Edgar Filing: FIRST CITIZENS BANCSHARES INC /DE/

FCNCA_10Q_03.31.2014

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________

FORM 10-Q

____________________________________________________

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

For the quarterly period ended March 31, 2014

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

Commission File Number: 001-16715

____________________________________________________

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

____________________________________________________



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

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

(919) 716-7000

(Registrant’s telephone number, including area code)

____________________________________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files) Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

Class A Common Stock—$1 Par Value—8,586,058 shares

Class B Common Stock—$1 Par Value—1,032,883 shares

(Number of shares outstanding, by class, as of May 7, 2014)

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INDEX



		Page(s)

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at March 31, 2014 and December 31, 2013	3

	Consolidated Statements of Income for the three-month period ended March 31, 2014 and March 31, 2013	4

	Consolidated Statements of Comprehensive Income for the three-month period ended March 31, 2014 and March 31, 2013	5

	Consolidated Statements of Changes in Shareholders’ Equity for the three-month period ended March 31, 2014 and March 31, 2013	6

	Consolidated Statements of Cash Flows for the three-month period ended March 31, 2014 and March 31, 2013	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59

Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 6.	Exhibits	61

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PART I


Item 1.	Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



(Dollars in thousands, unaudited)	March 31, 2014			December 31, 2013
Assets
Cash and due from banks	$	543,471		$	533,599
Overnight investments	1,161,469			859,324
Investment securities available for sale	5,676,237			5,387,703
Investment securities held to maturity	782			907
Loans held for sale	53,361			47,271
Loans and leases:
Acquired	1,270,818			1,029,426
Originated	12,200,226			12,104,298
Allowance for loan and lease losses	(222,942		)	(233,394		)
Net loans and leases	13,248,102			12,900,330
Premises and equipment	878,850			876,522
Other real estate owned:
Covered under loss share agreements	41,855			47,081
Not covered under loss share agreements	44,504			36,898
Income earned not collected	49,668			48,390
FDIC loss share receivable	74,784			93,397
Goodwill	127,140			102,625
Other intangible assets	4,390			1,247
Other assets	250,384			263,797
Total assets	$	22,154,997		$	21,199,091
Liabilities
Deposits:
Noninterest-bearing	$	5,627,868		$	5,241,817
Interest-bearing	13,135,677			12,632,249
Total deposits	18,763,545			17,874,066
Short-term borrowings	617,794			511,418
Long-term obligations	440,300			510,769
FDIC loss share payable	111,339			109,378
Other liabilities	117,189			116,785
Total liabilities	20,050,167			19,122,416
Shareholders’ Equity
Common stock:
Class A - $1 par value (11,000,000 shares authorized; 8,586,058 shares issued and outstanding at March 31, 2014 and December 31, 2013)	8,586			8,586
Class B - $1 par value (2,000,000 shares authorized; 1,032,883 shares issued and outstanding at March 31, 2014 and December 31, 2013)	1,033			1,033
Surplus	143,766			143,766
Retained earnings	1,968,039			1,948,558
Accumulated other comprehensive loss	(16,594		)	(25,268		)
Total shareholders’ equity	2,104,830			2,076,675
Total liabilities and shareholders’ equity	$	22,154,997		$	21,199,091

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income



	Three months ended March 31
(Dollars in thousands, except per share data, unaudited)	2014			2013
Interest income
Loans and leases	$	161,034		$	211,763
Investment securities interest and dividend income	11,748			8,484
Overnight investments	612			357
Total interest income	173,394			220,604
Interest expense
Deposits	6,825			10,313
Short-term borrowings	585			704
Long-term obligations	5,053			4,705
Total interest expense	12,463			15,722
Net interest income	160,931			204,882
Provision (credit) for loan and lease losses	(1,903		)	(18,606		)
Net interest income after provision for loan and lease losses	162,834			223,488
Noninterest income
Cardholder services	11,832			11,071
Merchant services	13,521			12,486
Service charges on deposit accounts	14,440			14,999
Wealth management services	14,880			14,515
Fees from processing services	4,861			5,619
Other service charges and fees	3,944			3,766
Mortgage income	955			3,788
Insurance commissions	3,287			2,980
ATM income	1,202			1,168
Adjustments to FDIC loss share receivable	(12,349		)	(24,053		)
Other	4,608			11,174
Total noninterest income	61,181			57,513
Noninterest expense
Salaries and wages	79,874			76,119
Employee benefits	20,100			25,019
Occupancy expense	20,425			18,809
Equipment expense	18,791			18,946
FDIC insurance expense	2,636			2,666
Foreclosure-related expenses	5,410			4,305
Other	43,794			48,491
Total noninterest expense	191,030			194,355
Income before income taxes	32,985			86,646
Provision for income taxes	10,619			31,061
Net income	$	22,366		$	55,585
Average shares outstanding	9,618,941			9,618,985
Net income per share	$	2.33		$	5.78

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income



	Three months ended March 31
(Dollars in thousands, unaudited)	2014			2013
Net income	$	22,366		$	55,585

Other comprehensive income (loss)
Unrealized gains and losses on securities:
Change in unrealized securities gains (losses) arising during period	11,899			(1,476		)
Tax effect	(4,643		)	565
Total change in unrealized gains and losses on securities, net of tax	7,256			(911		)

Change in fair value of cash flow hedges:
Change in unrecognized loss on cash flow hedges	719			815
Tax effect	(278		)	(322		)
Total change in unrecognized loss on cash flow hedges, net of tax	441			493

Change in pension obligation:
Reclassification adjustment for losses included in income before income taxes	1,599			4,304
Tax effect	(622		)	(1,685		)
Total change in pension obligation, net of tax	977			2,619

Other comprehensive income	8,674			2,201

Total comprehensive income	$	31,040		$	57,786

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



(Dollars in thousands, unaudited)	Class A Common Stock			Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2012	$	8,588		$	1,033	$	143,766	$	1,792,726		$	(82,106	)	$	1,864,007
Net income	—			—		—		55,585			—			55,585
Other comprehensive income, net of tax	—			—		—		—			2,201			2,201
Repurchase of 1,973 shares of Class A common stock	(2		)	—		—		(319		)	—			(321		)
Cash dividends ($0.30 per share)	—			—		—		(2,891		)	—			(2,891		)
Balance at March 31, 2013	$	8,586		$	1,033	$	143,766	$	1,845,101		$	(79,905	)	$	1,918,581
Balance at December 31, 2013	$	8,586		$	1,033	$	143,766	$	1,948,558		$	(25,268	)	$	2,076,675
Net income	—			—		—		22,366			—			22,366
Other comprehensive income, net of tax	—			—		—		—			8,674			8,674
Cash dividends ($0.30 per share)	—			—		—		(2,885		)	—			(2,885		)
Balance at March 31, 2014	$	8,586		$	1,033	$	143,766	$	1,968,039		$	(16,594	)	$	2,104,830

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	Three months ended March 31
(Dollars in thousands, unaudited)	2014			2013
OPERATING ACTIVITIES
Net income	$	22,366		55,585
Adjustments to reconcile net income to cash provided by operating activities:
Provision (credit) for loan and lease losses	(1,903		)	(18,606		)
Deferred tax (benefit) expense	(4,512		)	7,733
Change in current taxes payable	40,710			31,625
Depreciation	17,684			17,994
Change in accrued interest payable	(1,062		)	(2,700		)
Change in income earned not collected	(1,278		)	411
Gain on sale of processing services, net	—			(4,085		)
Origination of loans held for sale	(67,862		)	(117,981		)
Proceeds from sale of loans held for sale	64,009			121,523
Gain on sale of loans	(1,054		)	(3,560		)
Net writedowns/losses on other real estate	3,441			1,350
Net amortization of premiums and discounts	(5,796		)	(47,236		)
FDIC receivable for loss share agreements	4,359			5,619
Net change in other assets	(8,206		)	(7,038		)
Net change in other liabilities	2,186			32,662
Net cash provided by operating activities	63,082			73,296
INVESTING ACTIVITIES
Net change in loans outstanding	(4,788		)	269,428
Purchases of investment securities available for sale	(911,409		)	(736,923		)
Proceeds from maturities/calls of investment securities held to maturity	125			113
Proceeds from maturities/calls of investment securities available for sale	866,803			676,188
Net change in overnight investments	(302,145		)	(511,052		)
Cash (paid to) received from the FDIC for loss share agreements	(3,490		)	42,519
Proceeds from sale of other real estate	10,602			36,019
Additions to premises and equipment	(17,326		)	(8,713		)
Business acquisition, net of cash acquired	18,194			—
Net cash used by investing activities	(343,434		)	(232,421		)
FINANCING ACTIVITIES
Net change in time deposits	(51,268		)	(195,381		)
Net change in demand and other interest-bearing deposits	308,876			174,277
Net change in short-term borrowings	35,970			4,597
Repayment of long-term obligations	(469		)	(669		)
Repurchase of common stock	—			(321		)
Cash dividends paid	(2,885		)	(2,891		)
Net cash provided (used) by financing activities	290,224			(20,388		)
Change in cash and due from banks	9,872			(179,513		)
Cash and due from banks at beginning of period	533,599			639,730
Cash and due from banks at end of period	$	543,471		$	460,217
CASH PAYMENTS FOR:
Interest	$	13,525		$	18,422
Income taxes	2,184			3,364
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	4,832			38,008
Dividends declared but not paid	2,885			—

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements


Note A

Accounting Policies and Basis of Presentation

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

General

These consolidated financial statements and notes are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2013.

Reclassifications

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

Use of Estimates in the Preparation of Financial Statements

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

Recent Accounting Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU ) 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40)”

This ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We will adopt the guidance effective the first quarter of 2015, and we do not anticipate any effect on our consolidated financial position or consolidated results of operations as a result of adoption.

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FASB ASU 2013-11, “Income Taxes (Topic 740)”

This ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require BancShares to use, and BancShares does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.

The provisions of this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. BancShares adopted the guidance effective first quarter of 2014. The initial adoption had no effect on our consolidated financial position or consolidated results of operations.

FASB ASU 2013-04, “Liabilities”

This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.

The amendments in this update are effective for fiscal years beginning after December 31, 2013. BancShares adopted the guidance effective first quarter of 2014. The initial adoption did not have any effect on our consolidated financial position or consolidated results of operations.

Note B

Business Combinations

On January 1, 2014, FCB completed its merger with 1st Financial Services Corporation (1st Financial) of Hendersonville, NC and its wholly-owned subsidiary, Mountain 1st Bank & Trust Company (Mountain 1st). The merger allows FCB to expand its presence in Western North Carolina. Mountain 1st had twelve branches located in Asheville, Brevard, Columbus, Etowah, Fletcher, Forest City, Hendersonville, Hickory, Marion, Shelby and Waynesville. FCB requested and received approval from the North Carolina Commissioner of Banks and the FDIC to close seven Mountain 1st branches due to their proximity to legacy FCB branches. Customers have been notified, and the 90-day waiting period will expire on May 1. FCB anticipates closing the branches in Asheville, Brevard, Fletcher, Forest City, Hendersonville, Hickory and Marion sometime in May. All customer relationships assigned to those branches will be transferred to the nearest FCB branch.

FCB paid $10.0 million to acquire 1st Financial, including payments of $8.0 million to the U.S. Treasury to acquire and subsequently retire1st Financial's Troubled Asset Relief Program (TARP) obligation and $2.0 million paid to the shareholders of 1st Financial. As a result of the merger, FCB recorded $24.5 million in goodwill and $3.8 million in core deposit intangibles.

The 1st Financial transaction was accounted for under the acquisition method of accounting, and the purchased assets, assumed liabilities and identifiable intangible assets were recorded at their acquisition date estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the transaction as additional information regarding closing date fair values becomes available.

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The following table provides the carrying value of acquired assets and assumed liabilities, as recorded by 1st Financial, the fair value adjustments calculated at the time of the merger and the resulting fair value recorded by FCB.



	January 1, 2014
(Dollars in thousands)	As recorded by 1st Financial			Fair value adjustments			As recorded by FCB
Assets
Cash and cash equivalents	$	28,194		$	—		$	28,194
Investment securities	246,890			(9,452		)	237,438
Loans held for sale	1,183			—			1,183
Restricted equity securities	3,105			671			3,776
Loans	338,170			(21,843		)	316,327
Less: allowance for loan losses	(7,796		)	7,796			—
Premises and equipment	3,871			(1,185		)	2,686
Other real estate owned	12,896			(1,305		)	11,591
Intangible asset	—			3,780			3,780
Other assets	16,811			(465		)	16,346
Total assets acquired	$	643,324		$	(22,003	)	$	621,321
Liabilities
Deposits:
Noninterest-bearing	$	152,444		$	—		$	152,444
Interest-bearing	477,881			1,546			479,427
Total deposits	630,325			1,546			631,871
Short-term borrowings	406			—			406
Other liabilities	3,392			167			3,559
Total liabilities assumed	$	634,123		$	1,713		635,836
Fair value of net liabilities assumed							14,515
Cash paid to shareholders							2,000
Cash paid to acquire TARP securities							8,000
Goodwill recorded for 1st Financial							$	24,515

Goodwill recorded for 1st Financial represents future revenues to be derived from the existing customer base, including efficiencies that will result from combining operations and other non-identifiable intangible assets. The 1st Financial transaction is a taxable asset acquisition, and goodwill resulting from the transaction is deductible for income tax purposes.

Merger costs related to the 1st Financial transaction are estimated to be between $6.0 million and $7.0 million. Revenue generated from 1st Financial was approximately $6.9 million for the first quarter of 2014.

All loans resulting from the 1st Financial transaction are accounted for under the expected cash flow method (ASC 310-30).

For loans acquired from 1st Financial, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the merger date were:



(Dollars in thousands)	January 1, 2014
Contractually required payments	$	414,233
Cash flows expected to be collected	400,622
Fair value at acquisition date	316,327

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The recorded fair values of loans acquired in the 1st Financial transaction as of the merger date were as follows:



(Dollars in thousands)	January 1, 2014
Commercial:
Construction and land development	$	41,516
Commercial mortgage	123,925
Other commercial real estate	6,698
Commercial and industrial	29,126
Total commercial loans	201,265
Noncommercial:
Residential mortgage	113,177
Consumer	1,885
Total noncommercial loans	115,062
Total loans acquired from 1st Financial	$	316,327

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Note C

Investments

The amortized cost and fair value of investment securities classified as available for sale and held to maturity at March 31, 2014 and December 31, 2013, are as follows:



	March 31, 2014
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,274,716	$	379	$	1,874	$	1,273,221
Government agency	1,811,889		1,764		879		1,812,774
Mortgage-backed securities	2,592,766		5,524		31,624		2,566,666
Equity securities	543		22,017		—		22,560
Municipal securities	186		—		—		186
Other	870		—		40		830
Total investment securities available for sale	$	5,680,970	$	29,684	$	34,417	$	5,676,237

	December 31, 2013
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
U.S. Treasury	$	373,223	$	259	$	45	$	373,437
Government agency	2,543,223		1,798		792		2,544,229
Mortgage-backed securities	2,486,297		4,526		43,950		2,446,873
Equity securities	543		21,604		—		22,147
Municipal securities	186		1		—		187
Other	863		—		33		830
Total investment securities available for sale	$	5,404,335	$	28,188	$	44,820	$	5,387,703

	March 31, 2014
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities held to maturity
Mortgage-backed securities	$	782	$	53	$	—	$	835

	December 31, 2013
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Mortgage-backed securities	$	907	$	67	$	—	$	974

Investments in mortgage-backed securities primarily represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Other investments include a subordinated debenture investment in another financial institution.

The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Repayments of mortgage-backed securities are dependent on the repayments of the underlying loan balances. Equity securities do not have a stated maturity date.

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	March 31, 2014				December 31, 2013
(Dollars in thousands)	Cost		Fair value		Cost		Fair value
Investment securities available for sale
Amortizing securities maturing in:
One year or less	$	829,091	$	829,997	$	839,956	$	840,883
One through five years	2,258,570		2,257,014		2,077,539		2,077,800
Mortgage-backed securities	2,592,766		2,566,666		2,486,297		2,446,873
Equity securities	543		22,560		543		22,147
Total investment securities available for sale	$	5,680,970	$	5,676,237	$	5,404,335	$	5,387,703
Investment securities held to maturity
Mortgage-backed securities held to maturity	$	782	$	835	$	907	$	974

There were no realized securities gains (losses) during any period presented.

The following table provides information regarding securities with unrealized losses as of March 31, 2014 and December 31, 2013.



	March 31, 2014
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale:
U.S. Treasury	$	699,985	$	1,874	$	—	$	—	$	699,985	$	1,874
Government agency	400,423		879		—		—		400,423		879
Mortgage-backed securities	2,012,814		30,816		23,622		808		2,036,436		31,624
Other	830		40		—		—		830		40
Total	$	3,114,052	$	33,609	$	23,622	$	808	$	3,137,674	$	34,417

	December 31, 2013
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale:
U.S. Treasury	$	102,105	$	45	$	—	$	—	$	102,105	$	45
Government agency	780,552		761		29,969		31		810,521		792
Mortgage-backed securities	2,221,213		42,876		26,861		1,074		2,248,074		43,950
Other	830		33		—		—		830		33
Total	$	3,104,700	$	43,715	$	56,830	$	1,105	$	3,161,530	$	44,820

Investment securities with an aggregate fair value of $23.6 million and $56.8 million have had continuous unrealized losses for more than 12 months as of March 31, 2014 and December 31, 2013, with an aggregate unrealized loss of $0.8 million and $1.1 million, respectively. As of March 31, 2014, all 16 of these investments are mortgage-backed securities. None of the unrealized losses identified as of March 31, 2014 or December 31, 2013 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. For all periods presented, BancShares had the ability and intent to retain these securities for a

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period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.

Investment securities having an aggregate carrying value of $2.78 billion at March 31, 2014 and $2.75 billion at December 31, 2013 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

Note D

Loans and Leases

Loans and leases outstanding, by class, include the following as of the dates indicated:



(Dollars in thousands)	March 31, 2014		December 31, 2013
Acquired loans
Commercial:
Construction and land development	$	106,670	$	78,915
Commercial mortgage	728,872		642,891
Other commercial real estate	47,826		41,381
Commercial and industrial	38,838		17,254
Other	870		866
Total commercial loans	923,076		781,307
Noncommercial:
Residential mortgage	291,254		213,851
Revolving mortgage	25,776		30,834
Construction and land development	28,151		2,583
Consumer	2,561		851
Total noncommercial loans	347,742		248,119
Total acquired loans	1,270,818		1,029,426
Originated loans and leases:
Commercial:
Construction and land development	335,271		319,847
Commercial mortgage	6,330,843		6,362,490
Other commercial real estate	177,082		178,754
Commercial and industrial	1,175,543		1,081,158
Lease financing	394,268		381,763
Other	179,725		175,336
Total commercial loans	8,592,732		8,499,348
Noncommercial:
Residential mortgage	1,030,032		982,421
Revolving mortgage	2,091,000		2,113,285
Construction and land development	119,049		122,792
Consumer	367,413		386,452
Total noncommercial loans	3,607,494		3,604,950
Total originated loans and leases	12,200,226		12,104,298
Total loans and leases	$	13,471,044	$	13,133,724

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At March 31, 2014, $962.4 million in acquired loans were covered under loss share agreements, compared to $1.03 billion at December 31, 2013. The remaining acquired loans as of March 31, 2014 are from the 1st Financial merger.

At March 31, 2014, $2.57 billion in originated loans were pledged to secure debt obligations, compared to $2.56 billion at December 31, 2013.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Originated commercial loans and leases, originated noncommercial loans and leases and acquired loans have different credit quality indicators as a result of the unique characteristics relative to each loan segment being evaluated.

The credit quality indicators for commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Each commercial loan is evaluated annually with more frequent evaluation of more severely criticized loans or leases. The credit quality indicators for noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. Acquired loans are bifurcated into commercial and noncommercial segments and credit quality indicators are assigned in the same manner as the originated portfolio. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is one in which repayment is considered highly likely and there are no observable weaknesses in the asset. Such an asset does not meet any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be effected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of originated, ungraded loans at March 31, 2014 and December 31, 2013 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 loans and other smaller balance consumer loans. Prior to March 31, 2014, ungraded loans also included tobacco buyout loans classified as commercial and industrial loans. Final payment from the Commodity Credit Corporation was received during January 2014 for tobacco buyout loans held by FCB. As of March 31, 2014, ungraded also includes $122.2 million of loans resulting from the 1st Financial merger.

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Originated loans and leases outstanding at March 31, 2014 and December 31, 2013 by credit quality indicator are provided below:



	March 31, 2014
(Dollars in thousands)	Originated commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total originated commercial loans and leases
Pass	$	323,876	$	6,064,405	$	173,517	$	1,074,210	$	386,324	$	179,640	$	8,201,972
Special mention	8,442		117,436		1,302		16,777		4,233		10		148,200
Substandard	2,953		143,723		2,119		6,051		3,155		70		158,071
Doubtful	—		4,227		—		152		543		5		4,927
Ungraded	—		1,052		144		78,353		13		—		79,562
Total	$	335,271	$	6,330,843	$	177,082	$	1,175,543	$	394,268	$	179,725	$	8,592,732

	December 31, 2013
	Originated commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total originated commercial loans and leases
Pass	$	308,231	$	6,094,505	$	174,913	$	964,840	$	375,371	$	174,314	$	8,092,174
Special mention	8,620		119,515		1,362		14,686		2,160		982		147,325
Substandard	2,944		141,913		2,216		6,352		3,491		40		156,956
Doubtful	52		5,159		75		144		592		—		6,022
Ungraded	—		1,398		188		95,136		149		—		96,871
Total	$	319,847	$	6,362,490	$	178,754	$	1,081,158	$	381,763	$	175,336	$	8,499,348



	March 31, 2014
	Originated noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total originated noncommercial loans
Current	$	1,003,016	$	2,072,832	$	117,161	$	363,259	$	3,556,268
30-59 days past due	16,845		10,578		888		2,156		30,467
60-89 days past due	1,063		3,249		794		1,195		6,301
90 days or greater past due	9,108		4,341		206		803		14,458
Total	$	1,030,032	$	2,091,000	$	119,049	$	367,413	$	3,607,494

	December 31, 2013
	Originated noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total originated noncommercial loans
Current	$	955,300	$	2,095,480	$	121,026	$	382,710	$	3,554,516
30-59 days past due	12,885		10,977		1,193		2,114		27,169
60-89 days past due	4,658		2,378		317		955		8,308
90 days or greater past due	9,578		4,450		256		673		14,957
Total	$	982,421	$	2,113,285	$	122,792	$	386,452	$	3,604,950

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Acquired loans and leases outstanding at March 31, 2014 and December 31, 2013 by credit quality indicator are provided below:



	March 31, 2014
(Dollars in thousands)	Acquired loans
Grade:	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Construction and land development - noncommercial		Consumer and other		Total acquired loans
Pass	$	14,789	$	375,245	$	28,526	$	29,918	$	131,765	$	20,240	$	32	$	1,387	$	601,902
Special mention	24,065		134,414		114		3,260		4,823		2,649		—		—		169,325
Substandard	58,374		182,540		10,473		4,686		46,044		1,891		1,716		—		305,724
Doubtful	5,101		36,040		8,713		954		1,931		911		295		—		53,945
Ungraded	4,341		633		—		20		106,691		85		26,108		2,044		139,922
Total	$	106,670	$	728,872	$	47,826	$	38,838	$	291,254	$	25,776	$	28,151	$	3,431	$	1,270,818

	December 31, 2013
	Acquired loans
	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Construction and land development - noncommercial		Consumer and other		Total acquired loans
Pass	$	2,619	$	296,824	$	22,225	$	8,021	$	135,326	$	26,322	$	149	$	1,345	$	492,831
Special mention	15,530		125,295		3,431		2,585		6,301		2,608		—		—		155,750
Substandard	52,228		179,657		7,012		5,225		52,774		1,013		2,139		—		300,048
Doubtful	7,436		40,471		8,713		1,257		2,058		891		295		—		61,121
Ungraded	1,102		644		—		166		17,392		—		—		372		19,676
Total	$	78,915	$	642,891	$	41,381	$	17,254	$	213,851	$	30,834	$	2,583	$	1,717	$	1,029,426

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The aging of the outstanding loans and leases, by class, at March 31, 2014 and December 31, 2013 (excluding loans and leases acquired with deteriorated credit quality) is provided in the table below.

The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current 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, 2014
(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
Originated loans and leases:
Construction and land development - commercial	$	537	$	184	$	655	$	1,376	$	333,895	$	335,271
Commercial mortgage	24,451		3,934		11,248		39,633		6,291,210		6,330,843
Other commercial real estate	155		11		104		270		176,812		177,082
Commercial and industrial	3,921		488		509		4,918		1,170,625		1,175,543
Lease financing	757		323		92		1,172		393,096		394,268
Other	20		5		—		25		179,700		179,725
Residential mortgage	16,845		1,063		9,108		27,016		1,003,016		1,030,032
Revolving mortgage	10,578		3,249		4,341		18,168		2,072,832		2,091,000
Construction and land development - noncommercial	888		794		206		1,888		117,161		119,049
Consumer	2,156		1,195		803		4,154		363,259		367,413
Total originated loans and leases	$	60,308	$	11,246	$	27,066	$	98,620	$	12,101,606	$	12,200,226

	December 31, 2013
	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Originated loans and leases:
Construction and land development - commercial	$	1,603	$	9	$	457	$	2,069	$	317,778	$	319,847
Commercial mortgage	11,131		3,601		14,407		29,139		6,333,351		6,362,490
Other commercial real estate	139		210		470		819		177,935		178,754
Commercial and industrial	3,336		682		436		4,454		1,076,704		1,081,158
Lease financing	789		1,341		101		2,231		379,532		381,763
Other	—		85		—		85		175,251		175,336
Residential mortgage	12,885		4,658		9,578		27,121		955,300		982,421
Revolving mortgage	10,977		2,378		4,450		17,805		2,095,480		2,113,285
Construction and land development - noncommercial	1,193		317		256		1,766		121,026		122,792
Consumer	2,114		955		673		3,742		382,710		386,452
Total originated loans and leases	$	44,167	$	14,236	$	30,828	$	89,231	$	12,015,067	$	12,104,298

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The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at March 31, 2014 and December 31, 2013 (excluding acquired loans and leases) are as follows:



	March 31, 2014				December 31, 2013
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Originated loans and leases:
Construction and land development - commercial	$	702	$	192	$	544	$	—
Other commercial real estate	1,459		—		1,610		—
Commercial mortgage	28,910		927		33,529		1,113
Commercial and industrial	1,075		393		1,428		294
Lease financing	689		—		832		—
Residential mortgage	14,091		2,609		14,701		1,998
Revolving mortgage	—		4,341		—		4,450
Construction and land development - noncommercial	—		206		457		256
Consumer	26		803		69		673
Total originated loans and leases	$	46,952	$	9,471	$	53,170	$	8,784

Acquired Loans

The following table provides changes in the recorded investment of acquired loans during the three months ended March 31, 2014 and March 31, 2013:



(Dollars in thousands)	2014			2013
Balance at January 1	$	1,029,426		$	2,362,152
Fair value of acquired loans	316,327			—
Accretion	30,200			79,886
Payments received and other changes, net	(105,135		)	(258,169		)
Balance at March 31	$	1,270,818		$	2,183,869
Outstanding principal balance at March 31	$	1,727,492		$	3,618,722

The recorded investment of loans on the cost recovery method was $52.1 million at March 31, 2014 and $28.5 million at December 31, 2013. This increase is primarily driven by one large acquired loan relationship that was moved to cost recovery during the quarter. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the timing and amount of ultimate disposition of the asset.

The following table documents changes to the amount of accretable yield for the first three months of 2014 and 2013.



(Dollars in thousands)	2014			2013
Balance at January 1	$	439,990		$	539,564
Additions	84,295			—
Accretion	(30,200		)	(79,886		)
Reclassifications from (to) nonaccretable difference	6,048			(11,653		)
Changes in expected cash flows that do not affect nonaccretable difference	(9,888		)	37,910
Balance at March 31	$	490,245		$	485,935

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Note E

Allowance for Loan and Lease Losses

The following tables present the activity in the allowance for originated loan and lease losses by class of loans for the three months ended March 31, 2014 and March 31, 2013:



	Three months ended March 31, 2014
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage	Construction and land development - non- commercial	Consumer	Non- specific	Total
Originated Loans
Allowance for loan and lease losses:
Balance at January 1	$	10,335	$	100,257	$	1,009	$	22,362	$	4,749	$	190	$	10,511