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FCNCA First Citizens Bancshares, Inc

Filed: 26 Feb 20, 9:59am
0000798941 fcnca:OtherLoansMember us-gaap:PerformingFinancingReceivableMember us-gaap:CommercialPortfolioSegmentMember 2017-12-31



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission File Number: 001-16715
____________________________________________________
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
___________________________________________________
Delaware56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
    
4300 Six Forks RoadRaleighNorth Carolina27609
(Address of principle executive offices)(Zip code)
    
  (919)716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading SymbolName of each exchange on which registered
Class A Common Stock, Par Value $1FCNCANasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934.
Class B Common Stock, Par Value $1
(Title of class)
  _________________________________________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes     No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes     No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $2,987,147,364.

On February 14, 2020, there were 9,503,320 outstanding shares of the Registrant’s Class A Common Stock and 1,005,185 outstanding shares of the Registrant’s Class B Common Stock.
Portions of the Registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated in Part III of this report.





   Page
  CROSS REFERENCE INDEX 
    
PART IItem 1
 Item 1A
 Item 1BUnresolved Staff CommentsNone
 Item 2
 Item 3
 Item 4Mine Safety DisclosuresN/A
PART IIItem 5
 Item 6
 Item 7
 Item 7A
 Item 8Financial Statements and Supplementary Data 
  
  
  
  
  
  
  
  
  
 Item 9Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone
 Item 9A
  
 Item 9BOther InformationNone
PART IIIItem 10Directors, Executive Officers and Corporate Governance*
 Item 11Executive Compensation*
 Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 Item 13Certain Relationships and Related Transactions and Director Independence*
 Item 14Principal Accounting Fees and Services*
PART IVItem 15Exhibits, Financial Statement Schedules 
 (1)Financial Statements (see Item 8 for reference) 
 (2)All Financial Statement Schedules normally required for Form 10-K are omitted since they are not applicable, except as referred to in Item 8. 
 (3)
 Item 16Form 10-K SummaryNone
* Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Corporate Governance —Service on other Public Company Boards’ and ‘-Code of Ethics;’ ‘Committees of our Boards—Audit Committee;’ and ‘Executive Officers’ from the Registrant’s Proxy Statement for the 2020 Annual Meeting of Shareholders (“2020 Proxy Statement”).
Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Committees of our Board—Compensation Committee Report;’ and ‘—Effect of Risk Management on Compensation;’ ‘Compensation Discussion and Analysis;’ ‘Executive Compensation;’ and ‘Director Compensation’ of the 2020 Proxy Statement.
Information required by Item 12 is incorporated herein by reference to the information that appears under the captions ‘Beneficial Ownership of Our Common Stock—Directors and Executive Officers,’ ‘—Existing Pledge Arrangements,’ and ‘—Principal Shareholders’ of the 2020 Proxy Statement. The Registrant does not have any compensation plans under which equity securities of the Registrant are authorized for issuance to employees or directors.
Information required by Item 13 is incorporated herein by reference to the information that appears under the headings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Persons’ of the 2020 Proxy Statement.
Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Proposal 3: Ratification of Appointment of Independent Accounts—Services and Fees During 2019 and 2018’ of the 2020 Proxy Statement.

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Part I
Item 1. Business
 
General
First Citizens BancShares, Inc. (“we,” “us,” “our,” “BancShares”) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (“FCB,” or “the Bank”), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield in Smithfield, North Carolina, and later changed its name to First-Citizens Bank & Trust Company. BancShares has expanded through de novo branching and acquisitions and now operates in 19 states, providing a broad range of financial services to individuals, businesses and professionals. At December 31, 2019, BancShares had total assets of $39.82 billion.

Throughout its history, the operations of BancShares have been significantly influenced by descendants of Robert P. Holding, who came to control FCB during the 1920s. Robert P. Holding’s children and grandchildren have served as members of the Board of Directors (the “Board”), as chief executive officers and in other executive management positions and, since BancShares’ formation in 1986, have remained shareholders owning a large percentage of its common stock.

The Chairman of the Board and Chief Executive Officer, Frank B. Holding, Jr., is the grandson of Robert P. Holding. Hope Holding Bryant, Vice Chairman of BancShares, is Robert P. Holding’s granddaughter. Peter M. Bristow, President and Corporate Sales Executive of BancShares, is the brother-in-law of Frank B. Holding, Jr. and Hope Holding Bryant.

BancShares seeks to meet the financial needs of both individuals and commercial entities in its market areas through a wide range of retail and commercial banking services. Loan services include various types of commercial, business and consumer lending. Deposit services include checking, savings, money market and time deposit accounts. BancShares’ subsidiaries also provide mortgage lending, a full-service trust department, wealth management services for businesses and individuals, and other activities incidental to commercial banking. FCB’s wholly owned subsidiaries, First Citizens Investor Services, Inc. (“FCIS”) and First Citizens Asset Management, Inc. (“FCAM”), provide various investment products and services. As a registered broker/dealer, FCIS provides a full range of investment products, including annuities, discount brokerage services and third-party mutual funds. As registered investment advisors, FCIS and FCAM provide investment management services and advice.

BancShares’ subsidiaries deliver products and services to its customers through an extensive branch network as well as digital banking, telephone banking and various ATM networks. Services offered at most offices include the taking of deposits, the cashing of checks and providing for individual and commercial cash needs. Business customers may conduct banking transactions through the use of remote image technology.

Statistical information regarding our business activities is found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Competition
The financial services industry is highly competitive. BancShares’ subsidiaries compete with national, regional and local financial services providers. In recent years, the ability of non-bank financial entities to provide services has intensified competition. Non-bank financial service providers are not subject to the same significant regulatory restrictions as traditional commercial banks. More than ever, customers have the ability to select from a variety of traditional and nontraditional alternatives. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits and customer convenience.

FCB’s primary deposit markets are North Carolina and South Carolina, which represent approximately 48.8% and 23.2%, respectively, of total FCB deposits. FCB’s deposit market share in North Carolina was 4.4% as of June 30, 2019, based on the Federal Deposit Insurance Corporation (“FDIC”) Deposit Market Share Report, which makes FCB the fourth largest bank in North Carolina. The three banks larger than FCB based on deposits in North Carolina as of June 30, 2019, which include Bank of America, BB&T (now a part of Truist Bank) and Wells Fargo, collectively controlled 74.1% of North Carolina deposits. In South Carolina, FCB was the fourth largest bank in terms of deposit market share with 9.0% at June 30, 2019. The three larger banks, which include Bank of America, BB&T (now a part of Truist Bank) and Wells Fargo, collectively represent 43.5% of total deposits in South Carolina as of June 30, 2019.


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Geographic Locations and Employees
As of December 31, 2019, BancShares operated 574 branches in Arizona, California, Colorado, Florida, Georgia, Kansas, Maryland, Missouri, North Carolina, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington, Wisconsin and West Virginia. BancShares and its subsidiaries employ approximately 6,821 full-time staff and approximately 355 part-time staff for a total of 7,176 employees.

Business Combinations
BancShares pursues growth through strategic acquisitions to enhance organizational value, strengthen its presence in existing markets, as well as expand its footprint in new markets. Additional information relating to business combinations is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Business Combinations,” and Item 8. Notes to Consolidated Financial Statements, Note B, Business Combinations, in this Form 10-K.

Regulatory Considerations

Various laws and regulations administered by regulatory agencies affect BancShares’ and its subsidiaries’ corporate practices, including the payment of dividends, the incurrence of debt, and the acquisition of financial institutions and other companies; they also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, the types of business conducted, and the location of offices.

Numerous statutes and regulations also apply to and restrict the activities of BancShares and its subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements and restrictions on transactions with related persons and entities controlled by related persons. The impact of these statutes and regulations is discussed below and in the accompanying consolidated financial statements.

Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, significantly restructured the financial services regulatory environment; imposed significant regulatory and compliance changes; increased capital, leverage and liquidity requirements; and expanded the scope of oversight responsibility of certain federal agencies through the creation of new oversight bodies. For example, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws.

Effective during 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”), while largely preserving the fundamental elements of the post-Dodd-Frank Act regulatory framework, modified certain requirements of the Dodd-Frank Act as they applied to regional and community banking organizations. Certain of the significant requirements of the Dodd-Frank Act are listed below with information regarding how they apply to BancShares following the enactment of the EGRRCPA.

Capital Planning and Stress Testing. The Dodd-Frank Act mandated stress tests be developed and performed to ensure financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. The EGRRCPA gave immediate relief from stress testing for applicable bank holding companies and therefore, BancShares is no longer required to submit company-run annual stress tests. Notwithstanding these amendments to the stress testing requirements, the federal banking agencies indicated, through inter-agency guidance, the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process. BancShares will continue to monitor its capital consistent with the safety and soundness expectations of the federal regulators through the use of internal, customized stress testing in order to support the business and its capital planning process, as well as prudent risk mitigation.

The Volcker Rule. The Volcker Rule was promulgated to implement provisions of the Dodd-Frank Act. It prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. The EGRRCPA exempted many financial institutions with total consolidated assets of less than $10 billion from the Volcker Rule, but it continues to apply to BancShares and its subsidiaries. However, the Volcker Rule does not significantly impact our operations as we do not have any significant engagement in the businesses it prohibits.

Ability-to-Repay and Qualified Mortgage Rule. Creditors are required to comply with mortgage reform provisions prohibiting the origination of any residential mortgages that do not meet rigorous Qualified Mortgage standards or Ability-to-Repay standards. All mortgage loans originated by FCB meet Ability-to-Repay standards and a substantial majority also meet Qualified Mortgage standards. The EGRRCPA impact on the original Ability-to-Repay and Qualified Mortgage standards is only applicable to banks with less than $10 billion in total consolidated assets.

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BancShares
General. As a financial holding company registered under the Bank Holding Company Act (“BHCA”) of 1956, as amended, BancShares is subject to supervision, regulation and examination by the Federal Reserve Board (“Federal Reserve,” or “FRB”). BancShares is also registered under the bank holding company laws of North Carolina and is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks (“NCCOB”).

Permitted Activities. A bank holding company is limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities the Federal Reserve determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies, such as BancShares, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve), without prior approval of the Federal Reserve. Activities financial in nature include securities underwriting and dealing, serving as an insurance agent and underwriter and engaging in merchant banking.

Acquisitions. A bank holding company (“BHC”) must obtain approval from the Federal Reserve prior to directly or indirectly acquiring ownership or control of 5% of the voting shares or substantially all of the assets of another BHC or bank or prior to merging or consolidating with another BHC.

Status Requirements. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be well-capitalized and well-managed. A depository institution subsidiary is considered to be well-capitalized if it satisfies the requirements for this status under applicable Federal Reserve capital requirements. A depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve may impose limitations or conditions on the conduct of its activities.

Capital Requirements. The Federal Reserve imposes certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “Subsidiary Bank - FCB.” As of December 31, 2019, the risk-based Tier 1, common equity Tier 1, total capital and leverage capital ratios of BancShares were 10.86%, 10.86%, 12.12% and 8.81%, respectively, and each capital ratio listed above exceeded the applicable minimum requirements as well as the well-capitalized standards. Subject to its capital requirements and certain other restrictions, BancShares is able to borrow money to make capital contributions to FCB and such loans may be repaid from dividends paid by FCB to BancShares.

Source of Strength. Under the Dodd-Frank Act, bank holding companies are required to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, BancShares is expected to commit resources to support FCB, including times when BancShares may not be in a financial position to provide such resources. Any capital loans made by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Safety and Soundness. The federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and to the FDIC insurance fund in the event of a depository institution default.

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Limits on Dividends and Other Payments. BancShares is a legal entity, separate and distinct from its subsidiaries. Revenues of BancShares primarily result from dividends received from FCB. There are various legal limitations applicable to the payment of dividends by FCB to BancShares and to the payment of dividends by BancShares to its shareholders. The payment of dividends by FCB or BancShares may be limited by certain factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit FCB or BancShares from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending on the financial condition of FCB or BancShares, could be deemed to constitute such an unsafe or unsound practice.

Under the Federal Deposit Insurance Act, insured depository institutions, such as FCB, are prohibited from making capital distributions, including the payment of dividends, if, after making such distributions, the institution would become “undercapitalized” as such term is used in the statute. Additionally, under Basel III capital requirements, banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Based on FCB’s current financial condition, BancShares currently does not expect these provisions to have any material impact on its ability to receive dividends from FCB. BancShares’ non-bank subsidiaries pay dividends to BancShares periodically on a non-regulated basis.

Subsidiary Bank - FCB
General. FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the NCCOB. Deposit obligations are insured by the FDIC to the maximum legal limits.

Capital Requirements. Bank regulatory agencies approved Basel III regulatory capital guidelines aimed at strengthening existing capital requirements through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. BancShares and FCB implemented the requirements of Basel III effective January 1, 2015, subject to a transition period for several aspects of the rule. The table below describes the minimum and well-capitalized requirements.
 Basel III minimum requirement 
Basel III conservation buffer
2019
 
Basel III conservation buffer
2018
 Basel III well-capitalized
Leverage ratio4.00% N/A N/A 5.00%
Common equity Tier 14.50% 2.50% 1.875% 6.50%
Tier 1 capital ratio6.00% 2.50% 1.875% 8.00%
Total capital ratio8.00% 2.50% 1.875% 10.00%

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with ratios above the minimum, but below the conservation buffer, will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The transitional period began in 2016 and the capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented on January 1, 2019.

Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on FCB’s consolidated financial statements. As of December 31, 2019, FCB exceeded the applicable minimum requirements as well as the well-capitalized standards.

Although FCB is unable to control the external factors influencing its business, by maintaining high levels of balance sheet liquidity, prudently managing interest rate exposures, ensuring capital positions remain strong and actively monitoring asset quality, FCB seeks to minimize the potentially adverse risks of unforeseen and unfavorable economic trends and to take advantage of favorable economic conditions and opportunities when appropriate.

Transactions with Affiliates. Pursuant to Sections 23A and 23B of the Federal Reserve Act, Regulation W and Regulation O, the authority of FCB to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between FCB and its affiliates, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to FCB, as those prevailing for comparable nonaffiliated transactions. In addition, FCB generally may not purchase securities issued or underwritten by affiliates.


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FCB receives management fees from its subsidiaries and BancShares for expenses incurred for performing various functions on their behalf. These fees are charged to each company based upon the estimated cost for usage of services by that company. The fees are eliminated from the consolidated financial statements.

Community Reinvestment Act. FCB is subject to the requirements of the Community Reinvestment Act of 1977 (“CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low-and-moderate-income neighborhoods. If FCB receives a rating from the Federal Reserve of less than “satisfactory” under the CRA, restrictions would be imposed on our operating activities. In addition, in order for a financial holding company, like BancShares, to commence any new activity permitted by the BHCA or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. FCB currently has a “satisfactory” CRA rating.

Anti-Money Laundering and the United States Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) Regulation. Governmental policy in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations require financial institutions to take steps to prevent the use of their systems to facilitate the flow of illegal or illicit money or terrorist funds. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded anti-money laundering (“AML”) and financial transparency laws and regulations by imposing new compliance and due diligence obligations, including standards for verifying customer identification at account opening and maintaining expanded records, as well as rules promoting cooperation among financial institutions, regulators and law enforcement entities in identifying persons who may be involved in terrorism or money laundering. These rules were expanded to require new customer due diligence and beneficial ownership requirements in 2018. An institution subject to the BSA, such as FCB, must additionally provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The United States has imposed economic sanctions on transactions with certain designated foreign countries, nationals and others. As these rules are administrated by OFAC, these are generally known as the OFAC rules. Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all the relevant laws and regulations, could have serious legal and reputational consequences, including material fines and sanctions. FCB has implemented a program designed to facilitate compliance with the full extent of the applicable BSA and OFAC related laws, regulations and related sanctions.

Consumer Laws and Regulations. FCB is also subject to certain laws and regulations designed to protect consumers in transactions with banks. These laws include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Fair Housing Act and the Servicemembers Civil Relief Act. The laws and related regulations mandate certain disclosures and regulate the manner in which financial institutions transact business with certain customers. FCB must comply with these consumer protection laws and regulations in its relevant lines of business.
Available Information

BancShares does not have its own separate Internet website. However, FCB’s website (www.firstcitizens.com) includes a hyperlink to the Securities and Exchange Commission’s (“SEC”) website where the public may obtain copies of BancShares’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Interested parties may also directly access the SEC’s website (www.sec.gov), which contains reports and other information electronically filed by BancShares.

Item 1A. Risk Factors
We are subject to a number of risks and uncertainties that could have a material impact on our business, financial condition and results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities. We categorize risk into the following areas:

Operational Risk: The risk of loss resulting from inadequate or failed processes, people and systems or from external events.
Credit Risk: The risk a borrower will fail to perform on an obligation.

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Market Risk: The risk to BancShares’ financial condition resulting from adverse movements in market rates or prices, including, but not limited to, interest rates, foreign exchange rates or equity prices.
Liquidity Risk: The risk that BancShares will be unable to meet its obligations as they come due because of an inability to (i) liquidate assets or obtain adequate funding (referred to as “Funding Liquidity Risk”), or (ii) unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (“Market Liquidity Risk”).
Capital Adequacy Risk: The risk that capital levels are inadequate to preserve the safety and soundness of BancShares, support ongoing business operations and strategies and provide support against unexpected or sudden changes in the business/economic environment.
Compliance Risk: The risk of loss or reputational harm resulting from regulatory sanctions, fines, penalties or losses due to the failure to comply with laws, rules, regulations or other supervisory requirements applicable to a financial institution.
Strategic Risk: The risk to earnings or capital arising from business decisions or improper implementation of those decisions.
Financial Reporting Risk: The risk that financial information is reported incorrectly, including incorrect or incomplete financial information, errors and omissions, or improper application of accounting standards.
The risks and uncertainties management believes are material are described below. The risks listed are not the only risks BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem material could also have a material adverse impact on our financial condition and/or the results of our operations or our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, the market price of our common stock could significantly decline.
Operational Risks
We face significant operational risks in our businesses.
Safely conducting and growing our business requires that we 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 internal and third party automated systems to record and process transactions may further increase the risk that technical failures or system-tampering will result in losses that are difficult to detect. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain appropriate operational infrastructure and oversight can lead to loss of service to customers, legal actions and noncompliance with various laws and regulations. We have implemented internal controls that are designed to safeguard and maintain our operational and organizational infrastructure and information. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A cyber attack, information or security breach, or a technology failure of ours or of a third party could adversely affect our ability to conduct our business, manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
Our businesses are highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact or on whom we rely. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.

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We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of, cyber attacks. These cyber attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of ours, our employees, our customers or of third parties, damages to systems, or other material disruption to our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Additionally, the existence of cyber attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches, whether directed at us or third parties, there can be no assurance that we will not suffer such losses or other consequences in the future. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including financial counterparties; financial intermediaries such as clearing agents, exchanges and clearing houses; vendors; regulators; providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses.
Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.
We are exposed to losses related to fraud.
As technology continues to evolve, criminals are using increasingly more sophisticated techniques to commit and hide fraudulent activity. Fraudulent activity can come in many forms, including debit card/credit card fraud, check fraud, wire fraud, electronic scanning devices attached to ATM machines, social engineering, digital fraud and phishing attacks to obtain personal information and fraudulent impersonation of our clients through the use of falsified or stolen credentials. To counter the increased sophistication of these fraudulent activities, we have increased our investment in systems, technologies and controls to detect and prevent such fraud. Combating fraudulent activities as they evolve will result in continued ongoing investments in the future.

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We depend on key personnel for our success.
Our success depends to a great extent on our ability to attract and retain key personnel. We have an experienced management team the Board believes is capable of managing and growing our business. Losses of, or changes in, our current executive officers or other key personnel and their responsibilities may disrupt our business and could adversely affect our financial condition, results of operations and liquidity. We have developed an Executive Officer succession plan, but we cannot be certain of its transition or implementation success. There also can be no assurance we will be successful in retaining our current executive officers or other key personnel, or hiring additional key personnel to assist in executing our growth, expansion and acquisition strategies.
We are subject to litigation risks, and our expenses related to litigation may adversely affect our results.
We are subject to litigation risks in the ordinary course of our business. Claims and legal actions, including supervisory actions by our regulators, that may be initiated against us from time to time could involve large monetary sums and significant defense costs. During the last credit crisis, we saw the number of cases and our expenses related to those cases increase. The outcomes of such cases are always uncertain until finally adjudicated or resolved.
We establish reserves for legal claims when payments associated with the claims become probable and our liability can be reasonably estimated. We may still incur legal costs for a matter even if we have not established a reserve. In addition, the actual amount paid in resolution of a legal claim may be substantially higher than any amounts reserved for the matter. The ultimate resolution of a legal proceeding, depending on the remedy sought and any relief granted, could materially adversely affect our results of operations and financial condition.
Substantial legal claims or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. We may be exposed to substantial uninsured legal liabilities and/or regulatory actions which could adversely affect our results of operations and financial condition. For additional information, see the Notes to the Consolidated Financial Statements, Note T, Commitments and Contingencies, in this Form 10-K.
Our business and financial performance could be impacted by natural disasters, acts of war or terrorist activities.
Natural disasters (including but not limited to earthquakes, hurricanes, tornadoes, floods, fires, and explosions), acts of war and terrorist activities could hurt our performance (i) directly through damage to our facilities or other impacts to our ability to conduct business in the ordinary course, and (ii) indirectly through such damage or impacts to our customers, suppliers or other counterparties. In particular, a significant amount of our business is concentrated in North Carolina and South Carolina, including coastal areas where our retail and commercial customers have been and in the future could be impacted by hurricanes. We could also suffer adverse results to the extent that disasters, wars or terrorist activities affect the broader markets or economy. Our ability to minimize the consequences of such events is in significant measure reliant on the quality of our disaster recovery planning and our ability, if any, to forecast the events.
We rely on third parties.
Third party vendors provide key components of our business infrastructure, including certain data processing and information services. 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 could adversely affect our ability to deliver products and services to our customers. External vendors also present information security risks. We monitor significant 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.
The quality of our data could deteriorate and cause financial or reputational harm to the Bank.
While we have a Data Governance program, it is reliant on the execution of procedures, process controls and system functionality and there is no guarantee errors will not occur. Incomplete, inconsistent, or inaccurate data could lead to non-compliance with regulatory statutes and result in fines. Additionally, customer impact could result in reputational harm and customer attrition. Inaccurate or incomplete data presents the risk business decisions relying on such data will prove inefficient or ineffective. Additionally, information we provide to our investors and regulators may be negatively impacted by inaccurate or incomplete data.
Malicious action by an employee could result in harm to our customers or the Bank.
Several high-profile cases of misconduct have occurred at other financial institutions. Such an event may lead to large regulatory fines, as well as an erosion in customer confidence, which could impact our financial position. BancShares’ employees are subject to a code of ethics which requires annual review. We also have policies governing our compensation, conduct and sales practices designed to deter and respond to potential employee misconduct.

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Credit Risks
If we fail to effectively manage credit risk, our business and financial condition will suffer.
We must effectively manage credit risk. There are risks inherent in making any loan, including risks of repayment, risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. There is no assurance that our loan approval procedures and our credit risk monitoring are or will be adequate to or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business, and our consolidated results of operations and financial condition.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
We maintain an allowance for loan losses that is designed to cover losses on loans that borrowers may not repay in their entirety. We believe that we maintain an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio as of the corresponding balance sheet date, and in compliance with applicable accounting and regulatory guidance. However, the allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results. Accounting measurements related to asset impairment and the allowance require significant estimates that are subject to uncertainty and revisions driven by new information and changing circumstances. The significant uncertainties surrounding our borrowers’ abilities to conduct their businesses successfully through changing economic environments, competitive challenges and other factors complicate our estimates of the risk and/or amount of loss on any loan. Due to the degree of uncertainty and the susceptibility to change, the actual losses may vary from current estimates. We also expect fluctuations in the allowance due to economic changes nationally as well as locally within the states in which we conduct business.
As an integral part of their examination process, our banking regulators periodically review the allowance and may require us to increase it by recognizing additional provisions for loan losses charged to expense or to decrease the allowance by recognizing loan charge-offs, net of recoveries. Any such required additional loan loss provisions or charge-offs could have a material adverse effect on our financial condition and results of operations.
In the first quarter of 2020, we adopted a change to the methodology for the recognition and measurement of credit losses to comply with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). CECL introduces a new credit loss methodology which requires earlier recognition of credit losses, replacing multiple existing impairment methods, which generally require a loss to be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information an entity must consider in developing its expected credit losses. As a result, this will change the manner by which we calculate our allowance for credit losses and may introduce increased volatility to the balance of our reserves and related provision expense.
Our concentration of loans to borrowers within the medical and dental industries could impair our earnings if those industries experience economic difficulties.
Statutory or regulatory changes, or economic conditions in the market generally, could negatively impact borrowers’ businesses and their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations. Additionally, smaller practices such as those in the dental industry generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, and generally have a heightened vulnerability to negative economic conditions. Consequently, we could be required to increase our allowance for loan losses through additional provisions on our income statement, which would reduce reported net income. See Note D, Loans and Leases, in the Notes to the Consolidated Financial Statements for additional discussion.

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Economic conditions in real estate markets and our reliance on junior liens may adversely impact our business and our results of operations.
Real property collateral values may be impacted by economic conditions in the real estate market and may result in losses on loans that, while adequately collateralized at the time of origination, become inadequately collateralized. Our reliance on junior liens is concentrated in our non-commercial revolving mortgage loan portfolio. Approximately two-thirds of the noncommercial revolving mortgage portfolio is secured by junior lien positions, and lower real estate values for collateral underlying these loans may cause the outstanding balance of the senior lien to exceed the value of the collateral, resulting in a junior lien loan becoming effectively unsecured. Inadequate collateral values, rising interest rates and unfavorable economic conditions could result in greater delinquencies, write-downs or charge-offs in future periods, which could have a material adverse impact on our results of operations and capital adequacy.
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 and/or other relationships. We have exposure to numerous financial services providers, including banks, securities brokers and dealers and other financial services providers. Although we monitor the financial conditions of financial institutions with which we have credit exposure, transactions with those institutions expose us to credit risk through the possibility of counterparty default.
Market Risks
Unfavorable economic conditions could adversely affect our business.
Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. Our banking operations are located within several states but are locally oriented and community based. Our retail and commercial banking activities are primarily concentrated within the same geographic footprint. Our markets include the Southeast, Mid-Atlantic, Midwest and Western United States, with our greatest presence in North Carolina and South Carolina. Worsening economic conditions within our markets, particularly within North Carolina and South Carolina, could have a material adverse effect on our financial condition, results of operations and cash flows. Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve. Unfavorable changes in unemployment, real estate values, interest rates and other factors could weaken the economies of the communities we serve. Economic growth and business activity have remained relatively stable across a wide range of industries and geographic locations, but there can be no assurance that current economic conditions will continue or that these conditions will not worsen.
In addition, the political environment, the level of United States (“U.S.”) debt and global economic conditions can have a destabilizing effect on financial markets. Weakness in any of our market areas could have an adverse impact on our earnings, and consequently, our financial condition 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 (“GAAP”). The rate at which those discounts are accreted is unpredictable and the result of various factors including prepayments and changes in credit quality. Post-acquisition deterioration in excess of remaining discounts results in the recognition of provision expense. Additionally, the income statement impact of adjustments to the indemnification asset recorded in certain FDIC-assisted transactions 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.
The performance of equity securities and corporate bonds in the investment portfolio could be adversely impacted by the soundness and fluctuations in the market values of other financial institutions.
Our investment securities portfolio contains certain equity securities and corporate bonds of other financial institutions. As a result, a portion of our investment securities portfolio is subject to fluctuation due to changes in the financial stability and market value of other financial institutions, as well as interest rate sensitivity to economic and market conditions. Such fluctuations could have an adverse effect on our results of operations.

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Failure to effectively manage our interest rate risk could adversely affect us.
Our results of operations and cash flows are highly dependent upon 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 (“FOMC”). Changes in monetary policy could influence interest income, interest expense, and the fair value of our financial assets and liabilities. If changes in interest rates on our interest-earning assets are not equal to the changes in interest rates on our interest-bearing liabilities, our net interest income and, therefore, our net income, could be adversely impacted.
As interest rates rise, our interest expense will increase and our net interest margins may decrease, negatively impacting our performance and, potentially, our financial condition. To the extent banks and other financial services providers compete for interest-bearing deposit accounts through higher interest rates, our deposit base could be reduced if we are unwilling to pay those higher rates. If we decide to compete with those higher interest rates, our cost of funds could increase and our net interest margins could be reduced. Additionally, higher interest rates will impact our ability to originate new loans. Increases in interest rates could adversely affect the ability of our borrowers to meet higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and net charge-offs, which could adversely affect our business and financial condition.
Although we maintain an interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. Actual interest rate movements may differ from our forecasts, and unexpected actions by the FOMC may have a direct impact on market interest rates.
We may be adversely impacted by the transition from LIBOR as a reference rate
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
We have loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create additional costs and risks. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, systems, contracts, valuation tools, and product design. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation and potentially introduce additional legal risks. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
The value of our goodwill may decline in the future.
At December 31, 2019, we had $349.4 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, comparing 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 financial results; however, any such write-off would not impact our regulatory capital ratios, given that regulatory capital ratios are calculated using tangible capital amounts.
The market price of our stock may be volatile.
Although publicly traded, our common stock has less liquidity and public float than many other large, publicly traded financial services companies. Lower liquidity increases the price volatility of our stock and could make it difficult for our shareholders to sell or buy our common stock at specific prices.
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors, including expectations of financial and 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.

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Liquidity Risks
If our current level of balance sheet liquidity were to experience pressure, it could affect our ability to pay deposits and fund our operations.
Our deposit base represents our primary source of core funding and 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 need access to noncore funding such as borrowings from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve, Federal Funds purchased lines and brokered deposits. While we maintain access to these noncore funding sources, some sources are dependent on the availability of collateral as well as the counterparty’s willingness and ability to lend.
Capital Adequacy Risks
Our ability to grow is contingent upon access to capital.
Our primary capital sources have been retained earnings and debt issued through both private and public markets. Rating agencies regularly evaluate our creditworthiness and assign credit ratings to BancShares and FCB. The ratings of the agencies are based on a number of factors, some of which are outside 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. 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.
Based on existing capital levels, BancShares and FCB are well-capitalized under current leverage and risk-based capital standards. Our ability to grow is contingent on our ability to generate sufficient capital to remain well-capitalized under current and future capital adequacy guidelines.
We are subject to capital adequacy and liquidity guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected.
Under regulatory capital adequacy guidelines and other regulatory requirements, BancShares, together with FCB, must meet certain capital and liquidity guidelines, subject to qualitative judgments by regulators about components, risk weightings and other factors.
We are subject to capital rules issued by the Federal Reserve that established a new comprehensive capital framework for U.S. banking institutions and established a more conservative definition of capital. These requirements, known as Basel III, became effective January 1, 2015, and, as a result, we became subject to enhanced minimum capital and leverage ratios. These requirements could adversely affect our ability to pay dividends, restrict certain business activities or compel us to raise capital, each of which may adversely affect our results of operations or financial condition. In addition, the costs associated with complying with more stringent capital requirements, such as the requirement to formulate and submit capital plans based on pre-defined stress scenarios on an annual basis, could have an adverse effect on results of operations. See Item 1. Business of this Form 10-K for additional information regarding the capital requirements under the Dodd-Frank Act and Basel III.
Compliance Risks
We operate in a highly regulated industry; the laws and regulations that govern our operations, taxes, corporate governance, executive compensation and financial accounting and reporting, including changes in them or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation and supervision that govern almost all aspects of our operations. In addition to a multitude of regulations designed to protect customers, depositors and consumers, we must comply with other regulations that protect the deposit insurance fund and the stability of the U.S. financial system, including laws and regulations that, among other matters, prescribe minimum capital requirements; impose limitations on our business activities and investments; limit the dividends or distributions that we can pay; restrict the ability of our bank subsidiaries to guarantee our debt; and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations can be difficult and costly, and changes in laws and regulations often impose additional compliance costs.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations issued by the SEC and The Nasdaq Stock Market LLC (“Nasdaq”), as well as numerous other recently enacted statutes and regulations, including the Dodd-Frank Act, EGRRCPA, and regulations promulgated thereunder, have increased the scope, complexity and cost of corporate governance and reporting and disclosure practices, including the costs of completing our external audit and maintaining our internal controls. Such additional regulation and supervision may limit our ability to pursue business opportunities.

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The failure to comply with these various rules and regulations could subject us to restrictions on our business activities, including mergers and acquisitions, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our common stock.
We may be adversely affected by changes in U.S. tax laws and other laws and regulations.
Corporate tax rates affect our profitability and capital levels. The U.S. corporate tax code may be further reformed by the U.S. Congress and additional guidance may be issued by the U.S. Department of the Treasury relevant to the Tax Cuts and Jobs Act (“Tax Act”) enacted during 2017. Additional adverse amendments to the Tax Act or other legislation could have an adverse impact on our financial condition and results of operations.
Strategic Risks
We encounter significant competition that may reduce our market share and profitability.
We compete with other banks and specialized financial services providers in our market areas. Our primary competitors include local, regional and national banks; 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 certain banks with a significant presence in our market areas, have the capacity to offer products and services we do not offer. Some of our non-bank competitors operate in less stringent regulatory environments, and certain competitors are not subject to federal and/or state income taxes. The fierce competitive pressures that we face adversely affect pricing for many of our products and services.
Certain provisions in our Certificate of Incorporation and Bylaws may prevent a change in management or a takeover attempt a shareholder might consider to be in their best interests.
Certain provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could delay or prevent the removal of directors and other management. The provisions could also delay or make more difficult a tender offer, merger or proxy contest a shareholder might consider to be in their best interests. For example, our Certificate of Incorporation and/or Bylaws:
allow the Board to issue and set the terms of preferred shares without further shareholder approval;
limit who can call a special meeting of shareholders; and
establish advance notice requirements for nominations for election to the Board and proposals of other business to be considered at annual meetings of shareholders.
These provisions, as well as provisions of the BHCA and other relevant statutes and regulations that require advance notice and/or applications for regulatory approval of changes in control of banks and bank holding companies, may discourage bids for our common stock at a premium over market price, adversely affecting its market price. Additionally, the fact that the Holding family holds or controls shares representing a majority of the voting power of our common stock may discourage potential takeover attempts and/or bids for our common stock at a premium over market price.
We rely on dividends from FCB.
As a financial holding company, we are a separate legal entity from FCB. We derive most of our revenue and cash flow from dividends paid by FCB. These dividends are the primary source from which we pay dividends on our common stock and interest and principal on our debt obligations. State and federal laws impose restrictions on the dividends that FCB may pay to us. In the event FCB is unable to pay dividends to us for an extended period of time, we may not be able to service our debt obligations or pay dividends on our common stock.
Our financial performance depends upon our ability to attract and retain clients for our products and services, which ability may be adversely impacted by weakened consumer and/or business confidence, and by any inability on our part to predict and satisfy customers’ needs and demands.
Our financial performance is subject to risks associated with the loss of client confidence and demand. A fragile or weakening economy, or ambiguity surrounding the economic future, may lessen the demand for our products and services. Our performance may also be negatively impacted if we fail to attract and retain customers because we are not able to successfully anticipate, develop and market products and services that satisfy market demands. Such events could impact our performance through fewer loans, reduced fee income and fewer deposits, each of which could result in reduced net income.

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New technologies, and our ability to efficiently and effectively develop, market and deliver new products and services to our customers present competitive risks.
The rapid growth of new digital technologies, including internet services, smart phones and other mobile devices, requires us to continuously evaluate our product and service offerings to ensure they remain competitive. Our success depends in part on our ability to adapt and deliver our products and services in a manner responsive to evolving industry standards and consumer preferences. New technologies by banks and non-bank service providers may create risks if our products and services are no longer competitive with then-current standards, and could negatively affect our ability to attract or maintain a loyal customer base. These risks may affect our ability to grow and could reduce our revenue streams from certain products and services, while increasing expenses associated with developing more competitive solutions. Our results of operations and financial condition could be adversely affected.
We may be adversely affected by risks associated with completed, pending or any potential future acquisitions.
We plan to continue to grow our business organically. However, we have pursued and expect to continue to pursue acquisition opportunities that we believe support our business strategies and may enhance our profitability. We must generally satisfy a number of material conditions prior to consummating any acquisition including, in many cases, federal and state regulatory approval. We may fail to complete strategic and competitively significant business opportunities as a result of our inability to obtain required regulatory approvals in a timely manner or at all.
Acquisitions of financial institutions, assets of financial institutions, or other operating entities involve operational risks and uncertainties, and acquired companies or assets may have unknown or contingent liabilities, exposure to unexpected asset quality problems that require write downs or write-offs, or difficulty retaining key employees and customers. Additionally, acquired companies may have product lines, regulatory requirements, or operational challenges with which we are not familiar. These, among other issues, could negatively affect our results of operations and financial condition.
We may not be able to realize projected cost savings, synergies or other benefits associated with any such acquisition. Failure to efficiently integrate any acquired entities or assets into our existing operations could significantly increase our operating costs and have material adverse effects on our financial condition and results of operations. There can be no assurance that we will be successful in identifying, consummating, or integrating any potential acquisitions.
Financial Reporting Risks
Accounting standards may change and increase our operating costs and/or otherwise adversely affect our results.
FASB and the SEC periodically modify the standards governing 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 new or revised standards retroactively, resulting in changes to previously reported financial results or a cumulative adjustment to retained earnings. Implementation of new accounting rules or standards could additionally require us to implement technology changes which could impact ongoing earnings.

In the first quarter of 2020, we adopted a change to the methodology for the recognition and measurement of credit losses to comply with CECL. This accounting standard change will result in a decrease of $32 million to $42 million to the BancShares allowance for credit losses (“ACL”), as well as a corresponding increase to retained earnings of $32 million to $42 million and a decrease of $10 million to $15 million in deferred tax assets. Application of this new accounting standard resulted in additional technology investments to support enhanced modeling efforts and ongoing reporting requirements.
Our accounting policies and processes are critical to the reporting of financial condition and results of operations. They require management to make estimates about matters that are uncertain.

Accounting policies and processes are fundamental to how BancShares records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with GAAP. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in BancShares reporting materially different results than would have been reported under a different alternative.


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Management has identified certain accounting policies as being critical because they require management to make difficult, subjective or complex conclusions about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. BancShares has established policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding management's judgments and the estimates pertaining to these matters, BancShares cannot guarantee that it will not be required to adjust accounting policies or restate prior period financial statements. See “Critical Accounting Policies” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our business is highly quantitative and requires widespread use of financial models for day-to-day operations; these models may produce inaccurate predictions that significantly vary from actual results.
We rely on quantitative models to measure risks and to estimate certain financial values. Such models may be used in many processes including, but not limited to, the pricing of various products and services, classifications of loans, setting interest rates on loans and deposits, quantifying interest rate and other market risks, forecasting losses, measuring capital adequacy and calculating economic and regulatory capital levels. Models may also be used to estimate the value of financial instruments and balance sheet items. Inaccurate or erroneous models present the risk that business decisions relying on the models will prove inefficient or ineffective. Additionally, information we provide to our investors and regulators may be negatively impacted by inaccurately designed or implemented models. For further information on models, see the “Risk Management” section included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
Failure to maintain an effective system of internal control over financial reporting could have a material adverse effect on our results of operations and financial condition and disclosures.
We must have effective internal controls over financial reporting in order to provide reliable financial reports, to effectively prevent fraud and to operate successfully as a public company. If we were unable to provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of our internal controls over financial reporting, we may discover material weaknesses or significant deficiencies requiring remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We continually work to improve our internal controls; however, we cannot be certain that these measures will ensure appropriate and adequate controls over our future financial processes and reporting. Any failure to maintain effective controls or to implement any necessary improvement of our internal controls in a timely manner could, among other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, each of which could have a material adverse effect on our results of operations and financial condition and the market value of our common stock.
Item 2. Properties
BancShares’ and FCB’s headquarters facility, a nine-story building with approximately 163,000 square feet, is located in Raleigh, North Carolina. In addition, FCB occupies two separate facilities in Raleigh as well as a facility in Columbia, South Carolina, which serve as data and operations centers. As of December 31, 2019, FCB operated 574 branch offices throughout the Southeast, Mid-Atlantic, Midwest and Western United States. FCB owns many of the buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease commitments is set forth in Note F, Premises and Equipment, of BancShares’ Notes to Consolidated Financial Statements.
Item 3. 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 matters cannot be determined, in the opinion of management, no legal actions expected to have a material effect on BancShares’ consolidated financial statements currently exist. Additional information related to legal proceedings is set forth in Note T, Commitments and Contingencies, of BancShares’ Notes to Consolidated Financial Statements.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
BancShares has two classes of common stock—Class A common and Class B common. Shares of Class A common have one vote per share, while shares of Class B common have 16 votes per share. BancShares’ Class A common stock is listed on the Nasdaq Global Select Market under the symbol FCNCA. The Class B common stock is traded on the over-the-counter market and quoted on the OTC Pink Market under the symbol FCNCB. As of February 14, 2020, there were aggregates of 1,301 and 216 holders of record and individual participants in securities position listings with respect to the Class A common stock and Class B common stock, respectively. The market volume for Class B common stock is extremely limited. On many days there is no trading and, to the extent there is trading, it is generally low volume. Over-the-counter bid prices for BancShares Class B common stock represent inter-dealer prices without retail markup, markdown or commissions, and may not represent actual transaction prices.

The average monthly trading volume for the Class A common stock was 742,991 shares for the fourth quarter of December 31, 2019 and 902,318 shares for the year ended December 31, 2019. The Class B common stock monthly trading volume averaged 490 shares in the quarter ended December 31, 2019 and 780 shares for the year ended December 31, 2019.

During 2019, the Board approved a series of authorizations of share repurchases of BancShares’ Class A common stock. The shares could be repurchased from time to time at management’s discretion during the authorized periods. The authorizations did not obligate BancShares to repurchase any particular amount of shares, and repurchases were able to be suspended or discontinued at any time. A summary of share repurchases during 2019 is disclosed below. An additional 120,990 shares have been repurchased subsequent to December 31, 2019 through February 14, 2020.

During 2019, the share repurchases included 100,000 shares of Class A common stock purchased from Ella Anna Holding, as trustee of her revocable trust. Mrs. Holding is the widow of BancShares’ former Executive Vice Chairman, Frank B. Holding, and the mother of Frank B. Holding, Jr. and Hope H. Bryant, BancShares’ Chairman and Chief Executive Officer and Vice Chairman, respectively. Pursuant to the existing share repurchase authorization, the Board’s independent Audit Committee reviewed and approved the repurchase of up to 250,000 shares held by Mrs. Holding on or before April 30, 2020, pursuant to BancShares’ related person transaction policy.

On January 28, 2020, the Board authorized the repurchase of up to 500,000 shares of Class A common stock for the period of February 1, 2020 through April 30, 2020. This authority supersedes all previously approved authorities.

Shares of Class A common stock repurchased by BancShares during the year ended December 31, 2019.
Class A common stockTotal Number of Class A Shares Repurchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Repurchased Under the Plans or Programs
Total repurchases in the first quarter of 2019243,000
 $414.58
 243,000
 375,000
Total repurchases in the second quarter of 2019205,500
 436.81
 205,500
 169,500
Total repurchases in the third quarter of 2019295,900
 457.50
 295,900
 504,100
Repurchases from October 1, 2019 to October 31, 2019(1)
146,100
 472.94
 146,100
 358,000
Repurchases from November 1, 2019 to November 30, 2019(2)
64,210
 511.11
 64,210
 435,790
Repurchases from December 1, 2019 to December 31, 2019(2)
44,200
 521.22
 44,200
 391,590
Total repurchases in the fourth quarter of 2019254,510
 $490.96
 254,510
 391,590
Total repurchases in 2019998,910
 $451.33
 998,910
 391,590
(1)The Board authorized the repurchase of up to 800,000 of BancShares' Class A common stock for the period July 1, 2019 through June 30, 2020. The authorization was publicly announced on July 30, 2019.
(2)The Board authorized the repurchase of up to 500,000 shares of BancShares' Class A common stock for the period November 1, 2019 through January 31, 2020, superseding all previous authorities. The authorization was publicly announced on October 29, 2019.

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The following graph compares the cumulative total shareholder return (CTSR) of our Class A common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq – Banks Index and the Nasdaq – U.S. Index. Each trend line assumes $100 was invested on December 31, 2014, and dividends were reinvested for additional shares.

chart-6e7ce871b82855e1bfe.jpg

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Item 6. Selected Financial Data
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
(Dollars in thousands, except share data)2019 2018 2017 2016 2015
SUMMARY OF OPERATIONS         
Interest income$1,404,011
 $1,245,757
 $1,103,690
 $987,757
 $969,209
Interest expense92,642
 36,857
 43,794
 43,082
 44,304
Net interest income1,311,369
 1,208,900
 1,059,896
 944,675
 924,905
Provision for loan and lease losses31,441
 28,468
 25,692
 32,941
 20,664
Net interest income after provision for loan and lease losses1,279,928
 1,180,432
 1,034,204
 911,734
 904,241
Gain on acquisitions
 
 134,745
 5,831
 42,930
Noninterest income excluding gain on acquisitions415,861
 400,149
 387,218
 371,268
 424,158
Noninterest expense1,103,741
 1,076,971
 1,012,469
 937,766
 1,038,915
Income before income taxes592,048
 503,610
 543,698
 351,067
 332,414
Income taxes134,677
 103,297
 219,946
 125,585
 122,028
Net income$457,371
 $400,313
 $323,752
 $225,482
 $210,386
Net interest income, taxable equivalent (1)
$1,314,940
 $1,212,280
 $1,064,415
 $949,768
 $931,231
PER SHARE DATA         
Net income$41.05
 $33.53
 $26.96
 $18.77
 $17.52
Cash dividends1.60
 1.45
 1.25
 1.20
 1.20
Market price at period end (Class A)532.21
 377.05
 403.00
 355.00
 258.17
Book value at period end337.38
 300.04
 277.60
 250.82
 239.14
SELECTED PERIOD AVERAGE BALANCES         
Total assets$37,161,719
 $34,879,912
 $34,302,867
 $32,439,492
 $31,072,235
Investment securities6,919,069
 7,074,929
 7,036,564
 6,616,355
 7,011,767
Loans and leases (2)
26,656,048
 24,483,719
 22,725,665
 20,897,395
 19,528,153
Interest-earning assets34,866,734
 32,847,661
 32,213,646
 30,267,788
 28,893,157
Deposits32,218,536
 30,165,249
 29,119,344
 27,515,161
 26,485,245
Interest-bearing liabilities20,394,815
 18,995,727
 19,576,353
 19,158,317
 18,986,755
Securities sold under customer repurchase agreements530,818
 555,555
 649,252
 721,933
 606,357
Other short-term borrowings23,087
 58,686
 77,680
 7,536
 227,937
Long-term borrowings392,150
 304,318
 842,863
 811,755
 547,378
Shareholders’ equity$3,551,781
 $3,422,941
 $3,206,250
 $3,001,269
 $2,797,300
Shares outstanding11,141,069
 11,938,439
 12,010,405
 12,010,405
 12,010,405
SELECTED PERIOD-END BALANCES         
Total assets$39,824,496
 $35,408,629
 $34,527,512
 $32,990,836
 $31,475,934
Investment securities7,173,003
 6,834,362
 7,180,256
 7,006,678
 6,861,548
Loans and leases28,881,496
 25,523,276
 23,596,825
 21,737,878
 20,239,990
Deposits34,431,236
 30,672,460
 29,266,275
 28,161,343
 26,930,755
Securities sold under customer repurchase agreements442,956
 543,936
 586,256
 590,936
 592,182
Other short-term borrowings295,277
 28,351
 107,551
 12,551
 2,551
Long-term borrowings588,638
 319,867
 870,240
 832,942
 704,155
Shareholders’ equity$3,586,184
 $3,488,954
 $3,334,064
 $3,012,427
 $2,872,109
Shares outstanding10,629,495
 11,628,405
 12,010,405
 12,010,405
 12,010,405
SELECTED RATIOS AND OTHER DATA         
Rate of return on average assets1.23% 1.15% 0.94% 0.70% 0.68%
Rate of return on average shareholders’ equity12.88
 11.69
 10.10
 7.51
 7.52
Average equity to average assets ratio9.56
 9.81
 9.35
 9.25
 9.00
Net yield on interest-earning assets (taxable equivalent)3.77
 3.69
 3.30
 3.14
 3.22
Allowance for loan and lease losses to total loans and leases:         
PCI1.35
 1.51
 1.31
 1.70
 1.72
Non-PCI0.77
 0.86
 0.93
 0.98
 0.98
Total0.78
 0.88
 0.94
 1.01
 1.02
Ratio of total nonperforming assets to total loans, leases and other real estate owned0.58
 0.52
 0.61
 0.67
 0.83
Tier 1 risk-based capital ratio10.86
 12.67
 12.88
 12.42
 12.65
Common equity Tier 1 ratio10.86
 12.67
 12.88
 12.42
 12.51
Total risk-based capital ratio12.12
 13.99
 14.21
 13.85
 14.03
Leverage capital ratio8.81
 9.77
 9.47
 9.05
 8.96
Dividend payout ratio3.90
 4.32
 4.64
 6.39
 6.85
Average loans and leases to average deposits82.74
 81.17
 78.04
 75.95
 73.73
(1) The taxable-equivalent adjustment was $3.6 million, $3.4 million, $4.5 million, $5.1 million and $6.3 million for the years 2019, 2018, 2017, 2016, and 2015, respectively.
(2) Average loan and lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and leases.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (“BancShares”) and its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”). This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes presented within this report. Intercompany accounts and transactions have been eliminated. See Note A, Accounting Policies and Basis of Presentation, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, of this report for more detail. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2019, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us,” “our,” and “BancShares” in this section refer to the consolidated financial position and consolidated results of operations for BancShares.
Year-over-year comparisons of the financial results for 2018 and 2017 are contained in Item 7 of BancShares’ Form 10-K for 2018 filed with the SEC on February 20, 2019 and available through FCB’s website www.firstcitizens.com or the SEC’s EDGAR database.

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes statements 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 which 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 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.

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, 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 affecting 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 acquisition transactions and/or the risks discussed in Item 1A. Risk Factors above and other developments or changes in our business we do not expect.

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

CRITICAL ACCOUNTING ESTIMATES
 
The accounting and reporting policies of BancShares are in accordance with GAAP and are described in Note A, Accounting Policies and Basis of Presentation, of the Notes to the Consolidated Financial Statements. The preparation of financial statements in conformity with GAAP requires us to exercise judgment in determining many of the estimates and assumptions utilized to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Our financial position and results of operations could be materially affected by changes to these estimates and assumptions.

The following is a summary of the more critical areas where these critical assumptions and estimates could impact the financial condition, results of operations and cash flows of BancShares:

Allowance for loan and lease losses. The allowance for loan and lease losses (“ALLL”) represents the best estimate of inherent credit losses within the loan and lease portfolio as of the balance sheet date. Estimating credit losses requires judgment in determining the amount and timing of expected cash flows, the value of the underlying collateral and loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic conditions, historical loan losses, migration of loans through delinquency stages and changes in the size, composition and risks within the loan portfolio are also considered. Loan balances considered uncollectible are charged off against the ALLL. If it is probable a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement and a loss is probable, a specific valuation allowance is determined. Recoveries of amounts previously charged-off are generally credited to the ALLL.

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Purchased credit impaired (“PCI”) loans are initially recorded at fair value and are generally pooled based upon common risk characteristics. At each balance sheet date, we evaluate whether the estimated cash flows have decreased and if so, recognize an additional allowance. Subsequent improvements in expected cash flows results first in the recovery of any allowance established and then in the recognition of additional interest income over the remaining lives of the loans.
The ALLL for non-purchased credit impaired (“non-PCI”) loans is assessed at each balance sheet date and adjustments are recorded in provision for loan and lease losses. General reserves for collective impairment are based on historical loss rates for each loan class by credit quality indicator and may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends. Non-PCI loans classified as impaired as of the balance sheet date are assessed for individual impairment based on the loan’s characteristics and either a specific valuation allowance is established or partial charge-off is recorded.
Management considers the established ALLL adequate to absorb incurred losses for loans and leases outstanding at December 31, 2019. As of January 1, 2020, BancShares adopted FASB ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the methodology, accounting policies and inputs used in determining the allowance for credit losses. See Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for discussion of our accounting policies for the ALLL and the implementation status of ASU 2016-13. See Note E, Allowance for Loan and Lease Losses, in the Notes to Consolidated Financial Statements for additional disclosures.
Financial Measurements. Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Certain assets and liabilities are measured at fair value on a recurring basis. Examples of recurring uses of fair value include marketable equity securities, investment securities available for sale and loans held for sale. There were no liabilities measured at fair value on a recurring basis at December 31, 2019. We also measure certain assets at fair value on a non-recurring basis. Examples include impaired loans, other real estate owned (“OREO”), goodwill and intangible assets. Assets acquired and liabilities assumed in a business combination are recognized at fair value as of the acquisition date.

Fair value is determined using different inputs and assumptions based upon the instrument being valued. Where observable market prices from transactions for identical assets or liabilities are not available, we identify market prices for similar assets or liabilities. If observable market prices are unavailable or impracticable to obtain for any such similar assets or liabilities, we look to other modeling techniques, which often incorporate unobservable inputs which are inherently subjective and require significant judgment. Fair value estimates requiring significant judgments are determined using various inputs developed by management with the appropriate skills, understanding and knowledge of the underlying asset or liability to ensure the development of fair value estimates is reasonable. Typical pricing sources used in estimating fair values include, but are not limited to, active markets with high trading volume, third-party pricing services, external appraisals, valuation models and commercial and residential evaluation reports. In certain cases, our assessments, with respect to assumptions market participants would make, may be inherently difficult to determine, and the use of different assumptions could result in material changes to these fair value measurements. See Note P, Estimated Fair Values, and Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures regarding fair value.
 
Income taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments. Accrued income taxes payable represents an estimate of the net amounts due to or from taxing jurisdictions based upon various estimates, interpretations and judgments.
 
We evaluate our effective tax rate on a quarterly basis based upon the current estimate of net income, the favorable impact of various credits, statutory tax rates expected for the year and the amount of tax liability. We file tax returns in relevant jurisdictions and settle our return liabilities.
 
Changes in estimated income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements. See Note O, Income Taxes, in the Notes to Consolidated Financial Statements for additional disclosures.

CURRENT ACCOUNTING PRONOUNCEMENTS
Table 2 details ASUs issued by the FASB adopted in 2019. See Note A, Accounting Policies and Basis of Presentation, in the Notes to the Consolidated Financial Statements for more detail on the impact on the consolidated financial statements.

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Table 2
Recently Adopted Accounting Pronouncements
Standard Date of Adoption
ASU 2016-02 - Leases (Topic 842)
 January 1, 2019
ASU 2018-15 - Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
 July 1, 2019
ASU 2019-04 - Codification Improvements to 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
 November 1, 2019

EXECUTIVE OVERVIEW

BancShares conducts its banking operations through its wholly owned subsidiary FCB, a state-chartered bank organized under the laws of the state of North Carolina.

BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers as well as secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees generated from these products and services are a primary source of noninterest income and an essential component of our total revenue.
 
Our strong financial position enables us to pursue growth through strategic acquisitions to enhance organizational value by providing opportunities to grow capital and increase earnings. These transactions allow us to strengthen our presence in existing markets as well as expand our footprint into new markets.

The interest rate environment, specifically the decline in short-term rates and flattening of the yield curve in 2019, has presented significant challenges to the efforts of commercial banks to generate earnings and shareholder value. While our balance sheet is asset sensitive overall, we seek to reduce volatility and minimize the risk to earnings from interest rate movements in either direction. Additionally, our initiatives focus on growth of noninterest income sources, management of noninterest expenses, optimization of our branch network and further enhancements to our technology and delivery channels.

In lending, we continue to focus our activities within our core competencies of retail, small business, medical, commercial and commercial real estate lending to build a diversified portfolio. Our low to moderate risk appetite continues to govern all lending activities.

We also pursue noninterest income through enhanced credit card offerings and wealth management and merchant services. We have recently redesigned our credit card programs to offer more competitive products, intended to both increase the number of accounts and frequency of card usage. Enhancements include more comprehensive reward programs and improved card benefits. In wealth management, we have broadened our products and services to better align with the specialized needs and desires of those customers. Services include holistic financial planning, business owner advisory services and enhanced private banking offerings.

Our goals are to increase efficiencies and control costs while effectively executing an operating model that best serves our customers’ needs. We seek the appropriate footprint and staffing levels to take advantage of the revenue opportunities in each of our markets. Management is pursuing opportunities to improve operational efficiency and increase profitability through expense control, while continuing enterprise sustainability projects to improve the operating environment. Such initiatives include the automation of certain manual processes, elimination of duplicated and outdated systems, enhancements to existing technology, implementation of new digital technologies, and actively managing personnel expenses and discretionary spending. We routinely review vendor agreements and larger third party contracts for cost savings.

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Recent Economic and Industry Developments

Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. Based on the latest real gross domestic product (“GDP”) information available, the Bureau of Economic Analysis’ revised estimate of third quarter 2019 GDP growth was 2.1%, up from 2.0% GDP growth in the second quarter 2019. The acceleration in real GDP in the third quarter reflected a smaller decrease in private inventory investment and upturns in exports and residential fixed investment. These were partially offset by decelerations in personal consumption expenditures, federal government spending, and state and local government spending, and a larger decrease in nonresidential fixed investment.

The U.S. unemployment rate dropped from 3.9% in December 2018 to 3.5% in December 2019. According to the U.S. Department of Labor, nonfarm payroll employment growth in 2019 was 2.1 million, compared to 2.7 million in 2018.

During the latter half of 2019, the FOMC lowered the federal funds rate by 75 basis points to a target range of 1.50% to 1.75%. The FOMC cited the implications of global economic developments, muted inflation pressures as well as weakened business investment and exports for its actions. The FOMC also indicated that the U.S. labor market remains strong and economic activity rose at a moderate rate. In its most recent meeting, the FOMC decided to leave the federal funds rate target range unchanged. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC indicated it will assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0% inflation.

The U.S. Census Bureau and the Department of Housing and Urban Development’s latest estimate for sales of new single-family homes in November 2019 was at a seasonally adjusted annual rate of 719,000, up 16.9% from the November 2018 estimate of 615,000. Purchases of existing homes in 2019 are also up 2.7% from a year ago.

Similar to the economic environment, the performance trends in the banking industry are mixed, as shown in the latest national banking results from the third quarter of 2019. FDIC-insured institutions reported a 7.3% decrease in net income compared to the third quarter of 2018 primarily a result of nonrecurring events at three large institutions resulting in higher noninterest expense and realized losses on securities. Loan-loss provisions increased by 16.9% while noninterest expense rose by 5.7% from a year earlier. Banking industry average net interest margin (“NIM”) was 3.35% in the third quarter of 2019, down from 3.45% in the same quarter a year ago as average funding costs outpaced average asset yields. Total loans increased by 4.6% over the past twelve months primarily due to growth in commercial and industrial loans.

FINANCIAL PERFORMANCE SUMMARY

For the year ended December 31, 2019, net income was $457.4 million, or $41.05 per share, compared to $400.3 million, or $33.53 per share, during 2018. The return on average assets was 1.23% during 2019, compared to 1.15% during 2018. The return on average shareholders’ equity was 12.88% and 11.69% for the respective periods. The $57.1 million, or 14.3% increase in net income was primarily the result of the following:
Income Statement Highlights
Net interest income for the year ended 2019 increased $102.5 million, or by 8.5%, compared to the year ended 2018. The taxable-equivalent net interest margin was 3.77% for the year ended 2019, an increase of 8 basis points from the year ended 2018. These increases were driven by loan growth and increases in both loan and investment yields, partially offset by higher deposit costs.
BancShares recorded net provision expense for loan and lease losses of $31.4 million in 2019, compared to $28.5 million in 2018. Provision expense remained relatively stable due to strong credit quality, partially offset by loan growth. The net charge-off to average non-PCI loans ratio was 0.12% for the year, up 1 basis point from 2018.
Noninterest income for the year ended 2019 totaled $415.9 million, an increase of $15.7 million, or 3.9%, from the prior year. This was supported by our fee-income producing lines of business led by mortgage, cardholder and wealth services. Additionally, marketable equity securities gains and realized gains on investment securities available for sale increased $28.2 million and $6.8 million, respectively, offset by $26.6 million in debt extinguishment gains in 2018 which did not recur in 2019.

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Noninterest expense was $1.10 billion for the year ended December 31, 2019, compared to $1.08 billion for the same period in 2018. The increase was primarily attributable to personnel, furniture and equipment and merger-related expenses.
Income tax expense was $134.7 million and $103.3 million for the years ended 2019 and 2018, respectively, representing effective tax rates of 22.7% and 20.5%. The rate increase was primarily due to the 2018 recognition of a tax benefit recorded as a result of the Tax Act.
Balance Sheet Highlights
Loan growth was strong during 2019, as loans increased by $3.36 billion, or by 13.2% to $28.88 billion, primarily driven by originated portfolio growth and net loans acquired from Biscayne Bancshares, First South Bancorp and Entegra. Excluding current year acquired loans of $2.00 billion, total loans increased by $1.36 billion, or 5.3%.
The allowance for loan and lease losses as a percentage of total loans was 0.78% at December 31, 2019, compared to 0.88% at December 31, 2018. At December 31, 2019, BancShares’ nonperforming assets, including nonaccrual loans and OREO, increased $34.4 million to $168.3 million or 0.58% of total loans from $133.9 million or 0.52% of total loans at December 31, 2018. Although nonperforming assets have increased, credit quality continues to be strong and ratios remain at historically low levels.
Deposit growth continued in 2019, up $3.76 billion, or by 12.3% to $34.43 billion, primarily due to organic growth as well as the addition of deposit balances from the Biscayne Bancshares, First South Bancorp and Entegra acquisitions. Excluding current year acquired deposits of $2.27 billion, total deposits increased by $1.49 billion, or 4.8%.
Capital Highlights
In 2019, we returned $468.6 million of capital to shareholders through the repurchase of 998,910 shares of Class A common stock for $450.8 million and cash dividends of $17.7 million.
Common shareholders’ equity increased to $3.59 billion on December 31, 2019, compared to $3.49 billion on December 31, 2018 as earnings exceeded share repurchases and dividends during the year.
Under Basel III capital requirements, BancShares remained well-capitalized at December 31, 2019, with a total risk-based capital ratio of 12.12%, Tier 1 risk based capital ratio and common Tier 1 ratio of 10.86% and leverage capital ratio of 8.81%.




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BUSINESS COMBINATIONS

FCB has evaluated the financial statement significance for all business combinations completed during 2019 and 2018. FCB has concluded the completed business combinations noted below are not material to BancShares’ financial statements, individually or in aggregate, and therefore, pro forma financial data has not been included.

Community Financial Holding Co. Inc.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co. Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. As of December 31, 2019, Community Financial reported $224.0 million in consolidated assets, $136.9 million in loans, and $211.8 million in deposits.

Entegra Financial Corp.

On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 for each share of common stock was paid to the shareholders of Entegra, totaling approximately $222.8 million. The merger allows FCB to enhance banking efforts and expand its presence in western North Carolina. FCB agreed to divest certain branches, other assets and liabilities as a requirement of regulatory approval for the transaction, which is anticipated to close in 2020. The merger contributed $1.73 billion in consolidated assets, which included $1.03 billion in loans, and $1.33 billion in deposits, as of the merger date. The assets and liabilities of the branches to be divested are recorded on the Consolidated Balance Sheets and in the related Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $106.4 million, $2.3 million, and $186.4 million, respectively as of December 31, 2019.

First South Bancorp, Inc.

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

Biscayne Bancshares, Inc.

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

Palmetto Heritage Bancshares, Inc.

On November 1, 2018, FCB completed the merger of Pawleys Island, South Carolina-based Palmetto Heritage Bancshares, Inc. (“Palmetto Heritage”) and its subsidiary, Palmetto Heritage Bank & Trust, into FCB. Under the terms of the agreement, cash consideration of $135.00 per share was paid to the shareholders of Palmetto Heritage for each share of Palmetto Heritage’s common stock, with total consideration paid of $30.4 million. The merger allowed FCB to expand its presence and enhance banking efforts in the South Carolina coastal markets. The merger contributed $179.7 million in consolidated assets, which included $135.1 million in loans, and $124.9 million in deposits, as of the merger date.

Capital Commerce Bancorp, Inc.

On October 2, 2018, FCB completed the merger of Milwaukee, Wisconsin-based Capital Commerce Bancorp, Inc. (“Capital Commerce”) and its subsidiary, Securant Bank & Trust, into FCB. Under the terms of the merger agreement, cash consideration of $4.75 per share was paid to the shareholders of Capital Commerce for each share of Capital Commerce’s common stock, with total consideration paid of $28.1 million. The merger allowed FCB to expand its presence and enhance banking efforts in the Milwaukee market. The merger contributed $232.6 million in consolidated assets, which included $184.1 million in loans, and $172.4 million in deposits, as of the merger date.

26





HomeBancorp, Inc.

On May 1, 2018, FCB completed the merger of Tampa, Florida-based HomeBancorp, Inc. (“HomeBancorp”) and its subsidiary, HomeBanc, into FCB. Under the terms of the merger agreement, cash consideration of $15.03 per share was paid to the shareholders of HomeBancorp for each share of HomeBancorp’s common stock, with total consideration paid of $112.7 million. The merger allowed FCB to expand its footprint in Florida by entering into the Tampa and Orlando markets. The merger contributed $900.3 million in consolidated assets, which included $566.2 million in loans, and $619.6 million in deposits, as of the merger date.

See Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures.

FDIC-ASSISTED TRANSACTIONS

BancShares completed fourteen FDIC-assisted transactions between 2009 and 2017. The carrying value of loans acquired in these transactions was approximately $573.7 million at December 31, 2019. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.

At December 31, 2019, shared-loss protection remains for a single acquired bank related to single family residential loans of $44.8 million. Cumulative losses for all fourteen acquisitions incurred through December 31, 2019, totaled $1.20 billion. Cumulative amounts reimbursed by the FDIC through December 31, 2019, totaled $674.5 million. The shared-loss agreements for two FDIC-assisted transactions include provisions related to payments owed to the FDIC at the termination of the agreements if actual cumulative losses on covered assets are lower than originally estimated by the FDIC at the time of acquisition (“clawback liability”). As of December 31, 2019, and December 31, 2018, the estimated clawback liability was $112.4 million and $105.6 million, respectively. The clawback liability payment dates are March 2020 and March 2021.

Table 3 provides changes in the FDIC clawback liability for the years ended December 31, 2019 and December 31, 2018.

Table 3
FDIC CLAWBACK LIABILITY
(Dollars in thousands)2019 2018
Beginning balance$105,618
 $101,342
Accretion6,777
 4,023
Adjustments related to changes in assumptions
 253
Ending balance$112,395
 $105,618


27




Table 4
AVERAGE BALANCE SHEETS
             
 2019 2018 
(Dollars in thousands, taxable equivalent)Average
Balance
 Interest
Income/
Expense
 Yield/
Rate
 Average
Balance
 Interest
Income/
Expense
 Yield/
Rate
 
Assets            
Loans and leases(1)
$26,656,048
 $1,219,825
 4.58
%$24,483,719
 $1,075,682
 4.39
%
Investment securities:            
U.S. Treasury945,094
 22,235
 2.35
 1,514,598
 28,277
 1.87
 
Government agency491,001
 14,308
 2.91
 106,067
 2,697
 2.54
 
Mortgage-backed securities5,198,884
 114,819
 2.21
 5,241,865
 113,698
 2.17
 
Corporate bonds153,841
 7,945
 5.16
 104,796
 5,727
 5.46
 
Other investments130,249
 2,205
 1.69
 107,603
 1,059
 0.98
 
Total investment securities6,919,069
 161,512
 2.33
 7,074,929
 151,458
 2.14
 
Overnight investments1,291,617
 26,245
 2.03
 1,289,013
 21,997
 1.71
 
Total interest-earning assets34,866,734
 $1,407,582
 4.04
%32,847,661
 $1,249,137
 3.80
%
Cash and due from banks271,466
     281,510
     
Premises and equipment1,218,611
     1,164,542
     
Allowance for loan and lease losses(226,600)     (223,300)     
Other real estate owned45,895
     47,053
     
Other assets985,613
     762,446
     
 Total assets$37,161,719
     $34,879,912
     
             
Liabilities            
Interest-bearing deposits:            
Checking with interest$5,353,555
 $1,854
 0.03
%$5,188,542
 $1,257
 0.02
%
Savings2,604,217
 1,700
 0.07
 2,466,734
 789
 0.03
 
Money market accounts8,175,510
 27,479
 0.34
 7,993,943
 10,664
 0.13
 
Time deposits3,315,478
 45,221
 1.36
 2,427,949
 9,773
 0.40
 
Total interest-bearing deposits19,448,760
 76,254
 0.39
 18,077,168
 22,483
 0.12
 
Securities sold under customer repurchase agreements530,818
 1,995
 0.38
 555,555
 1,738
 0.31
 
Other short-term borrowings23,087
 671
 2.87
 58,686
 1,919
 3.27
 
Long-term obligations392,150
 13,722
 3.45
 304,318
 10,717
 3.48
 
Total interest-bearing liabilities20,394,815
 92,642
 0.45
 18,995,727
 36,857
 0.19
 
Demand deposits12,769,776
     12,088,081
     
Other liabilities445,347
     373,163
     
Shareholders’ equity3,551,781
     3,422,941
     
 Total liabilities and shareholders’ equity$37,161,719
     $34,879,912
     
Interest rate spread    3.59
%    3.61
%
             
Net interest income and net yield on interest-earning assets  $1,314,940
 3.77
%  $1,212,280
 3.69
%
(1)Loans and leases include PCI and non-PCI loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were $9.7 million, $8.8 million, and $9.7 million for the years ended 2019, 2018, and 2017, respectively. 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 21.0% for 2019 and 2018, and 35.0% for 2017, as well as state income tax rates of 3.9%, 3.4%, and 3.1% for the years ended 2019, 2018, and 2017, respectively. The taxable-equivalent adjustment was $3.6 million, $3.4 million, and $4.5 million, for the years ended 2019, 2018, and 2017, respectively.
(2)The rate/volume variance is allocated proportionally between the changes in volume and rate.


28




Table 4
AVERAGE BALANCE SHEETS (continued)
      2019 2018
2017 Change from previous year due to: Change from previous year due to:
Average
Balance
 Interest
Income/
Expense
 Yield/
Rate
 Volume Yield/Rate 
Total Change(2)
 Volume Yield/Rate 
Total Change(2)
                 
$22,725,665
 $959,785
 4.22%$83,908
 $60,235
 $144,143
 $65,709
 $50,188
 $115,897
                 
1,628,088
 18,015
 1.11 (10,632) 4,590
 (6,042) (1,255) 11,517
 10,262
38,948
 647
 1.66 9,787
 1,824
 11,611
 1,115
 935
 2,050
5,206,897
 98,341
 1.89 (191) 1,312
 1,121
 586
 14,771
 15,357
60,950
 3,877
 6.36 2,680
 (462) 2,218
 2,789
 (939) 1,850
101,681
 698
 0.69 230
 916
 1,146
 50
 311
 361
7,036,564
 121,578
 1.73 1,874
 8,180
 10,054
 3,285
 26,595
 29,880
2,451,417
 26,846
 1.10 45
 4,203
 4,248
 (12,729) 7,880
 (4,849)
32,213,646
 $1,108,209
 3.44%$85,827
 $72,618
 $158,445
 $56,265
 $84,663
 $140,928
417,229
                
1,133,255
                
(226,465)                
56,478
                
708,724
                
$34,302,867
                
                 
                 
                 
$4,956,498
 $1,021
 0.02%$40
 $557
 $597
 $48
 $188
 $236
2,278,895
 717
 0.03 44
 867
 911
 59
 13
 72
8,136,731
 6,969
 0.09 242
 16,573
 16,815
 (123) 3,818
 3,695
2,634,434
 7,489
 0.28 3,572
 31,876
 35,448
 (587) 2,871
 2,284
18,006,558
 16,196
 0.09 3,898
 49,873
 53,771
 (603) 6,890
 6,287
649,252
 2,179
 0.34 (77) 334
 257
 (314) (127) (441)
77,680
 2,659
 3.39 (1,164) (84) (1,248) (607) (133) (740)
842,863
 22,760
 2.67 3,057
 (52) 3,005
 (13,316) 1,273
 (12,043)
19,576,353
 43,794
 0.22 5,714
 50,071
 55,785
 (14,840) 7,903
 (6,937)
11,112,786
                
407,478
                
3,206,250
                
$34,302,867
                
    3.22%           
                 
  $1,064,415
 3.30%$80,113
 $22,547
 $102,660
 $71,105
 $76,760
 $147,865


29





RESULTS OF OPERATIONS
Net Interest Margin and Income (Taxable Equivalent Basis)

The year-to-date taxable-equivalent net interest margin for 2019 was 3.77%, compared to 3.69% during 2018. The margin increase was primarily due to improved yields on loans and investments. This increase was partially offset by higher deposit costs. During 2019, yields on loans, investment securities and overnight investments increased 19 basis points to 4.58%, 19 basis points to 2.33% and 32 basis points to 2.03%, respectively.
Net interest income was $1.31 billion for the year ended December 31, 2019, an increase of $102.7 million, or 8.5%, compared to 2018. Interest income increased $158.4 million primarily due to increased average loans, coupled with increased yields on loans and investments. Interest expense increased by $55.8 million primarily due to an increase in rates paid on deposit accounts.
Interest income from loans and leases was $1.22 billion during 2019, an increase of $144.1 million compared to 2018. The increase was primarily due to increased average loans in the commercial, business and residential loan portfolios as well as increased yields, primarily on commercial and business loans and equity lines.
Interest income earned on investment securities was $161.5 million and $151.5 million during 2019 and 2018, respectively. The $10.0 million increase was primarily due to a 19 basis point improvement in investment yields due to changes in portfolio mix and higher yield on short duration U.S. Treasury securities.
Interest expense on interest-bearing deposits was $76.3 million in 2019, an increase of $53.8 million compared to 2018, primarily due to higher rates paid on money market and time deposits. Interest expense on borrowings was $16.4 million in 2019, an increase of $2.0 million compared to 2018, primarily due to higher short-term interest rates and an increase in average borrowings.
Average interest-earning assets increased $2.02 billion, or by 6.1%, for the year ended December 31, 2019. Growth in average interest-earning assets during 2019 was primarily due to organic loan growth and loans acquired from Biscayne Bancshares and First South Bancorp, partially offset by a reduction in investments. The year-to-date taxable-equivalent yield on interest-earning assets in 2019 improved 24 basis points to 4.04%.
Average interest-bearing liabilities increased $1.40 billion for the year ended December 31, 2019, primarily due to increased time deposits and deposits from acquisitions. The rate paid on interest-bearing liabilities increased 26 basis points to 0.45% in 2019 compared to 0.19% in 2018.
While the full year margin increased, the Bank experienced margin compression throughout 2019, as variable rate loans and new loan production both priced lower following three decreases in the federal funds rate, coupled with higher deposit funding costs. While net interest income is expected to continue increasing in 2020, management expects net interest margin to face continued market rate pressures and initially decrease at a slower pace than the second half of 2019 before stabilizing for the remainder of 2020.

Provision for Loan and Lease Losses

Provision expense on non-PCI loans and leases was $33.0 million during 2019, compared to $29.2 million and $29.1 million in 2018 and 2017, respectively. Net charge-offs on non-PCI loans and leases were $30.0 million, $26.5 million and $22.3 million for 2019, 2018 and 2017, respectively. Net charge-offs on non-PCI loans and leases represented 0.12% of average non-PCI loans and leases during 2019, compared to 0.11% and 0.10% during 2018 and 2017, respectively.

The PCI loan portfolio net provision credit was $1.6 million during 2019, compared to net provision credits of $0.8 million and $3.4 million during the same periods of 2018 and 2017, respectively.

On January 1, 2020, BancShares adopted a new accounting standard for estimating credit losses, CECL. The day-one impact to the allowance for credit losses is not expected to be significant. Refer to Note A, Accounting Policies and Basis of Presentation, of the Notes to Consolidated Financial Statements for a discussion of the methodology used in the determination of the allowance for credit losses, as well as further information about the adoption of CECL, under the “Recently Issued Accounting Pronouncements” section.


30




Noninterest Income

Table 5
NONINTEREST INCOME
 Year ended December 31
(Dollars in thousands)2019 2018 2017
Service charges on deposit accounts$105,191
 $105,486
 $101,201
Wealth management services99,241
 97,966
 86,719
Cardholder services, net69,078
 65,478
 57,583
Other service charges and fees31,644
 30,606
 28,321
Merchant services, net24,304
 24,504
 22,678
Mortgage income21,126
 16,433
 23,251
Recoveries of PCI loans previously charged off17,445
 16,598
 21,111
Insurance commissions12,810
 12,702
 12,465
ATM income6,296
 7,980
 9,143
Marketable equity securities gains (losses), net20,625
 (7,610) 
Realized gains on investment securities available for sale, net7,115
 351
 4,293
Gain on extinguishment of debt
 26,553
 12,483
Gain on acquisitions
 
 134,745
Other986
 3,102
 7,970
Total noninterest income$415,861
 $400,149
 $521,963

For the year ended December 31, 2019, total noninterest income was $415.9 million, compared to $400.1 million for 2018, an increase of $15.7 million, or 3.9%. The change was primarily attributable to the following:
Marketable equity securities gains increased income by $28.2 million due to favorable movements in the stock market throughout 2019.
Realized gains on investment securities available for sale increased $6.8 million due primarily to gains recognized on sales of mortgage-backed securities.
Mortgage income increased $4.7 million primarily due to favorable mortgage interest rate movements and higher sales volumes.
Cardholder services income increased by $3.6 million due to an increase in sales volume and cost savings achieved by converting credit card processing services.
The gain on extinguishment of debt of $26.6 million due to the early termination of FHLB advances in 2018 did not recur in 2019.
Noninterest Expense

Table 6
NONINTEREST EXPENSE
 Year ended December 31
(Dollars in thousands)2019 2018 2017
Salaries and wages$551,112
 $527,691
 $490,610
Employee benefits120,501
 118,203
 105,975
Occupancy expense111,179
 109,169
 104,690
Equipment expense112,290
 102,909
 97,478
Processing fees paid to third parties29,552
 30,017
 25,673
Merger-related expenses17,166
 6,462
 9,015
Core deposit intangible amortization16,346
 17,165
 17,194
Consultant expense12,801
 14,345
 14,963
Collection and foreclosure-related expenses11,994
 16,567
 14,407
Advertising expense11,437
 11,650
 11,227
FDIC insurance expense10,664
 18,890
 22,191
Telecommunications expense9,391
 10,471
 12,172
Other89,308
 93,432
 86,874
Total noninterest expense$1,103,741
 $1,076,971
 $1,012,469

31





For the year ended December 31, 2019, total noninterest expense was $1.10 billion, compared to $1.08 billion for 2018, an increase of $26.8 million, or 2.5%. The change was primarily attributable to the following:

Personnel expense, which includes salaries, wages and employee benefits, increased by $25.7 million, primarily driven by merit increases, increased headcount primarily driven by acquired bank personnel, increased payroll incentives and commissions and higher retirement benefit costs.
Merger-related expenses increased by $10.7 million primarily due to the 2019 acquisitions of Biscayne Bancshares, First South Bancorp and Entegra.
Equipment expense increased by $9.4 million primarily due to increased depreciation from hardware and software additions.
FDIC insurance expense decreased $8.2 million primarily due to the discontinuation of the Deposit Insurance Fund surcharge on large banks during 2018.
Collections and foreclosure-related expense decreased by $4.6 million primarily due to reductions in the write-downs of bank-owned properties.

Income Taxes

For 2019, income tax expense was $134.7 million compared to $103.3 million during 2018 and $219.9 million during 2017, reflecting effective tax rates of 22.7%, 20.5% and 40.5% during the respective periods. The effective tax rate increase in 2019 was primarily due to the 2018 recognition of a tax benefit resulting from the Tax Act. The Tax Act reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018.

INTEREST-EARNING ASSETS

Interest-earning assets include overnight investments, investment securities and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning assets averaged $34.87 billion in 2019, compared to $32.85 billion in 2018. The increase of $2.02 billion, or 6.1%, was primarily the result of strong originated loan growth and loans acquired in the Biscayne Bancshares and First South Bancorp acquisitions, partially offset by a decrease in average investment securities.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note A, Accounting Policies and Basis of Presentation, and Note C, Investments, in the Notes to Consolidated Financial Statements for additional disclosures regarding investment securities.

The carrying value of all investment securities was $7.17 billion at December 31, 2019, an increase of $338.6 million when compared to $6.83 billion at December 31, 2018. The increase in the portfolio was primarily attributable to purchases totaling $4.95 billion and securities from acquisitions of $285.9 million, partially offset by maturities and paydowns of $2.69 billion and sales of $2.37 billion.


32




As of December 31, 2019, investment securities available for sale had a net pre-tax unrealized gain of $7.5 million, compared to a net pre-tax unrealized loss of $50.0 million as of December 31, 2018. After evaluating the investment securities with unrealized losses, management concluded that no other than temporary impairment existed as of December 31, 2019. Investment securities classified as available for sale reported at fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.

On November 1, 2019, as part of the adoption of ASU 2019-04, mortgage-backed securities with an amortized cost of $2.08 billion were transferred from investment securities held to maturity to the available for sale portfolio. At the time of the transfer, the mortgage-backed securities had a fair value of $2.15 billion. The transfer resulted in a reclassification of unrealized losses of $72.5 million, or $55.8 million net of tax, previously frozen in accumulated other comprehensive income (“AOCI”). FCB still has the intent and ability to hold the remainder of the held to maturity portfolio to maturity.

On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $2.38 billion and a weighted average contractual maturity of 13 years. The unrealized loss on these securities at the date of transfer was $109.5 million or $84.3 million net of tax, and was reported as a component of AOCI. This unrealized loss was accreted over the remaining expected life of the securities as an adjustment of yield and is partially offset by the amortization of the corresponding discount on the transferred securities. For the year ended December 31, 2019, $19.9 million, or $15.3 million net of tax, of the unrealized loss has been accreted from AOCI into interest income.

Table 7 presents the investment securities portfolio at December 31, 2019 segregated by major category.

Table 7
INVESTMENT SECURITIES
 December 31
 2019 2018 2017
(Dollars in thousands) Cost  Fair value  Cost Fair value Cost Fair value
Investment securities available for sale           
U.S. Treasury$409,397
 $409,999
 $1,249,243
 $1,247,710
 $1,658,410
 $1,657,864
Government agency684,085
 682,772
 257,252
 256,835
 
 
Residential mortgage-backed securities5,269,060
 5,267,090
 2,956,793
 2,909,339
 5,428,074
 5,349,426
Commercial mortgage-backed securities373,105
 380,020
 
 
 
 
Corporate bonds198,278
 201,566
 143,829
 143,226
 67,059
 67,682
State, county and municipal118,227
 118,227
 
 
 
 
Total investment securities available for sale7,052,152
 7,059,674
 4,607,117
 4,557,110
 7,153,543
 7,074,972
Investment in marketable equity securities59,262
 82,333
 73,809
 92,599
 75,471
 105,208
Investment securities held to maturity           
Residential mortgage-backed securities
 
 2,087,024
 2,103,126
 76
 81
Commercial mortgage-backed securities
 
 97,629
 98,376
 
 
Other30,996
 30,996
 
 
 
  
Total investment securities held to maturity30,996
 30,996
 2,184,653
 2,201,502
 76
 81
Total investment securities$7,142,410
 $7,173,003
 $6,865,579
 $6,851,211
 $7,229,090
 $7,180,261

At December 31, 2019, mortgage-backed securities represented 78.7% of the total fair value of investment securities, compared to government agency securities (9.5%), U.S. Treasury (5.7%), corporate bonds (2.8%), state, county and municipal securities (1.6%), marketable equity securities (1.1%) and other investments (0.4%). Overnight investments are with the Federal Reserve Bank and other financial institutions.


33




Table 8 presents the investment securities portfolio at December 31, 2019 segregated by major category with ranges of contractual maturities, average contractual maturities and taxable equivalent yields.

Table 8
INVESTMENT SECURITIES
 December 31, 2019
     
Average maturity
(Yrs./mos.)
 Weighted taxable equivalent yield
(Dollars in thousands) Cost Fair value  
Investment securities available for sale       
U.S. Treasury       
Within one year$406,325
 $406,927
 0/2 2.41%
One to five years2,021
 2,021
 2/7 1.65
Five to ten years1,051
 1,051
 5/1 1.69
Over ten years
 
 0 
Total409,397
 409,999
 0/3 2.41
Government agency(1)
       
One to five years3,236
 3,208
 4/2 3.35
Five to ten years236,247
 235,532
 9/5 2.42
Over ten years444,602
 444,032
 23/1 2.49
Total684,085
 682,772
 18/3 2.47
Residential mortgage-backed securities(1)
       
One to five years87
 87
 3/10 0.65
Five to ten years1,001,952
 996,404
 8/5 1.74
Over ten years4,267,021
 4,270,599
 18/8 2.30
Total5,269,060
 5,267,090
 16/9 2.20
Commercial mortgage-backed securities(1)
       
One to five years9,374
 9,374
 3/8 2.01
Five to ten years52,819
 54,460
 7/1 2.99
Over ten years310,912
 316,186
 35/10 3.16
Total373,105
 380,020
 30/11 3.11
State, county and municipal       
One to five years4,025
 4,025
 4/7 2.19
Five to ten years9,308
 9,308
 8/5 1.96
Over ten years104,894
 104,894
 15/11 2.26
Total118,227
 118,227
 14/11 2.24
Corporate bonds       
One to five years18,450
 18,925
 4/1 5.40
Five to ten years174,848
 177,508
 7/3 5.10
Over ten years4,980
 5,133
 17/4 7.41
Total198,278
 201,566
 7/3 5.18
Total investment securities available for sale7,052,152
 7,059,674
    
Investment securities held to maturity       
Other investments       
Within one year30,746
 30,746
 0/4 2.06
One to five years250
 250
 1/1 2.41
Total investment securities held to maturity30,996
 30,996
 0/4 2.06
(1) Government agency, residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.

34




Loans and Leases

Our accounting methods for loans and leases depend on whether they are originated or purchased, and if purchased, whether or not the loans reflect credit deterioration since origination. Non-PCI loans consist of loans which were originated by us or purchased from other institutions that did not reflect credit deterioration at the time of purchase. PCI loans are purchased loans which reflect credit deterioration since origination such that it is probable at acquisition that we will be unable to collect all contractually required payments.

Loans and leases were $28.88 billion at December 31, 2019, a net increase of $3.36 billion, or 13.2%, since December 31, 2018. Excluding current year acquired loans of $2.00 billion, total loans increased by $1.36 billion, or 5.3%. Non-PCI loans and leases were $28.32 billion at December 31, 2019, compared to $24.92 billion at December 31, 2018. The increase in non-PCI loans was driven by $1.50 billion of organic growth, primarily in the commercial, business and residential mortgage portfolios as well as the addition of $812.3 million, $139.7 million and $953.7 million in non-PCI loans from the Biscayne Bancshares, First South Bancorp and Entegra acquisitions, respectively. PCI loans were $558.7 million at December 31, 2019, compared to $606.6 million at December 31, 2018. The $47.9 million PCI portfolio decline over this period was a result of $149.2 million loan run-off, offset by newly acquired PCI loans totaling $101.3 million.

Non-PCI loans and leases represented 98.1% of total loans and leases at December 31, 2019, compared to 97.6% of total loans and leases at December 31, 2018.

Table 9 provides the composition of net loans and leases for the past five years.

Table 9
LOANS AND LEASES
 December 31
(Dollars in thousands)2019 2018 2017 2016 2015
Non-PCI loans and leases:         
Commercial:         
Construction and land development$1,013,454
 $757,854
 $669,215
 $649,157
 $620,352
Commercial mortgage12,282,635
 10,717,234
 9,729,022
 9,026,220
 8,274,548
Other commercial real estate542,028
 426,985
 473,433
 351,291
 321,021
Commercial and industrial and leases4,403,792
 3,938,730
 3,625,208
 3,393,771
 3,099,736
Other310,093
 296,424
 302,176
 340,264
 314,832
Total commercial loans18,552,002
 16,137,227
 14,799,054
 13,760,703
 12,630,489
Noncommercial:         
Residential mortgage5,293,917
 4,265,687
 3,523,786
 2,889,124
 2,695,985
Revolving mortgage2,339,072
 2,542,975
 2,701,525
 2,601,344
 2,523,106
Construction and land development357,385
 257,030
 248,289
 231,400
 220,073
Consumer1,780,404
 1,713,781
 1,561,173
 1,446,138
 1,219,821
Total noncommercial loans9,770,778
 8,779,473
 8,034,773
 7,168,006
 6,658,985
Total non-PCI loans and leases$28,322,780
 $24,916,700
 $22,833,827
 $20,928,709
 $19,289,474
Total PCI loans$558,716
 $606,576
 $762,998
 $809,169
 $950,516
Total loans and leases28,881,496
 25,523,276
 23,596,825
 21,737,878
 20,239,990
Less allowance for loan and lease losses(225,141) (223,712) (221,893) (218,795) (206,216)
Net loans and leases$28,656,355
 $25,299,564
 $23,374,932
 $21,519,083
 $20,033,774

Allowance for loan and lease losses

The ALLL was $225.1 million at December 31, 2019, compared to $223.7 million and $221.9 million at December 31, 2018 and 2017, respectively. The ALLL as a percentage of total loans was 0.78% at December 31, 2019, compared to 0.88% and 0.94% at December 31, 2018 and 2017, respectively.

At December 31, 2019, the ALLL allocated to non-PCI loans and leases was $217.6 million, or 0.77% of non-PCI loans and leases, compared to $214.6 million, or 0.86%, at December 31, 2018, and $211.9 million, or 0.93%, at December 31, 2017.


35




The ALLL as a percentage of non-PCI loans at December 31, 2019 and 2018 decreased primarily due to changes in portfolio mix and sustained credit quality, coupled with impact of loan growth from recent acquisitions with no recorded allowance. This was partially offset by increases in specific reserves. Credit quality indicators such as nonaccrual assets and delinquency showed small increases but remain at historically low levels.

The ALLL allocated to PCI loans totaled $7.5 million, or 1.35% of PCI loans, at December 31, 2019 compared to $9.1 million, or 1.51%, at December 31, 2018, and $10.0 million, or 1.31%, at December 31, 2017.

Management considers the ALLL adequate to absorb estimated inherent losses related to loans and leases outstanding at December 31, 2019. During January 2020, BancShares adopted ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the methodology, accounting policies, and inputs used in determining the allowance for credit losses. Refer to Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for a discussion of the methodology used in the determination of the allowance for credit losses, as well as further information about the adoption of CECL, under the "Recently Issued Accounting Pronouncements" section.

Table 10 provides details of the ALLL and provision components by loan class for the past five years.

Table 10
ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)2019 2018 2017 2016 2015
Allowance for loan and lease losses at beginning of period$223,712
 $221,893
 $218,795
 $206,216
 $204,466
Non-PCI provision for loan and lease losses33,049
 29,232
 29,139
 34,870
 22,937
PCI credit for loan losses(1,608) (765) (3,447) (1,929) (2,273)
Non-PCI Charge-offs:         
Commercial:         
Construction and land development(196) (44) (599) (680) (1,012)
Commercial mortgage(1,096) (1,140) (421) (987) (1,498)
Other commercial real estate
 (69) (5) 
 (178)
Commercial and industrial and leases(13,352) (10,211) (11,921) (9,455) (6,354)
Other(100) (130) (912) (144) 
Total commercial loans(14,744) (11,594) (13,858) (11,266) (9,042)
Noncommercial:         
Residential mortgage(1,137) (1,689) (1,376) (926) (1,619)
Revolving mortgage(2,584) (3,235) (2,368) (3,287) (2,925)
Construction and land development
 (219) 
 
 (22)
Consumer(24,562) (22,817) (18,784) (14,108) (11,696)
Total noncommercial loans(28,283) (27,960) (22,528) (18,321) (16,262)
Total non-PCI charge-offs(43,027) (39,554) (36,386) (29,587) (25,304)
Non-PCI Recoveries:         
Commercial:         
Construction and land development310
 311
 521
 398
 566
Commercial mortgage596
 1,076
 2,842
 1,281
 2,027
Other commercial real estate15
 150
 27
 176
 45
Commercial and industrial and leases2,894
 3,496
 3,989
 1,729
 947
Other869
 489
 285
 539
 91
Total commercial loans4,684
 5,522
 7,664
 4,123
 3,676
Noncommercial:         
Residential mortgage416
 558
 539
 467
 861
Revolving mortgage1,212
 1,549
 1,282
 916
 1,173
Construction and land development
 127
 
 66
 74
Consumer6,703
 5,267
 4,603
 4,267
 3,650
Total noncommercial loans8,331
 7,501
 6,424
 5,716
 5,758
Total non-PCI recoveries13,015
 13,023
 14,088
 9,839
 9,434
Non-PCI loans and leases charged off, net(30,012) (26,531) (22,298) (19,748) (15,870)
PCI loans charged off, net
 (117) (296) (614) (3,044)
Allowance for loan and lease losses at end of period$225,141
 $223,712
 $221,893
 $218,795
 $206,216
Reserve for unfunded commitments$1,055
 $1,107
 $1,032
 $1,133
 $379


36




Table 11 provides trends of the ALLL ratios for the past five years.

Table 11
ALLOWANCE FOR LOAN AND LEASE LOSSES RATIOS
(Dollars in thousands)2019 2018 2017 2016 2015
Average loans and leases:         
PCI$537,131
 $671,128
 $845,030
 $898,706
 $1,112,286
Non-PCI26,058,370
 23,812,591
 21,880,635
 19,998,689
 18,415,867
Loans and leases at period-end:         
PCI558,716
 606,576
 762,998
 809,169
 950,516
Non-PCI28,322,780
 24,916,700
 22,833,827
 20,928,709
 19,289,474
Allowance for loan and lease losses allocated to loans and leases:         
PCI7,536
 9,144
 10,026
 13,769
 16,312
Non-PCI217,605
 214,568
 211,867
 205,026
 189,904
Total$225,141
 $223,712
 $221,893
 $218,795
 $206,216
Net charge-offs to average loans and leases:         
PCI0.00% 0.02% 0.04% 0.07% 0.27%
Non-PCI0.12
 0.11
 0.10
 0.10
 0.09
Total0.11
 0.11
 0.10
 0.10
 0.10
Allowance for loan and lease losses to total loans and leases:         
PCI1.35
 1.51
 1.31
 1.70
 1.72
Non-PCI0.77
 0.86
 0.93
 0.98
 0.98
Total0.78
 0.88
 0.94
 1.01
 1.02

Table 12 details the allocation of the ALLL among the various loan types. See Note E, Allowance for Loan and Lease Losses, in the Notes to Consolidated Financial Statements for additional disclosures regarding the ALLL.

Table 12
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES

 December 31
 2019 2018 2017 2016 2015
(dollars in thousands)Allowance
for loan
and lease
losses
 Percent
of loans
to total
loans
 Allowance
for loan
and lease
losses
 Percent
of loans
to total
loans
 Allowance
for loan
and lease
losses
 Percent
of loans
to total
loans
 Allowance
for loan
and lease
losses
 Percent
of loans
to total
loans
 Allowance
for loan
and lease
losses
 Percent
of loans
to total
loans
Non-PCI loans and leases                   
Commercial:                   
Construction and land development$33,213
 3.5% $35,270
 3.0% $24,470
 2.8% $28,877
 3.0% $16,288
 3.1%
Commercial mortgage45,335
 42.5
 43,451
 42.0
 45,005
 41.2
 48,278
 41.4
 69,896
 40.8
Other commercial real estate2,211
 1.9
 2,481
 1.7
 4,571
 2.0
 3,269
 1.6
 2,168
 1.6
Commercial and industrial and leases59,374
 15.3
 55,620
 15.3
 59,824
 15.4
 56,132
 15.6
 48,640
 15.3
Other2,236
 1.1
 2,221
 1.2
 4,689
 1.3
 3,127
 1.6
 1,855
 1.6
Total commercial142,369
 64.3
 139,043
 63.2
 138,559
 62.7
 139,683
 63.2
 138,847
 62.4
Noncommercial:                   
Residential mortgage18,232
 18.3
 15,472
 16.7
 15,706
 15.0
 14,447
 13.3
 14,105
 13.3
Revolving mortgage19,702
 8.1
 21,862
 10.0
 22,436
 11.4
 21,013
 12.0
 15,971
 12.5
Construction and land development2,709
 1.2
 2,350
 1.0
 3,962
 1.1
 1,596
 1.1
 1,485
 1.1
Consumer34,593
 6.2
 35,841
 6.7
 31,204
 6.6
 28,287
 6.7
 19,496
 6.0
Total noncommercial75,236
 33.8
 75,525
 34.4
 73,308
 34.1
 65,343
 33.1
 51,057
 32.9
Total allowance for non-PCI loan and lease losses217,605
 98.1
 214,568
 97.6
 211,867
 96.8
 205,026
 96.3
 189,904
 95.3
Allowance for PCI loans7,536
 1.9
 9,144
 2.4
 10,026
 3.2
 13,769
 3.7
 16,312
 4.7
Total allowance for loan and lease losses$225,141
 100.0% $223,712
 100.0% $221,893
 100.0% $218,795
 100.0% $206,216
 100.0%


37




Nonperforming Assets

Nonperforming assets include nonaccrual loans and OREO resulting from both non-PCI and PCI loans. Non-PCI loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable that principal or interest is not fully collectible. When non-PCI loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. Non-PCI loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time as to both principal and interest and there is no longer concern as to the collectability of principal and interest. Accretion of income for PCI loans is discontinued when we are unable to estimate the amount or timing of cash flows. PCI loans may begin or resume accretion of income when information becomes available that allows us to estimate the amount and timing of future cash flows.

OREO includes foreclosed property and branch facilities that we have closed but not sold. Net book values of OREO are reviewed at least annually to evaluate if write-downs are required. 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. 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.

Since OREO is carried at the lower of cost or market value, less estimated selling costs, book value adjustments are only recorded when fair values have declined. Decisions regarding write-downs are based on factors that include appraisals, previous offers received on the property, market conditions and the number of days the property has been on the market.

Table 13 provides details on nonperforming assets and other risk elements.

Table 13
NONPERFORMING ASSETS
 December 31
(Dollars in thousands, except ratios)2019 2018 2017 2016 2015
Nonaccrual loans and leases:         
Non-PCI$114,946
 $84,546
 $92,534
 $82,307
 $95,854
PCI6,743
 1,276
 624
 3,451
 7,579
Other real estate owned46,591
 48,030
 51,097
 61,231
 65,559
Total nonperforming assets$168,280
 $133,852
 $144,255
 $146,989
 $168,992
          
Loans and leases:         
Non-PCI$28,322,780
 $24,916,700
 $22,833,827
 $20,928,709
 $19,289,474
PCI558,716
 606,576
 762,998
 809,169
 950,516
Total loans and leases$28,881,496
 $25,523,276
 $23,596,825
 $21,737,878
 $20,239,990
          
Accruing loans and leases 90 days or more past due:         
Non-PCI$3,291
 $2,888
 $2,978
 $2,718
 $3,315
PCI24,257
 37,020
 58,740
 65,523
 73,751
          
Interest income recognized on nonperforming loans and leases$1,888
 $792
 $843
 $549
 $1,110
Interest income that would have been earned on nonperforming loans and leases had they been performing5,677
 3,677
 4,013
 3,904
 4,324
Ratio of total nonperforming assets to total loans, leases and other real estate owned0.58% 0.52% 0.61% 0.67% 0.83%
For the year ended 2019, nonperforming assets increased by $34.4 million, or 25.7%, compared to December 31, 2018 primarily due to an increase in nonaccrual commercial mortgage and residential mortgage loans. Nonperforming assets decreased by $10.4 million, or 7.2%, between December 31, 2018 and December 31, 2017, primarily due to a decrease in nonaccrual commercial mortgage loans.
Total nonperforming assets and our ratio of nonperforming assets to total loans leases and other real estate owned increased slightly but remain at historically low levels.
Troubled Debt Restructurings (“TDR”)

A loan is considered a TDR when both of the following occur: (1) a modification to a borrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include short term deferrals of interest, modifications of payment terms, or, in certain limited instances, forgiveness of principal or interest. PCI loans are aggregated into pools based upon common risk characteristics and each pool is accounted for as a single unit. For pooled PCI loans, a subsequent modification that would otherwise meet the definition of a TDR is not reported or accounted for as a TDR as pooled PCI loans are excluded from the scope of TDR accounting. Excluding pooled PCI loans, PCI loans are classified as TDRs if a modification is made subsequent to acquisition. We further classify TDRs as performing and nonperforming. Performing TDRs accrue interest at the time of restructure and continue to perform based on the restructured terms. Nonperforming TDRs do not accrue interest and are included with other nonperforming assets within nonaccrual loans and leases. See Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for discussion of our accounting policies for TDRs.
At December 31, 2019, accruing non-PCI TDRs were $111.7 million, an increase of $2.7 million from $109.0 million at December 31, 2018. At December 31, 2019, nonaccruing non-PCI TDRs were $42.3 million, an increase of $13.4 million from $28.9 million at December 31, 2018. Both increases were primarily due to modifications within the residential mortgage, commercial mortgage and commercial and industrial portfolios. PCI TDRs continue to decline as a result of loan pay downs and pay offs.
Table 14 provides further details on performing and nonperforming TDRs for the last five years.

Table 14
TROUBLED DEBT RESTRUCTURINGS
 December 31
(Dollars in thousands)2019 2018 2017 2016 2015
Accruing TDRs:         
Non-PCI$111,676
 $108,992
 $112,228
 $101,462
 $84,065
PCI17,074
 18,101
 18,163
 26,068
 29,231
Total accruing TDRs$128,750
 $127,093
 $130,391
 $127,530
 $113,296
Nonaccruing TDRs:         
Non-PCI42,331
 28,918
 33,898
 23,085
 30,127
PCI111
 119
 272
 301
 1,420
Total nonaccruing TDRs$42,442
 $29,037
 $34,170
 $23,386
 $31,547
All TDRs:         
Non-PCI154,007
 137,910
 146,126
 124,547
 114,192
PCI17,185
 18,220
 18,435
 26,369
 30,651
Total TDRs$171,192
 $156,130
 $164,561
 $150,916
 $144,843

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debentures, and other borrowings. Interest-bearing liabilities were $22.83 billion at December 31, 2019, an increase of $3.15 billion from December 31, 2018, primarily resulting from growth in interest-bearing deposits of $2.71 billion, higher FHLB borrowings of $378.6 million and higher other borrowings of $134.4 million. Offsetting these increases was a decline in securities sold under customer repurchase agreements of $101.0 million. Current year acquisitions contributed to $1.83 billion, $167.0 million and $27.1 million in interest-bearing deposits, FHLB borrowings and subordinated debentures, respectively, at December 31, 2019.

Average interest-bearing liabilities increased $1.40 billion, or by 7.4%, in 2019 compared to 2018, primarily due to growth in average interest-bearing deposit balances of $1.37 billion.


38




Deposits

At December 31, 2019, total deposits were $34.43 billion, an increase of $3.76 billion, or 12.3%, since 2018. The Biscayne Bancshares, First South Bancorp, and Entegra acquisitions contributed total deposit balances of $780.0 million, $166.8 million and $1.33 billion, respectively, as of December 31, 2019. Excluding acquired deposits, demand deposits increased $597.9 million, money market deposits increased $348.8 million, and time deposits increased $329.9 million during 2019.

Table 15 provides deposit balances as of December 31, 2019, 2018 and 2017.

Table 15
DEPOSITS
 December 31
(Dollars in thousands)2019 2018 2017
Demand$12,926,796
 $11,882,670
 $11,237,375
Checking with interest5,782,967
 5,338,511
 5,230,060
Money market9,319,087
 8,194,818
 8,059,271
Savings2,564,777
 2,499,750
 2,340,449
Time3,837,609
 2,756,711
 2,399,120
Total deposits$34,431,236
 $30,672,460
 $29,266,275

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

Table 16 provides the expected maturity of time deposits of $100,000 or more as of December 31, 2019.

Table 16
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)December 31, 2019
Time deposits maturing in: 
Three months or less$568,038
Over three months through six months415,644
Over six months through 12 months523,215
More than 12 months478,161
Total$1,985,058
Borrowings
At December 31, 2019, total borrowings were $1.33 billion compared to $892.2 million at December 31, 2018. The $434.7 million increase was primarily due to an increase in FHLB borrowings of $378.6 million and an increase in other borrowings of $134.4 million primarily related to issuance of a term loan and revolving line of credit in 2019.

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Table 17
BORROWINGS
 December 31
(Dollars in thousands)2019 2018 2017
Securities sold under customer repurchase agreements$442,956
 $543,936
 $586,256
Federal funds purchased
 
 2,551
Federal Home Loan Bank borrowings572,185
 193,556
 835,221
Subordinated debentures     
SCB Capital Trust I9,739
 9,701
 9,662
FCB/SC Capital Trust II17,532
 17,401
 17,272
FCB/NC Capital Trust III88,145
 88,145
 90,207
Capital Trust debentures assumed in acquisitions14,433
 4,124
 
Other subordinated debentures33,563
 21,370
 15,000
Total subordinated debentures163,412
 140,741
 132,141
Other borrowings148,318
 13,921
 7,878
Total borrowings$1,326,871
 $892,154
 $1,564,047
BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon Capital Trust I (the “Trusts”), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debentures included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.
During the year ended December 31, 2019, FCB redeemed, in whole, all obligations related to CCBI Capital Trust I totaling $4.1 million.
Commitments and Contractual Obligations
 
Table 18 identifies significant obligations and commitments as of December 31, 2019 representing required and potential cash outflows. See Note T, Commitments and Contingencies, for additional information regarding total commitments. Loans commitments and standby letters of credit are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used.

Table 18
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Type of obligationPayments due by period
(Dollars in thousands)Less than 1 year 1-3 years 3-5 years Thereafter Total
Contractual obligations:         
Time deposits$2,971,410
 $692,584
 $156,235
 $17,380
 $3,837,609
Short-term borrowings738,233
 
 
 
 738,233
Long-term obligations61,995
 127,470
 132,026
 267,147
 588,638
Operating leases14,257
 23,949
 16,719
 36,653
 91,578
Estimated payment to settle FDIC clawback liability99,467
 15,888
 
 
 115,355
Total contractual obligations$3,885,362
 $859,891
 $304,980
 $321,180
 $5,371,413
Commitments:         
Loan commitments$5,478,293
 $1,405,296
 $710,970
 $3,087,819
 $10,682,378
Standby letters of credit88,790
 10,651
 
 160
 99,601
Affordable housing partnerships33,582
 34,021
 1,186
 1,184
 69,973
Total commitments$5,600,665
 $1,449,968
 $712,156
 $3,089,163
 $10,851,952

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 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 which could have a material impact on our consolidated financial statements.


40




On January 28, 2020, the Board authorized share repurchases of up to 500,000 of BancShares’ Class A common stock for the period February 1, 2020 through April 30, 2020. This authority will supersede all previously approved authorities.

During 2019, BancShares repurchased a total of 998,910 shares of Class A common stock, or 9.4% of outstanding Class A shares as of December 31, 2018, for $450.8 million at an average cost per share of $451.33. During 2018, BancShares repurchased a total of 382,000 shares of Class A common stock, or 3.5% of outstanding Class A shares of as of December 31, 2017, for $165.3 million at an average cost per share of $432.78. All share repurchases were executed under previously approved authorities. Subsequent to year-end through February 14, 2020, BancShares repurchased an additional 120,990 shares of Class A common stock for $63.8 million at an average cost per share of $527.27

During 2019, the share repurchases included 100,000 shares of Class A common stock purchased from Ella Anna Holding, as trustee of her revocable trust. Mrs. Holding is the widow of BancShares’ former Executive Vice Chairman, Frank B. Holding, and the mother of Frank B. Holding, Jr. and Hope H. Bryant, BancShares’ Chairman and Chief Executive Officer and Vice Chairman, respectively. Pursuant to the existing share repurchase authorization, the Board’s independent Audit Committee reviewed and approved the repurchase of up to 250,000 shares held by Mrs. Holding on or before April 30, 2020, pursuant to BancShares’ related person transaction policy.

Table 19 provides information on capital adequacy for BancShares and FCB as of December 31, 2019 and 2018.

Table 19
ANALYSIS OF CAPITAL ADEQUACY
   December 31, 2019 December 31, 2018
(Dollars in thousands)Requirements to be well-capitalized Amount Ratio Amount Ratio
BancShares         
Tier 1 risk-based capital8.00% $3,344,305
 10.86% $3,463,307
 12.67%
Common equity Tier 16.50
 3,344,305
 10.86
 3,463,307
 12.67
Total risk-based capital10.00
 3,731,501
 12.12
 3,826,626
 13.99
Leverage capital5.00
 3,344,305
 8.81
 3,463,307
 9.77
FCB         
Tier 1 risk-based capital8.00
 3,554,974
 11.54
 3,315,742
 12.17
Common equity Tier 16.50
 3,554,974
 11.54
 3,315,742
 12.17
Total risk-based capital10.00
 3,837,670
 12.46
 3,574,561
 13.12
Leverage capital5.00
 3,554,974
 9.38
 3,315,742
 9.39

BancShares and FCB are required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. Basel III became effective for BancShares on January 1, 2015. Under Basel III, requirements include a common equity Tier 1 ratio minimum of 4.50%, Tier 1 risk-based capital minimum of 6.00%, total risk-based capital ratio minimum of 8.00% and Tier 1 leverage capital ratio minimum of 4.00%. Failure to meet minimum capital requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial statements.

Basel III also introduced a capital conservation buffer in addition to the regulatory minimum capital requirements which was phased in annually over four years beginning January 1, 2016, at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625%. At January 1, 2018, the capital conservation buffer was 1.875%. As of January 1, 2019, the capital conservation buffer was fully phased in at 2.50%.
 
BancShares and FCB both remain well-capitalized under Basel III capital requirements. BancShares and FCB had capital conservation buffers of 4.12% and 4.46%, respectively, at December 31, 2019. These buffers exceeded the 2.50% requirement resulting in no limit on distributions.

At December 31, 2019, BancShares and FCB had $128.5 million and $24.0 million, respectively, of trust preferred capital securities and $32.5 million of qualifying subordinated debentures included in Tier 2 capital. At December 31, 2018, BancShares and FCB had $118.5 million and $14.0 million, respectively, of trust preferred capital securities and $20.0 million of qualifying subordinated debentures included in Tier 2 capital. Under current regulatory guidelines, when subordinated debentures are within five years of scheduled maturity date, issuers must discount the amount included in Tier 2 capital by 20% for each year until the debt matures. Once the debt is within one year of its scheduled maturity date, no amount of the debt is allowed to be included in Tier 2 capital.

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
RISK MANAGEMENT

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

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

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

Enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run.  Bank holding companies with assets of less than $100 billion, such as BancShares, are no longer subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of results; however, BancShares will continue to monitor and stress test its capital and liquidity consistent with the safety and soundness expectations of the federal regulators.
Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCI or non-PCI, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ALLL which accounts for losses inherent in the loan and lease portfolio.

We maintain a well-diversified loan and lease portfolio and seek to minimize the risks 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- and dental-related loans.
We have historically carried a significant concentration of real estate secured loans but actively mitigate exposure through underwriting policies which 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 December 31, 2019, loans secured by real estate were $22.38 billion, or 77.48%, of total loans and leases compared to $19.57 billion, or 76.66% at December 31, 2018, and $18.10 billion, or 76.70%, at December 31, 2017.


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Similar to our branch footprint, the collateral of loans secured by real estate is concentrated within North Carolina and South Carolina. At December 31, 2019, real estate located in North Carolina and South Carolina represented 37.2% and 16.0%, respectively, of all real estate used as collateral.

Table 20 provides the geographic distribution of real estate collateral by state.

Table 20
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE COLLATERAL
 December 31, 2019
Collateral locationPercent of real estate secured loans with collateral located in the state
North Carolina37.2
South Carolina16.0
California9.7
Florida8.1
Georgia6.6
Virginia6.5
Washington3.2
Texas2.6
Tennessee1.5
All other locations8.6

Among real estate secured loans, our revolving mortgage loans (“Home Equity Lines of Credit” or “HELOCs”) 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 HELOCs are secured by junior liens. Substantial declines in collateral values could cause junior lien positions to become effectively unsecured. HELOCs secured by real estate were $2.38 billion, or 8.2%, of total loans at December 31, 2019, compared to $2.59 billion, or 10.2%, at December 31, 2018, and $2.77 billion, or 11.7%, at December 31, 2017.

Except for loans acquired through mergers and acquisitions, we have not purchased HELOCs in the secondary market, nor have we originated these loans to customers outside of our market areas. All originated HELOCs were underwritten by us based on our standard lending criteria. The HELOC portfolio consists of variable rate lines of credit which allow customer draws during a specified period of the line of credit, with a portion switching to an amortizing term following the draw period. Approximately 80.9% of the revolving mortgage portfolio relates to properties in North Carolina and South Carolina. Approximately 35.6% of the loan balances outstanding are secured by senior collateral positions while the remaining 64.4% are secured by junior liens.

We actively monitor the portion of our HELOCs in the interest-only period and when they will mature. Approximately 86.5% of outstanding balances at December 31, 2019, require interest-only payments, while the remaining require monthly payments equal to the greater of 1.5% of the outstanding balance, or $100. When HELOCs switch from interest-only to fully amortizing, including principal and interest, some borrowers may not be able to afford the higher monthly payments. We have not experienced a significant increase in defaults as a result of these increased payments. In the normal course of business, the bank will work with each borrower as they approach the revolving period maturity date to discuss options for refinance or repayment.

Loans and leases to borrowers in medical, dental or related fields were $5.16 billion as of December 31, 2019, which represents 17.9% of total loans and leases, compared to $4.98 billion or 19.5% of total loans and leases at December 31, 2018, and $4.86 billion or 20.6% of total loans and leases at December 31, 2017. The credit risk of this industry concentration is mitigated through our underwriting policies which 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% of total loans and leases outstanding at December 31, 2019.
Interest rate risk management
Interest rate risk (“IRR”) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes.


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We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled, include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates.

Table 21 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of December 31, 2019 and 2018.

Table 21
NET INTEREST INCOME SENSITIVITY SIMULATION ANAYLYSIS
 Estimated (decrease) increase in net interest income
Change in interest rate (basis points)December 31, 2019 December 31, 2018
-100(8.00)% (10.67)%
+1001.30
 2.38
+2000.01
 1.66

Net interest income sensitivity metrics at December 31, 2019, compared to December 31, 2018, were primarily affected by a reduction in the prepayment speed forecast for the loan portfolio due to rising market interest rates during the fourth quarter of 2019. This reduced the amount of principal available for repricing during moderate rising interest rate shocks. Conversely, the same protects interest income during down rate shocks.

Long-term interest rate risk exposure is measured using the economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows under different interest rate scenarios. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet.

Table 22 presents the EVE profile as of December 31, 2019 and 2018.

Table 22
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS
 Estimated (decrease) increase in EVE
Change in interest rate (basis points)December 31, 2019 December 31, 2018
-100(8.25)% (15.14)%
+100(0.03) 3.34
+200(4.80) 1.40

The economic value of equity metrics at December 31, 2019, compared to December 31, 2018, saw declines when measured against moderate rising rate shocks due to several factors. Declining market interest rates relative to levels during the fourth quarter of 2018 generally allowed for an improvement in the valuation of the loan portfolio, however, a modest increase in the exposure to fixed rate loans, both organically and through acquisition, led to a decline in EVE metrics. Additionally, a reduction in short-term U.S. Treasury holdings and a comparable increase in agency mortgage-backed securities which enhanced yield and earnings as well as increased overall portfolio duration resulting in a further decline in EVE metrics.

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


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Table 23 provides loan maturity distribution and information regarding the sensitivity of loans and leases to changes in interest rates.

Table 23
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
 At December 31, 2019, maturing
(Dollars in thousands)Within
One Year
 One to Five
Years
 After
Five Years
 Total
Loans and leases:       
Secured by real estate$1,687,724
 $6,425,925
 $14,263,743
 $22,377,392
Commercial and industrial977,176
 2,194,956
 1,239,808
 4,411,940
Other435,601
 885,359
 771,204
 2,092,164
Total loans and leases$3,100,501
 $9,506,240
 $16,274,755
 $28,881,496
Loans maturing after one year with:       
Fixed interest rates  $7,871,730
 $10,096,854
 $17,968,584
Floating or adjustable rates  1,634,510
 6,177,901
 7,812,411
Total  $9,506,240
 $16,274,755
 $25,780,995

Liquidity risk management

Liquidity risk is the risk an institution is unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks affecting an institution’s liquidity risk profile.

We utilize various limit-based measures to monitor, measure and control liquidity risk across three different types of liquidity:

Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
Structural - Measures the amount by which illiquid assets are supported by long-term funding; and
Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner.

We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank and various other correspondent bank accounts and unencumbered securities, which totaled $3.57 billion at December 31, 2019, compared to $3.11 billion at December 31, 2018. Another source of available funds is advances from the FHLB of Atlanta. Outstanding FHLB advances were $572.2 million as of December 31, 2019, and we had sufficient collateral pledged to secure $6.01 billion of additional borrowings. Further, in the current year, $3.68 billion in non-PCI loans with a lendable collateral value of $2.98 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds and other credit lines, which had $582.7 million of available capacity at December 31, 2019.

FOURTH QUARTER ANALYSIS
For the quarter ended December 31, 2019, BancShares’ consolidated net income was $101.9 million compared to $89.5 million for the corresponding quarter of 2018, an increase of $12.4 million or 13.9%. Earnings per share were $9.55 for the fourth quarter of 2019 compared to $7.62 for the same period a year ago. The increase was primarily the result of higher interest income, higher noninterest income, lower provision expense, and fewer shares outstanding due to share repurchases. These net income improvements were partially offset by higher interest, noninterest and income tax expenses.

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Net interest income totaled $327.1 million, an increase of $6.2 million, or 1.9%, compared to the fourth quarter of 2018. The increase was primarily due to higher loan interest income of $20.3 million as a result of originated and acquired loan growth. This favorable impact was partially offset by an increase in interest expense on deposits of $13.4 million as a result of higher rates paid.
The taxable-equivalent net interest margin for the fourth quarter of 2019 was 3.62%, a decrease of 20 basis points from 3.82% in the same quarter in the prior year. The margin decline was primarily due to higher interest expense on deposits as well as lower loan yields.
Income tax expense totaled $29.7 million in the fourth quarter of 2019, up from $26.5 million in the fourth quarter of 2018. The effective tax rates were 22.55% and 22.82% during each of these respective periods. The increase in income tax expense was primarily a result of higher gross earnings.
BancShares recorded a net provision expense of $7.7 million for loan and lease losses during the fourth quarter of 2019, compared to $11.6 million for the fourth quarter of 2018. The $3.9 million decrease was primarily driven by changes in portfolio mix and continued strong credit quality.
Noninterest income was $104.4 million for the fourth quarter of 2019, an increase of $22.4 million from the same period of 2018. The increase was primarily driven by a $24.0 million increase in marketable equity securities gains as well as a $1.6 million increase in mortgage income. These increases were partially offset by a decrease of $3.1 million in cardholder and merchant services income.
Noninterest expense was $292.3 million for the fourth quarter of 2019, an increase of $16.9 million from the same quarter last year, largely due to an increase in personnel expenses, primarily related to merit increases as well as personnel additions from acquisitions, along with a $5.1 million increase in merger-related expenses. These increases were partially offset by a $1.9 million decrease in collection and foreclosure-related expenses and a $1.7 million decrease in consulting expenses.
Table 24 provides quarterly information for each quarter in 2019 and 2018. Table 25 provides the taxable equivalent rate/volume variance analysis between the fourth quarter of 2019 and 2018.

46




Table 24
SELECTED QUARTERLY DATA
 2019 2018
(Dollars in thousands, except share data and ratios)Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
 Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
SUMMARY OF OPERATIONS               
Interest income$354,048
 $362,318
 $350,721
 $336,924
 $333,573
 $315,706
 $303,877
 $292,601
Interest expense26,924
 25,893
 23,373
 16,452
 12,691
 8,344
 7,658
 8,164
Net interest income327,124
 336,425
 327,348
 320,472
 320,882
 307,362
 296,219
 284,437
Provision for loan and lease losses7,727
 6,766
 5,198
 11,750
 11,585
 840
 8,438
 7,605
Net interest income after provision for loan and lease losses319,397
 329,659
 322,150
 308,722
 309,297
 306,522
 287,781
 276,832
Noninterest income104,393
 100,930
 106,875
 103,663
 82,007
 94,531
 100,927
 122,684
Noninterest expense292,262
 270,425
 273,397
 267,657
 275,378
 267,537
 265,993
 268,063
Income before income taxes131,528
 160,164
 155,628
 144,728
 115,926
 133,516
 122,715
 131,453
Income taxes29,654
 35,385
 36,269
 33,369
 26,453
 16,198
 29,424
 31,222
Net income$101,874
 $124,779
 $119,359
 $111,359
 $89,473
 $117,318
 $93,291
 $100,231
Net interest income, taxable equivalent$328,045
 $337,322
 $328,201
 $321,372
 $321,804
 $308,207
 $297,021
 $285,248
PER SHARE DATA               
Net income$9.55
 $11.27
 $10.56
 $9.67
 $7.62
 $9.80
 $7.77
 $8.35
Cash dividends0.40
 0.40
 0.40
 0.40
 0.40
 0.35
 0.35
 0.35
Market price at period end (Class A)532.21
 471.55
 450.27
 407.20
 377.05
 452.28
 403.30
 413.24
Book value at period-end337.38
 327.86
 319.74
 309.46
 300.04
 294.40
 286.99
 280.77
SELECTED QUARTERLY AVERAGE BALANCES            
Total assets$38,326,641
 $37,618,836
 $37,049,030
 $35,625,885
 $35,625,500
 $34,937,175
 $34,673,927
 $34,267,495
Investment securities7,120,023
 6,956,981
 6,803,570
 6,790,671
 7,025,889
 7,129,089
 7,091,442
 7,053,001
Loans and leases(1)
27,508,062
 26,977,476
 26,597,242
 25,515,988
 25,343,813
 24,698,799
 24,205,363
 23,666,098
Interest-earning assets36,032,680
 35,293,979
 34,674,842
 33,432,162
 33,500,732
 32,886,276
 32,669,810
 32,320,431
Deposits33,295,141
 32,647,264
 32,100,210
 30,802,567
 30,835,157
 30,237,329
 30,100,615
 29,472,125
Interest-bearing liabilities20,958,943
 20,551,393
 20,397,445
 19,655,434
 19,282,749
 18,783,160
 18,885,168
 19,031,404
Securities sold under customer repurchase agreements495,804
 533,371
 556,374
 538,162
 572,442
 547,385
 516,999
 585,627
Other short-term borrowings28,284
 23,236
 40,513
 
 53,552
 43,720
 46,614
 91,440
Long-term borrowings467,223
 384,047
 371,843
 344,225
 319,410
 261,821
 233,373
 404,065
Shareholders' equity$3,570,872
 $3,580,235
 $3,546,041
 $3,509,746
 $3,491,914
 $3,470,368
 $3,400,867
 $3,333,114
Shares outstanding10,708,084
 11,060,462
 11,286,520
 11,519,008
 11,763,832
 11,971,460
 12,010,405
 12,010,405
SELECTED QUARTER-END BALANCES              
Total assets$39,824,496
 $37,748,324
 $37,655,094
 $35,961,670
 $35,408,629
 $34,954,659
 $35,088,566
 $34,436,437
Investment securities7,173,003
 7,167,680
 6,695,578
 6,914,513
 6,834,362
 7,040,674
 7,190,545
 6,967,921
Loans and leases28,881,496
 27,196,511
 26,728,237
 25,463,785
 25,523,276
 24,886,347
 24,538,437
 23,611,977
Deposits34,431,236
 32,743,277
 32,719,671
 31,198,093
 30,672,460
 30,163,537
 30,408,884
 29,969,245
Securities sold under customer repurchase agreements442,956
 522,195
 544,527
 508,508
 543,936
 567,438
 499,723
 522,207
Other short-term borrowings295,277
 
 
 
 28,351
 120,311
 114,270
 2,551
Long-term borrowings588,638
 453,876
 369,854
 341,108
 319,867
 297,487
 241,360
 224,413
Shareholders' equity$3,586,184
 $3,568,482
 $3,574,613
 $3,523,309
 $3,488,954
 $3,499,013
 $3,446,886
 $3,372,114
Shares outstanding10,629,495
 10,884,005
 11,179,905
 11,385,405
 11,628,405
 11,885,405
 12,010,405
 12,010,405
SELECTED RATIOS AND OTHER DATA              
Rate of return on average assets (annualized)1.05% 1.32% 1.29% 1.27% 1.00% 1.33% 1.08% 1.19%
Rate of return on average shareholders’ equity (annualized)11.32
 13.83
 13.50
 12.86
 10.17
 13.41
 11.00
 12.20
Net yield on interest-earning assets (taxable equivalent)3.62
 3.80
 3.79
 3.89
 3.82
 3.73
 3.64
 3.57
Allowance for loan and lease losses to total loans and leases:               
PCI1.35
 1.34
 1.51
 1.61
 1.51
 1.71
 1.84
 1.75
Non-PCI0.77
 0.82
 0.83
 0.88
 0.86
 0.86
 0.89
 0.92
Total0.78
 0.83
 0.85
 0.90
 0.88
 0.88
 0.92
 0.94
Ratio of total nonperforming assets to total loans, leases and other real estate owned0.58
 0.57
 0.57
 0.53
 0.52
 0.52
 0.54
 0.59
Tier 1 risk-based capital ratio10.86
 11.80
 12.03
 12.69
 12.67
 13.23
 13.06
 13.38
Tier 1 common equity ratio10.86
 11.80
 12.03
 12.69
 12.67
 13.23
 13.06
 13.38
Total risk-based capital ratio12.12
 13.09
 13.34
 14.02
 13.99
 14.57
 14.43
 14.70
Leverage capital ratio8.81
 9.18
 9.35
 9.80
 9.77
 10.11
 9.99
 10.01
Dividend payout ratio4.19
 3.55
 3.79
 4.14
 5.25
 3.57
 4.50
 4.19
Average loans and leases to average deposits82.62
 82.63
 82.86
 82.84
 82.19
 81.68
 80.41
 80.30
(1) Average loan and lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and leases.

47




Table 25
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - FOURTH QUARTER

 2019 2018 Increase (decrease) due to:
   Interest     Interest        
 Average Income/ Yield/ Average Income/ Yield/   Yield/ Total
(Dollars in thousands, taxable equivalent)Balance Expense  Rate Balance Expense Rate Volume Rate Change
Assets 
Loans and leases(1)
$27,508,062
 $308,832
 4.46
%$25,343,813
 $288,484
 4.52
%$21,390
 $(1,042) $20,348
Investment securities:                 
U. S. Treasury595,515
 3,706
 2.47
 1,454,889
 7,261
 1.98
 (4,289) 734
 (3,555)
Government agency659,857
 4,224
 2.56
 192,830
 1,288
 2.67
 3,120
 (184) 2,936
Mortgage-backed securities5,563,653
 29,964
 2.15
 5,136,489
 29,261
 2.28
 2,337
 (1,634) 703
Corporate bonds172,424
 2,165
 5.02
 135,962
 1,810
 5.32
 485
 (130) 355
Other investments128,574
 653
 2.02
 105,719
 326
 1.22
 119
 208
 327
Total investment securities7,120,023
 40,712
 2.29
 7,025,889
 39,946
 2.27
 1,772
 (1,006) 766
Overnight investments1,404,595
 5,425
 1.53
 1,131,030
 6,065
 2.13
 1,469
 (2,109) (640)
Total interest-earning assets36,032,680
 $354,969
 3.92
%33,500,732
 $334,495
 3.97
%$24,631
 $(4,157) $20,474
Cash and due from banks255,963
     282,589
          
Premises and equipment1,229,445
     1,182,640
          
Allowance for loan and lease losses(225,170)     (221,710)          
Other real estate owned44,134
     46,000
          
Other assets989,589
     835,249
          
Total assets$38,326,641
     $35,625,500
          
                  
Liabilities                 
Interest-bearing deposits:                 
Checking with interest$5,479,226
 $563
 0.04
%$5,254,677
 $332
 0.03
%$14
 $217
 $231
Savings2,596,608
 439
 0.07
 2,511,444
 213
 0.03
 7
 219
 226
Money market accounts8,378,366
 8,064
 0.38
 7,971,726
 4,335
 0.22
 221
 3,508
 3,729
Time deposits3,513,432
 13,367
 1.51
 2,599,498
 4,179
 0.64
 1,469
 7,719
 9,188
Total interest-bearing deposits19,967,632
 22,433
 0.45
 18,337,345
 9,059
 0.20
 1,711
 11,663
 13,374
Securities sold under customer repurchase agreements495,804
 479
 0.38
 572,442
 419
 0.29
 (56) 116
 60
Other short-term borrowings28,284
 190
 2.63
 53,552
 298
 2.21
 (141) 33
 (108)
Long-term borrowings467,223
 3,822
 3.20
 319,410
 2,915
 3.58
 1,334
 (427) 907
Total interest-bearing liabilities20,958,943
 26,924
 0.51
 19,282,749
 12,691
 0.26
 2,848
 11,385
 14,233
Demand deposits13,327,509
     12,497,812
          
Other liabilities469,317
     353,025
          
Shareholders' equity3,570,872
     3,491,914
          
 Total liabilities and shareholders' equity$38,326,641
     $35,625,500
          
Interest rate spread    3.41
%    3.71
%     
                  
Net interest income and net yield on interest-earning assets  $328,045
 3.62
%  $321,804
 3.82
%$21,783
 $(15,542) $6,241
(1)Loans and leases include PCI loans and non-PCI loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were $3.0 million and $2.2 million for the three months ended December 31, 2019, and 2018, respectively. 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 21.0% as well as state income tax rates of 3.9% and 3.4% for the three months ended December 31, 2019, and 2018, respectively. The taxable-equivalent adjustment was $921 thousand and $922 thousand for the three months ended December 31, 2019, and 2018, respectively.


48




dhguploada20.jpg


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of First Citizens BancShares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

49




Allowance for Loan and Lease Losses (ALLL)
Management describes their accounting policies related to the ALLL in Note A of the consolidated financial statements (Allowance for Loan and Lease Losses (ALLL)). Management also provides additional disclosure regarding the ALLL in Note E to the consolidated financial statements. General reserves for collective impairment are based on historical loss rates for each loan class by credit quality indicator and may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends. The models utilized by Management in determining the ALLL are highly complex with various key inputs and assumptions. Judgment is required to determine the inputs and assumptions used and these can significantly impact the provision recognized. The most significant judgments include the loss rates which comprise the length of the historical charge-off period used, estimates of the probability of default, losses incurred given default, and loss emergence period applied, as well as qualitative reserves relating to changes in the nature and volume of the portfolio. Overall, there is a significant judgment required by management in developing these models.
The ALLL represents a significant critical accounting estimate and management’s estimation of probable credit losses within the loan and lease portfolio at the balance sheet date. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the loan portfolio, credit concentrations, adequacy of collateral, debt service capacity, trends in historical loss experience, economic conditions, and specific impaired loans.

The principal considerations for our determination of the ALLL as a critical audit matter are the complexity and subjectivity of the estimates and assumptions that management utilized in determining the loss rates and qualitative factors, particularly the nature and volume of the portfolio. This required a high degree of judgment in selecting the auditor procedures to evaluate management’s estimate and assumptions as it relates to the ALLL.

The primary procedures we performed to address this critical audit matter included:

We tested the design and operating effectiveness of controls relating to management’s determination of the ALLL, including controls over the allowance models and the inputs utilized to support the reserve calculations. Controls tested around the model include review of the model calculations and analysis by management, monitoring over key performance indicators and other ratios, as well as the evaluation of factors impacting the qualitative assessment, such as changes in the factor related to the nature and volume of the portfolio. Additionally, we tested controls around the appropriateness of the loan grading policy and the consistency of application, including risk grade changes, as it relates to the loss factors and calculation of the quantitative reserve.

We evaluated the reasonableness of management’s judgment in determining qualitative loss factors, which included evaluating portfolio composition changes, economic factors, and other adjustments, and analyzing whether these inputs were appropriately applied based on available data.

We tested management’s assumptions in setting the qualitative factors, including the changes in the nature and volume of the loan portfolio, comparing trends in key performance indicators to changes in the components of the ALLL reserve for reasonableness.

We evaluated the appropriateness of inputs and assumptions used by management in determining the loss rates, such as historical charge-offs, loss frequencies used in calculating the probability of default, historical loan migration to charge-off experience, and delinquencies rates, assessing whether such factors were reasonable for the purpose used.


/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2004.
Raleigh, North Carolina
February 26, 2020

50




dhguploada21.jpg
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of First Citizens BancShares, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited First Citizens BancShares, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, First Citizens BancShares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, and our report dated February 26, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, the scope of management’s assessment of internal control over financial reporting as of December 31, 2019 has excluded Biscayne Bancshares, Inc. (Biscayne Bancshares) acquired on April 2, 2019, First South Bancorp, Inc. (First South Bancorp) acquired on May 1, 2019 and Entegra Financial Corp. (Entegra) acquired on December 31, 2019. We have also excluded Biscayne Bancshares, First South Bancorp, and Entegra from the scope of our audit of internal control over financial reporting. Biscayne Bancshares, First South Bancorp, and Entegra represented 2.10 percent, 0.43 percent and 0.00 percent of consolidated revenue (total interest income and total noninterest income) for the year ended December 31, 2019, respectively, and 2.36 percent, 0.42 percent and 4.22 percent of consolidated total assets as of December 31, 2019, respectively.

51




Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Dixon Hughes Goodman LLP
Raleigh, North Carolina
February 26, 2020

52




First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)December 31, 2019 December 31, 2018
Assets   
Cash and due from banks$376,719
 $327,440
Overnight investments1,107,844
 797,406
Investment in marketable equity securities (cost of $59,262 at December 31, 2019 and $73,809 at December 31, 2018)82,333
 92,599
Investment securities available for sale (cost of $7,052,152 at December 31, 2019 and $4,607,117 at December 31, 2018)7,059,674
 4,557,110
Investment securities held to maturity (fair value of $30,996 at December 31, 2019 and $2,201,502 at December 31, 2018)30,996
 2,184,653
Loans held for sale67,869
 45,505
Loans and leases28,881,496
 25,523,276
Allowance for loan and lease losses(225,141) (223,712)
Net loans and leases28,656,355
 25,299,564
Premises and equipment1,244,396
 1,204,179
Other real estate owned46,591
 48,030
Income earned not collected123,154
 109,903
Goodwill349,398
 236,347
Other intangible assets68,276
 72,298
Other assets610,891
 433,595
Total assets$39,824,496
 $35,408,629
Liabilities   
Deposits:   
Noninterest-bearing$12,926,796
 $11,882,670
Interest-bearing21,504,440
 18,789,790
Total deposits34,431,236
 30,672,460
Securities sold under customer repurchase agreements442,956
 543,936
Federal Home Loan Bank borrowings572,185
 193,556
Subordinated debentures163,412
 140,741
Other borrowings148,318
 13,921
FDIC shared-loss payable112,395
 105,618
Other liabilities367,810
 249,443
Total liabilities36,238,312
 31,919,675
Shareholders’ equity   
Common stock:   
Class A - $1 par value (16,000,000 shares authorized; 9,624,310 and 10,623,220 shares issued and outstanding at December 31, 2019 and December 31, 2018 respectively)9,624
 10,623
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at December 31, 2019 and December 31, 2018)1,005
 1,005
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at December 31, 2019 and December 31, 2018)
 
Surplus44,081
 493,962
Retained earnings3,658,197
 3,218,551
Accumulated other comprehensive loss(126,723) (235,187)
Total shareholders’ equity3,586,184
 3,488,954
Total liabilities and shareholders’ equity$39,824,496
 $35,408,629


See accompanying Notes to Consolidated Financial Statements.

53


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 Year ended December 31
(Dollars in thousands, except share and per share data)2019 2018 2017
Interest income     
Loans and leases$1,217,306
 $1,073,051
 $955,637
Investment securities interest and dividend income160,460
 150,709
 121,207
Overnight investments26,245
 21,997
 26,846
Total interest income1,404,011
 1,245,757
 1,103,690
Interest expense     
Deposits76,254
 22,483
 16,196
Securities sold under customer repurchase agreements1,995
 1,594
 1,767
Federal Home Loan Bank borrowings5,472
 5,801
 19,915
Subordinated debentures7,099
 6,277
 5,213
Other borrowings1,822
 702
 703
Total interest expense92,642
 36,857
 43,794
Net interest income1,311,369
 1,208,900
 1,059,896
Provision for loan and lease losses31,441
 28,468
 25,692
Net interest income after provision for loan and lease losses1,279,928
 1,180,432
 1,034,204
Noninterest income     
Service charges on deposit accounts105,191
 105,486
 101,201
Wealth management services99,241
 97,966
 86,719
Cardholder services, net69,078
 65,478
 57,583
Other service charges and fees31,644
 30,606
 28,321
Merchant services, net24,304
 24,504
 22,678
Mortgage income21,126
 16,433
 23,251
Insurance commissions12,810
 12,702
 12,465
ATM income6,296
 7,980
 9,143
Marketable equity securities gains (losses), net20,625
 (7,610) 
Realized gains on investment securities available for sale, net7,115
 351
 4,293
Gain on extinguishment of debt
 26,553
 12,483
Gain on acquisitions
 
 134,745
Other18,431
 19,700
 29,081
Total noninterest income415,861
 400,149
 521,963
Noninterest expense     
Salaries and wages551,112
 527,691
 490,610
Employee benefits120,501
 118,203
 105,975
Occupancy expense111,179
 109,169
 104,690
Equipment expense112,290
 102,909
 97,478
Processing fees paid to third parties29,552
 30,017
 25,673
FDIC insurance expense10,664
 18,890
 22,191
Collection and foreclosure-related expenses11,994
 16,567
 14,407
Merger-related expenses17,166
 6,462
 9,015
Other139,283
 147,063
 142,430
Total noninterest expense1,103,741
 1,076,971
 1,012,469
Income before income taxes592,048
 503,610
 543,698
Income taxes134,677
 103,297
 219,946
Net income$457,371
 $400,313
 $323,752
Weighted average shares outstanding11,141,069
 11,938,439
 12,010,405
Net income per share$41.05
 $33.53
 $29.96
Dividends declared per share$1.60
 $1.45
 $1.25


See accompanying Notes to Consolidated Financial Statements.

54




First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
 Year ended December 31
 2019 2018 2017
(Dollars in thousands)     
Net income$457,371
 $400,313
 $323,752
Other comprehensive income (loss)     
Unrealized gains on securities available for sale:     
Unrealized gains on securities available for sale arising during the period64,644
 29,170
 28,166
Tax effect(14,868) (6,709) (10,531)
Reclassification adjustment for realized gains on securities available for sale included in income before income taxes(7,115) (351) (4,293)
Tax effect1,636
 81
 1,588
Unrealized gains on securities available for sale arising during the period, net of tax44,297
 22,191
 14,930
      
Unrealized losses on securities available for sale transferred from (to) held to maturity:     
Unrealized losses on securities available for sale transferred from (to) held to maturity72,512
 (109,507) ��
Tax effect(16,678) 25,186
 
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity19,889
 17,106
 
Tax effect(4,574) (3,934) 
Total change in unrealized losses on securities available for sale transferred from (to) held to maturity, net of tax71,149
 (71,149) 
      
Defined benefit pension items:     
Actuarial losses arising during the period(20,049) (32,012) (12,945)
Tax effect4,611
 7,363
 4,789
Amortization of actuarial losses and prior service cost10,981
 13,981
 9,720
Tax effect(2,525) (3,216) (3,596)
Total change from defined benefit plans, net of tax(6,982) (13,884) (2,032)
Other comprehensive income (loss)108,464
 (62,842) 12,898
Total comprehensive income$565,835
 $337,471
 $336,650
      

See accompanying Notes to Consolidated Financial Statements.


55




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
(Dollars in thousands, except share and per share data)           
Balance at December 31, 2016$11,005
 $1,005
 $658,918
 $2,476,691
 $(135,192) $3,012,427
Net income
 
 
 323,752
 
 323,752
Other comprehensive income, net of tax
 
 
 
 12,898
 12,898
Cash dividends declared ($1.25 per share)           
Class A common stock
 
 
 (13,757) 
 (13,757)
Class B common stock
 
 
 (1,256) 
 (1,256)
Balance at December 31, 201711,005
 1,005
 658,918
 2,785,430
 (122,294) 3,334,064
Cumulative effect of adoption of ASU 2016-01
 
 
 18,715
 (18,715) 
Cumulative effect of adoption of ASU 2018-02
 
 
 31,336
 (31,336) 
Net income
 
 
 400,313
 
 400,313
Other comprehensive loss, net of tax
 
 
 
 (62,842) (62,842)
Repurchase of 382,000 shares of Class A common stock(382) 
 (164,956) 
 
 (165,338)
Cash dividends declared ($1.45 per share)           
Class A common stock
 
 
 (15,785) 
 (15,785)
Class B common stock
 
 
 (1,458) 
 (1,458)
Balance at December 31, 201810,623
 1,005
 493,962
 3,218,551
 (235,187) 3,488,954
Net income
 
 
 457,371
 
 457,371
Other comprehensive income, net of tax
 
 
 
 108,464
 108,464
Repurchase of 998,910 shares of Class A common stock(999) 
 (449,881) 
 
 (450,880)
Cash dividends declared ($1.60 per share)           
Class A common stock
 
 
 (16,117) 
 (16,117)
Class B common stock
 
 
 (1,608) 
 (1,608)
Balance at December 31, 2019$9,624
 $1,005
 $44,081
 $3,658,197
 $(126,723) $3,586,184

See accompanying Notes to Consolidated Financial Statements.


56




First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 Year ended December 31
(Dollars in thousands)2019 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES     
Net income$457,371
 $400,313
 $323,752
Adjustments to reconcile net income to cash provided by operating activities:     
Provision for loan and lease losses31,441
 28,468
 25,692
Deferred tax expense (benefit)54,598
 (13,377) 125,838
Net (increase) decrease in current taxes receivable(19,564) 23,353
 (10,616)
Depreciation and amortization103,828
 96,781
 90,804
Net increase (decrease) in accrued interest payable14,412
 (240) 155
Net increase in income earned not collected(4,151) (10,785) (8,899)
Gain on acquisitions
 
 (134,745)
Realized gains on investment securities available for sale, net(7,115) (351) (4,293)
Marketable equity securities (gains) losses, net(20,625) 7,610
 
Gain on extinguishment of debt
 (26,553) (919)
Origination of loans held for sale(736,015) (593,307) (622,503)
Proceeds from sale of loans held for sale731,803
 608,549
 660,808
Gain on sale of loans held for sale(14,884) (11,210) (14,843)
Gain on sale of portfolio loans(299) 
 (1,007)
Net write-downs/losses on other real estate owned2,664
 4,390
 4,460
Losses (gains) on premises and equipment4,115
 2,452
 (524)
Net accretion of premiums and discounts(34,040) (36,567) (40,028)
Amortization of intangible assets23,861
 23,648
 22,842
Net change in FDIC payable for shared-loss agreements6,777
 4,276
 4,334
Net change in mortgage servicing rights(5,927) (5,258) (7,178)
Net change in other assets(28,097) (3,961) (31,933)
Net change in other liabilities(19,584) (40,895) (25,939)
Net cash provided by operating activities540,569
 457,336
 355,258
CASH FLOWS FROM INVESTING ACTIVITIES     
Net increase in loans outstanding(1,282,880) (1,023,885) (1,213,686)
Purchases of investment securities available for sale(4,705,038) (1,451,287) (3,648,312)
Purchases of investment securities held to maturity(223,598) (97,827) 
Purchases of marketable equity securities(26,166) (2,818) 
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity341,077
 296,632
 22
Proceeds from maturities, calls, and principal repayments of investment securities available for sale2,345,512
 1,664,730
 1,842,563
Proceeds from sales of investment securities available for sale2,308,856
 360,218
 1,345,746
Proceeds from sales of marketable equity securities56,749
 9,528
 
Net (increase) decrease in overnight investments(65,181) 601,979
 586,279
Proceeds from sales of portfolio loans24,247
 9,591
 162,649
Cash paid to FDIC for shared-loss agreements(292) (3,567) (7,725)
Proceeds from sales of other real estate owned25,918
 28,128
 40,709
Proceeds from sales of premises and equipment132
 1,721
 3,061
Purchases of premises and equipment(121,077) (140,444) (84,798)
Business acquisitions, net of cash acquired(236,728) (155,126) 304,820
Net cash (used in) provided by investing activities(1,558,469) 97,573
 (668,672)
CASH FLOWS FROM FINANCING ACTIVITIES     
Net increase (decrease) in time deposits284,611
 33,023
 (538,250)
Net increase in demand and other interest-bearing deposits1,154,815
 457,196
 539,120
Net decrease in short-term borrowings(27,703) (246,517) (44,680)
Repayment of long-term obligations(73,284) (752,447) (6,955)
Origination of long-term obligations200,000
 125,000
 175,000
Repurchase of common stock(453,123) (163,095) 
Cash dividends paid(18,137) (16,779) (14,412)
Net cash provided by (used in) financing activities1,067,179
 (563,619) 109,823
Change in cash and due from banks49,279
 (8,710) (203,591)
Cash and due from banks at beginning of period327,440
 336,150
 539,741
Cash and due from banks at end of period$376,719
 $327,440
 $336,150
      
      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION     
Cash paid during the period for:     
Interest$78,230
 $37,097
 $43,639
Income taxes83,038
 73,806
 88,565
Noncash investing and financing activities:     
Transfers of loans to other real estate14,639
 23,375
 34,980
Dividends declared but not paid4,256
 4,668
 4,204
Unsettled maturities of investment securities
 
 100,000
Unsettled sales of investment securities
 
 208,464
Net reclassification of portfolio loans to (from) loans held for sale22,034
 (2,433) 161,719
Transfer of investment securities available for sale (from) to held to maturity(2,080,617) 2,485,761
 
Transfer of investment securities available for sale to marketable equity securities
 107,578
 
Transfers of premises and equipment to other real estate7,045
 1,622
 
Premises and equipment acquired through capital leases and other financing arrangements
 12,196
 5,327
Unsettled common stock repurchases
 2,243
 
Initial recognition of operating lease assets70,652
 
 
Initial recognition of operating lease liabilities71,793
 
 

See accompanying Notes to Consolidated Financial Statements.

57




First Citizens BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE A
ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Nature of Operations
First Citizens BancShares, Inc. (“we,” “us,” “our,” “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,” or “the Bank”), which is headquartered in Raleigh, North Carolina. BancShares and its subsidiaries operate 574 branches in 19 states predominantly located in the Southeast, Midwest and Southwest regions of the United States. BancShares seeks to meet the financial needs of individuals and commercial entities in its market areas through a wide range of retail and commercial banking services. Loan services include various types of commercial, business and consumer lending. Deposit services include checking, savings, money market and time deposit accounts. First Citizens Wealth Management provides holistic, goals-based advisory services encompassing a broad range of client deliverables. These deliverables include wealth planning, discretionary investment advisory services, insurance, brokerage, defined benefit and defined contribution services, private banking, trust, fiduciary, philanthropy and special asset services.
Principles of Consolidation and Basis of Presentation
The accounting and reporting policies of BancShares and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry.
The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, certain partnership interests and variable interest entities. All significant intercompany accounts and transactions are eliminated upon consolidation. BancShares operates with centralized management and combined reporting; thus, BancShares operates as 1 consolidated reportable segment.
Variable interest entities (“VIE”) are legal entities that either do not have sufficient equity to finance their activities without the support from other parties or whose equity investors lack a controlling financial interest. FCB has investments in certain partnerships and limited liability entities that have been evaluated and determined to be VIEs. Consolidation of a VIE is appropriate if a reporting entity holds a controlling financial interest in the VIE and is the primary beneficiary. FCB is not the primary beneficiary and does not hold a controlling interest in the VIEs as it does not have the power to direct the activities that most significantly impact the VIEs economic performance. As such, assets and liabilities of these entities are not consolidated into the financial statements of BancShares. The recorded investment in these entities is reported within other assets.
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 shareholders’ equity or net income.
During 2019, BancShares identified items in the prior period related to unsettled investment activity that had been reported as cash flows from operating activities and should have been presented as investing activities during 2018. BancShares corrected the previously presented cash flows for this activity and in doing so, decreased net cash flows from operating activities with an offsetting increase in net cash flows from investing activities. BancShares has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it was immaterial.

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions impacting the amounts reported. Actual results could differ from those estimates. The estimates BancShares considers significant are the allowance for loan and lease losses, fair value measurements, and income taxes.

58

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Business Combinations
BancShares accounts for all business combinations using the acquisition method of accounting. Under this method of accounting, acquired assets and assumed liabilities are included with the acquirer’s accounts as of the date of acquisition, with any excess of purchase price over the fair value of the net assets acquired recognized as either finite lived intangibles or capitalized as goodwill. In addition, acquisition related costs and restructuring costs are recognized as period expenses as incurred. See Note B, Business Combinations, for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks and federal funds sold. Cash and cash equivalents have initial maturities of three months or less. The carrying value of cash and cash equivalents approximates its fair value due to its short-term nature.
Debt Securities
BancShares classifies debt securities as held to maturity or available for sale. Debt securities are classified as held to maturity when BancShares has the intent and ability to hold the securities to maturity and are reported at amortized cost. Other debt securities are classified as available for sale and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in Accumulated Other Comprehensive Income (“AOCI”). Amortization of premiums and accretion of discounts for debt securities are included in interest income. Realized gains and losses from the sale of debt securities are determined by specific identification on a trade date basis and are included in noninterest income.
BancShares evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (“OTTI”) at least quarterly. BancShares considers such factors as the length of time and the extent to which the market value has been below amortized cost, long-term expectations and recent experience regarding principal and interest payments, BancShares intent to sell, and whether it is more likely than not that it would be required to sell those securities before the anticipated recovery of the amortized cost. In situations where BancShares does not intend to sell the security and it is more likely than not BancShares will not be required to sell the security prior to recovery the credit component of an OTTI loss is recognized in earnings and the non-credit component is recognized in AOCI.
Equity Securities
Equity securities are recorded on a trade date basis and measured at fair value. Realized and unrealized gains and losses are determined by specific identification and are included in noninterest income. Non-marketable equity securities are securities with no readily determinable fair values and are measured at cost. BancShares evaluates its non-marketable equity securities for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest expense. Non-marketable equity securities were $12.5 million and $2.5 million at December 31, 2019 and 2018, respectively, and are included in other assets.
Other Securities
Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of FHLB restricted stock. This stock is restricted as it may only be sold to the FHLB and all sales must be at par. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges and is recorded within other assets. FHLB restricted stock was $43.0 million and $25.3 million at December 31, 2019 and 2018, respectively.
Investments in Qualified Affordable Housing Projects
BancShares and FCB have investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, and the net investment performance is recognized in the income statement as a component of income tax expense. All of the investments held in qualified affordable housing projects qualify for the proportional amortization method and totaled $167.8 million and $147.3 million at December 31, 2019 and 2018, respectively, and are included in other assets.

59

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans Held For Sale
BancShares elected to apply the fair value option for new originations of prime residential mortgage loans to be sold. Gains and losses on sales of mortgage loans are recognized within mortgage income.
Loans and Leases
BancShares’ accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect credit deterioration at the date of acquisition.

Non-Purchased Credit Impaired (“Non-PCI”) Loans
Non-PCI loans consist of loans originated by BancShares or loans purchased from other institutions that do not reflect credit deterioration at acquisition.
Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield.
Purchased loans which do not reflect credit deterioration at acquisition are classified as non-PCI loans. These loans are recorded at fair value at the date of acquisition. The difference between the fair value and the unpaid principal balance at the acquisition date is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.
Purchased Credit Impaired (“PCI”) Loans
Purchased loans which reflect credit deterioration since origination, such that it is probable at acquisition that BancShares will be unable to collect all contractually required payments, are classified as PCI loans. PCI loans are recorded at fair value at the date of acquisition. If the timing and amount of the future cash flows can be reasonably estimated, any excess of cash flows expected at acquisition over the estimated fair value are recognized as interest income over the life of the loans using the effective yield method. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan losses. In the event of prepayment, the remaining unamortized amount is recognized in interest income. To the extent possible, PCI loans are aggregated into pools based upon common risk characteristics and each pool is accounted for as a single unit.
The performance of all loans within the BancShares portfolio is subject to a number of external risks, including changes in the overall health of the economy, declines in real estate values, changes in the demand for products and services and personal events, such as death, disability or change in marital status. BancShares evaluates and reports its non-PCI and PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial segments based on the type of borrower, purpose, collateral and/or our underlying credit management processes. Additionally, commercial and noncommercial loans are assigned to loan classes, which further disaggregate the loan portfolio.
Non-PCI Commercial Loans & Leases
Non-PCI commercial loans, excluding purchased non-impaired loans, are underwritten based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. Additionally, an understanding of the borrower’s business, including the experience and background of the principals is obtained prior to approval. To the extent the loan is secured by collateral, the likely value of the collateral and what level of strength the collateral brings to the transaction is also evaluated. If the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is also assessed. Acquired non-PCI commercial loans are evaluated using comparable methods and procedures as those originated by BancShares.
Construction and land development - Construction and land development consists of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.

60

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Commercial mortgage - Commercial mortgage consists of loans to purchase or refinance owner-occupied or investment nonresidential properties. Commercial mortgages secured by owner-occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. Commercial mortgages secured by investment properties include office buildings and other facilities rented or leased to unrelated parties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Other commercial real estate - Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (five or more) residential properties. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions beyond the control of the borrower. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in borrowers having to provide rental rate concessions to achieve adequate occupancy rates.
Commercial and industrial and lease financing - Commercial and industrial and lease financing consists of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.
Other - Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to nonprofit organizations such as churches, hospitals, educational and charitable organizations, and certain loans repurchased with government guarantees.
Non-PCI Noncommercial Loans & Leases
Non-PCI noncommercial loans, excluding purchased non-impaired loans, are centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use and recent credit inquiries. To the extent the loan is secured by collateral, the likely value of such collateral is evaluated. Acquired non-PCI noncommercial loans are evaluated using comparable methods and procedures as those originated by BancShares.
Residential mortgage - Residential mortgage consists of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral.
Revolving mortgage - Revolving mortgage consists of home equity lines of credit secured by first or second liens on the borrower’s primary residence. These loans are often secured by second liens on the residential real estate and are particularly susceptible to declining collateral values as a substantial decline in value could render a second lien position effectively unsecured.
Construction and land development - Construction and land development consists of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Consumer - Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

61

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

PCI Loans
The segments and classes utilized to evaluate and report PCI loans is consistent with that of non-PCI loans. PCI loans were underwritten by other institutions, often with different lending standards and methods; however, the underwriting risks are generally consistent with the risks identified for non-PCI loans. Additionally, in some cases, collateral for PCI loans may be located in regions that previously experienced deterioration in real estate values and the underlying collateral may therefore not support full repayment of these loans.
Nonperforming Assets and Troubled Debt Restructurings
Nonperforming Assets (“NPA”)
NPAs include nonaccrual loans and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of loan defaults and is discussed below.
All loans are classified as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Non-PCI loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable the principal or interest is not fully collectible. When non-PCI loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a reduction of the remaining principal balance as long as doubt exists as to the ultimate collection of the principal. Non-PCI loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the collectability of principal and interest. Accretion of income for PCI loans is discontinued when we are unable to estimate the amount or timing of cash flows. PCI loans may begin or resume accretion of income when information becomes available allowing us to estimate the amount and timing of future cash flows. The majority of PCI loans are pooled for accounting purposes and therefore, the NPA status is determined based upon the aggregate performance of the pool.
Troubled Debt Restructurings (“TDR”)
A loan is considered a TDR when both of the following occur: (1) a modification to a borrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include short-term deferrals of interest, modifications of payment terms, or (in certain limited instances) forgiveness of principal or interest. Loans restructured as a TDR are treated and reported as such for the remaining life of the loan. Modifications of pooled PCI loans are not designated as TDRs, whereas modifications of non-pooled PCI loans are designated as TDRs in the same manner as non-PCI loans. TDR loans can be nonaccrual or accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, the remaining balance is typically classified as nonaccrual.
Allowance for Loan and Lease Losses (“ALLL”)
The ALLL represents management’s best estimate of inherent credit losses within the loan and lease portfolio at the balance sheet date. Management determines the ALLL based on an ongoing evaluation of the loan portfolio. Estimates for loan losses are determined by analyzing quantitative and qualitative components, such as: economic conditions, historical loan losses, historical loan migration to charge-off experience, current trends in delinquencies and charge-offs, expected cash flows on PCI loans, current assessment of impaired loans, and changes in the size, composition and/or risk within the loan portfolio. Adjustments to the ALLL are recorded with a corresponding entry to provision for loan and lease losses. Loan balances considered uncollectible are charged-off against the ALLL. Recoveries of amounts previously charged-off are generally credited to the ALLL.
A primary component of determining the allowance on non-PCI loans collectively evaluated is the actual loss history of the various loan classes. Loan loss factors are based on historical experience and may be adjusted for significant factors, that in management’s judgment, affect the collectability of principal and interest at the balance sheet date. In accordance with our allowance methodology, loan loss factors are monitored quarterly and may be adjusted based on changes in the level of historical net charge-offs and updates by management, such as the number of periods included in the calculation of loss factors, loss severity, loss emergence period and portfolio attrition.
For the non-PCI commercial segment, management incorporates historical net loss data to develop the applicable loan loss factors. General reserves for collective impairment are based on incurred loss estimates for the loan class based on average loss rates by credit quality indicators, which are estimated using historical loss experience and credit risk rating migrations. Credit quality indicators include borrower classification codes and facility risk ratings. Incurred loss estimates may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends including credit quality, concentrations, aging of the portfolio and significant policy and underwriting changes.

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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the non-PCI noncommercial segment, management incorporates specific loan class and delinquency status trends into the loan loss factors. General reserve estimates of incurred losses are based on historical loss experience and the migration of loans through the various delinquency pools applied to the current risk mix.
Non-PCI loans are considered to be impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Generally, management considers the following loans to be impaired: all TDR loans and all loan relationships which are on nonaccrual or 90+ days past due and greater than $500,000. Non-PCI impaired loans greater than $500,000 are evaluated individually for impairment while others are evaluated collectively.
The impairment assessment and determination of the related specific reserve for each impaired loan is based on the loan’s characteristics. Impairment measurement for loans dependent on borrower cash flow for repayment is based on the present value of expected cash flows discounted at the interest rate implicit in the original loan agreement. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value (appropriately adjusted for an assessment of the sales and marketing costs) is used to calculate a fair value estimate. A specific valuation allowance is established or partial charge-off is recorded for the difference between the excess recorded investment in the loan and the loan’s estimated fair value less costs to sell.
The ALLL for PCI loans is estimated based on the expected cash flows over the life of the loan. BancShares continues to estimate and update cash flows expected to be collected on individual loans or pools of loans sharing common risk characteristics. BancShares compares the carrying value of all PCI loans to the present value at each balance sheet date. If the present value is less than the carrying value, the shortfall reduces the remaining credit discount and if it is in excess of the remaining credit discount, an ALLL is recorded through the recognition of provision expense. The ALLL for PCI loans with subsequent increases in expected cash flows to be collected is reduced and any remaining excess is recorded as an adjustment to the accretable yield over the loan’s or pool’s remaining life.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probable losses related to standby letters of credit and other commitments to extend credit. The reserve is calculated in a manner similar to the loans evaluated collectively for impairment, while also considering the applicable regulatory capital credit conversion factors for these off-balance sheet instruments as well as the estimated exposure upon default. The reserve for unfunded commitments is presented within other liabilities, distinct from the ALLL, and adjustments to the reserve for unfunded commitments are included in other noninterest expense and represent an immaterial balance.
Other Real Estate Owned (“OREO”)
OREO includes foreclosed real estate property and closed branch properties and is initially recorded at the asset’s estimated fair value less cost to sell. Any excess in the recorded investment in the loan over the estimated fair value less costs to sell is charged-off against the ALLL at the time of foreclosure. If the estimated value of the OREO exceeds the recorded investment of the loan, the difference is recorded as a gain within other income.
OREO is subsequently carried at the lower of cost or market value less estimated selling costs and is evaluated at least annually. The periodic evaluations are generally based on the appraised value of the property and may include additional adjustments based upon management’s review of the valuation estimate and specific knowledge of the property. Routine maintenance costs, income and expenses related to the operation of the foreclosed asset, subsequent declines in market value and net gains or losses on disposal are included in collection and foreclosure-related expense.
Payable to the Federal Deposit Insurance Corporation (“FDIC”) for Shared-Loss Agreements
The purchase and assumption agreements for certain FDIC-assisted transactions include payments that may be owed to the FDIC at the termination of the shared-loss agreements. The payment is due 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 liability is calculated by discounting estimated future payments and is reported as FDIC shared-loss payable. The ultimate settlement amount of the payment is dependent upon the performance of the underlying covered loans, recoveries, the passage of time and actual claims submitted to the FDIC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost. Depreciation expense is generally computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and capitalized leases are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the assets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the identifiable assets acquired. Goodwill is not amortized, but is evaluated at least annually for impairment during the third quarter, or when events or changes in circumstances indicate a potential impairment exists.
Other acquired intangible assets with finite lives, such as core deposit intangibles, are initially recorded at fair value and are amortized on an accelerated basis typically between five to twelve years over their estimated useful lives. Intangible assets are evaluated for impairment when events or changes in circumstances indicate a potential impairment exists.
Mortgage Servicing Rights (“MSR”)
The right to provide servicing under various loan servicing contracts is either retained in connection with a loan sale or acquired in a business combination. MSRs are initially recorded at fair value and amortized in proportion to, and over the period of, the future net servicing income of the underlying loan. At each reporting period, MSRs are evaluated for impairment based upon the fair value of the rights as compared to the carrying value.
Fair Values
The fair value of financial instruments and the methods and assumptions used in estimating fair value amounts and financial assets and liabilities for which fair value was elected are detailed in Note P, Estimated Fair Values.

Income Taxes

Income taxes are accounted for using the asset and liability approach as prescribed in ASC 740, Income Taxes. Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in BancShares’ income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period which includes the enactment date.
The potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities is continually monitored and evaluated. Income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where income tax returns are filed, as well as potential or pending audits or assessments by such tax auditors are evaluated on a periodic basis.
BancShares has unrecognized tax benefits related to the uncertain portion of tax positions BancShares has taken or expects to take. A liability may be created or an amount refundable may be reduced for the amount of unrecognized tax benefits. These uncertainties result from the application of complex tax laws, rules, regulations and interpretations, primarily in state taxing jurisdictions. Unrecognized tax benefits are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Estimated penalties and interest on uncertain tax positions are recognized in income tax expense.
BancShares files a consolidated federal income tax return and various combined and separate company state tax returns. See Note O, Income Taxes, for additional disclosures.
Per Share Data
Net income per share is computed by dividing net income by the weighted average number of both classes of common shares outstanding during each period. BancShares had no potential dilutive common shares outstanding in any period and did not report diluted net income per share.
Cash dividends per share apply to both Class A and Class B common stock. Shares of Class A common stock carry 1 vote per share, while shares of Class B common stock carry 16 votes per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Defined Benefit Pension Plans
BancShares maintains noncontributory defined benefit pension plans covering certain qualifying employees. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. All assumptions are reviewed annually for appropriateness. The discount rate assumption used to measure the plan obligations is based on a yield curve developed from high-quality corporate bonds across a full maturity spectrum. The projected cash flows of the pension plans are discounted based on this yield curve, and a single discount rate is calculated to achieve the same present value. The assumed rate of future compensation increases is based on actual experience and future salary expectations. We also estimate a long-term rate of return on pension plan assets used to estimate the future value of plan assets. In developing the long-term rate of return, we consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plans and projections of future returns on various asset classes. Refer to Note Q, Employee Benefit Plans, for disclosures related to BancShares’ defined benefit pension plans.
Leases
BancShares leases certain branch locations, administrative offices and equipment. Operating lease ROU assets are included in other assets and the associated lease obligations are included in other liabilities. Finance leases are included in premises and equipment and other borrowings. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we instead recognize lease expense for these leases on a straight-line basis over the lease term.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our corresponding obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating and finance lease ROU asset also includes initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of our leases do not provide an implicit rate, BancShares uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception. We utilize the implicit or incremental borrowing rate at the effective date of a modification not accounted for as a separate contract or a change in the lease terms to determine the present value of lease payments. For operating leases commencing prior to January 1, 2019, BancShares used the incremental borrowing rate as of that date.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain we will exercise our option to renew or extend the lease term, the option is included in calculating the value of the ROU asset and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
We determine if an arrangement is a lease at inception. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not lease any properties or facilities from any related party. As of December 31, 2019, there were no leases that have not yet commenced that would have a material impact on our consolidated financial statements. See Note R, Leases, for additional disclosures.
Revenue Recognition
BancShares generally acts in a principal capacity, on its own behalf, in its contracts with customers. In these transactions, we recognize revenues and the related costs to generate those revenues on a gross basis. In certain, circumstances, we act in an agent capacity, on behalf of the customers with other entities, and recognize revenues and the related costs to provide our services on a net basis. Business lines where BancShares acts as an agent include cardholder and merchant services, insurance, and brokerage. Descriptions of our noninterest revenue-generating activities are broadly segregated as follows:
Cardholder and Merchant Services - These represent interchange fees from customer debit and credit card transactions earned when a cardholder engages in a transaction with a merchant as well as fees charged to merchants for providing them the ability to accept and process the debit and credit card transaction. Revenue is recognized when the performance obligation has been satisfied, which is upon completion of the card transaction. Additionally, as FCB is acting as an agent for the customer and transaction processor, costs associated with cardholder and merchant services transactions are netted against the fee income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Service charges on deposit accounts - These deposit account-related fees represent monthly account maintenance and transaction-based service fees such as overdraft fees, stop payment fees and charges for issuing cashier’s checks and money orders. For account maintenance services, revenue is recognized at the end of the statement period when our performance obligation has been satisfied. All other revenues from transaction-based services are recognized at a point in time when the performance obligation has been completed.
Wealth management services - These primarily represent sales commissions on various product offerings, transaction fees and trust and asset management fees. The performance obligation for wealth management services is the provision of services to place annuity products issued by the counterparty to investors and the provision of services to manage the client’s assets, including brokerage custodial and other management services. Revenue from wealth management services is recognized over the period in which services are performed, and is based on a percentage of the value of the assets under management/administration.
Other service charges and fees - These include, but are not limited to, check cashing fees, international banking fees, internet banking fees, wire transfer fees and safe deposit fees. The performance obligation is fulfilled and revenue is recognized, at the point in time the requested service is provided to the customer.
Insurance commissions - These represent commissions earned on the issuance of insurance products and services. The performance obligation is generally satisfied upon the issuance of the insurance policy and revenue is recognized when the commission payment is remitted by the insurance carrier or policy holder depending on whether the billing is performed by BancShares or the carrier.
ATM income - These represent fees imposed on customers and non-customers for engaging in an ATM transaction. Revenue is recognized at the time of the transaction as the performance obligation of rendering the ATM service has been met.
Other - This consists of several forms of recurring revenue such as FHLB dividends and income earned on changes in the cash surrender value of bank-owned life insurance. The remaining miscellaneous income includes recoveries on PCI loans previously charged-off and other immaterial transactions where revenue is recognized when, or as, the performance obligation is satisfied. Refer to Note N, Other Noninterest Income and Other Noninterest Expense, for additional disclosures on other noninterest income.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)
This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between prior standards and this ASU is the requirement for lessees to recognize all lease contracts on their balance sheet. This ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the previous operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.
We adopted this standard, as of January 1, 2019, using the effective date method that allows for entities to initially apply the new leases standard at the adoption date. In addition, we made several policy elections permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification. We determined that most renewal options would not be reasonably determinable in estimating the expected lease term.
We made the policy election available under Topic 842 to combine lease and non-lease components and applied this practical expedient to leases in effect prior to the date of adoption. We will continue to apply the practical expedient to all leases entered into going forward.
The adoption of the new standard had an impact on our Consolidated Balance Sheet as of January 1, 2019, with the recording of operating Right-of-Use (“ROU”) assets and operating lease liabilities of $70.7 million and $71.8 million, respectively. The operating lease liability included a $1.1 million fair value adjustment for leases assumed in the acquisition of HomeBancorp, Inc. (“HomeBancorp”). In addition, at the adoption date we had finance lease ROU assets and finance lease liabilities, previously classified as capital leases, of $8.8 million and $8.3 million, respectively.  BancShares did not have a cumulative-effect adjustment to the opening balance of retained earnings at commencement. BancShares has no related party lease agreements.  This ASU did not have a material impact on our Consolidated Statements of Income. See Note R, Leases, for additional disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FASB ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in FASB ASC 350-40, Intangibles - Goodwill and Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (1) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (2) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement (3) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element (4) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. BancShares adopted this standard effective July 1, 2019 on a prospective basis. As of December 31, 2019, $5.7 million of deferred implementation costs net of accumulated amortization related to cloud computing arrangements were recorded in other assets. These costs are expensed over the fixed, noncancellable term of the arrangement and are recorded to processing fees paid to third parties, consistent with the line item of the income statement where fees paid for the associated hosted service are recorded.
FASB ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

In 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities that simplified the application of hedge accounting in certain situations and allowed an entity to make a one-time election to reclassify a prepayable debt security from held to maturity to available for sale if the debt security is eligible to be hedged in accordance with ASC 815-20-25-12A (last-of-layer method). In April of 2019, the FASB issued ASU 2019-04, which clarifies certain aspects of Topic 815, including an extension on the ability to elect to transfer securities under ASU 2017-12.

BancShares adopted ASU 2017-12 effective January 1, 2019, though the standard was immaterial to BancShares upon adoption and no transfer of securities from held to maturity to available for sale was made. BancShares adopted ASU 2019-04 as of November 1, 2019 on a prospective basis and elected to reclassify eligible debt securities from held to maturity to available for sale.  The book value of securities transferred was $2.08 billion with a fair value of $2.15 billion. The transfer resulted in a $72.5 million reclassification of unrealized losses that were previously frozen in accumulated other comprehensive income as a result of a transfer to held to maturity in the second quarter of 2018. This also resulted in recording an additional unrealized gain on the available for sale securities of $1.6 million and offset by a $16.7 million unwind of deferred tax assets, resulting in an increase to total assets and equity of $57.4 million.

Recently Issued Accounting Pronouncements
FASB ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020. Early adoption is permitted for all entities. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the fourth quarter of 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FASB ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2020.
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.
This ASU will be effective for BancShares’ annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We expect to adopt the guidance for our annual impairment test in fiscal year 2020. BancShares does not anticipate any impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU introduces a new credit loss methodology which requires earlier recognition of credit losses, replacing multiple existing impairment methods in current GAAP, which generally require a loss to be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity’s size, complexity and risk profile.
For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities. A cross-functional team co-led by Corporate Finance and Risk Management was established to implement the new standard. We have completed initial current expected credit loss (“CECL”) models and accounting interpretations. We continue to refine and test our models, estimation techniques, operational processes and controls to be used in preparing CECL loss estimates and related financial statement disclosures. We have also evaluated our debt securities portfolio to determine the impact of adoption of CECL. Given the majority of our debt securities are issued by government sponsored entities, we expect very minimal, if any, impact at adoption.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The CECL calculated losses on the loan portfolio are derived using estimated probability of default and loss given default models based on historical loss experience, borrower characteristics, forecasts of relevant economic conditions and other factors. We are using a two-year reasonable and supportable forecast period that incorporates one economic forecast, with a 12-month straight-line reversion period to historical averages. The outstanding loans are bifurcated between commercial and non-commercial loan portfolios and then further segmented into pools with similar risk characteristics. The commercial portfolio, comprising the majority of our total loans, consists primarily of loans with short contractual maturities and is expected to result in a reduction to the allowance for credit losses. This reduction is expected to be partially offset by an increase in the allowance for credit losses on the non-commercial portfolio as these assets have longer contractual maturities, as well as an increase in reserves for the acquired loan portfolios. Additionally, the reserve for unfunded commitments is expected to increase due to the change in scope under ASU 2016-13.
BancShares continues to evaluate the impact of this standard on its consolidated financial statements but expects the aggregate allowance for credit losses to decrease 15% to 20% with an initial increase to retained earnings of $32-$42 million. The allowance associated with PCD loans did not have an impact on retained earnings as the CECL reserve is essentially replacing the existing non-accretable discount. The release of existing reserves due to the implementation of CECL will result in an increase to total risk-based capital and a decrease in Tier 1 Capital. The changes to capital are not expected to be significant.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. BancShares adopted the guidance in the first quarter of 2020 using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
NOTE B
BUSINESS COMBINATIONS

FCB has evaluated the financial statement significance for all business combinations completed during 2019 and 2018. FCB has concluded the completed business combinations noted below are not material to BancShares’ consolidated financial statements, individually or in aggregate, and therefore, pro forma financial data has not been included.

Each transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair value becomes available. As of December 31, 2019, there have been no refinements to the fair value of assets acquired and liabilities assumed.

As part of the accounting for each acquisition, we perform an analysis of the acquired bank’s loan portfolio. Based on such credit factors as past due status, nonaccrual status, life-to-date charge-offs and other quantitative and qualitative considerations, the acquired loans were separated into PCI loans with evidence of credit deterioration since origination, which are accounted for under ASC 310-30, and non-PCI loans that do not meet this criteria, which are accounted for under ASC 310-20.

Community Financial Holding Co. Inc.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co. Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. As of December 31, 2019, Community Financial reported $224.0 million in consolidated assets, $136.9 million in loans, and $211.8 million in deposits.

Entegra Financial Corp.

On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share was paid to the shareholders of Entegra for each share of common stock totaling approximately $222.8 million. The merger allows FCB to expand its presence and enhance banking efforts in western North Carolina.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of the assets acquired was $1.68 billion, including $953.7 million in non-PCI loans, $77.5 million in PCI loans and $4.5 million in a core deposit intangible. Liabilities assumed were $1.51 billion, of which $1.33 billion were deposits. As a result of the transaction, FCB recorded $52.6 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.

FCB was required to agree to divest certain branches, other assets and liabilities in order to obtain regulatory approval for the transaction. FCB and Select Bank & Trust Company (“Select Bank”) have entered into an agreement for Select Bank to purchase North Carolina branches, located in Highlands, Sylva and Franklin. The branch sales are anticipated to close in 2020. The assets and liabilities of the branches to be divested are recorded on the Consolidated Balance Sheets and in the related Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $106.4 million, $2.3 million, and $186.4 million, respectively as of December 31, 2019.

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.
(Dollars in thousands) As recorded by FCB
Purchase price   $222,750
Assets    
Cash and due from banks $59,815
  
Overnight investments 242,770
  
Investment securities 227,834
  
Loans 1,031,186
  
Premises and equipment 24,458
  
Other real estate owned 1,846
  
Income earned not collected 5,447
  
Intangible assets 6,899
  
Other assets 81,069
  
Total assets acquired 1,681,324
  
Liabilities    
Deposits 1,326,967
  
Borrowings 169,433
  
Other liabilities 14,808
  
Total liabilities assumed $1,511,208
  
Fair value of net assets acquired   170,116
Goodwill recorded for Entegra   $52,634


Merger-related expenses of $5.4 million from the Entegra transaction were recorded in the Consolidated Statement of Income for the year ended December 31, 2019. Entegra assets generated no loan-related interest income for the year ended December 31, 2019.

First South Bancorp, Inc.

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

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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


Merger-related expenses of $4.1 million from the First South Bancorp transaction were recorded in the Consolidated Statement of Income for the year ended December 31, 2019. Loan-related interest income generated from First South Bancorp was approximately $6.1 million since the acquisition date.

Biscayne Bancshares, Inc.
On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (“Biscayne Bancshares”) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 per share was paid to the shareholders of Biscayne Bancshares for each share of common stock, totaling approximately $118.9 million. The merger allows FCB to expand its presence in Florida and enhance banking efforts in South Florida.
The fair value of the assets acquired was $1.03 billion, including $850.4 million in non-PCI loans, $13.0 million in PCI loans and $4.7 million in a core deposit intangible. Liabilities assumed were $956.8 million, of which $786.5 million were deposits. As a result of the transaction, FCB recorded $46.5 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:
(Dollars in thousands)As recorded by FCB
Purchase price  $118,949
Assets   
Cash and due from banks$78,010
  
Overnight investments306
  
Investment securities held to maturity34,539
  
Loans863,384
  
Premises and equipment1,533
  
Other real estate owned2,046
  
Income earned not collected3,049
  
Intangible assets4,745
  
Other assets41,572
  
Total assets acquired1,029,184
  
Liabilities   
Deposits786,512
  
Borrowings157,415
  
Accrued interest payable
  
Other liabilities12,829
  
Total liabilities assumed$956,756
  
Fair value of net assets acquired  72,428
Goodwill recorded for Biscayne Bancshares  $46,521

Merger-related expenses of $5.8 million were recorded in the Consolidated Statement of Income for the year ended December 31, 2019. Loan-related interest income generated from Biscayne Bancshares was approximately $33.8 million since the acquisition date.

Palmetto Heritage Bancshares, Inc.

On November 1, 2018, FCB completed the merger of Pawleys Island, South Carolina-based Palmetto Heritage Bancshares, Inc. (“Palmetto Heritage”) and its subsidiary, Palmetto Heritage Bank & Trust, into FCB. The Palmetto Heritage transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on October 31, 2019, with no material changes to the original calculated fair values.

The fair value of the assets acquired was $162.2 million, including $131.3 million in non-PCI loans, $3.9 million in PCI loans and $1.7 million in a core deposit intangible. Liabilities assumed were $149.3 million, of which $124.9 million were deposits. As a result of the transaction, FCB recorded $17.5 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired.

Merger-related expenses of $0.6 million and $0.5 million from the Palmetto Heritage transaction were recorded in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively. Loan-related interest income generated from Palmetto Heritage was approximately $5.6 million and $1.2 million for the years ended December 31, 2019 and 2018, respectively.

Capital Commerce Bancorp, Inc.

On October 2, 2018, FCB completed the merger of Milwaukee, Wisconsin-based Capital Commerce Bancorp, Inc. (“Capital Commerce”) and its subsidiary, Securant Bank & Trust, into FCB. The Capital Commerce transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values were subject to refinement for up to one year after the closing date. The measurement period ended on October 1, 2019, with no material changes to the original calculated fair values.

The fair value of the assets acquired was $221.9 million, including $173.4 million in non-PCI loans, $10.8 million in PCI loans and $2.7 million in a core deposit intangible. Liabilities assumed were $204.5 million, of which $172.4 million were deposits. As a result of the transaction, FCB recorded $10.7 million of goodwill.

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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Merger-related expenses of $0.7 million and $1.2 million from the Capital Commerce transaction were recorded in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively. Loan-related interest income generated from Capital Commerce was approximately $8.1 million and $3.2 million for the years ended December 31, 2019 and 2018, respectively.

HomeBancorp, Inc.

On May 1, 2018, FCB completed the merger of Tampa, Florida-based HomeBancorp, Inc. (“HomeBancorp”) and its subsidiary, HomeBanc, into FCB. The HomeBancorp transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values were subject to refinement for up to one year after the closing date. The measurement period ended on April 30, 2019, with no material changes to the original calculated fair values.

The fair value of the assets acquired was $842.7 million, including $550.6 million in non-PCI loans, $15.6 million in PCI loans and $9.9 million in a core deposit intangible. Liabilities assumed were $787.7 million, of which $619.6 million were deposits. As a result of the transaction, FCB recorded $57.6 million of goodwill.

Merger-related expenses of $0.1 million and $2.3 million from the HomeBancorp transaction were recorded in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively. Loan-related interest income generated from HomeBancorp was approximately $21.4 million and $17.4 million for the years ended December 31, 2019 and 2018, respectively.
NOTE C
INVESTMENTS
The amortized cost and fair value of investment and marketable equity securities at December 31, 2019 and 2018, were as follows:
 December 31, 2019
(Dollars in thousands)Cost 
Gross
unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale       
U.S. Treasury$409,397
 $602
 $
 $409,999
Government agency684,085
 928
 2,241
 682,772
Residential mortgage-backed securities5,269,060
 13,417
 15,387
 5,267,090
Commercial mortgage-backed securities373,105
 6,974
 59
 380,020
Corporate bonds198,278
 3,420
 132
 201,566
State, county and municipal118,227
 
 
 118,227
Total investment securities available for sale$7,052,152
 $25,341
 $17,819
 $7,059,674
Investment in marketable equity securities59,262
 23,304
 233
 82,333
Investment securities held to maturity       
Other30,996
 
 
 30,996
Total investment securities$7,142,410
 $48,645
 $18,052
 $7,173,003
        
 December 31, 2018
 Cost 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale       
U.S. Treasury$1,249,243
 $633
 $2,166
 $1,247,710
Government agency257,252
 222
 639
 256,835
Residential mortgage-backed securities2,956,793
 5,309
 52,763
 2,909,339
Corporate bonds143,829
 261
 864
 143,226
Total investment securities available for sale$4,607,117
 $6,425
 $56,432
 $4,557,110
Investment in marketable equity securities73,809
 19,010
 220
 92,599
Investment securities held to maturity       
Residential mortgage-backed securities2,087,024
 16,592
 490
 2,103,126
Commercial mortgage-backed securities97,629
 747
 
 98,376
Total investment securities held to maturity2,184,653
 17,339
 490
 2,201,502
Total investment securities$6,865,579
 $42,774
 $57,142
 $6,851,211


73

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


As described in Note A, Accounting Policies and Basis of Presentation, on November 1, 2019, as part of the adoption of ASU 2019-04, mortgage-backed securities with an amortized cost of $2.08 billion were transferred from investment securities held to maturity to the available for sale portfolio. At the time of the transfer, the securities had a fair value of $2.15 billion. The transfer resulted in a reclassification of unrealized losses of $72.5 million, or $55.8 million net of tax, previously frozen in AOCI as a result of the initial transfer to held to maturity. FCB still has the intent and ability to hold the remainder of the held to maturity portfolio to maturity.

On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $2.38 billion and a weighted average contractual maturity of 13 years. The unrealized loss on these securities at the date of transfer was $109.5 million, or $84.3 million net of tax, and was reported as a component of AOCI. This unrealized loss was accreted over the remaining expected life of the securities as an adjustment of yield and was partially offset by the amortization of the corresponding discount on the transferred securities.

Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Investments in government agency securities represent securities issued by the United States Small Business Administration. Investments in corporate bonds and marketable equity securities represent positions in securities of other financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions.

BancShares holds approximately 298,000 shares of Visa Class B common stock with a cost basis of zero. BancShares’ Visa Class B shares are not considered to have a readily determinable fair value and are recorded with 0 fair value.

The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Residential and commercial mortgage-backed and government agency securities are stated separately as they are not due at a single maturity date.
 December 31, 2019 December 31, 2018
(Dollars in thousands)Cost Fair value Cost Fair value
Investment securities available for sale       
Non-amortizing securities maturing in:       
One year or less$406,325
 $406,927
 $1,049,253
 $1,047,380
One through five years24,496
 24,971
 205,526
 205,805
Five through 10 years185,209
 187,868
 134,370
 133,626
Over 10 years109,872
 110,026
 3,923
 4,125
Government agency684,085
 682,772
 257,252
 256,835
Residential mortgage-backed securities5,269,060
 5,267,090
 2,956,793
 2,909,339
Commercial mortgage-backed securities373,105
 380,020
 
 
Total investment securities available for sale$7,052,152
 $7,059,674
 $4,607,117
 $4,557,110
Investment securities held to maturity       
Non-amortizing securities maturing in:       
One year or less30,746
 30,746
 
 
One through five years250
 250
 
 
Residential mortgage-backed securities
 
 2,087,024
 2,103,126
Commercial mortgage-backed securities
 
 97,629
 98,376
Total investment securities held to maturity$30,996
 $30,996
 $2,184,653
 $2,201,502

For each period presented, realized gains on investment securities available for sale include the following:
 Year ended December 31
(Dollars in thousands)2019 2018 2017
Gross gains on retirement/sales of investment securities available for sale$8,993
 $353
 $11,635
Gross losses on sales of investment securities available for sale(1,878) (2) (7,342)
Realized gains on investment securities available for sale, net$7,115
 $351
 $4,293



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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For each period presented, realized and unrealized gains or losses on marketable equity securities include the following:
 Year ended December 31
(Dollars in thousands)2019 2018
Marketable equity securities gains (losses), net$20,625
 $(7,610)
Less net gains recognized on marketable equity securities sold16,344
 1,190
Unrealized (losses) gains recognized on marketable equity securities held$4,281
 $(8,800)


The following table provides information regarding investment securities with unrealized losses as of December 31, 2019 and 2018:
 December 31, 2019
 Less than 12 months 12 months or more Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Investment securities available for sale           
Government agency$347,081
 $1,827
 $63,947
 $414
 $411,028
 $2,241
Residential mortgage-backed securities2,387,293
 14,016
 264,257
 1,371
 2,651,550
 15,387
Commercial mortgage-backed securities35,926
 59
 
 
 35,926
 59
Corporate bonds7,714
 123
 4,749
 9
 12,463
 132
Total$2,778,014
 $16,025
 $332,953
 $1,794
 $3,110,967
 $17,819
            
 December 31, 2018
 Less than 12 months 12 months or more Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Investment securities available for sale           
U.S. Treasury$248,983
 $113
 $848,622
 $2,053
 $1,097,605

$2,166
Government agency115,273
 601
 2,310
 38
 117,583
 639
Residential mortgage-backed securities262,204
 2,387
 1,940,695
 50,376
 2,202,899
 52,763
Corporate bonds79,066
 842
 5,000
 22
 84,066
 864
Total$705,526
 $3,943
 $2,796,627
 $52,489
 $3,502,153
 $56,432
Investment securities held to maturity           
Residential mortgage-backed securities$5,111
 $181
 $10,131
 $309
 $15,242
 $490

As of December 31, 2019, there were 91 investment securities available for sale with continuous losses for more than 12 months of which 90 are government sponsored, enterprise-issued mortgage-backed securities or government agency securities and 1 is a corporate bond.
NaN of the unrealized losses identified as of December 31, 2019 or December 31, 2018 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. Rather, the unrealized losses related to changes in interest rates and spreads relative to when the investment securities were purchased. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, NaN of the losses on these securities were deemed to be OTTI.
Investment securities having an aggregate carrying value of $3.93 billion at December 31, 2019 and $4.03 billion at December 31, 2018, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
NOTE D
LOANS AND LEASES
BancShares’ accounting methods for loans and leases differ depending on whether they are non-PCI or PCI. Loans originated by BancShares and loans performing under their contractual obligations at acquisition are classified as Non-PCI. Loans reflecting credit deterioration since origination such that it is probable at acquisition that BancShares will be unable to collect all contractually required payments are classified as PCI. Additionally, acquired loans are recorded at fair value at the date of acquisition, with no corresponding allowance for loan and lease losses. See Note A, Accounting Policies and Basis of Presentation, for additional information on non-PCI and PCI loans and leases.

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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans and leases outstanding include the following at December 31, 2019 and 2018:
(Dollars in thousands)December 31, 2019 December 31, 2018
Non-PCI loans and leases:   
Commercial:   
Construction and land development$1,013,454
 $757,854
Commercial mortgage12,282,635
 10,717,234
Other commercial real estate542,028
 426,985
Commercial and industrial and leases4,403,792
 3,938,730
Other310,093
 296,424
Total commercial loans18,552,002
 16,137,227
Noncommercial:   
Residential mortgage5,293,917
 4,265,687
Revolving mortgage2,339,072
 2,542,975
Construction and land development357,385
 257,030
Consumer1,780,404
 1,713,781
Total noncommercial loans9,770,778
 8,779,473
Total non-PCI loans and leases28,322,780
 24,916,700
Total PCI loans558,716
 606,576
Total loans and leases$28,881,496
 $25,523,276


At December 31, 2019, $9.41 billion in non-PCI loans with a lendable collateral value of $6.57 billion were used to secure $563.7 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.01 billion. At December 31, 2018, $9.12 billion in non-PCI loans with a lendable collateral value of $6.36 billion were used to secure $175.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $6.18 billion.

At December 31, 2019, $3.68 billion in non-PCI loans with a lendable collateral value of $2.98 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (“FRB”). At December 31, 2018, $2.94 billion in non-PCI loans with a lendable collateral value of $2.19 billion were used to secure additional borrowing capacity at the FRB.

Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. Loans held for sale totaled $67.9 million and $45.5 million at December 31, 2019 and 2018, respectively. We may change our strategy for certain portfolio loans and sell them in the secondary market. At such time, portfolio loans are transferred to loans held for sale at fair value.

During 2019, total proceeds from sales of residential mortgage loans were $756.0 million of which $731.8 million related to sales of loans held for sale. The remaining $24.2 million related to sales of portfolio loans, which resulted in a gain of $299 thousand. During 2018, total proceeds from sales of residential mortgage loans were $618.1 million, of which $608.5 million related to sales of loans held for sale. The remaining $9.6 million related to sales of portfolio loans, which were sold at par.

Net deferred fees on originated non-PCI loans and leases, including unearned income as well as unamortized costs, were $927 thousand and $79 thousand at December 31, 2019 and 2018, respectively. The unamortized discounts related to purchased non-PCI loans was $30.9 million at December 31, 2019 and $33.3 million at December 31, 2018. During the years ended December 31, 2019 and 2018, accretion income on purchased non-PCI loans and leases was $13.2 million and $12.8 million, respectively.

Loans and leases to borrowers in medical, dental or related fields were $5.16 billion as of December 31, 2019, which represents 17.9% of total loans and leases, compared to $4.98 billion or 19.5% of total loans and leases at December 31, 2018. The credit risk of this industry concentration is mitigated through our underwriting policies, which 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% of total loans and leases outstanding at December 31, 2019.

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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


77

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of the loans and leases outstanding at December 31, 2019 and December 31, 2018, by credit quality indicator are provided below:
 December 31, 2019
 Non-PCI commercial loans and leases
(Dollars in thousands)Construction and
land
development
 Commercial mortgage Other commercial real estate Commercial and industrial and leases Other Total non-PCI commercial loans and leases
Pass$1,004,922
 $12,050,799
 $536,682
 $4,256,456
 $308,796
 $18,157,655
Special mention2,577
 115,164
 3,899
 44,604
 622
 166,866
Substandard5,955
 116,672
 1,447
 34,148
 675
 158,897
Doubtful
 
 
 3
 
 3
Ungraded
 
 
 68,581
 
 68,581
Total$1,013,454
 $12,282,635
 $542,028
 $4,403,792
 $310,093
 $18,552,002
            
 December 31, 2018
 Non-PCI commercial loans and leases
 Construction and
land
development
 Commercial mortgage Other commercial real estate Commercial and industrial and leases Other Total non-PCI commercial loans and leases
Pass$753,985
 $10,507,687
 $422,500
 $3,778,797
 $294,700
 $15,757,669
Special mention1,369
 114,219
 3,193
 54,814
 1,105
 174,700
Substandard2,500
 92,743
 1,292
 30,688
 619
 127,842
Doubtful
 
 
 354
 
 354
Ungraded
 2,585
 
 74,077
 
 76,662
Total$757,854
 $10,717,234
 $426,985
 $3,938,730
 $296,424
 $16,137,227
 December 31, 2019
 Non-PCI noncommercial loans and leases
(Dollars in thousands)Residential mortgage Revolving mortgage Construction and land development Consumer Total non-PCI noncommercial loans and leases
Current$5,205,380
 $2,316,010
 $354,393
 $1,762,606
 $9,638,389
30-59 days past due45,839
 9,729
 977
 10,481
 67,026
60-89 days past due18,289
 3,468
 218
 3,746
 25,721
90 days or greater past due24,409
 9,865
 1,797
 3,571
 39,642
Total$5,293,917
 $2,339,072
 $357,385
 $1,780,404
 $9,770,778
          
 December 31, 2018
 Non-PCI noncommercial loans and leases
 Residential mortgage Revolving mortgage Construction and land development Consumer Total non-PCI noncommercial loans and leases
Current$4,214,783
 $2,514,269
 $254,837
 $1,696,321
 $8,680,210
30-59 days past due28,239
 12,585
 581
 10,035
 51,440
60-89 days past due7,357
 4,490
 21
 3,904
 15,772
90 days or greater past due15,308
 11,631
 1,591
 3,521
 32,051
Total$4,265,687
 $2,542,975
 $257,030
 $1,713,781
 $8,779,473

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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 December 31, 2019 December 31, 2018
(Dollars in thousands)PCI commercial loans
Pass$148,412
 $141,922
Special mention44,290
 48,475
Substandard87,970
 101,447
Doubtful3,657
 4,828
Ungraded
 
Total$284,329
 $296,672

 December 31, 2019 December 31, 2018
(Dollars in thousands)PCI noncommercial loans
Current$240,995
 $268,280
30-89 days past due13,764
 11,155
60-89 days past due5,608
 7,708
90 days or greater past due14,020
 22,761
Total$274,387
 $309,904




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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The aging of the outstanding non-PCI loans and leases, by class, at December 31, 2019, and December 31, 2018 is provided in the tables below. Loans and leases 30 days or less past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.
 December 31, 2019
(Dollars in thousands)
30-59 days
past due
 
60-89 days
past due
 90 days or greater 
Total past
due
 Current 
Total loans
and leases
Non-PCI loans and leases:           
Commercial:           
Construction and land development$3,146
 $195
 $2,702
 $6,043
 $1,007,411
 $1,013,454
Commercial mortgage20,389
 8,774
 8,319
 37,482
 12,245,153
 12,282,635
Other commercial real estate861
 331
 698
 1,890
 540,138
 542,028
Commercial and industrial and leases18,269
 4,842
 5,032
 28,143
 4,375,649
 4,403,792
Other51
 411
 126
 588
 309,505
 310,093
Total commercial loans42,716
 14,553
 16,877
 74,146
 18,477,856
 18,552,002
Noncommercial:           
Residential mortgage45,839
 18,289
 24,409
 88,537
 5,205,380
 5,293,917
Revolving mortgage9,729
 3,468
 9,865
 23,062
 2,316,010
 2,339,072
Construction and land development977
 218
 1,797
 2,992
 354,393
 357,385
Consumer10,481
 3,746
 3,571
 17,798
 1,762,606
 1,780,404
Total noncommercial loans67,026
 25,721
 39,642
 132,389
 9,638,389
 9,770,778
Total non-PCI loans and leases$109,742
 $40,274
 $56,519
 $206,535
 $28,116,245
 $28,322,780
  
 December 31, 2018
 
30-59 days
past due
 
60-89 days
past due
 90 days or greater 
Total past
due
 Current 
Total loans
and leases
Non-PCI loans and leases:           
Commercial:           
Construction and land development$516
 $9
 $444
 $969
 $756,885
 $757,854
Commercial mortgage14,200
 2,066
 3,237
 19,503
 10,697,731
 10,717,234
Other commercial real estate91
 76
 300
 467
 426,518
 426,985
Commercial and industrial and leases9,655
 1,759
 2,892
 14,306
 3,924,424
 3,938,730
Other285
 
 89
 374
 296,050
 296,424
Total commercial loans24,747
 3,910
 6,962
 35,619
 16,101,608
 16,137,227
Noncommercial:           
Residential mortgage28,239
 7,357
 15,308
 50,904
 4,214,783
 4,265,687
Revolving mortgage12,585
 4,490
 11,631
 28,706
 2,514,269
 2,542,975
Construction and land development581
 21
 1,591
 2,193
 254,837
 257,030
Consumer10,035
 3,904
 3,521
 17,460
 1,696,321
 1,713,781
Total noncommercial loans51,440
 15,772
 32,051
 99,263
 8,680,210
 8,779,473
Total non-PCI loans and leases$76,187
 $19,682
 $39,013
 $134,882
 $24,781,818
 24,916,700



80

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 December 31, 2019 and December 31, 2018 for non-PCI loans and leases, were as follows:
 December 31, 2019 December 31, 2018
(Dollars in thousands)
Nonaccrual
loans and
leases
 Loans and leases > 90 days and accruing 
Nonaccrual
loans and
leases
 
Loans and
leases > 90 days and accruing
Commercial:       
Construction and land development$4,281
 $
 $666
 $
Commercial mortgage29,733
 
 12,594
 
Commercial and industrial and leases7,365
 1,094
 4,624
 808
Other commercial real estate708
 
 366
 
Other320
 
 279
 
Total commercial loans42,407
 1,094
 18,529
 808
Noncommercial:       
Construction and land development2,828
 
 1,823
 
Residential mortgage44,357
 45
 35,662
 
Revolving mortgage22,411
 
 25,563
 
Consumer2,943
 2,152
 2,969
 2,080
Total noncommercial loans72,539
 2,197
 66,017
 2,080
Total non-PCI loans and leases$114,946
 $3,291
 $84,546
 $2,888


Purchased non-PCI loans and leases

The following table relates to purchased non-PCI loans acquired in 2019 and 2018 and summarizes the contractually required payments, which include principal and interest, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date.
 2019 2018
(Dollars in thousands)Entegra First South Bancorp Biscayne Bancshares Palmetto Heritage Capital Commerce HomeBancorp
Contractually required payments$1,135,451
 $175,465
 $1,078,854
 $142,413
 $198,568
 $710,876
Fair value at acquisition date953,679
 162,845
 850,352
 131,283
 173,354
 550,618

The recorded fair values of purchased non-PCI loans acquired in 2019 and 2018 as of their respective acquisition date were as follows:
 2019 2018
(Dollars in thousands)Entegra First South Bancorp Biscayne Bancshares Palmetto Heritage Capital Commerce HomeBancorp
Commercial:           
Construction and land development$92,495
 $8,663
 $15,647
 $13,186
 $10,299
 $525
Commercial mortgage381,729
 74,713
 203,605
 29,225
 57,049
 188,688
Other commercial real estate28,678
 7,509
 98,107
 753
 6,370
 55,183
Commercial and industrial and leases27,062
 40,208
 28,135
 8,153
 34,301
 7,931
Other4,741
 
 
 1,039
 
 
Total commercial loans and leases534,705
 131,093
 345,494
 52,356
 108,019
 252,327
Noncommercial:           
Residential mortgage310,039
 24,641
 405,419
 59,076
 50,630
 296,273
Revolving mortgage36,701
 2,162
 54,081
 6,175
 2,552
 51
Construction and land development51,786
 3,552
 31,668
 11,103
 11,173
 
Consumer20,448
 1,397
 13,690
 2,573
 980
 1,967
Total noncommercial loans and leases418,974
 31,752
 504,858
 78,927
 65,335
 298,291
Total non-PCI loans$953,679
 $162,845
 $850,352
 $131,283
 $173,354
 $550,618


81

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

PCI loans
The following table relates to PCI loans acquired in 2019 and 2018 and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected, and the fair value of PCI loans at the respective acquisition dates.
 2019 2018
(Dollars in thousands)Entegra First South Bancorp Biscayne Bancshares Palmetto Heritage Capital Commerce HomeBancorp
Contractually required payments$103,441
 $23,389
 $19,720
 $4,783
 $13,871
 $26,651
Cash flows expected to be collected82,503
 21,392
 16,815
 4,112
 11,814
 19,697
Fair value at acquisition date77,507
 16,398
 13,032
 3,863
 10,772
 15,555

The recorded fair values of PCI loans acquired in 2019 and 2018 as of their respective acquisition date were as follows:
 2019 2018
(Dollars in thousands)Entegra First South Bancorp Biscayne Bancshares Palmetto Heritage Capital Commerce HomeBancorp
Commercial:           
Construction and land development$10,326
 $1,233
 $
 $212
 $1,482
 $
Commercial mortgage30,316
 9,355
 7,589
 1,053
 1,846
 7,815
Other commercial real estate1,734
 
 
 
 
 
Commercial and industrial1,363
 1,202
 1,660
 372
 922
 423
Other1,731
 
 
 
 
 
Total commercial loans45,470
 11,790
 9,249
 1,637
 4,250
 8,238
Noncommercial:           
Residential mortgage24,989
 4,591
 3,783
 2,226
 6,503
 7,317
Revolving mortgage5,582
 
 
 
 
 
Construction and land development1,114
 17
 
 
 
 
Consumer352
 
 
 
 19
 
Total noncommercial loans32,037
 4,608
 3,783
 2,226
 6,522
 7,317
Total PCI loans$77,507
 $16,398
 $13,032
 $3,863
 $10,772
 $15,555
The following table provides changes in the carrying value of all PCI loans during the years ended December 31, 2019, 2018 and 2017:
(Dollars in thousands)2019 2018 2017
Balance at January 1$606,576
 $762,998
 $809,169
Fair value of PCI loans acquired during the year106,937
 30,190
 199,682
Accretion(1)
57,687
 61,502
 76,594
Payments received and other changes, net(212,484) (248,114) (322,447)
Balance at December 31$558,716
 $606,576
 $762,998
Unpaid principal balance at December 31$768,391
 $960,457
 $1,175,441
(1)Accretion is recorded in interest income from loans and leases
     


The carrying value of PCI loans on the cost recovery method was $2.9 million and $3.3 million at December 31, 2019, and 2018, respectively. The recorded investment of PCI loans on nonaccrual status was $6.7 million and $1.3 million at December 31, 2019, and 2018, respectively. PCI loans 90 days past due and still accruing were $24.3 million and $37.0 million at December 31, 2019, and 2018, respectively.
For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flows not related to credit improvements or deterioration do not affect the nonaccretable difference.

82

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes changes to the amount of accretable yield for 2019, 2018 and 2017.
(Dollars in thousands)2019 2018 2017
Balance at January 1$312,894
 $316,679
 $335,074
Additions from acquisitions17,403
 6,393
 44,120
Accretion(57,687) (61,502) (76,594)
Reclassifications from nonaccretable difference6,489
 5,980
 18,901
Changes in expected cash flows that do not affect nonaccretable difference(27,964) 45,344
 (4,822)
Balance at December 31$251,135
 $312,894
 $316,679


NOTE E
ALLOWANCE FOR LOAN AND LEASE LOSSES

Activity in the allowance for non-PCI loan and lease losses by class of loans is summarized as follows:
 Years ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial and leases
 Other 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-
commercial
 Consumer Total
Non-PCI Loans                   
Allowance for loan and lease losses:                   
Balance at January 1, 2017$28,877
 $48,278
 $3,269
 $56,132
 $3,127
 $14,447
 $21,013
 $1,596
 $28,287
 $205,026
Provision (credits)(4,329) (5,694) 1,280
 11,624
 2,189
 2,096
 2,509
 2,366
 17,098
 29,139
Charge-offs(599) (421) (5) (11,921) (912) (1,376) (2,368) 
 (18,784) (36,386)
Recoveries521
 2,842
 27
 3,989
 285
 539
 1,282
 
 4,603
 14,088
Balance at December 31, 201724,470
 45,005
 4,571
 59,824
 4,689
 15,706
 22,436
 3,962
 31,204
 211,867
Provision (credits)10,533
 (1,490) (2,171) 2,511
 (2,827) 897
 1,112
 (1,520) 22,187
 29,232
Charge-offs(44) (1,140) (69) (10,211) (130) (1,689) (3,235) (219)��(22,817) (39,554)
Recoveries311
 1,076
 150
 3,496
 489
 558
 1,549
 127
 5,267
 13,023
Balance at December 31, 201835,270
 43,451
 2,481
 55,620
 2,221
 15,472
 21,862
 2,350
 35,841
 214,568
Provision (credits)(2,171) 2,384
 (285) 14,212
 (754) 3,481
 (788) 359
 16,611
 33,049
Charge-offs(196) (1,096) 
 (13,352) (100) (1,137) (2,584) 
 (24,562) (43,027)
Recoveries310
 596
 15
 2,894
 869
 416
 1,212
 
 6,703
 13,015
Balance at December 31, 2019$33,213
 $45,335
 $2,211
 $59,374
 $2,236
 $18,232
 $19,702
 $2,709
 $34,593
 $217,605



83

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables present the allowance and recorded investment in loans and leases by class of loans, as well as the associated impairment method at December 31, 2019 and December 31, 2018.
 December 31, 2019
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 Other 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-commercial
 Consumer Total
Non-PCI Loans                   
Allowance for loan and lease losses:                   
ALLL for loans and leases individually evaluated for impairment$463
 $3,650
 $39
 $1,379
 $103
 $3,278
 $2,722
 $174
 $1,107
 $12,915
ALLL for loans and leases collectively evaluated for impairment32,750
 41,685
 2,172
 57,995
 2,133
 14,954
 16,980
 2,535
 33,486
 204,690
Total allowance for loan and lease losses$33,213
 $45,335
 $2,211
 $59,374
 $2,236
 $18,232
 $19,702
 $2,709
 $34,593
 $217,605
Loans and leases:                   
Loans and leases individually evaluated for impairment$4,655
 $70,149
 $1,268
 $12,182
 $639
 $60,442
 $28,869
 $3,882
 $3,513
 $185,599
Loans and leases collectively evaluated for impairment1,008,799
 12,212,486
 540,760
 4,391,610
 309,454
 5,233,475
 2,310,203
 353,503
 1,776,891
 28,137,181
Total loan and leases$1,013,454
 $12,282,635
 $542,028
 $4,403,792
 $310,093
 $5,293,917
 $2,339,072
 $357,385
 $1,780,404
 $28,322,780

 December 31, 2018
(Dollars in thousands)
Construction
and land
development
- commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and industrial and leases
 Other 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
- non-commercial
 Consumer Total
Non-PCI Loans                   
Allowance for loan and lease losses:                   
ALLL for loans and leases individually evaluated for impairment$490
 $2,671
 $42
 $1,137
 $105
 $1,901
 $2,515
 $81
 $885
 $9,827
ALLL for loans and leases collectively evaluated for impairment34,780
 40,780
 2,439
 54,483
 2,116
 13,571
 19,347
 2,269
 34,956
 204,741
Total allowance for loan and lease losses$35,270
 $43,451
 $2,481
 $55,620
 $2,221
 $15,472
 $21,862
 $2,350
 $35,841
 $214,568
Loans and leases:                   
Loans and leases individually evaluated for impairment$2,175
 $55,447
 $860
 $9,868
 $291
 $42,168
 $28,852
 $3,749
 $3,020
 $146,430
Loans and leases collectively evaluated for impairment755,679
 10,661,787
 426,125
 3,928,862
 296,133
 4,223,519
 2,514,123
 253,281
 1,710,761
 24,770,270
Total loan and leases$757,854
 $10,717,234
 $426,985
 $3,938,730
 $296,424
 $4,265,687
 $2,542,975
 $257,030
 $1,713,781
 $24,916,700
 
Activity in the PCI allowance and balances for years ended December 31, 2019, 2018 and 2017 is summarized as follows:
(Dollars in thousands)2019 2018 2017
Allowance for loan losses:     
Balance at January 1$9,144
 $10,026
 $13,769
Provision credits(1,608) (765) (3,447)
Charge-offs
 (117) (296)
Recoveries
 
 
Balance at December 31$7,536
 $9,144
 $10,026


The following table presents the PCI allowance and recorded investment in loans at December 31, 2019 and 2018.
(Dollars in thousands)December 31, 2019 December 31, 2018
Allowance for loan losses:   
ALLL for loans acquired with deteriorated credit quality$7,536
 $9,144
Loans acquired with deteriorated credit quality558,716
 606,576



84

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2019 and 2018, $139.4 million and $186.6 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding valuation reserve was $7.5 million and $9.1 million, respectively.

The following tables present the recorded investment and related allowance in non-PCI impaired loans and leases by class of loans, as well as the unpaid principle balance.
 December 31, 2019
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 Total Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases         
Commercial:         
Construction and land development$1,851
 $2,804
 $4,655
 $5,109
 $463
Commercial mortgage42,394
 27,755
 70,149
 74,804
 3,650
Other commercial real estate318
 950
 1,268
 1,360
 39
Commercial and industrial and leases7,547
 4,635
 12,182
 13,993
 1,379
Other406
 233
 639
 661
 103
Total commercial loans52,516
 36,377
 88,893
 95,927
 5,634
Noncommercial:         
Residential mortgage48,796
 11,646
 60,442
 64,741
 3,278
Revolving mortgage26,104
 2,765
 28,869
 31,960
 2,722
Construction and land development2,470
 1,412
 3,882
 4,150
 174
Consumer3,472
 41
 3,513
 3,821
 1,107
Total noncommercial loans$80,842
 $15,864
 $96,706
 $104,672
 $7,281
Total non-PCI impaired loans and leases$133,358
 $52,241
 $185,599
 $200,599
 $12,915
          
 December 31, 2018
(Dollars in thousands)
With a
recorded
allowance
 
With no
recorded
allowance
 Total Unpaid
principal
balance
 
Related
allowance
recorded
Non-PCI impaired loans and leases         
Commercial:         
Construction and land development$1,897
 $278
 $2,175
 $2,606
 $490
Commercial mortgage34,177
 21,270
 55,447
 61,317
 2,671
Other commercial real estate243
 617
 860
 946
 42
Commercial and industrial and leases7,153
 2,715
 9,868
 14,695
 1,137
Other216
 75
 291
 301
 105
Total commercial loans43,686
 24,955
 68,641
 79,865
 4,445
Noncommercial:         
Residential mortgage40,359
 1,809
 42,168
 45,226
 1,901
Revolving mortgage25,751
 3,101
 28,852
 31,371
 2,515
Construction and land development2,337
 1,412
 3,749
 4,035
 81
Consumer2,940
 80
 3,020
 3,405
 885
Total noncommercial loans71,387
 6,402
 77,789
 84,037
 5,382
Total non-PCI impaired loans and leases$115,073
 $31,357
 $146,430
 $163,902
 $9,827

Non-PCI impaired loans less than $500,000 that were collectively evaluated were $41.0 million and $47.1 million at December 31, 2019, and 2018, respectively.

85

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the years ended December 31, 2019, 2018 and 2017:
 2019 2018 2017
(Dollars in thousands)
Average
Balance
 Interest Income Recognized 
Average
Balance
 Interest Income Recognized 
Average
Balance
 Interest Income Recognized
Non-PCI impaired loans and leases:           
Commercial:           
Construction and land development$3,915
 $53
 $1,734
 $84
 $858
 $37
Commercial mortgage64,363
 2,188
 65,943
 2,569
 73,815
 2,596
Other commercial real estate919
 27
 1,225
 43
 1,642
 34
Commercial and industrial and leases11,884
 482
 9,560
 364
 11,600
 427
Other396
 11
 135
 3
 426
 22
Total commercial81,477
 2,761
 78,597
 3,063
 88,341
 3,116
Noncommercial:           
Residential mortgage52,045
 1,386
 41,368
 1,237
 33,818
 990
Revolving mortgage29,516
 1,009
 26,759
 900
 14,022
 436
Construction and land development3,589
 116
 3,677
 172
 3,383
 145
Consumer3,311
 138
 2,722
 116
 2,169
 103
Total noncommercial88,461
 2,649
 74,526
 2,425
 53,392
 1,674
Total non-PCI impaired loans and leases$169,938
 $5,410
 $153,123
 $5,488
 $141,733
 $4,790
            


Troubled Debt Restructurings

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

The following table provides a summary of total TDRs by accrual status. Total TDRs at December 31, 2019, were $171.2 million, of which $154.0 million were non-PCI and $17.2 million were PCI. Total TDRs at December 31, 2018, were $156.1 million, of which $137.9 million were non-PCI and $18.2 million were PCI. Total TDRs at December 31, 2017, were $164.6 million, of which $146.1 million were non-PCI and $18.5 million were PCI.
 December 31, 2019 December 31, 2018 December 31, 2017
(Dollars in thousands)Accruing Nonaccruing  Total  Accruing Nonaccruing  Total Accruing Nonaccruing Total
Commercial loans:                 
Construction and land development$487
 $2,279
 $2,766
 $1,946
 $352
 $2,298
 $4,089
 $483
 $4,572
Commercial mortgage50,819
 11,116
 61,935
 53,270
 7,795
 61,065
 62,358
 15,863
 78,221
Other commercial real estate571
 
 571
 851
 9
 860
 1,012
 788
 1,800
Commercial and industrial and leases9,430
 2,409
 11,839
 7,986
 2,060
 10,046
 8,320
 1,958
 10,278
Other320
 105
 425
 118
 173
 291
 521
 
 521
Total commercial loans61,627
 15,909
 77,536
 64,171
 10,389
 74,560
 76,300
 19,092
 95,392
Noncommercial:                 
Residential mortgage41,813
 16,048
 57,861
 37,903
 9,621
 47,524
 34,067
 9,475
 43,542
Revolving mortgage21,032
 7,367
 28,399
 20,492
 8,196
 28,688
 17,673
 5,180
 22,853
Construction and land development1,452
 2,430
 3,882
 2,227
 110
 2,337
 
 
 
Consumer2,826
 688
 3,514
 2,300
 721
 3,021
 2,351
 423
 2,774
Total noncommercial loans67,123
 26,533
 93,656
 62,922
 18,648
 81,570
 54,091
 15,078
 69,169
Total loans$128,750
 $42,442
 $171,192
 $127,093
 $29,037
 $156,130
 $130,391
 $34,170
 $164,561


86

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following tables provide the types of TDRs made during the years ended December 31, 2019, 2018 and 2017, as well as a summary of loans that were modified as a TDR during the years ended December 31, 2019, 2018 and 2017 that subsequently defaulted during the years ended December 31, 2019, 2018 and 2017. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due, foreclosure or charge-off, whichever occurs first.
 2019 2018 2017
 All restructurings Restructurings with payment default All restructurings Restructurings with payment default All restructurings Restructurings with payment default
 Number of LoansRecorded investment at period end Number of LoansRecorded investment at period end Number of LoansRecorded investment at period end Number of LoansRecorded investment at period end Number of LoansRecorded investment at period end Number of LoansRecorded investment at period end
(Dollars in thousands)                 
Loans and leases                 
Interest only period provided                 
Commercial loans11$1,595
 1$238
 3$1,003
 $
 5$1,124
 1$634
Noncommercial loans74,018
 22,717
 
 
 182
 
Total interest only185,613
 32,955
 31,003
 
 61,206