FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2020 March (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 March 31, 2020

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

Commission File Number: 001-16715

____________________________________________________

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

____________________________________________________



Delaware			56-1528994
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

4300 Six Forks Road	Raleigh	North Carolina	27609
(Address of principle executive offices)			(Zip code)

		(919)	716-7000
(Registrant’s telephone number, including area code)

____________________________________________________

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
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A	FCNCP	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—9,163,220 shares

Class B Common Stock—1,005,815 shares

(Number of shares outstanding, by class, as of April 30, 2020)

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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	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 6.	Exhibits	63

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PART I


Item 1.	Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



(Dollars in thousands, unaudited)	March 31, 2020			December 31, 2019
Assets
Cash and due from banks	$	454,220		$	376,719
Overnight investments	688,518			1,107,844
Investment in marketable equity securities (cost of $344,161 at March 31, 2020 and $59,262 at December 31, 2019)	315,501			82,333
Investment securities available for sale (cost of $7,656,464 at March 31, 2020 and $7,052,152 at December 31, 2019)	7,789,034			7,059,674
Investment securities held to maturity (fair value of $753,178 at March 31, 2020 and $30,996 at December 31, 2019)	740,662			30,996
Loans held for sale	76,347			67,869
Loans and leases	29,240,959			28,881,496
Allowance for credit losses	(209,259		)	(225,141		)
Net loans and leases	29,031,700			28,656,355
Premises and equipment	1,251,702			1,244,396
Other real estate owned	55,707			46,591
Income earned not collected	125,626			123,154
Goodwill	350,084			349,398
Other intangible assets	63,884			68,276
Other assets	651,468			610,891
Total assets	$	41,594,453		$	39,824,496
Liabilities
Deposits:
Noninterest-bearing	$	13,688,744		$	12,926,796
Interest-bearing	21,657,967			21,504,440
Total deposits	35,346,711			34,431,236
Securities sold under customer repurchase agreements	540,362			442,956
Federal Home Loan Bank borrowings	792,684			572,185
Subordinated debt	504,145			163,412
Other borrowings	105,303			148,318
FDIC shared-loss payable	14,737			112,395
Other liabilities	332,991			367,810
Total liabilities	37,636,933			36,238,312
Shareholders’ equity
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 9,274,920 and 9,624,310 shares issued and outstanding at March 31, 2020 and December 31, 2019 respectively)	9,275			9,624
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 31, 2020 and December 31, 2019)	1,005			1,005
Preferred Stock - $0.01 par value (10,000,000 shares authorized; 345,000 and no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively)	3			—
Surplus	339,955			44,081
Retained earnings	3,632,894			3,658,197
Accumulated other comprehensive loss	(25,612		)	(126,723		)
Total shareholders’ equity	3,957,520			3,586,184
Total liabilities and shareholders’ equity	$	41,594,453		$	39,824,496

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income



	Three months ended March 31
(Dollars in thousands, except per share data, unaudited)	2020			2019
Interest income
Loans and leases	$	325,548		$	290,922
Investment securities interest and dividend income	39,493			39,605
Overnight investments	4,518			6,397
Total interest income	369,559			336,924
Interest expense
Deposits	24,194			12,926
Securities sold under customer repurchase agreements	442			459
Federal Home Loan Bank borrowings	2,984			1,285
Subordinated debt	2,755			1,672
Other borrowings	784			110
Total interest expense	31,159			16,452
Net interest income	338,400			320,472
Provision for credit losses	28,355			11,750
Net interest income after provision for credit losses	310,045			308,722
Noninterest income
Service charges on deposit accounts	26,413			25,065
Wealth management services	26,412			25,001
Cardholder services, net	18,160			16,633
Other service charges and fees	7,792			7,422
Merchant services, net	5,888			5,835
Mortgage income	5,224			3,658
Insurance commissions	3,688			3,291
ATM income	1,422			1,511
Marketable equity securities (losses) gains, net	(51,408		)	11,328
Realized gains on investment securities available for sale, net	19,795			—
Other	625			3,919
Total noninterest income	64,011			103,663
Noninterest expense
Salaries and wages	145,255			132,421
Employee benefits	38,511			32,535
Occupancy expense	27,480			27,761
Equipment expense	27,850			26,740
Processing fees paid to third parties	10,372			7,089
FDIC insurance expense	3,466			2,660
Collection and foreclosure-related expenses	4,054			3,022
Merger-related expenses	4,232			1,719
Other	38,751			33,710
Total noninterest expense	299,971			267,657
Income before income taxes	74,085			144,728
Income taxes	16,916			33,369
Net income	$	57,169		$	111,359
Less: Preferred stock dividends	—			—
Net income available to common shareholders	$	57,169		$	111,359
Weighted average common shares outstanding	10,473,119			11,519,008
Net income per common share	$	5.46		$	9.67

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income



	Three months ended March 31
(Dollars in thousands, unaudited)	2020			2019
Net income	$	57,169		$	111,359
Other comprehensive income
Unrealized gains on securities available for sale:
Unrealized gains on securities available for sale arising during the period	144,843			28,071
Tax effect	(33,313		)	(6,456		)
Reclassification adjustment for realized gains on securities available for sale included in income before income taxes	(19,795		)	—
Tax effect	4,553			—
Unrealized gains on securities available for sale arising during the period, net of tax	96,288			21,615
Unrealized losses on securities available for sale transferred from/to held to maturity:
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity	—			5,962
Tax effect	—			(1,371		)
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax	—			4,591
Change in pension obligation:
Amortization of actuarial losses and prior service cost	6,264			2,755
Tax effect	(1,441		)	(634		)
Total change in pension obligation, net of tax	4,823			2,121
Other comprehensive income	101,111			28,327
Total comprehensive income	$	158,280		$	139,686

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



	Three months ended March 31
(Dollars in thousands, unaudited)	Class A Common Stock			Class B Common Stock		Preferred Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2018	$	10,623		$	1,005	$	—	$	493,962		$	3,218,551		$	(235,187	)	$	3,488,954
Net income	—			—		—		—			111,359			—			111,359
Other comprehensive income, net of tax	—			—		—		—			—			28,327			28,327
Repurchase of 243,000 shares of Class A common stock	(243		)	—		—		(100,513		)	—			—			(100,756		)
Cash dividends declared ($0.40 per share)
Class A common stock	—			—		—		—			(4,173		)	—			(4,173		)
Class B common stock	—			—		—		—			(402		)	—			(402		)
Balance at March 31, 2019	$	10,380		$	1,005	$	—	$	393,449		$	3,325,335		$	(206,860	)	$	3,523,309

Balance at December 31, 2019	$	9,624		$	1,005	$	—	$	44,081		$	3,658,197		$	(126,723	)	$	3,586,184
Cumulative effect of adoption of ASC 326	—			—		—		—			36,943			—			36,943
Net income	—			—		—		—			57,169			—			57,169
Other comprehensive income, net of tax	—			—		—		—			—			101,111			101,111
Issuance of preferred stock	—			—		3		339,955			—			—			339,958
Repurchase of 349,390 shares of Class A common stock	(349		)	—		—		(44,081		)	(115,274		)	—			(159,704		)
Cash dividends declared ($0.40 per share)
Class A common stock	—			—		—		—			(3,739		)	—			(3,739		)
Class B common stock	—			—		—		—			(402		)	—			(402		)
Balance at March 31, 2020	$	9,275		$	1,005	$	3	$	339,955		$	3,632,894		$	(25,612	)	$	3,957,520

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	Three months ended March 31
(Dollars in thousands, unaudited)	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	57,169		$	111,359
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses on loans and leases	28,355			11,750
Deferred tax benefit	(11,485		)	(7,316		)
Net decrease in current taxes receivable	11,829			37,898
Depreciation and amortization	26,879			28,195
Net (decrease) increase in accrued interest payable	(4,624		)	3,457
Net increase in income earned not collected	(1,914		)	(3,909		)
Contribution to pension plans	(100,000		)	—
Realized gains on investment securities available for sale, net	(19,795		)	—
Marketable equity securities losses (gains), net	51,408			(11,328		)
Origination of loans held for sale	(205,986		)	(128,949		)
Proceeds from sale of loans held for sale	201,886			123,047
Gain on sale of loans held for sale	(5,682		)	(2,181		)
Net write-downs/losses on other real estate owned	1,419			427
Net amortization (accretion) of premiums and discounts	4,674			(7,099		)
Amortization of intangible assets	6,160			5,943
Net change in mortgage servicing rights	1,384			(698		)
Net change in other assets	4,067			31,422
Net change in other liabilities	(28,135		)	(51,985		)
Net cash provided by operating activities	17,609			140,033
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans outstanding	(202,667		)	68,052
Purchases of investment securities available for sale	(4,305,818		)	(593,952		)
Purchases of investment securities held to maturity	(724,412		)	(116,028		)
Purchases of marketable equity securities	(287,014		)	(6,076		)
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity	14,166			88,400
Proceeds from maturities, calls, and principal repayments of investment securities available for sale	572,937			587,023
Proceeds from sales of investment securities available for sale	3,156,988			—
Proceeds from sales of marketable equity securities	2,438			119
Net decrease (increase) in overnight investments	454,455			(589,119		)
Cash paid to FDIC for settlement of shared-loss agreement	(99,468		)	—
Proceeds from sales of other real estate owned	5,265			7,430
Proceeds from sales of premises and equipment	—			54
Purchases of premises and equipment	(26,930		)	(23,875		)
Business acquisitions, net of cash acquired	(1,235		)	—
Net cash used in investing activities	(1,441,295		)	(577,972		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in time deposits	(310,224		)	138,640
Net increase in demand and other interest-bearing deposits	1,017,371			387,319
Net decrease in short-term borrowings	(92,871		)	(35,428		)
Repayment of long-term obligations	(38,583		)	(8,688		)
Origination of long-term obligations	400,000			—
Net proceeds from subordinated notes issuance	345,886			—
Net proceeds from preferred stock issuance	339,958			—
Repurchase of common stock	(156,094		)	(98,077		)
Cash dividends paid	(4,256		)	(4,668		)
Net cash provided by financing activities	1,501,187			379,098
Change in cash and due from banks	77,501			(58,841		)
Cash and due from banks at beginning of period	376,719			327,440
Cash and due from banks at end of period	$	454,220		$	268,599
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	$	4,560		$	2,613
Dividends declared but not paid	4,141			4,575
Net reclassification of portfolio loans from loans held for sale	(1,304		)	(605		)
Transfers of premises and equipment to other real estate	1,427			520
Premises and equipment acquired through finance leases and other financing arrangements	1,191			—
Unsettled common stock repurchases	3,610			2,679

See accompanying Notes to Unaudited 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 the Consolidated Financial Statements included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2019.

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 which affect the amounts reported. Actual results could differ from those estimates. The estimates BancShares considers significant are the allowance for credit losses, fair value measurements, and income taxes.

Issuance of Preferred Stock and Subordinated Debt

On March 4, 2020, BancShares completed its public offering of $350 million aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030 and redeemable at the option of BancShares starting in 2025. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series A Preferred Stock) for a total of $345 million. The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in First Citizens Bank as regulatory capital, and redeeming or repurchasing our common stock.

Share Repurchases

During the first quarter of 2020, BancShares repurchased 349,390 shares of Class A common stock for $159.7 million at an average cost per share of $457.05. During the first quarter of 2019, BancShares repurchased a total of 243,000 shares of Class A common stock for $100.7 million at an average cost per share of $414.58. All Class A common stock repurchases were consummated under previously approved authorizations.

The share repurchases in the first quarter of 2020 included 45,000 shares of Class A common stock repurchased from Ella Ann

Holding, as trustee of her revocable trust. Pursuant to the existing share repurchase authorization and BancShares’ related person transaction policy, the Board of Director’s (the “Board”) independent Audit Committee reviewed and approved the repurchase of up to 250,000 shares held by Mrs. Holding on or before April 30, 2020.

Subsequent to quarter-end through April 30, 2020, BancShares repurchased an additional 111,700 shares of Class A common stock for $37.3 million at an average cost per share of $333.71.

On April 28, 2020, the Board authorized share repurchases of up to 500,000 of BancShares’ Class A common stock for the period May 1, 2020 through July 31, 2020. This authority supersedes all previously approved authorities.

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Recently Adopted Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“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.

BancShares adopted this ASU during the first quarter of 2020 and have made all applicable updates to the disclosure within the Notes to the Unaudited Consolidated Financial Statements.

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.

BancShares adopted this ASU during the first quarter 2020 with no 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 (and all subsequent ASUs on this topic) introduce the current expected credit loss (“CECL”) model, a new credit loss methodology, 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.

BancShares adopted this ASU (and all subsequent ASUs on this topic) as of January 1, 2020 using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted the ASU using the prospective approach for debt securities available for sale and purchased credit deteriorated (“PCD”) loans previously accounted for under Accounting Standard Codification (“ASC”) ASC 310-30. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. BancShares made changes to loan classifications and segmentation in order to align with ASC 326 requirements and facilitate CECL modeling. Using this updated segmentation, BancShares developed new loan level models to estimate the allowance for credit losses (“ACL”) and facilitate revised disclosures.

The information presented below represents changes from Note A, Accounting Policies and Basis of Presentation, included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2019, as well as information on the impact of adoption.

Accounting Policy - Debt Securities

BancShares classifies debt securities as held to maturity (“HTM”) or available for sale (“AFS”). Debt securities are classified as HTM when BancShares has the intent and ability to hold the securities to maturity and are reported at amortized cost. Other debt securities are classified as AFS and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in Accumulated Other Comprehensive Income (“AOCI”). Amortization of premiums and accretion of discounts for debt securities are included in interest income. Realized gains and losses from the sale of debt securities are determined by specific identification on a trade date basis and are included in noninterest income.

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BancShares performs pre-purchase due diligence and evaluates the credit risk of AFS and HTM securities purchased directly into our portfolio or via acquisition. If securities have evidence of more than insignificant credit deterioration since issuance, they are designated as PCD. PCD securities are recorded at fair value at the date of acquisition which includes an associated allowance that is added to the purchase price or fair value to arrive at the Day 1 amortized cost basis. The difference between the purchase price and the Day 1 amortized cost is amortized or accreted to interest income over the contractual life of the securities using the effective interest method.

For AFS securities, management performs a quarterly analysis of the investment portfolio to evaluate securities currently in an unrealized loss position for potential credit-related impairment. If BancShares intends to sell a security, or does not have the intent and ability to hold a security before recovering the amortized cost, the entirety of the unrealized loss is immediately recorded in earnings. For the remaining securities, an analysis is performed to determine if any portion of the unrealized loss recorded relates to credit impairment. If credit related impairment exists, the amount is recorded through the ACL and related provision. This review includes indicators such as changes in credit rating, delinquency, bankruptcy or other significant news event impacting the issuer.

Bancshares’ portfolio of HTM debt securities is made up of mortgage-backed securities issued by government agencies and government sponsored entities. Given the historically strong credit rating of the US Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined zero expected credit losses on the HTM portfolio.

Accounting Policy - Loans and Leases

Non-Purchased Credit Deteriorated (“Non-PCD”) Loans

Non-PCD loans consist of loans originated by BancShares and loans purchased from other institutions that do not reflect more than insignificant credit deterioration at acquisition.

Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield.

Purchased loans which do not reflect more than insignificant credit deterioration at acquisition are classified as non-PCD loans. These loans are recorded at fair value at the date of acquisition and an initial allowance is recorded on these assets as provision expense at the date of acquisition. The difference between the fair value and the unpaid principal balance at the acquisition date is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.

Purchased Credit Deteriorated Loans

Purchased loans which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD and are recorded at acquisition date amortized cost, which is the purchase price or fair value in a business combination, plus our initial estimate of expected credit losses. The difference between the unpaid principal balance and the acquisition date amortized cost is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.

The performance of all loans within the BancShares portfolio is subject to a number of external risks, including but not limited to changes in the overall health of the economy, declines in real estate or other collateral values, changes in the demand for products and services and personal events, such as death, disability or change in marital status. BancShares evaluates and reports its non-PCD and PCD loan portfolios separately, and each non-PCD portfolio is further divided into commercial and consumer segments based on the type of borrower, purpose, collateral and/or our underlying credit management processes. Additionally, non-PCD commercial and consumer loans are assigned to loan classes, which further disaggregate the loan portfolio. PCD loans are reported as a single loan segment and class.

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The following represent our classes of loans as of January 1, 2020:

Commercial loans and leases

Construction and land development - Construction and land development consists of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.

Owner occupied commercial mortgage - Owner occupied commercial mortgages consists of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

Non-owner occupied commercial mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

Commercial and industrial and leases - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.

Consumer loans

Residential mortgage - Residential mortgage consists of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral.

Revolving mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render a the junior lien position effectively unsecured.

Construction and land development - Construction and land development consists of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.

Consumer auto loans - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

Other consumer - Consumer loans consist of loans to finance unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

Upon adoption of ASC 326, owner occupied and non-owner occupied commercial real estate were segregated into separate classes within the commercial segment. Similarly, consumer auto was segregated into its own class within the consumer segment. These enhancements were made to capture the unique credit characteristics used in our CECL models.

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Accounting Policy - Nonperforming Assets and Troubled Debt Restructurings

Nonperforming Assets (“NPA”)

NPAs include nonaccrual loans, past due securities and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of loan defaults and is discussed below.

All loans are classified as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable the principal or interest is not fully collectible. When loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a reduction of the remaining principal balance as long as doubt exists as to the ultimate collection of the principal. Loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the collectability of principal and interest.

Securities are also classified as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Missed interest payments on securities are rare. We review all securities with delinquent interest and immediately charge off any accrued interest determined to be uncollectible.

Troubled Debt Restructurings (“TDR”)

A loan is considered a TDR when both of the following occur: (1) a modification to a borrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include short-term deferrals of interest, modifications of payment terms, or (in certain limited instances) forgiveness of principal or interest. Loans restructured as a TDR are treated and reported as such for the remaining life of the loan. TDR loans can be nonaccrual or accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, the remaining balance is typically classified as nonaccrual.

Accounting Policy - Allowance for Credit Losses (“ACL”)

Loans

Loans within the various reporting classes are segregated into pools with similar risk characteristics and models are built to estimate the ACL. These loan level ACL models estimate the probability of default and loss given default for individual loans within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. Pools for estimating the ACL are aggregated into loan classes, as described above, which roll up into commercial and consumer loan segments. Non-PCD and PCD loans are modeled together within the loan level models using acquired and PCD indicator variables to provide differentiation of individual loan risk. BancShares uses a two-year reasonable and supportable forecast period which incorporates economic forecasts at the time of evaluation. For most pools, BancShares uses a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized.

The ACL represents management’s best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of pre-payment expectations. Pre-payment assumptions were developed through a review of BancShares historical pre-payment activity and began with a review of pre-payment assumptions utilized in other modeling activities. Estimates for loan losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to provision for credit losses. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL.

A primary component of determining the ACL on loans is the actual net loss history of the various loan pools. For commercial pools, key factors utilized in the models include delinquency trends as well as macroeconomic variables such as unemployment and commercial real estate price index. For consumer pools, key factors include delinquency trends and the borrower’s original credit score, as well as other macroeconomic variables such as unemployment, gross domestic product, home price index, and commercial real estate index. As the models project losses over the life of the loans, prepayment assumptions also serve as significant inputs. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes.

Within our ACL model, TDRs meet the definition of default and are given a 100% probability of default rating. TDRs are not individually evaluated unless determined to be collateral-dependent. Therefore, loss given default is calculated based on the individual risk characteristics of the loan as defined in the model.

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When loans do not share risk characteristics similar to others in the pool, the ACL is evaluated on an individual basis. Given that BancShares CECL models are loan level models, the population of loans evaluated individually is minimal and consists primarily of loans greater than $500 thousand and determined to be collateral-dependent. BancShares elected the practical expedient allowed under ASC 326 to assess the collectability of these loans, where repayment is expected to be provided substantially through operation or sale of collateral, based on the fair value of the underlying collateral. The fair value of the collateral is estimated using appraised and market values (appropriately adjusted for an assessment of the sales and marketing costs when applicable). A specific allowance is established, or partial charge-off is recorded, for the difference between the excess amortized cost of loan and the collateral’s estimated fair value.

Accrued Interest Receivable

BancShares has elected not to measure an ACL for accrued interest receivable and has excluded it from the amortized cost basis of loans and held to maturity debt securities as our accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner.

Unfunded Commitments

A reserve for unfunded commitments is established for off-balance sheet exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well a both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). These unfunded commitments are assessed to determine both the probability of funding as well the expectation of future losses. The expected funding balance is used in the probability of default and loss given default models to determine the reserve. The reserve for unfunded commitments was $10.5 million at March 31, 2020, and is recorded within other liabilities with changes recorded through other expense.

Adoption Impact

Upon adoption, BancShares recorded a net decrease of $37.9 million in the ACL which included a reduction of $56.9 million in the ACL on non-PCD loans, offset by an increase of $19.0 million in the ACL on PCD loans. The $56.9 million reduction in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in an increase in retained earnings of $36.9 million. The $19.0 million increase in the ACL on PCD loans resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes. There was no ACL recorded on debt securities held to maturity at adoption.

The largest changes in the ACL, affecting beginning retained earnings as a result of the adoption, were decreases in the ACL on commercial loan segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. The reduction in ACL on these segments was partially offset by increases in ACL on our consumer loan segments primarily due to their longer average lives. The increase in the reserve for unfunded commitments was primarily due to increases in the scope of off-balance sheet exposures considered in this estimate due to the provisions in ASU 2016-13.

BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30. In accordance with the standard, we did not assess whether purchased credit impaired (“PCI”) loans met the criteria of PCD as of the date of adoption and all loans previously classified as PCI were updated to the PCD classification. Pools utilized for PCI accounting under ASC 310-10 were dissolved upon adoption. Loans from performing PCI pools, not previously considered nonaccrual of $47.0 million, were reclassified into nonaccrual status as a result of adoption. PCD loans were assessed using the loan level probability of default and loss given default models, as well as utilizing prior specific loan reviews to inform the initial PCD loan ACL. The ACL for PCD loans increased as a result of adoption and the amortized cost basis of these loans was adjusted to reflect the transfer of this amount from credit discount to ACL. The remaining noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2020. At the date of adoption, no securities were determined to be PCD.

BancShares also adopted this ASU under the prospective transition approach for debt securities available for sale. No previously recorded other than temporary impairment was reported on the portfolio of debt securities.

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Recently Issued Accounting Pronouncements

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 fourth quarter of 2020.

NOTE B - BUSINESS COMBINATIONS

BancShares evaluated the financial statement significance for all business combinations completed during 2020 and concluded the completed business combinations noted below are not material to its consolidated financial statements, individually or in aggregate, and therefore, pro forma financial data is not included.

Each transaction is accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values as of 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 value becomes available.

As part of the accounting for each acquisition, we perform an analysis of the acquired bank’s loan portfolio and based on such credit factors as past due status, nonaccrual status, life-to-date charge-offs and other quantitative and qualitative considerations segregate the acquired loans into PCD loans and non-PCD loans. PCD loans are accounted for under ASC 326-20, and non-PCD loans which do not meet this criteria are accounted for under ASC 310-20. Additionally, we perform an analysis of the acquired bank’s portfolio of debt securities to determine if any debt securities should be designated PCD.

Community Financial Holding Co. Inc.

The fair value of the assets acquired was $221.4 million, including $110.6 million in non-PCD loans, $23.4 million in PCD loans net of an allowance for credit losses of $1.2 million and $536 thousand in a core deposit intangible. No debt securities purchased in the transaction were designated PCD. Liabilities assumed were $219.8 million, of which $209.3 million were deposits. As a result of the transaction, FCB recorded $686 thousand 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 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			$	2,320
Assets
Cash and due from banks	$	1,085
Overnight investments	35,129
Investment securities	30,146
Loans	133,989
Premises and equipment	7,624
Other real estate owned	9,813
Income earned not collected	558
Intangible assets	536
Other assets	2,520
Total assets acquired	221,400
Liabilities
Deposits	209,340
Borrowings	9,925
Other liabilities	501
Total liabilities assumed	$	219,766
Fair value of net assets acquired			1,634
Goodwill recorded for Community Financial			$	686

Merger-related expenses of $1.2 million were recorded for the three months ended March 31, 2020. Loan-related interest income generated from Community Financial was approximately $1.2 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.

Entegra Financial Corp.

On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. In order to obtain regulatory approval, FCB entered into an agreement for Select Bank & Trust Company (“Select Bank”) to purchase three of our North Carolina branches, located in Highlands, Sylva and Franklin. The assets and liabilities of the branches to be divested are recorded on the Consolidated Balance Sheets and in the related Unaudited Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $108.8 million, $1.9 million and $185.3 million, respectively, as of March 31, 2020. The Select Bank purchase price for the divested branches included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank. FCB completed the transaction with Select Bank on April 17, 2020.

NOTE C - INVESTMENTS

Information for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326 and reflect changes required by the adoption of this standard which includes evaluating held to maturity and available for sale debt securities to determine the need to record a related allowance for credit losses. Prior period information continues to be reported in accordance with previously applicable GAAP. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption.

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The amortized cost and fair value of investment securities at March 31, 2020 and December 31, 2019, were as follows:



	March 31, 2020
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Allowance for credit losses		Fair value
Investment securities available for sale
U.S. Treasury	$	204,971	$	811	$	—	$	—	$	205,782
Government agency	762,342		1,005		2,916		—		760,431
Residential mortgage-backed securities	5,832,518		123,114		2,791		—		5,952,841
Commercial mortgage-backed securities	635,565		15,603		603		—		650,565
Corporate bonds	221,068		3,520		5,173		—		219,415
Total investment securities available for sale	$	7,656,464	$	144,053	$	11,483	$	—	$	7,789,034
Investment in marketable equity securities	344,161		4,266		32,926				315,501
Investment securities held to maturity
Residential mortgage-backed securities	720,441		12,538		22		—		732,957
Other	20,221		—		—		—		20,221
Total investment securities held to maturity	740,662		12,538		22		—		753,178
Total investment securities	$	8,741,287	$	160,857	$	44,431	$	—	$	8,857,713

			December 31, 2019
(Dollars in thousands)			Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury			$	409,397	$	602	$	—	$	409,999
Government agency			684,085		928		2,241		682,772
Residential mortgage-backed securities			5,269,060		13,417		15,387		5,267,090
Commercial mortgage-backed securities			373,105		6,974		59		380,020
Corporate bonds			198,278		3,420		132		201,566
State, county and municipal			118,227		—		—		118,227
Total investment securities available for sale			$	7,052,152	$	25,341	$	17,819	$	7,059,674
Investment in marketable equity securities			59,262		23,304		233		82,333
Investment securities held to maturity
Other			30,996		—		—		30,996
Total investment securities held to maturity			30,996		—		—		30,996
Total investment securities			$	7,142,410	$	48,645	$	18,052	$	7,173,003

Investments in residential and commercial 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 held to maturity investments include certificates of deposit with other financial institutions.

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 recorded with no fair value. BancShares held FHLB stock of $51.1 million and $43.0 million and other non-marketable equity securities of $12.9 million and $12.5 million at March 31, 2020 and December 31, 2019, respectively. Both are included in other assets.

As of March 31, 2020 and January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities. Accrued interest receivable on debt securities at March 31, 2020 was $22.1 million and was excluded from the estimate of credit losses. During the three months ended March 31, 2020, no accrued interest was deemed uncollectible and written off against interest income.

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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 and government agency securities are dependent on the repayments of the underlying loan balances. Repayments of certain corporate bonds are subject to call provisions which can be exercised by the issuer at their discretion.



	March 31, 2020				December 31, 2019
(Dollars in thousands)	Cost		Fair value		Cost		Fair value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	204,971	$	205,782	$	406,325	$	406,927
One through five years	32,639		32,446		24,496		24,971
Five through 10 years	184,476		183,469		185,209		187,868
Over 10 years	3,953		3,500		109,872		110,026
Government agency	762,342		760,431		684,085		682,772
Residential mortgage-backed securities	5,832,518		5,952,841		5,269,060		5,267,090
Commercial mortgage-backed securities	635,565		650,565		373,105		380,020
Total investment securities available for sale	$	7,656,464	$	7,789,034	$	7,052,152	$	7,059,674
Investment securities held to maturity
Non-amortizing securities maturing in:
One year or less	19,472		19,472		30,746		30,746
One through five years	749		749		250		250
Residential mortgage-backed securities	720,441		732,957		—		—
Total investment securities held to maturity	$	740,662	$	753,178	$	30,996	$	30,996

There were gross gains of $20.5 million and gross losses of $679 thousand on sales of investment securities available for sale during the three months ended March 31, 2020. There were no gross gains or losses on sales of investment securities available for sale for the three months ended March 31, 2019.

The following table provides the realized and unrealized gains and losses on marketable equity securities for the three months ended March 31, 2020 and 2019:



	Three months ended March 31
(Dollars in thousands)	2020			2019
Marketable equity securities (losses) gains, net	$	(51,408	)	$	11,328
Less net gains recognized on marketable equity securities sold	323			44
Unrealized (losses) gains recognized on marketable equity securities held	$	(51,731	)	$	11,284

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The following table provides information regarding securities with unrealized losses as of March 31, 2020 and December 31, 2019:



	March 31, 2020
	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
Government agency	$	436,066	$	2,542	$	60,920	$	374	$	496,986	$	2,916
Residential mortgage-backed securities	366,901		625		177,167		2,166		544,068		2,791
Commercial mortgage-backed securities	75,480		603		—		—		75,480		603
Corporate bonds	106,822		4,480		8,856		693		115,678		5,173
Total	$	985,269	$	8,250	$	246,943	$	3,233	$	1,232,212	$	11,483
Investment securities held to maturity
Residential mortgage-backed securities	$	70,108	$	22	$	—	$	—	$	70,108	$	22

	December 31, 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
Government agency	$	347,081	$	1,827	$	63,947	$	414	$	411,028	$	2,241
Residential mortgage-backed securities	2,387,293		14,016		264,257		1,371		2,651,550		15,387
Commercial mortgage-backed securities	35,926		59		—		—		35,926		59
Corporate bonds	7,714		123		4,749		9		12,463		132
Total	$	2,778,014	$	16,025	$	332,953	$	1,794	$	3,110,967	$	17,819

As of March 31, 2020, there were 53 investment securities available for sale that had continuous losses for more than 12 months of which 51 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and two were corporate bonds.

None of the unrealized losses identified as of March 31, 2020 or December 31, 2019 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 investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the securities were deemed to require an allowance for credit losses. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

Investment securities having an aggregate carrying value of $4.02 billion at March 31, 2020 and $3.93 billion at December 31, 2019 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

Bancshares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities. Given the consistently strong credit rating of the U.S. Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no further credit monitoring is performed over these portfolios. Should there be downgrades to the credit rating of the U.S. Treasury or losses reported on securities issued by government agencies and government sponsored entities, Bancshares will reevaluate its determination of zero expected credit losses on held to maturity debt securities.

There were no debt securities held to maturity on nonaccrual status as of March 31, 2020.

A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of March 31, 2020.

NOTE D - LOANS AND LEASES

BancShares’ accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination, as of the date of acquisition. Non-PCD loans consist of loans originated by BancShares and loans purchased from other institutions, that do not reflect more than insignificant credit deterioration at acquisition and are reported by loan segments and classes as defined in Note A - Accounting Polices and Basis of Presentation. Purchased loans which reflect more than insignificant credit deterioration are classified as PCD and reported as a single loan segment or class. At the date of acquisition, all acquired loans are recorded at fair value.

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Upon adoption of ASC 326, there were changes to certain non-PCD loan classes to better differentiate credit characteristics and align with our ACL models. Within the commercial segment, owner occupied and non-owner occupied commercial real estate were segregated into separate classes. Similarly, consumer auto was segregated into its own class within the consumer segment. Information for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326 and reflect changes to the respective classes, while prior period amounts continue to be reported in accordance with previously applicable GAAP and have not been reclassified to conform to the current financial statement presentation.

Loans and leases outstanding included the following at March 31, 2020 and December 31, 2019:



(Dollars in thousands)	March 31, 2020
Commercial:
Construction and land development	$	1,014,017
Owner occupied commercial mortgage	10,076,132
Non-owner occupied commercial mortgage	3,058,235
Commercial and industrial and leases	4,738,098
Total commercial loans	18,886,482
Consumer:
Residential mortgage	5,299,412
Revolving mortgage	2,362,644
Construction and land development	363,190
Consumer auto	1,201,152
Consumer other	567,727
Total consumer loans	9,794,125
Total non-PCD loans and leases	28,680,607
PCD loans	560,352
Total loans and leases	$	29,240,959



(Dollars in thousands)	December 31, 2019
Commercial:
Construction and land development	$	1,013,454
Commercial mortgage	12,282,635
Other commercial real estate	542,028
Commercial and industrial and leases	4,403,792
Other	310,093
Total commercial loans	18,552,002
Noncommercial:
Residential mortgage	5,293,917
Revolving mortgage	2,339,072
Construction and land development	357,385
Consumer	1,780,404
Total noncommercial loans	9,770,778
Total non-PCI loans and leases	28,322,780
PCI loans	558,716
Total loans and leases	$	28,881,496

Accrued interest receivable on loans at March 31, 2020 was $90.0 million and was excluded from the estimate of credit losses.

At March 31, 2020, $10.31 billion in non-PCD loans with a lendable collateral value of $8.22 billion were used to secure $787.7 million in Federal Home Loan Bank (“FHLB”) of Atlanta advances, resulting in additional borrowing capacity of $7.43 billion. At December 31, 2019, $9.41 billion in non-PCD loans with a lendable collateral value of $6.57 billion were used to secure $563.7 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.01 billion.

At March 31, 2020, $3.88 billion in non-PCD loans with a lendable collateral value of $3.15 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (“FRB”). At December 31, 2019, $3.68 billion in non-PCD loans with a lendable collateral value of $2.98 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. Loans held for sale totaled $76.3 million and $67.9 million at March 31, 2020 and December 31, 2019, respectively.

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Net deferred fees on non-PCD loans and leases, including unearned and unamortized costs and fees, were $1.4 million and $0.9 million at March 31, 2020 and December 31, 2019, respectively. The net unamortized discount related to purchased non-PCD loans and leases was $28.3 million at March 31, 2020 and $30.9 million at December 31, 2019. The net unamortized discount related to PCD loans and leases was $61.6 million at March 31, 2020 and $88.2 million at December 31, 2019.

The aging of the outstanding loans and leases, by class, at March 31, 2020 and December 31, 2019 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.



	March 31, 2020
(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
Commercial:
Construction and land development	$	3,297	$	342	$	2,098	$	5,737	$	1,008,280	$	1,014,017
Owner occupied commercial mortgage	22,793		3,083		14,499		40,375		10,035,757		10,076,132
Non-owner occupied commercial mortgage	9,173		308		4,895		14,376		3,043,859		3,058,235
Commercial and industrial and leases	18,076		6,924		4,250		29,250		4,708,848		4,738,098
Total commercial loans	53,339		10,657		25,742		89,738		18,796,744		18,886,482
Consumer:
Residential mortgage	40,149		8,015		29,908		78,072		5,221,340		5,299,412
Revolving mortgage	10,145		3,410		8,033		21,588		2,341,056		2,362,644
Construction and land development	6,089		—		1,556		7,645		355,545		363,190
Consumer auto	5,675		1,181		1,485		8,341		1,192,811		1,201,152
Consumer other	3,647		2,058		2,293		7,998		559,729		567,727
Total consumer loans	65,705		14,664		43,275		123,644		9,670,481		9,794,125
PCD loans	27,628		8,680		27,961		64,269		496,083		560,352
Total loans and leases	$	146,672	$	34,001	$	96,978	$	277,651	$	28,963,308	$	29,240,959

	December 31, 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
Commercial:
Construction and land development	$	3,146	$	195	$	2,702	$	6,043	$	1,007,411	$	1,013,454
Commercial mortgage	20,389		8,774		8,319		37,482		12,245,153		12,282,635
Other commercial real estate	861		331		698		1,890		540,138		542,028
Commercial and industrial and leases	18,269		4,842		5,032		28,143		4,375,649		4,403,792
Other	51		411		126		588		309,505		310,093
Total commercial loans	42,716		14,553		16,877		74,146		18,477,856		18,552,002
Noncommercial:
Residential mortgage	45,839		18,289		24,409		88,537		5,205,380		5,293,917
Revolving mortgage	9,729		3,468		9,865		23,062		2,316,010		2,339,072
Construction and land development	977		218		1,797		2,992		354,393		357,385
Consumer	10,481		3,746		3,571		17,798		1,762,606		1,780,404
Total noncommercial loans	67,026		25,721		39,642		132,389		9,638,389		9,770,778
Total non-PCI loans and leases	$	109,742	$	40,274	$	56,519	$	206,535	$	28,116,245	$	28,322,780

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The amortized cost, by class, of loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at March 31, 2020 and December 31, 2019, were as follows:



	January 1, 2020⁽¹⁾		March 31, 2020
(Dollars in thousands)	Nonaccrual loans and leases		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Commercial:
Construction and land development	$	4,281	$	3,603	$	—
Owner occupied commercial mortgage	24,476		26,438		536
Non-owner occupied commercial mortgage	5,965		5,679		—
Commercial and industrial and leases	7,685		7,858		488
Total commercial loans	42,407		43,578		1,024
Consumer:
Residential mortgage	44,357		49,220		—
Revolving mortgage	22,411		22,067		—
Construction and land development	2,828		2,881		—
Consumer auto	2,145		2,832		—
Consumer other	798		759		1,909
Total consumer loans	72,539		77,759		1,909
PCD loans	53,771		53,234		37
Total loans and leases	$	168,717	$	174,571	$	2,970
⁽¹⁾Upon the adoption of ASC 326, BancShares eliminated the pooling of PCI loans and as a result $47.0 million in additional PCD loans were recognized as nonaccrual loans at January 1, 2020.



	December 31, 2019
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Commercial:
Construction and land development	$	4,281	$	—
Commercial mortgage	29,733		—
Commercial and industrial and leases	7,365		1,094
Other commercial real estate	708		—
Other	320		—
Total commercial loans	42,407		1,094
Noncommercial:
Construction and land development	2,828		—
Residential mortgage	44,357		45
Revolving mortgage	22,411		—
Consumer	2,943		2,152
Total noncommercial loans	72,539		2,197
Total loans and leases	$	114,946	$	3,291

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Credit Quality

Loans and leases are monitored for credit quality on a recurring basis. Commercial and consumer 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 commercial loans and leases are borrower risk classifications developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated at least annually, with more frequent evaluations done on criticized loans. Commercial loans are also updated if there is evidence of potential credit deterioration, such as delinquency. Commercial credit cards are included in the Commercial and industrial and leases segment, but are evaluated based primarily upon delinquency status. The risk classifications 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 March 31, 2020 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 consumer and PCD 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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The following tables represent current credit quality indicators by origination year as of March 31, 2020.



	Commercial Term Loans Amortized Cost Basis by Origination Year
Classification:	2020		2019		2018		2017		2016		Prior		Revolving		Revolving converted to term loans		Total
(Dollars in thousands)
Construction and land development
Pass	$	94,980	$	382,104	$	267,188	$	176,674	$	32,927	$	18,191	$	24,922	$	—	$	996,986
Special Mention	91		—		350		5,407		—		440		—		—		6,288
Substandard	1,638		1,239		7,161		—		8		697		—		—		10,743
Total	$	96,709	$	383,343	$	274,699	$	182,081	$	32,935	$	19,328	$	24,922	$	—	$	1,014,017
Owner occupied commercial mortgage
Pass	$	647,821	$	2,230,133	$	1,860,144	$	1,537,841	$	1,261,880	$	2,195,573	$	126,108	$	139	$	9,859,639
Special Mention	—		8,201		26,827		14,694		18,763		35,475		4,129		—		108,089
Substandard	1,679		10,759		13,471		19,717		14,039		40,751		7,916		72		108,404
Total	$	649,500	$	2,249,093	$	1,900,442	$	1,572,252	$	1,294,682	$	2,271,799	$	138,153	$	211	$	10,076,132
Non-owner occupied commercial mortgage
Pass	$	200,770	$	680,203	$	532,550	$	452,508	$	404,537	$	704,861	$	43,379	$	—	$	3,018,808
Special Mention	—		1,849		10,042		933		5,971		7,485		798		—		27,078
Substandard	499		1,821		1,939		823		4,445		1,343		1,479		—		12,349
Total	$	201,269	$	683,873	$	544,531	$	454,264	$	414,953	$	713,689	$	45,656	$	—	$	3,058,235
Commercial and industrial and leases
Pass	$	348,311	$	1,299,423	$	698,386	$	450,781	$	336,295	$	436,325	$	1,013,228	$	5,616	$	4,588,365
Special Mention	1,389		1,501		4,647		6,052		3,081		3,238		9,913		73		29,894
Substandard	4,035		4,311		4,408		5,798		3,175		7,655		19,632		816		49,830
Doubtful	—		—		—		—		—		—		3		—		3
Ungraded	—		—		—		—		—		—		70,006		—		70,006
Total	$	353,735	$	1,305,235	$	707,441	$	462,631	$	342,551	$	447,218	$	1,112,782	$	6,505	$	4,738,098
Total commercial	$	1,301,213	$	4,621,544	$	3,427,113	$	2,671,228	$	2,085,121	$	3,452,034	$	1,321,513	$	6,716	$	18,886,482

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	Consumer and PCD Term Loans Amortized Cost Basis by Origination Year
Days Past Due:	2020		2019		2018		2017		2016		Prior		Revolving		Revolving converted to term loans		Total
(Dollars in thousands)
Residential mortgage
Current	$	308,079	$	1,163,902	$	948,832	$	851,257	$	652,297	$	1,272,796	$	24,177	$	—	$	5,221,340
30-59 days	328		2,491		6,910		6,515		5,023		18,840		42		—		40,149
60-89 days	—		684		117		538		2,081		4,469		126		—		8,015
90 days or greater	—		647		3,388		5,810		5,547		11,544		2,972		—		29,908
Total	$	308,407	$	1,167,724	$	959,247	$	864,120	$	664,948	$	1,307,649	$	27,317	$	—	$	5,299,412
Revolving mortgage
Current	$	—	$	—	$	—	$	—	$	—	$	—	$	2,184,215	$	156,841	$	2,341,056
30-59 days	—		—		—		—		—		—		6,155		3,990		10,145
60-89 days	—		—		—		—		—		—		476		2,934		3,410
90 days or greater	—		—		—		—		—		—		2,206		5,827		8,033
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	2,193,052	$	169,592	$	2,362,644
Construction and land development
Current	$	36,285	$	208,509	$	67,438	$	19,024	$	8,720	$	10,255	$	5,314	$	—	$	355,545
30-59 days	517		3,923		1,310		312		3		24		—		—		6,089
90 days or greater	—		—		—		—		87		1,469		—		—		1,556
Total	$	36,802	$	212,432	$	68,748	$	19,336	$	8,810	$	11,748	$	5,314	$	—	$	363,190
Consumer auto
Current	$	132,008	$	461,232	$	316,446	$	163,033	$	89,287	$	30,805	$	—	$	—	$	1,192,811
30-59 days	43		1,739		1,703		1,346		472		372		—		—		5,675
60-89 days	—		261		376		252		184		108		—		—		1,181
90 days or greater	—		344		560		298		197		86		—		—		1,485
Total	$	132,051	$	463,576	$	319,085	$	164,929	$	90,140	$	31,371	$	—	$	—	$	1,201,152
Consumer other
Current	$	10,371	$	49,571	$	20,504	$	11,024	$	12,296	$	32,561	$	423,402	$	—	$	559,729
30-59 days	79		260		129		35		89		7		3,048		—		3,647
60-89 days	—		59		139		6		—		—		1,854		—		2,058
90 days or greater	—		41		31		5		—		—		2,216		—		2,293
Total	$	10,450	$	49,931	$	20,803	$	11,070	$	12,385	$	32,568	$	430,520	$	—	$	567,727
Total consumer	$	487,710	$	1,893,663	$	1,367,883	$	1,059,455	$	776,283	$	1,383,336	$	2,656,203	$	169,592	$	9,794,125
PCD loans
Current	$	9,871	$	28,888	$	39,500	$	40,406	$	34,571	$	301,337	$	16,310	$	25,200	$	496,083
30-59 days	56		4,291		2,471		1,104		306		18,759		181		460		27,628
60-89 days	—		2,202		105		285		—		5,677		90		321		8,680
90 days or greater	454		1,071		5,004		1,684		3,383		14,308		300		1,757		27,961
Total	$	10,381	$	36,452	$	47,080	$	43,479	$	38,260	$	340,081	$	16,881	$	27,738	$	560,352
Total loans and leases	$	1,799,304	$	6,551,659	$	4,842,076	$	3,774,162	$	2,899,664	$	5,175,451	$	3,994,597	$	204,046	$	29,240,959

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Loans and leases outstanding at December 31, 2019 by credit quality indicator are provided below:



	December 31, 2019
(Dollars in thousands)	Commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		PCI		Total commercial loans and leases
Pass	$	1,004,922	$	12,050,799	$	536,682	$	4,256,456	$	308,796	$	148,412	$	18,157,655
Special mention	2,577		115,164		3,899		44,604		622		44,290		166,866
Substandard	5,955		116,672		1,447		34,148		675		87,970		158,897
Doubtful	—		—		—		3		—		3,657		3
Ungraded	—		—		—		68,581		—		—		68,581
Total	$	1,013,454	$	12,282,635	$	542,028	$	4,403,792	$	310,093	$	284,329	$	18,552,002



	December 31, 2019
	Noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		PCI		Total noncommercial loans and leases
Days past due:
Current	$	5,205,380	$	2,316,010	$	354,393	$	1,762,606	$	240,995	$	9,638,389
30-59 days past due	45,839		9,729		977		10,481		13,764		67,026
60-89 days past due	18,289		3,468		218		3,746		5,608		25,721
90 days or greater past due	24,409		9,865		1,797		3,571		14,020		39,642
Total	$	5,293,917	$	2,339,072	$	357,385	$	1,780,404	$	274,387	$	9,770,778

Purchased loans and leases

The following table summarizes PCD loans acquired in the Community Financial transaction and provides the contractually required payments, less the initial allowance for credit losses and discount to produce the fair value of acquired loans with evidence of more than insignificant credit quality deterioration since origination at the acquisition date:



(Dollars in thousands)	Community Financial
Contractually required payments	$	25,635
Initial PCD allowance	1,193
Discount	1,055
Fair value at acquisition date	$	23,387

The recorded fair values of purchased non-PCD loans acquired in the Community Financial transaction as of the acquisition date are as follows:



(Dollars in thousands)	Community Financial
Commercial:
Construction and land development	$	9,428
Owner occupied commercial mortgage	31,473
Non-owner occupied commercial mortgage	25,143
Commercial and industrial and leases	15,065
Total commercial loans	81,109
Consumer:
Residential mortgage	21,168
Revolving mortgage	2,084
Construction and land development	5,254
Consumer auto	294
Consumer other	693
Total consumer loans	29,493
Total non-PCD loans	$	110,602

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NOTE E - ALLOWANCE FOR CREDIT LOSSES

Activity in the allowance for credit losses by class of loans is summarized as follows:



	Three months ended March 31, 2020
(Dollars in thousands)	Construction and land development - commercial			Owner occupied commercial mortgage			Non-owner occupied commercial mortgage			Commercial and industrial and leases			Residential mortgage			Revolving mortgage			Construction and land development - consumer			Consumer auto			Consumer other			PCD			Total
Balance at December 31	$	33,213		$	36,444		$	11,102		$	61,610		$	18,232		$	19,702		$	2,709		$	4,292		$	30,301		$	7,536		$	225,141
Adoption of ASC 326	(31,061		)	(19,316		)	460			(37,637		)	17,118			3,665			(1,291		)	1,100			10,037			19,001			(37,924		)
Balance at January 1	$	2,152		$	17,128		$	11,562		$	23,973		$	35,350		$	23,367		$	1,418		$	5,392		$	40,338		$	26,537		$	187,217
Provision (credits)	51			6,107			4,956			10,423			3,593			1,304			(223		)	958			3,774			(2,588		)	28,355
Initial allowance on PCD loans	—			—			—			—			—			—			—			—			—			1,193			1,193
Charge-offs	—			(320		)	—			(5,049		)	(800		)	(585		)	(70		)	(944		)	(5,370		)	(1,123		)	(14,261		)
Recoveries	87			55			13			1,272			223			471			15			363			1,359			2,897			6,755
Balance at March 31	$	2,290		$	22,970		$	16,531		$	30,619		$	38,366		$	24,557		$	1,140		$	5,769		$	40,101		$	26,916		$	209,259

	Three months ended March 31, 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			PCI			Total
Balance at January 1	$	35,270		$	43,451		$	2,481		$	55,620		$	2,221		$	15,472		$	21,862		$	2,350		$	35,841		$	9,144		$	223,712
Provision (credits)	2,119			2,371			(83		)	2,725			(498		)	1,508			209			123			3,440			(164		)	11,750
Charge-offs	(44		)	(761		)	—			(1,858		)	—			(166		)	(963		)	—			(6,362		)	—			(10,154		)
Recoveries	131			220			1			538			444			173			387			—			1,573			—			3,467
Balance at March 31	$	37,476		$	45,281		$	2,399		$	57,025		$	2,167		$	16,987		$	21,495		$	2,473		$	34,492		$	8,980		$	228,775

Upon adoption of ASC 326, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, offset by an increase of $19.0 million in the ACL on PCD loans. The largest changes as a result of adoption were decreases in the ACL on commercial loan segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. The reduction in ACL on these segments was partially offset by increases in ACL on our consumer loan segments primarily due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL.

ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the quarter ended March 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $21.5 million increase due to the potential economic impact of the novel coronavirus (“COVID-19”) and its estimated impact on credit losses during the quarter. Within our forecast period of 24 months, forecasts varied widely for key macroeconomic variables (unemployment, gross domestic product, home price index, and commercial real estate index) used in the ACL models. Expected loss estimates considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs. These loss estimates were also influenced by BancShares strong credit quality, historically low net charge-offs and recent credit trends, which remained stable through the quarter ended March 31, 2020.

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BancShares individually reviews loans greater than $500 thousand that are determined to be collateral-dependent. These collateral-dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Commercial and industrial loans and leases are collateralized by business assets, while the remaining loan classes are collateralized by real property.

The following table presents information on collateral-dependent loans by class and includes the amortized cost of collateral-dependent loans and leases, the net realizable value of the collateral, the extent to which collateral secures collateral-dependent loans and the associated ACL as of March 31, 2020 were as follows:



(Dollars in thousands)	Collateral-Dependant Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial loans:
Construction and land development	$	3,522	$	8,928	253.5	%	$	215
Owner occupied commercial mortgage	9,139		21,686		237.3		—
Non-owner occupied commercial mortgage	4,617		10,255		222.1		—
Commercial and industrial and leases	439		439		100.0		—
Total commercial loans	17,717		41,308		233.2		215
Consumer:
Residential mortgage	16,952		24,599		145.1		117
Revolving mortgage	428		452		105.6		—
Construction and land development	1,412		1,558		110.3		—
Total consumer loans	18,792		26,609		141.6		117
Total non-PCD loans	36,509		67,917		186.0		332
PCD	11,457		19,554		170.7		697
Total collateral-dependent loans	$	47,966	$	87,471	182.4	%	$	1,029

Collateral-dependent nonaccrual loans with no recorded allowance totaled $43.6 million as of March 31, 2020. All other nonaccrual loans have a recorded allowance.

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 December 31, 2019:



	December 31, 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	$	463	$	3,650	$	39	$	1,379	$	103	$	3,278	$	2,722	$	174	$	1,107	$	12,915
ALLL for loans and leases collectively evaluated for impairment	32,750		41,685		2,172		57,995		2,133		14,954		16,980		2,535		33,486		204,690
Total allowance for loan and lease losses	$	33,213	$	45,335	$	2,211	$	59,374	$	2,236	$	18,232	$	19,702	$	2,709	$	34,593	$	217,605

Loans and leases:
Loans and leases individually evaluated for impairment	$	4,655	$	70,149	$	1,268	$	12,182	$	639	$	60,442	$	28,869	$	3,882	$	3,513	$	185,599
Loans and leases collectively evaluated for impairment	1,008,799		12,212,486		540,760		4,391,610		309,454		5,233,475		2,310,203		353,503		1,776,891		28,137,181
Total loan and leases	$	1,013,454	$	12,282,635	$	542,028	$	4,403,792	$	310,093	$	5,293,917	$	2,339,072	$	357,385	$	1,780,404	$	28,322,780

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



(Dollars in thousands)	December 31, 2019
ALLL for loans acquired with deteriorated credit quality	$	7,536
Loans acquired with deteriorated credit quality	558,716

At December 31, 2019, $139.4 million of PCI loans experienced an adverse change in expected cash flows since the date of acquisition.

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



	December 31, 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	$	1,851	$	2,804	$	4,655	$	5,109	$	463
Commercial mortgage	42,394		27,755		70,149		74,804		3,650
Other commercial real estate	318		950		1,268		1,360		39
Commercial and industrial and leases	7,547		4,635		12,182		13,993		1,379
Other	406		233		639		661		103
Total commercial loans	52,516		36,377		88,893		95,927		5,634
Noncommercial:
Residential mortgage	48,796		11,646		60,442		64,741		3,278
Revolving mortgage	26,104		2,765		28,869		31,960		2,722
Construction and land development	2,470		1,412		3,882		4,150		174
Consumer	3,472		41		3,513		3,821		1,107
Total noncommercial loans	80,842		15,864		96,706		104,672		7,281
Total non-PCI impaired loans and leases	$	133,358	$	52,241	$	185,599	$	200,599	$	12,915

Non-PCI impaired loans less than $500,000 that were collectively evaluated for impairment totaled $41.0 million at December 31, 2019.

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2019:



	Three months ended March 31, 2019
(Dollars in thousands)	Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	2,147	$	28
Commercial mortgage	56,629		564
Other commercial real estate	685		8
Commercial and industrial and leases	10,000		100
Other	315		2
Total commercial	69,776		702
Noncommercial:
Residential mortgage	42,626		325
Revolving mortgage	28,742		247
Construction and land development	3,747		36
Consumer	3,000		29
Total noncommercial	78,115		637
Total non-PCI impaired loans and leases	$	147,891	$	1,339

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as TDRs. In general, the modification or restructuring of a loan is considered a TDR if, for economic 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. Within our allowance for credit loss models, TDRs are not individually evaluated unless determined to be collateral-dependent and are included in the definition of default which provides for a 100% probability of default applied within the models. As a result, subsequent changes in default status do not impact the calculation of the allowance for credit losses on TDR loans.

Recent legislation and regulatory requirements have allowed for relief and provided guidance around the determination of TDRs for new loan modifications and forbearances for borrowers experiencing COVID-19-related financial difficulty. BancShares has utilized this guidance to identify new TDRs beginning in the first quarter of 2020 and did not identify new modifications as TDRs for those borrowers experiencing COVID-19-related financial difficulty.

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The following tables provides a summary of total TDRs by accrual status:



	March 31, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	1,086	$	1,537	$	2,623
Owner occupied commercial mortgage	33,704		10,153		43,857
Non-owner occupied commercial mortgage	11,438		319		11,757
Commercial and industrial and leases	9,914		2,607		12,521
Total commercial loans	56,142		14,616		70,758
Consumer:
Residential mortgage	35,288		15,820		51,108
Revolving mortgage	22,677		7,206		29,883
Construction and land development	2,376		2,701		5,077
Consumer auto	2,018		718		2,736
Consumer other	1,061		124		1,185
Total consumer loans	63,420		26,569		89,989
PCD Loans	14,061		4,997		19,058
Total loans	$	133,623	$	46,182	$	179,805



	December 31, 2019
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	487	$	2,279	$	2,766
Commercial mortgage	50,819		11,116		61,935
Other commercial real estate	571		—		571
Commercial and industrial and leases	9,430		2,409		11,839
Other	320		105		425
Total commercial loans	61,627		15,909		77,536
Noncommercial:
Residential mortgage	41,813		16,048		57,861
Revolving mortgage	21,032		7,367		28,399
Construction and land development	1,452		2,430		3,882
Consumer	2,826		688		3,514
Total noncommercial loans	67,123		26,533		93,656
Total loans	$	128,750	$	42,442	$	171,192

Total TDRs included $17.2 million of PCI TDRs at December 31, 2019.

The following table provides the types of modifications designated as TDRs during the three months ended March 31, 2020 and March 31, 2019, as well as a summary of loans modified as a TDR during the twelve month periods ended March 31, 2020 and March 31, 2019 that subsequently defaulted during the three months ended March 31, 2020 and March 31, 2019. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.



	Three months ended March 31, 2020						Three months ended March 31, 2019
	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	10	$	3,986	—	$	—	—	$	—	—	$	—
Loan term extension	6	794		3	263		4	608		3	541
Below market interest rate	88	8,165		29	1,421		96	4,962		38	2,219
Discharged from bankruptcy	68	5,032		28	1,767		50	2,420		25	1,144
Total restructurings	172	$	17,977	60	$	3,451	150	$	7,990	66	$	3,904

For the three months ended March 31, 2020 and March 31, 2019, the pre-modification and post-modification outstanding amortized cost of loans modified as TDRs were not materially different.

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NOTE F - OTHER REAL ESTATE OWNED

The following table explains changes in OREO during the three months ended March 31, 2020 and 2019:



(Dollars in thousands)	OREO
Balance at December 31, 2019	$	46,591
Additions	5,987
Acquired in business combinations	9,813
Sales	(5,321		)
Write-downs/losses	(1,363		)
Balance at March 31, 2020	$	55,707

Balance at December 31, 2018	$	48,030
Additions	3,133
Sales	(6,934		)
Write-downs/losses	(923		)
Balance at March 31, 2019	$	43,306

At March 31, 2020 and December 31, 2019, BancShares had $13.1 million and $14.5 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 $22.0 million and $23.0 million at March 31, 2020 and December 31, 2019, respectively. Net losses recorded on the sale of OREO properties were $56 thousand for the three months ended March 31, 2020. Net gains recorded on the sale of OREO were $496 thousand for the three months ended March 31, 2019.

NOTE G - SERVICING RIGHTS

Mortgage Servicing Rights

Our portfolio of residential mortgage loans serviced for third parties was $3.41 billion and $3.38 billion as of March 31, 2020 and December 31, 2019, 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 are reported in other intangible assets. The associated amortization expense and any valuation allowance recognized were included as a reduction of mortgage income. Mortgage servicing rights are 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 March 31, 2020 and 2019 were $2.1 million and $1.9 million, respectively, and are reported in mortgage income.

The following table explains changes in the servicing asset during the three months ended March 31, 2020 and 2019:



	Three months ended March 31
(Dollars in thousands)	2020			2019
Beginning balance	$	22,963		$	21,396
Servicing rights originated	1,583			859
Amortization	(1,823		)	(1,447		)
Valuation allowance increase	(2,967		)	(161		)
Ending balance	$	19,756		$	20,647

The following table presents the activity in the servicing asset valuation allowance for the three months ended March 31, 2020 and 2019:



	Three months ended March 31
(Dollars in thousands)	2020		2019
Beginning balance	$	222	$	—
Valuation allowance increase	2,967		161
Ending balance	$	3,189	$	161

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Mortgage servicing rights valuations are performed using a pooling methodology where loans with similar risk characteristics 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:



	March 31, 2020			December 31, 2019
Discount rate - conventional fixed loans	7.67		%	8.92		%
Discount rate - all loans excluding conventional fixed loans	8.67		%	9.92		%
Weighted average constant prepayment rate	19.38		%	13.72		%
Weighted average cost to service a loan	$	87.30		$	87.09

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 a risk premium of 700 basis points for conventional fixed loans and 800 basis points for all other loans. 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, which occurred during first quarter 2020, resulting in an increase in the valuation allowance of $3.0 million. The average cost to service a loan is based on the number of loans serviced and the total cost to service the loans.

Other Servicing Rights

Other servicing rights were acquired as part of business combinations and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $1.7 million and $1.9 million at March 31, 2020 and December 31, 2019, respectively. The amortization related to other servicing rights is recorded in other noninterest income.

NOTE H - REPURCHASE AGREEMENTS

BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon price, and which obligates BancShares to repurchase the security 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.

BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s 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. The carrying value of investment securities available for sale pledged as collateral under repurchase agreements was $558.5 million and $477.6 million at March 31, 2020 and December 31, 2019, respectively.

BancShares held securities sold under agreements to repurchase of $540.4 million at March 31, 2020, with overnight and continuous remaining contractual maturities collateralized by government agency securities and $443.0 million at December 31, 2019, with overnight and continuous remaining contractual maturities collateralized by government agency securities.

NOTE I - FDIC SHARED-LOSS PAYABLE

At March 31, 2020, shared-loss protection remains for single family residential loans acquired in the amount of $42.4 million. The shared-loss agreement for two of the FDIC-assisted transactions include a provision related to a payment that may be owed to the FDIC at the termination of the agreement if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition (the “clawback liability”). BancShares issued a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions. The remaining clawback liability payment date is March 2021.

The following table provides changes in the FDIC shared-loss payable since December 31, 2019:



(Dollars in thousands)	Total
Balance at December 31, 2019	$	112,395
Accretion	1,810
Payment made to the FDIC to settle shared-loss agreement	(99,468		)
Balance at March 31, 2020	$	14,737

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NOTE J - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) included the following as of March 31, 2020 and December 31, 2019:



	March 31, 2020									December 31, 2019
(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 on securities available for sale	$	132,570		$	30,490		$	102,080		$	7,522		$	1,730		$	5,792
Defined benefit pension items	(165,834		)	(38,142		)	(127,692		)	(172,098		)	(39,583		)	(132,515		)
Total	$	(33,264	)	$	(7,652	)	$	(25,612	)	$	(164,576	)	$	(37,853	)	$	(126,723	)

The following table highlights changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2020 and 2019:



	Three months ended March 31, 2020
(Dollars in thousands, net of tax)	Unrealized gains on securities available for sale			Unrealized losses on securities available for sale transferred to held to maturity			Defined benefit pension items			Total
Beginning balance	$	5,792		$	—		$	(132,515	)	$	(126,723	)
Net unrealized gains arising during period	111,530			—			—			111,530
Amounts reclassified from accumulated other comprehensive loss	(15,242		)	—			4,823			(10,419		)
Net current period other comprehensive income	96,288			—			4,823			101,111
Ending balance	$	102,080		$	—		$	(127,692	)	$	(25,612	)

	Three months ended March 31, 2019
(Dollars in thousands, net of tax)	Unrealized gains on securities available for sale			Unrealized losses on securities available for sale transferred to held to maturity			Defined benefit pension items			Total
Beginning balance	$	(38,505	)	$	(71,149	)	$	(125,533	)	$	(235,187	)
Net unrealized gains arising during period	21,615			—			—			21,615
Amounts reclassified from accumulated other comprehensive loss	—			4,591			2,121			6,712
Net current period other comprehensive income	21,615			4,591			2,121			28,327
Ending balance	$	(16,890	)	$	(66,558	)	$	(123,412	)	$	(206,860	)

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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 months ended March 31, 2020 and 2019:



	Three months ended March 31, 2020
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)			Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale	$	19,795		Realized gains on investment securities available for sale, net
	(4,553		)	Income taxes
	$	15,242

Amortization of defined benefit pension items
Actuarial losses	$	(6,264	)	Other
	1,441			Income taxes
	$	(4,823	)
Total reclassifications for the period	$	10,419

	Three months ended March 31, 2019
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)			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	$	(5,962	)	Net interest income
	1,371			Income taxes
	$	(4,591	)

Amortization of defined benefit pension items
Prior service costs	$	(14	)	Salaries and wages
Actuarial losses	(2,741		)	Other
	(2,755		)	Income before income taxes
	634			Income taxes
	$	(2,121	)
Total reclassifications for the period	$	(6,712	)

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NOTE K - 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. Accuracy of the levels of the fair value hierarchy are validated 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 and held to maturity. The fair value of U.S. Treasury, government agency and mortgage-backed securities, municipal securities, as well as a portion of corporate bonds, is generally estimated 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. The remaining corporate bonds held 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 market activity. 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. Management elects the fair value option on certain residential real estate loans originated to be sold to investors. The loans 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. 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.

Mortgage and other servicing rights. Mortgage and other servicing rights are carried at the lower of amortized cost or market value 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.

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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 with 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 FHLB borrowings, subordinated debentures, and other 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 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 March 31, 2020 and December 31, 2019. 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 March 31, 2020 and December 31, 2019:



(Dollars in thousands)	March 31, 2020				December 31, 2019
	Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	454,220	$	454,220	$	376,719	$	376,719
Overnight investments	688,518		688,518		1,107,844		1,107,844
Investment in marketable equity securities	315,501		315,501		82,333		82,333
Investment securities available for sale	7,789,034		7,789,034		7,059,674		7,059,674
Investment securities held to maturity	740,662		753,178		30,996		30,996
Loans held for sale	76,347		76,347		67,869		67,869
Net loans and leases	29,031,700		29,565,373		28,656,355		28,878,550
Income earned not collected	125,626		125,626		123,154		123,154
Federal Home Loan Bank stock	51,087		51,087		43,039		43,039
Mortgage and other servicing rights	21,488		22,733		24,891		26,927
Deposits	35,346,711		35,382,365		34,431,236		34,435,789
Securities sold under customer repurchase agreements	540,362		540,362		442,956		442,956
Federal Home Loan Bank borrowings	792,684		829,785		572,185		577,362
Subordinated debt	504,145		467,612		163,412		173,685
Other borrowings	105,303		105,460		148,318		149,232
FDIC shared-loss payable	14,737		15,674		112,395		114,252
Accrued interest payable	13,500		13,500		18,124		18,124

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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 March 31, 2020 and December 31, 2019:



	March 31, 2020
			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	$	205,782	$	—	$	205,782	$	—
Government agency	760,431		—		760,431		—
Residential mortgage-backed securities	5,952,841		—		5,952,841		—
Commercial mortgage-backed securities	650,565		—		650,565		—
Corporate bonds	219,415		—		152,399		67,016
Total investment securities available for sale	$	7,789,034	$	—	$	7,722,018	$	67,016
Marketable equity securities	$	315,501	$	111,807	$	203,694	$	—
Loans held for sale	$	76,347	$	—	$	76,347	$	—

	December 31, 2019
			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	$	409,999	$	—	$	409,999	$	—
Government agency	682,772		—		682,772		—
Residential mortgage-backed securities	5,267,090		—		5,267,090		—
Commercial mortgage-backed securities	380,020		—		380,020		—
Corporate bonds	201,566		—		131,881		69,685
State, county and municipal	118,227		—		118,227		—
Total investment securities available for sale	$	7,059,674	$	—	$	6,989,989	$	69,685
Marketable equity securities	$	82,333	$	29,458	$	52,875	$	—
Loans held for sale	$	67,869	$	—	$	67,869	$	—

During the three months ended March 31, 2020, there were transfers from Level 2 to Level 3 of $1.8 million in corporate bonds available for sale. The transfers were due to a lack of observable inputs and trade activity for those securities. During the three months ended March 31, 2019, there were no transfers between levels.

The following tables summarize activity for Level 3 assets:



	Three months ended March 31, 2020
(Dollars in thousands)	Corporate bonds
Balance at January 1, 2020	$	69,685
Unrealized net losses included in other comprehensive income	(4,366		)
Amounts included in net income	(85		)
Transfers in	1,782
Balance at March 31, 2020	$	67,016

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at March 31, 2020:



(Dollars in thousands)			March 31, 2020
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 issuer	$	67,016

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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 gain of $1.2 million and a gain of $249 thousand for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019:



	March 31, 2020
(Dollars in thousands)	Fair value		Aggregate unpaid principal balance		Difference
Originated loans held for sale	$	76,347	$	72,883	$	3,464

	December 31, 2019
	Fair value		Aggregate unpaid principal balance		Difference
Originated loans held for sale	$	67,869	$	65,697	$	2,172

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of March 31, 2020 or December 31, 2019.

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.

Following the adoption of ASC 326, the population of loans measured at fair value on a non-recurring basis has greatly diminished and is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 9% and 11%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied was 9.45%.

Prior to the adoption of ASC 326, impaired loans were deemed to be at fair value if an associated allowance or current period charge-off had been recorded. The value of impaired loans was determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values were 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 were determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate for the majority of impaired loans generally ranges between 3% and 7%.

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 with discounts generally between 7% and 22% applied for estimated selling costs and other external factors that may impact the marketability of the property. At March 31, 2020, the weighted average discount applied was 8.37%. 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.

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For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of March 31, 2020 and December 31, 2019:



	March 31, 2020
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Collateral-dependent loans	$	5,489	$	—	$	—	$	5,489
Other real estate owned	46,710		—		—		46,710
Mortgage servicing rights	19,068		—		—		19,068

	December 31, 2019
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	132,336	$	—	$	—	$	132,336
Other real estate owned	38,310		—		—		38,310
Mortgage servicing rights	3,757		—		—		3,757

No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019.

NOTE L - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees. 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.

For the three months ended March 31, 2020 and 2019, the components of net periodic benefit cost are as follows:



	Three months ended March 31
(Dollars in thousands)	2020			2019
Service cost	$	3,457		$	3,113
Interest cost	8,531			9,291
Expected return on assets	(16,409		)	(15,635		)
Amortization of prior service cost	—			14
Amortization of net actuarial loss	6,264			2,741
Net periodic cost (benefit)	$	1,843		$	(476	)

A discretionary contribution of $100.0 million was made to the pension plans during the three months ended March 31, 2020. 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.

NOTE M - LEASES

The following table presents lease assets and liabilities as of March 31, 2020 and December 31, 2019:



(Dollars in thousands)	Classification	March 31, 2020		December 31, 2019
Assets:
Operating	Other assets	$	75,174	$	77,115
Finance	Premises and equipment	9,261		8,820
Total leased assets		$	84,435	$	85,935
Liabilities:
Operating	Other liabilities	$	75,011	$	76,746
Finance	Other borrowings	9,024		8,230
Total lease liabilities		$	84,035	$	84,976

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NOTE N - 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 involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit.

Commitments to extend credit are legally binding agreements to lend to customers. These commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of these 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 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. 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 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 standby letters of credit as of March 31, 2020 and December 31, 2019:



(Dollars in thousands)	March 31, 2020		December 31, 2019
Unused commitments to extend credit	$	10,775,845	$	10,682,378
Standby letters of credit	106,055		99,601

BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. Affordable housing project investments were $166.6 million and $167.8 million as of March 31, 2020 and December 31, 2019, respectively, and were recorded in other assets. Unfunded commitments to fund future investments in affordable housing projects totaled $68.9 million and $70.0 million as of March 31, 2020 and December 31, 2019, respectively, and were recorded in other liabilities.

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.

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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 Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our 2019 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 2020, 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 our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people.

Refer to our 2019 Annual Report on Form 10-K for further discussion of our strategy.

RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS

During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies. In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains and overall economic instability. This uncertainty has led to volatility in the financial markets, including significant declines in the United States (“US”) equity markets. This impact was coupled with spikes in unemployment as a result of business shutdowns that may indicate future labor disruptions or a potential recession.

During the first quarter of 2020, the Federal Reserve’s Federal Open Market Committee (“FOMC”) lowered the federal funds rate by 150 basis points to a target range of 0.00% to 0.25%. The FOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook. The FOMC expects to maintain this target range until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration (“SBA”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and US Treasury to the public. In addition, there were other regulatory actions taken that may impact our business including troubled debt restructuring recognition relief, changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts.

BANCSHARES’ COVID-19 CRISIS PREPAREDNESS AND RESPONSE

BancShares’ strong capital and liquidity positions, along with a history of sound risk management, provide flexibility and stability to navigate this crisis. At the onset, BancShares assembled a cross-functional leadership team to ensure business continuity, protect the safety of our associates, and support our customers and communities. Our continued investment in technology allowed our team to respond to customers without interruption. Digital account openings and virtual logins increased approximately 25% from pre-COVID-19 levels and we have successfully deployed a remote work strategy for numerous associates. Our leadership team, with the help of all our dedicated associates, has been working diligently to ensure our high standards of customer service continue while also protecting the safety and soundness of our organization and the health and welfare of our stakeholders.

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Supporting Our Associates


•	More than 90% of associates at our corporate locations are working remotely.


•	Branches transitioned to drive-thru and lobby by appointment only service to limit exposure to our associates and our customers.


•	Increased access to employee assistance programs, including emotional support and assistance with childcare and eldercare services.


•	Offering paid leave and medical treatment for associates with COVID-19-related illnesses.


•	Established an internal COVID-19 platform to provide daily communication across the company.

Supporting Our Customers


•	Ensuring the majority of our branches remain operational for our customers with appropriate safety protocols.


•	Waiving early withdrawal penalties on certificates of deposit when customers need the funds for relief.


•	Offering 90-day payment deferrals for qualified borrowers with no late fees.


•	Increasing access to funds through our traditional lending products and offering special unsecured loans for up to 24 months with a low fixed interest rate and no payments for 90 days.


•	Participating in the Small Business Administration Paycheck Protection Program (“SBA-PPP”).

Diversified Loan Portfolio and Ongoing Monitoring of Credit Risk

While we understand that helping our customers through this trying time may defer a full understanding of the impact of COVID-19, we are actively monitoring our loan portfolio for areas of increased risk. As of May 4, 2020, we have approved or processed loan payment extensions on approximately $6.5 billion in loans (approximately $200 million in deferred payments) for customers in good standing who have been affected by COVID-19. BancShares has a well-diversified loan portfolio by geography and industry, however, extensions have been concentrated in industries impacted the most by the pandemic which includes our dental and medical portfolios, as well as the hospitality industry. The risk profile is somewhat mitigated as our typical customer’s dental or medical practice is well established and actively managed. Social distancing requirements had an immediate impact on both of these industries; however, they should also see immediate demand for services once those restrictions are lessened. Through April 24, 2020, we have not seen significant shifts in credit line utilization or overall declines in credit quality. BancShares continues to have solid credit performance that has matched or exceeded its peer group net charge-off ratios over time.

We are actively participating in the SBA-PPP program, which will provide much needed funds to our small business customers. In March, we put together a detailed and comprehensive framework to enable us to accept applications from our customers to help them in this time of need. We processed approximately 5,000 SBA-PPP loan applications, securing funding for our customers of approximately $1.8 billion, during the initial round of funding for this program. As of May 4, 2020, we have processed approximately 18,000 additional loan applications for the second phase of this program, representing additional funding of approximately $1.6 billion.

Strong Liquidity Position and Low Cost Funding Sources

We maintain a strong level of liquidity, which positions us well to adapt to stresses posed by this environment. As of March 31, 2020, we had liquid assets (available cash and unencumbered high quality liquid assets at market value) totaling approximately $5.5 billion. This represented 13.2% of consolidated assets as of March 31, 2020.

In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.3 billion in the form of Federal Home Loan Bank borrowing capacity, Federal Reserve Discount Window availability, fed funds lines and a committed line of credit.

Our funding base is composed of 94.8% deposits, of which 38.7% are demand deposit accounts. Of our total deposits, 97.7% are core deposits. As of March 31, 2020, our loan to deposit ratio was 83.7% and our cost of total deposits was 0.28%.

Strong Capital Position

In accordance with our capital plan, we operate with a level of capital above regulatory established well-capitalized limits. This plan considers an assessment of internal and external risk factors and is further informed by combined idiosyncratic and market-stressed scenarios.

At March 31, 2020, BancShares’ regulatory capital ratios were well in excess of Basel III capital requirements to withstand these market-stressed scenarios with a total risk-based capital ratio of 13.7%, a Tier 1 risk-based capital ratio of 11.4%, a common equity Tier 1 ratio of 10.4%, a Tier 1 leverage ratio of 9.0%, and a capital conservation buffer of 5.4%, over twice the required level of 2.5%.

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SIGNIFICANT EVENTS IN 2020

On January 1, 2020 BancShares adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new credit loss methodology for the estimation of credit losses.The amendments in this ASU require loss estimates be determined over an asset’s lifetime and broaden the information that an entity must consider in developing its expected credit losses. BancShares adopted this ASU using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30 and debt securities available for sale. Refer to Note A - Accounting Policies and Basis of Presentation for additional information.

Upon adoption, BancShares recorded a net decrease of $37.9 million in the Allowance for Credit Losses (“ACL”) which included a decrease of $56.9 million in the ACL on non-purchased credit deteriorated (“non-PCD”) loans, offset by an increase of $19.0 million in the ACL on purchased credit deteriorated (“PCD”) loans. The $56.9 million change in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in an increase in retained earnings of $36.9 million. The $19.0 million increase in the ACL on PCD loans resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co. Inc. and its bank subsidiary, Gwinnett Community Bank, into FCB.

On April 17, 2020, FCB completed the sale of three branches to Select Bank & Trust Company (“Select Bank”), which were originally acquired from Entegra Bank on December 31, 2019.

FINANCIAL PERFORMANCE SUMMARY

First Quarter Highlights

•

Net income for the first quarter of 2020 totaled $57.2 million, a decrease of $54.2 million, or 48.7% compared to the same quarter in 2019. Net income per share common shares decreased $4.21, or 43.6%, to $5.46 in the first quarter of 2020, from $9.67 per share during the same period in 2019. First quarter 2020 earnings were impacted by a $51.4 million ($39.7 million net of tax) decline in fair value in the equity securities portfolio, as well as a $21.5 million ($16.6 million net of tax) additional provision expense for the potential impact of COVID-19.


•	Return on average assets for the first quarter of 2020 was 0.57%, down from 1.27% in the first quarter of 2019. Return on average equity for the first quarter of 2020 was 6.24%, down from 12.86% in the the first quarter of 2019. The impact of the adjustments to net income described above reduced the first quarter ROA and ROE by 0.56% and 6.14%, respectively.


•	Net interest income totaled $338.4 million for the first quarter of 2020, an increase of $17.9 million, or 5.6% compared to the same quarter in 2019. The taxable-equivalent net interest margin (“NIM”) was 3.55% for the first quarter of 2020, down from 3.86% for the first quarter in 2019.


•	The allowance for credit losses was $209.3 million at March 31, 2020, compared to $225.1 million at December 31, 2019. The $15.8 million change was due primarily to the $37.9 million reduction in the allowance as a result of adopting ASC 326, partially offset by a $21.5 million increase as a result of COVID-19.


•	Noninterest income for the first quarter of 2020 totaled $64.0 million, a decrease of $39.7 million, or 38.3% compared to the same quarter of 2019.


•	Noninterest expense was $300.0 million for the first quarter of 2020, compared to $267.7 million during the same quarter of 2019, an increase of $32.3 million or 12.1%.


•	Total loans grew to $29.24 billion, an increase of $359.5 million, or 5.0% on an annualized basis, since December 31, 2019. The net charge-off ratio was 0.10% for the first quarter of 2020, down from 0.11% for the same quarter in 2019.


•	Total deposits grew to $35.35 billion, an increase of $915.5 million, or 10.7% on an annualized basis, since December 31, 2019. Excluding acquired deposits, total deposits increased $697.5 million since December 31, 2019, or by 8.1% on an annualized basis.

•

During the first quarter of 2020, BancShares successfully completed a $695 million capital raise which consisted of $350 million of subordinated notes and $345 million of Series A preferred stock. BancShares repurchased 349,390 shares of its Class A common stock during the first quarter of 2020 totaling $159.7 million. At March 31, 2020, BancShares remained well capitalized with a total risk-based capital ratio of 13.7%, a Tier 1 risk-based capital of 11.4%, a common equity Tier 1 ratio of 10.4%, and a leverage ratio of 9.0%.

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Table 1

SELECTED QUARTERLY DATA



	2020			2019
	First			Fourth			Third			Second			First
(Dollars in thousands, except share data)	Quarter			Quarter			Quarter			Quarter			Quarter
SUMMARY OF OPERATIONS
Interest income	$	369,559		$	354,048		$	362,318		$	350,721		$	336,924
Interest expense	31,159			26,924			25,893			23,373			16,452
Net interest income	338,400			327,124			336,425			327,348			320,472
Provision for credit losses	28,355			7,727			6,766			5,198			11,750
Net interest income after provision for credit losses	310,045			319,397			329,659			322,150			308,722
Noninterest income	64,011			104,393			100,930			106,875			103,663
Noninterest expense	299,971			292,262			270,425			273,397			267,657
Income before income taxes	74,085			131,528			160,164			155,628			144,728
Income taxes	16,916			29,654			35,385			36,269			33,369
Net income	$	57,169		$	101,874		$	124,779		$	119,359		$	111,359
Net interest income, taxable equivalent	$	339,174		$	328,045		$	337,322		$	328,201		$	321,372
PER COMMON SHARE DATA
Net income	$	5.46		$	9.55		$	11.27		$	10.56		$	9.67
Cash dividends	0.40			0.40			0.40			0.40			0.40
Market price at period end (Class A)	332.87			532.21			471.55			450.27			407.20
Book value at period-end	351.90			337.38			327.86			319.74			309.46
SELECTED QUARTERLY AVERAGE BALANCES
Total assets ⁽¹⁾	$	40,648,806		$	38,326,641		$	37,618,836		$	37,049,030		$	35,625,885
Investment securities	7,453,159			7,120,023			6,956,981			6,803,570			6,790,671
Loans and leases ⁽²⁾	29,098,101			27,508,062			26,977,476			26,597,242			25,515,988
Interest-earning assets	38,004,341			36,032,680			35,293,979			34,674,842			33,432,162
Deposits	34,750,061			33,295,141			32,647,264			32,100,210			30,802,567
Interest-bearing liabilities	23,153,777			20,958,943			20,551,393			20,397,445			19,655,434
Securities sold under customer repurchase agreements	474,231			495,804			533,371			556,374			538,162
Other short-term borrowings	157,759			28,284			23,236			40,513			—
Long-term borrowings	961,132			467,223			384,047			371,843			344,225
Shareholders’ equity	$	3,682,634		$	3,570,872		$	3,580,235		$	3,546,041		$	3,509,746
Common shares outstanding	10,473,119			10,708,084			11,060,462			11,286,520			11,519,008
SELECTED QUARTER-END BALANCES
Total assets ⁽¹⁾	$	41,594,453		$	39,824,496		$	37,748,324		$	37,655,094		$	35,961,670
Investment securities	8,845,197			7,173,003			7,167,680			6,695,578			6,914,513
Loans and leases	29,240,959			28,881,496			27,196,511			26,728,237			25,463,785
Deposits	35,346,711			34,431,236			32,743,277			32,719,671			31,198,093
Securities sold under customer repurchase agreements	540,362			442,956			522,195			544,527			508,508
Long-term borrowings	1,297,132			588,638			453,876			369,854			341,108
Shareholders’ equity	$	3,957,520		$	3,586,184		$	3,568,482		$	3,574,613		$	3,523,309
Common shares outstanding	10,280,105			10,629,495			10,884,005			11,179,905			11,385,405
SELECTED RATIOS AND OTHER DATA
Return on average assets (annualized)	0.57		%	1.05		%	1.32		%	1.29		%	1.27		%
Return on average shareholders’ equity (annualized)	6.24			11.32			13.83			13.50			12.86
Net yield on interest-earning assets (taxable equivalent)	3.55			3.59			3.77			3.77			3.86
Net charge-offs (annualized) to average loans and leases	0.10			0.14			0.10			0.11			0.11
Allowance for credit losses to total loans and leases:
PCD	4.80			1.35			1.34			1.51			1.61
Non-PCD	0.64			0.77			0.82			0.83			0.88
Total	0.72			0.78			0.83			0.85			0.90
Ratio of total nonperforming assets to total loans, leases and other real estate owned ⁽³⁾	0.79			0.58			0.57			0.56			0.53
Tier 1 risk-based capital ratio	11.43			10.86			11.80			12.03			12.69
Common equity Tier 1 ratio	10.36			10.86			11.80			12.03			12.69
Total risk-based capital ratio	13.65			12.12			13.09			13.34			14.02
Tier 1 leverage capital ratio	8.98			8.81			9.18			9.35			9.80
Dividend payout ratio	7.33			4.19			3.55			3.79			4.14
Average loans and leases to average deposits	83.74			82.62			82.63			82.86			82.84

⁽¹⁾We adopted ASC Topic 326 utilizing the modified retrospective approach. We did not restate selected financial data for the quarters prior to 2020 presented above.

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

⁽³⁾ Upon adoption of ASC 326, we dissolved pooling of PCI loans allowed under ASC 310-10. This increased the amount of nonaccrual loans as those nonaccrual loans within performing PCI pools were previously excluded from reporting. As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools.

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BUSINESS COMBINATIONS

Community Financial Holding Co. Inc.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co. Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank, into FCB. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. The merger contributed $222.1 million in consolidated assets, which included $686 thousand of goodwill, $134.0 million in loans, and $209.3 million in deposits.

See Note B - Business Combinations for additional disclosures.

Entegra Financial Corp.

On April 17, 2020, FCB and Select Bank completed the sale of three North Carolina branches located in Highlands, Sylva and Franklin. FCB was required to divest these branches, other assets and liabilities in order to obtain regulatory approval for the merger of Franklin, North Carolina-based Entegra Entegra and its bank subsidiary, Entegra Bank, completed in the fourth quarter of 2019. The assets and liabilities of the branches divested are recorded on the Consolidated Balance Sheets and in the related Unaudited Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $108.8 million, $1.9 million, and $185.3 million, respectively as of March 31, 2020. The Select Bank purchase price, of the divested branches, included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank. FCB completed the transaction with Select Bank on April 17, 2020.

FDIC-Assisted Transactions

BancShares completed fourteen FDIC-assisted transactions between 2009 and 2017. 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 March 31, 2020, shared-loss protection remains for single family residential loans acquired in the amount of $42.4 million.

The shared-loss agreement for two of the FDIC-assisted transactions include a provision related to a payment that may be owed to the FDIC at the termination of the agreement (the “clawback liability”). As of March 31, 2020 and December 31, 2019, the estimated clawback liability was $14.7 million and $112.4 million, respectively. BancShares issued a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions. The remaining clawback liability payment date is March 2021.

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Table 2

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



	Three months ended
	March 31, 2020							March 31, 2019
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	29,098,101		$	326,155	4.46	%	$	25,515,988		$	291,569	4.59	%
Investment securities:
U. S. Treasury	299,777			1,677		2.25		1,208,231			6,496		2.18
Government agency	721,254			4,121		2.29		286,514			2,309		3.22
Mortgage-backed securities	6,060,434			30,707		2.03		5,051,416			28,834		2.28
Corporate bonds	205,504			2,477		4.82		145,127			1,937		5.34
Other investments	166,190			678		1.64		99,383			282		1.15
Total investment securities	7,453,159			39,660		2.13		6,790,671			39,858		2.35
Overnight investments	1,453,081			4,518		1.25		1,125,503			6,397		2.31
Total interest-earning assets	38,004,341			370,333		3.88		33,432,162			337,824		4.06
Cash and due from banks	300,433							282,060
Premises and equipment	1,251,970							1,214,324
Allowance for credit losses	(187,269		)					(224,434		)
Other real estate owned	53,356							47,098
Other assets	1,225,975							874,675
Total assets	$	40,648,806						$	35,625,885

Liabilities
Interest-bearing deposits:
Checking with interest	$	8,188,983		$	1,701	0.08	%	$	7,557,991		$	1,377	0.07	%
Savings	2,593,869			285		0.04		2,523,543			206		0.03
Money market accounts	7,016,587			9,109		0.52		5,847,740			4,140		0.29
Time deposits	3,761,216			13,099		1.40		2,843,773			7,203		1.03
Total interest-bearing deposits	21,560,655			24,194		0.45		18,773,047			12,926		0.28
Securities sold under customer repurchase agreements	474,231			442		0.38		538,162			459		0.35
Other short-term borrowings	157,759			804		2.02		—			—		—
Long-term borrowings	961,132			5,719		2.35		344,225			3,067		3.56
Total interest-bearing liabilities	23,153,777			31,159		0.54		19,655,434			16,452		0.34
Noninterest-bearing deposits	13,189,406							12,029,520
Other liabilities	622,989							431,185
Shareholders’ equity	3,682,634							3,509,746
Total liabilities and shareholders’ equity	$	40,648,806						$	35,625,885
Interest rate spread						3.34	%						3.72	%

Net interest income and net yield on interest-earning assets				$	339,174	3.55	%				$	321,372	3.86	%

Loans and leases include PCD loans, non-PCD 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 March 31, 2020 and 2019. The taxable-equivalent adjustment was $774 and $900 for the three months ended March 31, 2020 and 2019, respectively.

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Table 3

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME



	Three months ended March 31, 2020
	Change from prior year period due to:
(Dollars in thousands)	Volume⁽¹⁾			Yield/Rate⁽¹⁾			Total Change
Assets
Loans and leases	$	36,049		$	(1,463	)	$	34,586
Investment securities:
U. S. Treasury	(4,889		)	70			(4,819		)
Government agency	3,504			(1,692		)	1,812
Mortgage-backed securities	6,031			(4,158		)	1,873
Corporate bonds	806			(266		)	540
Other investments	—			396			396
Total investment securities	5,452			(5,650		)	(198		)
Overnight investments	1,886			(3,765		)	(1,879		)
Total interest-earning assets	$	43,387		$	(10,878	)	$	32,509
Liabilities
Interest-bearing deposits:
Checking with interest	$	109		$	215		$	324
Savings	4			75			79
Money market accounts	769			4,200			4,969
Time deposits	2,259			3,637			5,896
Total interest-bearing deposits	3,141			8,127			11,268
Securities sold under customer repurchase agreements	(56		)	40			(16		)
Other short-term borrowings	804			—			804
Long-term borrowings	5,536			(2,885		)	2,651
Total interest-bearing liabilities	9,425			5,282			14,707
Change in net interest income	$	33,962		$	(16,160	)	$	17,802
⁽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)

First Quarter 2020 compared to First Quarter 2019

Net interest income for the first quarter of 2020 totaled $338.4 million, an increase of $17.9 million, or 5.6%, compared to the first quarter of 2019. The taxable-equivalent NIM was 3.55% in the first quarter of 2020, a decrease of 31 basis points from the same quarter in the prior year.

The increase in net interest income was primarily due to an increase of $34.6 million in interest earned on loans from loan growth, partially offset by increases in interest expense on deposits of $11.3 million and borrowings of $3.4 million. The primary drivers of the margin decline were an increase in the rates paid on interest-bearing deposits, largely in time deposits and money market accounts, and a decline in the yield on interest earning assets.

Average interest-earning assets increased by $4.57 billion to $38.00 billion, compared to the first quarter of 2019. The primary drivers for this change were higher average loan balances which increased $3.58 billion, due to contributions from both recent acquisitions and organic loan growth, particularly within the commercial and residential mortgage portfolios, higher average investment securities of $662.5 million and higher average overnight investments of $327.6 million. The yield on interest-earning assets decreased by 18 basis points to 3.88% when compared to the first quarter of 2019. The yield on loans and leases decreased to 4.46%, or by 13 basis points, primarily due to lower yields on commercial and home equity loans mostly due to downward rate resets on variable rate loans and lower rates on originations. The yield on overnight investments and investment securities decreased by 106 basis points and 22 basis points, respectively. The yield decrease on overnight investments was primarily due to a lower federal funds rate, while lower yields on government agency and mortgage-backed securities were the primary reasons for the investment securities yield decline.

Average interest-bearing liabilities increased by $3.50 billion to $23.15 billion, compared to the first quarter of 2019. This increase was primarily due to an increase in average interest-bearing deposit balances of $2.79 billion driven by contributions from recent acquisitions and organic deposit growth, as well as an increase in average long-term borrowings of $616.9 million due to due to sub debt issuance and higher other borrowings in the quarter.

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Rates on interest-bearing liabilities increased by 20 basis points to 0.54%, primarily due to increased rates paid on time deposits and money market accounts.

Provision for Credit Losses

BancShares recorded net provision expense of $28.4 million for the three months ended March 31, 2020 as compared to $11.8 million, for the same period in 2019. The increase in the current period was primarily due to conditions related to COVID-19 and the potential impact on BancShares’ portfolio loan losses. Loss estimates consider the potential impact of slower economic activity and increasing unemployment, as well as potential mitigating effects from the government stimulus and loan modification programs. The increase in provision was mostly related to commercial and industrial loans and commercial real estate.

Noninterest Income

Table 4

NONINTEREST INCOME



	Three months ended
(Dollars in thousands)	March 31, 2020			March 31, 2019
Service charges on deposit accounts	$	26,413		$	25,065
Wealth management services	26,412			25,001
Cardholder services, net	18,160			16,633
Other service charges and fees	7,792			7,422
Merchant services, net	5,888			5,835
Mortgage income	5,224			3,658
Insurance commissions	3,688			3,291
ATM income	1,422			1,511
Marketable equity securities (losses) gains, net	(51,408		)	11,328
Realized gains on investment securities available for sale, net	19,795			—
Other	625			3,919
Total noninterest income	$	64,011		$	103,663

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 first quarter of 2020 was $64.0 million, compared to $103.7 million for the same period of 2019, a decrease of $39.7 million, or 38.3%. The most significant components of the change were as follows:


•	A decline in the market value of our equity securities portfolio resulted in a $62.7 million reduction in noninterest income.


•	Realized gains on investment securities available for sale were $19.8 million for the first quarter of 2020, while no gains were recognized in the first quarter of 2019.


•	Mortgage income increased by $1.6 million primarily due to favorable interest rate movements and increased origination volume. Noninterest income related to increased production was partially offset by a mortgage servicing rights impairment of $3.0 million recorded due to declining mortgage rates and an expected increase in prepayment activity.


•	Cardholder services increased by $1.5 million primarily due to volume increases and higher fee income.


•	Wealth management services increased by $1.4 million primarily due to an increase in average managed assets.

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Noninterest Expense

Table 5

NONINTEREST EXPENSE



	Three months ended
(Dollars in thousands)	March 31, 2020		March 31, 2019
Salaries and wages	$	145,255	$	132,421
Employee benefits	38,511		32,535
Occupancy expense	27,480		27,761
Equipment expense	27,850		26,740
Processing fees paid to third parties	10,372		7,089
FDIC insurance expense	3,466		2,660
Collection and foreclosure-related expenses	4,054		3,022
Merger-related expenses	4,232		1,719
Telecommunications expense	2,973		2,041
Consultant expense	3,260		2,881
Advertising expense	2,669		2,552
Core deposit intangible amortization	3,859		4,247
Other	25,990		21,989
Total noninterest expense	$	299,971	$	267,657

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

Noninterest expense was $300.0 million during the first quarter of 2020, compared to $267.7 million for the same period in 2019, an increase of $32.3 million, or 12.1%. The most significant components of the change were as follows:


•	Personnel expense increased $18.8 million primarily due to an increase in salaries and wages as a result of net staff additions, including personnel from acquisitions (impact of $5.8 million), and merit increases.


•	Other noninterest expense increased by $4.0 million primarily due to an increase in pension costs.


•	Processing fees paid to third parties increased $3.3 million primarily due to the expansion of digital banking offerings.


•	Merger-related expenses increased by $2.5 million due to an increase in acquisition activity, particularly related to the acquisitions of Entegra and Community Financial.


•	Equipment expense increased by $1.1 million primarily due to higher depreciation on hardware and software additions.

Income Taxes

Income tax expense was $16.9 million and $33.4 million for the first quarter of 2020 and first quarter of 2019, respectively, representing effective tax rates of 22.8% and 23.1% during the 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 $38.85 billion and $37.23 billion at March 31, 2020 and December 31, 2019, respectively. The $1.62 billion increase was primarily composed of a $1.67 billion increase in investment securities and a $359.5 million increase in loans and leases, partially offset by a $419.3 million decrease in overnight investments.

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Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities with 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 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 and into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C - Investments for additional disclosures.

The fair value of investment securities totaled $8.85 billion at March 31, 2020, an increase of $1.67 billion compared to December 31, 2019. The increase in the portfolio was primarily attributable to investment securities purchases of $5.32 billion, partially offset by sales of $3.16 billion and maturities/paydowns of $587.1 million.

As of March 31, 2020, investment securities available for sale had a net pre-tax unrealized gain of $132.6 million, compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019. 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 allowance for credit losses was needed at March 31, 2020. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income (“AOCI”), net of deferred taxes.

As part of the adoption of ASC 326, BancShares evaluated its portfolios of held to maturity and available for sale debt securities to determine the need to record a related allowance for credit losses. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption. As of March 31, 2020 and January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities

Table 6

INVESTMENT SECURITIES



	March 31, 2020						December 31, 2019
(Dollars in thousands)	Composition⁽¹⁾		Cost		Fair value		Composition⁽¹⁾		Cost		Fair value
Investment securities available for sale
U.S. Treasury	2.3	%	$	204,971	$	205,782	5.7	%	$	409,397	$	409,999
Government agency	8.6		762,342		760,431		9.5		684,085		682,772
Residential mortgage-backed securities	67.2		5,832,518		5,952,841		73.4		5,269,060		5,267,090
Commercial mortgage-backed securities	7.3		635,565		650,565		5.3		373,105		380,020
Corporate bonds	2.5		221,068		219,415		2.8		198,278		201,566
State, county and municipal	—		—		—		1.6		118,227		118,227
Total investment securities available for sale	87.9		7,656,464		7,789,034		98.4		7,052,152		7,059,674
Investment in marketable equity securities	3.6		344,161		315,501		1.1		59,262		82,333
Investment securities held to maturity
Residential mortgage-backed securities	8.3		720,441		732,957		—		—		—
Other	0.2		20,221		20,221		0.4		30,996		30,996
Total investment securities held to maturity	8.5		740,662		753,178		0.4		30,996		30,996
Total investment securities	100.0	%	$	8,741,287	$	8,857,713	100.0	%	$	7,142,410	$	7,173,003
⁽¹⁾ Calculated as a percent of the total fair value of investment securities.

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Loans and Leases

Loans and leases were $29.24 billion at March 31, 2020, a net increase of $359.5 million, representing annualized growth of 5.0% since December 31, 2019. This increase was driven by a $357.8 million net increase in the non-PCD portfolio as well as a $1.6 million net increase in the PCD loan portfolio. The net increase in the non-PCD portfolio was due to organic growth primarily in our commercial segments as well as $111.1 million in loans acquired from Community Financial. The net increase in PCD loans was primarily due to $24.2 million in loans from Community Financial as well as the adoption of ASC 326 resulting in a $19.0 million increase, partially offset by a $22.5 million decrease in loans from prior acquisitions. Excluding 2020 acquired loans, total loans grew by 3.1% on an annualized basis.

BancShares reports non-PCD and PCD loan portfolios separately, and the non-PCD portfolio is further divided into commercial and consumer segments. Non-PCD loans and leases at March 31, 2020 were $28.68 billion compared to non-PCI loans of $28.32 billion at December 31, 2019, representing 98.1% of total loans at both period ends. PCD loans at March 31, 2020 were $560.4 million, compared to $558.7 million of PCI loans at December 31, 2019, representing 1.9% of loans at both period ends.

The discount related to acquired non-PCD loans and leases at March 31, 2020 and PCI loans and leases at December 31, 2019 was $28.3 million and $30.9 million, respectively. The discount related to PCD loans at March 31, 2020 and PCI loans and leases at December 31, 2019 was $61.6 million and $88.2 million, respectively. The primary driver of the decrease in PCD discount is the adoption of ASC 326, which resulted in a reclassification of the credit portion of the loan discount to the ACL of $19.0 million.

During the three months ended March 31, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $2.5 million and $3.2 million, respectively. During the three months ended March 31, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $18.5 million and $17.8 million, respectively.

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Table 7

LOANS AND LEASES



(Dollars in thousands)	March 31, 2020
Commercial:
Construction and land development	$	1,014,017
Owner occupied commercial mortgage	10,076,132
Non-owner occupied commercial mortgage	3,058,235
Commercial and industrial and leases	4,738,098
Total commercial loans	18,886,482
Consumer:
Residential mortgage	5,299,412
Revolving mortgage	2,362,644
Construction and land development	363,190
Consumer auto	1,201,152
Consumer other	567,727
Total consumer loans	9,794,125
Total non-PCD loans and leases	28,680,607
PCD loans	560,352
Total loans and leases	29,240,959
Less allowance for credit losses on loans and leases	(209,259		)
Net loans and leases	$	29,031,700



(Dollars in thousands)	December 31, 2019
Commercial:
Construction and land development	$	1,013,454
Commercial mortgage	12,282,635
Other commercial real estate	542,028
Commercial and industrial and leases	4,403,792
Other	310,093
Total commercial loans	18,552,002
Noncommercial:
Residential mortgage	5,293,917
Revolving mortgage	2,339,072
Construction and land development	357,385
Consumer	1,780,404
Total noncommercial loans	9,770,778
Total non-PCI loans and leases	28,322,780
PCI loans	558,716
Total loans and leases	28,881,496
Less allowance for loan and lease losses	(225,141		)
Net loans and leases	$	28,656,355

ALLOWANCE FOR CREDIT LOSSES

The ACL was $209.3 million at March 31, 2020, representing a decrease of $19.5 million since December 31, 2019. The ACL as a percentage of total loans and leases was 0.72% at March 31, 2020, compared to 0.85% December 31, 2019.

Upon adoption of ASC 326, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, partially offset by an increase of $19.0 million in the ACL on PCD loans. The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. This decrease was partially offset by an increase in the consumer segments due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL.

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The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the quarter ended March 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $21.5 million increase due to the potential economic impact of COVID-19 and its estimated impact on credit losses during the quarter. Within our forecast period of 24 months, forecasts varied widely for key macroeconomic variables (unemployment, gross domestic product, home price index, and commercial real estate index) used in the ACL models. Expected loss estimates considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs. These loss estimates were also influenced by BancShares strong credit quality, historically low net charge-offs and recent credit trends, which remained stable through the quarter ended March 31, 2020.

At March 31, 2020, the ACL allocated to non-PCD loans and leases was $182.3 million, or 0.64% of non-PCD loans and leases, compared to $217.6 million, or 0.77%, at December 31, 2019. The decrease of 13 basis points since December 31, 2019 was primarily due to the adoption of ASC 326, partially offset by the forecasted potential economic impacts of the COVID-19 pandemic on expected credit losses.

At March 31, 2020, the ACL for PCD loans totaled $26.9 million compared to $7.5 million at December 31, 2019. The increase was primarily due the adoption of ASC 326.

Net charge-offs for loans and leases were $7.5 million during the first quarter of 2020, compared to $6.7 million during the first quarter of 2019. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.10% and 0.11% for the first quarter of 2020 and 2019, respectively.

Table 8

ALLOWANCE FOR CREDIT LOSSES



	Three months ended March 31, 2020
(Dollars in thousands)	Construction and land development - commercial			Owner occupied commercial mortgage			Non-owner occupied commercial mortgage			Commercial and industrial and leases			Residential mortgage			Revolving mortgage			Construction and land development - consumer			Consumer auto			Consumer other			PCD			Total
Balance at December 31	$	33,213		$	36,444		$	11,102		$	61,610		$	18,232		$	19,702		$	2,709		$	4,292		$	30,301		$	7,536		$	225,141
Adoption of ASC 326	(31,061		)	(19,316		)	460			(37,637		)	17,118			3,665			(1,291		)	1,100			10,037			19,001			(37,924		)
Balance at January 1	$	2,152		$	17,128		$	11,562		$	23,973		$	35,350		$	23,367		$	1,418		$	5,392		$	40,338		$	26,537		$	187,217
Provision (credits)	51			6,107			4,956			10,423			3,593			1,304			(223		)	958			3,774			(2,588		)	28,355
Initial allowance on PCD loans	—			—			—			—			—			—			—			—			—			1,193			1,193
Charge-offs	—			(320		)	—			(5,049		)	(800		)	(585		)	(70		)	(944		)	(5,370		)	(1,123		)	(14,261		)
Recoveries	87			55			13			1,272			223			471			15			363			1,359			2,897			6,755
Balance at March 31	$	2,290		$	22,970		$	16,531		$	30,619		$	38,366		$	24,557		$	1,140		$	5,769		$	40,101		$	26,916		$	209,259

	Three months ended March 31, 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			PCI			Total
Balance at January 1	$	35,270		$	43,451		$	2,481		$	55,620		$	2,221		$	15,472		$	21,862		$	2,350		$	35,841		$	9,144		$	223,712
Provision (credits)	2,119			2,371			(83		)	2,725			(498		)	1,508			209			123			3,440			(164		)	11,750
Charge-offs	(44		)	(761		)	—			(1,858		)	—			(166		)	(963		)	—			(6,362		)	—			(10,154		)
Recoveries	131			220			1			538			444			173			387			—			1,573			—			3,467
Balance at March 31	$	37,476		$	45,281		$	2,399		$	57,025		$	2,167		$	16,987		$	21,495		$	2,473		$	34,492		$	8,980		$	228,775

The reserve for unfunded loan commitments was $10.5 million and $1.1 million at March 31, 2020 and December 31, 2019, respectively. The increase in the reserve was primarily due to increases in the scope of off-balance sheet exposures considered in this estimate due to the provisions of ASC 326.

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Table 9

ALLOWANCE FOR CREDIT LOSSES RATIOS



	Three months ended March 31
(Dollars in thousands)	2020			2019
Average loans and leases:
PCD	$	530,087		$	579,080
Non-PCD	28,502,231			24,936,898
Loans and leases at period-end:
PCD	560,352			557,356
Non-PCD	28,680,607			24,906,429
Allowance for credit losses allocated to:
PCD	26,916			8,980
Non-PCD	182,343			219,795
Total	$	209,259		$	228,775
Net charge-offs (recoveries) to average loans and leases:
PCD	(1.35		)%	—		%
Non-PCD	0.13			0.11
Total	0.10			0.11
Allowance for credit losses to total loans and leases:
PCD	4.80			1.61
Non-PCD	0.64			0.88
Total	0.72			0.90

NONPERFORMING ASSETS

Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”). At March 31, 2020, BancShares’ nonperforming assets totaled $230.3 million, an increase of $79.1 million since December 31, 2019.

Nonaccrual loans and leases at March 31, 2020 were $174.6 million, reflecting an increase of $52.9 million since December 31, 2019. The increase was primarily due to the dissolution of PCI loan pools under the adoption of ASC 326 as those nonaccrual loans within performing PCI pools were previously excluded from reporting. As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools, including $24.2 million of loans that were greater than 90 days past due. The credit quality of the portfolio remains in line with our risk tolerances and management has not identified material increases in portfolio risk. At March 31, 2020, OREO totaled $55.7 million, representing an increase of $9.1 million since December 31, 2019 primarily due to additions from Community Financial of $9.8 million. The additional PCI nonaccrual loans and acquired OREO resulted in an increase of 18 basis points to the nonperforming assets ratio at March 31, 2020.

Table 10

NONPERFORMING ASSETS



	2020			2019
	First			Fourth			Third			Second			First
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Nonaccrual loans and leases:
Non-PCD	$	121,337		$	114,946		$	108,816		$	100,701		$	88,958
PCD	53,234			6,743			829			4,274			1,667
Other real estate owned	55,707			46,591			46,253			46,236			43,306
Total nonperforming assets	$	230,278		$	168,280		$	155,898		$	151,211		$	133,931

Accruing loans and leases 90 days or more past due
Non-PCD	$	2,933		$	3,291		$	4,247		$	3,468		$	3,493
PCD	37			24,257			23,287			29,319			33,981

Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.79		%	0.58		%	0.57		%	0.56		%	0.53		%

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TROUBLED DEBT RESTRUCTURINGS (“TDR”)

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 not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.

Table 11

TROUBLED DEBT RESTRUCTURINGS



(Dollars in thousands)	March 31, 2020		December 31, 2019
Accruing TDRs:
Non-PCD	$	119,562	$	111,676
PCD	14,061		17,074
Total accruing TDRs	133,623		128,750
Nonaccruing TDRs:
Non-PCD	41,185		42,331
PCD	4,997		111
Total nonaccruing TDRs	46,182		42,442
All TDRs:
Non-PCD	160,747		154,007
PCD	19,058		17,185
Total TDRs	$	179,805	$	171,192

Recent legislation and regulatory requirements have allowed for relief on determination of TDRs for new loan modifications and forbearances for borrowers experiencing COVID-19-related financial difficulty on loans that were current as of December 31, 2019. BancShares has elected to adopt this guidance and did not identify new TDRs as a result of COVID-19-related modifications beginning in March 31, 2020 for borrowers that were current at the time of requested modification.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debentures, and other borrowings. Interest-bearing liabilities totaled $23.60 billion at March 31, 2020, compared to $22.83 billion at December 31, 2019. The $769.2 million increase was due to an increase in total borrowings of $615.6 million and an increase in interest-bearing deposits of $153.5 million.

Deposits

Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe 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 March 31, 2020, total deposits were $35.35 billion, an increase of $915.5 million, representing annualized growth of 10.7% since December 31, 2019. Excluding acquired deposits totaling $218.0 million, deposits increased $697.5 million, or by 8.1% annualized, over the same time period. This organic growth was primarily the result of increases in demand and money market accounts partially offset by a decline in time deposits.

Table 12

DEPOSITS



(Dollars in thousands)	March 31, 2020		December 31, 2019
Demand	$	13,688,744	$	12,926,796
Checking with interest	8,204,383		8,284,302
Money market	7,172,488		6,817,752
Savings	2,661,000		2,564,777
Time	3,620,096		3,837,609
Total deposits	$	35,346,711	$	34,431,236

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Borrowings

At March 31, 2020, total borrowings were $1.94 billion compared to $1.33 billion at December 31, 2019. The $615.6 million increase was primarily due to a subordinated debt issuance of $340.7 million in the first quarter of 2020, an increase in FHLB borrowings of $220.5 million and an increase in securities sold under customer repurchase agreements of $97.4 million, partially offset by a decrease in other borrowings of $43.0 million.

Table 13

BORROWINGS



(Dollars in thousands)	March 31, 2020		December 31, 2019
Securities sold under customer repurchase agreements	$	540,362	$	442,956
Federal Home Loan Bank borrowings	792,684		572,185
Subordinated debt
SCB Capital Trust I	9,749		9,739
FCB/SC Capital Trust II	17,564		17,532
FCB/NC Capital Trust III	88,145		88,145
Capital Trust debentures assumed in acquisitions	14,433		14,433
Other subordinated debt	374,254		33,563
Total subordinated debt	504,145		163,412
Other borrowings	105,303		148,318
Total borrowings	$	1,942,494	$	1,326,871

BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon 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.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

On March 4, 2020, BancShares completed its public offering of $350 million aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series A Preferred Stock) for a total of $345 million.

The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in FCB as regulatory capital, and redeeming or repurchasing our common stock.

During the first quarter of 2020, BancShares repurchased 349,390 shares of Class A common stock for $159.7 million at an average cost per share of $457.05. During the three months ended March 31, 2019, BancShares repurchased a total of 243,000 shares of Class A common stock for $100.7 million at an average cost per share of $414.58. All Class A common stock repurchases completed in 2019 and 2018 were consummated under previously approved authorizations.

Subsequent to quarter-end through April 30, 2020, BancShares repurchased an additional 111,700 shares of Class A common stock for $37.3 million at an average cost per share of $333.71.

On April 28, 2020, the Board authorized share repurchases of up to 500,000 of BancShares’ Class A common stock for the period May 1, 2020 through July 31, 2020. This authority will supersede all previously approved authorities.

The table below shows activities that caused the change in outstanding Class A common stock over the past five quarters.

Table 14

CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING



	2020		2019
	First		Fourth		Third		Second		First
(in thousands)	Quarter		Quarter		Quarter		Quarter		Quarter
Class A shares outstanding at beginning of period	9,624		9,879		10,175		10,380		10,623
Repurchases	(349	)	(255	)	(296	)	(205	)	(243	)
Class A shares outstanding at end of period	9,275		9,624		9,879		10,175		10,380

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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.

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 15

ANALYSIS OF CAPITAL ADEQUACY



	Requirements to be well-capitalized		March 31, 2020				December 31, 2019
(Dollars in thousands)	Requirements to be well-capitalized		Amount		Ratio		Amount		Ratio
BancShares
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,612,960	11.43	%	$	3,344,305	10.86	%
Common equity Tier 1	6.50		3,273,002		10.36		3,344,305		10.86
Total risk-based capital	10.00		4,313,280		13.65		3,731,501		12.12
Tier 1 leverage ratio	5.00		3,612,960		8.98		3,344,305		8.81

FCB
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,904,111	12.42	%	$	3,554,974	11.54	%
Common equity Tier 1	6.50		3,904,111		12.42		3,554,974		11.54
Total risk-based capital	10.00		4,149,931		13.20		3,837,670		12.46
Tier 1 leverage ratio	5.00		3,904,111		9.72		3,554,974		9.38

As of March 31, 2020, 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.

BancShares and FCB had capital conservation buffers of 5.65% and 5.20%, respectively, at March 31, 2020, 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.

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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.

In response to COVID-19, BancShares assembled a cross-functional leadership team to identify and manage newly identified risks and provide effective risk oversight through this pandemic. New or elevated risks have been identified in multiple areas, including but not limited to, operational risk, credit risk, market risk, liquidity risk, capital adequacy risk, compliance risk, and financial reporting risk. As such, we have incorporated changes to Item 1A. Risk Factors within this Quarterly Report on Form 10-Q to capture these changes. These new or increased areas of risk are being actively managed by senior leadership, and have been incorporated into reporting for key management committees and regular updates are being provided to the Board of Directors.

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 PCD or non-PCD, 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 ACL that accounts for losses inherent in the loan and lease portfolio.

We are actively monitoring our loan portfolio for areas of increased risk as a result of COVID-19. As of May 4, 2020, we have approved or processed loan payment extensions on approximately $6.5 billion in loans (approximately $200 million in deferred payments) for customers in good standing who have been affected by COVID-19. BancShares has a well-diversified loan portfolio, by geography and industry, however, extensions have been concentrated in industries impacted the most by the pandemic, which include our dental and medical portfolios, as well as the hospitality industry. The risk profile is somewhat mitigated as our typical customer’s dental or medical practice is well established and actively managed. Social distancing requirements had an immediate impact on both of these industries; however, they should also see immediate demand for services once those restrictions are lessened. Through May 4, 2020, we have not seen significant shifts in credit line utilization or overall declines in credit quality. BancShares continues to have solid credit performance that has matched or exceeded its peer group.

Additionally, we are participating in the SBA-PPP program, which will provide much needed funds to our existing small business customers and continue to assess both the credit and operational risks this program presents. We processed approximately 5,000 SBA-PPP loan applications, securing funding for our customers of approximately $1.8 billion, during the initial round of funding for this program. As of May 4, 2020, we have processed approximately 18,000 additional loan applications for the second phase of this program, representing additional funding of approximately $1.6 billion.

Our ACL estimate for the quarter ended March 31, 2020 included extensive reviews of the changes in credit risk associated with the loan portfolio and uncertainties around economic forecasts and the overall economic impact of COVID-19. Expected loss estimates within each portfolio considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs. These loss estimates additionally considered BancShares historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen deterioration from COVID-19 as of March 31, 2020.

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. Market interest rates declined significantly from year-end driven by economic uncertainty brought on by COVID-19. Net interest income deterioration in down rate shocks will remain muted due to the low absolute value of market interest rates. Assumptions that incorporate customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise have been adjusted based on actual deposit behavior over the last 3 years during a rising rate cycle.

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Table 16 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of March 31, 2020 and December 31, 2019.

Table 16

NET INTEREST INCOME SENSITIVITY ANALYSIS



	Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis points)	March 31, 2020		December 31, 2019
-100	(4.20	)%	(8.00	)%
+100	3.40		1.30
+200	4.30		0.01

Net interest income sensitivity metrics at March 31, 2020 compared to December 31, 2019 were primarily affected by a reduction in both the number of offerings and promotional rates paid on time deposits. Additionally, as market interest rates have fallen in 2020, 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 17 table presents the EVE profile as of March 31, 2020 and December 31, 2019.

Table 17

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS



	Estimated percentage increase (decrease) in EVE
Change in interest rate (basis points)	March 31, 2020		December 31, 2019
-100	(11.50	)%	(8.25	)%
+100	2.40		(0.03	)
+200	(1.20	)	(4.80	)

The economic value of equity metrics at March 31, 2020 compared to December 31, 2019 were primarily affected by strong growth in non-interest demand deposits coupled with adjustments to assumptions related to customer migration.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to hedge our overall balance sheet interest rate sensitivity and risk.

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 three different categories of liquidity risk:


•	Tactical - 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 - Measures the amount by which illiquid assets are supported by long-term funding; and


•	Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner.

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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 $5.45 billion at March 31, 2020 compared to $3.57 billion at December 31, 2019. Another source of available funds was advances from the FHLB of Atlanta and Chicago. Outstanding FHLB advances were $792.7 million as of March 31, 2020, and we had sufficient collateral pledged to secure $7.43 billion of additional borrowings from the FHLB of Atlanta. Also, at March 31, 2020, $3.88 billion in non-PCD loans with a lendable collateral value of $3.15 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines and other credit lines, which had $623.0 million of available capacity at March 31, 2020.

CRITICAL ACCOUNTING ESTIMATES

Except as described below, there have been no significant changes in our Critical Accounting Estimates as described in our 2019 Annual Report on Form 10‑K.

Allowance for credit losses - The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.

The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast with reversion to historical assumptions. Loan losses are estimated using the fair value of collateral for collateral-dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL.

PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses.

Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID-19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q 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 impacts of COVID-19 on our business and the economy, 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.

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


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of March 31, 2020, BancShares’ market risk profile has changed since December 31, 2019 as discussed in the Form 10-K as a result of the outbreak of COVID-19 during the first quarter of 2020. See section Risk Management within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of changes. 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.

During the first quarter of 2020, BancShares adopted ASU-2016-13 which resulted in a material change to our methodology for estimating credit losses on the loan portfolio. As a result, the Company implemented changes to policies, processes, and controls over estimating the allowance for credit losses. Many of these controls are similar to those previously used for estimating the allowance for loan and lease losses under legacy GAAP, however, there were changes implemented to account for the additional complexity of the credit loss models, review of economic forecasts and other assumptions used in the estimation process.

Except as noted above, no changes in BancShares’ internal control over financial reporting occurred during the first quarter of 2020 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts 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 N - Commitments and Contingencies.

Item 1A. Risk Factors

The following paragraphs describe changes in the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.

An outbreak of COVID-19 has adversely affected BancShares' business, financial condition and results of operations.

A novel strain of coronavirus (“COVID-19”) has spread across most of the world, including the United States beginning in the first quarter of 2020. It has caused severe disruptions to the US economy, regional quarantines, business shutdowns, high unemployment, disruptions to supply chains, and overall economic instability that has adversely impacted the operations, activities and business of BancShares and its customers. Effects have generally been felt across all industries; however, the industries that have been the most negatively impacted to date include hospitality, travel and tourism, retail, medical and dental, and financial services.

In response to the national public health crisis, Federal, State and Local governments continue to impose an array of restrictions on the way all businesses conduct their operations and on our customers, business partners, vendors and employees. These restrictions, along with other economic factors including inflation risks, oil price volatility, and changes in interest rates have and may continue to destabilize financial markets and negatively impact our customers’ business activities and operations, making it difficult for them to satisfy existing debt obligations. They also have led to increasing unemployment and slower consumer spending which in turn will increase our collection risk as deteriorating economic conditions correlate with lower credit quality metrics and higher customer defaults on loans. Economic pressures and uncertainty has and may continue to change consumer and business behaviors, which, in the short and long term, could affect borrowers’ creditworthiness and the demand for loans and other products and services we offer. BancShares is actively monitoring the loan portfolio to identify changes in credit risk within a specific geography, loan class, or within a particular industry concentration. Therefore, provision expense could increase as we incorporate these changes into our estimate on the allowance for credit losses.

Additionally, our operations have experienced disruptions as we transitioned to a remote working environment for most corporate employees and we adjusted branch operations and corporate processes. There may be increased absenteeism, and lost productivity as a result of the remote workforce. We may see an increased incidence of cybersecurity threats or fraud as cyber-criminals look to profit from the disruption and potential strain on information technology and the fear of the general public. There may be disruption in critical third party services as they adjust to the new operating environment. BancShares has a comprehensive business continuity and data security plan in place but may not be able to mitigate all of the issues identified above.

Market volatility and general uncertainty in the capital markets may also impact our business. Our access to capital and liquidity could be limited by market disruptions which could be exacerbated by delays in customer payments or significant withdrawals from customer deposit accounts. In addition, the fair value of our assets and liabilities will be impacted by the changing market environment. This could also increase liquidity and capital adequacy risks, as well as long-lived asset impairment risk.

As the government and its regulatory bodies respond to the crisis, it increases the burden on our associates to quickly respond to changing regulatory guidance. This could increase the risk of noncompliance.

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The impacts laid out above and others will be felt across all of the following categories of risk identified by BancShares in our Annual Report on Form 10-K:


•	Operational Risk


•	Credit Risk


•	Market Risk


•	Liquidity Risk


•	Capital Adequacy Risk


•	Compliance Risk


•	Strategic Risk


•	Financial Reporting Risk

The effects of the COVID-19 pandemic will heighten specific risk factors and could impact substantially all risk factors described in our Annual Report on Form 10-K under the risk categories listed above. Those effects will adversely affect our business operations and results at least until the outbreak has subsided, and the negative effects on the economy, our customers and our business and results likely will continue to be felt for some time afterwards. The full extent of the impact will depend on future developments that are highly uncertain including the duration and spread of the outbreak, its severity, governmental actions to contain the virus, and the long term economic impact, both globally, as well as in our banking markets, which includes a potential recession. As a result, we currently cannot fully assess the risk and adverse impact of the COVID-19 pandemic, but the effects may have a material impact on our business and financial results and heighten many of the individual risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 March 31, 2020, is included in the following table:



Class A common stock	Total Number of Class A Shares Repurchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Repurchased Under the Plans or Programs
Repurchases from January 1, 2020 to January 31, 2020	92,590	$	526.93	92,590	299,000
Repurchases from February 1, 2020 to February 28, 2020	130,200	503.37		130,200	369,800
Repurchases from March 1, 2020 to March 31, 2020	126,600	358.31		126,600	243,200
Total	349,390	$	457.05	349,390	243,200
The Board authorized the repurchase of up to 500,000 shares of Class A common stock for the period November 1, 2019 through January 31, 2020. The authorization was publicly announced on October 29, 2019. The Board authorized the repurchase of up to 500,000 shares of Class A common stock for the period of February 1, 2020 through April 30, 2020, superseding all previous authorities. The authorization was publicly announced on February 7, 2020.

Subsequent to quarter-end and through April 30, 2020, BancShares repurchased an additional 111,700 shares of Class A common stock for $37.3 million at an average cost per share of $333.71.

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Item 6. Exhibits



3.1	Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-K for the year ended December 31, 2014)

3.2	Certificate of Designation of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-A filed March 12, 2020)

4.1	Specimen of the Registrant’s 5.375% Non-Cumulative Perpetual Preferred Stock, Series A Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-A filed March 12, 2020)

4.2	Deposit Agreement, dated as of March 12, 2020, by and among the Company, Broadridge Corporate Issuer Solutions, Inc., as Depositary, and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-A filed March 12, 2020)

4.3	Form of Depositary Receipt relating to the Registrant’s 5.375% Non-Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 4.2 (attached as Exhibit A thereto) to the Registrant’s Form 8-A filed March 12, 2020)

4.4	Indenture, dated as of March 4, 2020, by and between First Citizens BancShares, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K dated February 27, 2020)

4.5	First Supplemental Indenture, dated as of March 4, 2020, by and between First Citizens BancShares, Inc. and U.S. Bank National Association, as trustee (incorporate by reference to Exhibit 4.2 to the Registrant’s Form 8-K dated February 27, 2020)

4.6	Form of 3.375% Fixed-to-Floating Subordinated Notes due 2030 (incorporated by reference to Exhibit 4.2 (attached as Exhibit A thereto) to the Registrant’s Form 8-K dated February 27, 2020)

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	Inline XBRL Instance Document (filed herewith)

101.SCH	Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104	Cover Page Interactive Data File (embedded within the Inline XBRL document filed as Exhibit 101)

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SIGNATURES

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



Date:	May 5, 2020		FIRST CITIZENS BANCSHARES, INC.
			(Registrant)

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