		1,752,495		26,010,117
Total loan and leases	$	719,534	$	11,336,684	$	506,760	$	3,980,504	$	301,346	$	4,790,636	$	2,470,653	$	315,071	$	1,755,602	$	26,176,790

	December 31, 2018
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Residential mortgage		Revolving mortgage		Construction and land development - non- commercial		Consumer		Total
Non-PCI Loans
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	490	$	2,671	$	42	$	1,137	$	105	$	1,901	$	2,515	$	81	$	885	$	9,827
ALLL for loans and leases collectively evaluated for impairment	34,780		40,780		2,439		54,483		2,116		13,571		19,347		2,269		34,956		204,741
Total allowance for loan and lease losses	$	35,270	$	43,451	$	2,481	$	55,620	$	2,221	$	15,472	$	21,862	$	2,350	$	35,841	$	214,568

Loans and leases:
Loans and leases individually evaluated for impairment	$	2,175	$	55,447	$	860	$	9,868	$	291	$	42,168	$	28,852	$	3,749	$	3,020	$	146,430
Loans and leases collectively evaluated for impairment	755,679		10,661,787		426,125		3,928,862		296,133		4,223,519		2,514,123		253,281		1,710,761		24,770,270
Total loan and leases	$	757,854	$	10,717,234	$	426,985	$	3,938,730	$	296,424	$	4,265,687	$	2,542,975	$	257,030	$	1,713,781	$	24,916,700

PCI allowance activity and balances for the three and six months ended June 30, 2019 and June 30, 2018 is summarized as follows:



(Dollars in thousands)	Three months ended June 30, 2019			Three months ended June 30, 2018
PCI Loans
Allowance for loan losses:
Balance at April 1	$	8,980		$	12,296
(Credit) provision	(637		)	161
Charge-offs	—			(34		)
Recoveries	—			—
Balance at June 30	$	8,343		$	12,423

	Six months ended June 30, 2019			Six months ended June 30, 2018
Balance at January 1	$	9,144		$	10,026
(Credit) provision	(801		)	2,515
Charge-offs	—			(118		)
Recoveries	—			—
Balance at June 30	$	8,343		$	12,423

The following table presents the PCI allowance and recorded investment in loans at June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019		December 31, 2018
ALLL for loans acquired with deteriorated credit quality	$	8,343	$	9,144
Loans acquired with deteriorated credit quality	551,447		606,576

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At June 30, 2019 and December 31, 2018, $163.9 million and $186.6 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition.

The following tables provide information on non-PCI impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group:



	June 30, 2019
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	463	$	1,615	$	2,078	$	2,490	$	196
Commercial mortgage	38,793		23,477		62,270		68,477		3,042
Other commercial real estate	197		309		506		595		11
Commercial and industrial and leases	8,155		4,006		12,161		17,333		1,422
Other	249		66		315		336		104
Total commercial loans	47,857		29,473		77,330		89,231		4,775
Noncommercial:
Residential mortgage	43,349		9,788		53,137		56,860		2,566
Revolving mortgage	26,104		3,936		30,040		33,135		2,704
Construction and land development	1,647		1,412		3,059		3,353		82
Consumer	3,039		68		3,107		3,476		971
Total noncommercial loans	74,139		15,204		89,343		96,824		6,323
Total non-PCI impaired loans and leases	$	121,996	$	44,677	$	166,673	$	186,055	$	11,098

	December 31, 2018
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	1,897	$	278	$	2,175	$	2,606	$	490
Commercial mortgage	34,177		21,270		55,447		61,317		2,671
Other commercial real estate	243		617		860		946		42
Commercial and industrial and leases	7,153		2,715		9,868		14,695		1,137
Other	216		75		291		301		105
Total commercial loans	43,686		24,955		68,641		79,865		4,445
Noncommercial:
Residential mortgage	40,359		1,809		42,168		45,226		1,901
Revolving mortgage	25,751		3,101		28,852		31,371		2,515
Construction and land development	2,337		1,412		3,749		4,035		81
Consumer	2,940		80		3,020		3,405		885
Total noncommercial loans	71,387		6,402		77,789		84,037		5,382
Total non-PCI impaired loans and leases	$	115,073	$	31,357	$	146,430	$	163,902	$	9,827

Non-PCI impaired loans less than $500,000 that were collectively evaluated for impairment totaled $39.9 million and $47.1 million at June 30, 2019 and December 31, 2018, respectively.

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The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2019 and June 30, 2018:



	Three months ended June 30, 2019				Three months ended June 30, 2018
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	2,102	$	6	$	1,485	$	17
Commercial mortgage	58,906		538		68,113		659
Other commercial real estate	519		6		1,345		12
Commercial and industrial and leases	11,348		113		9,427		90
Other	328		2		67		—
Total commercial	73,203		665		80,437		778
Noncommercial:
Residential mortgage	48,490		317		42,046		298
Revolving mortgage	29,623		256		26,388		222
Construction and land development	3,547		32		3,526		44
Consumer	3,014		31		2,654		28
Total noncommercial	84,674		636		74,614		592
Total non-PCI impaired loans and leases	$	157,877	$	1,301	$	155,051	$	1,370

	Six months ended June 30, 2019				Six months ended June 30, 2018
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	2,125	$	34	$	1,320	$	28
Commercial mortgage	57,768		1,102		70,190		1,370
Other commercial real estate	602		14		1,529		23
Commercial and industrial and leases	10,674		213		9,594		177
Other	322		4		34		—
Total commercial	71,491		1,367		82,667		1,598
Noncommercial:
Residential mortgage	45,558		642		40,385		573
Revolving mortgage	29,183		503		25,590		423
Construction and land development	3,647		68		3,815		92
Consumer	3,007		60		2,581		56
Total noncommercial	81,395		1,273		72,371		1,144
Total non-PCI impaired loans and leases	$	152,886	$	2,640	$	155,038	$	2,742

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (TDRs). In general, the modification or restructuring of a loan is considered a TDR if, for economic reasons or legal reasons related to a borrower's financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. The majority of TDRs are included in the special mention, substandard or doubtful credit quality indicators, which results in more elevated loss expectations when projecting the expected cash flows that are used to determine the allowance for loan losses associated with these loans. The lower the credit quality indicator, the lower the estimated expected cash flows and the greater the allowance recorded. All TDRs are individually evaluated for impairment through review of collateral values or analysis of cash flows at least annually.

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The following table provides a summary of total TDRs by accrual status. Total TDRs included $18.0 million and $18.2 million of PCI TDRs at June 30, 2019 and December 31, 2018, respectively:



	June 30, 2019						December 31, 2018
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	567	$	1,626	$	2,193	$	1,946	$	352	$	2,298
Commercial mortgage	51,374		7,886		59,260		53,270		7,795		61,065
Other commercial real estate	506		—		506		851		9		860
Commercial and industrial and leases	9,851		2,345		12,196		7,986		2,060		10,046
Other	107		208		315		118		173		291
Total commercial loans	62,405		12,065		74,470		64,171		10,389		74,560
Noncommercial:
Residential mortgage	36,260		17,839		54,099		37,903		9,621		47,524
Revolving mortgage	21,203		8,919		30,122		20,492		8,196		28,688
Construction and land development	1,495		1,565		3,060		2,227		110		2,337
Consumer	2,437		669		3,106		2,300		721		3,021
Total noncommercial loans	61,395		28,992		90,387		62,922		18,648		81,570
Total loans	$	123,800	$	41,057	$	164,857	$	127,093	$	29,037	$	156,130

The following table provides the types of TDRs made during the three and six months ended June 30, 2019 and June 30, 2018, as well as a summary of loans that were modified as a TDR during the twelve month periods ended June 30, 2019 and June 30, 2018 that subsequently defaulted during the three and six months ended June 30, 2019 and June 30, 2018. 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 June 30, 2019						Three months ended June 30, 2018
	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
Loans and leases
Interest only	4	$	4,343	—	$	—	1	$	154	2	$	821
Loan term extension	4	998		2	183		10	936		7	341
Below market interest rate	67	6,979		30	2,612		53	9,525		33	1,702
Discharged from bankruptcy	40	5,054		30	3,106		37	2,472		24	1,490
Total restructurings	115	$	17,374	62	$	5,901	101	$	13,087	66	$	4,354

	Six months ended June 30, 2019						Six months ended June 30, 2018
	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
Loans and leases
Interest only	4	$	4,343	2	$	3,203	2	$	821	2	$	821
Loan term extension	8	1,437		4	534		17	1,658		8	638
Below market interest rate	125	11,063		61	4,645		139	15,873		64	3,385
Discharged from bankruptcy	102	7,679		53	3,948		91	5,595		55	4,338
Total restructurings	239	$	24,522	120	$	12,330	249	$	23,947	129	$	9,182

For the three and six months ended June 30, 2019 and June 30, 2018, the pre-modification and post-modification outstanding recorded investments of loans modified as TDRs were not materially different.

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NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in OREO during the six months ended June 30, 2019 and June 30, 2018:



(Dollars in thousands)	Total
Balance at December 31, 2018	$	48,030
Additions	7,894
Acquired	3,613
Sales	(11,012		)
Write-downs	(2,289		)
Balance at June 30, 2019	$	46,236

Balance at December 31, 2017	$	51,097
Additions	11,868
Acquired	2,135
Sales	(15,769		)
Write-downs	(2,698		)
Balance at June 30, 2018	$	46,633

At June 30, 2019 and December 31, 2018, BancShares had $17.7 million and $17.2 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 $22.8 million and $22.0 million at June 30, 2019 and December 31, 2018, respectively.

NOTE G - FDIC SHARED-LOSS PAYABLE

As of June 30, 2019, shared-loss protection remains for single family residential loans acquired in the amount of $50.2 million. The shared-loss agreements for two 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 and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. The clawback liability payment dates are March 2020 and March 2021.

The following table provides changes in the FDIC shared-loss payable since December 31, 2018:



(Dollars in thousands)	Total
Balance at December 31, 2018	$	105,618
Accretion	3,274
Balance at June 30, 2019	$	108,892

NOTE H - SERVICING RIGHTS

Mortgage Servicing Rights

Our portfolio of residential mortgage loans serviced for third parties was $3.01 billion and $2.95 billion as of June 30, 2019 and December 31, 2018, respectively. These loans are originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights were recorded as a servicing asset and reported in other intangible assets on the Consolidated Balance Sheets, and the associated amortization expense and any valuation allowance recognized was included as a reduction of mortgage income in the Consolidated Statements of Income. The mortgage servicing rights were initially recorded at fair value and then carried at the lower of amortized cost or fair value.

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended June 30, 2019 and 2018 were $2.0 million and $1.9 million, respectively, and reported in mortgage income in the Consolidated Statements of Income. For the six months ended June 30, 2019 and 2018, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $3.9 million and $3.8 million, respectively.

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The following table explains changes in the servicing asset during the three and six months ended June 30, 2019 and 2018:



	Three months ended June 30						Six months ended June 30
(Dollars in thousands)	2019			2018			2019			2018
Beginning balance	$	20,647		$	21,659		$	21,396		$	21,945
Servicing rights originated	1,552			1,430			2,411			2,630
Amortization	(1,567		)	(1,432		)	(3,014		)	(2,918		)
Valuation allowance credit (provision)	33			—			(128		)	—
Ending balance	$	20,665		$	21,657		$	20,665		$	21,657

BancShares released $33.0 thousand of the valuation allowance for the three months ended June 30, 2019 and recorded provision expense of $128.0 thousand for the six months ended June 30, 2019. There was no valuation allowance provision expense or release recorded for the the three and six months ended June 30, 2018. Mortgage servicing rights valuations are performed using a pooling methodology where similar loans are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value mortgage servicing rights were as follows:



	June 30, 2019			December 31, 2018
Discount rate - conventional fixed loans	9.01		%	9.69		%
Discount rate - all loans excluding conventional fixed loans	10.01		%	10.69		%
Weighted average constant prepayment rate	13.39		%	9.26		%
Weighted average cost to service a loan	$	88.03		$	87.52

The fair value of mortgage servicing rights is sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is based on the 10-year U.S. Treasury rate plus 700 basis points for conventional fixed loans and 800 basis points for all other loans. The 700 and 800 basis points were used as a risk premium when calculating the discount rate. The prepayment rate is derived from the Public Securities Association Standard Prepayment model. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity. This results in a decrease in fair value. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.

Other Servicing Rights

Other servicing rights were acquired as part of a business combination and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $2.1 million and $2.7 million at June 30, 2019 and December 31, 2018, respectively.

NOTE I - REPURCHASE AGREEMENTS

BancShares, through FCB, utilizes securities sold under customer repurchase agreements to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby FCB offers to sell to a counterparty an undivided interest in an eligible security, and which obligates FCB to repurchase the security, with interest, at an agreed upon date, repurchase price, and interest rate. These agreements are recorded at the amount of cash received in connection with the transaction and are reflected as securities sold under customer repurchase agreements on the Consolidated Balance Sheets.

Repurchase agreements require FCB to maintain collateral to support the outstanding obligations. 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 segregates 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 and consist of U.S. Treasury securities. The carrying value of investment securities pledged as collateral under repurchase agreements was $612.5 million and $598.6 million at June 30, 2019 and December 31, 2018, respectively.

The remaining contractual maturity of the $544.5 million and $543.9 million securities sold under repurchase agreements at June 30, 2019 and December 31, 2018, respectively, was overnight and continuous.

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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 used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would 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 derived from valuation techniques in which one or more significant inputs or assumptions are not observable in the market. These unobservable inputs and 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.

BancShares' management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, 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. Investment securities available for sale are carried at fair value. U.S. Treasury, government agency and mortgage-backed securities are generally measured at fair value using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. Corporate bonds and trust preferred securities are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3.

Investment in marketable equity securities. 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 in an 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 that are originated to be sold to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs. Portfolio loans that are subsequently transferred to held for sale to be sold in the secondary market are carried at fair value when a firm commitment from a counterparty exists. The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input.

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. 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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Mortgage and other servicing rights. Mortgage and other 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 amortized cost. The fair value of mortgage and other 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 and other 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.

Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security if available, otherwise, 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 borrowings are considered Level 2 inputs.

Payable to the FDIC for shared-loss agreements. The fair value of the payable to the FDIC for shared-loss agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the shared-loss 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.

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of June 30, 2019 and December 31, 2018. 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, securities sold under customer repurchase agreements, and accrued interest payable are considered Level 2.

The table presents the carrying values and estimated fair values for financial instruments as of June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019				December 31, 2018
	Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	284,147	$	284,147	$	327,440	$	327,440
Overnight investments	1,640,264		1,640,264		797,406		797,406
Investment securities available for sale	4,366,041		4,366,041		4,557,110		4,557,110
Investment securities held to maturity	2,218,048		2,285,283		2,184,653		2,201,502
Investment in marketable equity securities	111,489		111,489		92,599		92,599
Loans held for sale	52,837		52,837		45,505		45,505
Net loans and leases	26,501,654		26,791,041		25,299,564		24,845,060
Income earned not collected	115,303		115,303		109,903		109,903
Federal Home Loan Bank stock	25,545		25,545		25,304		25,304
Mortgage and other servicing rights	22,809		25,129		24,066		27,435
Deposits	32,719,671		31,461,196		30,672,460		30,623,214
Securities sold under customer repurchase agreements	544,527		544,527		543,936		543,936
Federal Home Loan Bank borrowings	197,131		203,464		193,556		195,374
Subordinated debentures	154,277		166,374		140,741		151,670
Other borrowings	18,446		18,625		13,921		13,985
FDIC shared-loss payable	108,892		111,298		105,618		105,846
Accrued interest payable	14,197		14,197		3,712		3,712

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Among BancShares' assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale 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 June 30, 2019 and December 31, 2018:



	June 30, 2019
			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	$	948,402	$	—	$	948,402	$	—
Government agency	534,804		—		534,804		—
Mortgage-backed securities	2,733,698		—		2,733,698		—
Corporate bonds	149,137		—		—		149,137
Total investment securities available for sale	$	4,366,041	$	—	$	4,216,904	$	149,137
Marketable equity securities	$	111,489	$	24,991	$	86,498	$	—
Loans held for sale	$	52,837	$	—	$	52,837	$	—

	December 31, 2018
			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	$	1,247,710	$	—	$	1,247,710	$	—
Government agency	256,835		—		256,835		—
Mortgage-backed securities	2,909,339		—		2,909,339		—
Corporate bonds	143,226		—		—		143,226
Total investment securities available for sale	$	4,557,110	$	—	$	4,413,884	$	143,226
Marketable equity securities	$	92,599	$	17,887	$	74,712	$	—
Loans held for sale	$	45,505	$	—	$	45,505	$	—

During the three and six months ended June 30, 2019, there were no transfers between levels. For the three months ended June 30, 2018, there were no transfers between levels and for the six ended June 30, 2018, there were transfers from Level 2 to Level 3 of $65.3 million for corporate bonds available for sale. The transfers were due to a lack of observable inputs and trade activity for those securities.

The following tables summarize activity for Level 3 assets:



	Six months ended June 30, 2019
(Dollars in thousands)	Corporate bonds
Balance at January 1, 2019	$	143,226
Amounts included in net income	82
Unrealized net gains included in other comprehensive income	1,838
Purchases	3,991
Balance at June 30, 2019	$	149,137

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at June 30, 2019:



(Dollars in thousands)			June 30, 2019
Level 3 assets	Valuation technique	Significant unobservable input	Fair Value
Corporate bonds	Indicative bid provided by broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company	$	149,137

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Fair Value Option

BancShares has elected the fair value option for residential real estate loans originated to be sold. 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 changes in fair value were recorded as a component of mortgage income and included a loss of $82 thousand and a gain of $700 thousand for the three months ended June 30, 2019 and June 30, 2018, respectively. The changes in fair value included a gain of $167 thousand and $245 thousand for six months ended June 30, 2019 and June 30, 2018, respectively.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of June 30, 2019 and December 31, 2018:



	June 30, 2019
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	52,837	$	51,237	$	1,600

	December 31, 2018
	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	45,505	$	44,073	$	1,432

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of June 30, 2019 or December 31, 2018.

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.

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 6% and 11% applied for estimated 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 18%.

OREO acquired or written down within the previous 12 months is deemed to be at fair value. Asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts generally between 6% and 11% applied for estimated 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.

For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2019 and December 31, 2018:



	June 30, 2019
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	120,783	$	—	$	—	$	120,783
Other real estate remeasured during the previous 12 months	20,079		—		—		20,079

	December 31, 2018
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	105,994	$	—	$	—	$	105,994
Other real estate remeasured during the previous 12 months	35,344		—		—		35,344

No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2019 and December 31, 2018.

NOTE K - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and former First Citizens Bancorporation, Inc. employees (Bancorporation Plan). The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.

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BancShares Plan

For the three and six months ended June 30, 2019 and 2018, the components of net periodic benefit cost are as follows:



	Three months ended June 30						Six months ended June 30
(Dollars in thousands)	2019			2018			2019			2018
Service cost	$	2,690		$	3,362		$	5,258		$	6,791
Interest cost	7,581			7,131			15,112			14,188
Expected return on assets	(12,886		)	(11,976		)	(25,753		)	(23,933		)
Amortization of prior service cost	14			20			28			40
Amortization of net actuarial loss	2,084			3,548			4,198			6,794
Net periodic (benefit) cost	$	(517	)	$	2,085		$	(1,157	)	$	3,880

Bancorporation Plan

For the three and six months ended June 30, 2019 and 2018, the components of net periodic benefit cost are as follows:



	Three months ended June 30						Six months ended June 30
(Dollars in thousands)	2019			2018			2019			2018
Service cost	$	581		$	624		$	1,126		$	1,286
Interest cost	1,757			1,592			3,517			3,179
Expected return on assets	(2,775		)	(3,110		)	(5,543		)	(6,216		)
Amortization of net actuarial loss	637			86			1,264			157
Net periodic cost (benefit)	$	200		$	(808	)	$	364		$	(1,594	)

No discretionary contributions were made during the six months ended June 30, 2019 to the BancShares or Bancorporation pension plans. Management evaluates the need for its pension plan contributions on a periodic basis based upon numerous factors including, but not limited to, the funded status of the plans, returns on plan assets, discount rates and the current economic environment. BancShares made a contribution of $3.5 million to the Bancorporation plan in July 2019.

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 and standby letters of credit. 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.

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, and the fair value of those commitments was not material. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. 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.

The following table presents the commitments to extend credit and unfunded commitments as of June 30, 2019 and December 31, 2018:



(Dollars in thousands)	June 30, 2019		December 31, 2018
Unused commitments to extend credit	$	10,348,284	$	10,054,712
Standby letters of credit	94,307		96,467
Unfunded commitments for investments in affordable housing projects	80,383		67,952

Affordable housing project investments were $170.3 million and $147.3 million as of June 30, 2019 and December 31, 2018, respectively, and were included in other assets on the Consolidated Balance Sheets.

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BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts were claimed. BancShares has also been exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various merger 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 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) included the following as of June 30, 2019 and December 31, 2018:



	June 30, 2019									December 31, 2018
(Dollars in thousands)	Accumulated other comprehensive income (loss)			Deferred tax expense (benefit)			Accumulated other comprehensive income (loss), net of tax			Accumulated other comprehensive income (loss)			Deferred tax expense (benefit)			Accumulated other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities available for sale	$	3,316		$	762		$	2,554		$	(50,007	)	$	(11,502	)	$	(38,505	)
Unrealized losses on securities available for sale transferred to held to maturity	(80,492		)	(18,513		)	(61,979		)	(92,401		)	(21,252		)	(71,149		)
Defined benefit pension items	(157,540		)	(36,234		)	(121,306		)	(163,030		)	(37,497		)	(125,533		)
Total	$	(234,716	)	$	(53,985	)	$	(180,731	)	$	(305,438	)	$	(70,251	)	$	(235,187	)

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The following table highlights changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2019 and June 30, 2018:



	Three months ended June 30, 2019
(Dollars in thousands)	Unrealized gains (losses) on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(16,890	)	$	(66,558	)	$	(123,412	)	$	(206,860	)
Net unrealized gains arising during period	23,848			—			—			23,848
Amounts reclassified from accumulated other comprehensive loss	(4,404		)	4,579			2,106			2,281
Net current period other comprehensive income	19,444			4,579			2,106			26,129
Ending balance	$	2,554		$	(61,979	)	$	(121,306	)	$	(180,731	)

	Three months ended June 30, 2018
(Dollars in thousands)	Unrealized gains (losses) on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(121,243	)	$	—		$	(109,080	)	$	(230,323	)
Net unrealized gains (losses) arising during period	63,747			(84,321		)	—			(20,574		)
Amounts reclassified from accumulated other comprehensive loss	—			3,445			2,814			6,259
Net current period other comprehensive income (loss)	63,747			(80,876		)	2,814			(14,315		)
Ending balance	$	(57,496	)	$	(80,876	)	$	(106,266	)	$	(244,638	)

	Six months ended June 30, 2019
(Dollars in thousands)	Unrealized gains (losses) on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(38,505	)	$	(71,149	)	$	(125,533	)	$	(235,187	)
Net unrealized gains arising during period	45,463			—			—			45,463
Amounts reclassified from accumulated other comprehensive loss	(4,404		)	9,170			4,227			8,993
Net current period other comprehensive income	41,059			9,170			4,227			54,456
Ending balance	$	2,554		$	(61,979	)	$	(121,306	)	$	(180,731	)

	Six months ended June 30, 2018
(Dollars in thousands)	Unrealized gains (losses) on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(30,945	)	$	—		$	(91,349	)	$	(122,294	)
Cumulative effect adjustments	(29,751		)	—			(20,300		)	(50,051		)
Adjusted beginning balance	(60,696		)	—			(111,649		)	(172,345		)
Net unrealized gains (losses) arising during period	3,200			(84,321		)	—			(81,121		)
Amounts reclassified from accumulated other comprehensive loss	—			3,445			5,383			8,828
Net current period other comprehensive income (loss)	3,200			(80,876		)	5,383			(72,293		)
Ending balance	$	(57,496	)	$	(80,876	)	$	(106,266	)	$	(244,638	)

⁽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 income (loss) and the line item affected in the statement where net income is presented for the three and six months ended June 30, 2019 and June 30, 2018:



	Three months ended June 30, 2019
(Dollars in thousands) 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 on securities available for sale	$	5,719		Securities gains, net
	(1,315		)	Income taxes
	$	4,404		Net income

Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(5,947	)	Net interest income
	1,368			Income taxes
	$	(4,579	)	Net Income

Amortization of defined benefit pension items
Prior service costs	$	(14	)	Salaries and wages
Actuarial losses	(2,721		)	Other
	(2,735		)	Income before income taxes
	629			Income taxes
	$	(2,106	)	Net income
Total reclassifications for the period	$	(2,281	)

	Three months ended June 30, 2018
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
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(4,473	)	Net interest income
	1,028			Income taxes
	$	(3,445	)	Net Income

Amortization of defined benefit pension items
Prior service costs	$	(20	)	Salaries and wages
Actuarial losses	(3,634		)	Other
	(3,654		)	Income before income taxes
	840			Income taxes
	$	(2,814	)	Net income
Total reclassifications for the period	$	(6,259	)
⁽¹⁾ Amounts in parentheses indicate debits to profit/loss.

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	Six months ended June 30, 2019
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 on securities available for sale	$	5,719		Securities gains, net
	(1,315		)	Income taxes
	$	4,404		Net income

Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(11,909	)	Net interest income
	2,739			Income taxes
	$	(9,170	)	Net income

Amortization of defined benefit pension items
Prior service costs	$	(28	)	Salaries and wages
Actuarial losses	(5,462		)	Other
	(5,490		)	Income before income taxes
	1,263			Income taxes
	$	(4,227	)	Net income
Total reclassifications for the period	$	(8,993	)

	Six months ended June 30, 2018
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
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(4,473	)	Net interest income
	1,028			Income taxes
	$	(3,445	)	Net income

Amortization of defined benefit pension items
Prior service costs	$	(40	)	Salaries and wages
Actuarial losses	(6,951		)	Other
	(6,991		)	Income before income taxes
	1,608			Income taxes
	$	(5,383	)	Net income
Total reclassifications for the period	$	(8,828	)

⁽¹⁾ Amounts in parentheses indicate debits to profit/loss.

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NOTE N - LEASES

BancShares leases certain branch locations, administrative offices and equipment. Operating lease ROU assets are included in other assets and the associated lease obligations are included in other liabilities on the Consolidated Balance Sheets. Finance leases are included in premises and equipment and other borrowings on the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we instead recognize lease expense for these leases on a straight-line basis over the lease term.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our corresponding obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating and finance lease ROU asset also includes initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of our leases do not provide an implicit rate, BancShares uses its incremental borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception. BancShares used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that we will exercise our option to renew or extend the lease term, that option is included in calculating the value of the ROU and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

We determine if an arrangement is a lease at inception and our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have no related party lease agreements. As of June 30, 2019, there were no leases that have not yet commenced that would have a material impact on our Consolidated Financial Statements.

We rent or sublease certain real estate to third parties to manage occupancy costs and provide flexibility to expand and contract occupancy space to meet our business needs.

The following table presents lease assets and liabilities as of June 30, 2019:



(Dollars in thousands)	Classification	June 30, 2019
Assets:
Operating	Other assets	$	81,534
Finance	Premises and equipment	8,098
Total leased assets		89,632
Liabilities:
Operating	Other liabilities	80,562
Finance	Other borrowings	7,459
Total lease liabilities		$	88,021

The following table presents lease costs for the three and six months ended June 30, 2019. Variable lease cost primarily represents variable payments such as common area maintenance and utilities that are recognized in the period in which the expense was incurred. Certain of our lease agreements also include rental payments that are adjusted periodically for inflation. While lease liabilities are not remeasured as a result of these changes, these adjustments are treated as a variable lease costs and recognized in the period in which the expense is incurred.



(Dollars in thousands)	Classification	Three months ended June 30, 2019			Six months ended June 30, 2019
Lease cost:
Operating lease cost ⁽¹⁾	Occupancy expense	$	3,581		$	6,785
Finance lease cost:
Amortization of leased assets	Equipment expense	446			893
Interest on lease liabilities	Interest expense - Other borrowings	62			127
Variable lease cost	Occupancy expense	724			1,252
Sublease income	Occupancy expense	(86		)	(216		)
Net lease cost		$	4,727		$	8,841
⁽¹⁾Operating lease cost includes short-term lease cost, which is immaterial.

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The following table presents lease liability maturities in the next five years and thereafter:



(Dollars in thousands)	Operating Leases		Finance Leases		Total
2019 ⁽¹⁾	$	7,267	$	870	$	8,137
2020	13,693		1,748		15,441
2021	12,129		1,764		13,893
2022	10,763		1,481		12,244
2023	8,908		599		9,507
Thereafter	42,606		1,683		44,289
Total lease payments	$	95,366	$	8,145	$	103,511
Less: Interest	14,804		686		15,490
Present value of lease liabilities	$	80,562	$	7,459	$	88,021
⁽¹⁾Represents the lease liability payments that will be made for the period July 1, 2019 through December 31, 2019.

The following table presents the remaining weighted average lease terms and discount rates as of June 30, 2019:



Weighted average remaining lease term (years):	June 30, 2019
Operating	9.7
Finance	5.2
Weighted average discount rate:
Operating	3.26	%
Finance	3.23

The following table presents supplemental cash flow information related to leases for the six months ended June 30, 2019:



(Dollars in thousands)	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,613
Operating cash flows from finance leases	127
Financing cash flows from finance leases	735
Right-of-use assets obtained in exchange for new operating lease liabilities	15,162
Right-of-use assets obtained in exchange for new finance lease liabilities	—

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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 2018 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 2019, the reclassifications had no 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 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.

BancShares’ earnings and cash flows are primarily derived from our 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. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue.

We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe that our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people. Management's primary focus is on loan and yield growth, deposit cost, and net interest margin. Management drives to this goal by focusing on core customer deposits and loans in the targeted interest rate risk profile. Additionally, our initiatives focus on growth of noninterest income sources, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology and delivery channels. Refer to our Form 10-K for the year ended December 31, 2018 for further discussion of our strategy.

Significant Events in 2019

On April 23, 2019, FCB entered into a definitive merger agreement for the acquisition of Franklin, North Carolina-based Entegra Financial Corp. and its bank subsidiary, Entegra Bank, into FCB.

On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp and its bank subsidiary, First South Bank, into FCB.

On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares and its bank subsidiary, Biscayne Bank, into FCB.

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. Based on the latest real gross domestic product (GDP) information available, the Bureau of Economic Analysis' revised estimate of first quarter of 2019 GDP growth was 3.1%, up from 2.2% GDP growth in the fourth quarter of 2018. The estimated real GDP acceleration in the first quarter primarily reflected an upturn in state and local government spending, accelerations in private inventory investment and an increase in exports. Imports decreased in the first quarter of 2019 after increasing in the fourth quarter of 2018. These movements were partly offset by a deceleration in personal consumption expenditures.

The United States (U.S.) unemployment rate declined from 3.8% in March 2019 to 3.7% in June 2019. According to the U.S. Department of Labor, the U.S. economy added approximately 512,000 new nonfarm payroll jobs during the second quarter of 2019. The U.S. housing market remains stable as a result of strong, but weakening, housing demand fueled by low mortgage interest rates, economic growth and job creation.

The Federal Reserve’s Federal Open Market Committee (FOMC) indicated in July 2019 the U.S. labor market remains strong and economic activity rose at a moderate rate. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the FOMC decided to lower the target range for the federal funds rate by 25 basis points to 2.00% to 2.25%. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC indicated it will assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0% inflation.

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FINANCIAL PERFORMANCE SUMMARY

Second Quarter Highlights


•	Net income for the second quarter of 2019 totaled $119.4 million, an increase of $26.1 million, or 27.9% compared to the same quarter in 2018. Net income increased $2.79 on a per share basis, or 35.9%, to $10.56 in the second quarter of 2019, from $7.77 per share during the same period in 2018.


•	Net interest income totaled $327.3 million for the second quarter of 2019, an increase of $31.1 million or 10.5%, compared to the same quarter in 2018. The taxable-equivalent net interest margin (NIM) was 3.79% for the second quarter of 2019, up from 3.64% for the second quarter in 2018.


•	Return on average assets for the second quarter of 2019 was 1.29%, a 21 basis point improvements over the second quarter of 2018. Return on average equity for the second quarter of 2019 was 13.50%, a 250 basis points improvement over the second quarter of 2018.

•

Total loans grew to $26.73 billion, an increase of $1.26 billion since March 31, 2019. The growth from recent acquisitions totaled $1.04 billion, while the remaining $221.8 million was due to organic growth. Provision expense totaled $5.2 million for the second quarter of 2019, a decrease of $3.2 million compared to the same quarter in 2018. The net charge-off ratio was 0.11% for the second quarter of 2019, unchanged for the same quarter in 2018.


•	Total deposits grew to $32.72 billion, an increase of $1.52 billion since March 31, 2019. The growth from recent acquisitions totaled $994.1 million, while the remaining $527.5 million was due to organic growth.


•	BancShares repurchased 205,500 shares of its Class A common stock during the second quarter of 2019 totaling $89.8 million. At June 30, 2019, BancShares remained well capitalized with a total risk-based capital ratio of 13.3%, a Tier 1 risk-based capital ratio and common equity Tier 1 ratio of 12.0% and a leverage ratio of 9.4%.

Year to Date Highlights


•	Net income for the six months ended June 30, 2019 totaled $230.7 million, an increase of $37.2 million, or 19.2% compared to the same period of 2018. Net income increased $4.12 on a per share basis, or 25.6%, to $20.23 for the six months ended June 30, 2019, from $16.11 per share during the same period in 2018.


•	Net interest income for the six months ended June 30, 2019, was $647.8 million, an increase of $67.2 million, or 11.6%, compared to the same period of 2018. The taxable-equivalent NIM was 3.84% for the six months ended June 30, 2019, up 23 basis points from 3.61% during the same period of 2018.


•	Return on average assets for the six months ended June 30, 2019 was 1.28%, a 15 basis points improvement over the same period in 2018. Return on average equity for the six months ended June 30, 2019 was 13.19%, a 160 basis points improvement over the same period in 2018.

•

Total loans grew to $26.73 billion, an increase of $1.20 billion since December 31, 2018. The growth from recent acquisitions totaled $1.04 billion, while the remaining $162.3 million was due to organic growth. Provision expense totaled $16.9 million for the six months ended June 30, 2019, an increase of $0.9 million compared to the same period of 2018. The net charge-off ratio was 0.11% for the six months ended June 30, 2019, unchanged for the same period of 2018.


•	Total deposits grew to $32.72 billion, an increase of $2.05 billion since December 31, 2018. The growth from recent acquisitions totaled $994.1 million, while the remaining $1.05 billion was due to organic growth.


•	BancShares repurchased 448,500 shares of its Class A common stock during the six months ended June 30, 2019 totaling $190.5 million.

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Table 1

SELECTED QUARTERLY DATA



	2019						2018									Six months ended June 30
	Second			First			Fourth			Third			Second			Six months ended June 30
(Dollars in thousands, except share data)	Quarter			Quarter			Quarter			Quarter			Quarter			2019			2018
SUMMARY OF OPERATIONS
Interest income	$	350,721		$	336,924		$	333,573		$	315,706		$	303,877		$	687,645		$	596,478
Interest expense	23,373			16,452			12,691			8,344			7,658			39,825			15,822
Net interest income	327,348			320,472			320,882			307,362			296,219			647,820			580,656
Provision for loan and lease losses	5,198			11,750			11,585			840			8,438			16,948			16,043
Net interest income after provision for loan and lease losses	322,150			308,722			309,297			306,522			287,781			630,872			564,613
Noninterest income	106,875			103,663			82,007			94,531			100,927			210,538			223,611
Noninterest expense	273,397			267,657			275,378			267,537			265,993			541,054			534,056
Income before income taxes	155,628			144,728			115,926			133,516			122,715			300,356			254,168
Income taxes	36,269			33,369			26,453			16,198			29,424			69,638			60,646
Net income	$	119,359		$	111,359		$	89,473		$	117,318		$	93,291		$	230,718		$	193,522
Net interest income, taxable equivalent	$	328,201		$	321,372		$	321,804		$	308,207		$	297,021		$	649,573		$	582,269
PER SHARE DATA
Net income	$	10.56		$	9.67		$	7.62		$	9.80		$	7.77		$	20.23		$	16.11
Cash dividends	0.40			0.40			0.40			0.35			0.35			0.80			0.70
Market price at period end (Class A)	450.27			407.20			377.05			452.28			403.30			450.27			403.30
Book value at period-end	319.74			309.46			300.04			294.40			286.99			319.74			286.99
SELECTED QUARTERLY AVERAGE BALANCES
Total assets ⁽¹⁾	$	37,049,030		$	35,625,885		$	35,625,500		$	34,937,175		$	34,673,927		$	36,338,836		$	34,471,833
Investment securities	6,803,570			6,790,671			7,025,889			7,129,089			7,091,442			6,797,656			7,072,328
Loans and leases ⁽²⁾	26,597,242			25,515,988			25,343,813			24,698,799			24,205,363			26,059,602			23,937,221
Interest-earning assets	34,674,842			33,432,162			33,500,732			32,886,276			32,669,810			34,056,935			32,496,086
Deposits	32,100,210			30,802,567			30,835,157			30,237,329			30,100,615			31,454,973			29,788,106
Interest-bearing liabilities	20,397,445			19,655,434			19,282,749			18,783,160			18,885,168			20,028,489			18,957,881
Securities sold under customer repurchase agreements	556,374			538,162			572,442			547,385			516,999			547,318			551,123
Other short-term borrowings	40,513			—			53,552			43,720			46,614			20,369			68,903
Long-term borrowings	371,843			344,225			319,410			261,821			233,373			358,110			318,247
Shareholders' equity	$	3,546,041		$	3,509,746		$	3,491,914		$	3,470,368		$	3,400,867		$	3,528,549		$	3,366,990
Shares outstanding	11,286,520			11,519,008			11,763,832			11,971,460			12,010,405			11,402,122			12,010,405
SELECTED QUARTER-END BALANCES
Total assets ⁽¹⁾	$	37,655,094		$	35,961,670		$	35,408,629		$	34,954,659		$	35,088,566		$	37,655,094		$	35,088,566
Investment securities	6,695,578			6,914,513			6,834,362			7,040,674			7,190,545			6,695,578			7,190,545
Loans and leases	26,728,237			25,463,785			25,523,276			24,886,347			24,538,437			26,728,237			24,538,437
Deposits	32,719,671			31,198,093			30,672,460			30,163,537			30,408,884			32,719,671			30,408,884
Securities sold under customer repurchase agreements	544,527			508,508			543,936			567,438			499,723			544,527			499,723
Other short-term borrowings	—			—			—			—			75,000			—			75,000
Long-term borrowings	369,854			341,108			348,218			417,798			280,630			369,854			280,630
Shareholders' equity	$	3,574,613		$	3,523,309		$	3,488,954		$	3,499,013		$	3,446,886		$	3,574,613		$	3,446,886
Shares outstanding	11,179,905			11,385,405			11,628,405			11,885,405			12,010,405			11,179,905			12,010,405
SELECTED RATIOS AND OTHER DATA
Rate of return on average assets (annualized)	1.29		%	1.27		%	1.00		%	1.33		%	1.08		%	1.28		%	1.13		%
Rate of return on average shareholders' equity (annualized)	13.50			12.86			10.17			13.41			11.00			13.19			11.59
Net yield on interest-earning assets (taxable equivalent)	3.79			3.89			3.82			3.73			3.64			3.84			3.61
Allowance for loan and lease losses to total loans and leases:
PCI	1.51			1.61			1.51			1.71			1.84			1.51			1.84
Non-PCI	0.83			0.88			0.86			0.86			0.89			0.83			0.89
Total	0.85			0.90			0.88			0.88			0.92			0.85			0.92
Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.57			0.53			0.52			0.52			0.54			0.57			0.54
Tier 1 risk-based capital ratio	12.03			12.69			12.67			13.23			13.06			12.03			13.06
Common equity Tier 1 ratio	12.03			12.69			12.67			13.23			13.06			12.03			13.06
Total risk-based capital ratio	13.34			14.02			13.99			14.57			14.43			13.34			14.43
Leverage capital ratio	9.35			9.80			9.77			10.11			9.99			9.35			9.99
Dividend payout ratio	3.79			4.14			5.25			3.57			4.50			3.95			4.35
Average loans and leases to average deposits	82.86			82.84			82.19			81.68			80.41			82.85			80.36

⁽¹⁾We adopted ASC Topic 842 and utilized the effective date method. We did not restate selected financial data for the quarters prior to 2019 presented above.

⁽²⁾Average loan and lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and leases.

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BUSINESS COMBINATIONS

Entegra Financial Corp.

On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. The transaction is anticipated to close during the fourth quarter of 2019, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each outstanding option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment. The total transaction value is anticipated to be approximately $219.8 million. As of June 30, 2019, Entegra reported $1.66 billion in consolidated assets, $1.09 billion in loans and $1.25 billion in deposits.

First South Bancorp, Inc.

On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp and its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of $1.15 was paid to the shareholders of First South Bancorp for each share of common stock totaling approximately $37.5 million. The merger allows FCB to expand its presence and enhance banking efforts in South Carolina. The merger contributed $253.0 million in consolidated assets, which included $179.2 million in loans and $207.6 million in deposits as of the merger date.

Biscayne Bancshares, Inc.

On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (Biscayne Bancshares) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 was paid to the shareholders of Biscayne Bancshares for each share of common stock, totaling approximately $118.9 million. The merger allows FCB to expand its presence in Florida and enhance banking efforts in South Florida. The merger contributed $1.08 billion in consolidated assets, which included $863.4 million in loans, and $786.5 million in deposits as of the merger date.

See Note B in the Consolidated Financial Statements for additional disclosures regarding the above business combinations.

FDIC-Assisted Transactions

As of June 30, 2019, BancShares had completed fourteen FDIC-assisted transactions. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. As of June 30, 2019, shared-loss protection remains for single family residential loans acquired in the amount of $50.2 million.

The shared-loss agreements for two of the FDIC-assisted transactions include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). As of June 30, 2019 and December 31, 2018, the estimated clawback liability was $108.9 million and $105.6 million, respectively. The clawback liability payment dates are March 2020 and March 2021.

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Table 2

CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS



	Three months ended
	June 30, 2019							June 30, 2018
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	26,597,242		$	303,803	4.58	%	$	24,205,363		$	261,703	4.34	%
Investment securities:
U. S. Treasury	1,150,001			6,770		2.36		1,532,868			7,139		1.87
Government agency	383,700			3,034		3.16		84,640			468		2.21
Mortgage-backed securities	4,979,160			28,130		2.26		5,270,891			28,184		2.14
Corporate bonds	147,669			1,931		5.23		94,401			1,298		5.50
State, county and municipal	334			1		1.81		764			8		4.07
Other investments	142,706			625		1.76		107,878			267		0.99
Total investment securities	6,803,570			40,491		2.38		7,091,442			37,364		2.11
Overnight investments	1,274,030			7,280		2.29		1,373,005			5,612		1.64
Total interest-earning assets	34,674,842			351,574		4.06		32,669,810			304,679		3.75
Cash and due from banks	295,052							276,418
Premises and equipment	1,214,144							1,162,893
Allowance for loan and lease losses	(229,067		)					(224,146		)
Other real estate owned	46,246							47,667
Other assets	1,047,813							741,285
Total assets	$	37,049,030						$	34,673,927

Liabilities
Interest-bearing deposits:
Checking with interest	$	5,366,731		$	445	0.03	%	$	5,228,803		$	314	0.02	%
Savings	2,658,974			527		0.08		2,468,677			194		0.03
Money market accounts	8,031,608			6,624		0.33		7,989,268			2,125		0.11
Time deposits	3,371,402			11,561		1.38		2,401,434			1,888		0.32
Total interest-bearing deposits	19,428,715			19,157		0.40		18,088,182			4,521		0.10
Securities sold under customer repurchase agreements	556,374			515		0.37		516,999			373		0.29
Other short-term borrowings	40,513			278		2.72		46,614			448		3.82
Long-term borrowings	371,843			3,423		3.64		233,373			2,316		3.96
Total interest-bearing liabilities	20,397,445			23,373		0.46		18,885,168			7,658		0.16
Noninterest-bearing deposits	12,671,495							12,012,433
Other liabilities	434,049							375,459
Shareholders' equity	3,546,041							3,400,867
Total liabilities and shareholders' equity	$	37,049,030						$	34,673,927
Interest rate spread						3.60	%						3.59	%

Net interest income and net yield on interest-earning assets				$	328,201	3.79	%				$	297,021	3.64	%

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 rate of 21.0%, as well as state income tax rate of 3.4%, for both the three months ended June 30, 2019 and June 30, 2018. The taxable-equivalent adjustment was $853 and $802 for the three months ended June 30, 2019 and June 30, 2018, respectively.

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Table 3

CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS



	Six months ended
	June 30, 2019							June 30, 2018
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	26,059,602		$	595,372	4.60	%	$	23,937,221		$	514,330	4.33	%
Investment securities:
U. S. Treasury	1,178,955			13,267		2.27		1,550,032			13,912		1.81
Government agency	335,375			5,343		3.19		49,989			568		2.27
Mortgage-backed securities	5,015,089			56,964		2.27		5,283,015			55,278		2.09
Corporate bonds	146,405			3,868		5.28		80,284			2,308		5.75
State, county and municipal	168			1		1.80		384			8		4.04
Other investments	121,664			914		1.51		108,624			476		0.88
Total investment securities	6,797,656			80,357		2.37		7,072,328			72,550		2.06
Overnight investments	1,199,677			13,669		2.30		1,486,537			11,211		1.52
Total interest-earning assets	34,056,935			689,398		4.07		32,496,086			598,091		3.70
Cash and due from banks	288,592							287,672
Premises and equipment	1,210,306							1,152,854
Allowance for loan and lease losses	(226,763		)					(222,925		)
Other real estate owned	46,669							48,612
Other assets	963,097							709,534
Total assets	$	36,338,836						$	34,471,833

Liabilities
Interest-bearing deposits:
Checking with interest	$	5,302,233		$	791	0.03	%	$	5,160,616		$	607	0.02	%
Savings	2,591,633			733		0.06		2,423,837			366		0.03
Money market accounts	8,099,781			11,796		0.29		8,063,921			3,874		0.10
Time deposits	3,109,045			18,764		1.22		2,371,234			3,430		0.29
Total interest-bearing deposits	19,102,692			32,084		0.34		18,019,608			8,277		0.09
Securities sold under customer repurchase agreements	547,318			974		0.36		551,123			921		0.33
Other short-term borrowings	20,369			278		2.72		68,903			1,334		3.86
Long-term borrowings	358,110			6,489		3.60		318,247			5,290		3.32
Total interest-bearing liabilities	20,028,489			39,825		0.40		18,957,881			15,822		0.17
Noninterest-bearing deposits	12,352,281							11,768,498
Other liabilities	429,517							378,464
Shareholders' equity	3,528,549							3,366,990
Total liabilities and shareholders' equity	$	36,338,836						$	34,471,833
Interest rate spread						3.67	%						3.53	%

Net interest income and net yield on interest-earning assets				$	649,573	3.84	%				$	582,269	3.61	%

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 rate of 21.0%, as well as state income tax rate of 3.4%, for both the six months ended June 30, 2019 and June 30, 2018. The taxable-equivalent adjustment was $1,753 and $1,613 for the six months ended June 30, 2019 and June 30, 2018, respectively.

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Table 4

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME



	Three months ended June 30, 2019									Six months ended June 30, 2019
	Change from prior year period due to:									Change from prior year period due to:
(Dollars in thousands)	Volume⁽¹⁾			Yield/Rate⁽¹⁾			Total Change			Volume⁽¹⁾			Yield/Rate⁽¹⁾			Total Change
Assets
Loans and leases	$	22,992		$	19,108		$	42,100		$	39,876		$	41,166		$	81,042
Investment securities:
U. S. Treasury	(1,783		)	1,414			(369		)	(3,331		)	2,686			(645		)
Government agency	1,655			911			2,566			3,245			1,530			4,775
Mortgage-backed securities	(1,278		)	1,224			(54		)	(2,421		)	4,107			1,686
Corporate bonds	733			(100		)	633			1,901			(341		)	1,560
State, county and municipal	(4		)	(3		)	(7		)	(4		)	(3		)	(7		)
Other investments	85			273			358			56			382			438
Total investment securities	(592		)	3,719			3,127			(554		)	8,361			7,807
Overnight investments	(403		)	2,071			1,668			(2,163		)	4,621			2,458
Total interest-earning assets	$	21,997		$	24,898		$	46,895		$	37,159		$	54,148		$	91,307
Liabilities
Interest-bearing deposits:
Checking with interest	$	8		$	123		$	131		$	17		$	167		$	184
Savings	15			318			333			25			342			367
Money market accounts	11			4,488			4,499			17			7,905			7,922
Time deposits	763			8,910			9,673			1,068			14,266			15,334
Total interest-bearing deposits	797			13,839			14,636			1,127			22,680			23,807
Securities sold under customer repurchase agreements	28			114			142			(6		)	59			53
Other short-term borrowings	(58		)	(112		)	(170		)	(929		)	(127		)	(1,056		)
Long-term borrowings	1,367			(260		)	1,107			656			543			1,199
Total interest-bearing liabilities	2,134			13,581			15,715			848			23,155			24,003
Change in net interest income	$	19,863		$	11,317		$	31,180		$	36,311		$	30,993		$	67,304
⁽¹⁾The rate/volume variance is allocated proportionally between the changes in volume and rate.

RESULTS OF OPERATIONS

Net Interest Income and Margin (Taxable-Equivalent Basis)

Second Quarter 2019 compared to Second Quarter 2018

Net interest income for the second quarter of 2019 totaled $327.3 million, an increase of $31.1 million, or 10.5%, compared to the second quarter of 2018. The taxable-equivalent NIM was 3.79% in the second quarter of 2019, an increase of 15 basis points from the same quarter in the prior year. The primary driver for this increase was a $42.1 million, or 24 basis points increase in interest and fees on loans due to higher average loans outstanding and higher loan yields, partially offset by a $14.6 million, or 30 basis points increase in interest expense on deposits due to higher balances and rates paid on time deposits and money market accounts.

Average interest-earning assets increased by $2.01 billion to $34.67 billion, compared to the second quarter of 2018. The primary driver for this change was higher average loan balances which increased $2.39 billion, primarily due to contributions from recent acquisitions and organic loan growth particularly within the commercial and residential mortgage portfolios. Offsetting this increase were declines in average investment securities of $287.9 million and average overnight investments of $99.0 million. The yield on interest-earning assets increased by 31 basis points to 4.06% when compared to the second quarter of 2018. The yield on loans and leases increased to 4.58%, or by 24 basis points, primarily due to higher yields on commercial and residential loans. The yield on overnight investments and investment securities increased by 65 basis points and 27 basis points, respectively. Higher federal funds rates was the primary driver for the yield increase on overnight investments, while the higher yields on mortgage-backed securities and U.S. Treasury securities were the primary drivers of the investment securities yield improvement.

Average interest-bearing liabilities increased $1.51 billion to $20.40 billion, compared to the second quarter of 2018. This increase was primarily due to an increase in average interest-bearing deposit balances of $1.34 billion driven by contributions from recent acquisitions and organic deposit growth, an increase in average long-term borrowings of $138.5 million, and an increase in average customer repurchase agreements of $39.4 million. Rates on interest-bearing liabilities increased by 30 basis points to 0.46%, primarily due to increased rates paid on time deposits and money market accounts.

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Six Months of 2019 compared to Six Months of 2018

Net interest income for the six months ended June 30, 2019, was $647.8 million, an increase of $67.2 million, or 11.6%, compared to the same period of 2018. The taxable-equivalent NIM was 3.84% for the six months ended June 30, 2019, an increase of 23 basis points, from the same period of 2018. The primary driver of the increase was an $81.1 million, or 27 basis points increase in interest and fees on loans due to an increase in average loans outstanding, as well as higher loan yields. This increase was partially offset by a $23.8 million, or 25 basis points increase in interest expense on deposits.

Average year-to-date interest-earning assets for the six months ended June 30, 2019, increased by $1.56 billion to $34.06 billion, compared to the same period in 2018. This increase was primarily due to a $2.12 billion increase in average outstanding loans due the impact of recent acquisitions and organic loan growth, particularly within the commercial and residential mortgage portfolios. These increases were partially offset by declines in average overnight investments of $286.9 million and average investment securities of $274.7 million. The yield on interest-earning assets increased by 37 basis points to 4.07% for the six months ended June 30, 2019, compared to the same period in 2018. The yield on loans and leases increased by 27 basis points primarily due to higher yielding commercial and residential loans. The yield on overnight investments and the investment securities portfolio increased by 78 basis points and 31 basis points, respectively. Higher federal funds rates was the primary driver for the yield increase on overnight investments, while the higher yields on mortgage-backed securities and U.S. Treasury securities were the primary drivers of the investment securities yield improvement.

Average year-to-date interest-bearing liabilities for the six months ended June 30, 2019 increased by $1.07 billion to $20.03 billion compared to the same period in 2018. This increase was primarily due to a $1.08 billion increase in average interest-bearing deposit balances driven by the impact of recent acquisitions, as well as organic growth, primarily in time deposits and money market accounts. The rate paid on interest-bearing liabilities increased by 23 basis points to 0.40% for the six months ended June 30, 2019 compared to same period in 2018. The rate paid on interest-bearing deposits increased by 25 basis points due primarily to increased rates on time deposits and money market accounts. Rates on long-term borrowings increased by 28 basis points due to higher rates on borrowings assumed in recent acquisitions.

Although net interest margin has expanded in recent periods, management does not believe this trend will continue as new loan yields are declining due to changes in forward rate expectations and increased competition. This trend, coupled with higher interest expense and rising betas on deposits will likely result in margin compression for the remainder of 2019.

Provision for Loan and Lease Losses

BancShares recorded net provision expense of $5.2 million and $16.9 million for the three and six months ended June 30, 2019 as compared to $8.4 million and $16.0 million, respectively, for the same periods in 2018. The fluctuations in provision expense were primarily due to variances in loan growth between the periods, as well as changes in portfolio composition and credit quality.

Noninterest Income

Table 5

NONINTEREST INCOME



	Three months ended				Six months ended
(Dollars in thousands)	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Cardholder services, net	$	18,479	$	14,925	$	35,112	$	29,707
Merchant services, net	6,455		6,478		12,290		12,655
Service charges on deposit accounts	25,790		25,952		50,855		52,495
Wealth management services	24,573		25,515		49,574		49,084
Securities gains, net	5,719		—		5,719		—
Marketable equity securities gains, net	3,144		4,440		14,472		5,411
Other service charges and fees	8,164		7,756		15,586		15,236
Mortgage income	5,038		4,703		8,696		8,940
Insurance commissions	2,854		2,940		6,145		6,716
ATM income	1,625		2,217		3,136		4,388
Gain on extinguishment of debt	—		—		—		25,814
Recoveries of PCI loans previously charged off	4,222		5,138		8,213		10,831
Other	812		863		740		2,334
Total noninterest income	$	106,875	$	100,927	$	210,538	$	223,611

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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 consist of fees and service charges generated from deposit accounts, cardholder and merchant services, wealth management services, and mortgage lending and servicing.

Noninterest income for the second quarter of 2019 was $106.9 million, compared to $100.9 million for the same period of 2018, an increase of $5.9 million, or 5.9%. The most significant components of the change were as follows:


•	Realized gains on investment securities sales were $5.7 million for the second quarter of 2019, while no gains were recognized in the second quarter of 2018.


•	Income from cardholder services increased by $3.6 million due to higher interchange rates and transaction volumes, as well as cost savings achieved by converting to a new processor.


•	Fair value adjustments on marketable equity securities declined by $1.3 million.

Noninterest income was $210.5 million for the first six months of 2019, compared to $223.6 million for the same period of 2018, a decrease of $13.1 million, or 1.31%. The most significant components of the change were as follows:


•	$25.8 million gain on the extinguishment of debt in was recognized 2018, while no gains were recognized in 2019. The gain was primarily due to the extinguishment of eight Federal Home Loan Bank debt obligations totaling $675.0 million.


•	Fair value adjustments on marketable equity securities increased by $9.1 million.


•	Realized gains on investment securities sales were $5.7 million in 2019; no gains were recognized in 2018.


•	Income from cardholder services increased by $5.4 million due to higher transaction volumes and interchange rates, as well as cost savings achieved by converting to a new processor.


•	Service charges on deposit accounts and ATM income declined by $2.9 million due to reductions in acquired deposit balances and the temporary suspension of ATM fees at certain acquired locations.


•	Recoveries on acquired loans previously charged-off decreased by $2.6 million.

Noninterest Expense

Table 6

NONINTEREST EXPENSE



	Three months ended				Six months ended
(Dollars in thousands)	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Salaries and wages	$	136,526	$	129,841	$	268,947	$	259,044
Employee benefits	30,197		29,715		62,732		61,806
Occupancy expense	26,886		26,100		54,647		54,054
Equipment expense	28,489		25,167		55,229		50,141
FDIC insurance expense	2,757		5,492		5,417		11,225
Collection and foreclosure-related expenses	3,659		3,974		6,681		8,120
Merger-related expenses	4,084		2,412		5,803		3,010
Processing fees paid to third parties	6,641		7,890		13,730		16,086
Telecommunications expense	2,393		2,654		4,434		5,344
Consultant expense	3,639		3,000		6,520		6,006
Advertising expense	2,942		2,542		5,494		5,093
Core deposit intangible amortization	4,233		4,368		8,480		8,510
Other	20,951		22,838		42,940		45,617
Total noninterest expense	$	273,397	$	265,993	$	541,054	$	534,056

The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense.

Noninterest expense was $273.4 million during the second quarter of 2019, compared to $266.0 million for the same period in 2018, an increase of $7.4 million, or 2.8%. The most significant components of the change were as follows:


•	Personnel expense increased $7.2 million primarily due to an increase in salaries and wages as a result of merit increases, and increased headcount from recent acquisitions.


•	Equipment expense increased by $3.3 million primarily due to hardware and software additions.


•	Merger-related expense increased by $1.7 million primarily due to an increase in acquisition activity.

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•	FDIC insurance expense decreased $2.7 million primarily due to the discontinuation of the Deposit Insurance Fund surcharge on large banks.


•	Processing fees paid to third parties decreased by $1.2 million primarily due to cost savings associated with the operational conversion of previously completed acquisitions, partially offset by an increase in digital banking costs.

Noninterest expense was $541.1 million for the first six months of 2019, compared to $534.1 million for the same period in 2018, an increase of $7.0 million, or 1.3%. The most significant components of the change were as follows:


•	Personnel expense increased $10.8 million primarily due to an increase in salaries and wages as a result of merit increases and increased headcount from recent acquisitions.


•	Equipment expense increased by $5.1 million primarily due to hardware and software additions.


•	Merger-related expense increased by $2.8 million primarily due to an increase in acquisition activity.


•	FDIC insurance expense decreased $5.8 million primarily due to the discontinuation of the Deposit Insurance Fund surcharge on large banks.


•	Processing fees paid to third parties decreased by $2.4 million primarily due to cost savings associated with the operational conversion of previously completed acquisitions, partially offset by an increase in digital banking costs.


•	Collection and foreclosure-related expense decreased $1.4 million primarily due to reductions in the write downs of bank-owned properties.

Income Taxes

Income tax expense was $36.3 million and $29.4 million for the second quarter of 2019 and second quarter of 2018, respectively, representing effective tax rates of 23.3% and 24.0% during the periods. Income tax expense was $69.6 million and $60.6 million for the six months ended June 30, 2019 and June 30, 2018, respectively, representing effective tax rates of 23.2% and 23.9% for the six months periods.

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 investment securities, loans and leases, 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 strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning assets totaled $35.12 billion and $33.20 billion at June 30, 2019 and December 31, 2018, respectively. The $1.92 billion increase was primarily composed of a $1.20 billion increase in loans and leases and a $842.9 million increase in overnight investments, partially offset by a $138.8 million decrease in investment securities.

Investment Securities

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 with BancShares' objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. 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. See Note C in the Consolidated Financial Statements for additional disclosures regarding investment securities.

Investment securities totaled $6.70 billion at June 30, 2019, a decrease of $138.8 million compared to December 31, 2018. The decrease in the portfolio was primarily attributable to investment securities maturities/paydowns of $1.40 billion and sales of $621.6 million only partially offset by purchases totaling $1.75 billion.

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As of June 30, 2019, investment securities available for sale had a net pre-tax unrealized gain of $3.3 million, compared to a net pre-tax unrealized loss of $50.0 million as of December 31, 2018. After evaluating the available for sale securities with unrealized losses, management concluded that the unrealized losses relate to changes in interest rates relative to when the securities were purchased, and therefore, no other than temporary impairment existed as of June 30, 2019. Available for sale securities are reported at fair value and unrealized gains and losses were included as a component of AOCI, net of deferred taxes.

Table 7

INVESTMENT SECURITIES



	June 30, 2019						December 31, 2018
(Dollars in thousands)	Composition		Cost		Fair value		Composition		Cost		Fair value
Investment securities available for sale
U.S. Treasury	14.0	%	$	946,859	$	948,402	18.2	%	$	1,249,243	$	1,247,710
Government agency	7.9		533,269		534,804		3.7		257,252		256,835
Mortgage-backed securities	40.4		2,734,696		2,733,698		42.5		2,956,793		2,909,339
Corporate bonds	2.2		147,901		149,137		2.1		143,829		143,226
Total investment securities available for sale	64.6		4,362,725		4,366,041		66.5		4,607,117		4,557,110
Investment in marketable equity securities	1.6		80,542		111,489		1.4		73,809		92,599
Investment securities held to maturity
Mortgage-backed securities	33.3		2,182,500		2,249,735		32.1		2,184,653		2,201,502
Other	0.5		35,548		35,548		—		—		—
Total investment securities held to maturity	33.8		2,218,048		2,285,283		32.1		2,184,653		2,201,502
Total investment securities	100.0	%	$	6,661,315	$	6,762,813	100.0	%	$	6,865,579	$	6,851,211

Loans and Leases

Loans and leases were $26.73 billion at June 30, 2019, a net increase of $1.20 billion, representing annualized growth of 9.5% since December 31, 2018. This increase was driven by a $1.26 billion net increase in the non-PCI portfolio, partially offset by a $55.1 million decline in the PCI loan portfolio. The net increase in the non-PCI portfolio was due to $1.01 billion in non-PCI loans acquired through the recent acquisitions of Biscayne Bancshares and First South Bancorp as well as organic growth primarily in the commercial mortgage and residential mortgage portfolios. Excluding acquired loans, total loans grew by 1.4% on an annualized basis.

BancShares reports non-PCI and PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial. Non-PCI loans and leases at June 30, 2019 were $26.18 billion, representing 97.9% of total loans and leases, compared to $24.92 billion or 97.6% at December 31, 2018. PCI loans at June 30, 2019 were $551.4 million, representing 2.1% of total loans and leases, compared to $606.6 million or 2.4% at December 31, 2018.

The discount related to acquired non-PCI loans and leases at June 30, 2019 and December 31, 2018 was $35.7 million and $33.3 million, respectively. The discount related to PCI loans at June 30, 2019 and December 31, 2018 was $93.0 million and $95.5 million, respectively.

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Table 8

LOANS AND LEASES



(Dollars in thousands)	June 30, 2019			December 31, 2018
Non-PCI loans and leases:
Commercial:
Construction and land development	$	719,534		$	757,854
Commercial mortgage	11,336,684			10,717,234
Other commercial real estate	506,760			426,985
Commercial and industrial and leases	3,980,504			3,938,730
Other	301,346			296,424
Total commercial loans	16,844,828			16,137,227
Noncommercial:
Residential mortgage	4,790,636			4,265,687
Revolving mortgage	2,470,653			2,542,975
Construction and land development	315,071			257,030
Consumer	1,755,602			1,713,781
Total noncommercial loans	9,331,962			8,779,473
Total non-PCI loans and leases	$	26,176,790		$	24,916,700
Total PCI loans	551,447			606,576
Total loans and leases	26,728,237			25,523,276
Less allowance for loan and lease losses	(226,583		)	(223,712		)
Net loans and leases	$	26,501,654		$	25,299,564

ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

The allowance for loan and lease losses was $226.6 million at June 30, 2019, representing an increase of $2.9 million since December 31, 2018. The ALLL as a percentage of total loans and leases was 0.85% at June 30, 2019, compared to 0.88% December 31, 2018.

At June 30, 2019, the ALLL allocated to total non-PCI loans and leases was $218.2 million, or 0.83% of non-PCI loans and leases, compared to $214.6 million, or 0.86%, at December 31, 2018. The ALLL as a percentage of non-PCI loans and leases declined 0.03% since December 31, 2018 primarily due to changes in portfolio mix partially offset by credit quality declines and increases in specific reserves.

At June 30, 2019, the ALLL for PCI loans totaled $8.3 million compared to $9.1 million at December 31, 2018. The decrease was primarily due to continued PCI loan portfolio run-off and improving cash flow estimates.

Net charge-offs for non-PCI loans and leases were $7.4 million during the second quarter of 2019, compared to $6.7 million during the second quarter of 2018. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.11% for the second quarter of 2019 and the second quarter of 2018. The net charge-off ratio was 0.11% for the six months ended June 30, 2019, unchanged for the same period of 2018.

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Table 9

ALLOWANCE FOR LOAN AND LEASE LOSSES



	Three months ended June 30						Six months ended June 30

(Dollars in thousands)	2019			2018			2019			2018
Allowance for loan and lease losses at beginning of period	$	228,775		$	223,116		$	223,712		$	221,893
Non-PCI provision for loan and lease losses	5,835			8,277			17,749			13,528
PCI (credit) provision for loan losses	(637		)	161			(801		)	2,515
Non-PCI Charge-offs:
Commercial:
Construction and land development	(28		)	(8		)	(72		)	(8		)
Commercial mortgage	(89		)	(459		)	(850		)	(505		)
Other commercial real estate	—			(69		)	—			(69		)
Commercial and industrial and leases	(3,422		)	(2,439		)	(5,280		)	(4,768		)
Other	(31		)	(38		)	(31		)	(41		)
Total commercial	(3,570		)	(3,013		)	(6,233		)	(5,391		)
Noncommercial:
Residential mortgage	(478		)	(289		)	(644		)	(1,095		)
Revolving mortgage	(493		)	(1,027		)	(1,456		)	(2,019		)
Construction and land development	—			(37		)	—			(219		)
Consumer	(6,061		)	(5,312		)	(12,423		)	(10,567		)
Total noncommercial	(7,032		)	(6,665		)	(14,523		)	(13,900		)
Total non-PCI charge-offs	(10,602		)	(9,678		)	(20,756		)	(19,291		)
Non-PCI Recoveries:
Commercial:
Construction and land development	40			93			171			116
Commercial mortgage	56			225			276			464
Other commercial real estate	—			1			1			146
Commercial and industrial and leases	599			642			1,137			1,902
Other	221			1			665			43
Total commercial	916			962			2,250			2,671
Noncommercial:
Residential mortgage	52			110			225			187
Revolving mortgage	447			520			834			714
Construction and land development	—			101			—			127
Consumer	1,797			1,330			3,370			2,639
Total noncommercial	2,296			2,061			4,429			3,667
Total non-PCI recoveries	3,212			3,023			6,679			6,338
Non-PCI loans and leases charged off, net	(7,390		)	(6,655		)	(14,077		)	(12,953		)
PCI loans charged off, net	—			(34		)	—			(118		)
Allowance for loan and lease losses at end of period	$	226,583		$	224,865		$	226,583		$	224,865
Reserve for unfunded commitments	$	1,149		$	1,554		$	1,149		$	1,554

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Table 10

ALLOWANCE FOR LOAN AND LEASE LOSSES RATIOS



	Three months ended June 30						Six months ended June 30
(Dollars in thousands)	2019			2018			2019			2018
Average loans and leases:
PCI	$	544,250		$	682,521		$	561,574		$	708,034
Non-PCI	25,995,212			23,522,842			25,448,455			23,229,187
Loans and leases at period-end:
PCI	551,447			674,269			551,447			674,269
Non-PCI	26,176,790			23,864,168			26,176,790			23,864,168
Allowance for loan and lease losses allocated to loans and leases:
PCI	8,343			12,423			8,343			12,423
Non-PCI	218,240			212,442			218,240			212,442
Total	$	226,583		$	224,865		$	226,583		$	224,865
Net charge-offs (annualized) to average loans and leases:
PCI	—		%	0.02		%	—		%	0.03		%
Non-PCI	0.11			0.11			0.11			0.11
Total	0.11			0.11			0.11			0.11
ALLL to total loans and leases:
PCI	1.51			1.84			1.51			1.84
Non-PCI	0.83			0.89			0.83			0.89
Total	0.85			0.92			0.85			0.92

NONPERFORMING ASSETS

Nonperforming assets include nonaccrual loans and leases and other real estate owned (OREO). At June 30, 2019, BancShares’ nonperforming assets totaled $151.2 million, an increase of $17.4 million since December 31, 2018.

Nonaccrual loans and leases at June 30, 2019 were $105.0 million, reflecting an increase of $19.2 million since December 31, 2018. The increase was primarily due to new nonaccrual loans within the commercial mortgage portfolio and acquired nonaccrual loans totaling $7.9 million. Despite this increase, the credit quality of the portfolio remains in line with our risk tolerances and management has not identified significant increases in portfolio risk. At June 30, 2019, OREO totaled $46.2 million, representing a decline of $1.8 million since December 31, 2018 as sales and write-downs of assets outpaced additions.

Table 11

NONPERFORMING ASSETS



	2019						2018
	Second			First			Fourth			Third			Second
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Nonaccrual loans and leases:
Non-PCI	$	100,701		$	88,958		$	84,546		$	85,419		$	85,055
PCI	4,274			1,667			1,276			1,530			1,570
Other real estate owned	46,236			43,306			48,030			43,601			46,633
Total nonperforming assets	$	151,211		$	133,931		$	133,852		$	130,550		$	133,258

Accruing loans and leases 90 days or more past due
Non-PCI	$	3,468		$	3,493		$	2,888		$	2,640		$	3,179
PCI	29,319			33,981			37,020			38,073			41,266

Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.57		%	0.53		%	0.52		%	0.52		%	0.54		%

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TROUBLED DEBT RESTRUCTURINGS (TDRs)

We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs that were not accruing interest at the time of restructure are included as nonperforming loans. TDRs that were accruing at the time of restructure and continue to perform based on the restructured terms are considered performing loans. Loans acquired under ASC 310-30 (PCI Loans), excluding pooled loans, are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modification 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.

Table 12

TROUBLED DEBT RESTRUCTURINGS



(Dollars in thousands)	June 30, 2019		December 31, 2018
Accruing TDRs:
Non-PCI	$	105,882	$	108,992
PCI	17,918		18,101
Total accruing TDRs	123,800		127,093
Nonaccruing TDRs:
Non-PCI	40,977		28,918
PCI	80		119
Total nonaccruing TDRs	41,057		29,037
All TDRs:
Non-PCI	146,859		137,910
PCI	17,998		18,220
Total TDRs	$	164,857	$	156,130

OTHER ASSETS

Other assets increased $305.8 million primarily due an increase in accounts receivable of $152.3 million mainly driven by outstanding proceeds from unsettled U.S. Treasury securities maturities, as well as the addition of new operating lease right-of-use assets totaling $81.5 million and additional BOLI assets totaling $32.6 million obtained in recent acquisitions.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, federal funds purchased, FHLB borrowings, subordinated debentures, and other borrowings. Interest-bearing liabilities totaled $20.68 billion at June 30, 2019, compared to $19.68 billion at December 31, 2018. The $1.00 billion increase was due an increase in interest-bearing deposits of $979.5 million, an increase in subordinated debentures of $13.5 million.

Deposits

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

At June 30, 2019, total deposits were $32.72 billion, an increase of $2.05 billion, representing annualized growth of 13.5% since December 31, 2018. Excluding acquired deposits totaling $1.04 billion, total deposits increased $1.01 billion, or by 6.6% annualized, over the same time period. This organic growth was primarily the result of increases in demand, interest checking and time deposit accounts, partially offset by a decline in money market accounts.

Table 13

DEPOSITS



	June 30, 2019		December 31, 2018
Demand	$	12,950,394	$	11,882,670
Checking with interest	5,458,688		5,338,511
Money market	8,179,135		8,194,818
Savings	2,646,939		2,499,750
Time	3,484,515		2,756,711
Total deposits	$	32,719,671	$	30,672,460

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Borrowings

At June 30, 2019, total borrowings were $914.4 million compared to $892.2 million at December 31, 2018. The $22.2 million increase from December 31, 2018 was primarily a result of acquired subordinated debentures totaling $13.5 million.

Table 14

BORROWINGS



	June 30, 2019		December 31, 2018
Securities sold under customer repurchase agreements	$	544,527	$	543,936
Federal Home Loan Bank borrowings	197,131		193,556
Subordinated debentures
SCB Capital Trust I	9,720		9,701
FCB/SC Capital Trust II	17,466		17,401
FCB/NC Capital Trust III	88,145		88,145
Capital Trust debentures assumed in acquisitions	5,155		4,124
Other subordinated debentures	33,791		21,370
Total subordinated debentures	154,277		140,741
Other borrowings	18,446		13,921
Total borrowings	$	914,381	$	892,154

BancShares owns five special purpose entities – FCB/NC Capital Trust III, FCB/SC Capital Trust II, SCB Capital Trust I, CCBI Capital Trust I, and FSBS Capital Trust I (the Trusts), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debentures included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.

During the six months ended June 30, 2019, FCB redeemed, in whole, all obligations related to CCBI Capital Trust I. In July 2019, FCB redeemed, in whole, all obligations related to FSBS Capital Trust I.

SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

Table 15 shows activities that caused the change in outstanding Class A common stock over the past five quarters.

In October 2018, BancShares' Board of Directors authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period November 1, 2018 through October 31, 2019. The authorization does not obligate BancShares to repurchase any particular amount of shares, and repurchases may be suspended or discontinued at any time. During the second quarter of 2019, BancShares repurchased 205,500 shares of Class A common stock for $89.8 million at an average cost per share of $436.81. During the first six months of 2019, BancShares repurchased a total of 448,500 shares of Class A common stock for $190.5 million at an average cost per share of $424.77. As of June 30, 2019, a total of 630,500 shares have been repurchased under the current Board authority. There were no share repurchases made during the comparable periods in 2018.

Table 15

CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING



	2019				2018
	Second		First		Fourth		Third		Second
(in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Class A shares outstanding at beginning of period	10,380		10,623		10,880		11,005		11,005
Repurchases	(205	)	(243	)	(257	)	(125	)	—
Class A shares outstanding at end of period	10,175		10,380		10,623		10,880		11,005

We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.

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In accordance with accounting principles generally accepted in the United States of America (GAAP), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios under current regulatory guidelines.

Table 16

ANALYSIS OF CAPITAL ADEQUACY



	Requirements to be well-capitalized		June 30, 2019				December 31, 2018
(Dollars in thousands)	Requirements to be well-capitalized		Amount		Ratio		Amount		Ratio
BancShares
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,434,211	12.03	%	$	3,463,307	12.67	%
Common equity Tier 1	6.50		3,434,211		12.03		3,463,307		12.67
Total risk-based capital	10.00		3,808,943		13.34		3,826,626		13.99
Tier 1 leverage ratio	5.00		3,434,211		9.35		3,463,307		9.77

FCB
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,463,780	12.15	%	$	3,315,742	12.17	%
Common equity Tier 1	6.50		3,463,780		12.15		3,315,742		12.17
Total risk-based capital	10.00		3,734,012		13.10		3,574,561		13.12
Tier 1 leverage ratio	5.00		3,463,780		9.46		3,315,742		9.39

As of June 30, 2019, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.

The capital conservation buffer introduced under Basel III became fully phased in at January 1, 2019 at 2.50%. BancShares and FCB had capital conservation buffers of 5.34% and 5.10%, respectively, at June 30, 2019, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee.

The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management's response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility.

In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.

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Credit risk management

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCI or non-PCI, are 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 originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These 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 that are 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, assets and liabilities repricing at the same point in time but in different amounts, and 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 forecasted net interest income, assuming stable rates. IRR scenarios modeled, include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. While market interest rates peaked in November 2018, interest-bearing deposit rates have continued to see upward pressure due to rate specials and acquisitions. Despite this trend, overall rates remain relatively low and, as such, it is unlikely these rates will decline materially from current levels. Additionally, our projections incorporate an internal rate outlook and assumptions of customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise.

Table 17 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of June 30, 2019 and December 31, 2018.

Table 17

NET INTEREST INCOME SENSITIVITY ANALYSIS



	Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis points)	June 30, 2019		December 31, 2018
-100	(11.18	)%	(10.67	)%
+100	3.66		2.38
+200	4.49		1.66

Net interest income sensitivity metrics at June 30, 2019 compared to December 31, 2018 were primarily affected by a reduction in the forecast for both the number of offerings and promotional rates paid on time deposits. Additionally, as market interest rates have continued to fall throughout 2019, prepayment speeds have increased leading to an increase in loan interest income under positive rate shocks.

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.

Table 18 table presents the EVE profile as of June 30, 2019 and December 31, 2018.

Table 18

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS



	Estimated percentage increase (decrease) in EVE
Change in interest rate (basis points)	June 30, 2019		December 31, 2018
-100	(21.14	)%	(15.14	)%
+100	10.24		3.34
+200	12.20		1.40

The economic value of equity metrics at June 30, 2019 compared to December 31, 2018 were primarily affected by strong growth in non-maturity deposits coupled with a sharp decline in market discount rates resulting in higher valuations.

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.

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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 borrowings (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, operational, 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 source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $4.07 billion at June 30, 2019 compared to $3.11 billion at December 31, 2018. Another source of available funds was advances from the FHLB of Atlanta and Chicago. Outstanding FHLB advances were $197.2 million as of June 30, 2019, and we had sufficient collateral pledged to secure $6.26 billion of additional borrowings from the FHLB of Atlanta. Also, at June 30, 2019, $2.73 billion in non-PCI loans with a lendable collateral value of $2.09 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines which had $732.7 million of available capacity at June 30, 2019.

CRITICAL ACCOUNTING ESTIMATES

There have been no significant changes in our Critical Accounting Estimates as described in our 2018 Annual Report on Form 10‑K.

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 acquisitions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect.

Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of June 30, 2019, BancShares’ market risk profile has not changed significantly from December 31, 2018 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 changes in BancShares' internal control over financial reporting occurred during the second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, BancShares' internal control over financial reporting.

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 were claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions currently exist that are expected to 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 risk factors described in our annual Form 10-K for the year ended December 31, 2018. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information concerning BancShares' repurchases of outstanding common stock during the three month period ended June 30, 2019, is included in the following table:



Shares of Class A common stock purchased by BancShares during the period ended June 30, 2019
Class A common stock	Total Number of Class A Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
Purchases from April 1, 2019 to April 30, 2019	56,300	$	430.39	56,300	318,700
Purchases from May 1, 2019 to May 31, 2019	76,600	442.63		76,600	242,100
Purchases from June 1, 2019 to June 30, 2019	72,600	435.66		72,600	169,500
Total	205,500	$	436.81	205,500	169,500
In October 2018, the Board authorized the purchase of up to 800,000 of BancShares' Class A common stock for the period November 1, 2018 through October 31, 2019. In April 2019, the Board authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period July 1, 2019 through June 30, 2020. This authorization was effective July 1, 2019 and supersedes the authorization approved in October 2018.

Subsequent to quarter-end and through August 2, 2019, BancShares repurchased an additional 69,600 shares of Class A common stock for $31.7 million at an average cost per share of $455.94.

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Item 6. Exhibits



2.1	Agreement and Plan of Merger, dated April 23, 2019, by and among First Citizens BancShares, Inc., First Citizens Bank & Trust Company, FC Merger Subsidiary VII, Inc., and Entegra Financial Corp. (incorporated by reference from Registrant's Form 8-K dated April 24, 2019)
31.1	Certification of Chief Executive Officer (filed herewith)

31.2	Certification of Chief Financial Officer (filed herewith)

32.1	Certification of Chief Executive Officer (filed herewith)

32.2	Certification of Chief Financial Officer (filed herewith)

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	August 6, 2019		FIRST CITIZENS BANCSHARES, INC.
			(Registrant)

		By:	/s/ CRAIG L. NIX
			Craig L. Nix
			Chief Financial Officer