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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 September 30, 2019
or
 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares Inc /DE/
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
 
 
4300 Six Forks Road
Raleigh
North Carolina
27609
(Address of principle executive offices)
(Zip code)
 
 
 
 
 
 
(919)
716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Stock, Par Value $1
FCNCA
Nasdaq Global Select Market

Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934.
Class B Common Stock, Par Value $1
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  ☒   No  ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  ☒    No  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☒
 
Accelerated filer
☐
 
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
Class A Common Stock—9,732,720 shares
Class B Common Stock—1,005,185 shares
(Number of shares outstanding, by class, as of October 31, 2019)


INDEX
 
 
 
Page No.
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
42
 
 
 
Item 3.
61
 
 
 
Item 4.
61
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
61
 
 
 
Item 1A.
61
 
 
 
Item 2.
61
 
 
 
Item 6.
62

2

PART I 
Item 1.
Financial Statements


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets

(Dollars in thousands, unaudited)
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and due from banks
$
288,933

 
$
327,440

Overnight investments
949,899

 
797,406

Investment in marketable equity securities (cost of $87,588 at September 30, 2019 and $73,809 at December 31, 2018)
116,854

 
92,599

Investment securities available for sale (cost of $4,898,771 at September 30, 2019 and $4,607,117 at December 31, 2018)
4,904,883

 
4,557,110

Investment securities held to maturity (fair value of $2,217,800 at September 30, 2019 and $2,201,502 at December 31, 2018)
2,145,943

 
2,184,653

Loans held for sale
83,256

 
45,505

Loans and leases
27,196,511

 
25,523,276

Allowance for loan and lease losses
(226,825
)
 
(223,712
)
Net loans and leases
26,969,686

 
25,299,564

Premises and equipment
1,222,659

 
1,204,179

Other real estate owned
46,253

 
48,030

Income earned not collected
117,123

 
109,903

Goodwill
296,764

 
236,347

Other intangible assets
65,147

 
72,298

Other assets
540,924

 
433,595

Total assets
$
37,748,324

 
$
35,408,629

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
12,966,890

 
$
11,882,670

Interest-bearing
19,776,387

 
18,789,790

Total deposits
32,743,277

 
30,672,460

Securities sold under customer repurchase agreements
522,195

 
543,936

Federal Home Loan Bank borrowings
192,672

 
193,556

Subordinated debentures
149,051

 
140,741

Other borrowings
112,153

 
13,921

FDIC shared-loss payable
110,586

 
105,618

Other liabilities
349,908

 
249,443

Total liabilities
34,179,842

 
31,919,675

Shareholders’ equity
 
 
 
Common stock:
 
 
 
Class A - $1 par value (16,000,000 shares authorized; 9,878,820 and 10,623,220 shares issued and outstanding at September 30, 2019 and December 31, 2018 respectively)
9,879

 
10,623

Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2019 and December 31, 2018 respectively)
1,005

 
1,005

Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018)
—

 
—

Surplus
168,790

 
493,962

Retained earnings
3,560,580

 
3,218,551

Accumulated other comprehensive loss
(171,772
)
 
(235,187
)
Total shareholders’ equity
3,568,482

 
3,488,954

Total liabilities and shareholders’ equity
$
37,748,324

 
$
35,408,629


See accompanying Notes to Consolidated Financial Statements.

3

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands, except per share data, unaudited)
2019
 
2018
 
2019
 
2018
Interest income
 
 
 
 
 
 
 
Loans and leases
$
315,012

 
$
272,215

 
$
909,167

 
$
785,283

Investment securities interest and dividend income
40,155

 
38,770

 
119,976

 
110,969

Overnight investments
7,151

 
4,721

 
20,820

 
15,932

Total interest income
362,318

 
315,706

 
1,049,963

 
912,184

Interest expense
 
 
 
 
 
 
 
Deposits
21,737

 
5,147

 
53,821

 
13,424

Securities sold under customer repurchase agreements
542

 
398

 
1,516

 
1,175

Federal Home Loan Bank borrowings
1,316

 
1,099

 
4,187

 
4,335

Subordinated debentures
1,774

 
1,561

 
5,398

 
4,655

Other borrowings
524

 
139

 
796

 
577

Total interest expense
25,893

 
8,344

 
65,718

 
24,166

Net interest income
336,425

 
307,362

 
984,245

 
888,018

Provision for loan and lease losses
6,766

 
840

 
23,714

 
16,883

Net interest income after provision for loan and lease losses
329,659

 
306,522

 
960,531

 
871,135

Noninterest income
 
 
 
 
 
 
 
Cardholder services, net
15,957

 
14,678

 
51,069

 
44,385

Merchant services, net
6,034

 
5,857

 
18,324

 
18,512

Service charges on deposit accounts
27,112

 
25,994

 
77,967

 
78,489

Wealth management services
25,212

 
24,459

 
74,786

 
73,543

Realized gains on investment securities available for sale, net
1,136

 
—

 
6,855

 
—

Marketable equity securities (losses) gains, net
(967
)
 
3,854

 
13,505

 
9,265

Other service charges and fees
8,237

 
7,651

 
23,823

 
22,887

Mortgage income
7,438

 
4,123

 
16,134

 
13,063

Insurance commissions
2,960

 
2,755

 
9,105

 
9,471

ATM income
1,635

 
1,919

 
4,771

 
6,307

Gain on extinguishment of debt
—

 
703

 
—

 
26,517

Other
6,176

 
2,538

 
15,129

 
15,703

Total noninterest income
100,930

 
94,531

 
311,468

 
318,142

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
137,841

 
133,867

 
406,788

 
392,911

Employee benefits
28,358

 
28,850

 
91,090

 
90,656

Occupancy expense
28,163

 
26,632

 
82,810

 
80,686

Equipment expense
28,770

 
25,880

 
83,999

 
76,021

Processing fees paid to third parties
7,250

 
7,297

 
20,980

 
23,383

FDIC insurance expense
2,440

 
5,186

 
7,857

 
16,411

Collection and foreclosure-related expenses
3,044

 
4,269

 
9,725

 
12,389

Merger-related expenses
3,892

 
1,126

 
9,695

 
4,136

Other
30,667

 
34,430

 
98,535

 
105,000

Total noninterest expense
270,425

 
267,537

 
811,479

 
801,593

Income before income taxes
160,164

 
133,516

 
460,520

 
387,684

Income taxes
35,385

 
16,198

 
105,023

 
76,844

Net income
$
124,779

 
$
117,318

 
$
355,497

 
$
310,840

Weighted average shares outstanding
11,060,462

 
11,971,460

 
11,286,984

 
11,997,281

Net income per share
$
11.27

 
$
9.80

 
$
31.50

 
$
25.91


See accompanying Notes to Consolidated Financial Statements.

4

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

 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands, unaudited)
2019
 
2018
 
2019
 
2018
Net income
$
124,779

 
$
117,318

 
$
355,497

 
$
310,840

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale arising during the period
3,932

 
(13,810
)
 
62,974

 
(9,656
)
Tax effect
(906
)
 
3,175

 
(14,485
)
 
2,221

Reclassification adjustment for realized gains on securities available for sale included in income before income taxes
(1,136
)
 
—

 
(6,855
)
 
—

Tax effect
262

 
—

 
1,577

 
—

Net unrealized gains (losses) on securities available for sale arising during the period
2,152

 
(10,635
)
 
43,211

 
(7,435
)
Unrealized losses on securities available for sale transferred to held to maturity:
 
 
 
 
 
 
 
Unrealized losses on securities available for sale transferred to held to maturity
—

 
—

 
—

 
(109,507
)
Tax effect
—

 
—

 
—

 
25,186

Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity
6,095

 
6,502

 
18,004

 
10,975

Tax effect
(1,402
)
 
(1,495
)
 
(4,141
)
 
(2,523
)
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax
4,693

 
5,007

 
13,863

 
(75,869
)
Change in pension obligation:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service cost
2,745

 
3,495

 
8,235

 
10,486

Tax effect
(631
)
 
(804
)
 
(1,894
)
 
(2,412
)
Total change in pension obligation, net of tax
2,114

 
2,691

 
6,341

 
8,074

Other comprehensive income (loss)
8,959

 
(2,937
)
 
63,415

 
(75,230
)
Total comprehensive income
$
133,738

 
$
114,381

 
$
418,912

 
$
235,610



See accompanying Notes to Consolidated Financial Statements.


5

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
 
Three months ended September 30
(Dollars in thousands, unaudited)
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance at June 30, 2018
$
11,005

 
$
1,005

 
$
658,918

 
$
3,020,596

 
$
(244,638
)
 
$
3,446,886

Net income
—

 
—

 
—

 
117,318

 
—

 
117,318

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(2,937
)
 
(2,937
)
Repurchase of 125,000 shares of Class A common stock
(125
)
 
—

 
(57,961
)
 
—

 
—

 
(58,086
)
Cash dividends declared ($0.35 per share)
 
 
 
 
 
 
 
 
 
 
 
Class A common stock
—

 
—

 
—

 
(3,817
)
 
—

 
(3,817
)
Class B common stock
—

 
—

 
—

 
(351
)
 
—

 
(351
)
Balance at September 30, 2018
$
10,880

 
$
1,005

 
$
600,957

 
$
3,133,746

 
$
(247,575
)
 
$
3,499,013

 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
$
10,175

 
$
1,005

 
$
303,880

 
$
3,440,284

 
$
(180,731
)
 
$
3,574,613

Net income
—

 
—

 
—

 
124,779

 
—

 
124,779

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
8,959

 
8,959

Repurchase of 295,900 shares of Class A common stock
(296
)
 
—

 
(135,090
)
 
—

 
—

 
(135,386
)
Cash dividends declared ($0.40 per share)
 
 
 
 
 
 
 
 
 
 
 
Class A common stock
—

 
—

 
—

 
(4,081
)
 
—

 
(4,081
)
Class B common stock
—

 
—

 
—

 
(402
)
 
—

 
(402
)
Balance at September 30, 2019
$
9,879

 
$
1,005

 
$
168,790

 
$
3,560,580

 
$
(171,772
)
 
$
3,568,482

 
Nine months ended September 30
(Dollars in thousands, unaudited)
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance at December 31, 2017
$
11,005

 
$
1,005

 
$
658,918

 
$
2,785,430

 
$
(122,294
)
 
$
3,334,064

Cumulative effect of adoption of ASU 2016-01
—

 
—

 
—

 
18,715

 
(18,715
)
 
—

Cumulative effect of adoption of ASU 2018-02
—

 
—

 
—

 
31,336

 
(31,336
)
 
—

Net income
—

 
—

 
—

 
310,840

 
—

 
310,840

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(75,230
)
 
(75,230
)
Repurchase of 125,000 shares of Class A common stock
(125
)
 
—

 
(57,961
)
 
—

 
—

 
(58,086
)
Cash dividends declared ($1.05 per share)
 
 
 
 
 
 
 
 
 
 
 
Class A common stock
—

 
—

 
—

 
(11,520
)
 
—

 
(11,520
)
Class B common stock
—

 
—

 
—

 
(1,055
)
 
—

 
(1,055
)
Balance at September 30, 2018
$
10,880

 
$
1,005

 
$
600,957

 
$
3,133,746

 
$
(247,575
)
 
$
3,499,013

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
10,623

 
$
1,005

 
$
493,962

 
$
3,218,551

 
$
(235,187
)
 
$
3,488,954

Net income
—

 
—

 
—

 
355,497

 
—

 
355,497

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
63,415

 
63,415

Repurchase of 744,400 shares of Class A common stock
(744
)
 
—

 
(325,172
)
 
—

 
—

 
(325,916
)
Cash dividends declared ($1.20 per share)
 
 
 
 
 
 
 
 
 
 
 
Class A common stock
—

 
—

 
—

 
(12,262
)
 
—

 
(12,262
)
Class B common stock
—

 
—

 
—

 
(1,206
)
 
—

 
(1,206
)
Balance at September 30, 2019
$
9,879

 
$
1,005

 
$
168,790

 
$
3,560,580

 
$
(171,772
)
 
$
3,568,482

See accompanying Notes to Consolidated Financial Statements.

6

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
Nine months ended September 30
(Dollars in thousands, unaudited)
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
355,497

 
$
310,840

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
23,714

 
16,883

Deferred tax expense
43,939

 
13,642

Net change in current taxes
(33,433
)
 
(21,266
)
Depreciation
77,024

 
71,484

Net increase (decrease) in accrued interest payable
14,147

 
(1,552
)
Net increase in income earned not collected
(3,567
)
 
(7,650
)
Realized gains on investment securities available for sale, net
(6,855
)
 
—

Marketable equity securities gains, net
(13,505
)
 
(9,265
)
Gain on extinguishment of debt
—

 
(26,517
)
Origination of loans held for sale
(518,894
)
 
(456,193
)
Proceeds from sale of loans held for sale
490,261

 
468,705

Gain on sale of loans held for sale
(10,308
)
 
(8,640
)
Gain on sale of portfolio loans
(299
)
 
—

Net write-downs/losses on other real estate owned
1,924

 
3,156

Losses on premises and equipment
1,082

 
1,480

Net accretion of premiums and discounts
(29,737
)
 
(22,965
)
Amortization of intangible assets
17,934

 
17,580

Net change in FDIC payable for shared-loss agreements
4,968

 
3,234

Net change in mortgage servicing rights
(3,770
)
 
(4,026
)
Net change in other assets
1,454

 
34,851

Net change in other liabilities
(12,416
)
 
(53,708
)
Net cash provided by operating activities
399,160

 
330,073

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(629,705
)
 
(702,356
)
Purchases of investment securities available for sale
(3,706,949
)
 
(979,495
)
Purchases of investment securities held to maturity
(223,353
)
 
(68,699
)
Purchases of marketable equity securities
(23,238
)
 
(2,818
)
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity
305,479

 
196,146

Proceeds from maturities, calls, and principal repayments of investment securities available for sale
1,690,277

 
1,046,293

Proceeds from sales of investment securities available for sale
1,746,099

 
327,737

Proceeds from sales of marketable equity securities
12,739

 
9,503

Net (increase) decrease in overnight investments
(150,006
)
 
455,295

Proceeds from sales of portfolio loans
24,247

 
—

Proceeds from sales of other real estate owned
18,892

 
23,488

Proceeds from sales of premises and equipment
128

 
1,648

Purchases of premises and equipment
(89,219
)
 
(91,200
)
Business acquisitions, net of cash acquired
(73,792
)
 
(106,298
)
Net cash (used in) provided by investing activities
(1,098,401
)
 
109,244

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in time deposits
376,596

 
(218,826
)
Net increase in demand and other interest-bearing deposits
701,426

 
496,499

Net decrease in short-term borrowings
(138,741
)
 
(127,547
)
Repayment of long-term obligations
(43,545
)
 
(717,370
)
Origination of long-term obligations
100,000

 
125,000

Repurchase of common stock
(321,263
)
 
(58,086
)
Cash dividends paid
(13,739
)
 
(12,612
)
Net cash provided by (used in) financing activities
660,734

 
(512,942
)
Change in cash and due from banks
(38,507
)
 
(73,625
)
Cash and due from banks at beginning of period
327,440

 
336,150

Cash and due from banks at end of period
$
288,933

 
$
262,525

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
13,242

 
$
17,013

Dividends declared but not paid
4,397

 
4,168

Net reclassification of portfolio loans to (from) loans held for sale
22,758

 
(2,016
)
Transfers of premises and equipment to other real estate
2,184

 
—

Transfer of investment securities available for sale to held to maturity
—

 
2,485,761

Unsettled common stock repurchases
4,653

 
—

Initial recognition of operating lease assets
70,652

 
—

Initial recognition of operating lease liabilities
71,793

 
—

See accompanying Notes to Consolidated Financial Statements.

7

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, 2018.
Reclassifications
In certain instances, amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported cash flows, shareholders' equity or net income.
During the third quarter of 2019, the Company identified items in the prior period related to unsettled investment activity that had been reported as cash flows from operating activities and should have been presented as investing activities. The Company corrected the previously presented cash flows for this activity and in doing so, decreased net cash flows from operating activities with an offsetting increase in net cash flows from investing activities. The Company has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it was immaterial.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. The estimates that BancShares considers significant are the allowance for loan and lease losses, fair value measurements, Federal Deposit Insurance Corporation (FDIC) shared-loss payable, pension plan assumptions, goodwill and other intangible assets, and income taxes.
Share Repurchases
During the third quarter of 2019, BancShares repurchased 295,900 shares of Class A common stock for $135.4 million at an average cost per share of $457.50. During the first nine months of 2019, BancShares repurchased a total of 744,400 shares of Class A common stock for $325.9 million at an average cost per share of $437.84. During the three and nine months ended September 30, 2018, BancShares repurchased a total of 125,000 shares of Class A common stock for $58.1 million at an average cost per share of $464.68. All Class A common stock repurchases completed in 2019 and 2018 were consummated under previously approved authorizations.
The shares repurchases in the third quarter of 2019 included 50,000 shares of Class A common stock purchased from Ella Ann Holding, as trustee of her revocable trust. Mrs. Holding is the widow of BancShares’ former Executive Vice Chairman, Frank B. Holding, and the mother of Frank B. Holding, Jr. and Hope H. Bryant, BancShares’ Chairman and Chief Executive Officer and Vice Chairman, respectively. Pursuant to the existing share purchase authorization, the board’s independent Audit Committee reviewed and approved the repurchase of up to 250,000 shares held by Mrs. Holding on or before April 30, 2020, pursuant to BancShares’ related person transaction policy.
Subsequent to quarter-end through October 31, 2019, BancShares repurchased an additional 146,100 shares of Class A common stock for $69.1 million at an average cost per share of $472.94, which included 50,000 shares repurchased from Mrs. Holding.
On October 29, 2019, the Board authorized share repurchases of up to 500,000 of BancShares' Class A common stock for the period November 1, 2019 through January 31, 2020. This authority will supersede all previously approved authorities.

8

Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842)
This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between prior standards and this ASU is the requirement for lessees to recognize all lease contracts on their balance sheet. This ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the previous operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.
We adopted this standard, as of January 1, 2019, using the effective date method that allows for entities to initially apply the new leases standard at the adoption date. In addition, we made several policy elections permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification. We determined that most renewal options would not be reasonably determinable in estimating the expected lease term.
We made the policy election available under Topic 842 to combine lease and non-lease components and applied this practical expedient to leases in effect prior to the date of adoption. We will continue to apply the practical expedient to all leases entered into going forward.
The adoption of the new standard had an impact on our Consolidated Balance Sheet as of January 1, 2019, with the recording of operating Right-of-Use (ROU) assets and operating lease liabilities of $70.7 million and $71.8 million, respectively. The operating lease liability included a $1.1 million fair value adjustment for leases assumed in the acquisition of HomeBancorp, Inc. (HomeBancorp). In addition, at the adoption date we had finance lease ROU assets and finance lease liabilities, previously classified as capital leases, of $9.1 million and $8.3 million, respectively.  The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings at commencement. The Company has no related party lease agreements.  This ASU did not have a material impact on our Consolidated Statements of Income. See Note N in the Consolidated Financial Statements for additional disclosures.
FASB ASU 2018-15 - Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (1) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (2) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement (3) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element (4) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. BancShares adopted this standard effective July 1, 2019 on a prospective basis. As of September 30, 2019, $3.7 million of deferred implementation costs related to cloud computing arrangements were recorded in other assets. These costs are expensed over the fixed, noncancellable term of the arrangement and are recorded to processing fees paid to third parties, consistent with the line item of the income statement where fees paid for the associated hosted service are recorded.

9

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 first quarter of 2020.
FASB ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public business entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2020.
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.
This ASU will be effective for BancShares' annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We expect to adopt the guidance for our annual impairment test in fiscal year 2020. BancShares does not anticipate any impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU introduces a new credit loss methodology which requires earlier recognition of credit losses, replacing multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile.
For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities. A cross-functional team co-led by Corporate Finance and Risk Management is in place to implement the new standard. We have completed initial current expected credit losses (CECL) models and accounting interpretations. We continue to refine and test our models, estimation techniques, operational processes and controls to be used in preparing CECL loss estimates and related financial statement disclosures. We have also begun evaluating our debt securities portfolio to determine the impact of adoption of CECL. We expect a significant portion of our securities portfolio to have an expectation of zero losses and therefore have no initial impact at adoption.

10

The CECL calculated losses on the loan portfolio are derived using estimated probability of default and loss given default models based on historical loss experience, borrower characteristics, forecasts of relevant economic conditions and other factors. Bancshares intends to use a two-year reasonable and supportable forecast period that incorporates one economic forecast, with a 12-month straight-line reversion period to historical averages. The outstanding loans are bifurcated between commercial and non-commercial portfolios and then further segmented into pools with similar risk characteristics. The commercial portfolio, comprising the majority of Bancshares’ total loans, primarily consists of loans with short contractual maturities that are expected to result in a reduction to the allowance for credit losses. This reduction is expected to be partially offset by an increase in the allowance for credit losses in the non-commercial portfolio given its longer contractual maturities. The Company is still evaluating the credit loss models for purchase credit impaired loans (PCI) to determine the appropriate amount required to be added to the allowance for credit losses.
BancShares continues to evaluate the impact of this standard on its consolidated financial statements but the total magnitude of this impact is still being finalized. The final impact will be dependent on, among other items, loan and debt security portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts in place at that time. Based on current factors, the overall allowance for credit losses is expected to decrease in aggregate, but the magnitude of the change is not anticipated to be material in relation to total assets, retained earnings or regulatory capital.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. BancShares will adopt the guidance in the first quarter of 2020 using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.

NOTE B - BUSINESS COMBINATIONS

Community Financial Holding Co. Inc.
On September 24, 2019, FCB and Community Financial Holding Co. Inc. (Community Financial) entered into a definitive merger agreement for the acquisition by FCB of Duluth, Georgia-based Community Financial and its bank subsidiary, Gwinnett Community Bank. Under the terms of the agreement, total cash consideration of $2.3 million will paid to the shareholders of Community Financial. The transaction is anticipated to close during the first quarter of 2020, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. As of September 30, 2019, Community Financial reported $223.5 million in consolidated assets, $211.3 million in deposits and $147.0 million in loans.
Entegra Financial Corp.
On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment. The total transaction value is estimated to be approximately $219.8 million. The transaction is anticipated to close during the fourth quarter of 2019 or first quarter of 2020, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. FCB will be required to divest certain branches or other assets and liabilities in order to obtain regulatory approval for the transactions contemplated by the merger agreement. Any divestiture plan is subject to approval by the Federal Reserve Board in conjunction with the Department of Justice and has not been finalized as of the date of this filing. As of September 30, 2019, Entegra Bank reported $1.70 billion in total assets, $1.28 billion in deposits and $1.09 billion in loans.
First South Bancorp, Inc.
On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp, Inc. (First South Bancorp) and its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of $1.15 per share was paid to the shareholders of First South Bancorp for each share of common stock, totaling approximately $37.5 million. The merger allows FCB to expand its presence in South Carolina.
The First South Bancorp transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

11

The fair value of the assets acquired was $239.2 million, including $162.8 million in non-purchased credit impaired (non-PCI) loans, $16.4 million in purchased credit impaired (PCI) loans and $2.3 million in a core deposit intangible. Liabilities assumed were $215.6 million, of which $207.6 million were deposits. As a result of the transaction, FCB recorded $13.9 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.
Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were separated into loans with evidence of credit deterioration, which are accounted for under ASC 310-30 (PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (non-PCI loans).
The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:
(Dollars in thousands)
As recorded by FCB
Purchase price
 
 
$
37,486

Assets
 
 
 
Cash and due from banks
$
4,633

 
 
Overnight investments
3,188

 
 
Investment securities
23,512

 
 
Loans
179,243

 
 
Premises and equipment
4,944

 
 
Other real estate owned
1,567

 
 
Income earned not collected
604

 
 
Intangible assets
2,268

 
 
Other assets
19,192

 
 
Total assets acquired
239,151

 
 
Liabilities
 
 
 
Deposits
207,556

 
 
Borrowings
5,155

 
 
Other liabilities
2,850

 
 
Total liabilities assumed
$
215,561

 
 
Fair value of net assets acquired
 
 
23,590

Goodwill recorded for First South Bancorp
 
 
$
13,896


Merger-related expenses of $2.5 million and $3.9 million were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2019, respectively. Loan-related interest income generated from First South Bancorp was approximately $4.0 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.
Biscayne Bancshares, Inc.
On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (Biscayne Bancshares) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 per share was paid to the shareholders of Biscayne Bancshares for each share of common stock, totaling approximately $118.9 million. The merger will allow FCB to expand its presence in Florida and enhance banking efforts in South Florida.
The Biscayne Bancshares transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.
The fair value of the assets acquired was $1.03 billion, including $850.4 million in non-purchased credit impaired (non-PCI) loans, $13.0 million in purchased credit impaired (PCI) loans and $4.7 million in a core deposit intangible. Liabilities assumed were $956.8 million, of which $786.5 million were deposits. As a result of the transaction, FCB recorded $46.5 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.
Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were separated into loans with evidence of credit deterioration, which are accounted for under ASC 310-30 (PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (non-PCI loans).

12

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:
(Dollars in thousands)
As recorded by FCB
Purchase price
 
 
$
118,949

Assets
 
 
 
Cash and due from banks
$
78,010

 
 
Overnight investments
306

 
 
Investment securities held to maturity
34,539

 
 
Loans
863,384

 
 
Premises and equipment
1,533

 
 
Other real estate owned
2,046

 
 
Income earned not collected
3,049

 
 
Intangible assets
4,745

 
 
Other assets
41,572

 
 
Total assets acquired
1,029,184

 
 
Liabilities
 
 
 
Deposits
786,512

 
 
Borrowings
157,415

 
 
Other liabilities
12,829

 
 
Total liabilities assumed
$
956,756

 
 
Fair value of net assets acquired
 
 
72,428

Goodwill recorded for Biscayne Bancshares
 
 
$
46,521


Merger-related expenses of $0.6 million and $3.5 million were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2019, respectively. Loan-related interest income generated from Biscayne Bancshares was approximately $22.6 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.


13

NOTE C - INVESTMENTS

The amortized cost and fair value of investment securities at September 30, 2019 and December 31, 2018, were as follows:
 
September 30, 2019
(Dollars in thousands)
Cost
 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
748,206

 
$
1,114

 
$
2

 
$
749,318

Government agency
666,029

 
1,404

 
1,812

 
665,621

Mortgage-backed securities
3,329,593

 
10,369

 
7,343

 
3,332,619

Corporate bonds
154,943

 
2,707

 
325

 
157,325

Total investment securities available for sale
4,898,771

 
15,594

 
9,482

 
4,904,883

Investment in marketable equity securities
87,588

 
29,605

 
339

 
116,854

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
2,115,141

 
71,857

 
—

 
2,186,998

Other
30,802

 
—

 
—

 
30,802

Total investment securities held to maturity
2,145,943

 
71,857

 
—

 
2,217,800

Total investment securities
$
7,132,302

 
$
117,056

 
$
9,821

 
$
7,239,537

 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
Cost
 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,249,243

 
$
633

 
$
2,166

 
$
1,247,710

Government agency
257,252

 
222

 
639

 
256,835

Mortgage-backed securities
2,956,793

 
5,309

 
52,763

 
2,909,339

Corporate bonds
143,829

 
261

 
864

 
143,226

Total investment securities available for sale
4,607,117

 
6,425

 
56,432

 
4,557,110

Investment in marketable equity securities
73,809

 
19,010

 
220

 
92,599

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
2,184,653

 
17,339

 
490

 
2,201,502

Total investment securities
$
6,865,579

 
$
42,774

 
$
57,142

 
$
6,851,211


Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Investments in government agency securities represent securities issued by the United States Small Business Administration. Investments in corporate bonds and marketable equity securities represent positions in securities of other financial institutions. Other 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 included in the Consolidated Balance Sheet with no fair value.

14

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 that can be exercised by the issuer at their discretion.
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Cost
 
Fair value
 
Cost
 
Fair value
Investment securities available for sale
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
$
748,206

 
$
749,318

 
$
1,049,253

 
$
1,047,380

One through five years
13,364

 
13,795

 
205,526

 
205,805

Five through 10 years
137,638

 
139,430

 
134,370

 
133,626

Over 10 years
3,941

 
4,100

 
3,923

 
4,125

Government agency
666,029

 
665,621

 
257,252

 
256,835

Mortgage-backed securities
3,329,593

 
3,332,619

 
2,956,793

 
2,909,339

Total investment securities available for sale
$
4,898,771

 
$
4,904,883

 
$
4,607,117

 
$
4,557,110

Investment securities held to maturity
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
30,552

 
30,552

 
—

 
—

One through five years
250

 
250

 
—

 
—

Mortgage-backed securities
2,115,141

 
2,186,998

 
2,184,653

 
2,201,502

Total investment securities held to maturity
$
2,145,943

 
$
2,217,800

 
$
2,184,653

 
$
2,201,502


There were gross gains of $1.3 million and $7.0 million on sales of investment securities available for sale for the three and nine months ended September 30, 2019, respectively. There were gross losses of $190.0 thousand on sales of investment securities available for sale during the three and nine month periods ended September 30, 2019. There were no gross gains or losses on sales of investment securities available for sale for the three and nine months ended September 30, 2018.
The following table provides the realized and unrealized gains and losses on marketable equity securities for the three and nine months ended September 30, 2019 and September 30, 2018:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Marketable equity securities (losses) gains, net
$
(967
)
 
$
3,854

 
$
13,505

 
$
9,265

Less net gains recognized on marketable equity securities sold
714

 
946

 
3,029

 
1,181

Unrealized (losses) gains recognized on marketable equity securities held
$
(1,681
)
 
$
2,908

 
$
10,476

 
$
8,084



15

The following table provides information regarding securities with unrealized losses as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
49,867

 
$
2

 
$
—

 
$
—

 
$
49,867

 
$
2

Government agency
323,470

 
1,471

 
66,278

 
341

 
389,748

 
1,812

Mortgage-backed securities
1,413,342

 
4,165

 
477,249

 
3,178

 
1,890,591

 
7,343

Corporate bonds
31,168

 
203

 
6,563

 
122

 
37,731

 
325

Total
$
1,817,847

 
$
5,841

 
$
550,090

 
$
3,641

 
$
2,367,937

 
$
9,482

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
248,983

 
$
113

 
$
848,622

 
$
2,053

 
$
1,097,605

 
$
2,166

Government agency
115,273

 
601

 
2,310

 
38

 
117,583

 
639

Mortgage-backed securities
262,204

 
2,387

 
1,940,695

 
50,376

 
2,202,899

 
52,763

Corporate bonds
79,066

 
842

 
5,000

 
22

 
84,066

 
864

Total
$
705,526

 
$
3,943

 
$
2,796,627

 
$
52,489

 
$
3,502,153

 
$
56,432

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
5,111

 
$
181

 
$
10,131

 
$
309

 
$
15,242

 
$
490


As of September 30, 2019, there were 108 investment securities available for sale that had continuous losses for more than 12 months of which 107 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and one was a corporate bond.
None of the unrealized losses identified as of September 30, 2019 or December 31, 2018 relate to the marketability of the securities or the issuers' ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the debt securities were purchased. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.
Debt securities having an aggregate carrying value of $3.40 billion at September 30, 2019 and $4.03 billion at December 31, 2018 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

NOTE D - LOANS AND LEASES

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

16

Loans and leases outstanding included the following at September 30, 2019 and December 31, 2018:
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
943,747

 
$
757,854

Commercial mortgage
11,453,353

 
10,717,234

Other commercial real estate
491,063

 
426,985

Commercial and industrial and leases
4,129,384

 
3,938,730

Other
301,791

 
296,424

Total commercial loans
17,319,338

 
16,137,227

Noncommercial:
 
 
 
Residential mortgage
4,869,562

 
4,265,687

Revolving mortgage
2,414,884

 
2,542,975

Construction and land development
321,903

 
257,030

Consumer
1,757,235

 
1,713,781

Total noncommercial loans
9,363,584

 
8,779,473

Total non-PCI loans and leases
26,682,922

 
24,916,700

PCI loans:
 
 
 
Total PCI loans
513,589

 
606,576

Total loans and leases
$
27,196,511

 
$
25,523,276


At September 30, 2019, $9.33 billion in non-PCI loans with a lendable collateral value of $6.54 billion were used to secure $181.7 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $6.35 billion. At December 31, 2018, $9.12 billion in non-PCI loans with a lendable collateral value of $6.36 billion were used to secure $175.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.18 billion.
At September 30, 2019, $3.47 billion in non-PCI loans with a lendable collateral value of $2.78 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). At December 31, 2018, $2.94 billion in non-PCI loans with a lendable collateral value of $2.19 billion were used to secure additional borrowing capacity at the FRB.
Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. In addition, we may change our strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value. Since December 31, 2018, $23.9 million in portfolio loans were transferred to held for sale and subsequently sold. Loans held for sale totaled $83.3 million and $45.5 million at September 30, 2019 and December 31, 2018, respectively.
Net deferred fees on non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were $0.2 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively. The net unamortized discount related to purchased non-PCI loans and leases was $32.2 million at September 30, 2019 and $33.3 million at December 31, 2018. During the three months ended September 30, 2019 and September 30, 2018, accretion income on purchased non-PCI loans and leases was $3.5 million and $2.9 million, respectively. During the nine months ended September 30, 2019 and September 30, 2018, accretion income on purchased non-PCI loans and leases was $10.0 million and $9.9 million, respectively.

17

Credit quality indicators
Loans and leases are monitored for credit quality on a recurring basis. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segments being evaluated. The credit quality indicators for non-PCI and PCI commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. Commercial credit cards are included in the Commercial and industrial and leases segment, but are not specifically graded as with other commercial loans. The indicators as of the date presented are based on the most recent assessment performed and are defined below:
Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.
Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at September 30, 2019 and December 31, 2018 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.
The credit quality indicators for non-PCI and PCI noncommercial loans are based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases.

18

Non-PCI loans and leases outstanding at September 30, 2019 and December 31, 2018 by credit quality indicator are provided below:
 
September 30, 2019
(Dollars in thousands)
Non-PCI commercial loans and leases
Grade:
Construction and
land
development
 
Commercial mortgage
 
Other commercial real estate
 
Commercial and industrial and leases
 
Other
 
Total non-PCI commercial loans and leases
Pass
$
935,478

 
$
11,217,849

 
$
486,331

 
$
3,974,806

 
$
300,492

 
$
16,914,956

Special mention
2,295

 
111,617

 
3,191

 
51,355

 
599

 
169,057

Substandard
5,974

 
123,887

 
1,541

 
33,584

 
700

 
165,686

Doubtful
—

 
—

 
—

 
115

 
—

 
115

Ungraded
—

 
—

 
—

 
69,524

 
—

 
69,524

Total
$
943,747

 
$
11,453,353

 
$
491,063

 
$
4,129,384

 
$
301,791

 
$
17,319,338

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
Non-PCI commercial loans and leases
Grade:
Construction and
land
development
 
Commercial mortgage
 
Other commercial real estate
 
Commercial and industrial and leases
 
Other
 
Total non-PCI commercial loans and leases
Pass
$
753,985

 
$
10,507,687

 
$
422,500

 
$
3,778,797

 
$
294,700

 
$
15,757,669

Special mention
1,369

 
114,219

 
3,193

 
54,814

 
1,105

 
174,700

Substandard
2,500

 
92,743

 
1,292

 
30,688

 
619

 
127,842

Doubtful
—

 
—

 
—

 
354

 
—

 
354

Ungraded
—

 
2,585

 
—

 
74,077

 
—

 
76,662

Total
$
757,854

 
$
10,717,234

 
$
426,985

 
$
3,938,730

 
$
296,424

 
$
16,137,227

 
September 30, 2019
 
Non-PCI noncommercial loans and leases
(Dollars in thousands)
Residential mortgage
 
Revolving mortgage
 
Construction and land development
 
Consumer
 
Total non-PCI noncommercial loans and leases
Current
$
4,810,600

 
$
2,391,778

 
$
318,589

 
$
1,741,622

 
$
9,262,589

30-59 days past due
29,551

 
10,581

 
701

 
8,901

 
49,734

60-89 days past due
9,087

 
4,219

 
1,013

 
3,482

 
17,801

90 days or greater past due
20,324

 
8,306

 
1,600

 
3,230

 
33,460

Total
$
4,869,562

 
$
2,414,884

 
$
321,903

 
$
1,757,235

 
$
9,363,584

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Non-PCI noncommercial loans and leases
(Dollars in thousands)
Residential mortgage
 
Revolving mortgage
 
Construction and land development
 
Consumer
 
Total non-PCI noncommercial loans and leases
Current
$
4,214,783

 
$
2,514,269

 
$
254,837

 
$
1,696,321

 
$
8,680,210

30-59 days past due
28,239

 
12,585

 
581

 
10,035

 
51,440

60-89 days past due
7,357

 
4,490

 
21

 
3,904

 
15,772

90 days or greater past due
15,308

 
11,631

 
1,591

 
3,521

 
32,051

Total
$
4,265,687

 
$
2,542,975

 
$
257,030

 
$
1,713,781

 
$
8,779,473


19

PCI loans outstanding at September 30, 2019 and December 31, 2018 by credit quality indicator are provided below:
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
PCI commercial Loans
Grade:

 
 
Pass
$
132,338

 
$
141,922

Special mention
43,535

 
48,475

Substandard
72,647

 
101,447

Doubtful
4,308

 
4,828

Total
$
252,828

 
$
296,672


 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
PCI noncommercial Loans
Current
$
234,494

 
$
268,280

30-59 days past due
8,613

 
11,155

60-89 days past due
5,573

 
7,708

90 days or greater past due
12,081

 
22,761

Total
$
260,761

 
$
309,904



20

The aging of the outstanding non-PCI loans and leases, by class, at September 30, 2019 and December 31, 2018 are provided in the tables below. Loans and leases past due 30 days or less are considered current as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.
 
September 30, 2019
(Dollars in thousands)
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
Non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
902

 
$
86

 
$
3,760

 
$
4,748

 
$
938,999

 
$
943,747

Commercial mortgage
22,270

 
2,386

 
10,737

 
35,393

 
11,417,960

 
11,453,353

Other commercial real estate
80

 
130

 
698

 
908

 
490,155

 
491,063

Commercial and industrial and leases
10,015

 
4,373

 
4,257

 
18,645

 
4,110,739

 
4,129,384

Other
61

 
211

 
13

 
285

 
301,506

 
301,791

Total commercial loans
33,328

 
7,186

 
19,465

 
59,979

 
17,259,359

 
17,319,338

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
29,551

 
9,087

 
20,324

 
58,962

 
4,810,600

 
4,869,562

Revolving mortgage
10,581

 
4,219

 
8,306

 
23,106

 
2,391,778

 
2,414,884

Construction and land development
701

 
1,013

 
1,600

 
3,314

 
318,589

 
321,903

Consumer
8,901

 
3,482

 
3,230

 
15,613

 
1,741,622

 
1,757,235

Total noncommercial loans
49,734

 
17,801

 
33,460

 
100,995

 
9,262,589

 
9,363,584

Total non-PCI loans and leases
$
83,062

 
$
24,987

 
$
52,925

 
$
160,974

 
$
26,521,948

 
$
26,682,922

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
Non-PCI loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
516

 
$
9

 
$
444

 
$
969

 
$
756,885

 
$
757,854

Commercial mortgage
14,200

 
2,066

 
3,237

 
19,503

 
10,697,731

 
10,717,234

Other commercial real estate
91

 
76

 
300

 
467

 
426,518

 
426,985

Commercial and industrial and leases
9,655

 
1,759

 
2,892

 
14,306

 
3,924,424

 
3,938,730

Other
285

 
—

 
89

 
374

 
296,050

 
296,424

Total commercial loans
24,747

 
3,910

 
6,962

 
35,619

 
16,101,608

 
16,137,227

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
28,239

 
7,357

 
15,308

 
50,904

 
4,214,783

 
4,265,687

Revolving mortgage
12,585

 
4,490

 
11,631

 
28,706

 
2,514,269

 
2,542,975

Construction and land development
581

 
21

 
1,591

 
2,193

 
254,837

 
257,030

Consumer
10,035

 
3,904

 
3,521

 
17,460

 
1,696,321

 
1,713,781

Total noncommercial loans
51,440

 
15,772

 
32,051

 
99,263

 
8,680,210

 
8,779,473

Total non-PCI loans and leases
$
76,187

 
$
19,682

 
$
39,013

 
$
134,882

 
$
24,781,818

 
$
24,916,700



21

The recorded investment, by class, in non-PCI loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at September 30, 2019 and December 31, 2018, were as follows:
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
Commercial:
 
 
 
 
 
 
 
Construction and land development
$
5,372

 
$
—

 
$
666

 
$
—

Commercial mortgage
24,993

 
796

 
12,594

 
—

Commercial and industrial and leases
6,630

 
1,099

 
4,624

 
808

Other commercial real estate
709

 
—

 
366

 
—

Other
121

 
—

 
279

 
—

Total commercial loans
37,825

 
1,895

 
18,529

 
808

Noncommercial:
 
 


 
 
 
 
Construction and land development
1,716

 
—

 
1,823

 
—

Residential mortgage
43,677

 
439

 
35,662

 
—

Revolving mortgage
22,748

 
—

 
25,563

 
—

Consumer
2,850

 
1,913

 
2,969

 
2,080

Total noncommercial loans
70,991

 
2,352

 
66,017

 
2,080

Total non-PCI loans and leases
$
108,816

 
$
4,247

 
$
84,546

 
$
2,888


Purchased non-PCI loans and leases
The following table relates to purchased non-PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date:
(Dollars in thousands)
Biscayne Bancshares
 
First South Bancorp
Contractually required payments
$
1,078,854

 
$
175,465

Fair value at acquisition date
850,352

 
162,845

The recorded fair values of purchased non-PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions as of the acquisition date are as follows:
(Dollars in thousands)
Biscayne Bancshares
 
First South Bancorp
Commercial:
 
 
 
Construction and land development
$
15,647

 
$
8,663

Commercial mortgage
203,605

 
74,713

Other commercial real estate
98,107

 
7,509

Commercial and industrial and leases
28,135

 
40,208

Total commercial loans
345,494

 
131,093

Noncommercial:
 
 
 
Residential mortgage
405,419

 
24,641

Revolving mortgage
54,081

 
2,162

Construction and land development
31,668

 
3,552

Consumer
13,690

 
1,397

Total noncommercial loans
504,858

 
31,752

Total non-PCI loans
$
850,352

 
$
162,845


22

Purchased credit-impaired loans
The following table relates to PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected and the fair value of PCI loans at the acquisition date:
(Dollars in thousands)
Biscayne Bancshares
 
First South Bancorp
Contractually required payments
$
19,720

 
$
23,389

Contractual cash flows expected to be collected
16,815

 
21,392

Fair value at acquisition date
13,032

 
16,398

The recorded fair values of PCI loans acquired in the Biscayne Bancshares and First South Bancorp transactions as of the acquisition date are as follows:
(Dollars in thousands)
Biscayne Bancshares
 
First South Bancorp
Commercial:
 
 
 
Construction and land development
$
—

 
$
1,233

Commercial mortgage
7,589

 
9,355

Commercial and industrial and leases
1,660

 
1,202

Total commercial loans
9,249

 
11,790

Noncommercial:
 
 
 
Residential mortgage
3,783

 
4,591

Construction and land development
—

 
17

Total noncommercial loans
3,783

 
4,608

Total PCI loans
$
13,032

 
$
16,398


The following table provides changes in the carrying value of all PCI loans during the nine months ended September 30, 2019 and September 30, 2018:
(Dollars in thousands)
2019
 
2018
Balance at January 1
$
606,576

 
$
762,998

Fair value of acquired loans
29,430

 
15,555

Accretion
45,891

 
45,699

Payments received and other changes, net
(168,308
)
 
(186,234
)
Balance at September 30
$
513,589

 
$
638,018

Unpaid principal balance at September 30
$
724,745

 
$
999,926


The carrying value of PCI loans on the cost recovery method was $3.1 million and $3.3 million at September 30, 2019 and December 31, 2018, respectively. The cost recovery method is applied to loans when the timing of future cash flows cannot be reasonably estimated due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was $0.8 million and $1.3 million at September 30, 2019 and December 31, 2018, respectively. The remaining discount on PCI loans was $85.0 million and $95.5 million at September 30, 2019 and December 31, 2018, respectively.
During the three months ended September 30, 2019 and September 30, 2018, accretion income on PCI loans was $16.2 million and $13.5 million, respectively. During the nine months ended September 30, 2019 and September 30, 2018, accretion income on PCI loans was $45.9 million and $45.7 million, respectively.
For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flow not related to credit improvements or deterioration do not affect the nonaccretable difference.
The following table documents changes to the amount of accretable yield for the first nine months of 2019 and 2018:
(Dollars in thousands)
2019
 
2018
Balance at January 1
$
312,894

 
$
316,679

Additions from Biscayne Bancshares and First South Bancorp acquisitions
8,777

 
—

Additions from HomeBancorp acquisition
—

 
4,142

Accretion
(45,891
)
 
(45,699
)
Reclassifications from nonaccretable difference
6,156

 
5,866

Changes in expected cash flows that do not affect nonaccretable difference
(21,757
)
 
42,214

Balance at September 30
$
260,179

 
$
323,202



23

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

Activity in the allowance for non-PCI loan and lease losses by class of loans is summarized as follows:
 
Three months ended September 30, 2019
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non - commercial
 
Consumer
 
Total
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1
$
31,944

 
$
48,962

 
$
2,342

 
$
56,901

 
$
2,183

 
$
16,932

 
$
21,121

 
$
2,750

 
$
35,105

 
$
218,240

Provision (credits)
208

 
(1,337
)
 
(90
)
 
4,714

 
54

 
1,024

 
(153
)
 
148

 
3,674

 
8,242

Charge-offs
(116
)
 
(1
)
 
—

 
(3,047
)
 
(42
)
 
(313
)
 
(534
)
 
—

 
(5,594
)
 
(9,647
)
Recoveries
52

 
226

 
—

 
611

 
20

 
68

 
201

 
—

 
1,945

 
3,123

Balance at September 30
$
32,088

 
$
47,850

 
$
2,252

 
$
59,179

 
$
2,215

 
$
17,711

 
$
20,635

 
$
2,898

 
$
35,130

 
$
219,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non - commercial
 
Consumer
 
Total
Balance at July 1
$
23,664

 
$
44,465

 
$
3,823

 
$
61,311

 
$
4,691

 
$
17,802

 
$
21,886

 
$
4,027

 
$
30,773

 
$
212,442

Provision (credits)
8,702

 
(2,870
)
 
(1,219
)
 
(5,260
)
 
(2,404
)
 
(1,828
)
 
465

 
(1,203
)
 
7,971

 
2,354

Charge-offs
(35
)
 
(606
)
 
—

 
(2,106
)
 
(56
)
 
(360
)
 
(759
)
 
—

 
(5,525
)
 
(9,447
)
Recoveries
136

 
99

 
1

 
497

 
117

 
128

 
712

 
—

 
1,249

 
2,939

Balance at September 30
$
32,467

 
$
41,088

 
$
2,605

 
$
54,442

 
$
2,348

 
$
15,742

 
$
22,304

 
$
2,824

 
$
34,468

 
$
208,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non - commercial
 
Consumer
 
Total
Balance at January 1
$
35,270

 
$
43,451

 
$
2,481

 
$
55,620

 
$
2,221

 
$
15,472

 
$
21,862

 
$
2,350

 
$
35,841

 
$
214,568

Provision (credits)
(3,217
)
 
4,748

 
(230
)
 
10,138

 
(618
)
 
2,903

 
(272
)
 
548

 
11,991

 
25,991

Charge-offs
(188
)
 
(851
)
 
—

 
(8,327
)
 
(73
)
 
(957
)
 
(1,990
)
 
—

 
(18,017
)
 
(30,403
)
Recoveries
223

 
502

 
1

 
1,748

 
685

 
293

 
1,035

 
—

 
5,315

 
9,802

Balance at September 30
$
32,088

 
$
47,850

 
$
2,252

 
$
59,179

 
$
2,215

 
$
17,711

 
$
20,635

 
$
2,898

 
$
35,130

 
$
219,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non - commercial
 
Consumer
 
Total
Balance at January 1
$
24,470

 
$
45,005

 
$
4,571

 
$
59,824

 
$
4,689

 
$
15,706

 
$
22,436

 
$
3,962

 
$
31,204

 
$
211,867

Provision (credits)
7,788

 
(3,369
)
 
(2,044
)
 
(907
)
 
(2,403
)
 
1,176

 
1,220

 
(1,046
)
 
15,468

 
15,883

Charge-offs
(43
)
 
(1,111
)
 
(69
)
 
(6,874
)
 
(98
)
 
(1,455
)
 
(2,778
)
 
(219
)
 
(16,092
)
 
(28,739
)
Recoveries
252

 
563

 
147

 
2,399

 
160

 
315

 
1,426

 
127

 
3,888

 
9,277

Balance at September 30
$
32,467

 
$
41,088

 
$
2,605

 
$
54,442

 
$
2,348

 
$
15,742

 
$
22,304

 
$
2,824

 
$
34,468

 
$
208,288



24

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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial
and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-
commercial
 
Consumer
 
Total
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
311

 
$
2,850

 
$
12

 
$
1,191

 
$
59

 
$
2,761

 
$
2,559

 
$
88

 
$
1,064

 
$
10,895

ALLL for loans and leases collectively evaluated for impairment
31,777

 
45,000

 
2,240

 
57,988

 
2,156

 
14,950

 
18,076

 
2,810

 
34,066

 
209,063

Total allowance for loan and lease losses
$
32,088

 
$
47,850

 
$
2,252

 
$
59,179

 
$
2,215

 
$
17,711

 
$
20,635

 
$
2,898

 
$
35,130

 
$
219,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
5,713

 
$
64,380

 
$
1,171

 
$
12,262

 
$
261

 
$
54,311

 
$
28,730

 
$
3,088

 
$
3,208

 
$
173,124

Loans and leases collectively evaluated for impairment
938,034

 
11,388,973

 
489,892

 
4,117,122

 
301,530

 
4,815,251

 
2,386,154

 
318,815

 
1,754,027

 
26,509,798

Total loan and leases
$
943,747

 
$
11,453,353

 
$
491,063

 
$
4,129,384

 
$
301,791

 
$
4,869,562

 
$
2,414,884

 
$
321,903

 
$
1,757,235

 
$
26,682,922

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial
and leases
 
Other
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-
commercial
 
Consumer
 
Total
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
490

 
$
2,671

 
$
42

 
$
1,137

 
$
105

 
$
1,901

 
$
2,515

 
$
81

 
$
885

 
$
9,827

ALLL for loans and leases collectively evaluated for impairment
34,780

 
40,780

 
2,439

 
54,483

 
2,116

 
13,571

 
19,347

 
2,269

 
34,956

 
204,741

Total allowance for loan and lease losses
$
35,270

 
$
43,451

 
$
2,481

 
$
55,620

 
$
2,221

 
$
15,472

 
$
21,862

 
$
2,350

 
$
35,841

 
$
214,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
2,175

 
$
55,447

 
$
860

 
$
9,868

 
$
291

 
$
42,168

 
$
28,852

 
$
3,749

 
$
3,020

 
$
146,430

Loans and leases collectively evaluated for impairment
755,679

 
10,661,787

 
426,125

 
3,928,862

 
296,133

 
4,223,519

 
2,514,123

 
253,281

 
1,710,761

 
24,770,270

Total loan and leases
$
757,854

 
$
10,717,234

 
$
426,985

 
$
3,938,730

 
$
296,424

 
$
4,265,687

 
$
2,542,975

 
$
257,030

 
$
1,713,781

 
$
24,916,700


PCI allowance activity and balances for the three and nine months ended September 30, 2019 and September 30, 2018 is summarized as follows:
(Dollars in thousands)
Three months ended September 30, 2019
 
Three months ended September 30, 2018
PCI Loans
 
 
 
Allowance for loan losses:
 
 
 
Balance at July 1
$
8,343

 
$
12,423

(Credit) provision
(1,476
)
 
(1,514
)
Charge-offs
—

 
—

Recoveries
—

 
—

Balance at September 30
$
6,867

 
$
10,909

 
 
 
 
 
Nine months ended September 30, 2019
 
Nine months ended September 30, 2018
Balance at January 1
$
9,144

 
$
10,026

(Credit) provision
(2,277
)
 
1,000

Charge-offs
—

 
(117
)
Recoveries
—

 
—

Balance at September 30
$
6,867

 
$
10,909


Recoveries related to PCI loans that have been previously charged-off and are not covered under loss share agreements are recorded as noninterest income rather than as an adjustment to the allowance for loan and lease losses.

25

The following table presents the PCI allowance and recorded investment in loans at September 30, 2019 and December 31, 2018:
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
ALLL for loans acquired with deteriorated credit quality
$
6,867

 
$
9,144

Loans acquired with deteriorated credit quality
513,589

 
606,576


At September 30, 2019 and December 31, 2018, $99.0 million and $186.6 million, respectively, of PCI loans experienced an adverse change in expected cash flows since the date of acquisition.
The following tables provide information on non-PCI impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group:
 
September 30, 2019
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
$
2,018

 
$
3,695

 
$
5,713

 
$
6,146

 
$
311

Commercial mortgage
35,222

 
29,158

 
64,380

 
69,172

 
2,850

Other commercial real estate
195

 
976

 
1,171

 
1,265

 
12

Commercial and industrial and leases
7,238

 
5,024

 
12,262

 
14,456

 
1,191

Other
198

 
63

 
261

 
280

 
59

Total commercial loans
44,871

 
38,916

 
83,787

 
91,319

 
4,423

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
44,009

 
10,302

 
54,311

 
58,515

 
2,761

Revolving mortgage
25,070

 
3,660

 
28,730

 
31,772

 
2,559

Construction and land development
1,676

 
1,412

 
3,088

 
3,381

 
88

Consumer
3,155

 
53

 
3,208

 
3,594

 
1,064

Total noncommercial loans
73,910

 
15,427

 
89,337

 
97,262

 
6,472

Total non-PCI impaired loans and leases
$
118,781

 
$
54,343

 
$
173,124

 
$
188,581

 
$
10,895

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
$
1,897

 
$
278

 
$
2,175

 
$
2,606

 
$
490

Commercial mortgage
34,177

 
21,270

 
55,447

 
61,317

 
2,671

Other commercial real estate
243

 
617

 
860

 
946

 
42

Commercial and industrial and leases
7,153

 
2,715

 
9,868

 
14,695

 
1,137

Other
216

 
75

 
291

 
301

 
105

Total commercial loans
43,686

 
24,955

 
68,641

 
79,865

 
4,445

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
40,359

 
1,809

 
42,168

 
45,226

 
1,901

Revolving mortgage
25,751

 
3,101

 
28,852

 
31,371

 
2,515

Construction and land development
2,337

 
1,412

 
3,749

 
4,035

 
81

Consumer
2,940

 
80

 
3,020

 
3,405

 
885

Total noncommercial loans
71,387

 
6,402

 
77,789

 
84,037

 
5,382

Total non-PCI impaired loans and leases
$
115,073

 
$
31,357

 
$
146,430

 
$
163,902

 
$
9,827

Non-PCI impaired loans less than $500,000 that were collectively evaluated for impairment totaled $42.8 million and $47.1 million at September 30, 2019 and December 31, 2018, respectively.

26

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2019 and September 30, 2018:
 
Three months ended September 30, 2019
 
Three months ended September 30, 2018
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Construction and land development
$
6,130

 
$
6

 
$
2,101

 
$
27

Commercial mortgage
70,351

 
551

 
63,752

 
583

Other commercial real estate
1,186

 
6

 
950

 
10

Commercial and industrial and leases
13,085

 
140

 
9,310

 
92

Other
298

 
2

 
205

 
1

Total commercial
91,050

 
705

 
76,318

 
713

Noncommercial:
 
 
 
 
 
 
 
Residential mortgage
56,029

 
346

 
42,601

 
330

Revolving mortgage
30,067

 
260

 
27,503

 
234

Construction and land development
3,124

 
25

 
3,190

 
42

Consumer
3,443

 
37

 
2,769

 
31

Total noncommercial
92,663

 
668

 
76,063

 
637

Total non-PCI impaired loans and leases
$
183,713

 
$
1,373

 
$
152,381

 
$
1,350

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
 
Nine months ended September 30, 2018
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Construction and land development
$
3,460

 
$
40

 
$
1,580

 
$
55

Commercial mortgage
61,962

 
1,653

 
68,043

 
1,953

Other commercial real estate
797

 
20

 
1,336

 
33

Commercial and industrial and leases
11,478

 
353

 
9,500

 
269

Other
314

 
6

 
90

 
1

Total commercial
78,011

 
2,072

 
80,549

 
2,311

Noncommercial:
 
 
 
 
 
 
 
Residential mortgage
49,048

 
988

 
41,124

 
903

Revolving mortgage
29,477

 
763

 
26,228

 
657

Construction and land development
3,473

 
93

 
3,607

 
134

Consumer
3,152

 
97

 
2,644

 
87

Total noncommercial
85,150

 
1,941

 
73,603

 
1,781

Total non-PCI impaired loans and leases
$
163,161

 
$
4,013

 
$
154,152

 
$
4,092


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

27

The following table provides a summary of total TDRs by accrual status. Total TDRs included $17.4 million and $18.2 million of PCI TDRs at September 30, 2019 and December 31, 2018, respectively:
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Accruing
 
 Nonaccruing
 
 Total
 
 Accruing
 
 Nonaccruing
 
 Total
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
518

 
$
1,109

 
$
1,627

 
$
1,946

 
$
352

 
$
2,298

Commercial mortgage
50,206

 
7,064

 
57,270

 
53,270

 
7,795

 
61,065

Other commercial real estate
474

 
—

 
474

 
851

 
9

 
860

Commercial and industrial and leases
10,161

 
2,180

 
12,341

 
7,986

 
2,060

 
10,046

Other
153

 
107

 
260

 
118

 
173

 
291

Total commercial loans
61,512

 
10,460

 
71,972

 
64,171

 
10,389

 
74,560

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
37,798

 
16,439

 
54,237

 
37,903

 
9,621

 
47,524

Revolving mortgage
20,968

 
7,839

 
28,807

 
20,492

 
8,196

 
28,688

Construction and land development
1,570

 
1,518

 
3,088

 
2,227

 
110

 
2,337

Consumer
2,566

 
642

 
3,208

 
2,300

 
721

 
3,021

Total noncommercial loans
62,902

 
26,438

 
89,340

 
62,922

 
18,648

 
81,570

Total loans
$
124,414

 
$
36,898

 
$
161,312

 
$
127,093

 
$
29,037

 
$
156,130


The following table provides the types of modifications designated as TDRs during the three and nine months ended September 30, 2019 and September 30, 2018, as well as a summary of loans that were modified as a TDR during the twelve month periods ended September 30, 2019 and September 30, 2018 that subsequently defaulted during the three and nine months ended September 30, 2019 and September 30, 2018. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.
 
Three months ended September 30, 2019
 
Three months ended September 30, 2018
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
(Dollars in thousands)
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
Loans and leases
 
 
 
 
 
 
 
 
 
 
 
Interest only
2

$
1,221

 
—

$
—

 
1

$
300

 
—

$
—

Loan term extension
5

2,473

 
—

—

 
9

2,565

 
2

327

Below market interest rate
80

4,460

 
34

2,034

 
56

7,109

 
32

2,832

Discharged from bankruptcy
55

6,097

 
25

2,002

 
38

1,833

 
16

607

Total restructurings
142

$
14,251

 
59

$
4,036

 
104

$
11,807

 
50

$
3,766

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
 
Nine months ended September 30, 2018
 
All restructurings
 
Restructurings with payment default
 
All restructurings
 
Restructurings with payment default
(Dollars in thousands)
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
 
Number of Loans
Recorded investment at period end
Loans and leases
 
 
 
 
 
 
 
 
 
 
 
Interest only
6

$
3,209

 
2

$
2,064

 
3

$
1,136

 
2

$
836

Loan term extension
13

3,870

 
4

514

 
32

4,414

 
9

943

Below market interest rate
205

14,968

 
86

5,977

 
211

24,245

 
82

6,098

Discharged from bankruptcy
157

13,499

 
72

5,421

 
139

7,360

 
69

3,595

Total restructurings
381

$
35,546

 
164

$
13,976

 
385

$
37,155

 
162

$
11,472

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

28

NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in OREO during the nine months ended September 30, 2019 and September 30, 2018:
(Dollars in thousands)
Total
Balance at December 31, 2018
$
48,030

Additions
15,426

Acquired in business combination
3,613

Sales
(17,595
)
Write-downs/losses
(3,221
)
Balance at September 30, 2019
$
46,253

 
 
Balance at December 31, 2017
$
51,097

Additions
17,013

Acquired in business combination
2,135

Sales
(23,488
)
Write-downs/losses
(3,156
)
Balance at September 30, 2018
$
43,601


At September 30, 2019 and December 31, 2018, BancShares had $16.4 million and $17.2 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $21.1 million and $22.0 million at September 30, 2019 and December 31, 2018, respectively.

NOTE G - FDIC SHARED-LOSS PAYABLE

As of September 30, 2019, Bancshares has outstanding shared-loss agreements related to two FDIC-assisted transactions. These agreements include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). The clawback liability represents a payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition and is recorded in the Consolidated Balance Sheets FDIC shared-loss payable. The clawback liability payment dates are March 2020 and March 2021.
As of September 30, 2019 shared-loss protection remains from FDIC transactions for single family residential loans acquired in the amount of $47.3 million.
The following table provides changes in the FDIC shared-loss payable since December 31, 2018:
(Dollars in thousands)
Total
Balance at December 31, 2018
$
105,618

Accretion
4,968

Balance at September 30, 2019
$
110,586



NOTE H - SERVICING RIGHTS

Mortgage Servicing Rights
Our portfolio of residential mortgage loans serviced for third parties was $3.06 billion and $2.95 billion as of September 30, 2019 and December 31, 2018, respectively. These loans are originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights were recorded as a servicing asset and are reported in other intangible assets on the Consolidated Balance Sheets, and the associated amortization expense and any valuation allowance recognized was included as a reduction of mortgage income in the Consolidated Statements of Income. 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 September 30, 2019 and 2018 were $1.9 million and are reported in mortgage income in the Consolidated Statements of Income. For the nine months ended September 30, 2019 and 2018, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $5.8 million and $5.6 million, respectively.

29

The following table explains changes in the servicing asset during the three and nine months ended September 30, 2019 and 2018:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Beginning balance
$
20,665

 
$
21,657

 
$
21,396

 
$
21,945

Servicing rights originated
1,532

 
1,396

 
3,943

 
4,026

Amortization
(1,581
)
 
(1,420
)
 
(4,595
)
 
(4,338
)
Valuation allowance (increase) decrease
(45
)
 
—

 
(173
)
 
—

Ending balance
$
20,571

 
$
21,633

 
$
20,571

 
$
21,633


BancShares recorded valuation allowance provision expense of $45.0 thousand and $173.0 thousand for the three and nine months ended September 30, 2019, respectively. There was no provision expense or release recorded for the the three and nine months ended September 30, 2018. 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:
 
September 30, 2019
 
December 31, 2018
Discount rate - conventional fixed loans
8.67
%
 
9.69
%
Discount rate - all loans excluding conventional fixed loans
9.67
%
 
10.69
%
Weighted average constant prepayment rate
14.15
%
 
9.26
%
Weighted average cost to service a loan
$
87.09

 
$
87.52

The fair value of mortgage servicing rights is sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is based on the 10-year U.S. Treasury rate plus 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. 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 a business combination and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $1.9 million and $2.7 million at September 30, 2019 and December 31, 2018, respectively.

NOTE I - REPURCHASE AGREEMENTS

BancShares utilizes securities sold under customer repurchase agreements 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, and which obligates BancShares to repurchase the security, with interest, at an agreed upon date, repurchase price, and interest rate. These agreements are recorded at the amount of cash received in connection with the transaction and are reflected as securities sold under customer repurchase agreements on the Consolidated Balance Sheets. The remaining contractual maturity of the $522.2 million and $543.9 million securities sold under repurchase agreements at September 30, 2019 and December 31, 2018, respectively, was overnight and continuous.
Repurchase agreements require BancShares to maintain collateral to support the outstanding obligations. BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents and consist of U.S. Treasury and mortgage-backed securities.
At September 30, 2019, the carrying value of investment securities pledged as collateral under repurchase agreements was $541.6 million, including investment securities available for sale of $305.2 million and investment securities held to maturity of $236.4 million. At December 31, 2018, the carrying value of investment securities pledged as collateral under repurchase agreements was $598.6 million, all of which were investment securities available for sale.


30

NOTE J - ESTIMATED FAIR VALUES

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, BancShares has made estimates using discounted cash flows or other valuation techniques. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange.
ASC 820, Fair Value Measurements and Disclosures, indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the highest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows:
•
Level 1 values are based on quoted prices for identical instruments in active markets.
•
Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 values are derived from valuation techniques in which one or more significant inputs or assumptions are not observable in the market. These unobservable inputs and assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.
BancShares' management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:
Investment securities available for sale and held to maturity. The fair value of U.S. Treasury, government agency and mortgage-backed securities 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. Corporate bonds held by BancShares are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3.
Investment in marketable equity securities. Equity securities are measured at fair value using observable closing prices and the valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market.
Loans held for sale. Management elects the fair value option on certain residential real estate loans that are 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 (PCI and Non-PCI). Fair value is estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. The inputs used in the fair value measurements for loans and leases are considered Level 3 inputs.
FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs.

31

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.
Deposits. For non-time deposits, carrying value is a reasonable estimate of fair value. The fair value of time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The inputs used in the fair value measurement for deposits are considered Level 2 inputs.    
Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security if available. Otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for 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 September 30, 2019 and December 31, 2018. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, securities sold under customer repurchase agreements, and accrued interest payable are considered Level 2.
The table presents the carrying values and estimated fair values for financial instruments as of September 30, 2019 and December 31, 2018:
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
288,933

 
$
288,933

 
$
327,440

 
$
327,440

Overnight investments
949,899

 
949,899

 
797,406

 
797,406

Investment in marketable equity securities
116,854

 
116,854

 
92,599

 
92,599

Investment securities available for sale
4,904,883

 
4,904,883

 
4,557,110

 
4,557,110

Investment securities held to maturity
2,145,943

 
2,217,800

 
2,184,653

 
2,201,502

Loans held for sale
83,256

 
83,256

 
45,505

 
45,505

Net loans and leases
26,969,686

 
27,301,164

 
25,299,564

 
24,845,060

Income earned not collected
117,123

 
117,123

 
109,903

 
109,903

Federal Home Loan Bank stock
25,355

 
25,355

 
25,304

 
25,304

Mortgage and other servicing rights
22,431

 
24,823

 
24,066

 
27,435

Deposits
32,743,277

 
32,739,923

 
30,672,460

 
30,623,214

Securities sold under customer repurchase agreements
522,195

 
522,195

 
543,936

 
543,936

Federal Home Loan Bank borrowings
192,672

 
199,098

 
193,556

 
195,374

Subordinated debentures
149,051

 
156,566

 
140,741

 
151,670

Other borrowings
112,153

 
117,630

 
13,921

 
13,985

FDIC shared-loss payable
110,586

 
113,309

 
105,618

 
105,846

Accrued interest payable
17,859

 
17,859

 
3,712

 
3,712



32

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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
749,318

 
$
—

 
$
749,318

 
$
—

Government agency
665,621

 
—

 
665,621

 
—

Mortgage-backed securities
3,332,619

 
—

 
3,332,619

 
—

Corporate bonds
157,325

 
—

 
—

 
157,325

Total investment securities available for sale
$
4,904,883

 
$
—

 
$
4,747,558

 
$
157,325

Marketable equity securities
$
116,854

 
$
29,241

 
$
87,613

 
$
—

Loans held for sale
$
83,256

 
$
—

 
$
83,256

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,247,710

 
$
—

 
$
1,247,710

 
$
—

Government agency
256,835

 
—

 
256,835

 
—

Mortgage-backed securities
2,909,339

 
—

 
2,909,339

 
—

Corporate bonds
143,226

 
—

 
—

 
143,226

Total investment securities available for sale
$
4,557,110

 
$
—

 
$
4,413,884

 
$
143,226

Marketable equity securities
$
92,599

 
$
17,887

 
$
74,712

 
$
—

Loans held for sale
$
45,505

 
$
—

 
$
45,505

 
$
—


During the three and nine months ended September 30, 2019, there were no transfers between levels. For the three months ended September 30, 2018, there were no transfers between levels and for the nine ended September 30, 2018, there were transfers from Level 2 to Level 3 of $65.3 million for corporate bonds available for sale. The transfers were due to a lack of observable inputs and trade activity for those securities.
The following tables summarize activity for Level 3 assets:
 
Nine months ended September 30, 2019
(Dollars in thousands)
Corporate bonds
Balance at January 1, 2019
$
143,226

Amounts included in net income
123

Unrealized net gains included in other comprehensive income
2,985

Purchases
11,991

Balance at September 30, 2019
$
157,325

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at September 30, 2019:
(Dollars in thousands)
 
 
 
September 30, 2019
Level 3 assets
 
Valuation technique
 
Significant unobservable input
 
Fair Value
Corporate bonds
 
Indicative bid provided by broker
 
Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer
 
$
157,325



33

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 $583 thousand and a loss of $773 thousand for the three months ended September 30, 2019 and September 30, 2018, respectively. The changes in fair value included a gain of $750 thousand and a loss of $528 thousand for nine months ended September 30, 2019 and September 30, 2018, respectively.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
(Dollars in thousands)
Fair value
 
Aggregate unpaid principal balance
 
Difference
Originated loans held for sale
$
83,256

 
$
81,073

 
$
2,183

 
 
 
 
 
 
 
December 31, 2018
 
Fair value
 
Aggregate unpaid principal balance
 
Difference
Originated loans held for sale
$
45,505

 
$
44,073

 
$
1,432

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2019 or December 31, 2018.
We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.
Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 6% and 11% applied for estimated selling costs and other external factors that may impact the marketability of the property. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate 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 discounts generally between 6% and 11% applied for estimated selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
118,658

 
$
—

 
$
—

 
$
118,658

Other real estate remeasured during the previous 12 months
36,670

 
—

 
—

 
36,670

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
105,994

 
$
—

 
$
—

 
$
105,994

Other real estate remeasured during the previous 12 months
35,344

 
—

 
—

 
35,344


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


34

NOTE K - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and former First Citizens Bancorporation, Inc. employees (Bancorporation Plan). The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.
BancShares Plan
For the three and nine months ended September 30, 2019 and 2018, the components of net periodic benefit cost are as follows:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Service cost
$
2,628

 
$
3,396

 
$
7,886

 
$
10,187

Interest cost
7,557

 
7,093

 
22,669

 
21,281

Expected return on assets
(12,876
)
 
(11,966
)
 
(38,629
)
 
(35,899
)
Amortization of prior service cost
15

 
19

 
43

 
59

Amortization of net actuarial loss
2,099

 
3,398

 
6,297

 
10,192

Net periodic (benefit) cost
$
(577
)
 
$
1,940

 
$
(1,734
)
 
$
5,820


Bancorporation Plan
For the three and nine months ended September 30, 2019 and 2018, the components of net periodic benefit cost are as follows:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Service cost
$
563

 
$
643

 
$
1,689

 
$
1,929

Interest cost
1,759

 
1,588

 
5,276

 
4,767

Expected return on assets
(2,771
)
 
(3,106
)
 
(8,314
)
 
(9,322
)
Amortization of net actuarial loss
631

 
78

 
1,895

 
235

Net periodic cost (benefit)
$
182

 
$
(797
)
 
$
546

 
$
(2,391
)

No discretionary contributions were made during the three or nine months ended September 30, 2019 to the BancShares pension plan. Discretionary contributions of $3.5 million were made during the three and nine months ended September 30, 2019 to the Bancorporation pension plan. 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 L - COMMITMENTS AND CONTINGENCIES

To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit, interest rate or liquidity risk.
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets.
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.
The following table presents the commitments to extend credit and standby letters of credit as of September 30, 2019 and December 31, 2018:
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Unused commitments to extend credit
$
10,509,643

 
$
10,054,712

Standby letters of credit
92,585

 
96,467



35

BancShares and FCB have 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 $165.7 million and $147.3 million as of September 30, 2019 and December 31, 2018, respectively, and were recorded in other assets on the Consolidated Balance Sheets. Unfunded commitments to fund future investments in affordable housing projects totaled $75.7 million and $68.0 million as of September 30, 2019 and December 31, 2018, respectively and were recorded within 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.

NOTE M - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) included the following as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
Unrealized gains (losses) on securities available for sale
$
6,112

 
$
1,406

 
$
4,706

 
$
(50,007
)
 
$
(11,502
)
 
$
(38,505
)
Unrealized losses on securities available for sale transferred to held to maturity
(74,397
)
 
(17,111
)
 
(57,286
)
 
(92,401
)
 
(21,252
)
 
(71,149
)
Defined benefit pension items
(154,795
)
 
(35,603
)
 
(119,192
)
 
(163,030
)
 
(37,497
)
 
(125,533
)
Total
$
(223,080
)
 
$
(51,308
)
 
$
(171,772
)
 
$
(305,438
)
 
$
(70,251
)
 
$
(235,187
)

36

The following table highlights changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2019 and September 30, 2018:
 
Three months ended September 30, 2019
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale(1)
 
Unrealized losses on securities available for sale transferred to held to maturity(1)
 
Defined benefit pension items(1)
 
Total
Beginning balance
$
2,554

 
$
(61,979
)
 
$
(121,306
)
 
$
(180,731
)
Net unrealized gains arising during period
3,026

 
—

 
—

 
3,026

Amounts reclassified from accumulated other comprehensive loss
(874
)
 
4,693

 
2,114

 
5,933

Net current period other comprehensive income
2,152

 
4,693

 
2,114

 
8,959

Ending balance
$
4,706

 
$
(57,286
)
 
$
(119,192
)
 
$
(171,772
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale(1)
 
Unrealized losses on securities available for sale transferred to held to maturity(1)
 
Defined benefit pension items(1)
 
Total
Beginning balance
$
(57,496
)
 
$
(80,876
)
 
$
(106,266
)
 
$
(244,638
)
Net unrealized losses arising during period
(10,635
)
 
—

 
—

 
(10,635
)
Amounts reclassified from accumulated other comprehensive loss
—

 
5,007

 
2,691

 
7,698

Net current period other comprehensive (loss) income
(10,635
)
 
5,007

 
2,691

 
(2,937
)
Ending balance
$
(68,131
)
 
$
(75,869
)
 
$
(103,575
)
 
$
(247,575
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale(1)
 
Unrealized losses on securities available for sale transferred to held to maturity(1)
 
Defined benefit pension items(1)
 
Total
Beginning balance
$
(38,505
)
 
$
(71,149
)
 
$
(125,533
)
 
$
(235,187
)
Net unrealized gains arising during period
48,489

 
—

 
—

 
48,489

Amounts reclassified from accumulated other comprehensive loss
(5,278
)
 
13,863

 
6,341

 
14,926

Net current period other comprehensive income
43,211

 
13,863

 
6,341

 
63,415

Ending balance
$
4,706

 
$
(57,286
)
 
$
(119,192
)
 
$
(171,772
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale(1)
 
Unrealized losses on securities available for sale transferred to held to maturity(1)
 
Defined benefit pension items(1)
 
Total
Beginning balance
$
(30,945
)
 
$
—

 
$
(91,349
)
 
$
(122,294
)
Cumulative effect adjustments(2)
(29,751
)
 
—

 
(20,300
)
 
(50,051
)
Adjusted beginning balance
(60,696
)
 
—

 
(111,649
)
 
(172,345
)
Net unrealized losses arising during period
(7,435
)
 
(84,321
)
 
—

 
(91,756
)
Amounts reclassified from accumulated other comprehensive loss
—

 
8,452

 
8,074

 
16,526

Net current period other comprehensive (loss) income
(7,435
)
 
(75,869
)
 
8,074

 
(75,230
)
Ending balance
$
(68,131
)
 
$
(75,869
)
 
$
(103,575
)
 
$
(247,575
)
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
(2) Cumulative adjustments for adoption of ASU 2018-02 of $31.3 million and ASU 2016-01 of $18.7 million.

37

The following table presents the amounts reclassified from accumulated other comprehensive income (loss) and the line item affected in the statement where net income is presented for the three and nine months ended September 30, 2019 and September 30, 2018:
 
 
Three months ended September 30, 2019
(Dollars in thousands)

         Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 
Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale
 
$
1,136

 
Realized gains on investment securities available for sale, net
 
 
(262
)
 
Income taxes
 
 
$
874

 

 
 
 
 
 
Amortization of unrealized losses on securities available for sale transferred to held to maturity
 
$
(6,095
)
 
Net interest income
 
 
1,402

 
Income taxes
 
 
$
(4,693
)
 

 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(15
)
 
Salaries and wages
Actuarial losses
 
(2,730
)
 
Other
 
 
(2,745
)
 
Income before income taxes
 
 
631

 
Income taxes
 
 
$
(2,114
)
 

Total reclassifications for the period
 
$
(5,933
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 
Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity
 
$
(6,502
)
 
Net interest income
 
 
1,495

 
Income taxes
 
 
$
(5,007
)
 

 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(19
)
 
Salaries and wages
Actuarial losses
 
(3,476
)
 
Other
 
 
(3,495
)
 
Income before income taxes
 
 
804

 
Income taxes
 
 
$
(2,691
)
 

Total reclassifications for the period
 
$
(7,698
)
 
 
(1) Amounts in parentheses indicate debits to income.
 
 
 
 

38

 
 
Nine months ended September 30, 2019
Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 
Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale
 
$
6,855

 
Realized gains on investment securities available for sale, net
 
 
(1,577
)
 
Income taxes
 
 
$
5,278

 

 
 
 
 
 
Amortization of unrealized losses on securities available for sale transferred to held to maturity
 
$
(18,004
)
 
Net interest income
 
 
4,141

 
Income taxes
 
 
$
(13,863
)
 

 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(43
)
 
Salaries and wages
Actuarial losses
 
(8,192
)
 
Other
 
 
(8,235
)
 
Income before income taxes
 
 
1,894

 
Income taxes
 
 
$
(6,341
)
 

Total reclassifications for the period
 
$
(14,926
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
Details about accumulated other comprehensive income (loss)
 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 
Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity
 
$
(10,975
)
 
Net interest income
 
 
2,523

 
Income taxes
 
 
$
(8,452
)
 

 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(59
)
 
Salaries and wages
Actuarial losses
 
(10,427
)
 
Other
 
 
(10,486
)
 
Income before income taxes
 
 
2,412

 
Income taxes
 
 
$
(8,074
)
 

Total reclassifications for the period
 
$
(16,526
)
 
 
(1) Amounts in parentheses indicate debits to income.

39

NOTE N - LEASES

BancShares leases certain branch locations, administrative offices and equipment. Operating lease ROU assets are included in other assets and the associated lease obligations are included in other liabilities on the Consolidated Balance Sheets. Finance leases are included in premises and equipment and other borrowings on the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we instead recognize lease expense for these leases on a straight-line basis over the lease term.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our corresponding obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating and finance lease ROU asset also includes initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of our leases do not provide an implicit rate, BancShares uses its incremental borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception. We utilize the implicit or incremental borrowing rate at the effective date of a modification not accounted for as a separate contract or a change in the lease terms to determine the present value of lease payments. BancShares used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that we will exercise our option to renew or extend the lease term, that option is included in calculating the value of the ROU and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
We determine if an arrangement is a lease at inception and our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have no related party lease agreements. As of September 30, 2019, there were no leases that have not yet commenced that would have a material impact on our Consolidated Financial Statements.
The following table presents lease assets and liabilities as of September 30, 2019:
(Dollars in thousands)
Classification
September 30, 2019
Assets:
 
 
Operating
Other assets
$
79,857

Finance
Premises and equipment
9,402

Total leased assets
 
$
89,259

Liabilities:
 
 
Operating
Other liabilities
$
79,234

Finance
Other borrowings
8,610

Total lease liabilities
 
$
87,844


The following table presents lease costs for the three and nine months ended September 30, 2019. Variable lease cost primarily represents variable payments such as common area maintenance and utilities that are recognized in the period in which the expense was incurred. Certain of our lease agreements also include rental payments that are adjusted periodically for inflation. While lease liabilities are not remeasured as a result of these changes, these adjustments are treated as variable lease costs and recognized in the period in which the expense is incurred.
(Dollars in thousands)
Classification
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Lease cost:
 
 
 
 
Operating lease cost (1)
Occupancy expense
$
5,273

 
$
12,059

Finance lease cost:

 
 
 
Amortization of leased assets
Equipment expense
541

 
1,434

Interest on lease liabilities
Interest expense - Other borrowings
93

 
220

Variable lease cost
Occupancy expense
527

 
1,779

Sublease income
Occupancy expense
(86
)
 
(303
)
Net lease cost
 
$
6,348

 
$
15,189

(1) Operating lease cost includes short-term lease cost, which is immaterial.
 
 


40

The following table presents lease liability maturities in the next five years and thereafter:
(Dollars in thousands)
Operating Leases
 
Finance Leases
 
Total
2019 (1)
$
3,617

 
$
435

 
$
4,052

2020
14,052

 
2,142

 
16,194

2021
12,546

 
2,159

 
14,705

2022
11,142

 
1,876

 
13,018

2023
9,258

 
993

 
10,251

Thereafter
43,841

 
1,683

 
45,524

Total lease payments
$
94,456

 
$
9,288

 
$
103,744

Less: Interest
15,222

 
678

 
15,900

Present value of lease liabilities
$
79,234

 
$
8,610

 
$
87,844

(1) Represents the lease liability payments that will be made for the period October 1, 2019 through December 31, 2019.

The following table presents the remaining weighted average lease terms and discount rates as of September 30, 2019:
Weighted average remaining lease term (years):
September 30, 2019
Operating
10.3

Finance
4.9

Weighted average discount rate:
 
Operating
3.22
%
Finance
3.07


The following table presents supplemental cash flow information related to leases for the nine months ended September 30, 2019:
(Dollars in thousands)
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
9,579

Operating cash flows from finance leases
220

Financing cash flows from finance leases
1,111

Right-of-use assets obtained in exchange for new operating lease liabilities
17,762

Right-of-use assets obtained in exchange for new finance lease liabilities
1,886



41

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (MD&A) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this report along with our financial statements and related MD&A of financial condition and results of operations included in our 2018 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2019, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares.
EXECUTIVE OVERVIEW
BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB), a state-chartered bank organized under the laws of the state of North Carolina.
BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue.
We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe that our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people. Management's primary focus is on loan and yield growth, deposit cost, and net interest margin. Management drives to this goal by focusing on core customer deposits and loans in the targeted interest rate risk profile. Additionally, our initiatives focus on growth of noninterest income sources, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology and delivery channels. Refer to our Form 10-K for the year ended December 31, 2018 for further discussion of our strategy.
Significant Events in 2019
On September 24, 2019, FCB entered into a definitive merger agreement for the acquisition of Duluth, Georgia-based Community Financial Holding Co. Inc. and its bank subsidiary, Gwinnett Community Bank, into FCB.
On April 23, 2019, FCB entered into a definitive merger agreement for the acquisition of Franklin, North Carolina-based Entegra Financial Corp. and its bank subsidiary, Entegra Bank, into FCB.
On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp and its bank subsidiary, First South Bank, into FCB.
On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares and its bank subsidiary, Biscayne Bank, into FCB.
RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS
Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. Based on the latest real gross domestic product (GDP) information available, the Bureau of Economic Analysis' revised estimate of second quarter of 2019 GDP growth was 2.0%, down from 3.1% GDP growth in the first quarter of 2019. The estimated real GDP deceleration in the second quarter primarily reflected downturns in inventory investment, exports and nonresidential fixed investment. These movements were partly offset by accelerations in personal consumption expenditures and federal government spending.
The United States (U.S.) unemployment rate declined from 3.7% in June 2019 to 3.5% in September 2019. According to the U.S. Department of Labor, the U.S. economy added approximately 470,000 new nonfarm payroll jobs during the third quarter of 2019. The U.S. housing market remains stable as a result of strong, but weakening, housing demand fueled by low mortgage interest rates, economic growth and job creation.
During the latter half of 2019, the Federal Reserve’s Federal Open Market Committee (FOMC) lowered the federal funds rate by 75 basis points to a target range of 1.50% to 1.75%. The FOMC cited the implications of global economic developments, muted inflation pressures as well as weakened business investment and exports for its actions. The FOMC also indicated that the U.S. labor market remains strong and economic activity rose at a moderate rate. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC indicated it will assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0% inflation.

42

FINANCIAL PERFORMANCE SUMMARY
Third Quarter Highlights
•
Net income for the third quarter of 2019 totaled $124.8 million, an increase of $7.5 million, or 6.4% compared to the same quarter in 2018. Earnings per share increased $1.47, or 15.0%, to $11.27 in the third quarter of 2019, from $9.80 per share during the same period in 2018.
•
Net interest income totaled $336.4 million for the third quarter of 2019, an increase of $29.1 million, or 9.5% compared to the same quarter in 2018. The taxable-equivalent net interest margin (NIM) was 3.80% for the third quarter of 2019, up from 3.73% for the third quarter in 2018.
•
Noninterest income for the third quarter of 2019 totaled $100.9 million, an increase of $6.4 million, or 6.8% compared to the same quarter of 2018.
•
Return on average assets for the third quarter of 2019 was 1.32%, down 1 basis point compared to the third quarter of 2018. Return on average equity for the third quarter of 2019 was 13.83%, up 42 basis points over the third quarter of 2018.
•
Total loans grew to $27.20 billion, an increase of $468.3 million, or 7.0% on an annualized basis, since June 30, 2019. The net charge-off ratio was 0.10% for the third quarter of 2019, unchanged for the same quarter in 2018.
•
Total deposits grew to $32.74 billion, an increase of $23.6 million, or 0.3% on an annualized basis, since June 30, 2019.
•
BancShares repurchased 295,900 shares of its Class A common stock during the third quarter of 2019 totaling $135.4 million. At September 30, 2019, BancShares remained well capitalized with a total risk-based capital ratio of 13.1%, Tier 1 risk-based capital and common equity Tier 1 ratios of 11.8% and a leverage ratio of 9.2%.
Year to Date Highlights
•
Net income for the nine months ended September 30, 2019 totaled $355.5 million, an increase of $44.7 million, or 14.4% compared to the same period of 2018. Earnings per share increased $5.59, or 21.6%, to $31.50 for the nine months ended September 30, 2019, from $25.91 per share during the same period in 2018.
•
Net interest income for the nine months ended September 30, 2019, was $984.2 million, an increase of $96.2 million, or 10.8% compared to the same period of 2018. The taxable-equivalent NIM was 3.83% for the nine months ended September 30, 2019, up 18 basis points from 3.65% during the same period of 2018.
•
Return on average assets for the nine months ended September 30, 2019 was 1.29%, up 9 basis points over the same period in 2018. Return on average equity for the nine months ended September 30, 2019 was 13.41%, up 119 basis points over the same period in 2018.
•
Total loans grew to $27.20 billion, an increase of $1.67 billion since December 31, 2018. The growth from recent acquisitions totaled $1.02 billion, while the remaining $657.3 million, or 3.4% on an annualized basis, was due to organic growth. The net charge-off ratio was 0.10% for the nine months ended September 30, 2019, a 1 basis point decrease compared to the same period of 2018.
•
Total deposits grew to $32.74 billion, an increase of $2.07 billion since December 31, 2018. The growth from recent acquisitions totaled $1.02 billion, while the remaining $1.05 billion, or 4.6% on an annualized basis, was due to organic growth.
•
BancShares repurchased 744,400 shares of its Class A common stock during the nine months ended September 30, 2019 totaling $325.9 million.

43

Table 1
SELECTED QUARTERLY DATA
 
2019
 
2018
 
Nine months ended September 30
 
Third
 
Second
 
First
 
Fourth
 
Third
 
(Dollars in thousands, except share data)
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
2019
 
2018
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
362,318

 
$
350,721

 
$
336,924

 
$
333,573

 
$
315,706

 
$
1,049,963

 
$
912,184

Interest expense
25,893

 
23,373

 
16,452

 
12,691

 
8,344

 
65,718

 
24,166

Net interest income
336,425

 
327,348

 
320,472

 
320,882

 
307,362

 
984,245

 
888,018

Provision for loan and lease losses
6,766

 
5,198

 
11,750

 
11,585

 
840

 
23,714

 
16,883

Net interest income after provision for loan and lease losses
329,659

 
322,150

 
308,722

 
309,297

 
306,522

 
960,531

 
871,135

Noninterest income
100,930

 
106,875

 
103,663

 
82,007

 
94,531

 
311,468

 
318,142

Noninterest expense
270,425

 
273,397

 
267,657

 
275,378

 
267,537

 
811,479

 
801,593

Income before income taxes
160,164

 
155,628

 
144,728

 
115,926

 
133,516

 
460,520

 
387,684

Income taxes
35,385

 
36,269

 
33,369

 
26,453

 
16,198

 
105,023

 
76,844

Net income
$
124,779

 
$
119,359

 
$
111,359

 
$
89,473

 
$
117,318

 
$
355,497

 
$
310,840

Net interest income, taxable equivalent
$
337,322

 
$
328,201

 
$
321,372

 
$
321,804

 
$
308,207

 
$
986,896

 
$
890,476

PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
11.27

 
$
10.56

 
$
9.67

 
$
7.62

 
$
9.80

 
$
31.50

 
$
25.91

Cash dividends
0.40

 
0.40

 
0.40

 
0.40

 
0.35

 
1.20

 
1.05

Market price at period end (Class A)
471.55

 
450.27

 
407.20

 
377.05

 
452.28

 
471.55

 
452.28

Book value at period-end
327.86

 
319.74

 
309.46

 
300.04

 
294.40

 
327.86

 
294.40

SELECTED QUARTERLY AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
Total assets (1)
$
37,618,836

 
$
37,049,030

 
$
35,625,885

 
$
35,625,500

 
$
34,937,175

 
$
36,770,191

 
$
34,628,652

Investment securities
6,956,981

 
6,803,570

 
6,790,671

 
7,025,889

 
7,129,089

 
6,851,348

 
7,091,456

Loans and leases (2)
26,977,476

 
26,597,242

 
25,515,988

 
25,343,813

 
24,698,799

 
26,368,922

 
24,193,870

Interest-earning assets
35,293,979

 
34,674,842

 
33,432,162

 
33,500,732

 
32,886,276

 
34,473,814

 
32,627,578

Deposits
32,647,264

 
32,100,210

 
30,802,567

 
30,835,157

 
30,237,329

 
31,856,771

 
29,939,492

Interest-bearing liabilities
20,551,393

 
20,397,445

 
19,655,434

 
19,282,749

 
18,783,160

 
20,204,705

 
18,899,001

Securities sold under customer repurchase agreements
533,371

 
556,374

 
538,162

 
572,442

 
547,385

 
542,618

 
549,863

Other short-term borrowings
23,236

 
40,513

 
—

 
53,552

 
43,720

 
21,335

 
60,417

Long-term borrowings
384,047

 
371,843

 
344,225

 
319,410

 
261,821

 
366,850

 
299,232

Shareholders' equity
$
3,580,235

 
$
3,546,041

 
$
3,509,746

 
$
3,491,914

 
$
3,470,368

 
$
3,545,418

 
$
3,401,450

Shares outstanding
11,060,462

 
11,286,520

 
11,519,008

 
11,763,832

 
11,971,460

 
11,286,984

 
11,997,281

SELECTED QUARTER-END BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
Total assets (1)
$
37,748,324

 
$
37,655,094

 
$
35,961,670

 
$
35,408,629

 
$
34,954,659

 
$
37,748,324

 
$
34,954,659

Investment securities
7,167,680

 
6,695,578

 
6,914,513

 
6,834,362

 
7,040,674

 
7,167,680

 
7,040,674

Loans and leases
27,196,511

 
26,728,237

 
25,463,785

 
25,523,276

 
24,886,347

 
27,196,511

 
24,886,347

Deposits
32,743,277

 
32,719,671

 
31,198,093

 
30,672,460

 
30,163,537

 
32,743,277

 
30,163,537

Securities sold under customer repurchase agreements
522,195

 
544,527

 
508,508

 
543,936

 
567,438

 
522,195

 
567,438

Long-term borrowings
453,876

 
369,854

 
341,108

 
348,218

 
417,798

 
453,876

 
417,798

Shareholders' equity
$
3,568,482

 
$
3,574,613

 
$
3,523,309

 
$
3,488,954

 
$
3,499,013

 
$
3,568,482

 
$
3,499,013

Shares outstanding
10,884,005

 
11,179,905

 
11,385,405

 
11,628,405

 
11,885,405

 
10,884,005

 
11,885,405

SELECTED RATIOS AND OTHER DATA
 
 
 
 
 
 
 
 
 
 
 
 
Rate of return on average assets (annualized)
1.32
%
 
1.29
%
 
1.27
%

1.00
%
 
1.33
%
 
1.29
%
 
1.20
%
Rate of return on average shareholders' equity (annualized)
13.83

 
13.50

 
12.86

 
10.17

 
13.41

 
13.41

 
12.22

Net yield on interest-earning assets (taxable equivalent)
3.80

 
3.79

 
3.89

 
3.82

 
3.73

 
3.83

 
3.65

Net charge-offs (annualized) to average loans and leases
0.10

 
0.11

 
0.11

 
0.11

 
0.10

 
0.10

 
0.11

Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
1.34

 
1.51

 
1.61

 
1.51

 
1.71

 
1.34

 
1.71

Non-PCI
0.82

 
0.83

 
0.88

 
0.86

 
0.86

 
0.82

 
0.86

Total
0.83

 
0.85

 
0.90

 
0.88

 
0.88

 
0.83

 
0.88

Ratio of total nonperforming assets to total loans, leases and other real estate owned
0.57

 
0.57

 
0.53

 
0.52

 
0.52

 
0.57

 
0.52

Tier 1 risk-based capital ratio
11.80

 
12.03

 
12.69

 
12.67

 
13.23

 
11.80

 
13.23

Common equity Tier 1 ratio
11.80

 
12.03

 
12.69

 
12.67

 
13.23

 
11.80

 
13.23

Total risk-based capital ratio
13.09

 
13.34

 
14.02

 
13.99

 
14.57

 
13.09

 
14.57

Leverage capital ratio
9.18

 
9.35

 
9.80

 
9.77

 
10.11

 
9.18

 
10.11

Dividend payout ratio
3.55

 
3.79

 
4.14

 
5.25

 
3.57

 
3.81

 
4.05

Average loans and leases to average deposits
82.63

 
82.86

 
82.84

 
82.19

 
81.68

 
82.77

 
80.81

(1) We adopted ASC Topic 842 and utilized the effective date method. We did not restate selected financial data for the quarters prior to 2019 presented above.
(2) Average loan and lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and leases.

44

BUSINESS COMBINATIONS
Community Financial Holding Co. Inc.
On September 24, 2019, FCB and Community Financial Holding Co. Inc. (Community Financial) entered into a definitive merger agreement for the acquisition by FCB of Duluth, Georgia-based Community Financial and its bank subsidiary, Gwinnett Community Bank. Under the terms of the agreement, total cash consideration of $2.3 million will paid to the shareholders of Community Financial. The transaction is expected to close during the first quarter of 2020, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. As of September 30, 2019, Community Financial reported $223.5 million in consolidated assets, $211.3 million in deposits and $147.0 million in gross loans.
Entegra Financial Corp.
On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each outstanding option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment. The total transaction value is anticipated to be approximately $219.8 million. The transaction is anticipated to close during the fourth quarter of 2019 or first quarter of 2020, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. FCB will be required to divest certain branches or other assets and liabilities in order to obtain regulatory approval for the transactions contemplated by the merger agreement. Any divestiture plan is subject to approval by the Federal Reserve Board in conjunction with the Department of Justice and has not been finalized as of the date of this filing. As of September 30, 2019, Entegra Bank reported $1.70 billion in total assets, $1.28 billion in deposits and $1.09 billion in loans.
First South Bancorp, Inc.
On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp and its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of $1.15 for each share of common stock was paid to the shareholders of First South Bancorp, totaling approximately $37.5 million. The merger allows FCB to expand its presence and enhance banking efforts in South Carolina. The merger contributed $253.0 million in consolidated assets, which included $179.2 million in loans and $207.6 million in deposits as of the merger date.
Biscayne Bancshares, Inc.
On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (Biscayne Bancshares) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 for each share of common stock was paid to the shareholders of Biscayne Bancshares, totaling approximately $118.9 million. The merger allows FCB to expand its presence in Florida and enhance banking efforts in South Florida. The merger contributed $1.08 billion in consolidated assets, which included $863.4 million in loans, and $786.5 million in deposits as of the merger date.
See Note B in the Consolidated Financial Statements for additional disclosures regarding the above business combinations.
FDIC-Assisted Transactions
As of September 30, 2019, BancShares had completed fourteen FDIC-assisted transactions. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. As of September 30, 2019, shared-loss protection remains for single family residential loans acquired in the amount of $47.3 million.
The shared-loss agreements for two of the FDIC-assisted transactions include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). As of September 30, 2019 and December 31, 2018, the estimated clawback liability was $110.6 million and $105.6 million, respectively. The clawback liability payment dates are March 2020 and March 2021.

45

Table 2
CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS
 
Three months ended
 
 
September 30, 2019
 
September 30, 2018
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
(Dollars in thousands)
Balance
 
Expense
 
Rate
 
Balance
 
Expense
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
26,977,476


$
315,621


4.65

%
$
24,698,799

 
$
272,868

 
4.39

%
Investment securities:





 
 
 
 
 
 
 
U. S. Treasury
834,577


5,262


2.50

 
1,504,594

 
7,104

 
1.87

 
Government agency
628,322


4,742


3.02

 
129,634

 
840

 
2.59

 
Mortgage-backed securities
5,195,711


27,891


2.15

 
5,266,282

 
29,160

 
2.21

 
Corporate bonds
149,888

 
1,912

 
5.10

 
121,855

 
1,609

 
5.28

 
State, county and municipal
—


—


—

 
—

 
—

 
—

 
Other investments
148,483


636


1.70

 
106,724

 
249

 
0.93

 
Total investment securities
6,956,981


40,443


2.32

 
7,129,089

 
38,962

 
2.18

 
Overnight investments
1,359,522


7,151


2.09

 
1,058,388

 
4,721

 
1.77

 
Total interest-earning assets
35,293,979


363,215


4.09


32,886,276

 
316,551

 
3.83


Cash and due from banks
256,379

 
 
 
 
 
268,307

 
 
 
 
 
Premises and equipment
1,224,118

 
 
 
 
 
1,169,440

 
 
 
 
 
Allowance for loan and lease losses
(227,707
)
 
 
 
 
 
(225,627
)
 
 
 
 
 
Other real estate owned
46,131

 
 
 
 
 
45,037

 
 
 
 
 
Other assets
1,025,936

 
 
 
 
 
793,742

 
 
 
 
 
Total assets
$
37,618,836

 
 
 
 
 
$
34,937,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
5,328,855


$
500


0.04

%
$
5,177,349

 
$
319

 
0.02

%
Savings
2,636,583


528


0.08

 
2,506,421

 
210

 
0.03

 
Money market accounts
8,121,643


7,619


0.37

 
7,878,484

 
2,455

 
0.12

 
Time deposits
3,523,658


13,090


1.47

 
2,367,980

 
2,163

 
0.36

 
Total interest-bearing deposits
19,610,739


21,737


0.44

 
17,930,234

 
5,147

 
0.11

 
Securities sold under customer repurchase agreements
533,371


542


0.40

 
547,385

 
398

 
0.29

 
Other short-term borrowings
23,236


203


3.50

 
43,720

 
287

 
2.57

 
Long-term borrowings
384,047


3,411


3.51

 
261,821

 
2,512

 
3.77

 
Total interest-bearing liabilities
20,551,393


25,893


0.50

 
18,783,160

 
8,344

 
0.18

 
Noninterest-bearing deposits
13,036,525

 
 
 
 
 
12,307,095

 
 
 
 
 
Other liabilities
450,683

 
 
 
 
 
376,552

 
 
 
 
 
Shareholders' equity
3,580,235

 
 
 
 
 
3,470,368

 
 
 
 
 
Total liabilities and shareholders' equity
$
37,618,836

 
 
 
 
 
$
34,937,175

 
 
 
 
 
Interest rate spread




3.59

%




3.65

%
 












Net interest income and net yield on interest-earning assets


$
337,322


3.80

%


$
308,207


3.73

%
Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the three months ended September 30, 2019 and September 30, 2018. The taxable-equivalent adjustment was $897 and $845 for the three months ended September 30, 2019 and September 30, 2018, respectively.

46

Table 3
CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS
 
Nine months ended
 
 
September 30, 2019
 
September 30, 2018
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
(Dollars in thousands)
Balance
 
Expense
 
Rate
 
Balance
 
Expense
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
26,368,922

 
$
910,993

 
4.62

%
$
24,193,870

 
$
787,198

 
4.35

%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
1,062,901

 
18,529

 
2.33

 
1,534,720

 
21,016

 
1.83

 
Government agency
434,097

 
10,084

 
3.10

 
76,829

 
1,408

 
2.44

 
Mortgage-backed securities
5,075,959

 
84,855

 
2.23

 
5,277,376

 
84,438

 
2.13

 
Corporate bonds
147,579

 
5,780

 
5.22

 
94,293

 
3,917

 
5.54

 
State, county and municipal
111

 
1

 
1.81

 
254

 
8

 
4.07

 
Other investments
130,701

 
1,551

 
1.59

 
107,984

 
725

 
0.90

 
Total investment securities
6,851,348

 
120,800

 
2.35

 
7,091,456

 
111,512

 
2.10

 
Overnight investments
1,253,544

 
20,820

 
2.22

 
1,342,252

 
15,932

 
1.59

 
Total interest-earning assets
34,473,814

 
1,052,613

 
4.08


32,627,578

 
914,642

 
3.75


Cash and due from banks
277,736

 
 
 
 
 
281,146

 
 
 
 
 
Premises and equipment
1,214,960

 
 
 
 
 
1,158,443

 
 
 
 
 
Allowance for loan and lease losses
(227,081
)
 
 
 
 
 
(223,835
)
 
 
 
 
 
Other real estate owned
46,488

 
 
 
 
 
47,408

 
 
 
 
 
Other assets
984,274

 
 
 
 
 
737,912

 
 
 
 
 
Total assets
$
36,770,191

 
 
 
 
 
$
34,628,652

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
5,311,205

 
$
1,291

 
0.03

%
$
5,166,255

 
$
926

 
0.02

%
Savings
2,606,781

 
1,260

 
0.06

 
2,451,667

 
575

 
0.03

 
Money market accounts
8,107,148

 
19,415

 
0.32

 
8,001,430

 
6,329

 
0.11

 
Time deposits
3,248,768

 
31,854

 
1.31

 
2,370,137

 
5,594

 
0.32

 
Total interest-bearing deposits
19,273,902

 
53,820

 
0.37

 
17,989,489

 
13,424

 
0.10

 
Securities sold under customer repurchase agreements
542,618

 
1,516

 
0.37

 
549,863

 
1,319

 
0.32

 
Other short-term borrowings
21,335

 
481

 
2.99

 
60,417

 
1,621

 
3.55

 
Long-term borrowings
366,850

 
9,900

 
3.56

 
299,232

 
7,802

 
3.44

 
Total interest-bearing liabilities
20,204,705

 
65,717

 
0.43


18,899,001

 
24,166

 
0.17


Noninterest-bearing deposits
12,582,869

 
 
 
 
 
11,950,003

 
 
 
 
 
Other liabilities
437,199

 
 
 
 
 
378,198

 
 
 
 
 
Shareholders' equity
3,545,418

 
 
 
 
 
3,401,450

 
 
 
 
 
Total liabilities and shareholders' equity
$
36,770,191

 
 
 
 
 
$
34,628,652

 
 
 
 
 
Interest rate spread
 
 
 
 
3.65

%
 
 
 
 
3.58

%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
986,896

 
3.83

%
 
 
$
890,476

 
3.65

%
Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the nine months ended September 30, 2019 and September 30, 2018. The taxable-equivalent adjustment was $2,651 and $2,458 for the nine months ended September 30, 2019 and September 30, 2018, respectively.

47

Table 4
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
 
Change from prior year period due to:
 
Change from prior year period due to:
(Dollars in thousands)
Volume(1)
 
Yield/Rate(1)
 
Total Change
 
Volume(1)
 
Yield/Rate(1)
 
Total Change
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
22,560

 
$
20,193

 
$
42,753

 
$
62,481

 
$
61,314

 
$
123,795

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
(3,163
)
 
1,321

 
(1,842
)
 
(6,461
)
 
3,974

 
(2,487
)
Government agency
3,232

 
670

 
3,902

 
6,550

 
2,126

 
8,676

Mortgage-backed securities
(531
)
 
(738
)
 
(1,269
)
 
(2,639
)
 
3,056

 
417

Corporate bonds
370

 
(67
)
 
303

 
2,214

 
(351
)
 
1,863

State, county and municipal
—

 
—

 
—

 
(4
)
 
(3
)
 
(7
)
Other investments
94

 
293

 
387

 
149

 
677

 
826

Total investment securities
2

 
1,479

 
1,481

 
(191
)
 
9,479

 
9,288

Overnight investments
1,349

 
1,081

 
2,430

 
(1,048
)
 
5,936

 
4,888

Total interest-earning assets
$
23,911

 
$
22,753

 
$
46,664

 
$
61,242

 
$
76,729

 
$
137,971

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
9

 
$
172

 
$
181

 
$
26

 
$
339

 
$
365

Savings
11

 
307

 
318

 
36

 
649

 
685

Money market accounts
76

 
5,088

 
5,164

 
84

 
13,002

 
13,086

Time deposits
1,056

 
9,871

 
10,927

 
2,074

 
24,186

 
26,260

Total interest-bearing deposits
1,152

 
15,438

 
16,590

 
2,220

 
38,176

 
40,396

Securities sold under customer repurchase agreements
(10
)
 
154

 
144

 
(17
)
 
214

 
197

Other short-term borrowings
(133
)
 
49

 
(84
)
 
(1,038
)
 
(102
)
 
(1,140
)
Long-term borrowings
1,161

 
(262
)
 
899

 
1,740

 
358

 
2,098

Total interest-bearing liabilities
2,170

 
15,379

 
17,549

 
2,905

 
38,646

 
41,551

Change in net interest income
$
21,741

 
$
7,374

 
$
29,115

 
$
58,337

 
$
38,083

 
$
96,420

(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)
Third Quarter 2019 compared to Third Quarter 2018
Net interest income for the third quarter of 2019 totaled $336.4 million, an increase of $29.1 million, or 9.5%, compared to the third quarter of 2018. The taxable-equivalent NIM was 3.80% in the third quarter of 2019, an increase of 7 basis points from the same quarter in the prior year.
Average interest-earning assets increased by $2.41 billion to $35.29 billion, compared to the third quarter of 2018. The primary drivers for this change were higher average loan balances which increased $2.28 billion, primarily due to contributions from recent acquisitions and organic loan growth, particularly within the commercial and residential mortgage portfolios, and higher average overnight investments of $301.1 million. Offsetting these increases was a decline in average investment securities of $172.1 million. The yield on interest-earning assets increased by 26 basis points to 4.09% when compared to the third quarter of 2018. The yield on loans and leases increased to 4.65%, or by 26 basis points, primarily due to higher yields on commercial and residential loans. The yield on overnight investments and investment securities increased by 32 basis points and 14 basis points, respectively. Higher federal funds rates was the primary driver for the yield increase on overnight investments, while the higher yield on government agency and U.S. Treasury securities was the primary driver of the investment securities yield improvement.
Average interest-bearing liabilities increased by $1.77 billion to $20.55 billion, compared to the third quarter of 2018. This increase was primarily due to an increase in average interest-bearing deposit balances of $1.68 billion driven by contributions from recent acquisitions and organic deposit growth, as well as an increase in average long-term borrowings of $122.2 million. Rates on interest-bearing liabilities increased by 33 basis points to 0.50%, primarily due to increased rates paid on time deposits and money market accounts.

48

Nine Months of 2019 compared to Nine Months of 2018
Net interest income for the nine months ended September 30, 2019, was $984.2 million, an increase of $96.2 million, or 10.8%, compared to the same period of 2018. The taxable-equivalent NIM was 3.83% for the nine months ended September 30, 2019, an increase of 18 basis points from the same period of 2018.
Average year-to-date interest-earning assets for the nine months ended September 30, 2019, increased by $1.85 billion to $34.47 billion, compared to the same period in 2018. This increase was primarily due to a $2.18 billion increase in average outstanding loans due the impact of recent acquisitions and organic loan growth, particularly within the commercial and residential mortgage portfolios. These increases were partially offset by declines in average investment securities of $240.1 million and average overnight investments of $88.7 million. The yield on interest-earning assets increased by 33 basis points to 4.08% for the nine months ended September 30, 2019, compared to the same period in 2018. The yield on loans and leases increased by 27 basis points primarily due to an increase in yields on commercial and residential loans. The yield on overnight investments and the investment securities portfolio increased by 63 basis points and 25 basis points, respectively. Higher federal funds rates was the primary driver for the yield increase on overnight investments, while the higher yields on mortgage-backed securities, government agency securities, and U.S. Treasury securities were the primary drivers of the investment securities yield improvement.
Average year-to-date interest-bearing liabilities for the nine months ended September 30, 2019 increased by $1.31 billion to $20.20 billion, compared to the same period in 2018. This increase was primarily due to a $1.28 billion increase in average interest-bearing deposit balances driven by the impact of recent acquisitions, as well as organic growth, primarily in time deposits and money market accounts. The rate paid on interest-bearing liabilities increased by 26 basis points to 0.43% for the nine months ended September 30, 2019 compared to same period in 2018. The rate paid on interest-bearing deposits increased by 27 basis points due primarily to increased rates on time deposits and money market accounts. Rates on long-term borrowings increased by 12 basis points due to higher rates on borrowings assumed in recent acquisitions.
Although net interest margin has expanded in recent periods, management does not believe this trend will continue as new loan yields are declining due to changes in forward rate expectations and increased competition. This trend will likely result in margin compression for the remainder of 2019.
Provision for Loan and Lease Losses
BancShares recorded net provision expense of $6.8 million and $23.7 million for the three and nine months ended September 30, 2019 as compared to $0.8 million and $16.9 million, respectively, for the same periods in 2018. The fluctuations in provision expense were primarily due to methodology enhancements adopted in 2018 driven by sustained improvements in credit quality, as well as variances in loan growth between the periods and changes in portfolio composition and credit quality.
Noninterest Income
Table 5
NONINTEREST INCOME
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Cardholder services, net
$
15,957

 
$
14,678

 
$
51,069

 
$
44,385

Merchant services, net
6,034

 
5,857

 
18,324

 
18,512

Service charges on deposit accounts
27,112

 
25,994

 
77,967

 
78,489

Wealth management services
25,212

 
24,459

 
74,786

 
73,543

Realized gains on investment securities available for sale, net
1,136

 
—

 
6,855

 
—

Marketable equity securities (losses) gains, net
(967
)
 
3,854

 
13,505

 
9,265

Other service charges and fees
8,237

 
7,651

 
23,823

 
22,887

Mortgage income
7,438

 
4,123

 
16,134

 
13,063

Insurance commissions
2,960

 
2,755

 
9,105

 
9,471

ATM income
1,635

 
1,919

 
4,771

 
6,307

Gain on extinguishment of debt
—

 
703

 
—

 
26,517

Recoveries of PCI loans previously charged off
5,611

 
2,751

 
13,824

 
13,582

Other
565

 
(213
)
 
1,305

 
2,121

Total noninterest income
$
100,930

 
$
94,531

 
$
311,468

 
$
318,142

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.

49

Noninterest income for the third quarter of 2019 was $100.9 million, compared to $94.5 million for the same period of 2018, an increase of $6.4 million, or 6.8%. The most significant components of the change were as follows:
•
Mortgage income increased by $3.3 million driven by increased refinance activity as mortgage rates declined.
•
Recoveries on PCI loans previously charged off increased by $2.9 million.
•
Income from cardholder services increased by $1.3 million due to higher interchange rates and transaction volumes, as well as cost savings achieved by converting to a new processor.
•
Service charges on deposits accounts increased $1.1 million due to increase in volume.
•
Realized gains on investment securities available for sale were $1.1 million for the third quarter of 2019, while no gains were recognized in the third quarter of 2018.
•
Fair value adjustments on marketable equity securities declined by $4.8 million.
Noninterest income was $311.5 million for the first nine months of 2019, compared to $318.1 million for the same period of 2018, a decrease of $6.7 million, or 1.23%. The most significant components of the change were as follows:
•
A $25.8 million gain on the extinguishment of debt was recognized 2018, while no gains were recognized in 2019. The gain was primarily due to the extinguishment of eight Federal Home Loan Bank debt obligations totaling $675.0 million.
•
Realized gains on investment securities available for sale were $6.9 million in 2019; no gains were recognized in 2018.
•
Income from cardholder services increased by $6.7 million due to higher transaction volumes and interchange rates, as well as cost savings achieved by converting to a new processor.
•
Fair value adjustments on marketable equity securities increased by $4.2 million.
•
Mortgage income increased by $3.1 million driven by increased refinance activity as mortgage rates declined.
•
Service charges on deposit accounts and ATM income declined by $2.1 million due to reductions in acquired deposit balances and the temporary suspension of ATM fees at certain acquired locations.
Noninterest Expense
Table 6
NONINTEREST EXPENSE
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Salaries and wages
$
137,841

 
$
133,867

 
$
406,788

 
$
392,911

Employee benefits
28,358

 
28,850

 
91,090

 
90,656

Occupancy expense
28,163

 
26,632

 
82,810

 
80,686

Equipment expense
28,770

 
25,880

 
83,999

 
76,021

Processing fees paid to third parties
7,250

 
7,297

 
20,980

 
23,383

FDIC insurance expense
2,440

 
5,186

 
7,857

 
16,411

Collection and foreclosure-related expenses
3,044

 
4,269

 
9,725

 
12,389

Merger-related expenses
3,892

 
1,126

 
9,695

 
4,136

Telecommunications expense
2,391

 
2,832

 
6,825

 
8,176

Consultant expense
2,764

 
3,101

 
9,284

 
9,107

Advertising expense
2,937

 
2,713

 
8,431

 
7,806

Core deposit intangible amortization
4,049

 
4,366

 
12,529

 
12,876

Other
18,526

 
21,418

 
61,466

 
67,035

Total noninterest expense
$
270,425

 
$
267,537

 
$
811,479

 
$
801,593


50

The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense.
Noninterest expense was $270.4 million during the third quarter of 2019, compared to $267.5 million for the same period in 2018, an increase of $2.9 million, or 1.1%. The most significant components of the change were as follows:
•
Personnel expense increased $3.5 million primarily due to an increase in salaries and wages as a result of merit increases and increased headcount from recent acquisitions.
•
Equipment expense increased by $2.9 million primarily due to hardware and software additions.
•
Merger-related expenses increased by $2.8 million primarily due to an increase in acquisition activity.
•
Other noninterest expense decreased by $2.9 million primarily due to recoveries of previously recorded legal fees.
•
FDIC insurance expense decreased $2.7 million primarily due to the discontinuation of the Deposit Insurance Fund surcharge on large banks.
Noninterest expense was $811.5 million for the first nine months of 2019, compared to $801.6 million for the same period in 2018, an increase of $9.9 million, or 1.2%. The most significant components of the change were as follows:
•
Personnel expense increased by $14.3 million primarily due to an increase in salaries and wages as a result of merit increases and increased headcount from recent acquisitions.
•
Equipment expense increased by $8.0 million primarily due to hardware and software additions.
•
Merger-related expense increased by $5.6 million primarily due to an increase in acquisition activity.
•
FDIC insurance expense decreased by $8.6 million primarily due to the discontinuation of the Deposit Insurance Fund surcharge on large banks.
•
Other noninterest expense decreased by $5.6 million primarily due to a reduction in legal fees, in part due to recoveries of previously recorded expenses.
•
Collection and foreclosure-related expense decreased by $2.7 million primarily due to reductions in the write downs of bank-owned properties.
•
Processing fees paid to third parties decreased by $2.4 million primarily due to cost savings associated with the operational conversions of previously completed acquisitions.
Income Taxes
Income tax expense was $35.4 million and $16.2 million for the third quarter of 2019 and third quarter of 2018, respectively, representing effective tax rates of 22.1% and 12.1% during the periods. Income tax expense was $105.0 million and $76.8 million for the nine months ended September 30, 2019 and September 30, 2018, respectively, representing effective tax rates of 22.8% and 19.8% for the nine months periods.
The effective tax rate for the third quarter of 2019 was impacted by the 2018 tax return true-ups, while the effective rate decrease for the third quarter of the prior year was primarily due a $15.7 million income tax benefit to update the deferred tax asset revaluation resulting from the Tax Act.
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.
INTEREST-EARNING ASSETS
Interest-earning assets include investment securities, loans and leases, and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to higher levels of market risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.
Interest-earning assets totaled $35.40 billion and $33.20 billion at September 30, 2019 and December 31, 2018, respectively. The $2.20 billion increase was primarily composed of a $1.67 billion increase in loans and leases, a $333.3 million increase in investment securities and a $152.5 million increase in overnight investments.
Investment Securities
The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk, and low to moderate interest rate risk. Other objectives include acting as a stable source of

51

liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares' objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C in the Consolidated Financial Statements for additional disclosures regarding investment securities.
Investment securities totaled $7.17 billion at September 30, 2019, an increase of $333.3 million compared to December 31, 2018. The increase in the portfolio was primarily attributable to investment securities purchases of $3.95 billion partially offset by maturities/paydowns of $2.00 billion and sales of $1.76 billion.
As of September 30, 2019, investment securities available for sale had a net pre-tax unrealized gain of $6.1 million, compared to a net pre-tax unrealized loss of $50.0 million as of December 31, 2018. After evaluating the available for sale securities with unrealized losses, management concluded that the unrealized losses relate to changes in interest rates relative to when the securities were purchased, and therefore, no other than temporary impairment existed as of September 30, 2019. Available for sale securities are reported at fair value and unrealized gains and losses were included as a component of AOCI, net of deferred taxes.
Table 7
INVESTMENT SECURITIES
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
Composition(1)
 
Cost
 
Fair
value
 
Composition(1)
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
10.4
%
 
$
748,206

 
$
749,318

 
18.2
%
 
$
1,249,243

 
$
1,247,710

Government agency
9.2

 
666,029

 
665,621

 
3.7

 
257,252

 
256,835

Mortgage-backed securities
46.0

 
3,329,593

 
3,332,619

 
42.5

 
2,956,793

 
2,909,339

Corporate bonds
2.2

 
154,943

 
157,325

 
2.1

 
143,829

 
143,226

Total investment securities available for sale
67.8

 
4,898,771

 
4,904,883

 
66.5

 
4,607,117

 
4,557,110

Investment in marketable equity securities
1.6

 
87,588

 
116,854

 
1.4

 
73,809

 
92,599

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
30.2

 
2,115,141

 
2,186,998

 
32.1

 
2,184,653

 
2,201,502

Other
0.4

 
30,802

 
30,802

 
—

 
—

 
—

Total investment securities held to maturity
30.6

 
2,145,943

 
2,217,800

 
32.1

 
2,184,653

 
2,201,502

Total investment securities
100.0
%
 
$
7,132,302

 
$
7,239,537

 
100.0
%
 
$
6,865,579

 
$
6,851,211

(1) Calculated as a percent of the total fair value of investment securities.
 
 
 
 
Loans and Leases
Loans and leases were $27.20 billion at September 30, 2019, a net increase of $1.67 billion, representing annualized growth of 9.5% since December 31, 2018. This increase was driven by a $1.77 billion net increase in the non-PCI portfolio, partially offset by a $93.0 million decline in the PCI loan portfolio. The net increase in the non-PCI portfolio was due to $989.9 million in loans acquired from Biscayne Bancshares and First South Bancorp, as well as organic growth primarily in the commercial mortgage and residential mortgage portfolios. PCI loans from acquisitions prior to 2019 decreased $119.0 million, offset by $26.0 million of additional PCI loans from Biscayne Bancshares and First South Bancorp. Excluding 2019 acquired loans, total loans grew by 3.4% on an annualized basis.
BancShares reports non-PCI and PCI loan portfolios separately, and the non-PCI portfolio is further divided into commercial and non-commercial. Non-PCI loans and leases at September 30, 2019 were $26.68 billion, representing 98.1% of total loans and leases, compared to $24.92 billion or 97.6% at December 31, 2018. PCI loans at September 30, 2019 were $513.6 million, representing 1.9% of total loans and leases, compared to $606.6 million or 2.4% at December 31, 2018.

52

The discount related to acquired non-PCI loans and leases at September 30, 2019 and December 31, 2018 was $32.2 million and $33.3 million, respectively. The discount related to PCI loans at September 30, 2019 and December 31, 2018 was $85.0 million and $95.5 million, respectively.
Table 8
LOANS AND LEASES
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
943,747

 
$
757,854

Commercial mortgage
11,453,353

 
10,717,234

Other commercial real estate
491,063

 
426,985

Commercial and industrial and leases
4,129,384

 
3,938,730

Other
301,791

 
296,424

Total commercial loans
17,319,338

 
16,137,227

Noncommercial:
 
 
 
Residential mortgage
4,869,562

 
4,265,687

Revolving mortgage
2,414,884

 
2,542,975

Construction and land development
321,903

 
257,030

Consumer
1,757,235

 
1,713,781

Total noncommercial loans
9,363,584

 
8,779,473

Total non-PCI loans and leases
$
26,682,922

 
$
24,916,700

Total PCI loans
513,589

 
606,576

Total loans and leases
27,196,511

 
25,523,276

Less allowance for loan and lease losses
(226,825
)
 
(223,712
)
Net loans and leases
$
26,969,686

 
$
25,299,564

ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The ALLL was $226.8 million at September 30, 2019, representing an increase of $3.1 million since December 31, 2018. The ALLL as a percentage of total loans and leases was 0.83% at September 30, 2019, compared to 0.88% December 31, 2018.
At September 30, 2019, the ALLL allocated to total non-PCI loans and leases was $220.0 million, or 0.82% of non-PCI loans and leases, compared to $214.6 million, or 0.86%, at December 31, 2018. The decrease of 4 basis points since December 31, 2018 was primarily due to changes in portfolio mix and sustained credit quality in the Construction and Land Development portfolio, partially offset by credit quality declines in other portfolios and increases in specific reserves.
At September 30, 2019, the ALLL for PCI loans totaled $6.9 million compared to $9.1 million at December 31, 2018. The decrease was primarily due to continued PCI loan portfolio run-off and improving cash flow estimates.
Net charge-offs for non-PCI loans and leases were $6.5 million during the third quarter of 2019, and the third quarter of 2018. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.10% for both the third quarter of 2019 and 2018. The net charge-off ratio was and 0.11% and 0.10% for the nine months ended September 30, 2019 and 2018, respectively.


53

Table 9
ALLOWANCE FOR LOAN AND LEASE LOSSES
 
Three months ended September 30
 
Nine months ended September 30
 
 
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Allowance for loan and lease losses at beginning of period
$
226,583

 
$
224,865

 
$
223,712

 
$
221,893

Non-PCI provision for loan and lease losses
8,242

 
2,354

 
25,991

 
15,883

PCI (credit) provision for loan losses
(1,476
)
 
(1,514
)
 
(2,277
)
 
1,000

Non-PCI Charge-offs:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Construction and land development
(116
)
 
(35
)
 
(188
)
 
(43
)
Commercial mortgage
(1
)
 
(606
)
 
(851
)
 
(1,111
)
Other commercial real estate
—

 
—

 
—

 
(69
)
Commercial and industrial and leases
(3,047
)
 
(2,106
)
 
(8,327
)
 
(6,874
)
Other
(42
)
 
(56
)
 
(73
)
 
(98
)
Total commercial
(3,206
)
 
(2,803
)
 
(9,439
)
 
(8,195
)
Noncommercial:
 
 
 
 
 
 
 
Residential mortgage
(313
)
 
(360
)
 
(957
)
 
(1,455
)
Revolving mortgage
(534
)
 
(759
)
 
(1,990
)
 
(2,778
)
Construction and land development
—

 
—

 
—

 
(219
)
Consumer
(5,594
)
 
(5,525
)
 
(18,017
)
 
(16,092
)
Total noncommercial
(6,441
)
 
(6,644
)
 
(20,964
)
 
(20,544
)
Total non-PCI charge-offs
(9,647
)
 
(9,447
)
 
(30,403
)
 
(28,739
)
Non-PCI Recoveries:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Construction and land development
52

 
136

 
223

 
252

Commercial mortgage
226

 
99

 
502

 
563

Other commercial real estate
—

 
1

 
1

 
147

Commercial and industrial and leases
611

 
497

 
1,748

 
2,399

Other
20

 
117

 
685

 
160

Total commercial
909

 
850

 
3,159

 
3,521

Noncommercial:
 
 
 
 
 
 
 
Residential mortgage
68

 
128

 
293

 
315

Revolving mortgage
201

 
712

 
1,035

 
1,426

Construction and land development
—

 
—

 
—

 
127

Consumer
1,945

 
1,249

 
5,315

 
3,888

Total noncommercial
2,214

 
2,089

 
6,643

 
5,756

Total non-PCI recoveries
3,123

 
2,939

 
9,802

 
9,277

Non-PCI loans and leases charged off, net
(6,524
)
 
(6,508
)
 
(20,601
)
 
(19,462
)
PCI loans charged off, net
—

 
—

 
—

 
(117
)
Allowance for loan and lease losses at end of period
$
226,825

 
$
219,197

 
$
226,825

 
$
219,197

Reserve for unfunded commitments
$
1,097

 
$
1,089

 
$
1,097

 
$
1,089


54

Table 10
ALLOWANCE FOR LOAN AND LEASE LOSSES RATIOS
 
Three months ended September 30
 
Nine months ended September 30
 
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
 
Average loans and leases:
 
 
 
 
 
 
 
 
PCI
$
530,390

 
$
652,983

 
$
551,065

 
$
689,482

 
Non-PCI
26,379,156

 
24,045,816

 
25,762,098

 
23,504,388

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
PCI
513,589

 
638,018

 
513,589

 
638,018

 
Non-PCI
26,682,922

 
24,248,329

 
26,682,922

 
24,248,329

 
Allowance for loan and lease losses allocated to loans and leases:
 
 
 
 
 
 
 
 
PCI
6,867

 
10,909

 
6,867

 
10,909

 
Non-PCI
219,958

 
208,288

 
219,958

 
208,288

 
Total
$
226,825

 
$
219,197

 
$
226,825

 
$
219,197

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

%
—

%
—

%
0.02

%
Non-PCI
0.10

 
0.11

 
0.11

 
0.11

 
Total
0.10

 
0.10

 
0.10

 
0.11

 
ALLL to total loans and leases:
 
 
 
 
 
 
 
 
PCI
1.34

 
1.71

 
1.34

 
1.71

 
Non-PCI
0.82

 
0.86

 
0.82

 
0.86

 
Total
0.83

 
0.88

 
0.83

 
0.88

 
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans and leases and other real estate owned (OREO). At September 30, 2019, BancShares’ nonperforming assets totaled $155.9 million, an increase of $22.0 million since December 31, 2018.
Nonaccrual loans and leases at September 30, 2019 were $109.6 million, reflecting an increase of $23.8 million since December 31, 2018. The increase was primarily due to new nonaccrual loans within the commercial mortgage portfolio. Despite this increase, the credit quality of the portfolio remains in line with our risk tolerances and management has not identified significant increases in portfolio risk. At September 30, 2019, OREO totaled $46.3 million, representing a decline of $1.8 million since December 31, 2018 as sales and write-downs of assets outpaced additions.
Table 11
NONPERFORMING ASSETS
 
2019
 
2018
 
Third
 
Second
 
First
 
Fourth
 
Third
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Non-PCI
$
108,816

 
$
100,701

 
$
88,958

 
$
84,546

 
$
85,419

PCI
829

 
4,274

 
1,667

 
1,276

 
1,530

Other real estate owned
46,253

 
46,236

 
43,306

 
48,030

 
43,601

Total nonperforming assets
$
155,898

 
$
151,211

 
$
133,931

 
$
133,852

 
$
130,550

 
 
 
 
 
 
 
 
 
 
Accruing loans and leases 90 days or more past due
 
 
 
 
 
 
 
 
 
Non-PCI
$
4,247

 
$
3,468

 
$
3,493

 
$
2,888

 
$
2,640

PCI
23,287

 
29,319

 
33,981

 
37,020

 
38,073

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

55

TROUBLED DEBT RESTRUCTURINGS (TDRs)
We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs that were not accruing interest at the time of restructure are included as nonperforming loans. TDRs that were accruing at the time of restructure and continue to perform based on the restructured terms are considered performing loans. Loans acquired under ASC 310-30 (PCI Loans), excluding pooled loans, are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modification of a PCI loan accounted for in a pool that would otherwise meet the definition of a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from the scope of TDR accounting.
Table 12
TROUBLED DEBT RESTRUCTURINGS
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Accruing TDRs:
 
 
 
Non-PCI
$
107,070

 
$
108,992

PCI
17,346

 
18,101

Total accruing TDRs
124,414

 
127,093

Nonaccruing TDRs:
 
 
 
Non-PCI
36,846

 
28,918

PCI
54

 
119

Total nonaccruing TDRs
36,898

 
29,037

All TDRs:
 
 
 
Non-PCI
143,916

 
137,910

PCI
17,400

 
18,220

Total TDRs
$
161,312

 
$
156,130

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 $20.75 billion at September 30, 2019, compared to $19.68 billion at December 31, 2018. The $1.07 billion increase was due an increase in interest-bearing deposits of $986.6 million and an increase in other borrowings of $98.2 million, partially offset by a decrease in customer repurchase agreements of $21.7 million.
Deposits
Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe that traditional bank deposit products remain an attractive option for many customers but, as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost.
At September 30, 2019, total deposits were $32.74 billion, an increase of $2.07 billion, representing annualized growth of 9.0% since December 31, 2018. Excluding acquired deposits totaling $1.02 billion, deposits increased $1.05 billion, or by 4.6% annualized, over the same time period. This organic growth was primarily the result of increases in demand and time deposit accounts partially offset by a decline in money markets.
Table 13
DEPOSITS
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Demand
$
12,966,890

 
$
11,882,670

Checking with interest
5,488,182

 
5,338,511

Money market
8,093,306

 
8,194,818

Savings
2,626,182

 
2,499,750

Time
3,568,717

 
2,756,711

Total deposits
$
32,743,277

 
$
30,672,460


56

Borrowings
At September 30, 2019, total borrowings were $976.1 million compared to $892.2 million at December 31, 2018. The $83.9 million increase from December 31, 2018 was primarily due to an increase in other borrowings of $98.2 million related to a new term loan in the third quarter of 2019.
Table 14
BORROWINGS
(Dollars in thousands)
September 30, 2019
 
December 31, 2018
Securities sold under customer repurchase agreements
$
522,195

 
$
543,936

Federal Home Loan Bank borrowings
192,672

 
193,556

Subordinated debentures
 
 
 
SCB Capital Trust I
9,730

 
9,701

FCB/SC Capital Trust II
17,499

 
17,401

FCB/NC Capital Trust III
88,145

 
88,145

Capital Trust debentures assumed in acquisitions
—

 
4,124

Other subordinated debentures
33,677

 
21,370

Total subordinated debentures
149,051

 
140,741

Other borrowings
112,153

 
13,921

Total borrowings
$
976,071

 
$
892,154

BancShares owns five special purpose entities – FCB/NC Capital Trust III, FCB/SC Capital Trust II, SCB Capital Trust I, CCBI Capital Trust I, and FSBS Capital Trust I (the Trusts), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debentures included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.
During the nine months ended September 30, 2019, FCB redeemed, in whole, all obligations related to CCBI Capital Trust I and FSBS Capital Trust I.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
The table below shows activities that caused the change in outstanding Class A common stock over the past five quarters.
During the third quarter of 2019, BancShares repurchased 295,900 shares of Class A common stock for $135.4 million at an average cost per share of $457.50. During the first nine months of 2019, BancShares repurchased a total of 744,400 shares of Class A common stock for $325.9 million at an average cost per share of $437.84. During the three and nine months ended September 30, 2018, BancShares repurchased a total of 125,000 shares of Class A common stock for $58.1 million at an average cost per share of $464.68. All Class A common stock repurchases completed in 2019 and 2018 were consummated under previously approved authorizations.
Subsequent to quarter-end through October 31, 2019, BancShares repurchased an additional 146,100 shares of Class A common stock for $69.1 million at an average cost per share of $472.94.
Table 15
CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING
 
2019
 
2018
 
 
Third
 
Second
 
First
 
Fourth
 
Third
 
(in thousands)
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Class A shares outstanding at beginning of period
10,175

 
10,380

 
10,623

 
10,880

 
11,005

 
Repurchases
(296
)
 
(205
)
 
(243
)
 
(257
)
 
(125
)
 
Class A shares outstanding at end of period
9,879

 
10,175

 
10,380

 
10,623

 
10,880

 
 
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.

57

In accordance with accounting principles generally accepted in the United States of America (GAAP), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios under current regulatory guidelines.
Table 16
ANALYSIS OF CAPITAL ADEQUACY
 
Requirements to be well-capitalized
 
September 30, 2019
 
December 31, 2018
(Dollars in thousands)
 
Amount
 
Ratio
 
Amount
 
Ratio
BancShares
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
8.00
%
 
$
3,424,657

 
11.80
%
 
$
3,463,307

 
12.67
%
Common equity Tier 1
6.50

 
3,424,657

 
11.80

 
3,463,307

 
12.67

Total risk-based capital
10.00

 
3,799,579

 
13.09

 
3,826,626

 
13.99

Tier 1 leverage ratio
5.00

 
3,424,657

 
9.18

 
3,463,307

 
9.77

 
 
 
 
 
 
 
 
 
 
FCB
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
8.00
%
 
$
3,504,390

 
12.09
%
 
$
3,315,742

 
12.17
%
Common equity Tier 1
6.50

 
3,504,390

 
12.09

 
3,315,742

 
12.17

Total risk-based capital
10.00

 
3,774,812

 
13.03

 
3,574,561

 
13.12

Tier 1 leverage ratio
5.00

 
3,504,390

 
9.42

 
3,315,742

 
9.39

As of September 30, 2019, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.
The capital conservation buffer introduced under Basel III became fully phased in at January 1, 2019 at 2.50%. BancShares and FCB had capital conservation buffers of 5.09% and 5.03%, respectively, at September 30, 2019, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.
RISK MANAGEMENT
Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework.  The Board of Directors administers its risk oversight function primarily through the Board Risk Committee.
The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management's response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility.
In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.

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Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCI or non-PCI, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ALLL that accounts for losses that are inherent in the loan and lease portfolio.
Interest rate risk management
Interest rate risk (IRR) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes.
We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled, include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. While market interest rates peaked in November 2018, interest-bearing deposit rates have continued to see upward pressure due to rate specials and acquisitions. Despite this trend, overall rates remain relatively low and, as such, it is unlikely these rates will decline materially from current levels. Additionally, our projections incorporate assumptions of customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise.
Table 17 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of September 30, 2019 and December 31, 2018.
Table 17
NET INTEREST INCOME SENSITIVITY ANALYSIS
 
 
Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis points)
 
September 30, 2019
 
December 31, 2018
-100
 
(10.53
)%
 
(10.67
)%
+100
 
4.23

 
2.38

+200
 
5.93

 
1.66

Net interest income sensitivity metrics at September 30, 2019 compared to December 31, 2018 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 continued to fall throughout 2019, prepayment speeds have increased leading to an increase in loan interest income under positive rate shocks.
Long-term interest rate risk exposure is measured using the economic value of equity (EVE) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet.
Table 18 table presents the EVE profile as of September 30, 2019 and December 31, 2018.
Table 18
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS
 
 
Estimated percentage increase (decrease) in EVE
Change in interest rate (basis points)
 
September 30, 2019
 
December 31, 2018
-100
 
(12.32
)%
 
(15.14
)%
+100
 
3.57

 
3.34

+200
 
0.96

 
1.40

The economic value of equity metrics at September 30, 2019 compared to December 31, 2018 were primarily affected by strong growth in non-interest demand deposits coupled with an increase in interest-earning cash balances.
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.

59

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.
We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $4.05 billion at September 30, 2019 compared to $3.11 billion at December 31, 2018. Another source of available funds was advances from the FHLB of Atlanta and Chicago. Outstanding FHLB advances were $192.7 million as of September 30, 2019, and we had sufficient collateral pledged to secure $6.35 billion of additional borrowings from the FHLB of Atlanta and Chicago. Also, at September 30, 2019, $3.47 billion in non-PCI loans with a lendable collateral value of $2.78 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 $615.0 million of available capacity at September 30, 2019.
CRITICAL ACCOUNTING ESTIMATES
There have been no significant changes in our Critical Accounting Estimates as described in our 2018 Annual Report on Form 10‑K.
FORWARD-LOOKING STATEMENTS
Statements in this Report and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the acquisitions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect.
Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

60

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 September 30, 2019, BancShares’ market risk profile has not changed significantly from December 31, 2018 as discussed in the Form 10-K. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.
Item 4.    Controls and Procedures
BancShares' management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares' disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.
No changes in BancShares' internal control over financial reporting occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, BancShares' internal control over financial reporting.
PART II
Item 1. Legal Proceedings
BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts were claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions currently exist that are expected to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note L of BancShares' Notes to Unaudited Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes from risk factors described in our annual Form 10-K for the year ended December 31, 2018. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning BancShares' repurchases of outstanding common stock during the three month period ended September 30, 2019, is included in the following table:
Class A common stock
Total Number of Class A Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
Purchases from July 1, 2019 to July 31, 2019
59,600

$
456.09

59,600

740,400

Purchases from August 1, 2019 to August 31, 2019
100,300

442.12

100,300

640,100

Purchases from September 1, 2019 to September 30, 2019
136,000

469.45

136,000

504,100

Total
295,900

$
457.50

295,900

504,100

In April 2019, the Board authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period July 1, 2019 through June 30, 2020. This authorization was effective July 1, 2019 and supersedes the previous authorization approved in October 2018. In October 2019, the Board authorized the repurchase of up to 500,000 shares of BancShares' Class A common stock for the period November 1, 2019 through January 31, 2020. This authorization supersedes all previously approved authorities.
Subsequent to quarter-end and through October 31, 2019, BancShares repurchased an additional 146,100 shares of Class A common stock for $69.1 million at an average cost per share of $472.94.

61

Item 6. Exhibits
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase

62

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:
November 5, 2019
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ CRAIG L. NIX
 
 
 
 
Craig L. Nix
 
 
 
 
Chief Financial Officer

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