10-Q 1 fcnca_10qx03312013.htm 10-Q FCNCA_10Q_03.31.2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Class A Common Stock—$1 Par Value—8,586,058 shares
Class B Common Stock—$1 Par Value—1,032,883 shares
(Number of shares outstanding, by class, as of May 9, 2013)



INDEX
 
 
 
Page(s)
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

2


Part 1
 
Item 1.
Financial Statements (Unaudited)

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
March 31*
2013
 
December 31#
2012
 
March 31*
2012
 
(thousands, except share data)
Assets
 
 
 
 
 
Cash and due from banks
$
460,217

 
$
639,730

 
$
552,663

Overnight investments
954,232

 
443,180

 
752,334

Investment securities available for sale
5,279,678

 
5,226,228

 
4,457,739

Investment securities held to maturity
1,229

 
1,342

 
1,688

Loans held for sale
86,351

 
86,333

 
73,457

Loans and leases:
 
 
 
 
 
Covered under loss share agreements
1,621,327

 
1,809,235

 
2,183,869

Not covered under loss share agreements
11,509,080

 
11,576,115

 
11,489,529

Less allowance for loan and lease losses
273,019

 
319,018

 
272,500

Net loans and leases
12,857,388

 
13,066,332

 
13,400,898

Premises and equipment
872,045

 
882,768

 
864,466

Other real estate owned:
 
 
 
 
 
Covered under loss share agreements
101,901

 
102,577

 
142,418

Not covered under loss share agreements
44,828

 
43,513

 
48,092

Income earned not collected
47,255

 
47,666

 
52,406

Receivable from FDIC for loss share agreements
195,942

 
270,192

 
492,384

Goodwill
102,625

 
102,625

 
102,625

Other intangible assets
2,884

 
3,556

 
6,076

Other assets
344,437

 
367,610

 
278,415

Total assets
$
21,351,012

 
$
21,283,652

 
$
21,225,661

Liabilities
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
4,915,038

 
$
4,885,700

 
$
4,572,300

Interest-bearing
13,149,883

 
13,200,325

 
13,187,192

Total deposits
18,064,921

 
18,086,025

 
17,759,492

Short-term borrowings
573,102

 
568,505

 
677,993

Long-term obligations
444,252

 
444,921

 
649,818

Payable to FDIC for loss share agreements
98,870

 
101,641

 
82,033

Other liabilities
251,286

 
218,553

 
164,202

Total liabilities
19,432,431

 
19,419,645

 
19,333,538

Shareholders’ Equity
 
 
 
 
 
Common stock:
 
 
 
 
 
Class A - $1 par value (11,000,000 shares authorized; 8,586,058 shares issued and outstanding at March 31, 2013; 8,588,031 shares issued and outstanding at December 31, 2012; 8,644,307 shares issued and outstanding at March 31, 2012)
8,586

 
8,588

 
8,644

Class B - $1 par value (2,000,000 shares authorized; 1,032,883 shares issued and outstanding at March 31, 2013; 1,032,883 shares issued and outstanding at December 31, 2012; 1,631,424 shares issued and outstanding at March 31, 2012)
1,033

 
1,033

 
1,631

Surplus
143,766

 
143,766

 
143,766

Retained earnings
1,845,101

 
1,792,726

 
1,804,498

Accumulated other comprehensive loss, net
(79,905
)
 
(82,106
)
 
(66,416
)
Total shareholders’ equity
1,918,581

 
1,864,007

 
1,892,123

Total liabilities and shareholders’ equity
$
21,351,012

 
$
21,283,652

 
$
21,225,661

 * Unaudited
# Derived from 2012 Annual Report on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.

3


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended March 31
 
2013
 
2012
 
(thousands, except share and per share data, unaudited)
Interest income
 
 
 
Loans and leases
$
211,763

 
$
238,137

Investment securities:
 
 
 
U. S. Treasury
496

 
739

Government agency
3,326

 
4,332

Residential mortgage-backed securities
4,579

 
1,889

Corporate bonds

 
1,199

State, county and municipal
6

 
12

Other
77

 
131

Total investment securities interest and dividend income
8,484

 
8,302

Overnight investments
357

 
313

Total interest income
220,604

 
246,752

Interest expense
 
 
 
Deposits
10,313

 
16,472

Short-term borrowings
704

 
1,391

Long-term obligations
4,705

 
7,937

Total interest expense
15,722

 
25,800

Net interest income
204,882

 
220,952

Provision for loan and lease losses
(18,606
)
 
30,715

Net interest income after provision for loan and lease losses
223,488

 
190,237

Noninterest income
 
 
 
Cardholder and merchant services
23,557

 
22,450

Service charges on deposit accounts
14,999

 
14,846

Wealth management services
14,515

 
13,755

Fees from processing services
5,619

 
8,562

Securities gains (losses)
58

 
(45
)
Other service charges and fees
3,766

 
3,441

Mortgage income
3,788

 
2,924

Insurance commissions
2,980

 
2,756

ATM income
1,168

 
1,455

Adjustment for FDIC receivable for loss share agreements
(24,053
)
 
(26,796
)
Other
11,116

 
3,595

Total noninterest income
57,513

 
46,943

Noninterest expense
 
 
 
Salaries and wages
76,119

 
75,684

Employee benefits
25,019

 
20,249

Occupancy expense
18,809

 
18,607

Equipment expense
18,946

 
18,166

FDIC insurance expense
2,666

 
3,057

Foreclosure-related expenses
4,305

 
4,590

Other
48,491

 
42,978

Total noninterest expense
194,355

 
183,331

Income before income taxes
86,646

 
53,849

Income taxes
31,061

 
18,354

Net income
$
55,585

 
$
35,495

Average shares outstanding
9,618,985

 
10,283,842

Net income per share
$
5.78

 
$
3.45


See accompanying Notes to Consolidated Financial Statements.

4


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


 
Three months ended March 31
 
2013
 
2012
 
(thousands, unaudited)
Net income
$
55,585

 
$
35,495

 
 
 
 
Other comprehensive income
 
 
 
Unrealized gains on securities:
 
 
 
Change in unrealized securities gains arising during period
(1,418
)
 
(2,898
)
Deferred tax benefit
542

 
1,123

Reclassification adjustment for gains included in income before income taxes
(58
)
 

Deferred tax expense
23

 

Total change in unrealized gains on securities, net of tax
(911
)
 
(1,775
)
 
 
 
 
Change in fair value of cash flow hedges:
 
 
 
Change in unrecognized loss on cash flow hedges
2

 
(359
)
Deferred tax expense
(1
)
 
141

Reclassification adjustment for gains included in income before income taxes
813

 
749

Deferred tax benefit
(321
)
 
(296
)
Total change in unrecognized loss on cash flow hedges, net of tax
493

 
235

 
 
 
 
Change in pension obligation:
 
 
 
Reclassification adjustment for gains included in income before income taxes
4,304

 
2,790

Deferred tax expense
(1,685
)
 
(1,092
)
Total change in pension obligation, net of tax
2,619

 
1,698

 
 
 
 
Other comprehensive income
2,201

 
158

 
 
 
 
Total comprehensive income
$
57,786

 
$
35,653

 
 
 
 

See accompanying Notes to Consolidated Financial Statements.


5


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

 
 
Class A
Common Stock
 
Class B
Common Stock
 
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
(thousands, except share data, unaudited)
Balance at December 31, 2011
$
8,644

 
$
1,640

 
$
143,766

 
$
1,773,652

 
$
(66,574
)
 
$
1,861,128

Net income

 

 

 
35,495

 

 
35,495

Other comprehensive income, net of tax

 

 

 

 
158

 
158

Repurchase of 8,388 shares of Class B common stock

 
(9
)
 

 
(1,564
)
 

 
(1,573
)
Cash dividends ($0.30 per share)

 

 

 
(3,085
)
 

 
(3,085
)
Balance at March 31, 2012
$
8,644

 
$
1,631

 
$
143,766

 
$
1,804,498

 
$
(66,416
)
 
$
1,892,123

Balance at December 31, 2012
$
8,588

 
$
1,033

 
$
143,766

 
$
1,792,726

 
$
(82,106
)
 
$
1,864,007

Net income

 

 

 
55,585

 

 
55,585

Other comprehensive income, net of tax

 

 

 

 
2,201

 
2,201

Repurchase of 1,973 shares of Class A common stock
(2
)
 

 

 
(319
)
 

 
(321
)
Cash dividends ($0.30 per share)

 

 

 
(2,891
)
 

 
(2,891
)
Balance at March 31, 2013
$
8,586

 
$
1,033

 
$
143,766

 
$
1,845,101

 
$
(79,905
)
 
$
1,918,581

See accompanying Notes to Consolidated Financial Statements.


6


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
 
 
Three months ended March 31
 
2013
 
2012
 
(thousands, unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
55,585

 
$
35,495

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
(18,606
)
 
30,715

Deferred tax (benefit) expense
7,733

 
(5,692
)
Change in current taxes payable
31,625

 
22,857

Depreciation
17,994

 
16,620

Change in accrued interest payable
(2,700
)
 
(2,233
)
Change in income earned not collected
411

 
(10,190
)
Gain on sale of processing services, net
(4,085
)
 

Securities losses (gains)
(58
)
 
45

Origination of loans held for sale
(117,981
)
 
(135,897
)
Proceeds from sale of loans held for sale
121,523

 
158,391

Gain on sale of loans
(3,560
)
 
(3,412
)
Loss on sale of other real estate
1,350

 
1,495

Net amortization of premiums and discounts
(47,236
)
 
(35,480
)
FDIC receivable for loss share agreements
5,619

 
(18,274
)
Net change in other assets
(6,980
)
 
23,564

Net change in other liabilities
32,662

 
6,487

Net cash provided by operating activities
73,296

 
84,491

INVESTING ACTIVITIES
 
 
 
Net change in loans outstanding
269,428

 
277,719

Purchases of investment securities available for sale
(736,923
)
 
(1,681,584
)
Proceeds from maturities of investment securities held to maturity
113

 
134

Proceeds from maturities of investment securities available for sale
674,606

 
1,275,014

Proceeds from sales of investment securities available for sale
1,582

 

Net change in overnight investments
(511,052
)
 
(317,359
)
Cash received from the FDIC for loss share agreements
42,519

 
123,204

Proceeds from sale of other real estate
36,019

 
23,853

Additions to premises and equipment
(8,713
)
 
(26,610
)
Net cash used by investing activities
(232,421
)
 
(325,629
)
FINANCING ACTIVITIES
 
 
 
Net change in time deposits
(195,381
)
 
(306,338
)
Net change in demand and other interest-bearing deposits
174,277

 
488,556

Net change in short-term borrowings
4,597

 
62,771

Repayment of long-term obligations
(669
)
 
(37,781
)
Repurchase of common stock
(321
)
 
(1,573
)
Cash dividends paid
(2,891
)
 
(3,085
)
Net cash provided (used) by financing activities
(20,388
)
 
202,550

Change in cash and due from banks
(179,513
)
 
(38,588
)
Cash and due from banks at beginning of period
639,730

 
590,801

Cash and due from banks at end of period
$
460,217

 
$
552,213

CASH PAYMENTS FOR:
 
 
 
Interest
$
18,422

 
$
28,033

Income taxes
3,364

 
84

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized securities gains (losses)
$
(1,476
)
 
$
(2,898
)
Change in fair value of cash flow hedge
815

 
389

Change in pension obligation
4,304

 
2,790

Transfers of loans to other real estate
38,008

 
26,840


See accompanying Notes to Consolidated Financial Statements.

7


First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note A

Accounting Policies and Basis of Presentation


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

General

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q 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 statement of the consolidated financial position and consolidated results of operations have been made. The information contained in the financial statements and footnotes included in BancShares Annual Report on Form 10-K for the year ended December 31, 2012, should be referred to in connection with these unaudited interim consolidated financial statements.

BancShares evaluates all subsequent events prior to filing this Form 10-Q.

Reclassifications

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

Use of Estimates in the Preparation of Financial Statements

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

Goodwill Impairment

Annual impairment tests are conducted as of July 31 each year. Based on the third quarter 2012 impairment test, management concluded there was no impairment of goodwill. In addition to the annual testing requirement, impairment tests are performed for various other events including significant adverse changes in the business climate, considering various qualitative and quantitative factors to determine whether impairment exists.

Recent Accounting and Regulatory Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU ) 2013-01, “Balance Sheet”

This ASU's objective is to clarify that the scope of ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement.


8


BancShares is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The effective date is the same as the effective date of Update 2011-11. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.

FASB ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”

This ASU requires BancShares to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, BancShares is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.

For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. BancShares has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations. BancShares has included the required disclosures in Note L.

FASB ASU 2013-04, “Liabilities”

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

The guidance requires BancShares to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.

The amendments in this update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. BancShares will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.








9


Note B
Investments
The aggregate values of investment securities at March 31, 2013December 31, 2012, and March 31, 2012, along with unrealized gains and losses determined on an individual security basis are as follows:
 
 
Cost
 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
U. S. Treasury
$
749,284

 
$
474

 
$
1

 
$
749,757

Government agency
3,147,363

 
2,952

 
274

 
3,150,041

Residential mortgage-backed securities
1,348,765

 
10,849

 
1,512

 
1,358,102

Equity securities
543

 
19,860

 

 
20,403

State, county and municipal
546

 
1

 

 
547

Other
844

 
1

 
17

 
828

Total investment securities available for sale
$
5,247,345

 
$
34,137

 
$
1,804

 
$
5,279,678

December 31, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
823,241

 
$
403

 
$
12

 
$
823,632

Government agency
3,052,040

 
3,501

 
337

 
3,055,204

Residential mortgage-backed securities
1,315,211

 
14,787

 
341

 
1,329,657

Equity securities
543

 
15,822

 

 
16,365

State, county and municipal
546

 
4

 

 
550

Other
838

 

 
18

 
820

Total investment securities available for sale
$
5,192,419

 
$
34,517

 
$
708

 
$
5,226,228

March 31, 2012
 
 
 
 
 
 
 
U. S. Treasury
$
1,065,035

 
$
306

 
$
305

 
$
1,065,036

Government agency
2,859,197

 
1,228

 
5,040

 
2,855,385

Corporate bonds
225,214

 
1,214

 

 
226,428

Residential mortgage-backed securities
282,706

 
8,393

 
191

 
290,908

Equity securities
894

 
18,049

 

 
18,943

State, county and municipal
1,026

 
14

 
1

 
1,039

Total investment securities available for sale
$
4,434,072

 
$
29,204

 
$
5,537

 
$
4,457,739

Investment securities held to maturity
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,229

 
$
120

 
$
27

 
$
1,322

December 31, 2012
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,342

 
$
133

 
$
27

 
$
1,448

March 31, 2012
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
1,688

 
$
183

 
$
27

 
$
1,844

 
 
 
 
 
 
 
 

Investments in residential mortgage-backed securities primarily represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation.

Investments in corporate bonds represent debt securities issued by various financial institutions under the Temporary Liquidity Guarantee Program. These debt obligations were issued with the full faith and credit of the United States of America. The guarantee for these securities is triggered when an issuer defaults on a scheduled payment.

The following table provides the expected maturity distribution for residential mortgage-backed securities and the contractual maturity distribution of other investment securities as of the dates indicated. Callable securities are assumed to mature on their earliest call date.


10


 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Cost
 
Fair
value
 
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
2,350,896

 
$
2,352,328

 
$
2,288,556

 
$
2,289,859

 
$
2,750,247

 
$
2,748,710

One through five years
2,233,407

 
2,237,530

 
2,323,222

 
2,329,207

 
1,469,876

 
1,469,236

Five through 10 years
181,370

 
182,281

 
194,398

 
196,371

 
67,229

 
67,683

Over 10 years
481,129

 
487,136

 
385,700

 
394,426

 
145,826

 
153,167

Equity securities
543

 
20,403

 
543

 
16,365

 
894

 
18,943

Total investment securities available for sale
$
5,247,345

 
$
5,279,678

 
$
5,192,419

 
$
5,226,228

 
$
4,434,072

 
$
4,457,739

Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
Maturing in:
 
 
 
 
 
 
 
 
 
 
 
One through five years
$
1,132

 
$
1,188

 
$
1,242

 
$
1,309

 
$
379

 
$
393

Five through 10 years
18

 
10

 
18

 
11

 
1,201

 
1,306

Over 10 years
79

 
124

 
82

 
128

 
108

 
145

Total investment securities held to maturity
$
1,229

 
$
1,322

 
$
1,342

 
$
1,448

 
$
1,688

 
$
1,844

For each period presented, securities gains (losses) include the following:
 
 
Three months ended March 31
 
2013
 
2012
Gross gains on sales of investment securities available for sale
$
58

 
$

Gross losses on sales of investment securities available for sale

 

Other than temporary impairment loss on equity securities

 
(45
)
Total securities gains (losses)
$
58

 
$
(45
)


11


The following table provides information regarding securities with unrealized losses as of March 31, 2013, December 31, 2012, and March 31, 2012:
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
25,060

 
$
1

 
$

 
$

 
$
25,060

 
$
1

Government agency
548,618

 
274

 

 

 
548,618

 
274

Residential mortgage-backed securities
349,746

 
1,379

 
10,089

 
133

 
359,835

 
1,512

Other
828

 
17

 

 

 
828

 
17

Total
$
924,252

 
$
1,671

 
$
10,089

 
$
133

 
$
934,341

 
$
1,804

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$

 
$

 
$
16

 
$
27

 
$
16

 
$
27

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
$
120,045

 
$
12

 
$

 
$

 
$
120,045

 
$
12

Government agency
407,498

 
337

 

 

 
407,498

 
337

Residential mortgage-backed securities
135,880

 
214

 
9,433

 
127

 
145,313

 
341

Other
820

 
18

 

 

 
820

 
18

Total
$
664,243

 
$
581

 
$
9,433

 
$
127

 
$
673,676

 
$
708

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$

 
$

 
$
17

 
$
27

 
$
17

 
$
27

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
579,673

 
$
305

 
$

 
$

 
$
579,673

 
$
305

Government agency
2,143,742

 
5,040

 

 

 
2,143,742

 
5,040

Residential mortgage-backed securities
28,595

 
156

 
1,113

 
35

 
29,708

 
191

State, county and municipal
127

 
1

 
10

 

 
137

 
1

Total
$
2,752,137

 
$
5,502

 
$
1,123

 
$
35

 
$
2,753,260

 
$
5,537

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$

 
$

 
$
20

 
$
27

 
$
20

 
$
27

Investment securities with an aggregate fair value of $10,105 have had continuous unrealized losses for more than 12 months as of March 31, 2013, with an aggregate unrealized loss of $160. These 30 investments are residential mortgage-backed securities. None of the unrealized losses identified as of March 31, 2013, December 31, 2012, or March 31, 2012, relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. For all periods presented, BancShares had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.

12


Investment securities having an aggregate carrying value of $2,558,079 at March 31, 2013, $2,351,072 at December 31, 2012, and $2,540,463 at March 31, 2012, were pledged as collateral to secure public funds on deposit to secure certain short-term borrowings and for other purposes as required by law.

Note C
Loans and Leases
Loans and leases outstanding include the following as of the dates indicated:
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
Covered loans
$
1,621,327

 
$
1,809,235

 
$
2,183,869

Noncovered loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
300,497

 
309,190

 
346,557

Commercial mortgage
5,352,594

 
5,341,839

 
5,127,948

Other commercial real estate
176,456

 
160,980

 
150,316

Commercial and industrial
1,662,124

 
1,726,126

 
1,739,724

Lease financing
336,329

 
330,679

 
315,704

Other
194,186

 
125,681

 
149,792

Total commercial loans
8,022,186

 
7,994,495

 
7,830,041

Noncommercial:
 
 
 
 
 
Residential mortgage
834,879

 
822,889

 
793,612

Revolving mortgage
2,150,800

 
2,210,133

 
2,282,138

Construction and land development
115,628

 
131,992

 
132,677

Consumer
385,587

 
416,606

 
451,061

Total noncommercial loans
3,486,894

 
3,581,620

 
3,659,488

Total noncovered loans and leases
11,509,080

 
11,576,115

 
11,489,529

Total loans and leases
$
13,130,407

 
$
13,385,350

 
$
13,673,398

 


13


 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired at
acquisition
date
 
All other
covered loans
 
Total
Covered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
53,209

 
$
151,315

 
$
204,524

 
$
71,225

 
$
166,681

 
$
237,906

 
$
100,736

 
$
209,865

 
$
310,601

Commercial mortgage
101,397

 
847,055

 
948,452

 
107,281

 
947,192

 
1,054,473

 
122,876

 
1,072,665

 
1,195,541

Other commercial real estate
30,191

 
63,041

 
93,232

 
35,369

 
71,750

 
107,119

 
31,727

 
113,251

 
144,978

Commercial and industrial
6,149

 
39,544

 
45,693

 
3,932

 
45,531

 
49,463

 
17,397

 
75,864

 
93,261

Lease financing

 

 

 

 

 

 

 
45

 
45

Other

 
1,042

 
1,042

 

 
1,074

 
1,074

 

 
1,283

 
1,283

Total commercial loans
190,946

 
1,101,997

 
1,292,943

 
217,807

 
1,232,228

 
1,450,035

 
272,736

 
1,472,973

 
1,745,709

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
43,924

 
235,073

 
278,997

 
48,077

 
249,849

 
297,926

 
46,905

 
251,633

 
298,538

Revolving mortgage
9,788

 
27,351

 
37,139

 
9,606

 
29,104

 
38,710

 
14,125

 
35,891

 
50,016

Construction and land development
10,609

 
415

 
11,024

 
15,136

 
5,657

 
20,793

 
56,722

 
28,833

 
85,555

Consumer

 
1,224

 
1,224

 

 
1,771

 
1,771

 
1,453

 
2,598

 
4,051

Total noncommercial loans
64,321

 
264,063

 
328,384

 
72,819

 
286,381

 
359,200

 
119,205

 
318,955

 
438,160

Total covered loans
$
255,267

 
$
1,366,060

 
$
1,621,327

 
$
290,626

 
$
1,518,609

 
$
1,809,235

 
$
391,941

 
$
1,791,928

 
$
2,183,869



At March 31, 2013, $2,522,055 in noncovered loans were pledged to secure debt obligations, compared to $2,570,773 at December 31, 2012, and $2,398,476 at March 31, 2012.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial loans and leases, noncommercial loans and leases, and covered loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.

The credit quality indicators for commercial loans and leases and all covered loans and leases are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

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

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


14


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

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

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of noncovered, ungraded loans at March 31, 2013, relate to business credit cards and tobacco buyout loans classified as commercial and industrial loans. Business credit card loans with an outstanding balance of $78,041 at March 31, 2013, are subject to automatic charge off when they become 120 days past due in the same manner as unsecured consumer lines of credit. Tobacco buyout loans with an outstanding balance of $21,304 at March 31, 2013, are secured by assignments of receivables made pursuant to the Fair and Equitable Tobacco Reform Act of 2004. The credit risk associated with these loans is considered low as the payments that began in 2005 and continue through 2014 are made by the Commodity Credit Corporation, which is part of the United States Department of Agriculture.

The credit quality indicators for noncovered, noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.

The composition of the loans and leases outstanding at March 31, 2013, December 31, 2012, and March 31, 2012, by credit quality indicator is provided below:
 
 
Commercial noncovered loans and leases
Grade:
Construction  and land
development
 
Commercial
mortgage
 
Other
commercial real estate
 
Commercial  and
industrial
 
Lease financing
 
Other
 
Total commercial noncovered loans and leases
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
274,917

 
$
5,050,073

 
$
168,885

 
$
1,519,890

 
$
332,790

 
$
192,489

 
$
7,539,044

Special mention
13,878

 
149,904

 
1,771

 
15,121

 
1,084

 
1,391

 
183,149

Substandard
11,501

 
139,262

 
5,158

 
24,176

 
1,689

 
17

 
181,803

Doubtful
73

 
9,600

 
98

 
1,252

 
728

 

 
11,751

Ungraded
128

 
3,755

 
544

 
101,685

 
38

 
289

 
106,439

Total
$
300,497

 
$
5,352,594

 
$
176,456

 
$
1,662,124

 
$
336,329

 
$
194,186

 
$
8,022,186

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
274,480

 
$
5,018,677

 
$
151,549

 
$
1,564,862

 
$
325,626

 
$
124,083

 
$
7,459,277

Special mention
14,666

 
161,789

 
2,812

 
18,368

 
1,601

 
837

 
200,073

Substandard
18,761

 
145,980

 
5,038

 
24,059

 
1,663

 
756

 
196,257

Doubtful
952

 
12,822

 
98

 
1,693

 
771

 

 
16,336

Ungraded
331

 
2,571

 
1,483

 
117,144

 
1,018

 
5

 
122,552

Total
$
309,190

 
$
5,341,839

 
$
160,980

 
$
1,726,126

 
$
330,679

 
$
125,681

 
$
7,994,495

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
303,018

 
$
4,744,063

 
$
136,776

 
$
1,554,112

 
$
309,681

 
$
147,767

 
$
7,195,417

Special mention
20,097

 
243,495

 
6,805

 
35,497

 
3,336

 
2,018

 
311,248

Substandard
21,297

 
130,815

 
6,068

 
27,057

 
2,453

 

 
187,690

Doubtful
1,821

 
6,588

 
365

 
1,676

 

 

 
10,450

Ungraded
324

 
2,987

 
302

 
121,382

 
234

 
7

 
125,236

Total
$
346,557

 
$
5,127,948

 
$
150,316

 
$
1,739,724

 
$
315,704

 
$
149,792

 
$
7,830,041


15


 
Noncommercial noncovered loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total noncommercial
noncovered loans
March 31, 2013
 
 
 
 
 
 
 
 
 
Current
$
802,439

 
$
2,130,189

 
$
114,077

 
$
381,769

 
$
3,428,474

30-59 days past due
19,663

 
14,022

 
217

 
1,815

 
35,717

60-89 days past due
789

 
2,998

 
63

 
968

 
4,818

90 days or greater past due
11,988

 
3,591

 
1,271

 
1,035

 
17,885

Total
$
834,879

 
$
2,150,800

 
$
115,628

 
$
385,587

 
$
3,486,894

December 31, 2012
 
 
 
 
 
 
 
 
 
Current
$
786,626

 
$
2,190,186

 
$
128,764

 
409,218

 
$
3,514,794

30-59 days past due
15,711

 
12,868

 
1,941

 
4,405

 
34,925

60-89 days past due
7,559

 
3,200

 
490

 
1,705

 
12,954

90 days or greater past due
12,993

 
3,879

 
797

 
1,278

 
18,947

Total
$
822,889

 
$
2,210,133

 
$
131,992

 
$
416,606

 
$
3,581,620

March 31, 2012
 
 
 
 
 
 
 
 
 
Current
$
763,411

 
$
2,274,091

 
$
130,561

 
$
446,421

 
$
3,614,484

30-59 days past due
14,001

 
2,349

 
808

 
1,885

 
19,043

60-89 days past due
2,812

 
1,212

 
446

 
1,028

 
5,498

90 days or greater past due
13,388

 
4,486

 
862

 
1,727

 
20,463

Total
$
793,612

 
$
2,282,138

 
$
132,677

 
$
451,061

 
$
3,659,488

 
 
Covered loans
Grade:
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Lease
financing
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
noncommercial
 
Consumer
and other
 
Total covered
loans
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
11,396

 
$
343,535

 
$
31,031

 
$
17,131

 
$

 
$
163,937

 
$
27,657

 
$
262

 
$
1,492

 
$
596,441

Special mention
25,886

 
233,026

 
12,832

 
10,822

 

 
14,687

 
1,926

 

 
30

 
299,209

Substandard
94,938

 
298,647

 
37,862

 
12,060

 

 
75,082

 
7,556

 
9,326

 
240

 
535,711

Doubtful
69,782

 
72,572

 
11,507

 
5,366

 

 
3,255

 

 
1,436

 

 
163,918

Ungraded
2,522

 
672

 

 
314

 

 
22,036

 

 

 
504

 
26,048

Total
$
204,524

 
$
948,452

 
$
93,232

 
$
45,693

 
$

 
$
278,997

 
$
37,139

 
$
11,024

 
$
2,266

 
$
1,621,327

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
17,010

 
$
376,974

 
$
33,570

 
$
19,451

 
$

 
$
172,165

 
$
29,540

 
$
334

 
$
1,617

 
$
650,661

Special mention
25,734

 
259,264

 
17,518

 
12,465

 

 
14,863

 
1,736

 

 
34

 
331,614

Substandard
105,061

 
344,542

 
44,335

 
14,698

 

 
83,193

 
7,434

 
17,190

 
239

 
616,692

Doubtful
87,445

 
73,016

 
11,696

 
2,757

 

 
4,268

 

 
3,269

 
117

 
182,568

Ungraded
2,656

 
677

 

 
92

 

 
23,437

 

 

 
838

 
27,700

Total
$
237,906

 
$
1,054,473

 
$
107,119

 
$
49,463

 
$

 
$
297,926

 
$
38,710

 
$
20,793

 
$
2,845

 
$
1,809,235

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
31,445

 
$
392,233

 
$
56,689

 
$
31,768

 
$
45

 
$
173,640

 
$
35,684

 
$
7,020

 
$
2,478

 
$
731,002

Special mention
89,243

 
335,020

 
26,736

 
21,376

 

 
18,054

 
802

 
14,263

 
546

 
506,040

Substandard
86,750

 
382,134

 
51,918

 
24,905

 

 
70,545

 
11,153

 
53,919

 
1,082

 
682,406

Doubtful
99,747

 
85,993

 
9,635

 
15,212

 

 
9,934

 
2,377

 
10,353

 
816

 
234,067

Ungraded
3,416

 
161

 

 

 

 
26,365

 

 

 
412

 
30,354

Total
$
310,601

 
$
1,195,541

 
$
144,978

 
$
93,261

 
$
45

 
$
298,538

 
$
50,016

 
$
85,555

 
$
5,334

 
$
2,183,869


16



The aging of the outstanding loans and leases, by class, at March 31, 2013, December 31, 2012, and March 31, 2012, (excluding loans and leases acquired with deteriorated credit quality) is provided in the table below. The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current due to various grace periods that allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.

 
30-59 days
past due
 
60-89 days
past due
 
90 days or greater
 
Total past
due
 
Current
 
Total loans
and leases
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Noncovered loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
782

 
$
7,943

 
$
1,082

 
$
9,807

 
$
290,690

 
$
300,497

Commercial mortgage
19,321

 
5,873

 
17,300

 
42,494

 
5,310,100

 
5,352,594

Other commercial real estate
346

 
503

 
1,282

 
2,131

 
174,325

 
176,456

Commercial and industrial
7,895

 
1,878

 
2,406

 
12,179

 
1,649,945

 
1,662,124

Lease financing
635

 
230

 
621

 
1,486

 
334,843

 
336,329

Other
42

 

 

 
42

 
194,144

 
194,186

Residential mortgage
19,663

 
789

 
11,988

 
32,440

 
802,439

 
834,879

Revolving mortgage
14,022

 
2,998

 
3,591

 
20,611

 
2,130,189

 
2,150,800

Construction and land development - noncommercial
217

 
63

 
1,271

 
1,551

 
114,077

 
115,628

Consumer
1,815

 
968

 
1,035

 
3,818

 
381,769

 
385,587

Total noncovered loans and leases
$
64,738

 
$
21,245

 
$
40,576

 
$
126,559

 
$
11,382,521

 
$
11,509,080

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Noncovered loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
927

 
$

 
$
7,878

 
$
8,805

 
$
300,385

 
$
309,190

Commercial mortgage
21,075

 
3,987

 
20,318

 
45,380

 
5,296,459

 
5,341,839

Other commercial real estate
387

 
1,240

 
1,034

 
2,661

 
158,319

 
160,980

Commercial and industrial
6,205

 
1,288

 
1,614

 
9,107

 
1,717,019

 
1,726,126

Lease financing
991

 
138

 
621

 
1,750

 
328,929

 
330,679

Other
18

 
13

 

 
31

 
125,650

 
125,681

Residential mortgage
15,711

 
7,559

 
12,993

 
36,263

 
786,626

 
822,889

Revolving mortgage
12,868

 
3,200

 
3,879

 
19,947

 
2,190,186

 
2,210,133

Construction and land development - noncommercial
1,941

 
490

 
797

 
3,228

 
128,764

 
131,992

Consumer
4,405

 
1,705

 
1,278

 
7,388

 
409,218

 
416,606

Total noncovered loans and leases
$
64,528

 
$
19,620

 
$
50,412

 
$
134,560

 
$
11,441,555

 
$
11,576,115

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Noncovered loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
2,030

 
$
1,366

 
$
3,288

 
$
6,684

 
$
339,873

 
$
346,557

Commercial mortgage
27,947

 
6,548

 
13,939

 
48,434

 
5,079,514

 
5,127,948

Other commercial real estate
787

 
43

 
193

 
1,023

 
149,293

 
150,316

Commercial and industrial
5,522

 
1,006

 
1,754

 
8,282

 
1,731,442

 
1,739,724

Lease financing
824

 
99

 
1,269

 
2,192

 
313,512

 
315,704

Other

 

 

 

 
149,792

 
149,792

Residential mortgage
14,001

 
2,812

 
13,388

 
30,201

 
763,411

 
793,612

Revolving mortgage
2,349

 
1,212

 
4,486

 
8,047

 
2,274,091

 
2,282,138

Construction and land development - noncommercial
808

 
446

 
862

 
2,116

 
130,561

 
132,677

Consumer
1,885

 
1,028

 
1,727

 
4,640

 
446,421

 
451,061

Total noncovered loans and leases
$
56,153

 
$
14,560

 
$
40,906

 
$
111,619

 
$
11,377,910

 
$
11,489,529



17


The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at March 31, 2013, December 31, 2012, and March 31, 2012, (excluding loans and leases acquired with deteriorated credit quality) are as follows:
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
 
Nonaccrual
loans and
leases
 
Loans and
leases > 90
days and
accruing
Noncovered loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
8,506

 
$
158

 
$
14,930

 
$
541

 
$
11,995

 
$
182

Commercial mortgage
46,722

 
3,565

 
48,869

 
1,671

 
31,222

 
1,180

Commercial and industrial
10,419

 
1,154

 
8,635

 
466

 
8,148

 
599

Lease financing
1,182

 
3

 
1,075

 

 
146

 
1,268

Other commercial real estate
2,361

 

 
2,319

 

 
783

 

Construction and land development - noncommercial
848

 
423

 
668

 
111

 

 
862

Residential mortgage
12,509

 
2,380

 
12,603

 
3,337

 
14,069

 
3,542

Revolving mortgage

 
3,589

 

 
3,877

 

 
4,467

Consumer
36

 
1,029

 
746

 
1,269

 

 
1,728

Total noncovered loans and leases
$
82,583

 
$
12,301

 
$
89,845

 
$
11,272

 
$
66,363

 
$
13,828

Acquired Loans
The following table provides changes in the carrying value of acquired loans impaired at acquisition date and all other acquired loans during the three months ended March 31, 2013, and 2012:
 
 
2013
 
2012
 
Impaired at
acquisition
date
 
All other
acquired loans
 
Impaired as
acquisition
date
 
All other
acquired loans
Balance, January 1
$
290,626

 
$
1,518,609

 
$
458,305

 
$
1,903,847

Reductions for repayments, foreclosures and changes in carrying value, net of accretion
(35,359
)
 
(152,549
)
 
(66,364
)
 
(111,919
)
Balance, March 31
$
255,267

 
$
1,366,060

 
$
391,941

 
$
1,791,928

Outstanding principal balance at March 31
$
858,645

 
$
1,838,709

 
$
1,222,862

 
$
2,395,860


The carrying value of loans on the cost recovery method was $43,882 at March 31, 2013, $74,479 at December 31, 2012, and $171,951 at March 31, 2012. Prior to the third quarter of 2012, the cost recovery method was being applied to nonperforming loans acquired from four of the six FDIC-assisted transactions. During the third and fourth quarters of 2012, those loans were installed on an automated acquired loan accounting system that estimated cash flows for all loans. Based on these improved cash flow estimates, loans that were previously accounted for under the cost recovery method began to accrete yield. The cost recovery method continues to be applied to loans when the timing of the cash flows is no longer reasonably estimable due to subsequent nonperformance by the borrower or uncertainty in the ultimate disposition of the asset.

For acquired loans, improved cash flow estimates and receipt of unscheduled loan payments result in the reclassification of nonaccretable difference to accretable yield. During the third and fourth quarters of 2012, the improved ability to estimate cash flows due to expanded use of an acquired loan accounting system also contributed to significant increases in accretable yield. Accretable yield resulting from the improved ability to estimate future cash flows generally does not represent amounts previously identified as nonaccretable difference.

 The following table documents changes to the amount of accretable yield for the first three months of 2013 and 2012. Other, net includes reclassifications from nonaccretable difference to accretable yield and changes to accretable yield attributable to revised cash flow estimates.

18


 
2013
 
2012
Balance, January 1
$
539,564

 
$
276,690

Accretion
(79,886
)
 
(64,896
)
Disposals
(485
)
 

Other, net
26,742

 
73,150

Balance, March 31
$
485,935

 
$
284,944



Note D
Allowance for Loan and Lease Losses
Activity in the allowance for loan and lease losses, ending balances of loans and leases and related allowance by class of loans is summarized as follows:
 
Construction
and Land
Development
- Commercial
 
Commercial
Mortgage
 
Other
Commercial
Real Estate
 
Commercial
and Industrial
 
Lease
Financing
 
Other
 
Residential
Mortgage
 
Revolving
Mortgage
 
Construction
and Land
Development
- Non-
commercial
 
Consumer
 
Non-
specific
 
Total
Noncovered Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
6,031

 
$
70,927

 
$
2,059

 
$
23,352

 
$
3,521

 
$
1,175

 
$
3,836

 
$
25,185

 
$
1,721

 
$
25,389

 
$
15,850

 
$
179,046

Charge-offs
(254
)
 
(654
)
 
(54
)
 
(1,258
)
 

 

 
(818
)
 
(2,188
)
 
(245
)
 
(2,596
)
 

 
(8,067
)
Recoveries
368

 
8

 
10

 
369

 

 

 
39

 
71

 
56

 
630

 

 
1,551

Provision
(1,834
)
 
2,536

 
(100
)
 
500

 
22

 
315

 
733

 
1,431

 
(113
)
 
604

 
(78
)
 
4,016

Balance at March 31
$
4,311

 
$
72,817

 
$
1,915

 
$
22,963

 
$
3,543

 
$
1,490

 
$
3,790

 
$
24,499

 
$
1,419

 
$
24,027

 
$
15,772

 
$
176,546

Three months ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
5,467

 
$
67,486

 
$
2,169

 
$
23,723

 
$
3,288

 
$
1,315

 
$
8,879

 
$
27,045

 
$
1,427

 
$
25,962

 
$
14,122

 
$
180,883

Charge-offs
(5,729
)
 
(2,464
)
 
(142
)
 
(1,447
)
 
(191
)
 

 
(1,035
)
 
(2,940
)
 
(676
)
 
(3,008
)
 

 
(17,632
)
Recoveries
42

 
996

 

 
250

 
31

 
4

 
42

 
216

 
7

 
432

 

 
2,020

Provision
6,828

 
6,137

 
221

 
1,720

 
192

 
(38
)
 
1,221

 
2,590

 
639

 
902

 
700

 
21,112

Balance at March 31
$
6,608

 
$
72,155

 
$
2,248

 
$
24,246

 
$
3,320

 
$
1,281

 
$
9,107

 
$
26,911

 
$
1,397

 
$
24,288

 
$
14,822

 
$
186,383


19


 
Construction
and Land
Development
- Commercial
 
Commercial
Mortgage
 
Other
Commercial
Real Estate
 
Commercial
and Industrial
 
Lease
Financing
 
Other
 
Residential
Mortgage
 
Revolving
Mortgage
 
Construction
and Land
Development
- Non-
commercial
 
Consumer
 
Non-
specific
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
588

 
$
10,405

 
$
141

 
$
3,159

 
$
223

 
$

 
$
694

 
$
44

 
$
82

 
$
179

 
$

 
$
15,515

ALLL for loans and leases collectively evaluated for impairment
3,723

 
62,412

 
1,774

 
19,804

 
3,320

 
1,490

 
3,096

 
24,455

 
1,337

 
23,848

 

 
145,259

Nonspecific ALLL

 

 

 

 

 

 

 

 

 

 
15,772

 
15,772

Total allowance for loan and lease losses
$
4,311

 
$
72,817

 
$
1,915

 
$
22,963

 
$
3,543

 
$
1,490

 
$
3,790

 
$
24,499

 
$
1,419

 
$
24,027

 
$
15,772

 
$
176,546

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
2,469

 
$
11,697

 
$
298

 
$
2,133

 
$
202

 
$
53

 
$
959

 
$
1

 
$
287

 
$
256

 
$

 
$
18,355

ALLL for loans and leases collectively evaluated for impairment
3,562

 
59,230

 
1,761

 
21,219

 
3,319

 
1,122

 
2,877

 
25,184

 
1,434

 
25,133

 

 
144,841

Nonspecific ALLL

 

 

 

 

 

 

 

 

 

 
15,850

 
15,850

Total allowance for loan and lease losses
$
6,031

 
$
70,927

 
$
2,059

 
$
23,352

 
$
3,521

 
$
1,175

 
$
3,836

 
$
25,185

 
$
1,721

 
$
25,389

 
$
15,850

 
$
179,046

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
2,605

 
$
6,662

 
$
256

 
$
838

 
$
19

 
$

 
$
782

 
$

 
$
145

 
$
42

 
$

 
$
11,349

ALLL for loans and leases collectively evaluated for impairment
4,003

 
65,493

 
1,992

 
23,408

 
3,301

 
1,281

 
8,325

 
26,911

 
1,252

 
24,246

 

 
160,212

Nonspecific ALLL

 

 

 

 

 

 

 

 

 

 
14,822

 
14,822

Total allowance for loan and lease losses
$
6,608

 
$
72,155

 
$
2,248

 
$
24,246

 
$
3,320

 
$
1,281

 
$
9,107

 
$
26,911

 
$
1,397

 
$
24,288

 
$
14,822

 
$
186,383

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
10,353

 
$
134,707

 
$
3,413

 
$
22,601

 
$
401

 
$

 
$
19,720

 
$
5,471

 
$
866

 
$
1,683

 
$

 
$
199,215

Loans and leases collectively evaluated for impairment
290,144

 
5,217,887

 
173,043

 
1,639,523

 
335,928

 
194,186

 
815,159

 
2,145,329

 
114,762

 
383,904

 

 
11,309,865

Total loan and leases
$
300,497

 
$
5,352,594

 
$
176,456

 
$
1,662,124

 
$
336,329

 
$
194,186

 
$
834,879

 
$
2,150,800

 
$
115,628

 
$
385,587

 
$

 
$
11,509,080

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
17,075

 
$
133,804

 
$
3,375

 
$
22,619

 
$
804

 
$
707

 
$
15,836

 
$
4,203

 
$
1,321

 
$
2,509

 
$

 
$
202,253

Loans and leases collectively evaluated for impairment
292,115

 
5,208,035

 
157,605

 
1,703,507

 
329,875

 
124,974

 
807,053

 
2,205,930

 
130,671

 
414,097

 

 
11,373,862

Total loan and leases
$
309,190

 
$
5,341,839

 
$
160,980

 
$
1,726,126

 
$
330,679

 
$
125,681

 
$
822,889

 
$
2,210,133

 
$
131,992

 
$
416,606

 
$

 
$
11,576,115

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
21,621

 
$
95,265

 
$
2,721

 
$
17,261

 
$
375

 
$

 
$
12,772

 
$

 
$
3,345

 
$
915

 
$

 
$
154,275

Loans and leases collectively evaluated for impairment
324,936

 
5,032,683

 
147,595

 
1,722,463

 
315,329

 
149,792

 
780,840

 
2,282,138

 
129,332

 
450,146

 

 
11,335,254

Total loan and leases
$
346,557

 
$
5,127,948

 
$
150,316

 
$
1,739,724

 
$
315,704

 
$
149,792

 
$
793,612

 
$
2,282,138

 
$
132,677

 
$
451,061

 
$

 
$
11,489,529


20



 
Construction
and Land
Development -
Commercial
 
Commercial
Mortgage
 
Other
Commercial
Real Estate
 
Commercial
and
Industrial
 
Lease
Financing
 
Residential
Mortgage
 
Revolving
Mortgage
 
Construction
and Land
Development -
Non-commercial
 
Consumer
and Other
 
Total
Covered Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
31,186

 
$
50,275

 
$
11,234

 
$
8,897

 
$

 
$
19,837

 
$
9,754

 
$
8,287

 
$
502

 
$
139,972

Charge-offs
(4,733
)
 
(9,898
)
 
(931
)
 
(1,254
)
 

 
(729
)
 
(114
)
 
(3,218
)
 

 
(20,877
)
Recoveries

 

 

 

 

 

 

 

 

 

Provision
(13,147
)
 
(2,084
)
 
(5,131
)
 
4,233

 

 
(1,505
)
 
(2,505
)
 
(2,313
)
 
(170
)
 
(22,622
)
Balance at March 31
$
13,306

 
$
38,293

 
$
5,172

 
$
11,876

 
$

 
$
17,603

 
$
7,135

 
$
2,756

 
$
332

 
$
96,473

Three months ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
16,693

 
$
39,557

 
$
16,862

 
$
5,500

 
$
13

 
$
5,433

 
$
77

 
$
4,652

 
$
474

 
$
89,261

Charge-offs
(1,387
)
 
(6,211
)
 

 
(3,189
)
 

 
(1,955
)
 

 

 
(5
)
 
(12,747
)
Recoveries

 

 

 

 

 

 

 

 

 

Provision
(2,570
)
 
6,398

 
(5,712
)
 
11,417

 
(10
)
 
1,254

 
950

 
(1,932
)
 
(192
)
 
9,603

Balance at March 31
$
12,736

 
$
39,744

 
$
11,150

 
$
13,728

 
$
3

 
$
4,732

 
$
1,027

 
$
2,720

 
$
277

 
$
86,117

Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
$
13,306

 
$
38,293

 
$
5,172

 
$
11,876

 
$

 
$
17,603

 
$
7,135

 
$
2,756

 
$
332

 
$
96,473

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
31,186

 
50,275

 
11,234

 
8,897

 

 
19,837

 
9,754

 
8,287

 
502

 
139,972

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases acquired with deteriorated credit quality
12,736

 
39,744

 
11,150

 
13,728

 
3

 
4,732

 
1,027

 
2,720

 
277

 
86,117

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
204,524

 
948,452

 
93,232

 
45,693

 

 
278,997

 
37,139

 
11,024

 
2,266

 
1,621,327

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
237,906

 
1,054,473

 
107,119

 
49,463

 

 
297,926

 
38,710

 
20,793

 
2,845

 
1,809,235

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
$
310,601

 
$
1,195,541

 
$
144,978

 
$
93,261

 
$
45

 
$
298,538

 
$
50,016

 
$
85,555

 
$
5,334

 
$
2,183,869





21



The following tables provide information on noncovered impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group, including interest income recognized in the period during which the loans and leases were considered impaired.
 
 
With a
recorded
allowance
 
With no
recorded
allowance
 
Total
 
Unpaid
principal
balance
 
Related
allowance
recorded
March 31, 2013
 
 
 
 
 
 
 
 
 
Impaired noncovered loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,333

 
$
7,949

 
$
9,282

 
$
20,303

 
$
458

Commercial mortgage
32,248

 
70,739

 
102,987

 
105,270

 
7,896

Other commercial real estate
528

 
2,620

 
3,148

 
3,203

 
101

Commercial and industrial
7,055

 
11,465

 
18,520

 
19,098

 
2,972

Lease financing
349

 

 
349

 
349

 
215

Residential mortgage
9,465

 
7,820

 
17,285

 
17,921

 
566

Revolving mortgage
1,925

 
3,546

 
5,471

 
5,471

 
44

Construction and land development - noncommercial
866

 

 
866

 
865

 
81

Consumer
1,683

 

 
1,683

 
1,683

 
179

Total impaired noncovered loans and leases
$
55,452

 
$
104,139

 
$
159,591

 
$
174,163

 
$
12,512

December 31, 2012
 
 
 
 
 
 
 
 
 
Impaired noncovered loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
5,941

 
$
10,116

 
$
16,057

 
$
31,879

 
$
2,340

Commercial mortgage
39,648

 
72,160

 
111,808

 
114,351

 
10,628

Other commercial real estate
1,425

 
1,823

 
3,248

 
3,348

 
279

Commercial and industrial
7,429

 
11,371

 
18,800

 
19,196

 
1,949

Lease financing
665

 
81

 
746

 
746

 
194

Other

 
707

 
707

 
707

 
53

Residential mortgage
9,346

 
4,240

 
13,586

 
13,978

 
832

Revolving mortgage
1,238

 
2,965

 
4,203

 
4,203

 
1

Construction and land development - noncommercial
1,162

 
158

 
1,320

 
1,321

 
287

Consumer
1,609

 
900

 
2,509

 
2,509

 
256

Total impaired noncovered loans and leases
$
68,463

 
$
104,521

 
$
172,984

 
$
192,238

 
$
16,819

March 31, 2012
 
 
 
 
 
 
 
 
 
Impaired noncovered loans and leases
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
19,768

 
$

 
$
19,768

 
$
33,430

 
$
2,487

Commercial mortgage
54,593

 
8,773

 
63,366

 
64,551

 
4,915

Other commercial real estate
1,521

 

 
1,521

 
1,521

 
196

Commercial and industrial
6,797

 
5,801

 
12,598

 
12,598

 
574

Lease financing
79

 

 
79

 
79

 
4

Residential mortgage
10,438

 

 
10,438

 
10,438

 
674

Construction and land development - noncommercial
3,345

 

 
3,345

 
3,345

 
145

Consumer
915

 

 
915

 
915

 
42

Total impaired noncovered loans and leases
$
97,456

 
$
14,574

 
$
112,030

 
$
126,877

 
$
9,037


At March 31, 2013, covered loans which have had an adverse change in expected cash flows since the date of acquisition equaled $739,900, for which $96,473 in related allowance for loan losses has been recorded.  At March 31, 2012, covered loans which have had an adverse change in expected cash flows since the date of acquisition equaled $1,892,721, for which $86,117 in related allowance for loan losses has been recorded. 


22


 
YTD
Average
Balance
 
YTD Interest Income Recognized
Three months ended March 31, 2013
 
 
 
Noncovered impaired loans and leases:
 
 
 
Construction and land development - commercial
$
9,284

 
$
112

Commercial mortgage
103,848

 
1,425

Other commercial real estate
3,179

 
45

Commercial and industrial
18,997

 
266

Lease financing
355

 
6

Residential mortgage
17,330

 
228

Revolving mortgage
5,472

 
25

Construction and land development - noncommercial
866

 
11

Consumer
1,683

 
5

Total noncovered impaired loans and leases
$
161,014

 
$
2,123

Three months ended March 31, 2012
 
 
 
Noncovered impaired loans and leases:
 
 
 
Construction and land development - commercial
$
23,129

 
$
58

Commercial mortgage
64,206

 
530

Other commercial real estate
2,050

 
15

Commercial and industrial
12,466

 
66

Lease financing
201

 
1

Residential mortgage
10,107

 
90

Construction and land development - noncommercial
3,510

 
23

Consumer
954

 
4

Total noncovered impaired loans and leases
$
116,623

 
$
787

 
 
 
 



23


Troubled Debt Restructurings

The following tables provide the types of troubled debt restructurings (TDRs) made during the three months ended March 31, 2013, and 2012, as well as a summary of loans that were modified as a TDR during the 12 months ended March 31, 2013, and 2012 that subsequently defaulted during the three months ended March 31, 2013, and 2012.

.
 
Three months ended March 31, 2013
 
Three months ended March 31, 2012
 
 
All Restructurings
 
Restructurings with payment default
 
All Restructurings
 
Restructurings with payment default
 
 
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
 
Noncovered loans
 
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
1
$
356

 
$

 
10
$
4,625

 
1
$
1,080

 
Commercial and industrial

 

 
1
531

 

 
Consumer

 

 
1
900

 

 
Total interest only
1
356

 

 
12
6,056

 
1
1,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
1
7,169

 

 
Commercial mortgage
6
2,117

 
1
483

 
13
3,692

 
4
1,452

 
Commercial and industrial
1
186

 

 
3
282

 
1
59

 
Lease financing

 

 
2
73

 

 
Residential mortgage
4
683

 

 
5
805

 
1
167

 
Construction and land development - noncommercial

 

 
1
2,001

 
1
395

 
Total loan term extension
11
2,986

 
1
483

 
25
14,022

 
7
2,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
1
231

 
2
763

 
Commercial mortgage
3
2,556

 
1
1,024

 
2
1,956

 
1
122

 
Commercial and industrial
1
17

 
1
116

 
764

 

 
Residential mortgage
5
675

 

 
1
878

 

 
Consumer
5
1,490

 

 
3

 

 
Total below market interest rate
14
4,738

 
2
1,140

 
7
3,829

 
3
885

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2
299

 

 

 
 
Revolving mortgage
24
1,878

 
5
233

 

 
 
Total discharged from bankruptcy
26
2,177

 
5
233

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other concession
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage

 

 
1
168

 

 
Commercial and industrial

 

 
1
23

 

 
Total other concession

 

 
2
191

 

 
Total noncovered restructurings
52
$
10,257

 
8
$
1,856

 
46
$
24,098

 
11
$
4,038

 


24


 
Three months ended March 31, 2013
 
Three months ended March 31, 2012
 
 
All Restructurings
 
Restructurings with payment default
 
All Restructurings
 
Restructurings with payment default
 
 
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
 
Covered loans
 
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$

 
$

 
1
$
133

 
$

 
Commercial mortgage
2
1,991

 
1
291

 

 

 
Total interest only
2
1,991

 
2
388

 
1
133

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

 

 
2
161

 

 
Commercial mortgage

 

 
1
480

 

 
Residential mortgage

 

 
1
49

 

 
Total loan term extension

 

 
4
690

 
1
145

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1
309

 

 
10
1,794

 

 
Commercial mortgage
1
2,946

 
3
3,222

 
7
9,194

 
1
2,449

 
Commercial and industrial
2
458

 

 
3
260

 

 
Residential mortgage
2
726

 
2
726

 
7
1,557

 
2
915

 
Total below market interest rate
6
4,439

 
5
3,948

 
27
12,805

 
4
3,435

 
Total covered restructurings
8
$
6,430

 
7
$
4,336

 
32
$
13,628

 
5
$
3,580

 

For the three months ended March 31, 2013, the recorded investment in troubled debt restructurings subsequent to modification was not materially impacted by the modification since forgiveness of principal is not a restructuring option frequently used by BancShares.

Total troubled debt restructurings at March 31, 2013, equaled $320,642, of which $182,411 were covered and $138,231 were noncovered. Troubled debt restructurings at December 31, 2012, totaled $333,170, which consisted of $193,207 covered by loss share agreements and $139,963 that were noncovered. At March 31, 2012, total troubled debt restructurings were $318,323 of which $165,857 were covered by loss share agreements and $152,466 were noncovered.

The majority of troubled debt restructurings are included in the special mention, substandard, or doubtful grading categories which results in more elevated loss expectations when determining the expected cash flows that are used to determine the allowance for loan losses associated with these loans. When a restructured loan subsequently defaults, it is evaluated and downgraded if appropriate. The more severely graded the loan, the lower the estimated expected cash flows and the greater the allowance recorded. Further, troubled debt restructurings over $500 and graded substandard or lower are evaluated individually for impairment through review of collateral values.


25


Note E
Other Real Estate Owned

The following table explains changes in other real estate owned during the three months ended March 31, 2013, and 2012.

 
Covered
 
Not covered
 
Total
Balance at December 31, 2011
$
148,599

 
$
50,399

 
$
198,998

Additions
20,532

 
6,308

 
26,840

Sales
(17,221
)
 
(8,157
)
 
(25,378
)
Writedowns
(9,492
)
 
(458
)
 
(9,950
)
Balance at March 31, 2012
$
142,418

 
$
48,092

 
$
190,510

Balance at December 31, 2012
$
102,577

 
$
43,513

 
$
146,090

Additions
29,370

 
8,638

 
38,008

Sales
(27,316
)
 
(6,223
)
 
(33,539
)
Writedowns
(2,730
)
 
(1,100
)
 
(3,830
)
Balance at March 31, 2013
$
101,901

 
$
44,828

 
$
146,729




Note F
Receivable from the FDIC for Loss Share Agreements

The following table provides changes in the receivable from the FDIC for the three-month periods ended March 31, 2013, and 2012:
 
 
Three months ended March 31
 
 
2013
 
2012
 
Balance at beginning of period
$
270,192

 
$
617,377

 
Accretion of discounts and premiums, net
(26,112
)
 
(20,063
)
 
Receipt of payments from FDIC
(42,519
)
 
(123,204
)
 
Post-acquisition and other adjustments, net
(5,619
)
 
18,274

 
Balance at end of period
$
195,942

 
$
492,384

 

The receivable from the FDIC for loss share agreements is measured separately from the related covered assets and is recorded at fair value at the acquisition date using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. See Note J for information related to BancShares' recorded payable to FDIC for loss share agreements.

Post-acquisition adjustments represent the net change in loss estimates related to covered loans and OREO as a result of changes in expected cash flows and the allowance for loan and lease losses related to covered loans. For loans covered by loss share agreements, subsequent decreases in the amount expected to be collected from the borrower or collateral liquidation result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses and a proportional adjustment to the receivable from the FDIC for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected from the borrower or collateral liquidation result in the reversal of any previously recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the receivable from the FDIC, or prospective adjustment to the accretable yield and the related receivable from the FDIC if no provision for loan and lease losses had been recorded previously. Other adjustments include those resulting from unexpected recoveries of amounts previously charged-off.


26


Note G
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 flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares could realize in a current market exchange.

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 of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 values are based on quoted prices for identical instruments in active markets.
Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 values are generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:

Investment securities. Investment securities are measured based on quoted market prices, when available. For certain residential mortgage-backed securities and state, county and municipal securities, fair values are determined using broker prices based on recent sales of similar securities. The inputs used in the fair value measurement of investment securities are considered level 1 or level 2 inputs. The details of investment securities available for sale and the corresponding level of inputs are provided in the table of assets measured at fair value on a recurring basis.

Loans held for sale. Fair value for loans held for sale is generally based on market prices for loans with similar characteristics or external valuations. The inputs used in the fair value measurements for loans held for sale are considered level 2 inputs.

Loans and leases. For variable rate loans, carrying value is a reasonable estimate of fair value. For fixed rate loans, fair values are 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. Additional valuation adjustments are made for liquidity and credit risk. The inputs used in the fair value measurements for loans and leases are considered level 3 inputs.

Receivable from the FDIC for loss share agreements. Fair value is estimated based on discounted future cash flows using current discount rates. Due to post-acquisition improvements in expected losses, significant portions of the FDIC receivable will be recovered through amortization of the receivable over the remaining life of the loss share agreement rather than by cash flows from the FDIC. The estimated amounts to be amortized in future periods have no fair value. The inputs used in the fair value measurements for the receivable from the FDIC are considered level 3 inputs. The FDIC loss share agreements are not transferable and, accordingly, there is no market for this receivable.

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.

Preferred stock issued under the TARP program. Preferred securities issued under the Troubled Asset Recovery Program are recorded at cost and are evaluated quarterly for impairment based on the ultimate recoverability of the purchase price. The fair value of these securities is derived from a third-party proprietary model that is considered to be a level 3 input.


27


Deposits. For non-time deposits and variable rate time deposits, carrying value is a reasonable estimate of fair value. The fair value of fixed rate 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 measurements for deposits are considered level 2 inputs.    

Long-term obligations. For fixed rate trust preferred securities, the fair values are determined based on recent trades of the actual security. For other long-term obligations, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurements for long-term obligations are considered level 2 inputs.

Payable to the FDIC for loss share agreements. The fair value of the payable to the FDIC for loss share agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the loss share agreements. Cash flows are discounted to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurements for the payable to the FDIC are considered level 3 inputs. See Note J for more information on the payable to the FDIC.

Interest Rate Swap. Under the terms of the existing cash flow hedge, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the three-month LIBOR rate. The fair value of the cash flow hedge is, therefore, based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. If the fair value of the swap is a net asset, the risk of default by the counterparty is considered in the determination of fair value and is considered a level 3 input. The inputs used in the fair value measurements of the interest rate swap are considered level 2 inputs.

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.
 
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of March 31, 2013, December 31, 2012, and March 31, 2012. 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 relating to them that would cause the fair value to differ from the carrying value.
 

28


 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
460,217

 
$
460,217

 
$
639,730

 
$
639,730

 
$
552,663

 
$
552,663

Overnight investments
954,232

 
954,232

 
443,180

 
443,180

 
752,334

 
752,334

Investment securities available for sale
5,279,678

 
5,279,678

 
5,226,228

 
5,226,228

 
4,457,739

 
4,457,739

Investment securities held to maturity
1,229

 
1,322

 
1,342

 
1,448

 
1,688

 
1,844

Loans held for sale
86,351

 
88,116

 
86,333

 
87,654

 
73,457

 
75,342

Loans covered by loss share agreements, net of allowance for loan and lease losses
1,524,854

 
1,494,357

 
1,669,263

 
1,635,878

 
2,097,752

 
2,055,797

Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses
11,332,534

 
11,298,475

 
11,397,069

 
11,238,597

 
11,303,146

 
11,171,217

Receivable from the FDIC for loss share agreements (1)
195,942

 
104,684

 
270,192

 
100,161

 
492,384

 
297,963

Income earned not collected
47,255

 
47,255

 
47,666

 
47,666

 
52,406

 
52,406

Stock issued by:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank of Atlanta
28,789

 
28,789

 
36,139

 
36,139

 
41,043

 
41,043

Federal Home Loan Bank of San Francisco
9,092

 
9,092

 
10,107

 
10,107

 
12,356

 
12,356

Federal Home Loan Bank of Seattle
4,370

 
4,370

 
4,410

 
4,410

 
4,490

 
4,490

Preferred stock
46,397

 
47,624

 
40,768

 
40,793

 

 

Deposits
18,064,921

 
18,099,371

 
18,086,025

 
18,126,893

 
17,759,492

 
17,810,831

Short-term borrowings
573,102

 
573,102

 
568,505

 
568,505

 
677,993

 
677,993

Long-term obligations
444,252

 
469,980

 
444,921

 
472,642

 
649,818

 
679,727

Payable to the FDIC for loss share agreements
98,870

 
119,473

 
101,641

 
125,065

 
82,033

 
95,643

Accrued interest payable
6,653

 
6,653

 
9,353

 
9,353

 
21,486

 
21,486

Interest rate swap
9,583

 
9,583

 
10,398

 
10,398

 
10,325

 
10,325


(1) The fair value of the receivable from FDIC for loss share agreements excludes receivable related to accretable yield in prospective periods.

Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or fair value. Impaired loans, OREO, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. BancShares did not elect to voluntarily report any assets or liabilities at fair value.

29


For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of March 31, 2013December 31, 2012, and March 31, 2012:
 
 
 
 
Fair value measurements using:
Description
Fair value
 

Level 1
 

Level 2
 

Level 3
March 31, 2013
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
749,757

 
$
749,757

 
$

 
$

Government agency
3,150,041

 
3,150,041

 

 

Other
828

 
828

 

 

Residential mortgage-backed securities
1,358,102

 

 
1,358,102

 

Equity securities
20,403

 
20,403

 

 

State, county, municipal
547

 

 
547

 

Total
$
5,279,678

 
$
3,921,029

 
$
1,358,649

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
9,583

 
$

 
$
9,583

 
$

December 31, 2012
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
823,632

 
$
823,632

 
$

 
$

Government agency
3,055,204

 
3,055,204

 

 

Other
820

 
820

 

 

Residential mortgage-backed securities
1,329,657

 

 
1,329,657

 

Equity securities
16,365

 
16,365

 

 

State, county, municipal
550

 

 
550

 

Total
$
5,226,228

 
$
3,896,021

 
$
1,330,207

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
10,398

 
$

 
$
10,398

 
$

March 31, 2012
 
 
 
 
 
 
 
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,065,036

 
$
1,065,036

 
$

 
$

Government agency
2,855,385

 
2,855,385

 

 

Corporate bonds
226,428

 
226,428

 

 

Residential mortgage-backed securities
290,908

 

 
290,908

 

Equity securities
18,943

 
18,943

 

 

State, county, municipal
1,039

 

 
1,039

 

Total
$
4,457,739

 
$
4,165,792

 
$
291,947

 
$

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
10,325

 
$

 
$
10,325

 
$



30


Prices for US Treasury securities, government agency securities, corporate bonds and equity securities are readily available in the active markets in which those securities are traded and the resulting fair values are derived from level 1 inputs. Prices for residential mortgage-backed securities and state, county and municipal securities are obtained using the fair values of similar
assets, which are deemed to be level 2 inputs. There were no assets or liabilities valued on a recurring basis using level 3 inputs at March 31, 2013December 31, 2012, or March 31, 2012, and there were no transfers between level 1 and level 2 categories during the three-month periods ended March 31, 2013, and 2012.

Certain financial assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are, therefore, carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. OREO not covered by loss share agreements that has been recently remeasured is deemed to be at fair value. For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of March 31, 2013December 31, 2012, and March 31, 2012:
 
 
 
 
Fair value measurements using:
Description
Fair value
 

Level 1
 

Level 2
 

Level 3
March 31, 2013
 
 
 
 
 
 
 
Loans held for sale
$
65,164

 
$

 
$
65,164

 
$

Impaired loans not covered by loss share agreements
39,937

 

 

 
39,937

Other real estate not covered by loss share agreements remeasured during current year
1,970

 

 

 
1,970

December 31, 2012
 
 
 
 
 
 
 
Loans held for sale
65,244

 

 
65,244

 

Impaired loans not covered by loss share agreements
51,644

 

 

 
51,644

Other real estate not covered by loss share agreements remeasured during current year
21,113

 

 

 
21,113

March 31, 2012
 
 
 
 
 
 
 
Loans held for sale
45,146

 

 
45,146

 

Impaired loans not covered by loss share agreements
82,882

 

 

 
82,882

Other real estate not covered by loss share agreements remeasured during current year
8,048

 

 

 
8,048


The values of loans held for sale are generally based on market prices for loans with similar characteristics or external valuations.

The values of impaired loans are determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Impaired loans are assigned to an asset manager and monitored monthly for significant changes since the last valuation. If significant changes are noted, the asset manager orders a new valuation or adjusts the valuation accordingly. Expected cash flows are determined using expected loss rates developed from historic experience for loans with similar risk characteristics.

OREO is measured and reported at fair value using level 3 inputs for valuations based on unobservable criteria. The values of OREO are determined by collateral valuations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.


31


No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2013December 31, 2012, or March 31, 2012.


Note H
Employee Benefit Plans
Pension expense is a component of employee benefits expense. For the three-month periods ended March 31, 2013, and 2012 the components of pension expense are as follows:
 
 
Three months ended March 31
 
 
2013
 
2012
 
Service cost
$
4,222

 
$
2,827

 
Interest cost
5,895

 
4,496

 
Expected return on assets
(6,931
)
 
(5,379
)
 
Amortization of prior service cost
53

 
53

 
Amortization of net actuarial loss
4,251

 
2,737

 
Total pension expense
$
7,490

 
$
4,734

 
The assumed discount rate for 2013 is 4.00 percent, the expected long-term rate of return on plan assets is 7.25 percent, and the assumed rate of salary increases is 4.00 percent. For 2012 the assumed discount rate was 4.75 percent, expected long-term rate of return was 7.50 percent and the assumed rate of salary increases was 4.00 percent.

Note I
Income Taxes

Income tax expense totaled $31,061 and $18,354 for the first quarters of 2013 and 2012, representing effective tax rates of 35.8 percent and 34.1 percent during the respective periods.

The increase in the effective tax rate for the first quarter of 2013 results from the diluted impact of various favorable permanent differences on higher pre-tax earnings.


Note J
Commitments and Contingencies

To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, standby letters of credit and recourse obligations on mortgage loans sold. These instruments involve elements of credit, interest rate or liquidity risk.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets. At March 31, 2013, BancShares had unused commitments totaling $5,546,883 compared to $5,467,998 at December 31, 2012 and $5,748,952 at March 31, 2012.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. To minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At March 31, 2013December 31, 2012, and March 31, 2012, BancShares had standby letters of credit amounting to $59,715, $63,085 and $59,798, respectively. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.


32


Residential mortgage loans are sold with standard representations and warranties relating to documentation and underwriting requirements for the loans. If deficiencies are discovered at any point in the life of the loan, the investor may require BancShares to repurchase the loan. As of March 31, 2013, and December 31, 2012, other liabilities included a reserve of $4,060 and $4,065, respectively, for estimated losses arising from the repurchase of loans under these provisions.

In addition to standard representations and warranties, residential mortgage loans sold with limited recourse liability represent guarantees to repurchase the loans or repay a portion of the sale proceeds in the event of nonperformance by the borrower. The recourse period is generally 120 days or fewer after sale. At March 31, 2013December 31, 2012, and March 31, 2012, BancShares has sold loans of approximately $194,242, $97,706 and $210,789, respectively, for which the recourse period had not yet elapsed. Of these loans at March 31, 2013, $90,772 represent loans that would require repurchase in the event of nonperformance by the borrower. Any loans that are repurchased under the recourse obligation will carry the same credit risk as mortgage loans originated by the company and will be collateralized in the same manner.

BancShares has recorded a receivable from the FDIC for the expected reimbursement of losses on assets covered under the various loss share agreements. These loss share agreements impose certain obligations on us that, in the event of noncompliance, could result in the delay or disallowance of some or all of our rights under those agreements. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed for noncompliance. The loss share agreements are subject to interpretation by both the FDIC and FCB, and disagreements may arise regarding coverage of losses, expenses and contingencies.

The loss share agreements for four FDIC-assisted transactions include provisions related to contingent payments commonly known as "clawback liability," which may be owed to the FDIC at the termination of the Agreements. The FDIC clawback liability represents an estimated payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The FDIC clawback liability is estimated by discounting estimated future payments and is recorded in the Consolidated Balance Sheets as a payable to FDIC for loss share agreements. As of March 31, 2013, December 31, 2012, and March 31, 2012, the clawback liability was $98,870, $101,641 and $82,033 respectively.

BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various FDIC-assisted transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
On February 18, 2011, United Western Bank, United Western Bank's parent company, United Western Bancorp, and five of their directors filed a complaint in the United States District Court for the District of Columbia against the OTS, its Acting Director, and the FDIC in its corporate and receivership capacities, alleging that the seizure of United Western Bank by the OTS and the subsequent appointment of the FDIC as receiver were illegal. The complaint requested the court to direct the OTS to remove the FDIC as receiver and return control of United Western Bank to the plaintiffs. Neither BancShares nor FCB was named as a party. In June 2011, the Court dismissed all plaintiffs other than United Western Bank and dismissed the FDIC in both capacities, leaving United Western Bank and the OTS and its Acting Director as the only parties. In July 2011, following passage of the Dodd-Frank Act, the OCC and the Acting Comptroller were substituted for the OTS and its Acting Director as the only defendants. On March 5, 2013, the court entered a final, appealable order denying United Western Bank's Motion for Summary Judgment and granting OCC's and the Comptroller's Motion for Summary Judgment. On April 26, 2013, United Western Bank filed its Notice of Appeal to the U.S. Court of Appeals for the District of Columbia. It is unclear what impact, if any, the litigation will have on FCB or the assets acquired in the United Western transaction.
During March 2012, FCB received communications from the US Small Business Administration (SBA) asserting that the SBA is entitled to receive a share of amounts paid or to be paid by the FDIC to FCB relating to certain specific SBA-guaranteed loans pursuant to the loss share agreement between FCB and the FDIC applicable to Temecula Valley Bank. FCB disputes the validity of the SBA claims and is pursuing administrative relief through the SBA. FCB is unable to determine the outcome or range of loss, if any, related to these claims.



33


Note K
Derivatives

At March 31, 2013, BancShares had an interest rate swap entered into during 2011 that qualifies as a cash flow hedge under GAAP. For all periods presented, the fair value of the outstanding derivative is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in the consolidated statements of cash flows under the caption of net change in other liabilities.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The 2011 interest rate swap has a notional amount of $93,500, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The 2011 interest rate swap hedges interest payments through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above the three-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. Settlement of the swap occurs quarterly. As of March 31, 2013, collateral with a fair value of $9,656 was pledged to secure the existing obligation under the interest rate swap.


 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Notional  amount
 
Estimated fair value of liability
 
Notional  amount
 
Estimated fair value of liability
 
Notional  amount
 
Estimated fair value of liability
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016
$
93,500

 
$
9,583

 
$
93,500

 
$
10,398

 
$
93,500

 
$
10,325


For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the three-month periods ended March 31, 2013 and 2012, BancShares recognized interest expense of $813 and $749, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness. The estimated net amount in accumulated other comprehensive income at March 31, 2013, that is expected to be reclassified into earnings within the next 12 months is a net after-tax loss of $1,951.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the three-month periods ended March 31, 2013, and 2012.
 
2013
 
2012
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1
$
(10,398
)
 
$
(10,714
)
Other comprehensive income recognized during the three-month period ended March 31
815

 
389

Accumulated other comprehensive loss resulting from interest rate swaps as of March 31
$
(9,583
)
 
$
(10,325
)
BancShares monitors the credit risk of the interest rate swap counterparty.



34


Note L
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following as of March 31, 2013December 31, 2012, and March 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
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
 
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax
expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
Unrealized gains on investment securities available for sale
$
32,333

 
$
12,727

 
$
19,606

 
$
33,809

 
$
13,292

 
$
20,517

 
$
23,667

 
$
9,327

 
$
14,340

Funded status of defined benefit plan
(154,030
)
 
(60,318
)
 
(93,712
)
 
(158,334
)
 
(62,003
)
 
(96,331
)
 
(122,465
)
 
(47,957
)
 
(74,508
)
Unrealized loss on cash flow hedge
(9,583
)
 
(3,784
)
 
(5,799
)
 
(10,398
)
 
(4,106
)
 
(6,292
)
 
(10,325
)
 
(4,077
)
 
(6,248
)
Total
$
(131,280
)
 
$
(51,375
)
 
$
(79,905
)
 
$
(134,923
)
 
$
(52,817
)
 
$
(82,106
)
 
$
(109,123
)
 
$
(42,707
)
 
$
(66,416
)


 
 
Gains and losses on cash flow hedges1
 
Unrealized gains and losses on available-for-sale securities1
 
Defined benefit pension items1
 
Total
Three months ended March 31, 2013
 
 
 
 
 
 
 
 
Beginning balance
 
$
(6,292
)
 
$
20,517

 
$
(96,331
)
 
$
(82,106
)
Other comprehensive income before reclassifications
 
1

 
(876
)
 

 
(875
)
Amounts reclassified from accumulated other comprehensive income
 
492

 
(35
)
 
2,619

 
3,076

Net current period other comprehensive income
 
493

 
(911
)
 
2,619

 
2,201

Ending balance
 
$
(5,799
)
 
$
19,606

 
$
(93,712
)
 
$
(79,905
)
Three months ended March 31, 2012
 
 
 
 
 
 
 
 
Beginning balance
 
$
(6,483
)
 
$
16,115

 
$
(76,206
)
 
$
(66,574
)
Other comprehensive income before reclassifications
 
(218
)
 
(1,775
)
 

 
(1,993
)
Amounts reclassified from accumulated other comprehensive income
 
453

 

 
1,698

 
2,151

Net current period other comprehensive income
 
235

 
(1,775
)
 
1,698

 
158

Ending balance
 
$
(6,248
)
 
$
14,340

 
$
(74,508
)
 
$
(66,416
)
1 All amounts are net of tax. Amounts in parentheses indicate debits.

35


 
 
 
Details about accumulated other comprehensive income
 
Amount reclassified from accumulated other comprehensive income1
 
Affected line item in the statement where net income is presented
Three months ended March 31, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate contracts
 
$
(813
)
 
Long-term obligations
 
 
321

 
Income taxes
 
 
$
(492
)
 
Net of tax
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
$
58

 
Securities gains (losses)
 
 
(23
)
 
Income taxes
 
 
35

 
Net of tax
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(52
)
 
Employee Benefits
     Actuarial gains
 
(4,252
)
 
Employee Benefits
 
 
(4,304
)
 
Total before taxes
 
 
1,685

 
Income taxes
 
 
$
(2,619
)
 
Net of tax
Total reclassifications for the period
 
$
(3,076
)
 
 
 
 
 
 
 
Three months ended March 31, 2012
 
 
Gains and losses on cash flow hedges
 
 
 
 
Interest rate contracts
 
$
(749
)
 
Long-term obligations
 
 
296

 
Income taxes
 
 
(453
)
 
Net of tax
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(53
)
 
Employee Benefits
     Actuarial gains
 
(2,737
)
 
Employee Benefits
 
 
(2,790
)
 
Total before taxes
 
 
1,092

 
Income taxes
 
 
$
(1,698
)
 
Net of tax
Total reclassifications for the period
 
$
(2,151
)
 
 
1 Amounts in parentheses indicate debits to profit/loss.



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

INTRODUCTION

Management’s discussion and analysis 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. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2013, the reclassifications have no material effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms "we," "us" and "BancShares" refer to the consolidated financial position and consolidated results of operations for BancShares.


36


BancShares is a financial holding company headquartered in Raleigh, North Carolina, that offers full-service banking through its wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank. FCB is a state-chartered bank organized under the laws of the state of North Carolina. As of March 31, 2013, FCB operated 412 branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, Florida, Georgia, Texas, Arizona, New Mexico, Oregon, Colorado, Oklahoma, Kansas, Missouri, and Washington, DC.

 
EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

BancShares’ earnings and cash flows are primarily derived from our commercial banking activities. We offer commercial and consumer loans, deposit and treasury services products, cardholder and merchant services, wealth management services, as well as various other products and services typically offered by commercial banks. 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 the bank premises, furniture and equipment used to conduct our commercial banking business.

Various external factors influence the focus of our business efforts. Since 2008, asset quality challenges, capital adequacy problems and weak economic conditions have resulted in unfavorable conditions for growth. However, during this period of industry-wide turmoil, we have elected to participate in FDIC-assisted transactions involving distressed financial institutions. Participation in FDIC-assisted transactions provided opportunities to increase our business volumes in existing markets and to expand our banking presence to adjacent markets that we deemed demographically attractive.

Under accounting principles generally accepted in the United States of America (GAAP), acquired assets are initially recorded at fair value, and fair value discounts and premiums are accreted or amortized to earnings over the life of the underlying asset or liability. In addition, post-acquisition deterioration results in an adjustment to the allowance for loan and lease losses. For each of the six FDIC-assisted transactions, loss share agreements protect us from a substantial portion of the asset quality risk that we would otherwise incur. The estimated receivable and payable related to those loss share agreements are measured and recorded in the financial statements and are remeasured based on changes in the estimated cash flows to be derived from the covered assets.

The amortization and accretion of premiums and discounts, the recognition of post-acquisition impairment, and the related accounting for the indemnification asset may result in significant income statement volatility. In some periods, the net impact may be favorable, while, in other periods, the net impact may be unfavorable.

Apart from acquisition accounting adjustments, various other trends have had an unfavorable impact on our income statement during the past two years. Low interest rates and competitive loan and deposit pricing has led to very narrow interest margins. Further, legislatively-imposed restrictions on our ability to collect various fees have adversely affected noninterest income. Additionally, while distressed customers continue to experience difficulty meeting their debt service obligations, other customers defer new borrowings due to economic uncertainty, while other customers aggressively continue to repay existing debt.

Although improved when compared to prior years, soft real estate markets continue to cause banks to carry relatively large inventories of ORE and to market and sell properties for amounts less than estimated market prices. Real estate demand in many of our markets remains weak, resulting in depressed real estate prices that continue to affect collateral values for many borrowers. As a result, when customer cash flow is inadequate to avoid default, losses resulting from liquidation of collateral are higher than would have occurred prior to the decline in real estate values. Exposure to declining real estate values have caused some loans secured by a second mortgage to become effectively unsecured.
In an effort to assist customers experiencing financial difficulty, we have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing liquidity challenges or other circumstances that could affect their ability to meet debt obligations. The majority of the modifications we provide are to customers that are currently performing under existing terms but may be unable to do so in the near future without a modification.

The demand for our treasury services products has been adversely influenced by extraordinarily low interest rates. Our balance sheet liquidity position remains strong despite significant attrition of deposits assumed in the FDIC-assisted transactions.


37


Ongoing economic weakness and market uncertainty continues to have a significant impact on virtually all financial institutions in the United States. Beyond the profitability pressures resulting from a weak economy, financial institutions continue to face challenges resulting from implementation of legislative and governmental reforms to stabilize the financial services industry and provide added consumer protection. In addition to the various actions previously enacted by governmental agencies and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), further regulatory changes will likely occur, including the Basel III capital requirements that are anticipated to be finalized during 2013.

The Dodd-Frank Act contained provisions that will gradually eliminate our ability to include trust preferred securities as equity for capital adequacy purposes. Due to the anticipated elimination of those securities from our capital and the cost of those borrowings, we elected to redeem $150.0 million of our trust preferred securities during July 2012.
BancShares’ consolidated net income during the first quarter of 2013 equaled $55.6 million, an increase of $20.1 million from the $35.5 million earned during the corresponding period of 2012. The annualized return on average assets and equity amounted to 1.07 percent and 12.01 percent, respectively, during the first quarter of 2013, compared to 0.68 percent and 7.63 percent during the same period of 2012. Net income per share during the first quarter of 2013 totaled $5.78, compared to $3.45 during the first quarter of 2012. The increase in net income in 2013 was due to a reduction in the provision for loan and lease losses and higher noninterest income, partially offset by lower net interest income and higher noninterest expense.

Net interest income decreased $16.1 million from $221.0 million in the first quarter of 2012 to $204.9 million in 2013, primarily due to the impact of loan shrinkage and a decrease in the taxable-equivalent yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets decreased 45 basis points from the first quarter of 2012 to 4.35 percent. For the first quarter, acquired loan accretion income significantly impacted the taxable-equivalent net yield on interest-earning assets. Since the balance of acquired loans will continue to decline over the next several years, accretion income will likewise decline.

We recorded an $18.6 million credit to provision for loan and lease losses during the first quarter of 2013, compared to provision expense of $30.7 million during the first quarter of 2012. The credit to provision expense related to covered loans totaled $22.6 million during the first quarter of 2013, compared to provision expense of $9.6 million during the first quarter of 2012, a $32.2 million favorable change. The significant reduction in provision expense for covered loans resulted from lower current impairment, unexpected payoffs of acquired loans for which an allowance had previously been established and the reversal of previously-identified post-acquisition deterioration of acquired loans covered by loss share agreements with the FDIC. To the extent deterioration is covered by a loss share agreement, there is a corresponding adjustment to the FDIC receivable with an offset to noninterest income for the covered credit-related portion at the appropriate indemnification rate. Impairment related to the timing of cash flows does not trigger adjustments to the FDIC receivable. Provision expense for noncovered loans totaled $4.0 million during the first quarter of 2013 compared to $21.1 million during the first quarter of 2012, a reduction of $17.1 million, resulting from lower charge-offs and credit quality improvements in the noncovered commercial loan portfolio.

Noninterest income increased $10.6 million in the first quarter of 2013 when compared to the first quarter of 2012, primarily resulting from the sale of a large portion of our client bank processing service relationships.

Noninterest expense increased $11.0 million, or 6.0 percent, in the first quarter of 2013, when compared to the same period in 2012, due to increases in employee benefits, processing fees paid to third parties and fixed asset impairments resulting from the sale of our client bank processing service relationships.

Income tax expense in the first quarter of 2013 totaled $31.1 million compared to $18.4 million for the same period of 2012,
representing effective tax rates of 35.8 percent and 34.1 percent during the respective periods. The increase in the effective tax rate for the first quarter of 2013 results from the diluted impact of various favorable permanent differences on higher pre-tax earnings.



38


Table 1
SELECTED QUARTERLY DATA

 
2013
 
2012
 
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
 
 
 
 
 
 
 
(thousands, except share data and ratios)
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Interest income
$
220,604

 
$
280,891

 
$
236,674

 
$
240,519

 
$
246,752

 
Interest expense
15,722

 
17,943

 
21,318

 
25,087

 
25,800

 
Net interest income
204,882

 
262,948

 
215,356

 
215,432

 
220,952

 
Provision for loan and lease losses
(18,606
)
 
64,880

 
17,623

 
29,667

 
30,715

 
Net interest income after provision for loan and lease losses
223,488

 
198,068

 
197,733

 
185,765

 
190,237

 
Noninterest income
57,513

 
33,219

 
51,842

 
57,296

 
46,943

 
Noninterest expense
194,355

 
198,728

 
190,077

 
194,797

 
183,331

 
Income before income taxes
86,646

 
32,559

 
59,498

 
48,264

 
53,849

 
Income taxes
31,061

 
10,813

 
19,974

 
10,681

 
18,354

 
Net income
$
55,585

 
$
21,746

 
$
39,524

 
$
37,583

 
$
35,495

 
Net interest income, taxable equivalent
$
205,553

 
$
263,635

 
$
216,069

 
$
216,194

 
$
221,765

 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 Net income
$
5.78

 
$
2.15

 
$
3.85

 
$
3.66

 
$
3.45

 
 Cash dividends
0.30

 
0.30

 
0.30

 
0.30

 
0.30

 
 Market price at period end (Class A)
182.70

 
163.50

 
162.90

 
166.65

 
182.69

 
 Book value at period end
199.46

 
193.75

 
192.49

 
187.88

 
184.14

 
SELECTED PERIOD AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,150,143

 
$
21,245,425

 
$
21,075,174

 
$
21,085,228

 
$
20,843,491

 
 Investment securities
5,196,930

 
5,169,159

 
4,888,047

 
4,598,141

 
4,141,160

 
 Loans and leases (covered and noncovered)
13,289,828

 
13,357,928

 
13,451,164

 
13,612,114

 
13,822,226

 
 Interest-earning assets
19,180,308

 
19,273,850

 
19,059,474

 
18,983,321

 
18,584,625

 
 Deposits
17,922,665

 
17,983,033

 
17,755,974

 
17,667,221

 
17,498,813

 
 Interest-bearing liabilities
14,140,511

 
14,109,359

 
14,188,609

 
14,418,509

 
14,478,901

 
 Long-term obligations
444,539

 
447,600

 
524,313

 
646,854

 
682,067

 
 Shareholders' equity
$
1,877,445

 
$
1,951,874

 
$
1,945,263

 
$
1,906,884

 
$
1,870,066

 
 Shares outstanding
9,618,985

 
10,159,262

 
10,264,159

 
10,271,343

 
10,283,842

 
SELECTED PERIOD-END BALANCES
 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,351,012

 
$
21,283,652

 
$
21,173,620

 
$
21,240,990

 
$
21,225,661

 
 Investment securities
5,280,907

 
5,227,570

 
5,013,500

 
4,635,826

 
4,459,427

 
 Loans and leases:
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
1,621,327

 
1,809,235

 
1,897,097

 
1,999,351

 
2,183,869

 
Not covered by loss share agreements
11,509,080

 
11,576,115

 
11,455,233

 
11,462,458

 
11,489,529

 
 Deposits
18,064,921

 
18,086,025

 
17,893,215

 
17,801,646

 
17,759,492

 
 Long-term obligations
444,252

 
444,921

 
472,170

 
644,682

 
649,818

 
 Shareholders' equity
$
1,918,581

 
$
1,864,007

 
$
1,974,124

 
$
1,929,790

 
$
1,892,123

 
 Shares outstanding
9,618,941

 
9,620,914

 
10,255,747

 
10,271,244

 
10,275,731

 
SELECTED RATIOS AND OTHER DATA
 
 
 
 
 
 
 
 
 
 
 Rate of return on average assets (annualized)
1.07

%
0.41

%
0.75

%
0.72

%
0.68

%
Rate of return on average shareholders' equity (annualized)
12.01

 
4.43

 
8.08

 
7.93

 
7.63

 
Net yield on interest-earning assets (taxable equivalent)
4.35

 
5.44

 
4.51

 
4.58

 
4.80

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
5.95

 
7.74

 
4.77

 
4.39

 
3.94

 
Not covered by loss share agreements
1.53

 
1.55

 
1.62

 
1.62

 
1.62

 
Nonperforming assets to total loans and leases and other real estate at period end:
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
8.46

 
9.26

 
12.87

 
18.37

 
18.68

 
Not covered by loss share agreements
1.10

 
1.15

 
1.05

 
1.03

 
0.99

 
Tier 1 risk-based capital ratio
14.50

 
14.27

 
15.08

 
15.97

 
15.74

 
Total risk-based capital ratio
16.19

 
15.95

 
16.76

 
17.66

 
17.62

 
Leverage capital ratio
9.36

 
9.22

 
9.67

 
10.21

 
10.16

 
Dividend payout ratio
5.19

 
13.95

 
7.79

 
8.20

 
8.70

 
Average loans and leases to average deposits
74.15

 
74.28

 
75.76

 
77.05

 
78.99

 
Average loan and lease balances include nonaccrual loans and leases. See discussion of issues affecting comparability of financial statements under the caption FDIC-Assisted Transactions.


39



FDIC-ASSISTED TRANSACTIONS

While our growth has historically been achieved primarily through de novo activities, since mid-2009 BancShares participated in six FDIC-assisted transactions involving failed financial institutions. These transactions have had a significant impact on BancShares' financial condition and results of operations in subsequent periods.

FDIC-assisted transactions provided significant growth opportunities for BancShares from 2009 through 2011. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to contiguous markets. Additionally, purchase discounts and fair value adjustments on acquired assets and assumed liabilities resulted in significant acquisition gains recorded at the time of each acquisition. All of the FDIC-assisted transactions include loss share agreements that protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.

Balance sheet impact. Table 2 summarizes the balance sheet impact of the six FDIC-assisted transactions consummated during 2011, 2010 and 2009.

Table 2
FDIC-ASSISTED TRANSACTIONS
 
 
 
Fair value of
 
Entity
Date of  transaction
 
Loans  acquired
 
Deposits
assumed
 
 
 
 
(thousands)
 
Colorado Capital Bank (CCB)
July 8, 2011
 
$
320,789

 
$
606,501

 
United Western Bank (United Western)
January 21, 2011
 
759,351

 
1,604,858

 
Sun American Bank (SAB)
March 5, 2010
 
290,891

 
420,012

 
First Regional Bank (First Regional)
January 29, 2010
 
1,260,249

 
1,287,719

 
Venture Bank (VB)
September 11, 2009
 
456,995

 
709,091

 
Temecula Valley Bank (TVB)
July 17, 2009
 
855,583

 
965,431

 
Total
 
 
$
3,943,858

 
$
5,593,612

 
Carrying value of acquired loans as of March 31, 2013
 
 
$
1,621,327

 
 
 


Income statement impact. The acquired loans, assumed deposits and assumed borrowings originated by the six banks have affected net interest income, provision for loan and lease losses and noninterest income in the periods following the respective acquisition date. Various fair value discounts and premiums that were previously recorded are being accreted and amortized into income over the life of the underlying asset or liability. Noninterest expense increased due to incremental staffing, facility costs for the branch locations, collection and foreclosure-related expenses resulting from the FDIC-assisted transactions. No acquisition gains were recorded during the three-month periods ended March 31, 2013, and March 31, 2012.

During the three-month period ended March 31, 2013, we recorded a credit to provision expense for covered loans totaling $22.6 million compared to provision expense of $9.6 million during the same period of 2012. The decrease in the provision for covered loan losses in 2013 is the result of improved cash flow projections that have resulted in the reversal of previously-recognized impairment for post-acquisition deterioration. Provision expense for the fourth quarter of 2012 totaled $62.3 million resulting from newly-identified impairment, including credit-related impairment and timing-related impairment resulting from changes in the projected loss dates.

The amount of accretable yield related to the loans changes when the estimated cash flows expected to be collected changes. The recognition of accretion income may be accelerated in the event of unscheduled repayments for amounts in excess of current estimates and various other post-acquisition events. Due to the many factors that can influence the amount of accretion income recognized in a given period, this component of net interest income is not easily predictable for future periods and impacts the comparability of interest income, net interest income and overall results of operations. During the three-month period ended March 31, 2013, accretion income for loans for which a fair value discount had been recorded equaled $79.9 million, compared to $110.6 million during the fourth quarter of 2012 and $64.9 million during the first quarter of 2012.


40


Post-acquisition improvements that affect accretion income, as well as post-acquisition deterioration of covered loans, also result in adjustments to the receivable from the FDIC for changes in the estimated amount that would be covered under the respective loss share agreement. While accretion income is recognized prospectively over the remaining life of the loan, the adjustment to the receivable from the FDIC is recognized over the shorter of the remaining life of the loan or the remaining term of the applicable loss share agreement. As a result, the recognition of accretion income may occur over a longer period than the related income statement impact of the adjustment to the receivable from the FDIC. During the three-month period ended March 31, 2013, the net adjustment to the FDIC receivable for post-acquisition improvements and deterioration in covered assets resulted in a net reduction to the FDIC receivable and noninterest income of $24.1 million, compared to a net reduction in the receivable and a corresponding reduction in noninterest income of $26.8 million during the same period of 2012.

The various terms of each loss share agreement and the components of the resulting receivable from the FDIC is provided in Table 3. The table includes the estimated fair value of the receivable at the respective acquisition dates of each FDIC-assisted transaction as well as the carrying value of the receivable at March 31, 2013. The carrying value as of March 31, 2013, excludes estimated obligations to the FDIC under any applicable clawback provisions.

As of March 31, 2013, the receivable from the FDIC includes $107.3 million of estimated reimbursements from the FDIC. The receivable from the FDIC also includes $88.7 million we expect to recover through prospective amortization of the asset arising from improvements in the related loans. The timing of expected losses on covered assets is monitored by management to ensure the losses will occur during the respective loss share terms. When projected losses are expected to occur after expiration of the applicable loss share agreement, the receivable from the FDIC is adjusted to reflect the forfeiture of loss share protection.

Acquisition accounting and issues affecting comparability of financial statements. As estimated exposures related to the acquired assets covered by the loss share agreements change based on post-acquisition events, our adherence to GAAP and accounting policy elections that we have made affect the comparability of our current results of operations to earlier periods. Several of the key issues affecting comparability are as follows:

When post-acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered by a loss share agreement is less than originally expected:
An allowance for loan and lease losses is established for the post-acquisition exposure that has emerged with a corresponding charge to provision for loan and lease losses;
If the expected loss is projected to occur during the relevant loss share period, the receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding increase to noninterest income;
When post-acquisition events suggest that the amount of cash flows we will ultimately receive for a loan covered under a loss share agreement is greater than originally expected:
Any allowance for loan and lease losses that was previously established for post-acquisition exposure is reversed with a corresponding reduction to provision for loan and lease losses; if no allowance was established in earlier periods, the amount of the improvement in the cash flow projection results in a reclassification from the nonaccretable difference created at the acquisition date to an accretable yield; the newly-identified accretable yield is accreted into income over the remaining life of the loan as a credit to interest income;
The receivable from the FDIC is adjusted immediately for reversals of previously recognized impairment and prospectively for reclassifications from nonaccretable difference to reflect the indemnified portion of the post-acquisition change in exposure; a corresponding reduction in noninterest income is also recorded immediately for reversals of previously established allowances or for reclassifications from nonaccretable difference, over the shorter of the remaining life of the related loan or loss share agreements;
When actual payments received on loans are greater than initial estimates, large nonrecurring discount accretion or reductions in the allowance for loan losses may be recognized during a specific period; discount accretion is recognized as an increase to interest income; reductions in the allowance for loan and lease losses are recorded with a reduction in the provision for loan and lease losses;

41



Adjustments to the receivable from the FDIC resulting from changes in estimated loan cash flows are based on the reimbursement provision of the applicable loss share agreement with the FDIC. Adjustments to the FDIC receivable partially offset the adjustment to the covered loan carrying value, but the rate of the change to the FDIC receivable relative to the change in the covered loan carrying value is not constant. The loss share agreements establish reimbursement rates for losses incurred within certain ranges. In some loss share agreements, higher loss estimates result in higher reimbursement rates, while in other loss share agreements, higher loss estimates trigger a reduction in the reimbursement rates. In addition, some of the loss share agreements include clawback provisions that require the purchaser to remit a payment to the FDIC in the event that the aggregate amount of losses is less than a loss estimate established by the FDIC. The adjustments to the FDIC receivable based on changes in loss estimates are measured based on the actual reimbursement rates and consider the impact of changes in the projected clawback payment. Table 3 provides details on the various reimbursement rates for each loss share agreement.


42


Table 3
LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS

 
Fair value at acquisition date
Losses/expenses incurred through 3/31/2013
Cumulative amount reimbursed by FDIC through 3/31/2013
Carrying value at March 31, 2013
Current portion of receivable due from (to) FDIC for 3/31/2013 filings
Receivable related to accretable yield as of 3/31/2013
 
Receivable from FDIC
Payable to FDIC
Entity
 
(dollars in thousands)
TVB - combined losses
$
103,558

$
187,033

$

$
35,028

$

$

$
20,404

VB - combined losses
138,963

154,993

119,259

7,897


4,735

379

First Regional - combined losses
378,695

313,391

224,061

50,777

66,925

(6,802
)
23,046

SAB - combined losses
89,734

90,816

69,936

27,479

2,610

2,717

18,226

United Western
 
 
 
 
 
 
 
Non-single family residential losses
112,672

108,486

87,435

23,822

15,109

(404
)
10,234

Single family residential losses
24,781

3,271

1,533

12,124

 
1,084

1,040

CCB - combined losses
155,070

175,896

138,173

38,815

14,226

2,685

15,344

Total
$
1,003,473

$
1,033,886

$
640,397

$
195,942

$
98,870

$
4,015

$
88,673

 
 
 
 
 
 
 
 
Each FDIC-assisted transaction has a separate loss share agreement for Single-Family Residential loans (SFR) and non-Single-Family Residential loans (NSFR).
For TVB, combined losses are covered at 0 percent up to $193.3 million, 80 percent for losses between $193.3 million and $464.0 million, and 95 percent for losses above $464.0 million.
For VB, combined losses are covered at 80 percent up to $235.0 million and 95 percent for losses above $235.0 million.
For FRB, combined losses are covered at 0 percent up to $41.8 million, 80 percent for losses between $41.8 million and $1.02 billion, and 95 percent for losses above $1.02 billion.
For SAB, combined losses are covered at 80 percent up to $99.0 million and 95 percent for losses above $99.0 million.
For United Western SFR loans, losses are covered at 80 percent up to $32.5 million, 0 percent between $32.5 million and $57.7 million, and 80 percent for losses above $57.7 million.
For United Western NSFR loans, losses are covered at 80 percent up to $111.5 million, 30 percent between $111.5 million and $227.0 million, and 80 percent for losses above $227.0 million.
For CCB, combined losses are covered at 80 percent up to $231.0 million, 0 percent between $231.0 million and $285.9 million, and 80 percent for losses above $285.9 million.
 
 
 
 
 
 
 
 
Fair value at acquisition date represents the initial fair value of the receivable, excluding the payable. Receivable related to accretable yield represents balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period.




43


INTEREST-EARNING ASSETS

Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to potentially higher levels of default.

We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures with a concentration of owner-occupied real estate loans in the medical and related fields. The focus on asset quality also influences the composition of our investment securities portfolio. At March 31, 2013, government agency securities represented 59.6 percent of our investment securities portfolio, compared to residential mortgage-backed securities and U.S. Treasury securities, which represented 25.7 percent and 14.2 percent, respectively, of the investment securities portfolio. The balance of the portfolio includes state, county and municipal securities and common stock of other financial institutions. Overnight investments are selectively made with the Federal Reserve Bank and other financial institutions that are within our risk tolerance.

During the first quarter of 2013, interest-earning assets averaged $19.18 billion, an increase of $595.7 million or 3.2 percent from the first quarter of 2012. The increase was due to higher levels of investment securities and overnight investments offset, in part, by lower loan and leases.

Loans and leases. Noncovered loans increased $19.6 million from $11.49 billion at March 31, 2012, to $11.51 billion at March 31, 2013, but declined $67.0 million since December 31, 2012. Loans covered by loss share agreements with the FDIC totaled $1.62 billion at March 31, 2013, compared to $1.81 billion at December 31, 2012, and $2.18 billion at March 31, 2012. Noncovered loan demand remains extremely sluggish, while covered loan balances continue to decline due to repayments and charge-offs. Table 4 provides the composition of covered and noncovered loan and leases.

Commercial mortgage loans not covered by loss share agreements totaled $5.35 billion at March 31, 2013, 46.5 percent of noncovered loans and leases. The March 31, 2013, balance increased $10.8 million or 0.2 percent since December 31, 2012, and $224.6 million or 4.4 percent since March 31, 2012. The growth reflects our continued focus on small business customers, particularly among medical-related and other professional customers. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.

At March 31, 2013, revolving mortgage loans not covered by loss share agreements totaled $2.15 billion, representing 18.7 percent of total noncovered loans outstanding, a decrease of $59.3 million or 2.7 percent since December 31, 2012, and $131.3 million or 5.8 percent compared to March 31, 2012. The reduction in revolving mortgage loans from 2012 is a result of continued efforts by customers to reduce debt obligations.

At March 31, 2013, commercial and industrial loans not covered by loss share agreements equaled $1.66 billion or 14.4 percent of total noncovered loans and leases, a reduction of $64.0 million or 3.7 percent since December 31, 2012, and $77.6 million or 4.5 percent since March 31, 2012. Weak economic conditions have limited our ability to originate commercial and industrial loans that meet our underwriting standards.

Commercial construction and land development loans not covered by loss share agreements totaled $300.5 million or 2.6 percent of total noncovered loans at March 31, 2013, a decrease of $46.1 million or 13.3 percent since March 31, 2012. This decrease was driven by a general reduction in construction lending. Our March 31, 2013, noncovered construction and land development portfolio does not include significant exposure to builders to acquire, develop or construct homes in large tracts of real estate. Most of the construction portfolio relates to borrowers in North Carolina and Virginia where real estate values have declined less severely than other markets in which we operate.

Consumer loans not covered by loss share agreements totaled $385.6 million at March 31, 2013, down $65.5 million or 14.5 percent since March 31, 2012, and down $31.0 million or 7.4 percent from December 31, 2012. This decline is the result of the general contraction in consumer borrowing in 2013 and 2012 due to recessionary economic conditions and continued run-off in our automobile sales finance portfolio.

Residential mortgage loans not covered by loss share agreements totaled $834.9 million at March 31, 2013, up $41.3 million or 5.2 percent since March 31, 2012, and up $12.0 million or 1.5 percent from December 31, 2012. While the majority of residential mortgage loans that we originated in 2012 and 2013 were sold to investors, other loans are retained in the loan portfolio principally due to the nonconforming characteristics of the retained loans.


44


Table 4
LOANS AND LEASES                                                

 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
 
(dollars in thousands)
 
Covered loans
$
1,621,327

 
$
1,809,235

 
$
2,183,869

 
Noncovered loans and leases:
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
Construction and land development
300,497

 
309,190

 
346,557

 
Commercial mortgage
5,352,594

 
5,341,839

 
5,127,948

 
Other commercial real estate
176,456

 
160,980

 
150,316

 
Commercial and industrial
1,662,124

 
1,726,126

 
1,739,724

 
Lease financing
336,329

 
330,679

 
315,704

 
Other
194,186

 
125,681

 
149,792

 
Total commercial loans
8,022,186

 
7,994,495

 
7,830,041

 
Noncommercial:
 
 
 
 
 
 
Residential mortgage
834,879

 
822,889

 
793,612

 
Revolving mortgage
2,150,800

 
2,210,133

 
2,282,138

 
Construction and land development
115,628

 
131,992

 
132,677

 
Consumer
385,587

 
416,606

 
451,061

 
Total noncommercial loans
3,486,894

 
3,581,620

 
3,659,488

 
Total noncovered loans and leases
11,509,080

 
11,576,115

 
11,489,529

 
Total loans and leases
$
13,130,407

 
$
13,385,350

 
$
13,673,398

 
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Impaired
at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired
at
acquisition
date
 
All other
covered loans
 
Total
 
Impaired
at
acquisition
date
 
All other
covered loans
 
Total
Covered loans:
(dollars in thousands)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
53,209

 
$
151,315

 
$
204,524

 
$
71,225

 
$
166,681

 
$
237,906

 
$
100,736

 
$
209,865

 
$
310,601

Commercial mortgage
101,397

 
847,055

 
948,452

 
107,281

 
947,192

 
1,054,473

 
122,876

 
1,072,665

 
1,195,541

Other commercial real estate
30,191

 
63,041

 
93,232

 
35,369

 
71,750

 
107,119

 
31,727

 
113,251

 
144,978

Commercial and industrial
6,149

 
39,544

 
45,693

 
3,932

 
45,531

 
49,463

 
17,397

 
75,864

 
93,261

Lease financing

 

 

 

 

 

 

 
45

 
45

Other

 
1,042

 
1,042

 

 
1,074

 
1,074

 

 
1,283

 
1,283

Total commercial loans
190,946

 
1,101,997

 
1,292,943

 
217,807

 
1,232,228

 
1,450,035

 
272,736

 
1,472,973

 
1,745,709

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
43,924

 
235,073

 
278,997

 
48,077

 
249,849

 
297,926

 
46,905

 
251,633

 
298,538

Revolving mortgage
9,788

 
27,351

 
37,139

 
9,606

 
29,104

 
38,710

 
14,125

 
35,891

 
50,016

Construction and land development
10,609

 
415

 
11,024

 
15,136

 
5,657

 
20,793

 
56,722

 
28,833

 
85,555

Consumer

 
1,224

 
1,224

 

 
1,771

 
1,771

 
1,453

 
2,598

 
4,051

Total noncommercial loans
64,321

 
264,063

 
328,384

 
72,819

 
286,381

 
359,200

 
119,205

 
318,955

 
438,160

Total covered loans
$
255,267

 
$
1,366,060

 
$
1,621,327

 
$
290,626

 
$
1,518,609

 
$
1,809,235

 
$
391,941

 
$
1,791,928

 
$
2,183,869


45



Commercial mortgage loans covered by loss share agreements totaled $948.5 million at March 31, 2013, representing 58.5 percent of the total covered portfolio compared to $1.05 billion at December 31, 2012, and $1.20 billion at March 31, 2012. Commercial construction and land development loans covered by loss share agreements amounted to $204.5 million, or 12.6 percent of total covered loans at March 31, 2013, a decrease of $33.4 million from December 31, 2012, and $106.1 million from March 31, 2012. Covered residential mortgage loans totaled $279.0 million or 17.2 percent of the covered portfolio as of March 31, 2013, compared to $297.9 million or 16.5 percent of total covered loans at December 31, 2012, and $298.5 million or 13.7 percent of total covered loans at March 31, 2012. The changes in covered loan balances since December 31, 2012, and from March 31, 2012, reflect continued reductions of outstanding loans from the FDIC-assisted transactions from payments, charge-offs and foreclosure.

Although there are signs of improvement, economic conditions remain tenuous. As a result, we expect noncovered loan growth for the next several quarters to remain sluggish due to the generally weak demand for loans. Loan growth projections are subject to change due to further economic deterioration or improvement and other external factors.

Investment securities. Investment securities available for sale equaled $5.28 billion at March 31, 2013, compared to $5.23 billion at December 31, 2012, and $4.46 billion at March 31, 2012. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Changes in the amount of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand. Details of investment securities at March 31, 2013, December 31, 2012, and March 31, 2012, are provided in Table 5.




46


Table 5
INVESTMENT SECURITIES

 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
 
 
 
 
 
Average
 
 Taxable
 
 
 
 
 
 
 
 
 
 
 
 
 Fair
 
maturity (1)
 
 equivalent
 
 
 
 Fair
 
 
 
Fair
 
 
 Cost
 
value
 
(Yrs./mos.)
 
yield (1)
 
 Cost
 
value
 
Cost
 
value
 
 Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U. S. Treasury:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
$
450,166

 
$
450,397

 
0/5
 
0.25

%
$
576,101

 
$
576,393

 
$
688,017

 
$
688,176

 
 One to five years
299,118

 
299,360

 
1/10
 
0.29

 
247,140

 
247,239

 
377,018

 
376,860

 
 Total
749,284

 
749,757

 
1/0
 
0.27

 
823,241

 
823,632

 
1,065,035

 
1,065,036

 
 Government agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
1,898,158

 
1,899,324

 
0/6
 
0.44

 
1,708,572

 
1,709,520

 
1,836,533

 
1,833,624

 
 One to five years
1,249,205

 
1,250,717

 
2/0
 
0.42

 
1,343,468

 
1,345,684

 
1,022,664

 
1,021,761

 
 Total
3,147,363

 
3,150,041

 
1/1
 
0.43

 
3,052,040

 
3,055,204

 
2,859,197

 
2,855,385

 
 Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
2,086

 
2,120

 
0/9
 
3.67

 
3,397

 
3,456

 
241

 
239

 
 One to five years
685,084

 
687,453

 
3/2
 
1.50

 
732,614

 
736,284

 
69,835

 
70,244

 
 Five to ten years
180,466

 
181,393

 
6/11
 
1.77

 
193,500

 
195,491

 
67,219

 
67,673

 
 Over ten years
481,129

 
487,136

 
17/3
 
2.70

 
385,700

 
394,426

 
145,411

 
152,752

 
 Total
1,348,765

 
1,358,102

 
8/9
 
1.97

 
1,315,211

 
1,329,657

 
282,706

 
290,908

 
 State, county and municipal:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year
486

 
487

 
0/3
 
5.22

 
486

 
490

 
242

 
243

 
 One to five years

 

 
 

 

 

 
359

 
371

 
 Five to ten years
60

 
60

 
  5/8
 
4.75

 
60

 
60

 
10

 
10

 
 Over ten years

 

 
 

 

 

 
415

 
415

 
 Total
546

 
547

 
0/10
 
5.16

 
546

 
550

 
1,026

 
1,039

 
 Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Within one year

 

 
 

 

 

 
225,214

 
226,428

 
 Total

 

 
 

 

 

 
225,214

 
226,428

 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Five to ten years
844

 
828

 
5/3
 
7.58

 
838

 
820

 

 

 
 Equity securities
543

 
20,403

 
 
 
 
 
543

 
16,365

 
894

 
18,943

 
 Total investment securities available for sale
5,247,345

 
5,279,678

 
 
 
 
 
5,192,419

 
5,226,228

 
4,434,072

 
4,457,739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 One to five years
1,132

 
1,188

 
4/0
 
5.59

 
1,242

 
1,309

 
379

 
393

 
 Five to ten years
18

 
10

 
8/7
 
4.54

 
18

 
11

 
1,201

 
1,306

 
 Over ten years
79

 
124

 
16/0
 
7.10

 
82

 
128

 
108

 
145

 
 Total investment securities held to maturity
1,229

 
1,322

 
4/10
 
5.67

 
1,342

 
1,448

 
1,688

 
1,844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total investment securities
$
5,248,574

 
$
5,281,000

 
 
 
 
 
$
5,193,761

 
$
5,227,676

 
$
4,435,760

 
$
4,459,583

 

(1)
Average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities exempt from federal and/or state income taxes are stated on a taxable yield basis assuming statutory rates of 35.0 percent.




47



INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits represent our primary funding source, although we have the ability to utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer demand for treasury services. Interest-bearing liabilities totaled $14.17 billion as of March 31, 2013, down $347.8 million from March 31, 2012, due to continued customer migration of balances in interest-bearing accounts to demand deposit accounts, the continued reductions in deposits assumed in FDIC-assisted transactions, maturities of FHLB borrowings and the 2012 redemption of trust preferred securities.

Deposits. At March 31, 2013, total deposits equaled $18.06 billion, a decrease of $21.1 million or 0.1 percent since December 31, 2012, and an increase of $305.4 million or 1.7 percent since March 31, 2012. The increase resulted from growth in legacy markets, partially offset by a reduction in assumed deposits.

Core deposit retention remains a key business objective. While we believe that traditional bank deposit products remain an attractive option for many customers, as economic conditions improve, our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth could be constrained unless we are able to generate new deposits at a reasonable cost.

Short-term borrowings. At March 31, 2013, short-term borrowings totaled $573.1 million compared to $568.5 million at December 31, 2012, and $678.0 million at March 31, 2012. The increase in short-term borrowings since December 31, 2012, is due to higher customer balances in our business and treasury services sweep products.

Long-term obligations. Long-term obligations equaled $444.3 million at March 31, 2013, down $0.7 million from December 31, 2012, and $205.6 million from March 31, 2012. The decrease since March 31, 2012, resulted from the early redemption of trust preferred securities in July 2012, repayment of debt obligations related to a prior revolving mortgage loan securitization, and maturities of FHLB obligations.

At March 31, 2013, and December 31, 2012, long-term obligations included $96.4 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, a special purpose entity and the grantor trust for $93.5 million of trust preferred securities. FCB/NC Capital Trust III's trust preferred securities mature in 2036 and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of FCB/NC Capital Trust III. The proceeds from the trust preferred securities were used to purchase the junior subordinated debentures issued by BancShares.

At March 31, 2012, long-term obligations included $251.7 million in junior subordinated debentures representing obligations to two special purpose entities, FCB/NC Capital Trust I and FCB/NC Capital Trust III (the Capital Trusts). The Capital Trusts were the grantor trusts for $243.5 million of trust preferred securities outstanding as of March 31, 2012. The proceeds from the trust preferred securities were used to purchase the junior subordinated debentures issued by BancShares. The $150.0 million in trust preferred securities issued by FCB/NC Capital Trust I had a scheduled maturity date in 2028 but were redeemed in whole in July 2012. BancShares has guaranteed all obligations of the Capital Trusts.

The Dodd-Frank Act contains provisions that, over a three-year period, will eliminate our ability to include the trust preferred securities in tier 1 capital. Beginning January 1, 2013, one-third of the outstanding trust preferred securities no longer qualified as tier 1 capital. All trust preferred securities will be excluded from tier 1 capital effective January 1, 2015. The inability to include the securities in tier 1 capital was the primary factor that resulted in our decision to redeem the trust preferred securities issued by FCB/NC Capital Trust I.

NET INTEREST INCOME

Interest income amounted to $220.6 million during the first quarter of 2013, a $26.1 million or 10.6 percent decrease from the first quarter of 2012. The decrease in interest income resulted from lower asset yields and a significant shift in asset composition resulting from a large reduction in average loans, offset by higher investment securities. Average interest-earning assets increased $595.7 million or 3.2 percent to $19.18 billion. The taxable-equivalent yield on interest-earning assets equaled 4.68 percent for the first quarter of 2013, compared to 5.36 percent for the corresponding period of 2012 as reflected in Table 6.

48


Interest income earned from loans and leases totaled $211.8 million during the first quarter of 2013, a $26.4 million or 11.1 percent reduction when compared to the same period of 2012, the combined result of a $532.4 million reduction in average loans and leases and a 47 basis point decline in the taxable-equivalent loan yield. During the fourth quarter of 2012, interest income earned on loans and leases totaled $270.8 million. The taxable-equivalent yield on loans during the first quarter of 2013 was 6.48 percent compared to 8.08 percent during the fourth quarter of 2012 and 6.95 percent during the first quarter of 2012. Accretion income on acquired loans totaled $79.9 million during the first quarter of 2013 compared to $110.6 million during the fourth quarter of 2012 and $64.9 million during the first quarter of 2012. The recognition of accretion income on acquired loans is significantly influenced by differences between initial cash flow estimates and changes to those estimates that evolve in subsequent periods. Accretion income in future periods will remain volatile but is likely to decrease as the balance of acquired loans continues to decline.
Interest income earned on the investment securities portfolio totaled $8.5 million during the first quarter of 2013 compared to $8.3 million during the same period of 2012. This decrease in income is the result of lower yields partially offset by an increase in average balances. The taxable-equivalent yield decreased 15 basis points from 0.82 percent in the first quarter of 2012 to 0.67 percent in the first quarter of 2013. This yield reduction was caused by significantly lower reinvestment rates on new securities compared to maturing and called securities. We anticipate the yield on investment securities will remain at current low levels until the Federal Reserve begins to raise the benchmark fed funds rates, an action that would likely lead to higher asset yields.
Interest expense amounted to $15.7 million during the first quarter of 2013, a $10.1 million or 39.1 percent decrease from the first quarter of 2012. The reduced level of interest expense resulted from lower rates and average balances. The rate on average interest-bearing liabilities equaled 0.45 percent during the first quarter of 2013, a 27 basis point decrease from the first quarter of 2012. Average interest-bearing liabilities decreased $338.4 million or 2.3 percent from the first quarter of 2012 to the first quarter of 2013 due to the run-off of deposits assumed in FDIC-assisted transactions and a reduction in long-term obligations resulting from the early redemption of trust preferred securities and maturities of FHLB borrowings.
Average interest-bearing deposits equaled $13.14 billion during the first quarter of 2013, a decrease of $28.2 million or 0.2 percent from the first quarter of 2012. Average money market accounts increased $664.9 million or 11.5 percent from the first quarter of 2012, due to customers holding available liquidity in flexible deposit accounts. During the first quarter of 2013, time deposits averaged $3.46 billion, down $1.02 billion or 22.7 percent from the first quarter of 2012, resulting from customer preference for non-time deposits.
For the quarters ended March 31, 2013, and March 31, 2012, short-term borrowings averaged $559.6 million and $632.3 million, respectively. The $72.7 million or 11.5 percent decrease in average short-term borrowings since the first quarter of 2012 is the result of maturities of FHLB debt during 2012.
Net interest income totaled $204.9 million during the first quarter of 2013, a decrease of $16.1 million or 7.3 percent from the first quarter of 2012. Lower current year net interest income and net yield on interest-earning assets resulted from loan shrinkage. During 2013 and 2012, growth in investment securities and reductions in average loans have caused the taxable-equivalent net yield on interest-earning assets to decline to 4.35 percent for the first quarter, down 45 basis points from the 4.80 percent recorded for the first quarter of 2012. Net interest income for the first quarter of 2013 included $79.9 million of accretion income, compared to $64.9 million in the first quarter of 2012.
Net interest income during the first quarter of 2013 represented a decrease of $58.1 million when compared to the $262.9 million recorded during the fourth quarter of 2012, primarily due to lower asset yields. The taxable-equivalent net yield on interest-earning assets for the first quarter of 2013 declined 109 basis points from the 5.44 percent recorded in the fourth quarter of 2012. A significant factor in the net interest income reduction was accretion income, which declined $30.7 million in the first quarter of 2013 when compared to $110.6 million of accretion income earned in the fourth quarter of 2012.
The continuing accretion of fair value discounts resulting from acquired loans will contribute to volatility in net interest income in future periods. Factors affecting the amount of accretion include unscheduled loan payments, changes in estimated cash flows and impairment. During 2012, many of the loans previously accounted for under the cost recovery method were transferred to an acquired loan accounting system and are now accreting yield. Fair value discounts related to non-pooled loans that have been repaid unexpectedly are accreted into interest income at the time the loan obligation is satisfied.


49


Table 6
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Three Months

 
2013
 
2012
 
Increase (decrease) due to:
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
 
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
 
 
Yield/
 
Total
 
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Volume
 
Rate
 
Change
Assets
(dollars in thousands)
Loans and leases
$
13,289,828

 
$
212,271

 
6.48

%
$
13,822,226

 
$
238,732

 
6.95

%
$
(9,783
)
 
$
(16,678
)
 
$
(26,461
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
803,803

 
517

 
0.26

 
964,015

 
770

 
0.32

 
(118
)
 
(135
)
 
(253
)
Government agency
3,096,761

 
3,466

 
0.45

 
2,611,298

 
4,512

 
0.69

 
679

 
(1,725
)
 
(1,046
)
Residential mortgage-backed securities
1,278,491

 
4,579

 
1.45

 
301,780

 
1,889

 
2.52

 
4,778

 
(2,088
)
 
2,690

Corporate bonds

 

 

 
247,673

 
1,199

 
1.94

 
(600
)
 
(599
)
 
(1,199
)
State, county and municipal
549

 
9

 
6.65

 
1,041

 
19

 
7.34

 
(9
)
 
(1
)
 
(10
)
Other
17,326

 
76

 
1.78

 
15,353

 
131

 
3.43

 
12

 
(67
)
 
(55
)
Total investment securities
5,196,930

 
8,647

 
0.67

 
4,141,160

 
8,520

 
0.82

 
4,742

 
(4,615
)
 
127

Overnight investments
693,550

 
357

 
0.21

 
621,239

 
313

 
0.20

 
32

 
12

 
44

Total interest-earning assets
19,180,308

 
$
221,275

 
4.68

%
18,584,625

 
$
247,565

 
5.36

%
$
(5,009
)
 
$
(21,281
)
 
$
(26,290
)
Cash and due from banks
508,417

 
 
 
 
 
534,135

 
 
 
 
 
 
 
 
 
 
Premises and equipment
881,023

 
 
 
 
 
864,355

 
 
 
 
 
 
 
 
 
 
Receivable from FDIC for loss share agreements
234,670

 
 
 
 
 
495,887

 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
(282,977
)
 
 
 
 
 
(269,931
)
 
 
 
 
 
 
 
 
 
 
Other real estate owned
150,870

 
 
 
 
 
197,868

 
 
 
 
 
 
 
 
 
 
Other assets
477,832

 
 
 
 
 
436,552

 
 
 
 
 
 
 
 
 
 
 Total assets
$
21,150,143

 
 
 
 
 
$
20,843,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking With Interest
$
2,283,684

 
$
143

 
0.03

%
$
2,049,885

 
$
340

 
0.07

%
$
23

 
$
(220
)
 
$
(197
)
Savings
928,485

 
114

 
0.05

 
836,499

 
112

 
0.05

 
7

 
(5
)
 
2

Money market accounts
6,463,186

 
3,185

 
0.20

 
5,798,321

 
4,272

 
0.30

 
417

 
(1,504
)
 
(1,087
)
Time deposits
3,460,968

 
6,871

 
0.81

 
4,479,784

 
11,748

 
1.05

 
(2,432
)
 
(2,445
)
 
(4,877
)
Total interest-bearing deposits
13,136,323

 
10,313

 
0.32

 
13,164,489

 
16,472

 
0.50

 
(1,985
)
 
(4,174
)
 
(6,159
)
Short-term borrowings
559,649

 
704

 
0.51

 
632,345

 
1,391

 
0.88

 
(134
)
 
(553
)
 
(687
)
Long-term obligations
444,539

 
4,705

 
4.23

 
682,067

 
7,937

 
4.65

 
(2,639
)
 
(593
)
 
(3,232
)
Total interest-bearing liabilities
14,140,511

 
$
15,722

 
0.45

%
14,478,901

 
$
25,800

 
0.72

%
$
(4,758
)
 
$
(5,320
)
 
$
(10,078
)
Demand deposits
4,786,342

 
 
 
 
 
4,334,324

 
 
 
 
 
 
 
 
 
 
Other liabilities
345,845

 
 
 
 
 
150,752

 
 
 
 
 
 
 
 
 
 
Shareholders' equity
1,877,445

 
 
 
 
 
1,869,613

 
 
 
 
 
 
 
 
 
 
 Total liabilities and shareholders' equity
$
21,150,143

 
 
 
 
 
$
20,833,590

 
 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
 
 
4.23

%
 
 
 
 
4.64

%
 
 
 
 
 
Net interest income and net yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on interest-earning assets
 
 
$
205,553

 
4.35

%
 
 
$
221,765

 
4.80

%
$
(251
)
 
$
(15,961
)
 
$
(16,212
)
Loans and leases include loans covered under loss share agreements, loans not covered under loss share agreements, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent and state income tax rates of 6.9 percent for each period. The taxable-equivalent adjustment was $671 and $813 for 2013 and 2012, respectively. The rate/volume variance is allocated equally between the changes in volume and rate.




50


NONINTEREST INCOME

Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. The primary sources of noninterest income have traditionally consisted of cardholder and merchant services income, service charges on deposit accounts and revenues derived from wealth management services. During 2013 and 2012, noninterest income has been significantly influenced by post-acquisition adjustments to the receivable from the FDIC resulting from the FDIC-assisted transactions.

Table 7
NONINTEREST INCOME

 
Three months ended March 31
 
2013
 
2012
 
 
 
 
Cardholder and merchant services
$
23,557

 
$
22,450

Service charges on deposit accounts
14,999

 
14,846

Wealth management services
14,515

 
13,755

Fees from processing services
5,619

 
8,562

Securities gains (losses)
58

 
(45
)
Other service charges and fees
3,766

 
3,441

Mortgage income
3,788

 
2,924

Insurance commissions
2,980

 
2,756

ATM income
1,168

 
1,455

Adjustments to FDIC receivable for loss share agreements
(24,053
)
 
(26,796
)
Other
11,116

 
3,595

Total noninterest income
$
57,513

 
$
46,943



During the first three months of 2013, noninterest income amounted to $57.5 million, compared to $46.9 million during the same period of 2012. The majority of the $10.6 million increase during 2013 is due to the sale of the processing services line of business, adjustments to the FDIC receivable for loss share agreements, cardholder and merchant services, and wealth management services income.

Other noninterest income includes $7.5 million generated from the sale of our rights and most of our obligations under various service agreements with client banks, some of which are Related Persons. Net of asset impairments and severance costs recorded in conjunction with the sale that are included in noninterest expense, we recorded a net gain of $5.5 million. We will continue to provide processing services to First Citizens Bank and Trust Company, Inc. (FCB-SC), a Related Person and our largest client bank, pursuant to a Master Services Agreement, which is attached as Exhibit 10.2.

The gain recorded during the first quarter was partially offset by a reduction in the fees from processing services, which declined $2.9 million or 34.4 percent during the first three months of 2013 when compared to 2012. As a result of the non-retained service agreements, fees from processing services totaled $5.6 million during the first quarter of 2013, compared to $8.6 million during the first quarter of 2012. The large reduction will continue in future periods. Fees from processing services generated by all banks other than FCB-SC totaled $19.2 million during 2012.

Changes in the FDIC receivable resulting from post-acquisition improvement and deterioration of covered assets is generally offset by an adjustment to noninterest income. Increases in the FDIC receivable for deterioration in covered assets has a favorable impact on noninterest income, while reductions in the FDIC receivable for improvements in covered assets has an unfavorable impact on noninterest income. As a result of adjustments to the receivable from the FDIC, noninterest income was reduced by $24.1 million during the first quarter of 2013, compared to $43.8 million during the fourth quarter of 2012 and $26.8 million during the first quarter of 2012. For each period, the reductions in noninterest income corresponded to writedowns of the FDIC receivable resulting from net improvements in estimated cash flows related to covered assets.


51


Cardholder and merchant services generated $23.6 million during the first quarter of 2013, an increase of $1.1 million or 4.9 percent compared to the first quarter of 2012, the result of improved merchant revenue. Income from wealth management services totaled $14.5 million during the first quarter of 2013, compared to $13.8 million during the first quarter of 2012, an increase of $760,000 or 5.5 percent due to favorable market conditions.

Service charges on deposit accounts equaled $15.0 million and $14.8 million for the first quarter of 2013 and 2012, respectively, resulting in a modest 1.0 percent increase. Mortgage income equaled $3.8 million and $2.9 million for the first quarters of 2013 and 2012, respectively, a $864,000 increase from 2012.

NONINTEREST EXPENSE

The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs for our branch offices and our technology and operations infrastructure.

Table 8
NONINTEREST EXPENSE

 
Three months ended March 31
 
2013
 
2012
 
 
 
 
Salaries and wages
$
76,119

 
$
75,684

Employee benefits
25,019

 
20,249

Occupancy expense
18,809

 
18,607

Equipment expense
18,946

 
18,166

FDIC insurance expense
2,666

 
3,057

Foreclosure-related expenses
4,305

 
4,590

Collection
5,274

 
5,939

Processing fees paid to third parties
4,381

 
3,149

Consultant
1,626

 
601

Advertising
297

 
1,363

Other
36,913

 
31,926

Total noninterest expense
$
194,355

 
$
183,331


Noninterest expense equaled $194.4 million for the first three months of 2013, an $11.0 million or 6.0 percent increase from the $183.3 million recorded during the same period of 2012.

For the first quarter of 2013, noninterest expense included a $4.8 million increase in employee benefits expense due to a $2.8 million increase in pension expense resulting from a lower discount rate during 2013. Employee health costs also increased during 2013.

Equipment expense increased $780,000 or 4.3 percent during the first quarter of 2013 due to higher software depreciation. Equipment expenses will increase in future periods as we continue an effort to update our core technology systems and related business processes. The project begins in 2013 and will continue until 2016 with total costs estimated at $100.0 million. As each phase of the project is completed, we anticipate that equipment expense, including depreciation expense for software and hardware investments and related maintenance expense, will increase.

Processing fees paid to third parties increased $1.2 million or 39.1 percent during the first quarter of 2013, primarily due to increases related to mobile banking and outsourcing our commercial lockbox function.

Other noninterest expense includes $1.4 million of fixed asset writedowns that resulted from the previously-discussed sale of the service agreements with client banks. The writedowns related to prior technology investments that became impaired as a result of that transaction.


52


INCOME TAXES

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 such tax auditors.

Income tax expense totaled $31.1 million and $18.4 million for the first quarters of 2013 and 2012, representing effective tax rates of 35.8 percent and 34.1 percent during the respective periods. The higher effective tax rate results from the impact of various favorable permanent differences on higher pre-tax income in 2013.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

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 comfortably 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 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. Table 9 provides information on capital adequacy for BancShares as of March 31, 2013December 31, 2012, and March 31, 2012.

Table 9
ANALYSIS OF CAPITAL ADEQUACY
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Regulatory
minimum
 
Well-capitalized requirement
 
(dollars in thousands)
 
 
 
 
Tier 1 capital
$
1,972,088

 
$
1,949,985

 
$
2,108,473

 
 
 
 
Tier 2 capital
229,865

 
229,385

 
251,442

 
 
 
 
Total capital
$
2,201,953

 
$
2,179,370

 
$
2,359,915

 
 
 
 
Risk-adjusted assets
$
13,601,048

 
$
13,663,353

 
$
13,394,789

 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 capital
14.50
%
 
14.27
%
 
15.74
%
 
4.00
%
 
6.00
%
Total capital
16.19

 
15.95

 
17.62

 
8.00

 
10.00

Tier 1 leverage ratio
9.36

 
9.22

 
10.16

 
3.00

 
5.00


BancShares continues to exceed minimum capital standards and FCB remains well-capitalized.
    
As of July 1, 2012, our board granted authority to purchase up to 100,000 and 25,000 shares of Class A and Class B common stock, respectively, through June 30, 2013. During 2012, we purchased and retired 56,276 shares of Class A common stock and 100 shares of Class B common stock pursuant to the July 1, 2012, board authorization. During the first quarter of 2013, BancShares purchased and retired 1,973 shares of Class A common stock pursuant to the existing authorization. As of March 31, 2013, BancShares had the ability to purchase 41,751 and 24,900 shares of Class A and Class B common stock, respectively, under existing authorizations.

The Dodd-Frank Act contains provisions that gradually phase out our ability to include trust preferred capital securities in tier 1 capital. As of March 31, 2013, one-third of our trust preferred capital securities were excluded from tier 1 capital. After excluding the $31.2 million no longer eligible, BancShares had $62.3 million of trust preferred capital securities included in tier 1 capital as of March 31, 2013, compared to $93.5 million at December 31, 2012, and $243.5 million at March 31, 2012. Due to the Dodd-Frank exclusion, excessive liquidity and the high coupon rate, BancShares redeemed $150.0 million of trust preferred securities on July 31, 2012.

BancShares’ remaining $62.3 million in trust preferred capital securities that currently qualify as tier 1 capital will be phased out in equal increments of $31.2 million during 2014 and 2015. Elimination of all trust preferred capital securities from the March 31, 2013, capital structure would result in a proforma tier 1 leverage capital ratio of 9.07 percent, a tier 1 risk-based capital ratio of 14.04 percent, and a total risk-based capital ratio of 15.73 percent. On a proforma basis assuming disallowance of all trust preferred capital securities, BancShares and FCB continue to remain well-capitalized under current regulatory guidelines.

53



Tier 2 capital of BancShares and FCB includes qualifying subordinated debt that was issued in 2005 with a scheduled maturity date of June 1, 2015. Under current regulatory guidelines, when subordinated debt is within five years of its scheduled maturity date, issuers must discount the amount included in tier 2 capital by 20 percent for each year until the debt matures. The amount of subordinated debt that qualifies as tier 2 capital totaled $50.0 million as of March 31, 2013, compared to $75.0 million at March 31, 2012. The amount of subordinated debt eligible to be included in tier 2 capital will decline to $25.0 million in the second quarter of 2013 and will be completely removed from tier 2 capital in the second quarter of 2014. Tier 2 capital is part of total risk-based capital, reflected in Table 9.

In September 2010, the Basel Committee on Banking Supervision announced new global regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and exposure. In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules for United States banking organizations. The proposed rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock and an effective minimum tier 1 common equity ratio of 7.00 percent. Final rules are expected to be issued in 2013. While we have estimated the impact the proposed rules would have on our capital ratios, we are unable at this time to predict how the final rules will differ from the proposed rules and the effective date of the final rules. We continue to monitor Basel III developments and remain committed to managing our capital levels in a prudent manner. BancShares' tier 1 common equity ratio based on the current tier 1 capital and risk-weighted assets calculations, excluding trust preferred securities, is 14.04 percent at March 31, 2013, compared to the fully phased-in Federal Reserve standards of 7.00 percent. Tier 1 common equity ratio is calculated in Table 10.

Table 10
TIER 1 COMMON EQUITY

 
March 31, 2013
 
(dollars in thousands)
Tier 1 capital
$
1,972,088

Less: restricted core capital
62,333

Tier 1 common equity
$
1,909,755

Risk-adjusted assets
$
13,601,048

 
 
Tier 1 common equity ratio
14.04
%

GOODWILL IMPAIRMENT

GAAP requires that we perform an impairment test each year to determine if goodwill is impaired. Annual impairment tests are conducted as of July 31 each year. We performed the annual goodwill impairment test during the third quarter of 2012 and there was no impairment of goodwill.

In addition to the annual testing requirement, we are required to test goodwill for impairment for various other events including significant adverse changes in the business climate. The test considers various qualitative and quantitative factors to determine whether impairment exists. As of March 31, 2013, the book value of our common stock was $199.46, compared to a market price of $182.70. If the stock price deteriorates further or remains below book value for a sustained period, subsequent impairment tests may determine that goodwill impairment exists. An impairment charge could have a significant impact on our consolidated income statement. However, a goodwill impairment charge would not impact our capital ratios as those ratios are calculated using tangible capital amounts.









54


RISK MANAGEMENT

Effective risk management is critical to our success. The most significant risks we confront are credit, interest rate and liquidity risk. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loan, lease and investment assets. Interest rate risk results from changes in interest rates which may impact the re-pricing of assets and liabilities in different amounts or at different dates. Liquidity risk is the risk that we will be unable to fund obligations to loan customers, depositors or other creditors. To manage these risks as well as other risks that are inherent in our operation and to provide reasonable assurance that our long-term business objectives will be attained, various policies and risk management processes identify, monitor and manage risk within appropriate ranges. Management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.

In response to the requirements of the Dodd-Frank Act, federal regulators released final stress testing rules on October 9, 2012. The annual stress test is a component of a broader stress testing framework that was finalized in late 2012. Implementation of the annual stress testing requirement has been delayed until September 30, 2013, for institutions, such as BancShares, with total assets of $10.00 billion to $50.00 billion. Through the stress testing program that has been implemented, BancShares and FCB satisfactorily comply with the 2012 stress testing regulations as well as guidance for ongoing bank-level stress testing published in May 2012. The results of the stress testing activities will be considered in combination with other risk management and monitoring practices to maintain an effective risk management program.

Credit risk management. The maintenance of excellent asset quality has historically been one of our key performance measures. Loans and leases not covered by loss share agreements with the FDIC were underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Loans covered by loss share agreements with the FDIC were recorded at fair value at the date of the acquisition and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses to ensure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan and lease losses that are inherent in the loan and lease portfolio.

We maintain a well-diversified loan and lease portfolio and seek to minimize the risk associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to significant risk, such as our concentrations of real estate secured loans, revolving mortgage loans and medical-related loans.

We have historically carried a significant concentration of real estate secured loans. Within our noncovered loan portfolio, we mitigate that exposure through our underwriting policies that primarily rely on borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner occupied. At March 31, 2013, loans secured by real estate not covered by loss share agreements totaled $8.93 billion or 77.6 percent of total noncovered loans and leases compared to $8.98 billion or 77.5 percent of noncovered loans and leases at December 31, 2012, and $8.83 billion or 76.9 percent at March 31, 2012.

Among real estate secured loans, our revolving mortgage loans present a heightened risk due to long commitment periods during which the financial position of individual borrowers or collateral values may deteriorate significantly. In addition, a large percentage of our revolving mortgage loans are secured by junior liens. Substantial declines in collateral values could cause junior lien positions to become effectively unsecured. Revolving mortgage loans secured by real estate amounted to $2.15 billion, or 18.7 percent of loans not covered by loss share agreements at March 31, 2013, compared to $2.21 billion or 19.1 percent at December 31, 2012, and $2.28 billion or 19.9 percent at March 31, 2012.

We have not acquired revolving mortgages in the secondary market nor have we originated these loans to customers outside of our market areas. All noncovered revolving mortgage loans were originated by us and were underwritten based on our standard lending criteria. The revolving mortgage loan portfolio consists largely of variable rate lines of credit which allow customer draws during the entire contractual period of the line of credit, typically 15 years. Approximately 85 percent of outstanding balances at March 31, 2013, require interest-only payments, while the remaining require monthly payments equal to 1.5 percent of the outstanding balance. Approximately 89.9 percent of the revolving mortgage portfolio relates to properties in North Carolina and Virginia. Approximately 34.9 percent of the loan balances outstanding are secured by senior collateral positions while the remaining 65.1 percent are secured by junior liens.


55


Due to higher default risk resulting from financial strain facing our borrowers and lower collateral values, during 2012, we engaged a third party to obtain credit quality data on certain of our junior lien revolving mortgage loans. After gathering information on current lien position and delinquency status for both our junior lien position and the related senior lien, we considered whether the new data indicated that changes in loss estimates were required. The lien positions obtained by the third party closely matched the data in our loan systems that we had used to calculate the allowance for loan and lease losses. In addition, the data collected indicated that 97.0 percent of the sampled junior liens that were current as to payment status on the junior lien were also current on the related senior lien. Only 1.4 percent of the sampled junior liens had senior liens with more severe delinquency status compared to the related junior lien. Management concluded the credit quality and the probability of default of the senior liens was generally consistent with our junior lien historical results. The allowance for our revolving mortgage loans is calculated using estimated loss rates with primary consideration placed on losses sustained in recent periods.  When considering future losses, we apply subjective adjustments to actual prior losses if we believe we may experience different levels of losses in future periods due to the various risks applicable to revolving mortgage loans including junior lien positions, trends in real estate valuations and potentially higher interest rates.

Noncovered loans and leases to borrowers in medical, dental or related fields totaled $3.11 billion as of March 31, 2013, which represents 27.0 percent of loans and leases not covered by loss share agreements, compared to $3.02 billion or 26.1 percent of noncovered loans and leases at December 31, 2012, and $3.19 billion or 27.8 percent of noncovered loans and leases at March 31, 2012. The credit risk of this industry concentration is mitigated through our underwriting policies that emphasize reliance on adequate borrower cash flow rather than underlying collateral value and our preference for financing secured by owner-occupied real property. Except for this single concentration, no other industry represented more than 10 percent of total noncovered loans and leases outstanding at March 31, 2013.

Nonperforming assets include nonaccrual loans and leases and OREO that are both covered and not covered by FDIC loss share agreements. With the exception of certain residential mortgage loans, the accrual of interest on noncovered loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Noncovered loans and leases are returned to accrual status when both principal and interest are current and the asset is determined to be performing in accordance with the terms of the loan instrument. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due and resumes when the loan is less than three monthly payments past due. Accretion of income for covered loans is discontinued when we are unable to estimate the amount or timing of cash flows. This designation may be made at acquisition date or subsequent to acquisition date, including at maturity when no formal repayment plan has been established. Covered loans may begin or resume accretion of income if information becomes available that allows us to estimate the amount or timing of future cash flows. See Table 11 for details on nonperforming assets and other risk elements.

At March 31, 2013, BancShares’ nonperforming assets amounted to $273.2 million or 2.1 percent of total loans and leases plus OREO, compared to $310.4 million or 2.3 percent at December 31, 2012, and $549.1 million or 4.0 percent at March 31, 2012. Of the $273.2 million in nonperforming assets at March 31, 2013, $145.8 million is covered by FDIC loss share agreements while the remaining $127.4 million is not covered by loss share agreements. Nonperforming assets not covered by loss share agreements represent 1.1 percent of noncovered loans, leases and OREO at March 31, 2013, compared to 1.0 percent at March 31, 2012.

Covered nonaccrual loans equaled $43.9 million as of March 31, 2013, compared to $74.5 million at December 31, 2012, and $292.2 million at March 31, 2012. The reduction in covered nonaccrual loans as of March 31, 2013, results primarily from the late-2012 deployment of the acquired loan accounting system, which resulted in accretion income being recognized on loans previously classified as nonaccrual and accounted for under the cost recovery method. Noncovered nonaccrual loans decreased $7.3 million from December 31, 2012, to March 31, 2013, the net result of decreases in commercial mortgage and commercial construction and land development loans.

OREO includes foreclosed property and branch facilities that we have closed but not sold. Noncovered OREO totaled $44.8 million at March 31, 2013, compared to $43.5 million at December 31, 2012, and $48.1 million at March 31, 2012. At March 31, 2013, construction and land development properties including vacant land for development represented 37.7 percent of OREO. Vacant land values have experienced an especially steep decline during the economic slowdown due to a significant drop in demand and values may continue to decline if demand remains weak.


56


Once acquired, net book values of OREO are reviewed at least annually to evaluate if write-downs are required. Real estate appraisals are reviewed by the appraisal review department to ensure the quality of the appraised value in the report. The level of review is dependent on the value and type of the collateral, with higher value and more complex properties receiving a more detailed review. In a market of declining property values, as we have experienced in recent years, we utilize resources in addition to appraisals to obtain the most current market value. 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. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information. Decisions regarding write-downs are based on factors that include appraisals, broker opinions, previous offers received on the property, market conditions and the number of days the property has been on the market.

At March 31, 2013, the allowance for loan and lease losses allocated to noncovered loans totaled $176.5 million or 1.53 percent of loans and leases not covered by loss share agreements, compared to $179.0 million or 1.55 percent at December 31, 2012, and $186.4 million or 1.62 percent at March 31, 2012. The reduction in the allowance for noncovered loan and lease losses from March 31, 2012, was primarily due to reductions in allowance for loans evaluated collectively for impairment, partially offset by higher allowances recorded for loans evaluated individually for impairment. The allowance for loans collectively evaluated for impairment has decreased $15.0 million due to a significantly larger portion of the loan portfolio evaluated for individual impairment.The allowance for loans individually evaluated for impairment has increased by $4.2 million since March 31, 2012, primarily due to a lower threshold used to identify impaired loans and reductions in collateral values.

An additional allowance of $96.5 million relates to covered loans at March 31, 2013, established as a result of post-acquisition deterioration in credit quality for covered loans. The allowance for covered loans equaled $86.1 million at March 31, 2012. The allowance for covered loans has increased since March 31, 2012, due to post-acquisition deterioration, partially offset by charge-offs that have been recorded and the reversal of previously recorded credit- and timing-related impairment.

Management considers the allowance adequate to absorb estimated probable losses that relate to loans and leases outstanding at March 31, 2013, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. Such agencies may require adjustments to the allowance based on information available to them at the time of their examination.

The provision for noncovered loan and lease losses recorded during the first quarter of 2013 equaled $4.0 million, compared to $21.1 million during the first quarter of 2012. The reduction in provision for noncovered loans and leases was primarily the result of reduced loss estimates, lower charge-offs and lower provisions for loans between $500,000 and $1.0 million now individually evaluated for impairment.

During the first quarter of 2013, we recorded a credit to provision expense of $22.6 million for covered loans compared to provision expense of $62.3 million during the fourth quarter of 2012 and $9.6 million recorded during the first quarter of 2012. The favorable change compared to the prior periods resulted from the reversal of previously-identified post-acquisition deterioration of acquired loans covered by loss share agreements with the FDIC resulting from changes in estimates or payoffs. The increased provision expense recognized during the fourth quarter of 2012 primarily related to newly-identified impairment, including credit-related impairment and timing-related impairment resulting from changes in the projected loss dates. To the extent deterioration is covered by a loss share agreement, we also record a corresponding adjustment to the FDIC receivable with an offset to noninterest income for the covered credit-related portion at the appropriate indemnification rate. Impairment related to the timing of cash flows does not trigger adjustments to the FDIC receivable. Due to the imprecision of actual results when compared to prior estimates, the amount of covered loan provision expense is subject to significant volatility. That volatility is even more significant due to our limited use of loan pools for accounting purposes.

Exclusive of losses related to covered loans, net charge-offs equaled $6.5 million during the first quarter of 2013, compared to $15.6 million during the first quarter of 2012. On an annualized basis, net charge-offs represented 0.23 percent of average noncovered loans and leases during the first quarter of 2013 compared to 0.54 percent during the first quarter of 2012. Net charge-offs on covered loans equaled $20.9 million in the first quarter of 2013 compared to $12.7 million recorded in the first quarter of 2012. Loss estimates for most covered loans are made at the individual loan level using loan-specific information. Therefore, fluctuations in charge-off levels on covered loans are not necessarily indicative of future performance of other covered loans.

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Table 11 provides details concerning the allowance for loan and lease losses during the past five quarters.

Table 11
ALLOWANCE FOR LOAN AND LEASE LOSS EXPERIENCE AND RISK ELEMENTS

 
 
2013
 
2012
 
 
 
First
 
Fourth
 
Third
 
 Second
 
First
 
 
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 
 
(dollars in thousands)
 
Allowance for loan and lease losses at beginning of period
 
$
319,018

 
$
276,554

 
$
272,929

 
$
272,500

 
$
270,144

 
Provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
(22,622
)
 
62,332

 
10,226

 
18,678

 
9,603

 
Not covered by loss share agreements
 
4,016

 
2,548

 
7,397

 
10,989

 
21,112

 
Net charge-offs of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
 
(28,944
)
 
(23,969
)
 
(15,196
)
 
(30,934
)
 
(30,379
)
 
Recoveries
 
1,551

 
1,553

 
1,198

 
1,696

 
2,020

 
Net charge-offs of loans and leases
 
(27,393
)
 
(22,416
)
 
(13,998
)
 
(29,238
)
 
(28,359
)
 
Allowance for loan and lease losses at end of period
 
$
273,019

 
$
319,018

 
$
276,554

 
$
272,929

 
$
272,500

 
Allowance for loan and lease losses at end of period allocated to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
$
96,473

 
$
139,972

 
$
90,507

 
$
87,797

 
$
86,117

 
Not covered by loss share agreements
 
176,546

 
179,046

 
186,047

 
185,132

 
186,383

 
Allowance for loan and lease losses at end of period
 
$
273,019

 
$
319,018

 
$
276,554

 
$
272,929

 
$
272,500

 
Detail of net charge-offs of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
$
20,877

 
$
12,867

 
$
7,516

 
$
16,998

 
$
12,747

 
Not covered by loss share agreements
 
6,516

 
9,549

 
6,482

 
12,240

 
15,612

 
Total net charge-offs
 
$
27,393

 
$
22,416

 
$
13,998

 
$
29,238

 
$
28,359

 
Reserve for unfunded commitments
 
$
7,744

 
$
7,692

 
$
7,999

 
$
7,869

 
$
7,789

 
Average loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
$
1,697,776

 
$
1,825,491

 
$
1,916,305

 
$
2,076,199

 
$
2,254,636

 
Not covered by loss share agreements
 
11,592,052

 
11,532,437

 
11,534,859

 
11,535,335

 
11,567,590

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
1,621,327

 
1,809,235

 
1,897,097

 
1,999,351

 
2,183,869

 
Not covered by loss share agreements
 
11,509,080

 
11,576,115

 
11,455,233

 
11,462,458

 
11,489,529

 
Risk Elements
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
$
43,882

 
$
74,479

 
$
142,696

 
$
271,381

 
$
292,229

 
Not covered by loss share agreements
 
82,583

 
89,845

 
75,255

 
69,406

 
66,363

 
Other real estate:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
101,901

 
102,577

 
116,405

 
117,381

 
142,418

 
Not covered by loss share agreements
 
44,828

 
43,513

 
45,063

 
49,454

 
48,092

 
 Total nonperforming assets
 
$
273,194

 
$
310,414

 
$
379,419

 
$
507,622

 
$
549,102

 
 Nonperforming assets covered by loss share agreements
 
$
145,783

 
$
177,056

 
$
259,101

 
$
388,762

 
$
434,647

 
 Nonperforming assets not covered by loss share agreements
 
127,411

 
133,358

 
120,318

 
118,860

 
114,455

 
 Total nonperforming assets
 
$
273,194

 
$
310,414

 
$
379,419

 
$
507,622

 
$
549,102

 
Accruing loans and leases greater than 90 days past due:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
$
278,687

 
$
281,000

 
$
248,573

 
$
254,580

 
$
268,403

 
Not covered by loss share agreements
 
12,301

 
11,272

 
14,071

 
12,907

 
13,828

 
Ratios
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs (annualized) to average loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
4.99

%
2.80

%
1.56

%
3.29

 
2.27

%
Not covered by loss share agreements
 
0.23

 
0.33

 
0.22

 
0.43

 
0.54

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
5.95

 
7.74

 
4.77

 
4.39

 
3.94

 
Not covered by loss share agreements
 
1.53

 
1.55

 
1.62

 
1.62

 
1.62

 
Nonperforming assets to total loans and leases plus other real estate:
 
 
 
 
 
 
 
 
 
 
 
Covered by loss share agreements
 
8.46

 
9.26

 
12.87

 
18.37

 
18.68

 
Not covered by loss share agreements
 
1.10

 
1.15

 
1.05

 
1.03

 
0.99

 
Total
 
2.06

 
2.29

 
2.81

 
3.72

 
3.96

 


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Restructured loans (TDRs) not covered by loss share agreements that are performing under their modified terms equaled $85.6 million at March 31, 2013, compared to $89.1 million at December 31, 2012, and $114.9 million at March 31, 2012. Total covered and noncovered restructured loans as of March 31, 2013, equaled $320.6 million, $242.5 million of which are performing under their modified terms. TDRs are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. These modifications are typically executed only when customers are current on their payment obligation and we believe the modification will result in avoidance of default. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as risk elements within nonaccrual loans and leases in Table 11. Table 11 does not include performing TDRs, which are accruing interest based on the restructured terms. Table 12 provides details on performing and nonperforming TDRs as of March 31, 2013, December 31, 2012, and March 31, 2012.

Table 12
TROUBLED DEBT RESTRUCTURINGS
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
Performing TDRs:
(dollars in thousands)
 
Covered by loss share agreements
$
156,862

 
$
164,256

 
$
121,778

 
Not covered by loss share agreements
85,621

 
89,133

 
114,944

 
Total performing TDRs
242,483

 
253,389

 
236,722

 
Nonperforming TDRs:
 
 
 
 
 
 
Covered by loss share agreements
25,549

 
28,951

 
44,079

 
Not covered by loss share agreements
52,610

 
50,830

 
37,522

 
Total nonperforming TDRs
78,159

 
79,781

 
81,601

 
All TDRs:
 
 
 
 
 
 
Covered by loss share agreements
182,411

 
193,207

 
165,857

 
Not covered by loss share agreements
138,231

 
139,963

 
152,466

 
Total TDRs
$
320,642

 
$
333,170

 
$
318,323

 

Interest rate risk management. Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans and leases that are originated as well as the rate characteristics of our interest-bearing liabilities.

We assess our interest rate risk by simulating future amounts of net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Certain variable rate products, including revolving mortgage loans, have interest rate floors. Due to the existence of contractual floors on loans, competitive pressures that constrain our ability to reduce deposit interest rates and the extraordinarily low current level of interest rates, it is highly unlikely that the rates on most interest-earning assets and interest-bearing liabilities can decline materially from current levels. In our simulations, we do not calculate rate shocks, rate ramps or market value of equity for declining rate scenarios and assume the prime interest rate will not move below the March 31, 2013, rate of 3.25 percent. Our rate shock simulations indicate that, over a 24-month period, net interest income will increase by 5.1 percent, 4.1 percent and 1.1 percent with rates rising 200- and 300- and 400-basis points respectively. Our shock projections incorporate assumptions of likely customer migration of short-term deposit instruments to long-term, higher-rate instruments as rates rise. We also utilize the market value of equity as a tool in measuring and managing interest rate risk. As of March 31, 2013, the market value of equity calculated with 200-, 300- and 400-basis point immediate increases in interest rates equal 9.7 percent, 9.3 percent and 8.7 percent, respectively. The projected market value of equity under a stable rate scenario equals 10.1 percent.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk. However, we have entered into an interest rate swap to synthetically convert the variable rate on $93.5 million of junior subordinated debentures to a fixed rate of 5.50 percent through June 2016. The interest rate swap qualifies as a hedge under GAAP.

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Liquidity risk management. Liquidity risk results from the mismatching of asset and liability cash flows and the potential inability to secure adequate amounts of funding from traditional sources of liquidity at a reasonable cost. We manage this risk by structuring our balance sheet prudently and by maintaining various noncore funding sources to fund potential cash needs. Our primary source of funds has historically been our large retail and commercial customer base, which continues to provide a stable base of core deposits. Core deposits are our largest and most cost-effective source of funding. We also maintain access to various types of noncore funding, including advances from the FHLB of Atlanta, federal funds arrangements with correspondent banks, brokered and CDARS deposits and a line of credit from a correspondent bank. Short-term borrowings resulting from commercial treasury customers are also a recurring source of liquidity, although the majority of those borrowings must be collateralized, thereby potentially restricting the use of the resulting liquidity.

We project our liquidity levels in the normal course of business as well as in conditions that might give rise to significant stress on our current liquidity and contingent sources of liquidity through noncore funding. We endeavor to estimate the impact of on and off-balance sheet arrangements and commitments that may impact liquidity. We monitor various financial and liquidity metrics, perform liquidity stress testing and have documented contingency funding plans that would be invoked if conditions warranted. Sources of noncore funding include available cash reserves, the ability to sell, pledge or borrow against unpledged investment securities and available borrowing capacity at the FHLB of Atlanta and the Federal Reserve discount window.

One of our principal sources of noncore funding is advances from the FHLB of Atlanta. Outstanding FHLB advances equaled $195.3 million as of March 31, 2013, and we had sufficient collateral pledged to secure $1.31 billion of additional borrowings. Additionally, we maintain federal funds lines of credit and other borrowing facilities. At March 31, 2013, BancShares had contingent access to $475.0 million in unsecured borrowings through its various sources.

Once we have satisfied our loan demand and other funding needs, residual liquidity is held in cash or invested in overnight investments and investment securities available for sale. Net of amounts pledged for various purposes, the amount of such immediately-available balance sheet liquidity approximated $2.61 billion at March 31, 2013, compared to $1.40 billion at December 31, 2012, and $1.47 billion at March 31, 2012.

LEGAL PROCEEDINGS

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

Additional information relating to legal proceedings is set forth in Note J of BancShares' Notes to Unaudited Consolidated Financial Statements.

CURRENT ACCOUNTING AND REGULATORY ISSUES

In June 2011, the FASB issued Comprehensive Income: Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 allows financial statement issuers to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12) which deferred the portion of ASU 2011-05 that relates to the presentation of reclassification adjustments. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, which is the presentation method previously utilized by BancShares. The updates in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and have been applied retrospectively. The provisions of these updates have affected BancShares' financial statement format but had no impact on BancShares' financial condition, results of operations or liquidity.


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The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has resulted in expansive changes in many areas affecting the financial services industry in general and BancShares in particular. The legislation provides broad economic oversight, consumer financial services protection, investor protection, rating agency reform, and derivative regulatory reform. Various corporate governance requirements have resulted in expanded proxy disclosures and shareholder rights. Additional provisions address the mortgage industry in an effort to strengthen lending practices. Deposit insurance reform has resulted in permanent FDIC protection for up to $250,000 of deposits and requires the FDIC’s Deposit Insurance Fund to maintain 1.35 percent of insured deposits with the burden for closing the shortfall falling to banks with more than $10.00 billion in assets.

In response to the Dodd-Frank Act, the formula used to calculate the FDIC insurance assessment paid by each FDIC-insured institution was significantly altered. The new formula was effective April 1, 2011, and changes the assessment base from deposits to total assets less equity, thereby placing a larger assessment burden on banks with large levels of non-deposit funding. The new assessment formula also considers the level of higher-risk consumer loans and higher-risk commercial and industrial loans and securities, risk factors that will potentially result in incremental insurance costs. The FDIC recently finalized their definitions of these higher-risk assets and reporting of these assets under the new definitions is effective beginning April 1, 2013. This new reporting requirement requires BancShares to implement process and system changes to accurately identify and report these higher-risk assets.

The Dodd-Frank Act also imposes new regulatory capital requirements for banks that will result in the disallowance of qualified trust preferred capital securities as tier 1 capital beginning in 2013. This legislation requires the reduction in tier 1 capital by the amount of qualified trust preferred capital securities in equal increments over a three-year period beginning in 2013. As of March 31, 2013, BancShares had $62.3 million in trust preferred capital securities that were outstanding and included as tier 1 capital following the July 31, 2012, redemption of $150.0 million of trust preferred capital securities. The remaining $62.3 million in trust preferred capital securities will be eliminated from tier 1 capital in installments of $31.2 million in 2014 and 2015.

In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules for United States banking organizations. The proposed rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock, and an effective floor for tier 1 common equity of 7.00 percent. Final rules are expected to be adopted in 2013. While we have estimated the impact that the proposed rules would have on our capital ratios, we are unable at this time to predict how the final rules will differ from the proposed rules and the effective date of the final rules. We will continue to monitor Basel III developments and remain committed to managing our capital levels in a prudent manner. BancShares' tier 1 common equity ratio based on the current tier 1 capital and risk-adjusted assets calculations (excluding trust preferred securities) is 14.04 percent at March 31, 2013, compared to the proposed fully phased-in Federal Reserve standards of 7.00 percent.

Management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.

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.


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Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the FDIC-assisted transactions, and other developments or changes in our business that we do not expect.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

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Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of March 31, 2013, BancShares’ market risk profile has not changed significantly from December 31, 2012. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4.
Controls and Procedures

BancShares' management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares' disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.

No change in BancShares' internal control over financial reporting occurred during the first quarter of 2013 that had materially affected or is reasonably likely to materially affect, BancShares' internal control over financial reporting.

    

  




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PART II
 
Item 1A.
Risk Factors

The risks and uncertainties that management believes are material are described below. The risks listed are not the only risks that BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem to be material could also have a material adverse impact on our financial condition, the results of our operations or our business. If this were to occur, the market price of our common stock could decline significantly.
 
Unfavorable economic conditions could continue to adversely affect our business
 
Our business is highly affected by national, regional and local economic conditions. These conditions cannot be predicted or controlled and may have a material impact on our operations and financial condition. Unfavorable economic developments beginning in 2008 have resulted in negative effects on the business, risk profile, financial condition and results of operations of financial institutions in the United States, including BancShares and FCB. Continued unfavorable economic conditions could weaken the national economy further as well as the economies of communities that we serve. Further economic deterioration in our market areas could depress our earnings and have an adverse impact on our financial condition and capital adequacy.
 
Weakness in real estate markets and exposure to junior liens have adversely impacted our business and our results of operations and may continue to do so
 
Real property collateral values have declined due to continuing weaknesses in real estate sales activity. That risk, coupled with higher delinquencies and losses on various loan products caused by high rates of unemployment and underemployment, has resulted in losses on loans that, while adequately collateralized at the time of origination, are no longer fully secured. Our continuing exposure to under-collateralization is concentrated in our non-commercial revolving mortgage loan portfolio. Approximately two-thirds of the revolving mortgage portfolio is secured by junior lien positions and lower real estate values for collateral underlying these loans has, in many cases, caused the outstanding balance of the senior lien to exceed the value of the collateral, resulting in a junior lien loan that is in effect unsecured. A large portion of our losses within the revolving mortgage portfolio has arisen from junior lien loans due to the inadequate collateral position.

Because of our conservative underwriting policies and generally stable or increasing collateral values, in past years, we have not experienced significant losses resulting from our junior lien positions. As a result, we have not closely monitored performance of senior lien positions held by other financial institutions in prior years. However, due to higher defaults resulting from financial strain facing our borrowers and lower collateral values, we now collect data to monitor performance of senior lien positions held by other lenders. That information allows us to better estimate the probability of default on junior lien positions we hold.

Further declines in collateral values, unfavorable economic conditions and sustained high rates of unemployment could result in greater delinquency, write-downs or charge-offs in future periods, which could have a material adverse impact on our results of operations and capital adequacy.

Accounting for acquired assets may result in earnings volatility
     
Fair value discounts that are recorded at the time an asset is acquired are accreted into interest income based on accounting principles generally accepted in the United States of America. The rate at which those discounts are accreted is unpredictable, the result of various factors including unscheduled prepayments and credit quality improvements that result in a reclassification from nonaccretable difference to accretable yield that is prospectively included in interest income. Post-acquisition deterioration results in the recognition of provision expense and allowance for loan and lease losses. Additionally, the income statement impact of adjustments to the indemnification asset may occur over a shorter period of time than the adjustments to the covered assets.

Fair value discount accretion, post-acquisition impairment and adjustments to the indemnification asset may result in significant volatility in our earnings. Volatility in earnings could unfavorably influence investor interest in our common stock thereby depressing the market value of our stock and the market capitalization of our company.
 
 

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Reimbursements under loss share agreements are subject to FDIC oversight and interpretation and contractual term limitations
 
The FDIC-assisted transactions completed during 2011, 2010 and 2009 include significant protection to FCB from the exposures to prospective losses on certain assets that are covered under loss share agreements with the FDIC. Loans and leases covered under loss share agreements represent 12.3 percent of total loans and leases as of March 31, 2013. The loss share agreements impose certain obligations on us, including obligations to manage covered assets in a manner consistent with prudent business practices and in accordance with the procedures and practices that we customarily use for assets that are not covered by loss share agreements. Based on projected losses as of March 31, 2013, we expect to receive cash payments from the FDIC totaling $107.3 million over the remaining lives of the respective loss share agreements. We are also required to report detailed loan level information and file requests for reimbursement of covered losses and expenses on a quarterly basis. In the event of noncompliance, delay or disallowance of some or all of our rights under those agreements could occur, including the denial of reimbursement for losses and related collection costs.

The loss share agreements are subject to differing interpretations by the FDIC and FCB and disagreements may arise regarding coverage of losses, expenses and contingencies. Additionally, losses that are currently projected to occur during the loss share term may not occur until after the expiration of the applicable agreement and those losses could have a material impact on results of operations in future periods. Our current estimates of losses include only those losses that we project to occur during the loss share period and for which we believe we will receive reimbursement from the FDIC at the applicable reimbursement rate.
During March 2012, FCB received communications from the US Small Business Administration (SBA) asserting that the SBA is entitled to receive a share of amounts paid or to be paid by the FDIC to FCB relating to certain specific SBA-guaranteed loans pursuant to the Loss Share Agreement between FCB and the FDIC applicable to Temecula Valley Bank. FCB disputes the validity of the SBA claims and is pursuing administrative relief through the SBA.

We are subject to extensive oversight and regulation that continues to change
 
We and FCB are subject to extensive federal and state banking laws and regulations. These laws and regulations primarily focus on the protection of depositors, federal deposit insurance funds and the banking system as a whole rather than the protection of security holders. Federal and state banking regulators possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums, increased expenses, reductions in fee income and limitations on activities that could have a material adverse effect on our results of operations.

The Dodd-Frank Act instituted significant changes to the overall regulatory framework for financial institutions, including the creation of the CFPB that will impact BancShares and FCB. During the fourth quarter of 2011, limitations on debit card interchange fees became effective. Beginning January 1, 2013, one-third of our trust preferred securities that qualified as tier 1 capital ceased to be included in tier 1 capital with similar phase-outs occurring during 2014 and 2015.

In September 2010, the Basel Committee on Banking Supervision announced new global regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and exposure.

In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules for United States banking organizations. The proposed rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock and an effective floor for tier 1 common equity of 7.00 percent. Final rules are expected to be adopted in 2013. While we have estimated the impact that the proposed rules would have on our capital ratios, we are unable at this time to predict how the final rules will differ from the proposed rules and the effective date of the final rules.
 
We encounter significant competition
 
We compete with other banks and specialized financial service providers in our market areas. Our primary competitors include local, regional and national banks and savings associations, credit unions, commercial finance companies, various wealth management providers, independent and captive insurance agencies, mortgage companies and non-bank providers of financial services. Some of our larger competitors, including banks that have a significant presence in our market areas, have the

65


capacity to offer products and services we do not offer. Some of our competitors operate in a regulatory environment that is less stringent than the one in which we operate, or are not subject to federal and state income taxes. The fierce competitive pressure that we face tends to reduce pricing for many of our products and services to levels that are marginally profitable.

Our financial condition could be adversely affected by the soundness of other financial institutions

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to numerous financial service providers, including banks, brokers and dealers in securities and other institutional clients. Transactions with other financial institutions expose us to credit risk in the event of default of the counterparty.
 
Natural disasters and other catastrophes could affect our ability to operate
 
The occurrence of catastrophic events, including weather-related events such as hurricanes, tropical storms, floods or windstorms, as well as earthquakes, pandemic disease, fires and other catastrophes, could adversely affect our financial condition and results of operations. In addition to natural catastrophic events, man-made events, such as acts of terror and governmental response to acts of terror, could adversely affect general economic conditions, which could have a material impact on our results of operations.
 
Unpredictable natural and other disasters could have an adverse effect if those events materially disrupt our operations or affect customers’ access to the financial services we offer. Although we carry insurance to mitigate our exposure to certain catastrophic events, catastrophic events could nevertheless adversely affect our results of operations.
 
We are subject to interest rate risk
 
Our results of operations and cash flows are highly dependent upon our net interest income. Interest rates are sensitive to economic and market conditions that are beyond our control, including the actions of the Federal Reserve Board’s Federal Open Market Committee. Changes in monetary policy could influence our interest income and interest expense as well as the fair value of our financial assets and liabilities. If the changes in interest rates on our interest-earning assets are not roughly equal to the changes in interest rates paid on our interest-bearing liabilities, our net interest income and, therefore, our net income could be adversely impacted.
 
Even though we maintain what we believe to be an adequate interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. The shape of the yield curve may change differently than we forecasted, and we cannot accurately predict changes in interest rates or actions by the Federal Open Market Committee that may have a direct impact on market interest rates.
 
Our current level of balance sheet liquidity may come under pressure
 
Our deposit base represents our primary source of core funding and thus balance sheet liquidity. We normally have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we would need access to noncore funding such as borrowings from the Federal Home Loan Bank and the Federal Reserve, fed funds purchased and brokered deposits. While we maintain access to noncore funding sources, we are dependent on the availability of collateral, the counterparty’s willingness to lend to us and their liquidity capacity.
 
We face significant operational risks in our businesses
 
Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways, including employee fraud, customer fraud and control lapses in bank operations and information technology. Our dependence on our employees and automated systems, including the automated systems used to account for acquired loans and those systems maintained by third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are also subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, legal actions and noncompliance with various laws and regulations.
 
Our business could suffer if we fail to attract and retain skilled people

FCB's success depends primarily on its ability to attract and retain key people. Competition is intense for people who we believe will be successful in developing and attracting new business and/or managing critical support functions for FCB. Our

66


historical lack of providing compensation to key people through annual cash incentives, incentive stock awards or long-term incentive awards creates unique challenges to our attraction and retention of key people. We may not be able to hire the best people or retain them for an adequate period of time after their hire date.

We continue to encounter technological change for which we expect to incur significant expense
 
The financial services industry continues to experience an increase in technological complexity required to provide a competitive array of products and services to customers. Our future success requires that we maintain technology that will support our ability to provide products and services that satisfactorily meet the banking and other financial needs of our customers. During the past two years, we have closely examined the state of our core technology systems and related business processes and determined that significant investments are required. The project to modernize our systems will begin in 2013 with phased implementation through 2016. The magnitude and scope of this project is significant with total costs estimated at $100 million. If the project objectives are not achieved or if the cost of the project is materially in excess of the estimate, our business, financial condition and financial results could be adversely impacted.

We are subject to information security risks
    
We maintain and transmit large amounts of sensitive information electronically, including personal and financial information of our customers. In addition to our own systems, we also rely on external vendors to provide certain services and are, therefore, exposed to their information security risk. While we seek to mitigate internal and external information security risks, the volume of business conducted through electronic devices continues to grow, and our computer systems and network infrastructure, as well as the systems of external vendors and customers, present security risks and could be susceptible to hacking or identity theft.

We are also subject to risks arising from distributed denial of service attacks, which are occurring with increasing frequency. These attacks arise from both domestic and international sources and seek to obtain customer information for fraudulent purposes or, in some cases, to disrupt business activities. These information security risks could lead to a material adverse impact on our business, financial condition and financial results of operations, as well as result in reputational damage.
    
We rely on external vendors
 
Third party vendors provide key components of our business infrastructure, including certain data processing and information services. A number of our vendors are large national entities with dominant market presence in their respective fields, and their services could be difficult to quickly replace in the event of failure or other interruption in service. Failures of certain vendors to provide services for any reason could adversely affect our ability to deliver products and services to our customers. External vendors also present information security risk. We monitor vendor risks, including the financial stability of critical vendors. The failure of a critical external vendor could disrupt our business and cause us to incur significant expense.
 
We are subject to litigation risks that may be uninsured
 
We face litigation risks as principal and fiduciary from customers, employees, vendors, federal and state regulatory agencies and other parties who may seek to assert single or class action liabilities against us. The frequency of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm. Although we carry insurance to mitigate our exposure to certain litigation risks, litigation could, nevertheless, adversely affect our results of operations.
 
We use accounting estimates in the preparation of our financial statements
 
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. Significant estimates include the allowance for loan and lease losses, the fair values of acquired loans and OREO both at acquisition date and in subsequent periods, and the related receivable from the FDIC for loss share agreements. Due to the uncertainty of the circumstances relating to these estimates, we may experience more adverse outcomes than originally estimated. The allowance for loan and lease losses may need to be significantly increased based on future events. The actual losses or expenses on loans or the losses or expenses not covered under the FDIC agreements may differ from the recorded amounts, resulting in charges that could materially affect our results of operations.
 

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Accounting standards may change
 
The Financial Accounting Standards Board and the Securities and Exchange Commission periodically modify the standards that govern the preparation of our financial statements. The nature of these changes is not predictable and could impact how we record transactions in our financial statements, which could lead to material changes in assets, liabilities, shareholders’ equity, revenues, expenses and net income. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously-reported financial results or a cumulative adjustment to retained earnings. The application of new accounting rules or standards could require us to implement costly technology changes.
 
Our access to capital is limited which could impact our future growth
 
Based on existing capital levels, BancShares and FCB maintain well-capitalized ratios under current leverage and risk-based capital standards including the impact of the acquisitions in 2011, 2010 and 2009. Historically, our primary capital sources have been retained earnings and debt issued through both private and public markets including trust preferred securities and subordinated debt. Effective January 1, 2013, provisions of the Dodd-Frank Act eliminated one-third of our trust preferred securities from tier 1 risk-based capital with total elimination on January 1, 2015. The inability to include the trust preferred securities in tier 1 risk-based capital may lead us to redeem a portion or all of the securities prior to their scheduled maturity date. Since we have not historically raised capital through new issues of our common stock, absent additional acquisition gains our ability to raise additional tier 1 capital is limited to issuance of perpetual preferred stock. A lack of ready access to adequate amounts of tier 1 capital could limit our ability to consummate additional acquisitions, make new loans, meet our existing lending commitments and could potentially affect our liquidity and capital adequacy.
 
The major rating agencies regularly evaluate our creditworthiness and assign credit ratings to our debt and the debt of our bank subsidiary. The ratings of the agencies are based on a number of factors, some of which are outside of our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions generally affecting the financial services industry. In light of the difficulties currently confronting the financial services industry, there can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding.
 
The market price of our stock may be volatile
 
Although publicly traded, our common stock has substantially less liquidity and public float than other large publicly traded financial services companies as well as average companies listed on the NASDAQ National Market System. This low liquidity increases the price volatility of our stock which may make it difficult for our shareholders to sell or buy our common stock when they deem a transaction is warranted at a price that they believe is attractive.
 
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors including expectations of operating results, actual operating results, actions of institutional shareholders, speculation in the press or the investment community, market perception of acquisitions, rating agency upgrades or downgrades, stock prices of other companies that are similar to us, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry.
 
BancShares relies on dividends from FCB
 
As a financial holding company, BancShares is a separate legal entity from FCB and receives substantially all of its revenue and cash flow from dividends paid by FCB. The cash flow from these dividends is the primary source which allows BancShares to pay dividends on its common stock and interest and principal on its debt obligations. North Carolina state law limits the amount of dividends that FCB may pay to BancShares. In the event that FCB is unable to pay dividends to BancShares for an extended period of time, BancShares may not be able to service its debt obligations or pay dividends on its common stock.
 
Our recorded goodwill may become impaired

As of March 31, 2013, we had $102.6 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, and the impairment test compares the estimated fair value of a reporting unit with its net book value. We also test goodwill for impairment when certain events occur, such as a significant decline in our expected future cash flows, a significant adverse change in the business climate, or a sustained decline in the price of our common stock. These tests may result in a write-off of goodwill deemed to be impaired, which could have a significant impact on our results of

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operations, but would not impact our capital ratios since capital ratios are calculated using tangible capital amounts. Although the book value per share of our Class A common stock as of March 31, 2013, was $199.46 compared to a market value of $182.70, we do not believe that this represents a sustained decline in the price of our common stock, and, as of March 31, 2013, no impairment of goodwill had been recorded.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
PURCHASES OF COMMON STOCK
On June 18, 2012, the Board of Directors approved a stock trading plan that provides for the purchase of up to 100,000 shares of Registrant's Class A common stock and up to 25,000 shares of Registrant's Class B common stock. The shares may be purchased from time to time from July 1, 2012, through June 30, 2013. The board's action approving share purchases does not obligate BancShares to acquire any particular amount of shares, and purchases may be suspended or discontinued at any time. Any shares of stock that are purchased will be canceled.
The following tables provide the shares of Class A and Class B common stock purchased by BancShares during the three months ended March 31, 2013, as well as shares that may be purchased under publicly announced plans.
 
Class A common stock
Total number of shares purchases
 
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
Repurchases from January 1, 2013, through January 31, 2013
1,973

 
$
163.48

 
1,973

 
41,751

Repurchases from February 1, 2013, through February 28, 2013

 

 

 
41,751

Repurchases from March 1, 2013, through March 31, 2013

 

 

 
41,751

Total
1,973

 
$
163.48

 
1,973

 
41,751


Class B common stock
 
 
 
 
 
 
 
Repurchases from January 1, 2013, through January 31, 2013

 
$

 

 
24,900

Repurchases from February 1, 2013, through February 28, 2013

 

 

 
24,900

Repurchases from March 1, 2013, through March 31, 2013

 

 

 
24,900

Total

 
$

 

 
24,900




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Item 6.
Exhibits

 
 
10.1
Post Retirement Agreement and Release between Registrant's subsidiary First-Citizens Bank & Trust Company and Kenneth A. Black (filed herewith)
10.2
Master Agreement for Banking Support Services between Registrant's subsidiary First-Citizens Bank & Trust Company and First Citizens Bank and Trust Company, Inc. (filed herewith, portions of which have been omitted pursuant to a request for confidential treatment)
31.1
Certification of Chief Executive Officer (filed herewith)
 
 
31.2
Certification of Chief Financial Officer (filed herewith)
 
 
32.1
Certification of Chief Executive Officer (filed herewith)
 
 
32.2
Certification of Chief Financial Officer (filed herewith)
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
May 9, 2013
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ GLENN D. MCCOY
 
 
Glenn D. McCoy
 
 
Vice President and
Chief Financial Officer

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