UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

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

Commission File Number: 001-16715

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)



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

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

(919) 716-7000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer	x	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 x

~~Class A Common Stock—$1 Par Value—11,005,220 shares~~Securities registered pursuant to Section 12(b) of the Exchange Act:

~~Class B Common Stock—$1 Par Value—1,005,185 shares~~

~~(Number of shares outstanding, by class, as of August 1, 2018)~~



Title of each class	Trade symbol	Name of each exchange on which registered	Shares Outstanding
Class A Common Stock, $1 Par Value	FCNCA	The NASDAQ Stock Market LLC	10,373,120
Class B Common Stock, $1 Par Value	FCNCB	OTC US	1,005,185
(Number of shares outstanding as of 5/6/2019)

INDEX



		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Unaudited)	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6

	Consolidated Statements of Cash Flows (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4035

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6352

Item 4.	Controls and Procedures	6352

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	6452

Item 1A.	Risk Factors	6452

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6452

Item 6.	Exhibits	6453

PART I


Item 1.	Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets


(Dollars in thousands, unaudited)	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	260,525		$	336,150		$	268,599		$	327,440
Overnight investments	1,223,311			1,387,927			1,386,525			797,406
Investment in marketable equity securities	107,264			—
Investment securities available for sale	4,783,507			7,180,180
Investment securities held to maturity	2,299,774			76
Investment in marketable equity securities (cost of $79,809 at March 31, 2019 and $73,809 at December 31, 2018)							109,884			92,599
Investment securities available for sale (cost of $4,611,736 at March 31, 2019 and $4,607,117 at December 31, 2018)							4,589,800			4,557,110
Investment securities held to maturity (fair value of $2,254,924 at March 31, 2019 and $2,201,502 at December 31, 2018)							2,214,829			2,184,653
Loans held for sale	58,961			51,179			53,232			45,505
Loans and leases	24,538,437			23,596,825			25,463,785			25,523,276
Allowance for loan and lease losses	(224,865		)	(221,893		)	(228,775		)	(223,712		)
Net loans and leases	24,313,572			23,374,932			25,235,010			25,299,564
Premises and equipment	1,167,532			1,138,431			1,203,674			1,204,179
Other real estate owned	46,633			51,097			43,306			48,030
Income earned not collected	99,567			95,249			113,812			109,903
Goodwill	208,217			150,601			236,347			236,347
Other intangible assets	77,370			73,096			67,053			72,298
Other assets	442,333			688,594			439,599			433,595
Total assets	$	35,088,566		$	34,527,512		$	35,961,670		$	35,408,629
Liabilities
Deposits:
Noninterest-bearing	$	12,181,717		$	11,237,375		$	12,376,913		$	11,882,670
Interest-bearing	18,227,167			18,028,900			18,821,180			18,789,790
Total deposits	30,408,884			29,266,275			31,198,093			30,672,460
Short-term borrowings	613,993			693,807
Long-term obligations	241,360			870,240
Securities sold under customer repurchase agreements							508,508			543,936
Federal home loan bank borrowings							189,594			193,556
Subordinated debentures							136,544			140,741
Other borrowings							14,970			13,921
FDIC shared-loss payable	103,487			101,342			107,256			105,618
Other liabilities	273,956			261,784			283,396			249,443
Total liabilities	31,641,680			31,193,448			32,438,361			31,919,675
Shareholders’ equity
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at June 30, 2018 and December 31, 2017)	11,005			11,005
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at June 30, 2018 and December 31, 2017)	1,005			1,005
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2018 and December 31, 2017)	—			—
Class A - $1 par value (16,000,000 shares authorized; 10,380,220 and 10,623,220 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)							10,380			10,623
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 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 March 31, 2019 and December 31, 2018)							—			—
Surplus	658,918			658,918			393,449			493,962
Retained earnings	3,020,596			2,785,430			3,325,335			3,218,551
Accumulated other comprehensive loss	(244,638		)	(122,294		)	(206,860		)	(235,187		)
Total shareholders’ equity	3,446,886			3,334,064			3,523,309			3,488,954
Total liabilities and shareholders’ equity	$	35,088,566		$	34,527,512		$	35,961,670		$	35,408,629

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income


	Three months ended June 30				Six months ended June 30					Three months ended March 31
(Dollars in thousands, except per share data, unaudited)	2018		2017		2018		2017			2019		2018
Interest income
Loans and leases	$	261,086	$	235,732	$	513,068	$	462,362		$	290,922	$	251,982
Investment securities and dividend income	37,179		30,406		72,199		60,157
Investment securities interest and dividend income										39,605		35,020
Overnight investments	5,612		6,404		11,211		10,880			6,397		5,599
Total interest income	303,877		272,542		596,478		533,399			336,924		292,601
Interest expense
Deposits	4,521		4,132		8,277		8,568			12,926		3,756
Short-term borrowings	821		1,176		2,255		1,756
Long-term obligations	2,316		5,625		5,290		11,123
Securities sold under customer repurchase agreements										459		404
Federal home loan bank borrowings										1,285		2,384
Subordinated debentures										1,672		1,441
Other borrowings										110		179
Total interest expense	7,658		10,933		15,822		21,447			16,452		8,164
Net interest income	296,219		261,609		580,656		511,952			320,472		284,437
Provision for loan and lease losses	8,438		12,324		16,043		20,555			11,750		7,605
Net interest income after provision for loan and lease losses	287,781		249,285		564,613		491,397			308,722		276,832
Noninterest income
Gain on acquisitions	—		122,728		—		134,745
Cardholder services, net	14,925		14,518		29,707		27,361			16,633		14,782
Merchant services, net	6,478		5,800		12,655		11,556			5,835		6,177
Service charges on deposit accounts	25,952		25,862		52,495		48,004			25,065		26,543
Wealth management services	25,515		21,920		49,084		42,882			25,001		23,569
Securities gains, net	—		3,351		—		3,327
Marketable equity securities gains, net	4,440		—		5,411		—			11,328		971
Other service charges and fees	7,756		6,628		15,236		14,229			7,422		7,480
Mortgage income	4,703		4,966		8,940		12,542			3,658		4,237
Insurance commissions	2,940		2,563		6,716		6,121			3,291		3,776
ATM income	2,217		2,513		4,388		4,286			1,511		2,171
Net impact from FDIC shared-loss agreement termination	—		—		—		(45		)
Gain on extinguishment of debt	—		—		25,814		—			—		25,814
Other	6,001		6,792		13,165		12,279			3,919		7,164
Total noninterest income	100,927		217,641		223,611		317,287			103,663		122,684
Noninterest expense
Salaries and wages	129,841		121,826		259,044		238,188			132,421		129,203
Employee benefits	29,715		25,383		61,806		52,560			32,535		32,091
Occupancy expense	26,100		26,059		54,054		50,821			27,761		27,954
Equipment expense	25,167		24,654		50,141		49,242			26,740		24,974
FDIC insurance expense	5,492		5,705		11,225		11,298			2,660		5,733
Collection and foreclosure-related expenses	3,974		2,376		8,120		6,139			3,022		4,146
Merger-related expenses	2,412		6,853		3,010		7,686			1,719		598
Processing fees paid to third parties										7,089		8,196
Other	43,292		42,191		86,656		75,812			33,710		35,168
Total noninterest expense	265,993		255,047		534,056		491,746			267,657		268,063
Income before income taxes	122,715		211,879		254,168		316,938			144,728		131,453
Income taxes	29,424		77,219		60,646		114,657			33,369		31,222
Net income	$	93,291	$	134,660	$	193,522	$	202,281		$	111,359	$	100,231
Average shares outstanding	12,010,405		12,010,405		12,010,405		12,010,405
Weighted average shares outstanding										11,519,008		12,010,405
Net income per share	$	7.77	$	11.21	$	16.11	$	16.84		$	9.67	$	8.35

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income


	Three months ended June 30						Six months ended June 30						Three months ended March 31
(Dollars in thousands, unaudited)	2018			2017			2018			2017			2019			2018
Net income	$	93,291		$	134,660		$	193,522		$	202,281		$	111,359		$	100,231
Other comprehensive (loss) income:
Unrealized gains on securities available for sale:
Change in unrealized securities available for sale gains arising during period	82,789			13,771			4,155			49,867
Other comprehensive income (loss)
Unrealized gains (losses) on securities available for sale:
Change in unrealized gains (losses) on securities available for sale arising during period													28,071			(78,635		)
Tax effect	(19,042		)	(5,125		)	(954		)	(18,544		)	(6,456		)	18,088
Reclassification adjustment for gains included in income before income taxes	—			(3,351		)	—			(3,327		)
Tax effect	—			1,240			—			1,231
Total change in unrealized gains on securities available for sale, net of tax	63,747			6,535			3,201			29,227
Total change in unrealized gains (losses) on securities available for sale, net of tax													21,615			(60,547		)
Unrealized losses on securities available for sale transferred to held to maturity:
Unrealized losses on securities available for sale transferred to held to maturity	(109,507		)	—			(109,507		)	—
Tax effect	25,186			—			25,186			—
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity	4,473			—			4,473			—			5,962			—
Tax effect	(1,028		)	—			(1,028		)	—			(1,371		)	—
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax	(80,876		)	—			(80,876		)	—			4,591			—
Change in pension obligation:
Amortization of actuarial losses and prior service cost	3,654			2,460			6,991			4,960			2,755			3,337
Tax effect	(840		)	(897		)	(1,608		)	(1,838		)	(634		)	(768		)
Total change in pension obligation, net of tax	2,814			1,563			5,383			3,122			2,121			2,569
Other comprehensive (loss) income	(14,315		)	8,098			(72,292		)	32,349
Other comprehensive income (loss)													28,327			(57,978		)
Total comprehensive income	$	78,976		$	142,758		$	121,230		$	234,630		$	139,686		$	42,253

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity


(Dollars in thousands, unaudited)	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity			Class A Common Stock			Class B Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2016	$	11,005	$	1,005	$	658,918	$	2,476,691		$	(135,192	)	$	3,012,427
Net income	—		—		—		202,281			—			202,281
Other comprehensive income, net of tax	—		—		—		—			32,349			32,349
Cash dividends ($0.60 per share)	—		—		—		(7,206		)	—			(7,206		)
Balance at June 30, 2017	$	11,005	$	1,005	$	658,918	$	2,671,766		$	(102,843	)	$	3,239,851

Balance at December 31, 2017	$	11,005	$	1,005	$	658,918	$	2,785,430		$	(122,294	)	$	3,334,064		$	11,005		$	1,005	$	658,918		$	2,785,430		$	(122,294	)	$	3,334,064
Cumulative effect of adoption of ASU 2016-01	—		—		—		18,716			(18,716		)	—			—			—		—			18,715			(18,715		)	—
Cumulative effect of adoption of ASU 2018-02	—		—		—		31,336			(31,336		)	—			—			—		—			31,336			(31,336		)	—
Net income	—		—		—		193,522			—			193,522			—			—		—			100,231			—			100,231
Other comprehensive loss, net of tax	—		—		—		—			(72,292		)	(72,292		)	—			—		—			—			(57,978		)	(57,978		)
Cash dividends ($0.70 per share)	—		—		—		(8,408		)	—			(8,408		)
Balance at June 30, 2018	$	11,005	$	1,005	$	658,918	$	3,020,596		$	(244,638	)	$	3,446,886
Cash dividends declared ($0.35 per share)
Class A common stock																—			—		—			(3,851		)	—			(3,851		)
Class B common stock																—			—		—			(352		)	—			(352		)
Balance at March 31, 2018																$	11,005		$	1,005	$	658,918		$	2,931,509		$	(230,323	)	$	3,372,114

Balance at December 31, 2018																$	10,623		$	1,005	$	493,962		$	3,218,551		$	(235,187	)	$	3,488,954
Net income																—			—		—			111,359			—			111,359
Other comprehensive income, net of tax																—			—		—			—			28,327			28,327
Repurchase of 243,000 shares of Class A common stock																(243		)	—		(100,513		)	—			—			(100,756		)
Cash dividends declared ($0.40 per share)
Class A common stock																—			—		—			(4,173		)	—			(4,173		)
Class B common stock																—			—		—			(402		)	—			(402		)
Balance at March 31, 2019																$	10,380		$	1,005	$	393,449		$	3,325,335		$	(206,860	)	$	3,523,309

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	Six months ended June 30						Three months ended March 31
(Dollars in thousands, unaudited)	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	193,522		$	202,281		$	111,359		$	100,231
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses	16,043			20,555			11,750			7,605
Deferred tax (benefit) expense	(2,835		)	45,628
Deferred tax benefit							(7,316		)	(5,573		)
Net change in current taxes	(16,609		)	17,404			37,898			33,128
Depreciation	47,343			45,420			28,195			23,179
Net (decrease) increase in accrued interest payable	(2,043		)	1,344
Net increase (decrease) in accrued interest payable							3,457			(2,454		)
Net increase in income earned not collected	(1,601		)	(290		)	(3,909		)	(1,358		)
Gain on acquisitions	—			(134,745		)
Securities gains, net	—			(3,327		)
Marketable equity securities gains, net	(5,411		)	—			(11,328		)	(971		)
Gain on extinguishment of debt	(25,814		)	—			—			(25,814		)
Loss on termination of FDIC shared-loss agreements	—			45
Origination of loans held for sale	(304,580		)	(299,136		)	(128,949		)	(131,353		)
Proceeds from sale of loans held for sale	302,766			309,791			123,047			138,538
Gain on sale of loans held for sale	(5,610		)	(6,279		)	(2,181		)	(2,666		)
Gain on sale of portfolio loans	—			(164		)
Net write-downs/losses on other real estate	2,698			2,160			427			1,210
Gain on sales of premises and equipment	—			(159		)
Losses on premises and equipment							358			—
Net accretion of premiums and discounts	(17,240		)	(22,918		)	(8,737		)	(10,323		)
Amortization of intangible assets	11,562			11,045			5,943			6,049
Net change in FDIC receivable for shared-loss agreements	—			4,821
Net change in FDIC payable for shared-loss agreements	2,145			2,118			1,638			1,124
Net change in mortgage servicing rights							(698		)	(1,200		)
Net change in other assets	310,635			(34,340		)	31,072			341,678
Net change in other liabilities	14,998			29,647			(51,985		)	(12,642		)
Net cash provided by operating activities	519,969			190,901			140,041			458,388
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding	(360,764		)	(462,385		)
Net decrease (increase) in loans outstanding							68,052			(7,283		)
Purchases of investment securities available for sale	(920,356		)	(1,186,883		)	(593,952		)	(374,850		)
Purchases of investment securities held to maturity							(116,028		)	—
Purchases of marketable equity securities	(2,818		)	—			(6,076		)	(2,272		)
Proceeds from maturities/calls of investment securities held to maturity	78,384			18			88,400			2
Proceeds from maturities/calls of investment securities available for sale	797,739			1,140,459			587,023			503,717
Proceeds from sales of investment securities available for sale	119,273			517,588
Proceeds from sales of marketable equity securities	8,493			—			119			664
Net decrease (increase) in overnight investments	175,009			(908,583		)
Proceeds from sales of portfolio loans	—			32,294
Net increase in overnight investments							(589,119		)	(558,955		)
Cash paid to the FDIC for shared-loss agreements	—			(5,197		)	(8		)	—
Net cash paid to the FDIC for termination of shared-loss agreements	—			(285		)
Proceeds from sales of other real estate	15,769			20,236			7,430			8,380
Proceeds from sales of premises and equipment	198			2,305			54			13
Purchases of premises and equipment	(59,603		)	(35,912		)	(23,875		)	(24,081		)
Business acquisitions, net of cash acquired	(106,298		)	300,703
Net cash used in investing activities	(254,974		)	(585,642		)	(577,980		)	(454,665		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in time deposits	(181,889		)	(238,751		)
Net increase (decrease) in time deposits							138,640			(92,064		)
Net increase in demand and other interest-bearing deposits	704,909			429,684			387,319			795,034
Net (decrease) increase in short-term borrowings	(201,303		)	61,030
Net decrease in short-term borrowings							(35,428		)	(139,049		)
Repayment of long-term obligations	(653,929		)	(7,985		)	(8,688		)	(651,451		)
Origination of long-term obligations	—			175,000
Repurchase of common stock							(98,077		)	—
Cash dividends paid	(8,408		)	(7,206		)	(4,668		)	(4,204		)
Net cash (used in) provided by financing activities	(340,620		)	411,772
Net cash provided by (used in) financing activities							379,098			(91,734		)
Change in cash and due from banks	(75,625		)	17,031			(58,841		)	(88,011		)
Cash and due from banks at beginning of period	336,150			539,741			327,440			336,150
Cash and due from banks at end of period	$	260,525		$	556,772		$	268,599		$	248,139
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	$	11,868		$	21,891		$	2,613		$	6,582
Dividends declared but not paid	4,204			3,603			4,575			4,204
Reclassification of portfolio loans to loans held for sale	—			84,509
Transfer of investment securities available for sale to held to maturity	2,486,761			—
Reclassification of portfolio loans from loans held for sale							(605		)	—
Transfers of premises and equipment to other real estate							520			—
Unsettled common stock repurchases							(2,679		)	—
Initial recognition of operating lease assets							70,652			—
Initial recognition of operating lease liabilities							71,793			—

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION

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

General

These consolidated financial statements and notes thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements included in BancShares' Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

2018.

Reclassifications

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

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position, the consolidated results of its operations or related disclosures. Materialestimates. The estimates that BancShares considers significant are ~~particularly susceptible to significant change include:~~

~~Allowance~~the allowance for loan and lease ~~losses;~~

~~Fair~~losses, fair value ~~of financial instruments, including acquired assets and assumed liabilities;~~

~~Pension plan assumptions;~~

~~Cash flow estimates on purchased credit-impaired (PCI) loans;~~

~~Goodwill and other intangible assets;~~

measurements, Federal Deposit Insurance Corporation (FDIC) shared-loss ~~payable;~~payable, pension plan assumptions, goodwill and other intangible assets and income taxes.

~~Income tax assets, liabilities~~Share Repurchases

In October 2018, BancShares' Board of Directors (Board) authorized the purchase of up to 800,000 of BancShares' Class A common stock for the period November 1, 2018 through October 31, 2019. The authorization does not obligate Bancshares to purchase any particular amount of shares, and ~~expense~~purchases may be suspended or discontinued at any time. During the first quarter of 2019, BancShares repurchased 243,000 shares of Class A common stock for approximately $100.7 million at an average cost per share of $414.58. There were no share repurchases made during the first quarter of 2018. As of March 31, 2019, a total of 425,000 shares have been repurchased under the current Board authority.

Subsequent to quarter-end and through May 6, 2019, BancShares repurchased an additional 63,400 shares of Class A common stock for approximately $27.4 million at an average cost per share of $432.78.

Recently Adopted Accounting Pronouncements

~~FASB ASU 2018-02,~~Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, ~~Income Statement - Reporting Comprehensive Income~~Leases (Topic ~~220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~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 ~~reclassification from accumulated~~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 ~~comprehensive income (AOCI)~~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, 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 includes a $1.1 million fair value adjustment for leases assumed in the acquisition of HomeBancorp, Inc. (HomeBancorp). In addition, at the adoption date we had finance lease ROU assets and finance lease liabilities, previously classified as capital leases, of $9.1 million and $8.3 million, respectively. The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings ~~for stranded tax effects resulting from the newly enacted federal corporate income tax rate~~at commencement. The Company has no related party lease agreements. This ASU did not have a material impact on our Consolidated Statements of Income. See Note N in the ~~Tax Cuts~~Consolidated Financial Statements for additional disclosures.

FASB ASU 2019-01, Leases (Topic 842): Codification Improvements

This ASU reinstated the exception in Topic 842 for lessors that are not manufacturers or dealers for determining the fair value of leased property as the underlying asset's cost, reflecting any volume or trade discounts that may apply, allows lessors that are depository and ~~Jobs Act~~lending institutions within the scope of ~~2017 (Tax Act), which was enacted~~ASU Topic 942 to present "principal payments received under leases" within investing activities on ~~December 22, 2017. The Tax Act included a reduction~~the Statement of Cash Flows, and provides an exemption to the ~~corporate income tax rate from 35 percent to 21 percent effective~~ASC 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. We early adopted this standard with ASU 2016-02 as of January 1, ~~2018. The amount~~2019 and the impact was not material to our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

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 ~~reclassification~~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 ~~the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.~~presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, ~~2018, including~~2019 and interim periods within those fiscal years. Early adoption is permitted. ~~We adopted~~BancShares is currently evaluating the ~~guidance effective in~~impact this new standard will have on its Consolidated Financial Statements and whether we will early adopt prior to the first quarter of 2018. The change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $31.3 million increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.

2020.

FASB ASU ~~2017-07,~~2018-14 - Compensation - Retirement Benefits ~~(Topic 715)~~- Defined Benefit Plans - General (Subtopic 715-20): ~~Improving~~Disclosure Framework - Changes to the ~~Presentation of Net Periodic Pension Cost and Net Periodic Postretirement~~Disclosure Requirements for Defined Benefit ~~Cost~~Plans

This ASU ~~requires~~modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to ~~present~~disclose the ~~service cost component~~amounts in accumulated other comprehensive income expected to be recognized as components of ~~the~~ 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 ~~same income statement line item as other employee compensation costs arising from services rendered during~~benefit obligation for the period. Employers will present the other components separately from the line item that includes the service cost. In addition, only the service cost component of net benefit cost is eligible for capitalization.

The amendments in this ASU are effective for public ~~business~~ entities for fiscal years ~~beginning~~ending after December 15, ~~2017, including interim periods within those fiscal years. We adopted~~2020. Early adoption is permitted for all entities. BancShares will adopt all applicable amendments and update the ~~guidance effective in~~disclosures as appropriate during the first quarter of ~~2018. The adoption did not have a material impact on our consolidated financial position or consolidated results of operations.~~2021.

FASB ASU ~~2016-01,~~ 2018-13~~Financial Instruments-Overall (Subtopic 825-10)~~ - Fair Value Measurement (Topic 820): ~~Recognition and~~Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ~~of Financial Assets and Financial Liabilities~~

This ASU ~~addresses certain aspects of recognition, measurement, presentation and~~modifies the disclosure ~~of certain financial instruments. The amendments in this ASU (1) require most equity investments to be measured at~~requirements on fair value ~~with changes in~~measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value ~~recognized in net income;~~hierarchy (2) ~~simplify~~ the ~~impairment assessment~~policy for timing of ~~equity investments without a readily determinable~~transfers between levels and (3) the valuation processes for Level 3 fair ~~value; (3) eliminate~~value measurements. This ASU also added specific disclosure requirements for fair value measurements for public business entities including the requirement to disclose the ~~method(s)~~changes in unrealized gains and ~~significant assumptions used to estimate~~losses for the fair value for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use exit price notion, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (5) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (6) require separate presentationperiod included in other comprehensive income ~~of the portion of the total change in the~~for recurring Level 3 fair value measurements and the range and weighted average of ~~a liability resulting from a change in the instrument-specific credit risk when the organization has elected~~significant unobservable inputs used to ~~measure the liability at~~develop Level 3 fair value in accordance with the fair value option for financial instruments; and (7) state that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets.measurements.

The amendments in this ASU are effective for ~~public business~~all entities for fiscal years beginning after December 15, ~~2017, including~~2019, and all interim periods within those fiscal years. ~~We adopted~~Early adoption is permitted upon issuance of the ~~guidance~~ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective indate. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2018. The change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in an $18.7 million increase to retained earnings and a decrease to AOCI on January 1, 2018. With the adoption of this ASU equity securities can no longer be classified as available for sale, as such marketable equity securities are disclosed as a separate line item on the balance sheet with changes in the fair value of equity securities reflected in net income.

For equity investments without a readily determinable fair value, BancShares has elected to measure the equity investments using the measurement alternative which requires BancShares to make a qualitative assessment of whether the investment is impaired at each reporting period. Under the measurement alternative these investments will be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. If a qualitative assessment indicates that the investment is impaired, BancShares will estimate the investment's fair value in accordance with ASC 820 and, if the fair value is less than the investment's carrying value, recognize an impairment loss in net income equal to the difference between carrying value and fair value. Equity investments without a readily determinable fair value are recorded within other assets in the consolidated balance sheets.

~~FASB ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~

In May 2014, the FASB issued a standard on the recognition of revenue from contracts with customers with the core principle being for a company to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard, which provides a five step model to determine when and how revenue is recognized, also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements.

~~Per ASU 2015-14,~~ ~~Deferral of the Effective Date~~, this guidance was deferred and is effective for fiscal periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted the guidance effective in the first quarter of 2018. Our revenue is comprised primarily of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are in scope of the guidance are primarily related to cardholder and merchant services income, service charges on deposit accounts, wealth management services income, other service charges and fees, insurance commissions, ATM income, sales of other real estate and other. Based on our overall assessment of revenue streams and review of related contracts affected by the ASU, the adoption of this guidance did not change the method in which we currently recognize revenue.2020.

We also completed an evaluation of the costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on this evaluation, we determined that the classification of cardholder and merchant processing costs as well as expenses for cardholder reward programs should be netted against cardholder and merchant services income. We used the full retrospective method of adoption and restated the prior financial statements to net the cardholder and merchant processing costs against the related cardholder and merchant services income. These classification changes resulted in changes to both noninterest income and noninterest expense, however, there was no change to previously reported net income. Merchant processing expenses of $20.8 million and $40.0 million have been reclassified and reported as a component of merchant services income for the three and six months ended June 30, 2017, respectively. Cardholder processing expenses of $6.8 million and cardholder reward programs expense of $3.0 million have been reclassified and reported as a component of cardholder services income for the three months ended June 30, 2017. For the six months ended June 30, 2017, cardholder processing expenses of $12.7 million and cardholder reward programs expense of $5.5 million were reclassified and reported as a component of cardholder services income.

~~Revenue Recognition~~

The standard requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

~~Descriptions of our noninterest revenue-generating activities that are within the scope of the new revenue ASU is broadly segregated as follows:~~

~~Cardholder and Merchant Services~~ - These represent interchange fees from customer debit and credit card transactions that are earned at the time 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 met as it is satisfied upon the completion of the card transaction. Additionally, ASU 2014-09 requires costs associated with cardholder and merchant services transactions to be netted against the fees from such transactions when an entity is acting as an agent in providing services to a customer.

~~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 annuity fees, sales commissions, management fees, insurance sales, 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 is recognized over the period in which services are performed, are based on a percentage of the value of the assets under management/administration, and are fixed or variable based on account type, or are transaction-based.

~~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. These fees are charged, and revenue is recognized, at the point in time the service being requested by the customer is provided thus satisfying our performance obligation.

~~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 if the billing is performed by FCB 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.

~~Sales of Other Real Estate~~ - ORE property consists of foreclosed real estate used as collateral for loans, closed branches, land acquired and no longer intended for future use by FCB, and other real estate purchased for resale as ORE. Revenue is generally recognized on the date of sale where the performance obligation of providing access and transferring control of the specified ORE property to the buyer in good faith and good title is satisfied. This is recorded as a component of other noninterest income.

~~Other~~ - This consists of several forms of recurring revenue such as external rental income, parking income, FHLB dividends, and income earned on changes in the cash surrender value of bank-owned life insurance, all of which are outside the scope of ASU

~~2014-09. The remaining miscellaneous income is the result of immaterial transactions where revenue is recognized when, or as, the performance obligation is satisfied.~~

~~Recently Issued Accounting Pronouncements~~

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 ~~eliminates the delayed~~introduces a new credit loss methodology which requires earlier recognition ~~of the full amount~~ of credit losses, ~~until the~~replacing multiple existing impairment methods in current GAAP, which generally require that a loss ~~was probable of occurring and instead will reflect an entity's current estimate of all expected credit losses.~~be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit ~~loss estimate for assets measured either collectively or individually.~~losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. WeBancShares will adopt the guidance byin the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities. A cross-functional team co-led by Corporate Finance and Risk Management is in place to implement the new standard. ~~The team~~We have completed preliminary current expected credit losses (CECL) accounting interpretations, and continue to refine and test our models, estimation techniques, data, operational processes and controls to be used in preparing CECL loss estimates. During 2019, we expect to address any gaps in our interpretations, methodology, data and operational processes based upon our reviews and tests. BancShares continues ~~to work on critical activities such as building models, documenting accounting policies, reviewing data quality, and implementing a reporting and disclosure solution. We continue~~ to evaluate the impact ~~the new~~of this standard ~~will have~~ on ~~our~~its consolidated financial statements but the magnitude of this impact has not been determined. The final impact will be dependent on, among other items, on loan portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts in place at that time.

~~FASB 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 existing 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 current 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.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We will adopt during the first quarter of 2019. We expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases. Additionally, adding these assets to our balance sheet will impact our

total risk-weighted assets used to determine our regulatory capital levels. Our impact analysis on this change in accounting principle estimates an increase to the Consolidated Balance Sheets for total lease liability ranging between $65.0 million and $85.0 million, as the initial gross up of both assets and liabilities. Capital is expected to be adversely impacted by an estimated four to six basis points. These are preliminary estimates subject to change and will continue to be refined closer to adoption.

NOTE B - BUSINESS COMBINATIONS

~~Palmetto Heritage Bancshares,~~First South Bancorp, Inc.

On ~~July 25, 2018,~~May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First ~~Citizens Bank~~South Bancorp and ~~Palmetto Heritage Bancshares, Inc. announced the signing of a definitive merger agreement. The agreement provides for the acquisition of Pawley's Island, SC-based Palmetto Heritage Bancshares.~~its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of ~~$135.00~~$1.15 per share ~~will be~~was paid to the shareholders of ~~Palmetto Heritage Bancshares~~First South Bancorp for each share of Palmetto Heritage's common stock with total consideration paid of $30.3 million. The transaction is expected to close during the fourth quarter of 2018, subject to the receipt of regulatory approvals and the approval of Palmetto Heritage Bancshares’ shareholders. As of June 30, 2018, Palmetto Heritage Bancshares reported $167.9 million in consolidated assets, $137.8 million in loans and $126.4 million in deposits.

~~Capital Commerce Bancorp, Inc.~~

On June 27, 2018, FCB and Capital Commerce Bancorp, Inc. (Capital Commerce) entered into a definitive merger agreement. The agreement provides for the acquisition of Milwaukee, Wisconsin-based Capital Commerce by FCB. Under the terms of the agreement, cash consideration of $4.75 per share will be paid to the shareholders of Capital Commerce for each share of Capital Commerce's common stock totaling approximately ~~$28.1~~$37.5 million. The ~~transaction is expected to close no later than~~total consideration assumes the ~~fourth quarter~~conversion of ~~2018, subject to the receipt of regulatory approvals and the approval of Capital Commerce's shareholders, and will be accounted for under the acquisition method of accounting.~~all First South Bancorp's Series A preferred shares into common stock. The merger will allow FCB to expand its presence and enhance banking efforts in ~~the Milwaukee market.~~South Carolina. As of March 31, ~~2018, Capital Commerce~~2019, First South Bancorp reported ~~$216.2~~$236.0 million in consolidated assets, ~~$180.6~~$206.1 million in ~~loans~~deposits and ~~$171.0~~$183.3 million in ~~deposits.~~loans.

Entegra Financial Corp.

On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment equal to $30.18 for each share underlying the option minus the applicable exercise price of the option. The total transaction value, including termination fee, is anticipated to be approximately $219.8 million. The transaction is anticipated to close during the second half of 2019, subject to the receipt of regulatory approvals and the approval of Entegra's shareholders. As of March 31, 2019, Entegra reported $1.67 billion in consolidated assets, $1.25 billion in deposits and $1.08 billion in loans.

~~HomeBancorp,~~Biscayne Bancshares, Inc.

On ~~May 1, 2018,~~April 2, 2019, FCB completed the merger of ~~Tampa,~~Coconut Grove, Florida-based ~~HomeBancorp,~~Biscayne Bancshares, Inc. ~~(HomeBancorp)~~(Biscayne Bancshares) and its bank subsidiary, ~~HomeBanc, into FCB.~~Biscayne Bank. Under the terms of the ~~merger~~ agreement, cash consideration of ~~$15.03~~$25.05 per share was paid to the shareholders of ~~HomeBancorp~~Biscayne Bancshares for each share of ~~HomeBancorp's~~ common stock, ~~and total consideration was $112.7~~totaling approximately $118.9 million. The merger ~~allowed~~will allow FCB to expand its ~~footprint~~presence in Florida ~~by entering into two new markets~~and enhance banking efforts in ~~Tampa and Orlando.~~

~~The HomeBancorp transaction was accounted for under the acquisition method~~South Florida. As of ~~accounting and, accordingly,~~March 31, 2019, Biscayne Bancshares reported $1.02 billion in consolidated assets, acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

~~The fair value of the assets acquired was $842.7 million, including $550.6~~$879.9 million in ~~non-purchased credit impaired (non-PCI)~~ loans ~~$15.6~~and $788.2 million in ~~purchased credit impaired (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. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a qualified stock purchase.

Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were separated into loans with evidence of credit deterioration, which are accounted for under ASC 310-30 (PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (non-PCI loans).

~~The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.~~

(Dollars in thousands) As recorded by FCB
Purchase Price $ 112,657
Assets
Cash and due from banks $ 6,359

Overnight investments 10,393

Investment securities 200,918

Loans held for sale 791

Loans 566,173

Premises and equipment 6,542

Other real estate owned 2,135

Income earned not collected 2,717

Intangible assets 13,206

Other assets 33,459

Total assets acquired 842,693

Liabilities
Deposits 619,589

Short-term borrowings 108,973

Accrued interest payable 1,020

Long-term obligations 52,944

Other liabilities 5,126

Total liabilities assumed $ 787,652

Fair value of net assets assumed 55,041
Goodwill recorded for HomeBancorp $ 57,616

Merger-related expenses of $1.5 million and $1.7 million were recorded in the Consolidated Statements of Income for the three and six months ended June 30, 2018. Loan-related interest income generated from HomeBancorp was approximately $5.0 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.

NOTE C - INVESTMENTS

The amortized cost and fair value of investment securities ~~classified as available for sale and held to maturity~~ at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, were as follows:

June 30, 2018
(Dollars in thousands) Cost
Gross
unrealized gains

Gross unrealized
losses

Fair
value
Investment securities available for sale
U.S. Treasury $ 1,508,435
$ —
$ 4,461
$ 1,503,974
Government agency 131,233
157
355
131,035
Mortgage-backed securities 3,104,316
1,621
71,872
3,034,065
Corporate bonds 108,649
391
250
108,790
Other 5,545
98
—
5,643
Total investment securities available for sale $ 4,858,178
$ 2,267
$ 76,938
$ 4,783,507

December 31, 2017
Cost Gross
unrealized gains Gross unrealized
losses Fair
value
Investment securities available for sale
U.S. Treasury $ 1,658,410
$ —
$ 546
$ 1,657,864
Government agency 8,695
15
40
8,670
Mortgage-backed securities 5,419,379
1,529
80,152
5,340,756
Equity securities 75,471
29,737
—
105,208
Corporate bonds 59,414
557
8
59,963
Other 7,645
256
182
7,719
Total investment securities available for sale $ 7,229,014
$ 32,094
$ 80,928
$ 7,180,180

June 30, 2018
Cost Gross
unrealized gains Gross unrealized
losses Fair
value
Investment securities held to maturity
Mortgage-backed securities $ 2,299,774
$ 3,778
$ 1,459
$ 2,302,093

December 31, 2017
Cost Gross
unrealized gains Gross unrealized
losses Fair
value
Investment securities held to maturity
Mortgage-backed securities $ 76
$ 5
$ —
$ 81

As a result of adopting ASU 2016-01 in the first quarter of 2018, investments in marketable equity securities are no longer classified as investments available for sale. At June 30, 2018 and December 31, 2017, we had $107.3 million and $105.2 million, respectively, in marketable equity securities recorded at fair value. Prior to January 1, 2018 equity securities were classified as available for sale and stated at fair value with unrealized gains and losses reported in accumulated other comprehensive income. A cumulative-effect adjustment of $18.7 million was recorded on January 1, 2018 to reclassify the net unrealized gains from accumulated other comprehensive income to retained earnings with subsequent changes in fair value recognized in the Consolidated Statements of Income.

On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from investments 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 and continues to be reported as a component of AOCI. This unrealized loss will be accreted over the remaining expected life of the securities as an adjustment of yield and is offset by the amortization of the corresponding discount on the transferred securities. FCB has the intent and ability to retain these securities until maturity.



	March 31, 2019
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,196,584	$	1,305	$	847	$	1,197,042
Government agency	351,284		330		1,087		350,527
Mortgage-backed securities	2,917,000		7,373		28,429		2,895,944
Corporate bonds	142,939		183		960		142,162
Other	3,929		196		—		4,125
Total investment securities available for sale	4,611,736		9,387		31,323		4,589,800
Investment in marketable equity securities	79,809		30,252		177		109,884
Investment securities held to maturity
Mortgage-backed securities	2,214,829		40,545		450		2,254,924
Total investment securities	$	6,906,374	$	80,184	$	31,950	$	6,954,608

	December 31, 2018
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,249,243	$	633	$	2,166	$	1,247,710
Government agency	257,252		222		639		256,835
Mortgage-backed securities	2,956,793		5,309		52,763		2,909,339
Corporate bonds	139,906		59		864		139,101
Other	3,923		202		—		4,125
Total investment securities available for sale	4,607,117		6,425		56,432		4,557,110
Investment in marketable equity securities	73,809		19,010		220		92,599
Investment securities held to maturity
Mortgage-backed securities	2,184,653		17,339		490		2,201,502
Total investment securities	$	6,865,579	$	42,774	$	57,142	$	6,851,211

Investments in mortgage-backed securities ~~primarily~~ 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 investments include trust preferred securities of financial institutions. BancShares holds approximately 298,000 shares of Visa Class B common stock. BancShares' Visa Class B shares are not considered to have a readily determinable fair value and are included in the Consolidated Balance Sheet with no fair value.

The following table provides the amortized cost and fair value by contractual maturity for investment securities available for sale and held to maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Repayments of mortgage-backed securities are dependent on the repayments of the underlying loan ~~balances.~~balances, while repayments of certain corporate bonds are subject to call provisions that can be exercised by the issuer at their discretion.


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
(Dollars in thousands)	Cost		Fair value		Cost		Fair value		Cost		Fair value		Cost		Fair value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	1,255,746	$	1,252,487	$	808,768	$	808,301	$	1,046,796	$	1,046,362	$	1,049,253	$	1,047,380
One through five years	252,689		251,487		849,642		849,563		155,297		155,680		205,526		205,805
Five through 10 years	108,649		108,790		59,414		59,963		137,430		137,162		134,370		133,626
Over 10 years	5,545		5,643		7,645		7,719		3,929		4,125		3,923		4,125
Government agency	131,233		131,035		8,695		8,670		351,284		350,527		257,252		256,835
Mortgage-backed securities	3,104,316		3,034,065		5,419,379		5,340,756		2,917,000		2,895,944		2,956,793		2,909,339
Equity securities	—		—		75,471		105,208
Total investment securities available for sale	$	4,858,178	$	4,783,507	$	7,229,014	$	7,180,180	$	4,611,736	$	4,589,800	$	4,607,117	$	4,557,110
Investment securities held to maturity
Mortgage-backed securities held to maturity	$	2,299,774	$	2,302,093	$	76	$	81
Total investment securities held to maturity									$	2,214,829	$	2,254,924	$	2,184,653	$	2,201,502

There were no gross gains or losses on sales of investment securities available for sale for the three ~~or six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018. Gross gains and gross losses on sales of investment securities available for sale were $3.4 million and $2 thousand, respectively for the three months ended June 30, 2017. Gross gains and gross losses on sales of investment securities available for sale were $3.4 million and $29 thousand, respectively for the six months ended June 30, 2017.

The following table provides the realized and unrealized gains ~~or losses~~ on marketable equity securities for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2019.


					Three months ended March 31
(Dollars in thousands)	Three months ended June 30, 2018		Six months ended June 30, 2018		2019		2018
Marketable equity securities gains, net	$	4,440	$	5,411	$	11,328	$	971
Less net gains recognized on marketable equity securities sold	139		235		44		96
Unrealized gains recognized on marketable equity securities held	$	4,301	$	5,176	$	11,284	$	875

The following table provides information regarding securities ~~available for sale~~ with unrealized losses as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


	June 30, 2018												March 31, 2019
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Investment securities available for sale:
Investment securities available for sale
U.S. Treasury	$	1,503,974	$	4,461	$	—	$	—	$	1,503,974	$	4,461	$	—	$	—	$	599,883	$	847	$	599,883	$	847
Government agency	83,383		328		2,004		27		85,387		355		219,395		901		12,590		186		231,985		1,087
Mortgage-backed securities	1,923,954		50,765		654,212		21,107		2,578,166		71,872		114,863		314		1,956,003		28,115		2,070,866		28,429
Corporate bonds	24,673		248		5,025		2		29,698		250		56,393		891		9,950		69		66,343		960
Total	$	3,535,984	$	55,802	$	661,241	$	21,136	$	4,197,225	$	76,938	$	390,651	$	2,106	$	2,578,426	$	29,217	$	2,969,077	$	31,323
Investment securities held to maturity:
Investment securities held to maturity
Mortgage-backed securities	$	1,126,683	$	1,249	$	11,219	$	210	$	1,137,902	$	1,459	$	40,142	$	291	$	9,988	$	159	$	50,130	$	450

	December 31, 2017												December 31, 2018
	Less than 12 months				12 months or more				Total				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:
(Dollars in thousands)													Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Investment securities available for sale
U.S. Treasury	$	1,408,166	$	345	$	249,698	$	201	$	1,657,864	$	546	$	248,983	$	113	$	848,622	$	2,053	$	1,097,605	$	2,166
Government agency	848		12		2,527		28		3,375		40		115,273		601		2,310		38		117,583		639
Mortgage-backed securities	2,333,254		20,911		2,723,406		59,241		5,056,660		80,152		262,204		2,387		1,940,695		50,376		2,202,899		52,763
Corporate bonds	5,025		8		—		—		5,025		8		79,066		842		5,000		22		84,066		864
Other	5,349		182		—		—		5,349		182
Total	$	3,752,642	$	21,458	$	2,975,631	$	59,470	$	6,728,273	$	80,928	$	705,526	$	3,943	$	2,796,627	$	52,489	$	3,502,153	$	56,432
Investment securities held to maturity
Mortgage-backed securities													$	5,111	$	181	$	10,131	$	309	$	15,242	$	490

As of ~~June 30, 2018,~~March 31, 2019, there were ~~120~~230 investment securities available for sale that had continuous losses for more than 12 months of which ~~119 are~~223 were government sponsored enterprise-issued mortgage-backed securities or government agency securities, five were U.S. Treasury securities and ~~1 is a~~two were corporate ~~bond.~~bonds. There were 2two investment securities held to maturity, which were government sponsored enterprise-issued ~~mortgage~~mortgage-backed securities, ~~that~~which had continuous losses for more than 12 months at ~~June 30, 2018.~~March 31, 2019.

None of the unrealized losses identified as of ~~June 30, 2018~~March 31, 2019 or December 31, ~~2017~~2018 relate to the marketability of the securities or the issuers' ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the debt securities were purchased. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.

Debt securities having an aggregate carrying value of ~~$3.67~~$3.68 billion at ~~June 30, 2018~~March 31, 2019 and ~~$4.59~~$4.03 billion at December 31, ~~2017~~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~~non-purchased credit impaired (Non-PCI) or ~~PCI. For loans to be included as non-PCI, they~~purchased credit impaired (PCI). Loans that are ~~either~~ originated by FCB, ~~or it must be determined~~as well as loans that ~~the loans do not have any~~are performing under their contractual obligations at acquisition, are classified as Non-PCI. Loans that reflect credit deterioration ~~at the time of acquisition. Conversely, loans for which~~since origination, such that it is probable at acquisition that FCB will be unable to collect all contractually required payments, ~~will not be collected in accordance with contractual terms~~ are ~~considered impaired and, therefore,~~ classified as ~~PCI loans. PCI~~PCI. Additionally, at the date of acquisition, all acquired loans are recorded at fair value ~~at the date of acquisition. No~~with no corresponding allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk over the life of the loans. An allowance is subsequently recorded if there is additional credit deterioration after the acquisition date.

BancShares reports non-PCI and PCI loan portfolios separately, and the non-PCI portfolio is further divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

~~Commercial~~ –~~Commercial loan classes include construction and land development, commercial mortgage, other commercial real estate, commercial and industrial, lease financing and other.~~

~~Construction and land development~~ – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise; multifamily apartments; and other commercial buildings that may be owner-occupied or income generating investments for the owner.

~~Commercial mortgage~~ – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.

~~Other commercial real estate~~ ~~– Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (5 or more) residential properties.~~

~~Commercial and industrial~~ ~~– Commercial and industrial consists of loans or lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.~~

~~Lease financing~~ ~~– Lease financing consists solely of lease financing agreements for business equipment, vehicles and other assets.~~

~~Other~~ – Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations, and certain loans repurchased with government guarantees.

~~Noncommercial~~ – ~~Noncommercial loan classes consist of residential and revolving mortgage, construction and land development, and consumer loans.~~

~~Residential mortgage~~ ~~– Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.~~

~~Revolving mortgage~~ ~~– Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.~~

~~Construction and land development~~ ~~– Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.~~

~~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.losses.

Loans and leases outstanding included the following at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


(Dollars in thousands)	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Non-PCI loans and leases:
Commercial:
Construction and land development	$	715,011	$	669,215	$	804,463	$	757,854
Commercial mortgage	10,278,741		9,729,022		10,747,715		10,717,234
Other commercial real estate	473,452		473,433		427,419		426,985
Commercial and industrial	3,097,541		2,730,407
Lease financing	613,377		894,801
Commercial and industrial and leases					3,879,575		3,938,730
Other	296,614		302,176		280,848		296,424
Total commercial loans	15,474,736		14,799,054		16,140,020		16,137,227
Noncommercial:
Residential mortgage	3,980,845		3,523,786		4,303,137		4,265,687
Revolving mortgage	2,604,955		2,701,525		2,469,898		2,542,975
Construction and land development	250,704		248,289		258,959		257,030
Consumer	1,552,928		1,561,173		1,734,415		1,713,781
Total noncommercial loans	8,389,432		8,034,773		8,766,409		8,779,473
Total non-PCI loans and leases	23,864,168		22,833,827		24,906,429		24,916,700
PCI loans:
Total PCI loans	674,269		762,998		557,356		606,576
Total loans and leases	$	24,538,437	$	23,596,825	$	25,463,785	$	25,523,276

At ~~June 30, 2018,~~March 31, 2019, $9.08 billion in ~~noncovered~~non-PCI loans with a lendable collateral value of ~~$6.22~~$6.36 billion were used to secure ~~$128.7~~$175.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances and $14.5 million in FHLB of Chicago advances, resulting in additional borrowing capacity of ~~$6.09~~$6.17 billion. At December 31, ~~2017, $8.75~~2018, $9.12 billion in ~~noncovered~~non-PCI loans with a lendable collateral value of ~~$6.08~~$6.36 billion were used to secure ~~$835.2~~$175.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of ~~$5.24~~$6.18 billion.

At ~~June 30, 2018, $2.88~~March 31, 2019, $2.93 billion in ~~noncovered~~non-PCI loans with a lendable collateral value of ~~$2.17~~$2.23 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). At December 31, ~~2017, $2.77~~2018, $2.94 billion in ~~noncovered~~non-PCI loans with a lendable collateral value of ~~$2.08~~$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 $59.0 million and $51.2 million at June 30, 2018 and December 31, 2017, respectively.~~ In addition, we may change our strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at ~~the lower of amortized cost or market.~~ fair value. Loans held for sale totaled $53.2 million and $45.5 million at March 31, 2019 and December 31, 2018, respectively.

During the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, total proceeds from sales of loans held for sale were ~~$164.2~~$123.0 million ~~and $302.8 million, respectively,~~ and there were no transfers to loans held for sale from the residential mortgage ~~portfolio for either period.~~portfolio. For the three months ended June 30, 2017, total proceeds from sales of loans held for sale which did not include any loans transferred from the residential mortgage portfolio were $147.0 million. For the six months ended June 30, 2017,March 31, 2018, total proceeds from sales of loans held for sale were ~~$342.1~~$138.5 million ~~of which $32.3 million in sales~~and there were ~~transferred~~no transfers to loans held for sale from the residential mortgage ~~portfolio, resulting in a gain of $164 thousand.~~portfolio.

Net deferred fees on ~~originated~~ non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were ~~$1.2 million~~$130 thousand and ~~$1.7 million~~$79 thousand at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The net unamortized discount related to purchased non-PCI loans and leases ~~in the HomeBancorp, Guaranty Bank (Guaranty), Cordia Bancorp Inc. (Cordia)~~was $30.1 million at March 31, 2019 and ~~First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $7.0~~$33.3 million ~~$12.3 million, $1.9 million and $14.7 million, respectively,~~ at ~~June 30, 2018. At~~ December 31, ~~2017, the unamortized discount related to purchased non-PCI loans and leases from the Guaranty, Cordia and Bancorporation acquisitions was $14.2 million, $2.7 million and $18.1 million, respectively.~~2018. During the three months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017,~~ accretion income on purchased non-PCI loans and leases was ~~$4.1~~$3.2 million and ~~$3.0 million, respectively. During the six months ended June 30, 2018 and June 30, 2017, accretion income on purchased non-PCI loans and leases was $7.0 million and $6.0~~$2.9 million, respectively.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. ~~The credit quality indicators used are dependent on the portfolio segment to which the loan relates.~~ Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan ~~segment~~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 ~~more severely~~ criticized ~~loans or leases. The~~loans. Commercial credit ~~quality indicators for non-PCI~~cards are included in the Commercial and ~~PCI noncommercial loans~~industrial and leases segment, but are ~~based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.~~not specifically graded as with other commercial loans. The indicators ~~represent the rating for loans or leases~~ as of the date presented are based on the most recent assessment ~~performed. These credit quality indicators~~performed and are defined ~~as follows:~~

below:

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

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

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

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

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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.

~~Non-PCI~~The composition of the loans and leases outstanding at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 by credit quality indicator are provided below:


	June 30, 2018														March 31, 2019
(Dollars in thousands)	Non-PCI commercial loans and leases														Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total 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	$	703,034	$	10,083,382	$	470,236	$	2,868,180	$	603,760	$	293,804	$	15,022,396	$	800,703	$	10,528,026	$	423,288	$	3,717,237	$	279,899	$	15,749,153
Special mention	352		88,157		1,159		35,636		3,916		1,258		130,478		1,345		110,413		3,244		46,928		350		162,280
Substandard	3,195		105,647		2,057		21,265		5,701		1,552		139,417		2,415		109,276		887		37,443		599		150,620
Doubtful	—		999		—		365		—		—		1,364		—		—		—		354		—		354
Ungraded	8,430		556		—		172,095		—		—		181,081		—		—		—		77,613		—		77,613
Total	$	715,011	$	10,278,741	$	473,452	$	3,097,541	$	613,377	$	296,614	$	15,474,736	$	804,463	$	10,747,715	$	427,419	$	3,879,575	$	280,848	$	16,140,020

	December 31, 2017														December 31, 2018
	Non-PCI commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
(Dollars in thousands)															Non-PCI commercial loans and leases
Grade:															Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Total non-PCI commercial loans and leases
Pass	$	665,197	$	9,521,019	$	468,942	$	2,511,307	$	883,779	$	298,064	$	14,348,308	$	753,985	$	10,507,687	$	422,500	$	3,778,797	$	294,700	$	15,757,669
Special mention	691		78,643		1,260		44,130		4,340		2,919		131,983		1,369		114,219		3,193		54,814		1,105		174,700
Substandard	3,327		128,848		3,224		18,617		6,585		1,193		161,794		2,500		92,743		1,292		30,688		619		127,842
Doubtful	—		262		—		385		—		—		647		—		—		—		354		—		354
Ungraded	—		250		7		155,968		97		—		156,322		—		2,585		—		74,077		—		76,662
Total	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	14,799,054	$	757,854	$	10,717,234	$	426,985	$	3,938,730	$	296,424	$	16,137,227


	June 30, 2018										March 31, 2019
	Non-PCI noncommercial loans and leases										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		Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	3,936,065	$	2,581,818	$	248,343	$	1,541,465	$	8,307,691	$	4,248,823	$	2,444,150	$	256,801	$	1,720,142	$	8,669,916
30-59 days past due	21,032		9,864		1,839		6,013		38,748		33,623		10,734		581		7,966		52,904
60-89 days past due	6,291		3,367		51		2,729		12,438		7,760		4,227		28		3,001		15,016
90 days or greater past due	17,457		9,906		471		2,721		30,555		12,931		10,787		1,549		3,306		28,573
Total	$	3,980,845	$	2,604,955	$	250,704	$	1,552,928	$	8,389,432	$	4,303,137	$	2,469,898	$	258,959	$	1,734,415	$	8,766,409

	December 31, 2017										December 31, 2018
	Non-PCI noncommercial loans and leases										Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total 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	$	3,465,935	$	2,674,390	$	239,648	$	1,546,473	$	7,926,446	$	4,214,783	$	2,514,269	$	254,837	$	1,696,321	$	8,680,210
30-59 days past due	27,886		13,428		7,154		8,812		57,280		28,239		12,585		581		10,035		51,440
60-89 days past due	8,064		3,485		108		2,893		14,550		7,357		4,490		21		3,904		15,772
90 days or greater past due	21,901		10,222		1,379		2,995		36,497		15,308		11,631		1,591		3,521		32,051
Total	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	8,034,773	$	4,265,687	$	2,542,975	$	257,030	$	1,713,781	$	8,779,473

PCI loans outstanding at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 by credit quality indicator are provided below:


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
(Dollars in thousands)	PCI commercial loans				PCI commercial loans
Grade:
Pass	$	165,578	$	201,332	$	131,018	$	141,922
Special mention	58,024		63,257		43,068		48,475
Substandard	105,937		117,068		91,940		101,447
Doubtful	6,536		11,735		3,887		4,828
Ungraded	34		27
Total	$	336,109	$	393,419	$	269,913	$	296,672


	June 30, 2018		December 31, 2017
	PCI noncommercial loans				March 31, 2019		December 31, 2018
(Dollars in thousands)					PCI noncommercial loans
Current	$	299,579	$	318,632	$	255,145	$	268,280
30-59 days past due	12,146		13,343		8,565		11,155
60-89 days past due	4,167		6,212		3,449		7,708
90 days or greater past due	22,268		31,392		20,284		22,761
Total	$	338,160	$	369,579	$	287,443	$	309,904

The aging of the outstanding non-PCI loans and leases, by class, at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are 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.


	June 30, 2018												March 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		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 - commercial	$	466	$	264	$	132	$	862	$	714,149	$	715,011	$	617	$	262	$	206	$	1,085	$	803,378	$	804,463
Commercial mortgage	10,120		5,021		5,599		20,740		10,258,001		10,278,741		16,120		8,818		2,802		27,740		10,719,975		10,747,715
Other commercial real estate	1,568		—		18		1,586		471,866		473,452		1,198		517		—		1,715		425,704		427,419
Commercial and industrial	6,445		3,743		1,155		11,343		3,086,198		3,097,541
Lease financing	3,062		1,167		951		5,180		608,197		613,377
Commercial and industrial and leases													9,706		2,403		3,389		15,498		3,864,077		3,879,575
Other													113		24		—		137		280,711		280,848
Total commercial loans													27,754		12,024		6,397		46,175		16,093,845		16,140,020
Noncommercial:
Residential mortgage	21,032		6,291		17,457		44,780		3,936,065		3,980,845		33,623		7,760		12,931		54,314		4,248,823		4,303,137
Revolving mortgage	9,864		3,367		9,906		23,137		2,581,818		2,604,955		10,734		4,227		10,787		25,748		2,444,150		2,469,898
Construction and land development - noncommercial	1,839		51		471		2,361		248,343		250,704
Construction and land development - non-commercial													581		28		1,549		2,158		256,801		258,959
Consumer	6,013		2,729		2,721		11,463		1,541,465		1,552,928		7,966		3,001		3,306		14,273		1,720,142		1,734,415
Other	42		17		—		59		296,555		296,614
Total noncommercial loans													52,904		15,016		28,573		96,493		8,669,916		8,766,409
Total non-PCI loans and leases	$	60,451	$	22,650	$	38,410	$	121,511	$	23,742,657	$	23,864,168	$	80,658	$	27,040	$	34,970	$	142,668	$	24,763,761	$	24,906,429

	December 31, 2017												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
(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 - commercial	$	491	$	442	$	357	$	1,290	$	667,925	$	669,215	$	516	$	9	$	444	$	969	$	756,885	$	757,854
Commercial mortgage	12,288		2,375		6,490		21,153		9,707,869		9,729,022		14,200		2,066		3,237		19,503		10,697,731		10,717,234
Other commercial real estate	107		—		75		182		473,251		473,433		91		76		300		467		426,518		426,985
Commercial and industrial	6,694		1,510		1,266		9,470		2,720,937		2,730,407
Lease financing	2,983		167		973		4,123		890,678		894,801
Commercial and industrial and leases													9,655		1,759		2,892		14,306		3,924,424		3,938,730
Other													285		—		89		374		296,050		296,424
Total commercial loans													24,747		3,910		6,962		35,619		16,101,608		16,137,227
Noncommercial:
Residential mortgage	27,886		8,064		21,901		57,851		3,465,935		3,523,786		28,239		7,357		15,308		50,904		4,214,783		4,265,687
Revolving mortgage	13,428		3,485		10,222		27,135		2,674,390		2,701,525		12,585		4,490		11,631		28,706		2,514,269		2,542,975
Construction and land development - noncommercial	7,154		108		1,379		8,641		239,648		248,289
Construction and land development - non-commercial													581		21		1,591		2,193		254,837		257,030
Consumer	8,812		2,893		2,995		14,700		1,546,473		1,561,173		10,035		3,904		3,521		17,460		1,696,321		1,713,781
Other	188		6		133		327		301,849		302,176
Total noncommercial loans													51,440		15,772		32,051		99,263		8,680,210		8,779,473
Total non-PCI loans and leases	$	80,031	$	19,050	$	45,791	$	144,872	$	22,688,955	$	22,833,827	$	76,187	$	19,682	$	39,013	$	134,882	$	24,781,818	$	24,916,700

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 for non-PCI loans and leases, were as follows:

June 30, 2018 December 31, 2017
(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
Non-PCI loans and leases:
Construction and land development - commercial $ 420
$ —
$ 1,040
$ —
Commercial mortgage 18,457
839
22,625
397
Other commercial real estate 103
—
916
—
Commercial and industrial 3,168
319
2,884
428
Lease financing 1,755
—
1,992
—
Residential mortgage 35,173
—
38,942
—
Revolving mortgage 22,500
—
19,990
—
Construction and land development - noncommercial 1,012
—
1,989
—
Consumer 2,390
2,021
1,992
2,153
Other 77
—
164
—
Total non-PCI loans and leases $ 85,055
$ 3,179
$ 92,534
$ 2,978

~~Purchased non-PCI loans and leases~~

The following table relates to purchased non-PCI loans acquired in the HomeBancorp transaction and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date.

(Dollars in thousands)
Contractually required payments $ 710,876
Contractual cash flows not expected to be collected $ 9,845
Fair value at acquisition date $ 550,618

~~The recorded fair values of purchased non-PCI loans acquired in the HomeBancorp transaction as of the acquisition date are as follows:~~

(Dollars in thousands)
Commercial:
Construction and land development $ 525
Commercial mortgage 188,688
Other commercial real estate 55,183
Commercial and industrial 7,931
Total commercial loans 252,327
Noncommercial:
Residential mortgage 296,273
Revolving mortgage 51
Consumer 1,967
Total noncommercial loans 298,291
Total non-PCI loans $ 550,618

~~Purchased credit-impaired loans~~

The following table relates to PCI loans acquired in the HomeBancorp transaction and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected and the fair value of PCI loans at the acquisition date.

(Dollars in thousands)
Contractually required payments $ 26,651
Cash flows expected to be collected $ 19,697
Fair value of loans at acquisition $ 15,555

~~The recorded fair values of PCI loans acquired in the HomeBancorp transaction as of the acquisition date are as follows:~~

(Dollars in thousands)
Commercial:
Commercial mortgage $ 7,815
Commercial and industrial 423
Total commercial loans 8,238
Noncommercial:
Residential mortgage 7,317
Total noncommercial loans 7,317
Total PCI loans $ 15,555



	March 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
Non-PCI loans and leases:
Construction and land development - commercial	$	407	$	—	$	666	$	—
Commercial mortgage	15,744		—		12,594		—
Other commercial real estate	19		—		366		—
Commercial and industrial and leases	5,482		667		4,624		808
Residential mortgage	36,573		614		35,662		—
Revolving mortgage	25,723		—		25,563		—
Construction and land development - noncommercial	1,699		—		1,823		—
Consumer	3,054		2,212		2,969		2,080
Other	257		—		279		—
Total non-PCI loans and leases	$	88,958	$	3,493	$	84,546	$	2,888

The following table provides changes in the carrying value of all PCI loans during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~March 31, 2018:


(Dollars in thousands)	2018			2017			2019			2018
Balance at January 1	$	762,998		$	809,169		$	606,576		$	762,998
Fair value of acquired loans	15,555			199,682			—			—
Accretion	32,188			39,798			17,755			17,973
Payments received and other changes, net	(136,472		)	(153,786		)	(66,975		)	(77,134		)
Balance at June 30	$	674,269		$	894,863
Unpaid principal balance at June 30	$	1,044,148		$	1,199,358
Balance at March 31							$	557,356		$	703,837
Unpaid principal balance at March 31							$	810,683		$	1,108,379

The carrying value of PCI loans on the cost recovery method was ~~$2.1~~$3.3 million at ~~June 30, 2018~~both March 31, 2019 and ~~$1.1 million at~~ December 31, ~~2017.~~2018. The cost recovery method is applied to loans when the timing of future cash flows ~~is not~~cannot be reasonably ~~estimable~~estimated due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was ~~$1.6~~$1.7 million and ~~$624 thousand~~$1.3 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The remaining discount on PCI loans was $89.4 million and $95.5 million at March 31, 2019 and December 31, 2018, respectively.

During the three months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017,~~ accretion income on PCI loans was ~~$14.2~~$17.8 million and ~~$20.4~~$18.0 million, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flow not related to credit improvements or deterioration do not affect the nonaccretable difference.

The following table documents changes to the amount of accretable yield for the first ~~six~~three months of ~~2018~~2019 and ~~2017.~~2018.


(Dollars in thousands)	2018			2017			2019			2018
Balance at January 1	$	316,679		$	335,074		$	312,894		$	316,679
Additions from acquisitions	4,142			44,120			—			—
Accretion	(32,188		)	(39,798		)	(17,755		)	(17,973		)
Reclassifications from nonaccretable difference	6,899			12,328
Reclassifications from (to) nonaccretable difference							600			(929		)
Changes in expected cash flows that do not affect nonaccretable difference	48,988			(1,405		)	(9,547		)	11,568
Balance at June 30	$	344,520		$	350,319
Balance at March 31							$	286,192		$	309,345

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

~~The following tables present the activity~~Activity in the ~~ALLL~~allowance for non-PCI loan and lease losses by ~~loan~~ class ~~for the three and six months ended June 30, 2018 and June 30, 2017:~~of loans is summarized as follows:

Three months ended June 30, 2018
(Dollars in thousands)
Construction
and land
development
- commercial

Commercial
mortgage
Other commercial real estate
Commercial
and industrial

Lease
financing
Other
Residential
mortgage

Revolving
mortgage

Construction
and land
development
- non-
commercial
Consumer Total
Non-PCI Loans
Allowance for loan and lease losses:
Balance at April 1 $ 26,718
$ 43,833
$ 3,423
$ 53,016
$ 6,301
$ 4,842
$ 16,489
$ 22,104
$ 3,913
$ 30,181
$ 210,820
Provision (3,139 ) 866
468
5,670
(1,879 ) (114 ) 1,492
289
50
4,574
8,277
Charge-offs (8 ) (459 ) (69 ) (1,994 ) (445 ) (38 ) (289 ) (1,027 ) (37 ) (5,312 ) (9,678 )
Recoveries 93
225
1
638
4
1
110
520
101
1,330
3,023
Balance at June 30 $ 23,664
$ 44,465
$ 3,823
$ 57,330
$ 3,981
$ 4,691
$ 17,802
$ 21,886
$ 4,027
$ 30,773
$ 212,442

Three months ended June 30, 2017
(Dollars in thousands)
Construction
and land
development
- commercial

Commercial
mortgage
Other commercial real estate
Commercial
and industrial

Lease
financing
Other
Residential
mortgage

Revolving
mortgage

Construction
and land
development
- non-
commercial
Consumer Total
Balance at April 1 $ 31,391
$ 48,611
$ 3,572
$ 50,829
$ 6,315
$ 3,534
$ 15,835
$ 21,290
$ 1,513
$ 27,129
$ 210,019
Provision 2,372
639
33
968
186
(214 ) 155
1,054
(10 ) 4,569
9,752
Charge-offs (413 ) (235 ) —
(3,121 ) (97 ) (64 ) (222 ) (280 ) —
(4,991 ) (9,423 )
Recoveries 209
731
7
2,392
—
46
75
401
—
1,093
4,954
Balance at June 30 $ 33,559
$ 49,746
$ 3,612
$ 51,068
$ 6,404
$ 3,302
$ 15,843
$ 22,465
$ 1,503
$ 27,800
$ 215,302

Six months ended June 30, 2018
(Dollars in thousands)
Construction
and land
development
- commercial

Commercial
mortgage
Other commercial real estate
Commercial
and industrial

Lease
financing
Other
Residential
mortgage

Revolving
mortgage

Construction
and land
development
- non-
commercial
Consumer Total
Balance at January 1 $ 24,470
$ 45,005
$ 4,571
$ 53,697
$ 6,127
$ 4,689
$ 15,706
$ 22,436
$ 3,962
$ 31,204
$ 211,867
Provision (914 ) (499 ) (825 ) 5,245
(892 ) —
3,004
755
157
7,497
13,528
Charge-offs (8 ) (505 ) (69 ) (3,469 ) (1,299 ) (41 ) (1,095 ) (2,019 ) (219 ) (10,567 ) (19,291 )
Recoveries 116
464
146
1,857
45
43
187
714
127
2,639
6,338
Balance at June 30 $ 23,664
$ 44,465
$ 3,823
$ 57,330
$ 3,981
$ 4,691
$ 17,802
$ 21,886
$ 4,027
$ 30,773
$ 212,442

Six months ended June 30, 2017
(Dollars in thousands)
Construction
and land
development
- commercial

Commercial
mortgage
Other commercial real estate
Commercial
and industrial

Lease
financing
Other
Residential
mortgage

Revolving
mortgage

Construction
and land
development
- non-
commercial
Consumer Total
Balance at January 1 $ 28,877
$ 48,278
$ 3,269
$ 50,225
$ 5,907
$ 3,127
$ 14,447
$ 21,013
$ 1,596
$ 28,287
$ 205,026
Provision 4,908
645
337
4,560
761
241
1,506
1,604
(93 ) 6,359
20,828
Charge-offs (490 ) (272 ) (5 ) (6,374 ) (270 ) (187 ) (472 ) (1,105 ) —
(9,019 ) (18,194 )
Recoveries 264
1,095
11
2,657
6
121
362
953
—
2,173
7,642
Balance at June 30 $ 33,559
$ 49,746
$ 3,612
$ 51,068
$ 6,404
$ 3,302
$ 15,843
$ 22,465
$ 1,503
$ 27,800
$ 215,302



	Three months ended March 31, 2019
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial and leases			Other			Residential mortgage			Revolving mortgage			Construction and land development - non - commercial			Consumer			Total
Non-PCI Loans
Allowance for loan and lease losses:
Balance at January 1	$	35,270		$	43,451		$	2,481		$	55,620		$	2,221		$	15,472		$	21,862		$	2,350		$	35,841		$	214,568
Provision (credits)	2,119			2,371			(83		)	2,725			(498		)	1,508			209			123			3,440			11,914
Charge-offs	(44		)	(761		)	—			(1,858		)	—			(166		)	(963		)	—			(6,362		)	(10,154		)
Recoveries	131			220			1			538			444			173			387			—			1,573			3,467
Balance at March 31	$	37,476		$	45,281		$	2,399		$	57,025		$	2,167		$	16,987		$	21,495		$	2,473		$	34,492		$	219,795

	Three months ended March 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
Balance at January 1	$	24,470		$	45,005		$	4,571		$	59,824		$	4,689		$	15,706		$	22,436		$	3,962		$	31,204		$	211,867
Provision (credits)	2,225			(1,365		)	(1,293		)	562			114			1,512			466			107			2,923			5,251
Charge-offs	—			(46		)	—			(2,329		)	(3		)	(806		)	(992		)	(182		)	(5,255		)	(9,613		)
Recoveries	23			239			145			1,260			42			77			194			26			1,309			3,315
Balance at March 31	$	26,718		$	43,833		$	3,423		$	59,317		$	4,842		$	16,489		$	22,104		$	3,913		$	30,181		$	210,820

The following tables present the allowance ~~for non-PCI loan~~ and ~~lease losses and the~~ recorded investment in loans and leases by ~~loan~~ class ~~based on~~of loans, as well as the associated impairment method ~~as of June 30, 2018~~at March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018																						March 31, 2019
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total		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	$	274	$	3,325	$	65	$	985	$	107	$	20	$	3,343	$	1,112	$	66	$	704	$	10,001	$	533	$	2,949	$	16	$	1,420	$	151	$	3,149	$	2,742	$	99	$	906	$	11,965
ALLL for loans and leases collectively evaluated for impairment	23,390		41,140		3,758		56,345		3,874		4,671		14,459		20,774		3,961		30,069		202,441		36,943		42,332		2,383		55,605		2,016		13,838		18,753		2,374		33,586		207,830
Total allowance for loan and lease losses	$	23,664	$	44,465	$	3,823	$	57,330	$	3,981	$	4,691	$	17,802	$	21,886	$	4,027	$	30,773	$	212,442	$	37,476	$	45,281	$	2,399	$	57,025	$	2,167	$	16,987	$	21,495	$	2,473	$	34,492	$	219,795

Loans and leases:
Loans and leases individually evaluated for impairment	$	2,098	$	66,172	$	1,077	$	7,652	$	1,176	$	97	$	43,953	$	27,407	$	2,911	$	2,685	$	155,228	$	2,123	$	56,157	$	541	$	9,987	$	337	$	44,944	$	29,216	$	3,742	$	2,954	$	150,001
Loans and leases collectively evaluated for impairment	712,913		10,212,569		472,375		3,089,889		612,201		296,517		3,936,892		2,577,548		247,793		1,550,243		23,708,940		802,340		10,691,558		426,878		3,869,588		280,511		4,258,193		2,440,682		255,217		1,731,461		24,756,428
Total loan and leases	$	715,011	$	10,278,741	$	473,452	$	3,097,541	$	613,377	$	296,614	$	3,980,845	$	2,604,955	$	250,704	$	1,552,928	$	23,864,168	$	804,463	$	10,747,715	$	427,419	$	3,879,575	$	280,848	$	4,303,137	$	2,469,898	$	258,959	$	1,734,415	$	24,906,429

	December 31, 2017																						December 31, 2018
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total		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	$	185	$	3,648	$	209	$	665	$	397	$	—	$	2,733	$	1,085	$	68	$	738	$	9,728	$	490	$	2,671	$	42	$	1,137	$	105	$	1,901	$	2,515	$	81	$	885	$	9,827
ALLL for loans and leases collectively evaluated for impairment	24,285		41,357		4,362		53,032		5,730		4,689		12,973		21,351		3,894		30,466		202,139		34,780		40,780		2,439		54,483		2,116		13,571		19,347		2,269		34,956		204,741
Total allowance for loan and lease losses	$	24,470	$	45,005	$	4,571	$	53,697	$	6,127	$	4,689	$	15,706	$	22,436	$	3,962	$	31,204	$	211,867	$	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	$	788	$	73,655	$	1,857	$	7,974	$	1,914	$	521	$	37,842	$	23,770	$	4,551	$	2,774	$	155,646	$	2,175	$	55,447	$	860	$	9,868	$	291	$	42,168	$	28,852	$	3,749	$	3,020	$	146,430
Loans and leases collectively evaluated for impairment	668,427		9,655,367		471,576		2,722,433		892,887		301,655		3,485,944		2,677,755		243,738		1,558,399		22,678,181		755,679		10,661,787		426,125		3,928,862		296,133		4,223,519		2,514,123		253,281		1,710,761		24,770,270
Total loan and leases	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	22,833,827	$	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

~~The following tables show the activity~~Activity in the PCI allowance ~~for PCI loan losses~~activity and balances for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018 ~~and June 30, 2017.~~is summarized as follows:


(Dollars in thousands)	Three months ended June 30, 2018			Three months ended June 30, 2017			Three months ended March 31, 2019			Three months ended March 31, 2018
PCI Loans
Allowance for loan and lease losses:
Balance at April 1	$	12,296		$	10,924
Provision	161			2,572
Charge-offs	(34		)	—
Recoveries	—			—
Balance at June 30	$	12,423		$	13,496

	Six months ended June 30, 2018			Six months ended June 30, 2017
Allowance for loan losses:
Balance at January 1	$	10,026		$	13,769		$	9,144		$	10,026
Provision	2,515			(273		)	(164		)	2,354
Charge-offs	(118		)	—			—			(84		)
Recoveries	—			—			—			—
Balance at June 30	$	12,423		$	13,496
Balance at March 31							$	8,980		$	12,296

The following table ~~shows~~presents the ~~ending balances of~~ PCI allowance and recorded investment in loans ~~and related allowance as of June 30, 2018~~at March 31, 2019 and December 31, ~~2017:~~2018:


(Dollars in thousands)	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
ALLL for loans acquired with deteriorated credit quality	$	12,423	$	10,026	$	8,980	$	9,144
Loans acquired with deteriorated credit quality	674,269		762,998		557,356		606,576

~~As of June 30, 2018~~At March 31, 2019 and December 31, ~~2017, $160.8~~2018, $160.4 million and ~~$279.8~~$186.6 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition.

The following tables provide information on non-PCI impaired loans and leases, ~~individually~~exclusive of loans and leases evaluated collectively as ~~of June 30, 2018~~a homogeneous group, including interest income recognized in the period during which the loans and ~~December 31, 2017.~~leases were considered impaired.


	June 30, 2018										March 31, 2019
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded		With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	2,098	$	—	$	2,098	$	2,431	$	274	$	1,932	$	191	$	2,123	$	2,538	$	533
Commercial mortgage	35,934		30,238		66,172		72,467		3,325		37,575		18,582		56,157		61,845		2,949
Other commercial real estate	375		702		1,077		1,264		65		222		319		541		629		16
Commercial and industrial	6,262		1,390		7,652		11,684		985
Lease financing	789		387		1,176		2,808		107
Commercial and industrial and leases											7,613		2,374		9,987		14,002		1,420
Other	97		—		97		315		20		262		75		337		353		151
Residential mortgage	25,529		18,424		43,953		46,684		3,343		43,553		1,391		44,944		48,216		3,149
Revolving mortgage	10,217		17,190		27,407		30,170		1,112		26,017		3,199		29,216		32,074		2,742
Construction and land development - noncommercial	544		2,367		2,911		3,633		66		2,330		1,412		3,742		4,045		99
Consumer	1,777		908		2,685		3,004		704		2,872		82		2,954		3,378		906
Total non-PCI impaired loans and leases	$	83,622	$	71,606	$	155,228	$	174,460	$	10,001	$	122,376	$	27,625	$	150,001	$	167,080	$	11,965

	December 31, 2017										December 31, 2018
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded		With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	788	$	—	$	788	$	1,110	$	185	$	1,897	$	278	$	2,175	$	2,606	$	490
Commercial mortgage	39,135		34,520		73,655		78,936		3,648		34,177		21,270		55,447		61,317		2,671
Other commercial real estate	1,351		506		1,857		2,267		209		243		617		860		946		42
Commercial and industrial	6,326		1,648		7,974		10,475		665
Lease financing	1,890		24		1,914		2,571		397
Commercial and industrial and leases											7,153		2,715		9,868		14,695		1,137
Other	—		521		521		521		—		216		75		291		301		105
Residential mortgage	19,135		18,707		37,842		39,946		2,733		40,359		1,809		42,168		45,226		1,901
Revolving mortgage	5,875		17,895		23,770		25,941		1,085		25,751		3,101		28,852		31,371		2,515
Construction and land development - noncommercial	592		3,959		4,551		5,224		68		2,337		1,412		3,749		4,035		81
Consumer	2,107		667		2,774		3,043		738		2,940		80		3,020		3,405		885
Total non-PCI impaired loans and leases	$	77,199	$	78,447	$	155,646	$	170,034	$	9,728	$	115,073	$	31,357	$	146,430	$	163,902	$	9,827

Non-PCI impaired loans less than $500,000 that ~~are~~were collectively evaluated ~~were $44.1~~for impairment totaled $44.8 million and ~~$49.1~~$47.1 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~March 31, 2018:

Three months ended June 30, 2018 Three months ended June 30, 2017
(Dollars in thousands) Average
balance Interest income recognized Average
balance Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial $ 1,485
$ 17
$ 970
$ 11
Commercial mortgage 68,113
659
74,121
651
Other commercial real estate 1,345
12
1,525
9
Commercial and industrial 7,585
76
10,159
98
Lease financing 1,842
14
1,911
14
Other 67
—
434
5
Residential mortgage 42,046
298
36,767
272
Revolving mortgage 26,388
222
8,484
62
Construction and land development - noncommercial 3,526
44
3,185
33
Consumer 2,654
28
2,052
24
Total non-PCI impaired loans and leases $ 155,051
$ 1,370
$ 139,608
$ 1,179

Six months ended June 30, 2018 Six months ended June 30, 2017
(Dollars in thousands)
Average
balance
Interest income recognized Average
balance Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial $ 1,320
$ 28
$ 1,013
$ 23
Commercial mortgage 70,190
1,370
74,715
1,293
Other commercial real estate 1,529
23
1,555
17
Commercial and industrial 7,554
152
10,844
202
Lease financing 2,040
25
1,740
28
Other 34
—
315
7
Residential mortgage 40,385
573
34,864
525
Revolving mortgage 25,590
423
8,227
119
Construction and land development - noncommercial 3,815
92
2,895
66
Consumer 2,581
56
1,976
47
Total non-PCI impaired loans and leases $ 155,038
$ 2,742
$ 138,144
$ 2,327



	Three months ended March 31, 2019				Three months ended March 31, 2018
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	2,147	$	28	$	1,155	$	11
Commercial mortgage	56,629		564		72,267		711
Other commercial real estate	685		8		1,713		11
Commercial and industrial and leases	10,000		100		9,762		87
Other	315		2		—		—
Residential mortgage	42,626		325		38,724		275
Revolving mortgage	28,742		247		24,792		201
Construction and land development - noncommercial	3,747		36		4,104		48
Consumer	3,000		29		2,508		28
Total non-PCI impaired loans and leases	$	147,891	$	1,339	$	155,025	$	1,372

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (TDRs). In general, the modification or restructuring of a loan is considered a TDR if, for economic reasons or legal reasons related to a borrower's financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. The majority of TDRs are included in the special mention, substandard or doubtful credit ~~grading categories,~~quality indicators, which results in more elevated loss expectations when projecting the expected cash flows that are used to determine the allowance for loan losses associated with these loans. The ~~more severely graded~~lower the ~~loan,~~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 included $17.9 million and $18.2 million of PCI TDRs at March 31, 2019 and December 31, 2018, respectively.

June 30, 2018 December 31, 2017
(Dollars in thousands) Accruing Nonaccruing Total Accruing Nonaccruing Total
Commercial loans
Construction and land development -
commercial $ 2,050
$ 228
$ 2,278
$ 4,089
$ 483
$ 4,572
Commercial mortgage 58,877
10,304
69,181
62,358
15,863
78,221
Other commercial real estate 1,039
39
1,078
1,012
788
1,800
Commercial and industrial 6,673
988
7,661
7,598
910
8,508
Lease financing 677
429
1,106
722
1,048
1,770
Other 44
126
170
521
—
521
Total commercial TDRs 69,360
12,114
81,474
76,300
19,092
95,392
Noncommercial
Residential mortgage 38,266
9,958
48,224
34,067
9,475
43,542
Revolving mortgage 19,752
6,778
26,530
17,673
5,180
22,853
Construction and land development -
noncommercial 2,821
90
2,911
—
—
—
Consumer and other 2,111
574
2,685
2,351
423
2,774
Total noncommercial TDRs 62,950
17,400
80,350
54,091
15,078
69,169
Total TDRs $ 132,310
$ 29,514
$ 161,824
$ 130,391
$ 34,170
$ 164,561

~~The following table shows the accrual status of non-PCI and PCI TDRs.~~

(Dollars in thousands) June 30, 2018 December 31, 2017
Accruing TDRs:
PCI $ 18,546
$ 18,163
Non-PCI 113,764
112,228
Total accruing TDRs 132,310
130,391
Nonaccruing TDRs:
PCI 253
272
Non-PCI 29,261
33,898
Total nonaccruing TDRs 29,514
34,170
All TDRs:
PCI 18,799
18,435
Non-PCI 143,025
146,126
Total TDRs $ 161,824
$ 164,561



	March 31, 2019						December 31, 2018
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial loans
Construction and land development - commercial	$	1,914	$	329	$	2,243	$	1,946	$	352	$	2,298
Commercial mortgage	51,202		6,653		57,855		53,270		7,795		61,065
Other commercial real estate	536		5		541		851		9		860
Commercial and industrial and leases	8,253		1,792		10,045		7,986		2,060		10,046
Other	119		218		337		118		173		291
Total commercial loans	62,024		8,997		71,021		64,171		10,389		74,560
Noncommercial
Residential mortgage	37,111		10,582		47,693		37,903		9,621		47,524
Revolving mortgage	20,320		9,200		29,520		20,492		8,196		28,688
Construction and land development - noncommercial	2,150		180		2,330		2,227		110		2,337
Consumer and other	2,106		847		2,953		2,300		721		3,021
Total noncommercial loans	61,687		20,809		82,496		62,922		18,648		81,570
Total loans	$	123,711	$	29,806	$	153,517	$	127,093	$	29,037	$	156,130

The following table provides the types of ~~non-PCI and PCI~~ TDRs made during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017,~~ as well as a summary of loans that were modified as a TDR during the twelve month periods ended ~~June 30,~~March 31, 2019 and March 31, 2018 ~~and June 30, 2017~~ that subsequently defaulted during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017.~~March 31, 2018. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.

Three months ended June 30, 2018 Three months ended June 30, 2017
All restructurings Restructurings with payment default All restructurings Restructurings with payment default
(Dollars in thousands) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end
Non-PCI and PCI loans and leases
Interest only 1
154
2
821
3
571
1
332
Loan term extension 10
936
7
341
13
1,397
1
32
Below market interest rate 53
9,525
33
1,702
73
4,440
32
2,800
Discharged from bankruptcy 37
2,472
24
1,490
40
1,442
24
615
Total non-PCI and PCI restructurings 101
$ 13,087
66
$ 4,354
129
$ 7,850
58
$ 3,779


	Six months ended June 30, 2018						Six months ended June 30, 2017						Three months ended March 31, 2019						Three months ended March 31, 2018
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Non-PCI and PCI loans and leases
Loans and leases
Interest only	2	821		2	821		3	571		1	332		—	$	—	—	$	—	1	$	644	—	$	—
Loan term extension	17	1,658		8	638		21	2,070		1	32		3	420		3	541		6	932		1	305
Below market interest rate	139	15,873		64	3,385		159	12,582		49	4,231		46	2,953		33	2,123		66	5,660		30	1,814
Discharged from bankruptcy	91	5,595		55	4,338		97	3,005		42	2,091		42	1,868		25	1,144		48	3,813		43	3,172
Total non-PCI and PCI restructurings	249	$	23,947	129	$	9,182	280	$	18,228	93	$	6,686

Total restructurings													91	$	5,241	61	$	3,808	121	$	11,049	74	$	5,291

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017,~~ the pre-modification and post-modification outstanding recorded investments of loans modified as TDRs were not materially different.

NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in other real estate owned during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017.~~March 31, 2018.


(Dollars in thousands)	Total			Total
Balance at December 31, 2016	$	61,231
Balance at December 31, 2018				$	48,030
Additions	21,891			3,133
Additions acquired in the Guaranty Bank acquisition	55
Sales	(20,236		)	(6,934		)
Write-downs	(2,160		)	(923		)
Balance at June 30, 2017	$	60,781
Balance at March 31, 2019				$	43,306

Balance at December 31, 2017	$	51,097		$	51,097
Additions	11,868			6,582
Additions acquired in the HomeBanc acquisition	2,135
Sales	(15,769		)	(7,997		)
Write-downs	(2,698		)	(1,593		)
Balance at June 30, 2018	$	46,633
Balance at March 31, 2018				$	48,089

At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, BancShares had ~~$15.1~~$15.4 million and ~~$19.8~~$17.2 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was ~~$25.3~~$23.9 million and ~~$26.9~~$22.0 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

NOTE G - FDIC SHARED-LOSS PAYABLE

BancShares completed six FDIC-assisted transactions with shared-loss agreements during the period beginning in 2009 through 2011. Prior to its merger into BancShares, Bancorporation completed three FDIC-assisted transactions with shared-loss agreements.

As of ~~June 30, 2018,~~March 31, 2019, shared-loss ~~agreements are still active for Georgian Bank (GB) and United Western Bank (UWB). Shared-loss~~ protection remains for single family residential loans acquired ~~from UWB and GB~~ in the amount of ~~$62.1~~$53.9 million.

The shared-loss agreements for two FDIC-assisted transactions ~~First Regional Bank (FRB) and UWB,~~ include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). The clawback liability represents a payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. ~~As of June 30, 2018 and December 31, 2017, the estimated clawback liability was $103.5 million and $101.3 million, respectively.~~ The clawback liability payment dates ~~for FRB and UWB~~ are March 2020 and March ~~2021, respectively.~~2021.

The following table provides changes in the FDIC shared-loss payable ~~for the three and six months ended June 30, 2018 and June 30, 2017.~~since December 31, 2018:

Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2018 2017 2018 2017
Beginning balance $ 102,466
$ 98,013
$ 101,342
$ 97,008
Amortization 1,001
963
1,993
1,917
Adjustments related to changes in assumptions 20
150
152
201
Ending balance $ 103,487
$ 99,126
$ 103,487
$ 99,126



(Dollars in thousands)	Total
Balance at December 31, 2018	$	105,618
Accretion	1,638
Balance at March 31, 2019	$	107,256

NOTE H - ~~MORTGAGE~~ SERVICING RIGHTS

Mortgage Servicing Rights

Our portfolio of residential mortgage loans serviced for third parties was ~~$2.87~~$2.97 billion and ~~$2.81~~$2.95 billion as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. These loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. ~~These~~The retained servicing rights are recorded as a servicing asset and reported in other intangible assets on the Consolidated Balance ~~Sheets.~~Sheets, while the associated amortization expense and any valuation allowance recognized is included as a reduction of mortgage income in the Consolidated Statements of Income. The mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair ~~market~~ value.

~~The activity of the servicing asset for the three and six months ended June 30, 2018 and 2017 is presented in the following table:~~

Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2018 2017 2018 2017
Beginning balance $ 21,659
$ 20,771
$ 21,945
$ 20,415
Servicing rights originated 1,430
1,123
2,630
2,825
Amortization (1,432 ) (1,370 ) (2,918 ) (2,720 )
Valuation allowance reversal —
—
—
4
Ending balance $ 21,657
$ 20,524
$ 21,657
$ 20,524

The amortization expense related to mortgage servicing rights is included as a reduction of mortgage income in the Consolidated Statements of Income. Mortgage income for the three and six months ended June 30, 2018 and the three months ended June 30, 2017 did not include any impairment compared to an impairment reversal of $4 thousand for the six months ended June 30, 2017.

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for ~~both~~ the three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were $1.9 million and reported in mortgage income in the Consolidated Statements of Income. ~~For~~

The following table explains changes in the ~~six~~servicing asset during the three months ended ~~June 30,~~March 31, 2019 and 2018.



(Dollars in thousands)	Total
Balance at December 31, 2018	$	21,396
Servicing rights originated	859
Amortization	(1,447		)
Valuation allowance provision	(161		)
Balance at March 31, 2019	$	20,647

Balance at December 31, 2017	$	21,945
Servicing rights originated	1,200
Amortization	(1,486		)
Balance at March 31, 2018	$	21,659

BancShares recorded a valuation allowance of $161.0 thousand compared to no valuation allowance for the three months ended March 31, 2019 and March 31, 2018, ~~and 2017, contractually specified mortgage servicing fees, late fees and ancillary fees earned were $3.8 million and $3.6 million,~~ respectively.

Valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. Key economic assumptions used to value mortgage servicing rights ~~as of June 30, 2018 and December 31, 2017~~ were as follows:


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Discount rate - conventional fixed loans	9.86		%	9.41		%	9.41		%	9.69		%
Discount rate - all loans excluding conventional fixed loans	10.86		%	10.41		%	10.41		%	10.69		%
Weighted average constant prepayment rate	8.43		%	10.93		%	11.28		%	9.26		%
Weighted average cost to service a loan	$	72.79		$	64.03		$	88.07		$	87.52

The fair value of mortgage servicing rights is sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is based on the 10-year U.S. Treasury rate plus 700 basis points for conventional fixed loans and 800 basis points for all other loans. The 700 and 800 basis points are used as a risk premium when calculating the discount rate. The ~~repayment~~prepayment rate is derived from the Public Securities Association Standard Prepayment model. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity. This results in a decrease in fair value. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.

Other Servicing Rights

Other servicing rights were acquired as part of a business combination and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $2.4 million and $2.7 million at March 31, 2019 and December 31, 2018, respectively.

NOTE I - REPURCHASE AGREEMENTS

BancShares, through FCB, utilizes securities sold under customer repurchase agreements ~~to repurchase~~ to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby ~~BancShares~~FCB offers to sell to a counterparty an undivided interest in an eligible security, ~~at an agreed upon purchase price,~~ and which obligates ~~BancShares~~FCB to repurchase the security, ~~on an agreed upon date at an agreed upon repurchase price plus~~with interest, at an agreed upon date, repurchase price, and interest rate. ~~Securities sold under~~These agreements ~~to repurchase~~ are recorded at the amount of cash received in connection with the transaction and are ~~generally~~ reflected as ~~short-term borrowings~~securities sold under customer repurchase agreements on the Consolidated Balance Sheets.

Repurchase agreements require FCB to maintain collateral to support the outstanding obligations. BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of ~~available for sale~~ investment securities pledged as collateral under repurchase agreements was ~~$511.8~~$571.6 million and ~~$684.2~~$598.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The remaining contractual maturity of the $508.5 million and $543.9 million securities sold under repurchase agreements ~~to repurchase by class of collateral pledged included~~at March 31, 2019 and December 31, 2018, respectively, is overnight and continuous and are pledged by U.S. Treasury securities totaling $499.7 million at June 30, 2018 and $556.2 million at December 31, 2017. At December 31, 2017, there also were U.S. Treasury securities with a remaining contractual maturity of 30-90 days totaling $30.0 million for a gross amount of $586.2 million.

securities.

NOTE J - ESTIMATED FAIR VALUES

Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, BancShares has made estimates using discounted cash flows or other valuation techniques. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange.

ASC 820, Fair Value Measurements and Disclosures, indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the highest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows:

Level 1 values are based on quoted prices for identical instruments in active markets.

Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 values are derived from valuation techniques in which one or more significant inputs or assumptions are not observable in the market. These unobservable inputs and assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

BancShares' management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

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

Investment securities available for sale. Investment securities available for sale are carried at fair value. U.S. Treasury, government agency and mortgage-backed securities are generally measured at fair value using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. Corporate bonds and trust preferred securities are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3.

~~Marketable~~Investment in marketable equity securities. Equity securities are measured at fair value using observable closing prices and the valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market.

Loans held for sale. Certain residential real estate loans that are originated to be sold to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs. Portfolio loans that are subsequently transferred to held for sale to be sold in the secondary market are carried at the lower of amortized cost or fair value. The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input.

Net loans and leases (PCI and Non-PCI). Fair value is estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. The inputs used in the fair value measurements for loans and leases are considered Level 3 inputs.

FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs.

Mortgage and other servicing rights. Mortgage and other servicing rights are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is performed using a pooling methodology. Similar loans are pooled together and a model that relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage and other servicing rights are considered Level 3 inputs.

Deposits. For non-time deposits, carrying value is a reasonable estimate of fair value. The fair value of time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The inputs used in the fair value measurement for deposits are considered Level 2 inputs.

~~Long-term obligations.~~Borrowings. For ~~long-term obligations,~~borrowings, the fair values are determined based on recent trades or sales of the actual security if available, otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for long-term ~~obligations~~borrowings are considered Level 2 inputs.

Payable to the FDIC for shared-loss agreements. The fair value of the payable to the FDIC for shared-loss agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the shared-loss agreements. Cash flows are discounted using current discount rates to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurement for the payable to the FDIC are considered Level 3 inputs.

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, ~~short-term borrowings~~securities sold under customer repurchase agreements, and accrued interest payable are considered Level 2.

The table presents the carrying values and estimated fair values for financial instruments as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


(Dollars in thousands)	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	260,525	$	260,525	$	336,150	$	336,150	$	268,599	$	268,599	$	327,440	$	327,440
Overnight investments	1,223,311		1,223,311		1,387,927		1,387,927		1,386,525		1,386,525		797,406		797,406
Investment securities available for sale	4,783,507		4,783,507		7,180,180		7,180,180		4,589,800		4,589,800		4,557,110		4,557,110
Investment securities held to maturity	2,299,774		2,302,093		76		81		2,214,829		2,254,924		2,184,653		2,201,502
Marketable equity securities	107,264		107,264		—		—
Investment in marketable equity securities									109,884		109,884		92,599		92,599
Loans held for sale	58,961		58,961		51,179		51,179		53,232		53,232		45,505		45,505
Net loans and leases	24,313,572		23,704,523		23,374,932		22,257,803		25,235,010		25,187,938		25,299,564		24,845,060
Income earned not collected	99,567		99,567		95,249		95,249		113,812		113,812		109,903		109,903
Federal Home Loan Bank stock	22,658		22,658		52,685		52,685		25,174		25,174		25,304		25,304
Mortgage servicing rights	21,657		28,668		21,945		26,170
Mortgage and other servicing rights									24,080		25,769		24,615		27,435
Deposits	30,408,884		30,362,605		29,266,275		29,230,768		31,198,093		31,174,142		30,672,460		30,623,214
Short-term borrowings	613,993		613,993		693,807		693,807
Long-term obligations	241,360		250,823		870,240		852,112
Payable to the FDIC for shared-loss agreements	103,487		103,966		101,342		102,684
Securities sold under customer repurchase agreements									508,508		508,508		543,936		543,936
Federal Home Loan Bank borrowings									189,594		192,779		193,556		195,374
Subordinated debentures									136,544		140,676		140,741		151,670
Other borrowings									14,970		14,833		13,921		13,985
FDIC shared-loss payable									107,256		109,947		105,618		105,846
Accrued interest payable	1,909		1,909		3,952		3,952		7,169		7,169		3,712		3,712

Among BancShares' assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


	June 30, 2018								March 31, 2019
			Fair value measurements using:								Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,503,974	$	—	$	1,503,974	$	—	$	1,197,042	$	—	$	1,197,042	$	—
Government agency	131,035		—		131,035		—		350,527		—		350,527		—
Mortgage-backed securities	3,034,065		—		3,034,065		—		2,895,944		—		2,895,944		—
Corporate bonds	108,790		—		—		108,790		142,162		—		—		142,162
Other	5,643		—		—		5,643		4,125		—		—		4,125
Total investment securities available for sale	$	4,783,507	$	—	$	4,669,074	$	114,433	$	4,589,800	$	—	$	4,443,513	$	146,287
Marketable equity securities	$	107,264	$	21,667	$	85,597	$	—	$	109,884	$	18,250	$	91,634	$	—
Loans held for sale	$	58,961	$	—	$	58,961	$	—	$	53,232	$	—	$	53,232	$	—

	December 31, 2017								December 31, 2018
			Fair value measurements using:								Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,657,864	$	—	$	1,657,864	$	—	$	1,247,710	$	—	$	1,247,710	$	—
Government agency	8,670		—		8,670		—		256,835		—		256,835		—
Mortgage-backed securities	5,340,756		—		5,340,756		—		2,909,339		—		2,909,339		—
Equity securities	105,208		19,341		85,867		—
Corporate bonds	59,963		—		59,963		—		139,101		—		—		139,101
Other	7,719		—		7,719		—		4,125		—		—		4,125
Total investment securities available for sale	$	7,180,180	$	19,341	$	7,160,839	$	—	$	4,557,110	$	—	$	4,413,884	$	143,226
Marketable equity securities									$	92,599	$	17,887	$	74,712	$	—
Loans held for sale	$	51,179	$	—	$	51,179	$	—	$	45,505	$	—	$	45,505	$	—

During the three months ended ~~June 30, 2018,~~March 31, 2019, there were no transfers between levels. For the ~~six~~three months ended ~~June 30,~~March 31, 2018 there were transfers from Level 2 to Level 3 of $59.7 million and $5.6 million offor corporate bonds and other investment securities available for sale, respectively. The transfers were due to a lack of observable inputs and trade activity for those securities. ~~There were no transfers between levels for the three and six months ended June 30, 2017.~~

The following tables summarize activity for Level 3 assets:

Three months ended June 30, 2018
(Dollars in thousands) Corporate bonds Other
Balance at April 1, 2018 $ 59,653
$ 5,618
Amounts included in net income 48
7
Unrealized net (losses) gains included in other comprehensive income (97 ) 18
Purchases 51,591
—
Sales (2,405 ) —
Balance at June 30, 2018 $ 108,790
$ 5,643


	Six months ended June 30, 2018					Three months ended March 31, 2019
(Dollars in thousands)	Corporate bonds			Other		Corporate bonds		Other
Balance at January 1, 2018	$	—		$	—
Balance at January 1, 2019						$	139,101	$	4,125
Transfers in	59,653			5,618		—		—
Amounts included in net income	48			7		39		6
Unrealized net (losses) gains included in other comprehensive income	(97		)	18
Unrealized net gains (losses) included in other comprehensive income						22		(6		)
Purchases	51,591			—		3,000		—
Sales	(2,405		)	—
Balance at June 30, 2018	$	108,790		$	5,643
Sales / Calls						—		—
Balance at March 31, 2019						$	142,162	$	4,125

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at ~~June 30, 2018.~~March 31, 2019.

(Dollars in thousands)

June 30, 2018

(Dollars in thousands)

March 31, 2019

Level 3 assets

Valuation technique

Significant unobservable input

Fair Value

Valuation technique

Significant unobservable input

Fair Value

Corporate bonds

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company

108,790

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company

142,162

Other

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company

5,643

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company

4,125

Fair Value Option

BancShares has elected the fair value option for residential real estate loans originated to be sold. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value are recorded as a component of mortgage income and included ~~gains~~a gain of ~~$700~~$249 thousand and ~~$291~~a loss of $455 thousand for the three months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017, respectively. For the six months ended June 30, 2018 and 2017, the changes in fair value were gains of $245 thousand and $3.5 million,~~ respectively.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


	June 30, 2018						March 31, 2019
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference		Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	58,961	$	57,334	$	1,627	$	53,232	$	51,550	$	1,682

	December 31, 2017						December 31, 2018
	Fair Value		Aggregate Unpaid Principal Balance		Difference		Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	51,179	$	49,796	$	1,383	$	45,505	$	44,073	$	1,432

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of ~~June 30, 2018~~March 31, 2019 or December 31, ~~2017.~~2018.

~~Certain other~~We may be required to measure certain financial assets ~~are adjusted to their~~at fair value on a nonrecurring ~~basis, including impaired loans, OREO, and goodwill, which are periodically tested for impairment, and mortgage servicing rights, which are carried at~~basis. These adjustments to fair value usually result from the application of lower of amortized cost or ~~market. Non-impaired loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at~~ fair ~~value.~~value accounting or write-downs of individual assets due to impairment.

Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 66% and ~~11 percent~~11% applied for estimated ~~holding and~~ selling costs and other external factors that may impact the marketability of the property. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate generally ranges between 22% and ~~18 percent.~~18%.

OREO ~~that has been~~ acquired or written down inwithin the ~~current year~~previous 12 months is deemed to be at fair ~~value, which uses asset valuations.~~value. Asset ~~values~~valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts generally between 66% and ~~11 percent~~11% applied for estimated ~~holding and~~ selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information.

For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


	June 30, 2018								March 31, 2019
			Fair value measurements using:								Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	74,301	$	—	$	—	$	74,301	$	110,411	$	—	$	—	$	110,411
Other real estate remeasured during current year	21,105		—		—		21,105
Other real estate remeasured during the previous 12 months									32,620		—		—		32,620

	December 31, 2017								December 31, 2018
			Fair value measurements using:								Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	72,539	$	—	$	—	$	72,539	$	105,994	$	—	$	—	$	105,994
Other real estate remeasured during current year	40,167		—		—		40,167
Other real estate remeasured during the previous 12 months									35,344		—		—		35,344

No financial liabilities were carried at fair value on a nonrecurring basis as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

NOTE K - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and former First Citizens Bancorporation, Inc. employees (Bancorporation Plan). The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.

BancShares Plan

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the components of net periodic benefit cost are as follows:


	Three months ended June 30						Six months ended June 30						Three months ended March 31
(Dollars in thousands)	2018			2017			2018			2017			2019			2018
Service cost	$	3,362		$	2,934		$	6,791		$	6,310		$	2,568		$	3,429
Interest cost	7,131			7,069			14,188			14,449			7,531			7,057
Expected return on assets	(11,976		)	(10,307		)	(23,933		)	(21,005		)	(12,867		)	(11,957		)
Amortization of prior service cost	20			53			40			105			14			20
Amortization of net actuarial loss	3,548			2,193			6,794			4,427			2,114			3,246
Net periodic benefit cost	$	2,085		$	1,942		$	3,880		$	4,286
Net periodic (benefit) cost													$	(640	)	$	1,795

Bancorporation Plan

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the components of net periodic benefit cost are as follows:


	Three months ended June 30						Six months ended June 30						Three months ended March 31
(Dollars in thousands)	2018			2017			2018			2017			2019			2018
Service cost	$	624		$	670		$	1,286		$	1,341		$	545		$	662
Interest cost	1,592			1,682			3,179			3,365			1,760			1,587
Expected return on assets	(3,110		)	(2,796		)	(6,216		)	(5,592		)	(2,768		)	(3,106		)
Amortization of net actuarial loss	86			214			157			428			627			71
Net periodic benefit cost	$	(808	)	$	(230	)	$	(1,594	)	$	(458	)
Net periodic cost (benefit)													$	164		$	(786	)

No discretionary contributions were made during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 to the BancShares or Bancorporation pension plans. ~~We anticipate making~~Management evaluates the need for its pension plan contributions on a ~~$50.0 million contribution~~periodic basis based upon numerous factors including, but not limited to, the ~~BancShares plan during 2018.~~funded status of and returns on the pension plans, discount rates and the current economic environment.

NOTE L - COMMITMENTS AND CONTINGENCIES

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

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements, and the fair value of those commitments is not material. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.

The following table presents the commitments to extend credit and unfunded commitments as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


(Dollars in thousands)	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Unused commitments to extend credit	$	10,119,455	$	9,629,365	$	10,187,550	$	10,054,712
Standby letters of credit	87,574		81,530		91,719		96,467
Unfunded commitments for investments in affordable housing projects	77,622		61,819		72,002		67,952

Affordable housing project investments were ~~$150.5~~$152.9 million and ~~$128.0~~$147.3 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, and are included in other assets on the Consolidated Balance Sheets.

Pursuant to standard representations and warranties relating to residential mortgage loan sales sold on a non-recourse basis, contingent obligations exist for various events that may occur following the loan sale. If underwriting or documentation deficiencies are discovered at any point in the life of the loan or if the loan fails to perform per the terms of the loan purchase agreement, typically within 180 days from the date of sale, the investor may require BancShares to repurchase the loan or to repay a portion of the sale proceeds. Other liabilities included reserves of $830 thousand and $882 thousand as of June 30, 2018 and December 31, 2017, respectively, for estimated losses arising from these standard representation and warranty provisions.

BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various merger transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

NOTE M - ACCUMULATED OTHER COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

Accumulated other comprehensive loss included the following as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018:


	June 30, 2018									December 31, 2017									March 31, 2019									December 31, 2018
(Dollars in thousands)	Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax
Unrealized losses on securities available for sale	$	(74,671	)	$	(17,175	)	$	(57,496	)	$	(48,834	)	$	(17,889	)	$	(30,945	)	$	(21,936	)	$	(5,046	)	$	(16,890	)	$	(50,007	)	$	(11,502	)	$	(38,505	)
Unrealized losses on securities available for sale transferred to held to maturity	(105,034		)	(24,158		)	(80,876		)	—			—			—			(86,439		)	(19,881		)	(66,558		)	(92,401		)	(21,252		)	(71,149		)
Funded status of defined benefit plans	(138,008		)	(31,742		)	(106,266		)	(144,999		)	(53,650		)	(91,349		)
Defined benefit pension items																			(160,275		)	(36,863		)	(123,412		)	(163,030		)	(37,497		)	(125,533		)
Total	$	(317,713	)	$	(73,075	)	$	(244,638	)	$	(193,833	)	$	(71,539	)	$	(122,294	)	$	(268,650	)	$	(61,790	)	$	(206,860	)	$	(305,438	)	$	(70,251	)	$	(235,187	)

The following table highlights changes in accumulated other comprehensive (loss) income by component for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~March 31, 2018:


	Three months ended June 30, 2018												Three months ended March 31, 2019
(Dollars in thousands)	Unrealized (losses) gains on securities available for sale¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total			Unrealized (losses) gains on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(121,243	)	$	—		$	(109,080	)	$	(230,323	)	$	(38,505	)	$	(71,149	)	$	(125,533	)	$	(235,187	)
Cumulative effect adjustments	—			—			—			—			—			—			—			—
Other comprehensive loss before reclassifications	63,747			(84,321		)	—			(20,574		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			3,445			2,814			6,259
Net current period other comprehensive (loss) income	63,747			(80,876		)	2,814			(14,315		)
Ending balance	$	(57,496	)	$	(80,876	)	$	(106,266	)	$	(244,638	)

	Three months ended June 30, 2017
	Unrealized (losses) gains on securities available for sale¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance	$	(23,183	)	$	—		$	(87,758	)	$	(110,941	)
Other comprehensive income before reclassifications	8,646			—			—			8,646
Amounts reclassified from accumulated other comprehensive (loss) income	(2,111		)	—			1,563			(548		)
Net unrealized gains arising during period													21,615			—			—			21,615
Amounts reclassified from accumulated other comprehensive loss													—			4,591			2,121			6,712
Net current period other comprehensive income	6,535			—			1,563			8,098			21,615			4,591			2,121			28,327
Ending balance	$	(16,648	)	$	—		$	(86,195	)	$	(102,843	)	$	(16,890	)	$	(66,558	)	$	(123,412	)	$	(206,860	)

	Six months ended June 30, 2018												Three months ended March 31, 2018
	Unrealized (losses) gains on securities¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total			Unrealized (losses) gains on securities available for sale⁽¹⁾			Unrealized losses on securities available for sale transferred to held to maturity⁽¹⁾			Defined benefit pension items⁽¹⁾			Total
Beginning balance	$	(30,945	)	$	—		$	(91,349	)	$	(122,294	)	$	(30,945	)	$	—		$	(91,349	)	$	(122,294	)
Cumulative effect adjustments	(29,752		)	—			(20,300		)	(50,052		)	(29,751		)	—			(20,300		)	(50,051		)
Other comprehensive income before reclassifications	3,201			(84,321		)	—			(81,120		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			3,445			5,383			8,828
Net current period other comprehensive income	3,201			(80,876		)	5,383			(72,292		)
Net unrealized (losses) arising during period													(60,547		)	—			—			(60,547		)
Amounts reclassified from accumulated other comprehensive loss													—			—			2,569			2,569
Net current period other comprehensive (loss) income													(60,547		)	—			2,569			(57,978		)
Ending balance	$	(57,496	)	$	(80,876	)	$	(106,266	)	$	(244,638	)	$	(121,243	)	$	—		$	(109,080	)	$	(230,323	)

	Six months ended June 30, 2017
	Unrealized (losses) gains on securities¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance	$	(45,875	)	$	—		$	(89,317	)	$	(135,192	)
Other comprehensive income before reclassifications	31,323			—			—			31,323
Amounts reclassified from accumulated other comprehensive (loss) income	(2,096		)	—			3,122			1,026
Net current period other comprehensive income	29,227			—			3,122			32,349
Ending balance	$	(16,648	)	$	—		$	(86,195	)	$	(102,843	)

¹⁽¹⁾ All amounts are net of tax. Amounts in parentheses indicate debits.

The following table presents the amounts reclassified from accumulated other comprehensive (loss) income ~~(loss)~~ and the line item affected in the statement where net income is presented for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~March 31, 2018.


(Dollars in thousands)	Three months ended June 30, 2018
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
					Three months ended March 31, 2019
(Dollars in thousands) Details about accumulated other comprehensive (loss) income					Amounts reclassified from accumulated other comprehensive (loss) income⁽¹⁾			Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(4,473	)	Other	$	(5,962	)	Net interest income
	1,028			Income taxes	1,371			Income taxes
	$	(3,445	)	Net Income	$	(4,591	)	Net Income
Amortization of defined benefit pension items
Prior service costs	$	(20	)	Salaries and wages	$	(14	)	Salaries and wages
Actuarial losses	(3,634		)	Other	(2,741		)	Other
	(3,654		)	Income before income taxes	(2,755		)	Income before income taxes
	840			Income taxes	634			Income taxes
	$	(2,814	)	Net income	$	(2,121	)	Net income
Total reclassifications for the period	$	(6,259	)		$	(6,712	)

	Three months ended June 30, 2017				Three months ended March 31, 2018
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
Unrealized gains and losses on securities available for sale	$	3,351		Securities gains, net
	(1,240		)	Income taxes
	$	2,111		Net income
Details about accumulated other comprehensive (loss) income					Amounts reclassified from accumulated other comprehensive (loss) income⁽¹⁾			Affected line item in the statement where net income is presented
Amortization of defined benefit pension items
Prior service costs	$	(53	)	Salaries and wages	$	(20	)	Salaries and wages
Actuarial losses	(2,407		)	Other	(3,317		)	Other
	(2,460		)	Income before income taxes	(3,337		)	Income before income taxes
	897			Income taxes	768			Income taxes
	$	(1,563	)	Net income	$	(2,569	)	Net income
Total reclassifications for the period	$	548			$	(2,569	)

	Six months ended June 30, 2018
Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(4,473	)	Other
	1,028			Income taxes
	$	(3,445	)	Net income
Amortization of defined benefit pension items
Prior service costs	$	(40	)	Salaries and wages
Actuarial losses	(6,951		)	Other
	(6,991		)	Employee benefits
	1,608			Income taxes
	$	(5,383	)	Net income
Total reclassifications for the period	$	(8,828	)

	Six months ended June 30, 2017
Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
Unrealized gains and losses on securities available for sale	$	3,327		Securities gains, net
	(1,231		)	Income taxes
	$	2,096		Net income
Amortization of defined benefit pension items
Prior service costs	$	(105	)	Salaries and wages
Actuarial losses	(4,855		)	Other
	(4,960		)	Employee benefits
	1,838			Income taxes
	$	(3,122	)	Net income
Total reclassifications for the period	$	(1,026	)

¹⁽¹⁾ Amounts in parentheses indicate debits to profit/loss.

NOTE N - LEASES

BancShares leases certain branch locations, administrative offices and equipment. Operating leases are included in other assets and other liabilities on the Consolidated Balance Sheets. Finance leases are included in premises and equipment and other borrowings on the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we instead recognize lease expense for these leases on a straight-line basis over the lease term.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our corresponding obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating and finance lease ROU asset also includes initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of our leases do not provide an implicit rate, BancShares uses its incremental borrowing rate, based on the information available at commencement date in determining the present value of lease payments. BancShares determines the incremental borrowing rate using secured rates for FHLB new advances under similar terms as the lease at inception. BancShares used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that we will exercise our option to renew or extend the lease term, that option is included in determining the value of the ROU and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

We determine if an arrangement is a lease at inception and our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have no related party lease agreements. As of March 31, 2019,there are no leases that have not yet commenced that would have a material impact on our Consolidated Financial Statements.

We rent or sublease certain real estate to third parties to manage occupancy costs and provide flexibility to expand and contract occupancy space to meet our business needs.

The following table presents lease assets and liabilities as of March 31, 2019.



(Dollars in thousands)	Classification	March 31, 2019
Assets:
Operating	Other assets	$	70,815
Finance	Premises and equipment	8,763
Total leased assets		$	79,578
Liabilities:
Operating	Other liabilities	72,315
Finance	Other borrowings	7,828
Total lease liabilities		$	80,143

The following table presents lease costs for the three months ended March 31, 2019. Variable lease cost primarily represents variable payments such as common area maintenance and utilities that are recognized in the period in which the expense is incurred. Certain of our lease agreements also include rental payments that are adjusted periodically for inflation. While lease liabilities are not remeasured as a result of these changes, these adjustments are treated as a variable lease cost and recognized in the period in which the expense is incurred.



(Dollars in thousands)	Classification	Three months ended March 31, 2019
Lease cost:
Operating lease cost ⁽¹⁾	Occupancy expense	$	3,204
Finance lease cost:
Amortization of leased assets	Equipment expense	447
Interest on lease liabilities	Interest Expense - Other borrowings	65
Variable lease cost	Occupancy expense	528
Sublease income	Occupancy expense	(130		)
Net lease cost		$	4,114
⁽¹⁾Operating lease cost includes short-term lease cost, which is immaterial.

The following table presents lease liability maturities in the next five years and thereafter.



(Dollars in thousands)	Operating Leases		Finance Leases		Total
2019 ⁽¹⁾	$	10,310	$	1,301	$	11,611
2020	12,475		1,748		14,223
2021	10,947		1,764		12,711
2022	9,575		1,481		11,056
2023	7,772		599		8,371
Thereafter	35,343		1,683		37,026
Total lease payments	$	86,422	$	8,576	$	94,998
Less: Interest	14,107		748		14,855
Present value of lease liabilities	$	72,315	$	7,828	$	80,143
⁽¹⁾Represents the lease liability payments that will be made for the period April 1, 2019 through December 31, 2019.

The following table presents the remaining weighted average lease terms and discount rates as of March 31, 2019.



Weighted average remaining lease term (years):	March 31, 2019
Operating	9.7
Finance	5.4
Weighted average discount rate:
Operating	3.36	%
Finance	3.22

The following table presents supplemental cash flow information related to leases for the three months ended March 31, 2019.



(Dollars in thousands)	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,550
Operating cash flows from finance leases	65
Financing cash flows from finance leases	366
Right-of-use assets obtained in exchange for new operating lease liabilities	3,591
Right-of-use assets obtained in exchange for new finance lease liabilities	—


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

Management’s discussion and analysis (MD&A) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this report along with our financial statements and related MD&A of financial condition and results of operations included in our ~~2017~~2018 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for ~~2018,~~2019, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares.

EXECUTIVE OVERVIEW

BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB), a state-chartered bank organized under the laws of the state of North Carolina.

BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue.

Interest rates have presented significant challenges to commercial banks' efforts to generate earnings and shareholder value. Our strategy continues to focus on maintaining an interest rate risk profile that will benefit net interest income in a rising rate environment. Management drives to this goal by focusing on core customer deposits and loans in the targeted interest rate risk profile. Additionally, our initiatives focus on growth of noninterest income sources, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology and delivery channels. Refer to our Form 10-K for the year ended December 31, ~~2017~~2018 for further discussion of our strategy.

Significant Events in ~~2018~~2019

On ~~July 25, 2018,~~May 1, 2019, FCB completed the merger of Spartanburg, South Carolina-based First South Bancorp and Palmetto Heritage Bancshares, Inc. (Palmetto) announced the signing of a definitive merger agreement. The agreement provides for the acquisition of Pawley's Island, SC-based Palmetto Heritage Bancshares byits bank subsidiary, First South Bank, into FCB. ~~This acquisition is expected to close during the fourth quarter of 2018.~~

On ~~June 27, 2018,~~April 23, 2019, FCB ~~and Capital Commerce Bancorp, Inc. (Capital Commerce)~~ entered into a definitive merger ~~agreement. The~~ agreement ~~provides~~ for the acquisition of ~~Milwaukee, Wisconsin-based Capital Commerce by~~Franklin, North Carolina-based Entegra Financial Corp. and its bank subsidiary, Entegra Bank, into FCB. ~~This acquisition is expected to close no later than the fourth quarter of 2018.~~

On ~~May 1, 2018,~~April 2, 2019, FCB completed the merger of ~~Tampa,~~Coconut Grove, Florida-based ~~HomeBancorp, Inc. (HomeBancorp)~~Biscayne Bancshares and its bank subsidiary, ~~HomeBanc,~~Biscayne Bank, into FCB.

RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS

Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. ~~Second~~Based on the latest real gross domestic product (GDP) information available, the Bureau of Economic Analysis' revised estimate of fourth quarter 2018 ~~national economic results indicate solid labor market conditions~~GDP growth was 2.2%, down from 3.4% GDP growth in the third quarter of 2018. The estimated real GDP deceleration in the fourth quarter primarily reflected slow declines in private inventory investment, state and ~~strong gains~~government spending, personal consumption expenditures and federal government spending. Imports increased less in ~~employment, counterpoised~~the fourth quarter of 2018 than in the third quarter of 2018. These movements were partly offset by ~~moderated growth rates~~an upturn in ~~household spending~~exports and ~~business capital spending.~~ an acceleration in nonresidential fixed investment.

The ~~national~~United States (U.S.) unemployment rate declined from ~~4.1 percent~~3.9% in December 2018 to 3.8% in March ~~2018 to 4.0 percent in June 2018.~~2019. According to the U.S. Department of Labor, the U.S. economy added approximately ~~632,000~~541,000 new nonfarm payroll jobs during the ~~second~~first quarter of ~~2018.~~2019. The U.S. housing market remains stable as a result of solid housing demand fueled by low mortgage interest rates, economic growth and job creation.

The Federal Reserve’s Federal Open Market Committee (FOMC) indicated in the ~~second~~first quarter of 2019 that the U.S. labor market ~~continued to strengthen~~remains strong and that economic activity ~~has been rising~~rose at a solid rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to ~~raise~~maintain the target range for the federal funds rate, ~~by 25 basis points~~leaving it at 2.25% to ~~1.75 to 2.0 percent.~~2.50%. 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 percent~~2.0% inflation.

~~The trends in the banking industry are similar to those of the broader economy as shown in the latest national banking results from~~

FINANCIAL PERFORMANCE SUMMARY

For the first quarter of ~~2018. FDIC-insured institutions reported a 27.5 percent increase in net income compared to the first~~

quarter of 2017 as a result of growth in net interest income, higher noninterest income and a lower effective tax rate due to the Tax Cuts and Jobs Act of 2017 (Tax Act). Using the higher effective tax rate before the enactment of the Tax Act, estimated net income for the first quarter of 2018 would have increased 12.6 percent compared to the same period in 2017. These improvements to net income were partially offset by higher loan-loss provisions and increased noninterest expense. Banking industry average net interest margin was 3.32 percent in the first quarter of 2018, up from 3.19 percent in the first quarter of 2017. Total loans and leases increased by 4.9 percent over the past twelve months due to growth in commercial and industrial loans, residential mortgage loans, credit cards and nonfarm nonresidential loans.

~~EARNINGS PERFORMANCE SUMMARY~~

~~BancShares'~~2019 consolidated net income ~~for the second quarter of 2018~~ was ~~$93.3~~$111.4 million, or ~~$7.77~~$9.67 per share, compared to $100.2 million, or $8.35 per share, for the ~~first quarter of 2018, and $134.7 million, or $11.21 per share, for the~~ corresponding period of ~~2017.~~2018. BancShares’ ~~current~~first quarter results generated an annualized return on average assets of ~~1.08 percent~~1.27% and an annualized return on average equity of ~~11.00 percent,~~12.86%, compared to ~~respective returns of 1.19 percent~~1.19% and ~~12.20 percent~~12.20%, respectively, for the first quarter of ~~2018, and 1.58 percent and 17.10 percent for the second quarter of 2017.~~ 2018.

First Quarter Highlights

Net ~~interest margin for the second quarter of 2018 was 3.64 percent, compared to 3.57 percent~~income for the first quarter of ~~2018 and 3.28 percent for~~2019 totaled $111.4 million, an increase of $11.2 million, or 11.1% compared to the ~~second~~first quarter of ~~the prior year.~~

~~For the six months ended June 30, 2018, net~~2018. Net income ~~was $193.5 million, or $16.11~~ per share ~~compared~~increased 15.8% to $202.3 million, or $16.84 per share, reported for the same period of 2017. Annualized returns on average assets and average equity were 1.13 percent and 11.59 percent, respectively, for the six months ended June 30, 2018, compared to 1.20 percent and 13.11 percent, respectively, for the same period a year earlier. Year-to-date 2018 earnings included a pre-tax gain of $25.7 million resulting from the extinguishment of Federal Home Loan Bank (FHLB) debt obligations as well as favorable impacts from the Tax Cuts and Jobs Act of 2017 (Tax Act), which reduced the federal tax rate to 21.0 percent. Year-to-date 2017 earnings included pre-tax acquisition gains of $134.7 million recognized in connection with the FDIC-assisted transactions of Guaranty Bank (Guaranty) and Harvest Community Bank (HCB).

~~Key highlights~~$9.67 in the ~~second~~first quarter of ~~2018 include:~~

~~Loans grew~~2019, largely impacted by ~~$926.4 million to $24.54 billion, or by 15.7 percent on an annualized basis, from March 31, 2018, due to the HomeBancorp acquisition and originated portfolio growth.~~

Deposits increased $439.6 million to $30.41 billion, or by 5.9 percent on an annualized basis, from March 31, 2018, primarily due to the deposit balances acquired from HomeBancorp and organic growth in demand deposit and interest-bearing savings and checking account balances.common stock repurchases.

Net interest income for the first quarter of 2019 increased ~~$11.8~~$36.1 million, or by ~~4.1 percent,~~12.7%, compared to the first quarter of 2018. The ~~increase was primarily due to higher non-purchased credit impaired (non-PCI) loan balances and yields, improved investment yields and a decline in interest expense.~~

~~The~~ taxable-equivalent net interest margin ~~increased 7~~(NIM) totaled 3.89% for the first quarter of 2019, an increase of 32 basis points ~~to 3.64 percent,~~ compared to 3.57% for the same quarter in 2018. This increase was primarily the result of higher loan interest and fees due to higher average outstanding balances and higher loan yields, partially offset by higher deposit costs.

Noninterest income for the first quarter of 2019 totaled $103.7 million, a decrease of $19.0 million from the first quarter of 2018. The reduction was primarily driven by a $25.8 million gain on debt extinguishment recognized during the first quarter of 2018, partially offset by a $10.4 million increase in the fair value adjustment on marketable equity securities, a $1.9 million increase in cardholder services income and a $1.4 million increase in wealth services income.

Noninterest expense for the first quarter of 2019 totaled $267.7 million, a decrease of $0.4 million from the first quarter of 2018. Declines in FDIC insurance, collection and foreclosure-related expense and processing fees were partially offset by increases in salaries and wages and equipment expense.

Income tax expense totaled $33.4 million with an effective tax rate of 23.1% for the first quarter of 2019, compared to $31.2 million tax expense and an effective tax rate of 23.8% for the first quarter of 2018.

Loans and leases were $25.46 billion at March 31, 2019, a net decrease of $59.5 million compared to December 31, 2018, or 0.9% on an annualized basis. This decrease was driven by a $49.2 million decline in the PCI loan portfolio and a $10.3 million net decline in the non-PCI portfolio. The net decline in the non-PCI portfolio was driven in part by reductions in revolving mortgages, as well as seasonality in the government lending portfolio. These declines were partially offset by sustained growth in commercial construction and land development, commercial mortgage and consumer auto loans.

Deposits grew by $525.6 million, or 6.9% on an annualized basis, from December 31, 2018, primarily driven by an increase in demand deposits due to ~~higher loan yields~~both seasonal fluctuations in commercial demand deposits and ~~improved loan mix, improved investment yields and reductions~~continued focus by branch associates on deposit growth.

During the first quarter of ~~debt balances, offset by lower PCI interest income.~~2019, BancShares repurchased 243,000 shares of class A common stock for $100.7 million.

BancShares remained well capitalized with a Tier 1 risk-based capital ratio and common equity Tier 1 ratio of ~~13.06 percent,~~12.69%, total risk-based capital ratio of ~~14.43 percent~~14.02% and leverage capital ratio of ~~9.99 percent~~9.80% at ~~June 30, 2018.~~March 31, 2019.

Table 1

~~Selected Quarterly Data~~SELECTED QUARTERLY DATA


	2018						2017										Six months ended June 30						2019			2018
	Second			First			Fourth				Third			Second								First			Fourth			Third			Second			First
(Dollars in thousands, except share data)	Quarter			Quarter			Quarter				Quarter			Quarter			Six months ended June 30	2018			2017			Quarter			Quarter			Quarter			Quarter			Quarter
SUMMARY OF OPERATIONS
Interest income	$	303,877		$	292,601		$	285,958			$	284,333		$	272,542		$	596,478		$	533,399		$	336,924		$	333,573		$	315,706		$	303,877		$	292,601
Interest expense	7,658			8,164			11,189				11,158			10,933			15,822			21,447			16,452			12,691			8,344			7,658			8,164
Net interest income	296,219			284,437			274,769				273,175			261,609			580,656			511,952			320,472			320,882			307,362			296,219			284,437
Provision (credit) for loan and lease losses	8,438			7,605			(2,809		)		7,946			12,324			16,043			20,555
Provision for loan and lease losses																							11,750			11,585			840			8,438			7,605
Net interest income after provision for loan and lease losses	287,781			276,832			277,578				265,229			249,285			564,613			491,397			308,722			309,297			306,522			287,781			276,832
Gain on acquisitions	—			—			—				—			122,728			—			134,745
Noninterest income excluding gain on acquisitions	100,927			122,684			108,606				95,850			94,913			223,611			182,542
Noninterest income																							103,663			82,007			94,531			100,927			122,684
Noninterest expense	265,993			268,063			263,073				257,430			255,047			534,056			491,746			267,657			275,378			267,537			265,993			268,063
Income before income taxes	122,715			131,453			123,111				103,649			211,879			254,168			316,938			144,728			115,926			133,516			122,715			131,453
Income taxes	29,424			31,222			68,704				36,585			77,219			60,646			114,657			33,369			26,453			16,198			29,424			31,222
Net income	$	93,291		$	100,231		$	54,407			$	67,064		$	134,660		$	193,522		$	202,281		$	111,359		$	89,473		$	117,318		$	93,291		$	100,231
Net interest income, taxable equivalent	$	297,021		$	285,248		$	276,002			$	274,272		$	262,549		$	582,269		$	514,142		$	321,372		$	321,804		$	308,207		$	297,021		$	285,248
PER SHARE DATA
Net income	$	7.77		$	8.35		$	4.53			$	5.58		$	11.21		$	16.11		$	16.84		$	9.67		$	7.62		$	9.80		$	7.77		$	8.35
Cash dividends	0.35			0.35			0.35				0.30			0.30			0.70			0.60			0.40			0.40			0.35			0.35			0.35
Market price at period end (Class A)	403.30			413.24			403.00				373.89			372.70			403.30			372.70			407.20			377.05			452.28			403.30			413.24
Book value at period end	286.99			280.77			277.60				275.91			269.75			286.99			269.75
Book value at period-end																							309.46			300.04			294.40			286.99			280.77
SELECTED QUARTERLY AVERAGE BALANCES	SELECTED QUARTERLY AVERAGE BALANCES																						SELECTED QUARTERLY AVERAGE BALANCES
Total assets	$	34,673,927		$	34,267,945		$	34,864,720			$	34,590,503		$	34,243,527		$	34,471,833		$	33,871,083
Total assets ⁽¹⁾																							$	35,625,885		$	35,625,500		$	34,937,175		$	34,673,927		$	34,267,495
Investment securities	7,091,442			7,053,001			7,044,534				6,906,345			7,112,267			7,072,328			7,098,702			6,790,671			7,025,889			7,129,089			7,091,442			7,053,001
Loans and leases ⁽¹⁾	24,205,363			23,666,098			23,360,235				22,997,195			22,575,323			23,937,221			22,265,106
Loans and leases ⁽²⁾																							25,515,988			25,343,813			24,698,799			24,205,363			23,666,098
Interest-earning assets	32,669,810			32,320,431			32,874,233				32,555,597			32,104,717			32,496,086			31,704,069			33,432,162			33,500,732			32,886,276			32,669,810			32,320,431
Deposits	30,100,615			29,472,125			29,525,843				29,319,384			29,087,852			29,788,106			28,811,046			30,802,567			30,835,157			30,237,329			30,100,615			29,472,125
Long-term obligations	233,373			404,065			866,198				887,948			799,319			318,247			808,087
Interest-bearing liabilities	18,885,168			19,031,404			19,425,404				19,484,663			19,729,956			18,957,881			19,699,683			19,655,434			19,282,749			18,783,160			18,885,168			19,031,404
Securities sold under customer repurchase agreements																							538,162			572,442			547,385			516,999			585,627
Other short-term borrowings																							—			53,552			43,720			46,614			91,440
Long-term borrowings																							344,225			319,410			261,821			233,373			404,065
Shareholders' equity	$	3,400,867		$	3,333,114		$	3,329,562			$	3,284,044		$	3,159,004		$	3,366,990		$	3,111,388		$	3,509,746		$	3,491,914		$	3,470,368		$	3,400,867		$	3,333,114
Shares outstanding	12,010,405			12,010,405			12,010,405				12,010,405			12,010,405			12,010,405			12,010,405			11,519,008			11,763,832			11,971,460			12,010,405			12,010,405
SELECTED QUARTER-END BALANCES	SELECTED QUARTER-END BALANCES																						SELECTED QUARTER-END BALANCES
Total assets	$	35,088,566		$	34,436,437		$	34,527,512			$	34,584,154		$	34,769,850		$	35,088,566		$	34,769,850
Total assets ⁽¹⁾																							$	35,961,670		$	35,408,629		$	34,954,659		$	35,088,566		34,436,437
Investment securities	7,190,545			6,967,921			7,180,256				6,992,955			6,596,530			7,190,545			6,596,530			6,914,513			6,834,362			7,040,674			7,190,545			6,967,921
Loans and leases:
PCI	674,269			703,837			762,998				834,167			894,863			674,269			894,863
Non-PCI	23,864,168			22,908,140			22,833,827				22,314,906			21,976,602			23,864,168			21,976,602
Loans and leases																							25,463,785			25,523,276			24,886,347			24,538,437			23,611,977
Deposits	30,408,884			29,969,245			29,266,275				29,333,949			29,456,338			30,408,884			29,456,338			31,198,093			30,672,460			30,163,537			30,408,884			29,969,245
Long-term obligations	241,360			194,413			870,240				866,123			879,957			241,360			879,957
Securities sold under customer repurchase agreements																							508,508			543,936			567,438			499,723			522,207
Other short-term borrowings																							—			—			—			75,000			2,551
Long-term borrowings																							341,108			348,218			417,798			280,630			224,413
Shareholders' equity	$	3,446,886		$	3,372,114		$	3,334,064			$	3,313,831		$	3,239,851		$	3,446,886		$	3,239,851		$	3,523,309		$	3,488,954		$	3,499,013		$	3,446,886		$	3,372,114
Shares outstanding	12,010,405			12,010,405			12,010,405				12,010,405			12,010,405			12,010,405			12,010,405			11,385,405			11,628,405			11,885,405			12,010,405			12,010,405
SELECTED RATIOS AND OTHER DATA	SELECTED RATIOS AND OTHER DATA																						SELECTED RATIOS AND OTHER DATA
Rate of return on average assets (annualized)	1.08		%	1.19		%	0.62			%	0.77		%	1.58		%	1.13		%	1.20		%	1.27		%	1.00		%	1.33		%	1.08		%	1.19		%
Rate of return on average shareholders' equity (annualized)	11.00			12.20			6.48				8.10			17.10			11.59			13.11			12.86			10.17			13.41			11.00			12.20
Net yield on interest-earning assets (taxable equivalent)	3.64			3.57			3.34				3.35			3.28			3.61			3.27			3.89			3.82			3.73			3.64			3.57
Allowance for loan and lease losses to total loans and leases:
PCI	1.84			1.75			1.31				1.55			1.51			1.84			1.51			1.61			1.51			1.71			1.84			1.75
Non-PCI	0.89			0.92			0.93				0.98			0.98			0.89			0.98			0.88			0.86			0.86			0.89			0.92
Total	0.92			0.94			0.94				1.00			1.00			0.92			1.00			0.90			0.88			0.88			0.92			0.94
Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.54			0.59			0.61				0.63			0.65			0.54			0.65			0.53			0.52			0.52			0.54			0.59
Tier 1 risk-based capital ratio	13.06			13.38			12.88				12.95			12.69			13.06			12.69			12.69			12.67			13.23			13.06			13.38
Common equity Tier 1 ratio	13.06			13.38			12.88				12.95			12.69			13.06			12.69			12.69			12.67			13.23			13.06			13.38
Total risk-based capital ratio	14.43			14.70			14.21				14.34			14.07			14.43			14.07			14.02			13.99			14.57			14.43			14.70
Leverage capital ratio	9.99			10.02			9.47				9.43			9.33			9.99			9.33			9.80			9.77			10.11			9.99			10.02
Dividend payout ratio	4.50			4.19			7.73				5.38			2.68			4.35			3.56			4.14			5.25			3.57			4.50			4.19
Average loans and leases to average deposits	80.41			80.30			79.12				78.44			77.61			80.36			77.28			82.84			82.19			81.68			80.41			80.30

⁽¹⁾We adopted ASC Topic 842 and utilized the effective date method. We did not restate selected financial data for the quarters prior to 2019 presented above.

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

BUSINESS COMBINATIONS

~~Palmetto Heritage Bancshares,~~First South Bancorp, Inc.

~~Capital Commerce Bancorp, Inc.~~

On June 27, 2018, FCB and Capital Commerce Bancorp, Inc. (Capital Commerce) entered into a definitive merger agreement. The agreement provides for the acquisition of Milwaukee, Wisconsin-based Capital Commerce by FCB. Under the terms of the agreement, cash consideration of $4.75 per share will be paid to the shareholders of Capital Commerce for each share of Capital Commerce's common stock totaling approximately ~~$28.1~~$37.5 million. The ~~transaction is expected to close no later than~~total consideration assumes the ~~fourth quarter~~conversion of ~~2018, subject to the receipt of regulatory approvals and the approval of Capital Commerce's shareholders, and will be accounted for under the acquisition method of accounting.~~all First South Bancorp's Series A preferred shares into common stock. The merger will allow FCB to expand its presence and enhance banking efforts in ~~the Milwaukee market.~~South Carolina. As of March 31, ~~2018, Capital Commerce~~2019, First South Bancorp reported ~~$216.2~~$236.0 million in consolidated assets, ~~$180.6~~$183.3 million in loans and ~~$171.0~~$206.1 million in deposits.

Entegra Financial Corp.

~~HomeBancorp,~~On April 23, 2019, FCB and Entegra Financial Corp. (Entegra) entered into a definitive merger agreement for the acquisition by FCB of Franklin, North Carolina-based Entegra and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 per share will be paid to the shareholders of Entegra for each share of common stock and for each restricted stock unit after conversion to common stock, and each option to purchase Entegra common stock will be canceled and each option holder will receive a cash payment equal to $30.18 for each share underlying the option minus the applicable exercise price of the option. The total transaction value, including termination fee, is anticipated to be approximately $219.8 million. The transaction is anticipated to close during the second half of 2019, subject to the receipt of regulatory approvals and the approval of Entegra's shareholders. As of March 31, 2019, Entegra reported $1.67 billion in consolidated assets, $1.25 billion in deposits and $1.08 billion in loans.

Biscayne Bancshares, Inc.

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 value on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

~~At the date of acquisition, non-PCI loans acquired were $550.6~~$788.2 million ~~and PCI loans acquired were $15.6 million.~~

~~The following table provides the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.~~

~~Table 2~~

~~HomeBancorp~~

(Dollars in thousands) As recorded by FCB
Purchase Price $ 112,657
Assets
Cash and due from banks $ 6,359

Overnight investments 10,393

Investment securities 200,918

Investment securities held to maturity —

Loans held for sale 791

Loans 566,173

Premises and equipment 6,542

Other real estate owned 2,135

Income earned not collected 2,717

Intangible assets 13,206

Other assets 33,459

Total assets acquired 842,693

Liabilities
Deposits 619,589

Short-term borrowings 108,973

Accrued interest payable 1,020

Long-term obligations 52,944

Other liabilities 5,126

Total liabilities assumed 787,652

Fair value of net assets assumed 55,041
Goodwill recorded for HomeBancorp $ 57,616

~~Merger-related expenses of $1.5 million and $1.7 million were recorded~~ in the Consolidated Statements of Income for the three and six months ended June 30, 2018. Loan-related interest income generated from HomeBancorp was approximately $5.0 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.

deposits.

FDIC-Assisted Transactions

As of March 31, 2019, BancShares completed ~~eleven~~fourteen FDIC-assisted ~~transactions during the period beginning in 2009 through 2017. Prior to its merger into BancShares in 2014, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted~~ transactions. ~~These transactions provided us significant contributions to capital and earnings.~~ Nine of the fourteen FDIC-assisted transactions ~~(including the three completed by Bancorporation)~~ included shared-loss agreements ~~that,~~which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. As of ~~June 30, 2018,~~March 31, 2019, shared-loss ~~agreements are still active for Georgian Bank (GB) and United Western Bank (UWB). Shared-loss~~ protection remains for single family residential loans acquired ~~from UWB and GB~~ in the amount of ~~$62.1~~$53.9 million.

The shared-loss agreements for two FDIC-assisted transactions include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). As of March 31, 2019 and December 31, 2018, the estimated clawback liability was $107.3 million and $105.6 million, respectively. The clawback liability payment dates are March 2020 and March 2021.

Table 32

~~Consolidated Quarter-to-Date Average Taxable-Equivalent Balance Sheets~~AVERAGE BALANCE SHEETS


	Three months ended																					Three months ended
	June 30, 2018							March 31, 2018							June 30, 2017							March 31, 2019							March 31, 2018
				Interest							Interest							Interest							Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	24,205,363		$	261,703	4.34	%	$	23,666,098		$	252,627	4.32	%	$	22,575,323		$	236,580	4.20	%	$	25,515,988		$	291,569	4.62	%	$	23,666,098		$	252,627	4.32	%
Investment securities:
U. S. Treasury	1,532,868			7,139		1.87		1,567,388			6,774		1.75		1,622,936			4,453		1.10		1,208,231			6,496		2.18		1,567,388			6,774		1.75
Government agency	84,640			468		2.21		14,952			100		2.67		52,049			203		1.56		286,514			2,309		3.22		14,952			100		2.67
Mortgage-backed securities	5,270,891			28,184		2.14		5,295,273			27,093		2.05		5,278,731			24,756		1.88		5,051,416			28,834		2.28		5,295,273			27,093		2.05
Corporate bonds and other	94,401			1,298		5.50		66,009			1,010		6.12		60,356			932		6.17		145,127			1,937		5.34		66,009			1,010		6.12
State, county and municipal	764			8		4.07		—			—		—		—			—		—
Marketable equity securities	107,878			267		0.99		109,379			209		0.77		98,195			154		0.63		99,383			282		1.15		109,379			209		0.77
Total investment securities	7,091,442			37,364		2.11		7,053,001			35,186		2.00		7,112,267			30,498		1.72		6,790,671			39,858		2.35		7,053,001			35,186		2.00
Overnight investments	1,373,005			5,612		1.64		1,601,332			5,599		1.42		2,417,127			6,404		1.06		1,125,503			6,397		2.31		1,601,332			5,599		1.42
Total interest-earning assets	32,669,810			$	304,679	3.75	%	32,320,431			$	293,412	3.67	%	32,104,717			$	273,482	3.42	%	33,432,162			$	337,824	4.09	%	32,320,431			$	293,412	3.67	%
Cash and due from banks	276,418							299,052							503,205							282,060							299,052
Premises and equipment	1,162,893							1,142,704							1,130,796							1,214,324							1,142,704
Allowance for loan and lease losses	(224,146		)					(221,690		)					(222,882		)					(224,434		)					(221,690		)
Other real estate owned	47,667							49,568							57,044							47,098							49,568
Other assets	741,285							677,430							670,647							874,675							677,430
Total assets	$	34,673,927						$	34,267,495						$	34,243,527						$	35,625,885						$	34,267,495

Liabilities
Interest-bearing deposits:
Checking with interest	$	5,228,803		$	314	0.02	%	$	5,091,670		$	293	0.02	%	$	4,978,159		$	253	0.02	%	$	5,237,019		$	345	0.03	%	$	5,091,670		$	293	0.02	%
Savings	2,468,677			194		0.03		2,378,499			171		0.03		2,293,589			188		0.03		2,523,543			206		0.03		2,378,499			171		0.03
Money market accounts	7,989,268			2,125		0.11		8,139,405			1,749		0.09		8,107,107			1,688		0.08		8,168,712			5,172		0.26		8,139,405			1,749		0.09
Time deposits	2,401,434			1,888		0.32		2,340,698			1,543		0.27		2,745,473			2,003		0.29		2,843,773			7,203		1.03		2,340,698			1,543		0.27
Total interest-bearing deposits	18,088,182			4,521		0.10		17,950,272			3,756		0.08		18,124,328			4,132		0.09		18,773,047			12,926		0.28		17,950,272			3,756		0.08
Repurchase agreements	516,999			373		0.29		585,627			548		0.37		718,700			539		0.30
Securities sold under customer repurchase agreements																						538,162			459		0.35		585,627			548		0.37
Other short-term borrowings	46,614			448		3.82		91,440			886		3.88		87,609			637		2.88		—			—		—		91,440			886		3.88
Long-term obligations	233,373			2,316		3.96		404,065			2,974		2.94		799,319			5,625		2.82
Long-term borrowings																						344,225			3,067		3.56		404,065			2,974		2.94
Total interest-bearing liabilities	18,885,168			7,658		0.16		19,031,404			8,164		0.17		19,729,956			10,933		0.22		19,655,434			16,452		0.34		19,031,404			8,164		0.17
Noninterest-bearing deposits	12,012,433							11,521,853							10,963,524							12,029,520							11,521,853
Other liabilities	375,459							381,124							391,043							431,185							381,124
Shareholders' equity	3,400,867							3,333,114							3,159,004							3,509,746							3,333,114
Total liabilities and shareholders' equity	$	34,673,927						$	34,267,495						$	34,243,527						$	35,625,885						$	34,267,495
Interest rate spread						3.59	%						3.50	%						3.20	%						3.75	%						3.50	%

Net interest income and net yield on interest-earning assets				$	297,021	3.64	%				$	285,248	3.57	%				$	262,549	3.28	%				$	321,372	3.89	%				$	285,248	3.57	%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax ~~rates~~rate of ~~21.0 percent, 21.0 percent and 35.0 percent~~21.0%, as well as state income tax ~~rates~~rate of ~~3.4 percent, 3.4 percent and 3.1 percent~~3.4%, for the three months ended ~~June 30, 2018,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017,~~ respectively. The taxable-equivalent adjustment was ~~$802,~~$900 and $811 ~~and $940~~ for the three months ended ~~June 30, 2018,~~March 31, 2019 and March 31, 2018, ~~and June 30, 2017, respectively.~~

~~Table 4~~

~~Consolidated Year-to-Date Average Taxable-Equivalent Balance Sheets~~

Six months ended
June 30, 2018 June 30, 2017
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Loans and leases $ 23,937,221
$ 514,330
4.33
% $ 22,265,106
$ 464,372
4.20
%
Investment securities:
U.S. Treasury 1,550,032
13,912
1.81
1,633,707
8,652
1.07

Government agency 49,989
568
2.27
52,793
408
1.54

Mortgage-backed securities 5,283,015
55,278
2.09
5,260,117
49,078
1.87

Corporate bonds and other 80,284
2,308
5.75
58,739
1,912
6.51

State, county and municipal 384
8
4.04
—
—
—

Marketable equity securities 108,624
476
0.88
93,346
287
0.62

Total investment securities 7,072,328
72,550
2.06
7,098,702
60,337
1.70

Overnight investments 1,486,537
11,211
1.52
2,340,261
10,880
0.94

Total interest-earning assets 32,496,086
$ 598,091
3.70
% 31,704,069
$ 535,589
3.40
%
Cash and due from banks 287,672
500,084

Premises and equipment 1,152,854
1,130,425

Allowance for loan and lease losses (222,925 ) (221,852 )
Other real estate owned 48,612
58,531

Other assets 709,534
699,826

Total assets $ 34,471,833
$ 33,871,083

Liabilities
Interest-bearing deposits:
Checking with interest $ 5,160,616
$ 607
0.02
% $ 4,906,865
$ 505
0.02
%
Savings 2,423,837
366
0.03
2,227,506
372
0.03

Money market accounts 8,063,921
3,874
0.10
8,224,447
3,547
0.09

Time deposits 2,371,234
3,430
0.29
2,780,384
4,144
0.30

Total interest-bearing deposits 18,019,608
8,277
0.09
18,139,202
8,568
0.10

Repurchase agreements 551,123
921
0.33
694,447
943
0.27

Other short-term borrowings 68,903
1,334
3.86
57,947
813
2.79

Long-term obligations 318,247
5,290
3.32
808,087
11,123
2.75

Total interest-bearing liabilities 18,957,881
15,822
0.17
19,699,683
21,447
0.22

Noninterest-bearing deposits 11,768,498
10,671,844

Other liabilities 378,464
388,168

Shareholders' equity 3,366,990
3,111,388

Total liabilities and shareholders' equity $ 34,471,833
$ 33,871,083

Interest rate spread 3.53
% 3.18
%

Net interest income and net yield on interest-earning assets $ 582,269
3.61
% $ 514,142
3.27
%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0 percent and 35.0 percent as well as state income tax rates of 3.4 percent and 3.1 percent for the six months ended June 30, 2018 and 2017, respectively. The taxable-equivalent adjustment was $1,613 and $2,190 for the six months ended June 30, 2018 and 2017, respectively.

Table 3

~~Table 5~~

~~Changes in Consolidated Taxable Equivalent Net Interest Income~~CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

Three months ended June 30, 2018 Six months ended June 30, 2018
Change from prior year period due to: Change from prior year period due to:
(Dollars in thousands) Volume Yield/Rate Total Change Volume Yield/Rate Total Change
Assets
Loans and leases $ 17,156
$ 7,967
$ 25,123
$ 35,215
$ 14,743
$ 49,958
Investment securities:
U. S. Treasury (338 ) 3,024
2,686
(590 ) 5,850
5,260
Government agency 154
111
265
(27 ) 187
160
Mortgage-backed securities (20 ) 3,448
3,428
314
5,886
6,200
Corporate bonds and other 496
(130 ) 366
660
(264 ) 396
State, county and municipal 8
—
8
8
—
8
Marketable equity securities 20
93
113
58
131
189
Total investment securities 320
6,546
6,866
423
11,790
12,213
Overnight investments (3,523 ) 2,731
(792 ) (5,190 ) 5,521
331
Total interest-earning assets $ 13,953
$ 17,244
$ 31,197
$ 30,448
$ 32,054
$ 62,502
Liabilities
Interest-bearing deposits:
Checking with interest $ 37
$ 24
$ 61
$ 64
$ 38
$ 102
Savings 10
(4 ) 6
12
(18 ) (6 )
Money market accounts (96 ) 533
437
(76 ) 403
327
Time deposits (285 ) 170
(115 ) (592 ) (122 ) (714 )
Total interest-bearing deposits (334 ) 723
389
(592 ) 301
(291 )
Repurchase agreements (149 ) (17 ) (166 ) (210 ) 188
(22 )
Other short-term borrowings (344 ) 155
(189 ) 183
338
521
Long-term obligations (4,788 ) 1,479
(3,309 ) (7,436 ) 1,603
(5,833 )
Total interest-bearing liabilities (5,615 ) 2,340
(3,275 ) (8,055 ) 2,430
(5,625 )
Change in net interest income $ 19,568
$ 14,904
$ 34,472
$ 38,503
$ 29,624
$ 68,127

~~The rate/volume variance is allocated equally between the changes in volume and rate.~~



	Three months ended March 31, 2019
	Change from prior year period due to:
(Dollars in thousands)	Volume⁽¹⁾			Yield/Rate⁽¹⁾			Total Change
Assets
Loans and leases	$	16,887		$	22,055		$	38,942
Investment securities:
U. S. Treasury	(1,552		)	1,274			(278		)
Government agency	1,813			396			2,209
Mortgage-backed securities	(1,190		)	2,931			1,741
Corporate bonds and other	1,211			(284		)	927
Marketable equity securities	(19		)	92			73
Total investment securities	263			4,409			4,672
Overnight investments	(1,664		)	2,462			798
Total interest-earning assets	$	15,486		$	28,926		$	44,412
Liabilities
Interest-bearing deposits:
Checking with interest	$	8		$	44		$	52
Savings	11			24			35
Money market accounts	6			3,417			3,423
Time deposits	332			5,328			5,660
Total interest-bearing deposits	357			8,813			9,170
Securities sold under customer repurchase agreements	(160		)	71			(89		)
Other short-term borrowings	(886		)	—			(886		)
Long-term borrowings	(1,139		)	1,232			93
Total interest-bearing liabilities	(1,828		)	10,116			8,288
Change in net interest income	$	17,314		$	18,810		$	36,124
⁽¹⁾The rate/volume variance is allocated proportionally between the changes in volume and rate.

RESULTS OF OPERATIONS

Net Interest Income and Margin (Taxable Equivalent Basis)

~~Second~~First Quarter 2019 compared to First Quarter 2018

~~Compared~~Net interest income for the first quarter of 2019 totaled $320.5 million, an increase of $36.1 million, or 12.7%, compared to the first quarter of ~~2018, net interest income increased $11.8 million, or by 4.1 percent, to $296.2 million for the second quarter of 2018~~. The increase was primarily due to higher non-PCI loan interest income of $12.8 million due to higher loan yields and balances, which were driven by the HomeBancorp acquisition and organic growth, particularly in the commercial mortgage as well as commercial and industrial loan portfolios. Net interest income also benefited from a $2.2 million increase in investment securities interest income resulting from higher investment yields driven by the reinvestment of lower yielding cash flows from maturities, paydowns and sales into higher yielding mortgage-backed securities. Additionally, there was a $506 thousand decrease in interest expense primarily a result of lower borrowings. These improvements were partially offset by a decrease in PCI loan interest income of $3.7 million, primarily resulting from PCI loan portfolio run-off.

Compared to the second quarter of 2017, net interest income increased $34.6 million, or by 13.2 percent. The increase was primarily due to a $31.6 million increase in non-PCI loan interest income resulting from originated loan growth and improved yields, as well as the contribution from the HomeBancorp acquisition. The largest contributors to the increase in originated loan growth were increases in commercial mortgage and commercial and industrial loans. Net interest income also benefited from a $6.8 million increase in investment securities interest income driven by improved yields as a result of the aforementioned purchase of mortgage-backed securities. Furthermore, there was a decline in interest expense of $3.3 million largely related to lower borrowings due to the extinguishment of debt. These positive impacts were partially offset by a decline in PCI loan interest income of $6.2 million as a result of continued PCI loan portfolio run-off as well as a $792 thousand decrease in interest income earned on overnight investments.

2018. The taxable-equivalent net interest margin was ~~3.64 percent for the second quarter of 2018, an increase of 7 basis points from~~3.89% in the first quarter of ~~2018 and~~2019, an increase of 3632 basis points from the same quarter in the prior year. The ~~margin improvement~~primary driver for ~~both periods~~this increase was ~~primarily~~a $38.9 million, or 30 basis points, increase to interest and fees on loans due to ~~improved~~higher average loans outstanding and higher loan ~~and investment~~ yields. ~~Yields were positively impacted~~This increase was partially offset by ~~the federal funds 25~~a $9.2 million, or 20 basis

~~point~~ points increase in ~~each of March, June~~interest expense on deposits due to higher balances and ~~December of 2017 with an additional 25 basis point increase in each of March~~rates paid on time deposits and June of 2018 to end the period at 2.0 percent. Furthermore, the taxable-equivalent yields on our tax-exempt loans and securities were impacted by lower effective tax rates from the enactment of the Tax Act.money market accounts.

~~For the second quarter of 2018, average~~Average interest earning assets increased by ~~$349.4 million since~~$1.11 billion, compared to the first quarter ~~of 2018 as a result of a $539.3 million increase~~ in ~~average~~2018. Average loans ~~outstanding,~~increased $1.85 billion primarily due to originated loan growth, ~~mostly~~particularly within the commercial and business and residential loan ~~segment, as well as loans acquired in~~portfolios, and contributions from the HomeBancorp, ~~acquisition,~~Inc. (HomeBancorp), Capital Commerce Bancorp, Inc. (Capital Commerce), and Palmetto Heritage Bancshares, Inc. (Palmetto Heritage) acquisitions. Offsetting this increase was a decline in average overnight investments of $475.8 million and a ~~$38.4 million increase~~decline in average investment securities ~~mainly driven by the purchase~~ of ~~higher yielding mortgage-backed securities. These increases were offset by a $228.3 million decrease in average overnight investments.~~$262.3 million. The yield on interest-earning assets ~~was 3.75 percent, an increase from 3.67 percent~~increased by 42 basis points to 4.09% since the first quarter of 2018. Yields on ~~our~~ loans and leases increased by 230 basis points, ~~in the second quarter of 2018~~ primarily due to higher ~~yielding~~yields on commercial loans and equity lines. Yields on our investment securities portfolio and overnight investments increased by 1135 basis points and 2289 basis points, ~~respectively, in the second quarter of 2018.~~respectively. Higher ~~yielding~~yields on mortgage-backed securities ~~was~~and U.S. Treasury securities were the primary ~~driver~~drivers to the yield increase inon investment securities while the increase in the federal funds rate contributed to the yield increase inon overnight investments.

~~For the second quarter of 2018, average interest earning assets~~Average interest-bearing liabilities increased ~~by $565.1~~$624.0 million compared to the same quarter in the prior year. Average loans experienced a $1.63 billion increase primarily due to originated loan growth, particularly within the commercial loan segment, and contributions from the HomeBancorp acquisition. Offsetting this increase was a decrease in average overnight investments of $1.04 billion primarily related to the use of funds for the extinguishment of debt obligations in the first quarter of 2018. ~~Additionally, there was a decrease in average investment securities of $20.8 million driven by a decline in average balances on U.S. Treasury securities, partially offset by~~This increase is primarily due to an increase in average interest-bearing deposit balances ~~on government agency securities and corporate bonds. The yield on interest-earning assets increased~~of $822.8 million driven by 33 basis points from 3.42 percent since the second quarter of 2017. Yields on our loans and leases increased by 14 basis points in the second quarter of 2018 primarily due to higher yielding commercial loans and equity lines. Yields on our investment securities portfolio and overnight investments increased by 39 basis points and 58 basis points, respectively, in the second quarter of 2018. Higher yielding mortgage-backed securities was the primary driver to the yield increase in investment securities while the increase in the federal funds rate contributed to the yield increase in overnight investments.

For the second quarter of 2018, average interest-bearing liabilities decreased by $146.2 million since the first quarter of 2018, due to a $170.7 million decrease in average long-term obligations as a result of lower FHLB borrowings and a $113.5 million decrease in average short-term borrowings as a result of lower repurchase obligations and FHLB borrowings. These decreases were offset by a $137.9 million increase in average interest-bearing deposits resulting from organic deposit growth and ~~deposit balances~~deposits acquired in the HomeBancorp, ~~acquisition. The rate on interest-bearing liabilities was 0.16 percent, a decrease from 0.17 percent since the first quarter~~Capital Commerce, and Palmetto Heritage acquisitions. Offsetting these increases were declines in average other short-term borrowings of ~~2018.~~$91.4 million, average long-term borrowings of $59.8 million, and average customer repurchase agreements of $47.5 million. Rates on our interest bearing deposits ~~increased by 2 basis points in the second quarter of 2018. Rates on~~and long-term borrowings increased by ~~102 basis points while rates on our repurchase agreements and other short-term borrowings decreased by 8~~20 basis points and 662 basis points, ~~respectively, in~~respectively.

Provision for Loan and Lease Losses

BancShares recorded a net provision expense for loan and lease losses of $11.8 million for the ~~second quarter of~~three months ended March 31, 2019, compared to $7.6 million for the three months ended March 31, 2018. The $4.2 million increase ~~in long-term borrowings was due to higher rates on remaining borrowings after the extinguishment of debt in the first quarter of 2018.~~

~~For the second quarter of 2018, average interest-bearing liabilities decreased $844.8 million compared to the same quarter in~~from the prior year ~~primarily due to a decrease in average long-term obligations of $565.9 million~~quarter was largely driven by higher general reserves related to ~~the extinguishment of FHLB debt~~changes in ~~the first quarter of 2018. Also contributing to the decrease were declines in average short-term borrowings of $242.7 million~~credit quality, growth within portfolios which are reserved at higher rates and average interest-bearing deposits of $36.1 million. The decline in average short-term borrowings was primarily due to FHLB borrowing maturities of $85.0 million, the maturity of a $30.0 million repurchase agreement as well as the maturity of a $15.0 million subordinated notes payable and lower customer repurchase agreement balances. The decline in average interest-bearing deposits was primarily due to continued run-off in time deposits. The rate on interest-bearing liabilities decreased by 6 basis points from 0.22 percent since the second quarter of 2017. Rates on our interest bearing deposits increased by 1 basis point in the second quarter of 2018. Rates on long-term borrowings and other short-term borrowings increased by 114 basis points and 94 basis points, respectively, while rates on repurchase agreements decreased by 1 basis point in the second quarter of 2018. Thean increase in ~~borrowings was due to higher rates on remaining borrowings after the extinguishment of debt in the first quarter of 2018.~~

~~Year-to-date 2018~~

Net interest income for the first six months of 2018 was $580.7 million, an increase of $68.7 million, or 13.4 percent, compared to the same period of 2017. Loan interest income increased $50.7 million as a result of a $58.4 million increase in non-PCI loan interest income primarily due to originated loan growth, particularly in the commercial mortgage as well as commercial and industrial loan portfolios, and loans acquired in the HomeBancorp acquisition, offset by a $7.7 million decline in PCI loan interest income due to PCI loan portfolio run-off. Additionally, net interest income benefited from a $12.0 million improvement in investment securities interest income and reduced borrowing costs of $5.3 million.

The taxable-equivalent net interest margin increased 34 basis points to 3.61 percent in the first six months of 2018, compared to the same period of 2017. The margin improvement was primarily due to higher loan yields and improved investment yields. Yields for the first six months of 2018 were impacted by the aforementioned incremental increases in the federal funds rate and Tax Act.

Average year-to-date interest earning assets increased by $792.0 million in the first six months of 2018 compared to the same period of 2017, primarily due to a $1.67 billion increase in average outstanding loans due to originated loan growth, particularly within the commercial loan segment, and the impact of the HomeBancorp acquisition. This increase wasspecific reserves, partially offset by a decline in ~~average overnight investments of $853.7 million primarily related to~~ the ~~use of funds~~provision for ~~the extinguishment of FHLB debt obligations~~PCI loans. Lower PCI provision was driven by positive changes in ~~the first quarter of 2018 and a decrease in average investment securities of $26.4 million. The yield on interest-earning assets~~expected cash flows. Period over period provision amounts for ~~the first six months of 2018 was 3.70 percent, an increase from 3.40 percent for the same period of 2017. Yields on our~~PCI loans and leases increased by 13 basis points in the first six months of 2018 primarily due to higher yielding commercial loans and equity lines. Yields on our investment securities portfolio and overnight investments increased by 36 basis points and 58 basis points, respectively. Higher yielding mortgage-backed securities was the primary driver to the yield increase in investment securities while the increase in the federal funds rate contributed to the yield increase in overnight investments.

Average year-to-date interest-bearing liabilities decreased by $741.8 million in the first six months of 2018 compared to the same period of 2017, due to a decline of $489.8 million in average long-term obligations primarily related to the extinguishment of FHLB debt obligations totaling $675.0 million in the first quarter of 2018. Additionally, there were reclassifications of $15.0 million in FHLB borrowings from long-term obligations to short-term borrowings, partially offset by acquired subordinated debt of $21.6 million and FHLB borrowings of $18.8 million from HomeBancorp and increases in capital leases of $12.9 million. The decrease in average year-to-date interest-bearing liabilities was also impacted by decreases of $132.4 million in average short-term borrowings due to extinguishment of debt and $119.6 million in average interest-bearing deposits as time deposits continue to mature and are renewed at lower rates. The rate on interest-bearing liabilities for the first six months of 2018 was 0.17 percent, a decrease from 0.22 percent for the same period of 2017. Rates on our interest bearing deposits decreased by 1 basis point while repurchase agreements, other short-term borrowings and long-term borrowings increased by 6 basis point, 107 basis points and 57 basis points, respectively. The increase in borrowings was due to higher rates on remaining borrowings after the extinguishment of debt in the first quarter of 2018.can be volatile.

~~Noninterest Income~~

NONINTEREST INCOME

Table 64

~~Noninterest Income~~NONINTEREST INCOME


	Three months ended						Six months ended					Three months ended
(Dollars in thousands)	June 30, 2018		March 31, 2018		June 30, 2017		June 30, 2018		June 30, 2017			March 31, 2019			March 31, 2018
Gain on acquisitions	$	—	$	—	$	122,728	$	—	$	134,745
Cardholder services, net	14,925		14,782		14,518		29,707		27,361			$	16,633		$	14,782
Merchant services, net	6,478		6,177		5,800		12,655		11,556			5,835			6,177
Service charges on deposit accounts	25,952		26,543		25,862		52,495		48,004			25,065			26,543
Wealth management services	25,515		23,569		21,920		49,084		42,882			25,001			23,569
Securities gains, net	—		—		3,351		—		3,327
Marketable equity securities gains, net	4,440		971		—		5,411		—			11,328			971
Other service charges and fees	7,756		7,480		6,628		15,236		14,229			7,422			7,480
Mortgage income	4,703		4,237		4,966		8,940		12,542			3,658			4,237
Insurance commissions	2,940		3,776		2,563		6,716		6,121			3,291			3,776
ATM income	2,217		2,171		2,513		4,388		4,286			1,511			2,171
Net impact from FDIC shared-loss termination	—		—		—		—		(45		)
Gain on extinguishment of debt												—			25,814
Adjustments to FDIC shared-loss receivable												(2,033		)	(1,478		)
Recoveries of PCI loans previously charged off	5,138		5,693		4,310		10,831		9,534			3,991			5,693
Gain on extinguishment of debt	—		25,814		—		25,814		—
Other	863		1,471		2,482		2,334		2,745			1,961			2,949
Total noninterest income	$	100,927	$	122,684	$	217,641	$	223,611	$	317,287		$	103,663		$	122,684

Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. The primary sources of noninterest income traditionally consist of fees and service charges generated from cardholder services and deposit accounts, merchant services, ~~deposit accounts,~~ wealth management services, and mortgage lending and servicing. ~~Other sources include gains on acquisitions, gains on the sale of investment securities and recoveries on PCI loans that have been previously~~

~~charged-off.~~ Noninterest income for the period ended ~~June 30, 2018~~March 31, 2019, includes a full ~~six~~three months impact from the ~~Guaranty Bank acquisition~~HomeBancorp, Capital Commerce, and Palmetto Heritage acquisitions compared to ~~two months of activity~~no impact for the period ending ~~June 30, 2017.~~March 31, 2018, as the acquisitions were completed after the first quarter of 2018.

Noninterest income for the ~~second~~first quarter of ~~2018~~2019 was ~~$100.9~~$103.7 million, compared to $122.7 million for the ~~first quarter~~same period of 2018, a decrease of ~~$21.8~~$19.0 million, or ~~by 17.73%~~15.5%. The most significant components of the change were as follows:

Gain on extinguishment of ~~$675.0~~debt was $25.8 million for the first quarter of ~~FHLB obligations totaled $25.7 million~~2018 and no gains were recognized in the first quarter of ~~2018.~~2019. The gain in the first quarter 2018 was primarily due to the extinguishment of eight Federal Home Loan Bank debt obligations totaling $675.0 million.

Marketable equity securities gains ~~net~~ increased by ~~$3.5~~$10.4 million.

Income from cardholder services increased by $1.9 million ~~primarily~~ due to ~~favorable market movements on equity stock positions held in the second quarter.~~

~~Noninterest income for the second quarter of 2018 was $100.9 million, compared~~higher transaction volume, as well as cost savings achieved by converting to $217.6 million for the same period of 2017. Excluding acquisition gains of $122.7 million on the Guaranty acquisition in the second quarter of 2017, total noninterest income increased $6.0 million, or by 6.34%. The increase was primarily attributable to the following drivers:

Marketable equity securities gains, net was $4.4 million for the second quarter of 2018 due to the implementation of ASU 2016-01 requiring unrealized gains and losses on equity securities to be recorded through the income statement.a new processor.

Wealth management ~~fees~~services income increased by ~~$3.6~~$1.4 million ~~primarily~~ due to ~~higher annuity~~an increase in sales ~~volume and higher trust income driven by growth in assets under management.~~

~~Reduction in security gains, net of $3.3 million primarily due to gains on the sale of mortgage-backed securities in 2017.~~

Noninterest income was $223.6 million for the first six months of 2018, compared to $317.3 million for the same period of 2017, a decrease of $93.7 million, or by 29.52%. Excluding acquisition gains of $134.7 million on the Harvest Community Bank and Guaranty Bank acquisitions in the first six months of 2017, total noninterest income increased $41.1 million, or by 22.50%. The increase was primarily attributable to the following drivers:

~~Gain on extinguishment of FHLB obligations totaled $25.7 million.~~

~~Wealth management fees increased by $6.2 million primarily due to higher annuity sales volume and higher trust income driven by growth in assets under management.~~

Marketable equity securities gains, net was $5.4 million in 2018 due to the implementation of ASU 2016-01 requiring unrealized gains and losses on equity securities to be recorded through the income statement.volume.

Service charges on deposit accounts ~~increased~~and ATM income declined by ~~$4.5~~$2.1 million ~~primarily~~ due to reductions in acquired deposit balances and the ~~Guaranty Bank acquisition and an increase in the volume~~temporary suspension of ~~overdraft transactions.~~

~~Mortgage income decreased by $3.6 million resulting from lower hedge income primarily due to higher interest rates as well as a reduction in gains on sales driven by mortgage sales in 2017.~~ATM fees at certain acquired locations.

~~Noninterest Expense~~NONINTEREST EXPENSE

Table 5

NONINTEREST EXPENSE



	Three months ended
(Dollars in thousands)	March 31, 2019		March 31, 2018
Salaries and wages	$	132,421	$	129,203
Employee benefits	32,535		32,091
Occupancy expense	27,761		27,954
Equipment expense	26,740		24,974
FDIC insurance expense	2,660		5,733
Collection and foreclosure-related expenses	3,022		4,146
Merger-related expenses	1,719		598
Processing fees paid to third parties	7,089		8,196
Telecommunications expense	2,041		2,690
Consultant expense	2,881		3,006
Advertising expense	2,552		2,551
Core deposit intangible amortization	4,247		4,142
Other	21,989		22,779
Total noninterest expense	$	267,657	$	268,063

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

~~Table 7~~

~~Noninterest Expense~~

Three months ended Six months ended
(Dollars in thousands) June 30, 2018 March 31, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Salaries and wages $ 129,841
$ 129,203
$ 121,826
$ 259,044
$ 238,188
Employee benefits 29,715
32,091
25,383
61,806
52,560
Occupancy expense 26,100
27,954
26,059
54,054
50,821
Equipment expense 25,167
24,974
24,654
50,141
49,242
FDIC insurance expense 5,492
5,733
5,705
11,225
11,298
Collection and foreclosure-related expenses 3,974
4,146
2,376
8,120
6,139
Merger-related expenses 2,412
598
6,853
3,010
7,686
Processing fees paid to third parties 7,890
8,196
5,426
16,086
9,742
Telecommunications 2,654
2,690
3,224
5,344
6,836
Consultant expense 3,000
3,006
3,423
6,006
5,302
Advertising expense 2,542
2,551
2,947
5,093
5,447
Core deposit intangible amortization 4,368
4,142
4,404
8,510
8,325
Other 22,838
22,779
22,767
45,617
40,160
Total noninterest expense $ 265,993
$ 268,063
$ 255,047
$ 534,056
$ 491,746

Noninterest expense for the period ended ~~June 30, 2018~~March 31, 2019, includes a full ~~six~~three months impact from the ~~Guaranty Bank acquisition~~HomeBancorp, Capital Commerce, and Palmetto Heritage acquisitions compared to ~~two months of activity~~no impact for the period ending ~~June 30, 2017.~~March 31, 2018, as the acquisitions were completed after the first quarter of 2018.

Noninterest expense was ~~$266.0~~$267.7 million in the ~~second~~first quarter of ~~2018,~~2019, compared to $268.1 million for the ~~first quarter of~~same period in 2018, a decrease of ~~$2.1~~$0.4 million, or by ~~0.77%~~0.2%. The most significant components of the change ~~was attributable to the following drivers:~~were as follows:

Personnel expenses decreased by $1.7 million primarily driven by employee benefits of $2.4 million due to declines in payroll and unemployment taxes, offset by an increase in salary and wage expenses of $638 thousand.

~~Occupancy~~FDIC insurance expense decreased ~~by $1.9 million largely due to decreases in building repairs, landscaping, and utilities.~~

~~Merger-related expenses increased by $1.8~~$3.1 million due to the ~~HomeBancorp acquisition.~~discontinuation of the Deposit Insurance Fund surcharge on large banks.

~~Noninterest~~Collection and foreclosure-related expense ~~was $266.0~~decreased $1.1 million primarily due to reductions in the ~~second quarter~~write downs of ~~2018, compared to $255.0 million for the same period in 2017, an increase of $10.9 million, or by 4.29%. The change was attributable to the following drivers:~~

Personnel expenses increased by $12.3 million largely due to higher headcount, which includes the effects of the Guaranty and HomeBancorp acquisitions, merit and incentive increases and higher benefit costs.bank-owned properties.

Processing fees paid to third parties ~~increased~~decreased by ~~$2.5~~$1.1 million primarily due to ~~core bank processing fees related to~~cost savings associated with the operational conversion of Guaranty Bank, ~~and growth~~partially offset by an increase in ~~the bill pay service provided to customers.~~digital banking costs.

~~Merger-related expenses decreased by $4.4~~Personnel expense increased $3.7 million primarily due to ~~expenses in the second quarter of 2017 related to the Guaranty Bank acquisition exceeding the expenses in the second quarter of 2018 related to the HomeBancorp acquisition.~~

~~Noninterest expense was $534.1 million for the first six months of 2018, compared to $491.7 million for the same period in 2017,~~ an increase in salaries and wages as a result of ~~$42.3 million, or by 8.60%. The increase was primarily attributable to the following drivers:~~merit increases in 2018, as well as increased headcount from recent acquisitions.

~~Personnel~~Equipment expense increased ~~$30.1~~by $1.8 million primarily due to ~~higher wages~~hardware and ~~benefits from the Guaranty acquisition, increased headcount, which includes the effect of the HomeBancorp acquisition, merit and incentive increases and higher benefit costs.~~software asset additions as we continue to invest in technology.

~~Processing fees paid to third parties increased by $6.3 million primarily due to core bank processing fees related to Guaranty Bank and an increase in bill pay services used by bank customers.~~

Other expense increased by $5.5 million, primarily resulting from higher legal costs, operational loss increases and a $1.5 million reversal of a repurchase reserve on a Small Business Administration guaranteed loan recorded in 2017.

~~Occupancy expense increased by~~ ~~$3.2 million~~ ~~primarily due to higher building maintenance and new expenses related to the Guaranty acquisition and increased landscaping costs.~~

~~Merger-related expenses decreased by~~ ~~$4.7 million~~ ~~primarily due to higher merger expenses related to the Guaranty acquisition during 2017 in comparison to the HomeBancorp acquisition.~~

~~Income Taxes~~INCOME TAXES

Income tax expense was ~~$29.4 million, $31.2~~$33.4 million and ~~$77.2~~$31.2 million for the ~~second~~first quarter of ~~2018,~~2019 and first quarter of 2018, ~~and second quarter of 2017,~~ representing effective tax rates of ~~24.0 percent, 23.8 percent~~23.1% and ~~36.4 percent~~23.8% during the respective periods. Income tax expense was $60.6 million and $114.7 million for the six months ended June 30, 2018 and 2017, respectively, representing effective tax rates of 23.9 percent and 36.2 percent for the respective six month periods. The income tax expense and effective tax rate decreases during the reported periods in 2018 compared to those in 2017 were primarily due to the impact of the Tax Act, which reduced the federal tax rate from 34.0 percent to 21.0 percent.

We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.

INTEREST-EARNING ASSETS

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

We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning assets ~~averaged $32.67~~totaled $33.82 billion and ~~$32.87~~$33.20 billion ~~for the quarters ended June 30, 2018~~at March 31, 2019 and December 31, ~~2017,~~2018, respectively. The ~~$204.4~~$617.5 million ~~decrease from December 31, 2017~~increase was primarily composed of ~~an $1.10 billion decline~~a $589.1 million increase in overnight investments, ~~primarily related to the use of funds for the extinguishment of FHLB debt obligations totaling $675.0 million during the first quarter of 2018, offset by a $845.1 million increase in loans~~ and ~~leases as a result of originated loan growth and the acquisition of HomeBanc, and a $46.9~~an $80.2 million increase in investment ~~securities.~~securities, partially offset by a $59.5 million decrease in loans and leases.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk and low to moderate interest rate risk. Other objectives include acting as a stable source of 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.

~~With the adoption of Accounting Standard Update (ASU) 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,~~ ~~in the first quarter of 2018, marketable equity investments are no long classified as investments available for sale and the fair value changes in those investments is reflected~~ See Note C in the Consolidated Financial Statements of Income. At adoption, we recorded a cumulative-effect adjustment to the balance sheet resulting in an $18.7 million increase to retained earnings and a decrease to accumulated other comprehensive income (AOCI) on January 1, 2018.

for additional disclosures regarding investment securities.

The fair value of ~~total~~all investment securities was ~~$7.19~~$6.95 billion at ~~June 30, 2018,~~March 31, 2019, an increase of ~~$12.6~~$103.4 million, when compared to ~~$7.18 billion at~~ December 31, ~~2017.~~2018. The increase in the portfolio from December 31, ~~2017~~2018 was ~~primarily~~ attributable to ~~deploying excess cash into~~net purchases totaling $40.6 million, primarily consisting of mortgage-backed and government agency securities, and a $62.6 million improvement in the ~~portfolio to take advantage~~fair market valuation of higher rates as well as the retention of a portion of HomeBancorp's investment portfolio, partially offset by a rise in unrealized losses on the available for sale portfolio. Investment securities increased $596.3 million from June 30, 2017 to June 30, 2018 primarily due to reinvesting proceeds from sales, maturities and pay downs of securities back into the investment ~~portfolio and the retention of a portion of HomeBancorp's investment portfolio.~~

On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from investments available for sale (AFS) to the held to maturity (HTM) portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $2.38 billion and a weighted average maturity of 13 years. The unrealized loss on these securities at ~~the date of transfer was $109.1 million and continues to be reported as a component of AOCI. This unrealized loss will be amortized out of AOCI into the~~

consolidated statements of income over the remaining expected life of the securities offset by the amortization of the corresponding discount on the transferred securities. FCB has the intent and ability to retain these securities until maturity.

March 31, 2019.

As of ~~June 30, 2018,~~March 31, 2019, investment securities available for sale had a net pre-tax unrealized loss of ~~$74.7~~$21.9 million, compared to a net pre-tax unrealized loss of ~~$48.8~~$50.0 million as of December 31, ~~2017~~2018. After evaluating the available for sale securities with unrealized losses, management concluded that the unrealized losses relate to changes in interest rates relative to when the securities were purchased, and ~~a net pre-tax unrealized loss of $26.2 million~~therefore, no other than temporary impairment existed as of ~~June 30, 2017.~~March 31, 2019. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. The fair value of equity securities was $107.3 million at June 30, 2018. After evaluating the AFS securities with unrealized losses, management concluded that no other than temporary impairment existed as of June 30, 2018.

~~There were no gains or losses on the sale of investment securities available for sale for the three months ended June 30, 2018 and~~At March 31, 2018 compared to a net gain of $3.4 million on sales of securities for the three months ended June 30, 2017. During the six months ended June 30, 2018 we recognized no gains or losses on the sale of investment securities compared to a net gain of $3.3 million for the corresponding period of 2017. The net marketable equity securities gains was $4.4 million and $5.4 million for the three and six months ended months ended June 30, 2018 and is recorded on the Consolidated Statements of Income.

~~At June 30, 2018,~~2019, mortgage-backed securities represented ~~74.2 percent~~74.1% of total investment securities, compared to U.S. Treasury, government agency securities, corporate bonds, other investments and marketable equity securities, which represented ~~20.9 percent, 1.8 percent, 1.5 percent, 0.1 percent~~17.2%, 5.0%, 2.0%, 0.1% and ~~1.5 percent~~1.6% of the total investment securities, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

Excluding the June 30, 2018 fair market value of the mortgage-backed securities transferred to HTM of $2.30 billion, the carrying value of mortgage-backed securities AFS decreased $4.6 million primarily due to rising market rates that have negatively impacted mortgage-backed securities valuations. U.S. Treasury securities decreased $153.9 million primarily due to maturities with only a portion of the proceeds reinvested back into U.S. Treasury securities. Government agency securities increased $122.4 million due to new purchases during 2018 and the retention of certain investments from HomeBancorp's investment portfolio. Corporate bonds increased $48.8 million primarily due to bonds retained from HomeBancorp's investment portfolio coupled with new purchases in 2018. Equity securities, comprised of investments in other financial institutions, increased $2.1 million since December 31, 2017 primarily due to higher market prices at June 30, 2018.

Table 86

~~Investment Securities~~INVESTMENT SECURITIES


	June 30, 2018				December 31, 2017				June 30, 2017				March 31, 2019				December 31, 2018
(Dollars in thousands)	Cost		Fair value		Cost		Fair value		Cost		Fair Value		Cost		Fair value		Cost		Fair value
Investment securities available for sale:
Investment securities available for sale
U.S. Treasury	$	1,508,435	$	1,503,974	$	1,658,410	$	1,657,864	$	1,619,225	$	1,616,134	$	1,196,584	$	1,197,042	$	1,249,243	$	1,247,710
Government agency	131,233		131,035		8,695		8,670		40,080		40,081		351,284		350,527		257,252		256,835
Mortgage-backed securities	3,104,316		3,034,065		5,419,379		5,340,756		4,822,517		4,772,242		2,917,000		2,895,944		2,956,793		2,909,339
Equity securities	—		—		75,471		105,208		78,753		105,859
Corporate bonds	108,649		108,790		59,414		59,963		54,412		54,705		142,939		142,162		139,906		139,101
Other	5,545		5,643		7,645		7,719		7,630		7,429		3,929		4,125		3,923		4,125
Total investment securities available for sale	4,858,178		4,783,507		7,229,014		7,180,180		6,622,617		6,596,450		4,611,736		4,589,800		4,607,117		4,557,110
Investment in marketable equity securities	74,156		107,264		—		—		—		—		79,809		109,884		73,809		92,599
Investment securities held to maturity:
Investment securities held to maturity
Mortgage-backed securities	2,299,774		2,302,093		76		81		80		86		2,214,829		2,254,924		2,184,653		2,201,502
Total investment securities	$	7,232,108	$	7,192,864	$	7,229,090	$	7,180,261	$	6,622,697	$	6,596,536	$	6,906,374	$	6,954,608	$	6,865,579	$	6,851,211

Loans and Leases

Loans and leases were ~~$24.54~~$25.46 billion at ~~June 30, 2018,~~March 31, 2019, a net ~~increase~~decrease of ~~$941.6~~$59.5 million compared to December 31, ~~2017, representing growth of 8.0 percent~~2018, or 0.9% on an annualized basis. This ~~increase~~decrease was ~~primarily~~ driven by ~~$543.4~~a $49.2 million ~~in non-PCI loans acquired~~decline in the ~~HomeBancorp acquisition~~PCI loan portfolio and ~~$486.9~~a $10.3 million ~~of organic growth~~net decline in the non-PCI portfolio. The ~~PCI~~net decline in the non-PCI portfolio ~~decreased over this period~~was driven in part by ~~$88.7 million~~reductions in revolving mortgages due to ~~PCI loan portfolio run-off~~increasing interest rates and changes in tax laws enacted by the Tax Cuts and Jobs Act of ~~$104.2 million,~~2017, as well as seasonality in the government lending portfolio. These declines were partially offset by ~~net PCI loans acquired from HomeBancorp of $15.5 million.~~sustained growth in commercial construction and land development, commercial mortgage and consumer auto loans.

Non-PCI loans increased by $1.89 billion, compared to June 30, 2017, due to originated loan growth and loans acquired in the HomeBancorp transaction. PCI loans decreased $220.6 million from June 30, 2017 due to continued pay downs in the PCI loan portfolio, offset by the contributions from the HomeBancorp acquisition.

BancShares reports non-PCI and PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics, such as commercial real estate, commercial and industrial or residential mortgage. ~~Table 9~~ ~~provides the composition of non-PCI and PCI loans and leases.~~

~~Non-PCI Loans and Leases~~

The non-PCI portfolio includes loans that management has the intent and ability to hold and is reported at the principal balance outstanding, net of deferred loan fees and costs. It consists of originated loans and purchased non-credit impaired loans and leases that do not have evidence of credit deterioration at acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.

Non-PCI loans and leases at ~~June 30, 2018~~March 31, 2019 were ~~$23.86~~$24.91 billion, representing ~~97.3 percent~~97.8% of total loans and leases, compared to ~~$22.83~~$24.92 billion ~~and $21.98 billion~~or 97.6% at December 31, ~~2017 and June 30, 2017, respectively.~~

The non-PCI commercial loan portfolio is composed of Commercial Mortgage, Commercial and Industrial, Construction and Land Development, Lease Financing, Other Commercial Real Estate and Other Commercial loans. Non-PCI commercial loans were $15.47 billion at June 30, 2018, an increase of $675.7 million and $1.18 billion compared to December 31, 2017 and June 30, 2017, respectively, primarily resulting from originated loan growth and the HomeBancorp acquisition which contributed $253.7 million at June 30, 2018.

The non-PCI noncommercial loan portfolio is composed of Residential Mortgage, Revolving Mortgage, Consumer and Construction and Land Development loans. Non-PCI noncommercial loans were $8.39 billion at June 30, 2018, an increase of $354.7 million and $711.7 million compared to December 31, 2017 and June 30, 2017, respectively, primarily resulting from originated loan growth and the HomeBancorp acquisition which contributed $289.7 million at June 30, 2018.

~~PCI Loans~~

The PCI portfolio includes loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and that it is probable at the date of acquisition all contractually required principal and interest payments will not be collected. All nonrevolving loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the loans are accounted for under the guidance in ASC Topic 310-30. PCI loans are valued at fair value at the date of acquisition.

PCI loans at ~~June 30, 2018~~March 31, 2019 were ~~$674.3~~$557.4 million, representing ~~2.7 percent~~2.2% of total loans and leases, compared to ~~$763.0~~$606.6 million ~~and $894.9 million~~or 2.4% at December 31, ~~2017~~2018.

The discount related to acquired non-PCI loans and ~~June 30, 2017,~~leases at March 31, 2019 and December 31, 2018 was $30.1 million and $33.3 million, respectively. The discount related to PCI loans at March 31, 2019 and December 31, 2018 was $89.4 million and $95.5 million, respectively.

~~PCI commercial loans were $336.1~~Table 7

LOANS AND LEASES



(Dollars in thousands)	March 31, 2019			December 31, 2018
Non-PCI loans and leases:
Commercial:
Construction and land development	$	804,463		$	757,854
Commercial mortgage	10,747,715			10,717,234
Other commercial real estate	427,419			426,985
Commercial and industrial and leases	3,879,575			3,938,730
Other	280,848			296,424
Total commercial loans	16,140,020			16,137,227
Noncommercial:
Residential mortgage	4,303,137			4,265,687
Revolving mortgage	2,469,898			2,542,975
Construction and land development	258,959			257,030
Consumer	1,734,415			1,713,781
Total noncommercial loans	8,766,409			8,779,473
Total non-PCI loans and leases	$	24,906,429		$	24,916,700
PCI loans:
Total PCI loans	557,356			606,576
Total loans and leases	25,463,785			25,523,276
Less allowance for loan and lease losses	(228,775		)	(223,712		)
Net loans and leases	$	25,235,010		$	25,299,564

ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

The allowance for loan and lease losses was $228.8 million at ~~June 30, 2018, a decrease~~March 31, 2019, representing an increase of ~~$57.3~~$5.1 million since December 31, 2017 and a decrease of $140.9 million since June 30, 2017, due to continued loan run-off, offset by $8.2 million of PCI commercial loans acquired from HomeBancorp. At June 30, 2018, PCI noncommercial loans were $338.2 million, a decrease of $31.4 million since December 31, 2017 and a decrease of $79.6 million since June 30, 2017, reflecting continued loan run-off, offset by $7.3 million from the HomeBancorp acquisition.

~~Table 9~~

~~Loans and Leases~~

(Dollars in thousands) June 30, 2018 December 31, 2017 June 30, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development $ 715,011
$ 669,215
$ 740,291
Commercial mortgage 10,278,741
9,729,022
9,301,154
Other commercial real estate 473,452
473,433
363,339
Commercial and industrial 3,097,541
2,730,407
2,553,612
Lease financing 613,377
894,801
853,943
Other 296,614
302,176
486,573
Total commercial loans 15,474,736
14,799,054
14,298,912
Noncommercial:
Residential mortgage 3,980,845
3,523,786
3,305,361
Revolving mortgage 2,604,955
2,701,525
2,678,686
Construction and land development 250,704
248,289
218,233
Consumer 1,552,928
1,561,173
1,475,410
Total noncommercial loans 8,389,432
8,034,773
7,677,690
Total non-PCI loans and leases 23,864,168
22,833,827
21,976,602
PCI loans:
Total PCI loans 674,269
762,998
894,863
Total loans and leases $ 24,538,437
$ 23,596,825
$ 22,871,465

~~Allowance for Loan and Lease Losses (ALLL)~~

~~The ALLL was $224.9 million at June 30, 2018, representing an increase of $3.0 million since December 31, 2017 and a decrease of $3.9 million since June 30, 2017.~~2018. The ALLL as a percentage of total loans and leases was ~~0.92 percent~~0.90% at ~~June 30, 2018,~~March 31, 2019, compared to ~~0.94 percent and 1.00 percent at~~0.88% December 31, ~~2017 and June 30, 2017, respectively.~~

2018.

At ~~June 30, 2018,~~March 31, 2019, the ALLL allocated to total non-PCI loans and leases was ~~$212.4~~$219.8 million, or ~~0.89 percent~~0.88% of non-PCI loans and leases, compared to ~~$211.9~~$214.6 million, or ~~0.93 percent,~~0.86%, at December 31, 2017 and $215.3 million, or 0.98 percent, at June 30, 2017. The ALLL for total non-PCI loans and leases increased from December 31, 2017 primarily due to loan growth, offset by credit quality improvements. The ALLL for total non-PCI loans and leases decreased from June 30, 2017 primarily due to lower loan growth within the commercial construction and land development portfolio and credit quality improvements.

Originated non-PCI loans were $21.95 billion, $21.13 billion and $19.80 billion at June 30, 2018, December 31, 2017 and June 30, 2017, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans. At June 30, 2018, the ALLL allocated to originated non-PCI loans and leases was $211.7 million, or 0.96 percent of originated non-PCI loans and leases, compared to $211.3 million, or 1.00 percent, at December 31, 2017 and $214.5 million, or 1.08 percent, at June 30, 2017.

~~The remaining ALLL of $12.4 million relates to PCI loans at June 30, 2018, compared to $10.0 million and $13.5 million at December 31, 2017 and June 30, 2017, respectively.~~2018. The increase from December 31, ~~2017~~2018 is largely due to loan growth within portfolios which are reserved at higher rates, changes in credit quality, and increases in specific reserves.

At March 31, 2019, the ALLL for PCI loans totaled $9.0 million compared to $9.1 million at December 31, 2018. The decrease was primarily ~~due to updated cash flow estimates and the decrease from June 30, 2017 was largely~~ due to continued PCI loan portfolio ~~run-off.~~

BancShares recorded a net provision expense of $8.4 million for loan and lease losses for the second quarter of 2018, compared to $7.6 million for the first quarter of 2018 and $12.3 million for the second quarter of 2017. The $833 thousand increase in net provision expense compared to the first quarter of 2018 was largely driven by an increase in the non-PCI provision as a result of loan growth, partiallyrun-off, offset by a decrease in the PCI provision. The $3.9 million decline in net provision expense from the second quarter of 2017 was primarily due to decreases in the PCI and non-PCI provisions. The decrease in the non-PCI provision was a result of lower loan growth in the current quarter and lower calculated reserves on individually impaired loans, partially offset by fewer credit quality improvements in the current quarter.

Net provision expense for the six months ended June 30, 2018 was $16.0 million compared to $20.6 million for the same period of 2017. The decrease in provision expense was primarily due to favorable loan growth mix and credit quality improvements, offset by an increase in net charge-offs and an increase in the PCI provision.updated cash flow estimates.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.11% for the ~~second quarter and~~ first quarter of ~~2018 was 0.11 percent compared to 0.08 percent in~~2019 and the ~~second~~first quarter of ~~2017.~~2018. Net charge-offs for non-PCI loans and

leases were $6.7 million during the ~~second~~first quarter of ~~2018,~~2019, compared to $6.3 ~~million and $4.5~~ million during the first quarter of ~~2018 and second quarter of 2017, respectively.~~

The discount related to acquired non-PCI loans and leases at June 30, 2018, December 31, 2017 and June 30, 2017 was $35.8 million, $35.0 million and $42.9 million, respectively. The discount related to PCI loans at June 30, 2018, December 31, 2017 and June 30, 2017 was $103.0 million, $111.3 million and $129.8 million, respectively.

Management considers the ALLL adequate to absorb estimated inherent losses that relate to loans and leases outstanding at June 30, 2018, although future adjustments may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies periodically review the ALLL as part of their exam process which could result in adjustments to the ALLL based on information available to them at the time of their examination.2018.

Table 108

~~Allowance for Loan and Lease Losses Components by Loan Class~~ALLOWANCE FOR LOAN AND LEASE LOSSES

2018 2017 Six months ended June 30
Second First Fourth Third Second
(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter 2018 2017
Allowance for loan and lease losses at beginning of period $ 223,116
$ 221,893
$ 231,842
$ 228,798
$ 220,943
$ 221,893
$ 218,795
Non-PCI provision (credit) for loan and lease losses
Total commercial 1,872
243
(8,615 ) 2,233
3,984
2,115
11,452
Total noncommercial 6,405
5,008
8,443
6,250
5,768
11,413
9,376
Non-PCI provision (credit) for loan and lease losses 8,277
5,251
(172 ) 8,483
9,752
13,528
20,828
PCI provision (credit) for loan losses 161
2,354
(2,637 ) (537 ) 2,572
2,515
(273 )
Non-PCI Charge-offs:
Commercial:
Construction and land development (8 ) —
(100 ) (9 ) (413 ) (8 ) (490 )
Commercial mortgage (459 ) (46 ) (110 ) (39 ) (235 ) (505 ) (272 )
Other commercial real estate (69 ) —
—
—
—
(69 ) (5 )
Commercial and industrial (1,994 ) (1,475 ) (3,277 ) (1,275 ) (3,121 ) (3,469 ) (6,374 )
Lease financing (445 ) (854 ) (38 ) (687 ) (97 ) (1,299 ) (270 )
Other (38 ) (3 ) (59 ) (666 ) (64 ) (41 ) (187 )
Total commercial (3,013 ) (2,378 ) (3,584 ) (2,676 ) (3,930 ) (5,391 ) (7,598 )
Noncommercial:
Residential mortgage (289 ) (806 ) (300 ) (604 ) (222 ) (1,095 ) (472 )
Revolving mortgage (1,027 ) (992 ) (1,045 ) (218 ) (280 ) (2,019 ) (1,105 )
Construction and land development (37 ) (182 ) —
—
—
(219 ) —
Consumer (5,312 ) (5,255 ) (4,769 ) (4,996 ) (4,991 ) (10,567 ) (9,019 )
Total noncommercial (6,665 ) (7,235 ) (6,114 ) (5,818 ) (5,493 ) (13,900 ) (10,596 )
Total non-PCI charge-offs (9,678 ) (9,613 ) (9,698 ) (8,494 ) (9,423 ) (19,291 ) (18,194 )
Non-PCI Recoveries:
Commercial:
Construction and land development 93
23
201
56
209
116
264
Commercial mortgage 225
239
301
1,446
731
464
1,095
Other commercial real estate 1
145
8
8
7
146
11
Commercial and industrial 638
1,219
650
433
2,392
1,857
2,657
Lease financing 4
41
240
3
—
45
6
Other 1
42
41
123
46
43
121
Total commercial 962
1,709
1,441
2,069
3,385
2,671
4,154
Noncommercial:
Residential mortgage 110
77
85
92
75
187
362
Revolving mortgage 520
194
101
228
401
714
953
Construction and land development 101
26
—
—
—
127
—
Consumer 1,330
1,309
1,227
1,203
1,093
2,639
2,173
Total noncommercial 2,061
1,606
1,413
1,523
1,569
3,667
3,488
Total non-PCI recoveries 3,023
3,315
2,854
3,592
4,954
6,338
7,642
Non-PCI loans and leases charged off, net (6,655 ) (6,298 ) (6,844 ) (4,902 ) (4,469 ) (12,953 ) (10,552 )
PCI loans charged off, net (34 ) (84 ) (296 ) —
—
(118 ) —
Allowance for loan and lease losses at end of period $ 224,865
$ 223,116
$ 221,893
$ 231,842
$ 228,798
$ 224,865
$ 228,798
Reserve for unfunded commitments $ 1,554
$ 1,116
$ 1,032
$ 1,309
$ 1,133
$ 1,554
$ 1,133

~~Second Quarter 2018 to First Quarter 2018~~

Provision expense for non-PCI commercial loans was $1.9 million in the second quarter of 2018, compared to $243 thousand for the first quarter of 2018. This increase of $1.6 million was primarily due to an increase in commercial and industrial loan balances, offset by the release of the construction and land development provision due to loan movement into other commercial real estate.

Provision expense for non-PCI noncommercial loans was $6.4 million in the second quarter of 2018, compared to $5.0 million for the first quarter of 2018. This increase of $1.4 million was primarily due to loan growth, particularly within the residential mortgage loan portfolio.

~~Second Quarter 2018 to Second Quarter 2017~~

Provision expense in the second quarter of 2018 for non-PCI commercial loans was $1.9 million, down $2.1 million from $4.0 million in the second quarter of 2017 resulting from a decrease in the provision for construction and land development as loan balances were moved to other commercial real estate, offset by loan growth and updated loan loss factors.

Provision expense in the second quarter of 2018 for non-PCI noncommercial loans was $6.4 million, an increase of $637 thousand from $5.8 million in the second quarter of 2017 primarily due to loan growth, particularly within the residential mortgage loan portfolio, and updated loan loss factors.

~~Year-to-date 2018~~

Provision expense for non-PCI commercial loans was $2.1 million in the first six months of 2018, compared to $11.5 million in the same period of 2017. This decrease was primarily due to credit quality improvements and updated loan loss factors in the current year compared to the prior year.

Provision expense for non-PCI noncommercial loans was $11.4 million in the first six months of 2018, compared to $9.4 million in the same period of 2017. This increase was primarily due to loan growth, particularly within the residential mortgage loan portfolio, and updated loan loss factors.



	Three months ended March 31

(Dollars in thousands)	2019			2018
Allowance for loan and lease losses at beginning of period	$	223,712		$	221,893
Non-PCI provision for loan and lease losses	11,914			5,251
PCI (credit) provision for loan losses	(164		)	2,354
Non-PCI Charge-offs:
Commercial:
Construction and land development	(44		)	—
Commercial mortgage	(761		)	(46		)
Other commercial real estate	—			—
Commercial and industrial and leases	(1,858		)	(2,329		)
Other	—			(3		)
Total commercial	(2,663		)	(2,378		)
Noncommercial:
Residential mortgage	(166		)	(806		)
Revolving mortgage	(963		)	(992		)
Construction and land development	—			(182		)
Consumer	(6,362		)	(5,255		)
Total noncommercial	(7,491		)	(7,235		)
Total non-PCI charge-offs	(10,154		)	(9,613		)
Non-PCI Recoveries:
Commercial:
Construction and land development	131			23
Commercial mortgage	220			239
Other commercial real estate	1			145
Commercial and industrial and leases	538			1,260
Other	444			42
Total commercial	1,334			1,709
Noncommercial:
Residential mortgage	173			77
Revolving mortgage	387			194
Construction and land development	—			26
Consumer	1,573			1,309
Total noncommercial	2,133			1,606
Total non-PCI recoveries	3,467			3,315
Non-PCI loans and leases charged off, net	(6,687		)	(6,298		)
PCI loans charged off, net	—			(84		)
Allowance for loan and lease losses at end of period	$	228,775		$	223,116
Reserve for unfunded commitments	$	1,052		$	1,116

Table 119

~~Allowance for Loan and Lease Losses Metrics and Ratios~~ALLOWANCE FOR LOAN AND LEASE LOSSES RATIOS


	2018						2017									Six months ended June 30						Three months ended March 31
	Second			First			Fourth			Third			Second
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter				2018			2017			2019			2018
Average loans and leases:
PCI	$	682,521		$	733,830		$	799,399		$	865,580		$	858,053		$	708,034		$	857,778		$	579,080		$	733,830
Non-PCI	23,522,842			22,932,268			22,560,836			22,131,615			21,717,270			23,229,187			21,407,328			24,936,898			22,932,268
Loans and leases at period-end:
PCI	674,269			703,837			762,998			834,167			894,863			674,269			894,863			557,356			703,837
Non-PCI	23,864,168			22,908,140			22,833,827			22,314,906			21,976,602			23,864,168			21,976,602			24,906,429			22,908,140
Allowance for loan and lease losses allocated to loans and leases:
PCI	12,423			12,296			10,026			12,959			13,496			12,423			13,496			8,980			12,296
Non-PCI	212,442			210,820			211,867			218,883			215,302			212,442			215,302			219,795			210,820
Total	$	224,865		$	223,116		$	221,893		$	231,842		$	228,798		$	224,865		$	228,798		$	228,775		$	223,116
Net charge-offs (annualized) to average loans and leases:
PCI	0.02		%	0.05		%	0.15		%	—		%	—		%	0.03		%	—		%	—		%	0.05		%
Non-PCI	0.11			0.11			0.12			0.09			0.08			0.11			0.10			0.11			0.11
Total	0.11			0.11			0.12			0.08			0.08			0.11			0.10			0.11			0.11
ALLL to total loans and leases:
PCI	1.84			1.75			1.31			1.55			1.51			1.84			1.51			1.61			1.75
Non-PCI	0.89			0.92			0.93			0.98			0.98			0.89			0.98			0.88			0.92
Total	0.92			0.94			0.94			1.00			1.00			0.92			1.00			0.90			0.94

~~Nonperforming Assets~~NONPERFORMING ASSETS

Nonperforming assets include nonaccrual loans and leases and ~~OREO resulting from both non-PCI and PCI loans.~~other real estate owned (OREO). At ~~June 30, 2018,~~March 31, 2019, BancShares’ nonperforming assets were ~~$133.3~~$133.9 million, ~~down~~unchanged from ~~$144.3 million and $150.2 million at~~ December 31, ~~2017 at June 30, 2017, respectively.~~2018.

Nonaccrual ~~non-PCI~~ loans and leases at ~~June 30, 2018~~March 31, 2019 were ~~$85.1~~$90.6 million reflecting ~~decreases~~an increase of ~~$7.5 million and $3.0~~$4.8 million since December 31, ~~2017 and June 30, 2017, respectively.~~2018. The ~~declines in both periods were~~increase is primarily due to new nonaccrual loans within the commercial ~~and residential~~ mortgage loans returning to accrual status and payoffs, offset by an increase in revolving mortgage loans that went on nonaccrual status during these periods. Nonaccrual PCI loans at June 30, 2018 were up $946 thousand and $258 thousand from Decemberportfolio. At March 31, ~~2017 and June 30, 2017, respectively. At June 30, 2018,~~2019, OREO totaled ~~$46.6~~$43.3 million, representing ~~declines~~a decline of ~~$4.5 million and $14.1~~$4.7 million since December 31, ~~2017 and June 30, 2017, respectively,~~2018 as sales and write-downs of assets outpaced additions.

Table 1210

~~Nonperforming Assets~~NONPERFORMING ASSETS


	2018						2017									2019			2018
	Second			First			Fourth			Third			Second			First			Fourth			Third			Second			First
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
Nonaccrual loans and leases:
Non-PCI	$	85,055		$	89,260		$	92,534		$	90,064		$	88,067		$	88,958		$	84,546		$	85,419		$	85,055		$	89,260
PCI	1,570			1,580			624			1,017			1,312			1,667			1,276			1,530			1,570			1,580
Other real estate	46,633			48,089			51,097			53,988			60,781
Other real estate owned																43,306			48,030			43,601			46,633			48,089
Total nonperforming assets	$	133,258		$	138,929		$	144,255		$	145,069		$	150,160		$	133,931		$	133,852		$	130,550		$	133,258		$	138,929

Loans and leases:
Non-PCI	$	23,864,168		$	22,908,140		$	22,833,827		$	22,314,906		$	21,976,602
PCI	674,269			703,837			762,998			834,167			894,863
Total loans and leases	$	24,538,437		$	23,611,977		$	23,596,825		$	23,149,073		$	22,871,465

Accruing loans and leases 90 days or more past due
Non-PCI	$	3,179		$	3,030		$	2,978		$	3,449		$	4,192		$	3,493		$	2,888		$	2,640		$	3,179		$	3,030
PCI	41,266			48,229			58,740			64,801			72,586			33,981			37,020			38,073			41,266			48,229

Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.54		%	0.59		%	0.61		%	0.63		%	0.65		%	0.53		%	0.52		%	0.52		%	0.54		%	0.59		%

~~Troubled Debt Restructurings~~

TROUBLED DEBT RESTRUCTURINGS (TDRs)

We have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs that are not accruing interest are included as nonperforming assets within nonaccrual loans and leases. TDRs that are accruing at the time of restructure and continue to perform based on the restructured terms are considered performing. Loans acquired under ASC 310-30, excluding pooled loans, are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modification of a PCI loan accounted for in a pool that would otherwise meet the definition of a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from the scope of TDR accounting.

Table 1311

~~Troubled Debt Restructurings~~TROUBLED DEBT RESTRUCTURINGS


(Dollars in thousands)	June 30, 2018		December 31, 2017		June 30, 2017		March 31, 2019		December 31, 2018
Accruing TDRs:
Non-PCI							$	105,872	$	108,992
PCI	$	18,546	$	18,163	$	19,877	17,839		18,101
Non-PCI	113,764		112,228		104,298
Total accruing TDRs	132,310		130,391		124,175		123,711		127,093
Nonaccruing TDRs:
Non-PCI							29,724		28,918
PCI	253		272		318		82		119
Non-PCI	29,261		33,898		26,398
Total nonaccruing TDRs	29,514		34,170		26,716		29,806		29,037
All TDRs:
Non-PCI							135,596		137,910
PCI	18,799		18,435		20,195		17,921		18,220
Non-PCI	143,025		146,126		130,696
Total TDRs	$	161,824	$	164,561	$	150,891	$	153,517	$	156,130

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, ~~short-term~~securities sold under customer repurchase agreements, federal funds purchased, FHLB borrowings, subordinated debentures, and ~~long-term obligations.~~other borrowings. Interest-bearing liabilities were ~~$19.08 billion and $19.59~~$19.67 billion at ~~June 30, 2018 and~~March 31, 2019, compared to $19.68 billion at December 31, ~~2017, respectively.~~2018. The ~~$510.4~~$11.1 million ~~decline from December 31, 2017~~decrease was due to decreases in ~~long-term obligations~~customer repurchase agreements and ~~short-term borrowings~~subordinated debentures of ~~$628.9~~$35.4 million and ~~$79.8~~$4.2 million, respectively, partially offset by an increase in interest-bearing deposits of ~~$198.3~~$31.4 million. Interest-bearing liabilities were $19.08 billion at June 30, 2018, a decrease of $862.7 million from $19.95 billion at June 30, 2017 due to a $638.6 million decrease in long-term obligations, a $170.5 million decrease in short-term borrowings and a decrease of $53.6 million in interest-bearing deposits.

Deposits

At June 30, 2018, total deposits were $30.41 billion, an increase of $1.14 billion, or 3.9 percent, compared to December 31, 2017 and an increase of $952.5 million, or 3.2 percent, when compared to June 30, 2017. The increase from both periods was primarily the result of organic growth in demand deposit and interest-bearing savings and checking account balances as well as the deposit balances acquired from the HomeBancorp acquisition of $582.2 million at June 30, 2018. These positive drivers were offset by run-off in time deposits and lower money market account balances.

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

At March 31, 2019, total deposits were $31.20 billion, an increase of $525.6 million, representing annualized growth of 6.9% when compared to December 31, 2018. This increase was the result of organic growth in demand, interest checking and time deposit accounts, partially offset by declines in money market accounts. Demand and interest checking deposits increased $590.8 million due to both seasonal fluctuations in commercial demand deposits and a continued focus by branch associates on core deposit growth.

Table 1412

~~Deposits~~DEPOSITS


	June 30, 2018	December 31, 2017	June 30, 2017	March 31, 2019		December 31, 2018
Demand	12,181,717	11,237,375	11,175,580	$	12,376,913	$	11,882,670
Checking with interest	5,375,126	5,230,060	5,172,860	5,435,101		5,338,511
Money market	7,963,153	8,059,271	8,078,633	7,940,984		8,194,818
Savings	2,503,367	2,340,449	2,330,646	2,550,070		2,499,750
Time	2,385,521	2,399,120	2,698,619	2,895,025		2,756,711
Total deposits	30,408,884	29,266,275	29,456,338	$	31,198,093	$	30,672,460

~~Short-Term~~ Borrowings

At ~~June 30, 2018, short-term~~March 31, 2019, total borrowings were ~~$614.0~~$849.6 million compared to ~~$693.8 million and $784.5~~$892.2 million at December 31, ~~2017 and June 30, 2017, respectively.~~2018. The ~~$79.8~~$42.6 million decrease from December 31, ~~2017~~2018 was ~~due to FHLB borrowing maturities of $75.0 million, the maturity~~primarily a result of a ~~$30.0 million repurchase agreement as well as the maturity of a $15.0 million subordinated notes payable and lower~~decrease in customer repurchase ~~agreement balances. These declines were offset by additional federal funds purchased~~agreements of $72.4 million and FHLB borrowings of $24.5 million. The $170.5 million decrease from June 30, 2017 was due to FHLB borrowing maturities of $85.0 million, the maturity of a $30.0 million repurchase agreement as well as the maturity of a $15.0 million subordinated notes payable and lower customer repurchase agreement balances. These declines were offset by additional federal funds purchased of $72.4 million, an increase in FHLB borrowings of $24.5 million and reclassifications of $15.0 million in FHLB borrowings from long-term obligations.

~~Long-Term Obligations~~

~~Long-term obligations were $241.4 million at June 30, 2018, down $628.9 million from December 31, 2017 primarily due to the extinguishment of FHLB debt obligations totaling $675.0~~$35.4 million and a ~~redemption~~decrease in subordinated debentures of $2.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/NC Capital Trust III. These decreases were partially offset by additional subordinated debt of $21.6 million and FHLB borrowings of $18.8 million acquired from HomeBancorp as well as capital leases of $8.2$4.2 million. Long-term obligations decreased $638.6 million from June 30, 2017 primarily due to the extinguishment of FHLB debt obligations totaling $675.0 million, reclassification of $15.0 million in FHLB borrowings from long-term obligations to short-term borrowings, as well as a redemption of $2.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/NC Capital Trust III. These decreases were partially offset by additional subordinated debt of $21.6 million acquired from HomeBancorp, FHLB borrowings of $18.8 million and capital leases of $12.9 million.

BancShares owns three special purpose entities – FCB/NC Capital Trust III, FCB/SC Capital Trust II and SCB Capital Trust I (the Trusts). Long-term ~~obligations~~borrowings 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. BancShares had the following issues of trust preferred securities and subordinated debentures owed to the Trusts:

Table 1513

~~Trust Preferred Securities and Subordinated Debentures~~TRUST PREFERRED SECURITIES AND SUBORDINATED DEBENTURES


	June 30, 2018				December 31, 2017				June 30, 2017					March 31, 2019				December 31, 2018				Maturity Date
(Dollars in thousands)	Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Maturity Date	Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Maturity Date
FCB/NC Capital Trust III	$	88,145	$	85,500	$	90,207	$	87,500	$	90,206	$	87,500	June 30, 2036	$	88,145	$	85,500	$	88,145	$	85,500	June 30, 2036
FCB/SC Capital Trust II	19,588		19,000		19,588		19,000		19,588		19,000		June 15, 2034	19,588		19,000		19,588		19,000		June 15, 2034
SCB Capital Trust I	10,310		10,000		10,310		10,000		10,310		10,000		April 7, 2034	10,310		10,000		10,310		10,000		April 7, 2034
	$	118,043	$	114,500	$	120,105	$	116,500	$	120,104	$	116,500		$	118,043	$	114,500	$	118,043	$	114,500

~~Shareholders' Equity~~SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

Table 14 shows activities that caused the change in outstanding Class A common stock over the past five quarters.

Table 14

CHANGES IN CLASS A COMMON STOCK OUTSTANDING



	2019		2018
	First		Fourth		Third		Second	First
(in thousands)	Quarter		Quarter⁽¹⁾		Quarter		Quarter	Quarter
Shares outstanding at beginning of period	10,623		10,880		11,005		11,005	11,005
Repurchases	(243	)	(257	)	(125	)	—	—
Shares outstanding at end of period	10,380		10,623		10,880		11,005	11,005
¹182,000 shares repurchased under the current Board authority and 75,000 shares repurchased under the previous Board authority.

We are committed to effectively managing our capital to protect our depositors, creditors and ~~Capital Adequacy~~

shareholders. We continually monitor the capital levels and ratios for BancShares and FCB ~~are required~~ to ~~meet~~ensure they exceed the minimum ~~capital~~ requirements ~~set forth~~imposed by regulatory ~~authorities.~~authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory environment. Failure to meet ~~minimum~~certain capital requirements may result in ~~certain~~ actions by ~~regulators~~regulatory agencies that could have a ~~direct~~ material ~~effect~~impact on ~~the~~our consolidated financial statements.

In accordance with accounting principles generally accepted in the United States of America (GAAP), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in ~~AOCI~~accumulated other comprehensive loss within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios under current regulatory guidelines. Shareholders' equity was also impacted by first quarter 2018 cumulative effect adjustments of $50.0 million related to both the adoption of ASU 2016-01 for the accounting of equity investments which had an impact of $18.7 million and ASU 2018-02 for the accounting of stranded tax effects in AOCI resulting from the 2017 Tax Act which had an impact of $31.3 million.

In the aggregate, the unrealized gains and losses and cumulative effect adjustments represented a net reduction in shareholders' equity of $244.6 million at June 30, 2018, compared to a net reduction of $122.3 million at December 31, 2017 and $102.8 million at June 30, 2017. The decrease in AOCI of $122.3 million from December 31, 2017 and $141.8 million from June 30, 2017 were primarily driven by the cumulative effect adjustments recorded in the first quarter of 2018 and an increase in unrealized losses on investment securities as a result of lower market interest rates. During the current quarter, mortgage-backed securities were transferred from investments available for sale to the held to maturity portfolio. The unrealized loss on these securities at the date of transfer was $109.5 million and will be amortized out of AOCI into the consolidated statements of income over the expected remaining life of the securities. The decrease from June 30, 2017 was also attributed by the decline in the discount rate used in our defined benefit pension plans.

Table 1615

~~Analysis of Capital Adequacy~~

ANALYSIS OF CAPITAL ADEQUACY

June 30, 2018 December 31, 2017 June 30, 2017 Regulatory
minimum Well-capitalized requirement
BancShares
Risk-based capital ratios
Tier 1 risk-based capital 13.06 % 12.88 % 12.69 % 6.00 % 8.00 %
Common equity Tier 1 13.06
12.88
12.69
4.50
6.50
Total risk-based capital 14.43
14.21
14.07
8.00
10.00
Tier 1 leverage ratio 9.99
9.47
9.33
4.00
5.00

Bank
Risk-based capital ratios
Tier 1 risk-based capital 12.71 % 12.54 % 12.55 % 6.00 % 8.00 %
Common equity Tier 1 12.71
12.54
12.55
4.50
6.50
Total risk-based capital 13.68
13.46
13.51
8.00
10.00
Tier 1 leverage ratio 9.72
9.22
9.23
4.00
5.00

Bank regulatory agencies approved regulatory capital guidelines (Basel III) aimed at strengthening existing capital requirements for banking organizations. The final rules set minimum requirements for both the quantity and quality of capital held by BancShares and FCB and included a common equity Tier 1 capital to risk-weighted assets ratio. A capital conservation buffer was also established

and was phased in beginning January 1, 2016 at 0.625 percent above minimum risk-based capital requirements and will increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.50 percent on January 1, 2019. As such, the capital conservation buffer requirement was 1.88% percent effective January 1, 2018. BancShares and FCB had capital conservation buffers above minimum risk-based capital requirements of 6.43 percent and 5.68 percent, respectively, at June 30, 2018. The buffers exceeded the 1.88% percent requirement and, therefore, resulted in no limit on distributions.



	Requirements to be well-capitalized		March 31, 2019				December 31, 2018
(Dollars in thousands)	Requirements to be well-capitalized		Amount		Ratio		Amount		Ratio
BancShares
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,472,242	12.69	%	$	3,463,307	12.67	%
Common equity Tier 1	6.50		3,472,242		12.69		3,463,307		12.67
Total risk-based capital	10.00		3,836,569		14.02		3,826,626		13.99
Tier 1 leverage ratio	5.00		3,472,242		9.80		3,463,307		9.77

FCB
Risk-based capital ratios
Tier 1 risk-based capital	8.00	%	$	3,371,323	12.36	%	$	3,315,742	12.17	%
Common equity Tier 1	6.50		3,371,323		12.36		3,315,742		12.17
Total risk-based capital	10.00		3,631,150		13.32		3,574,561		13.12
Tier 1 leverage ratio	5.00		3,371,323		9.56		3,315,742		9.39

As of ~~June 30, 2018,~~March 31, 2019, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. BancShares had no trust preferred capital securities included in Tier 1 capital at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.

The capital conservation buffer introduced under Basel III became fully phased in at January 1, 2019 at 2.50%. BancShares and FCB had capital conservation buffers of 6.02% and 5.32%, respectively, at March 31, 2019. These buffers exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

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

The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of ~~risk related~~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 ~~legal,~~ and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance ~~levels;~~levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the ~~Enterprise~~ Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also ~~reviews~~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~~risk-related regulatory orand 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~~enterprise-wide stress testing activities are part of ~~our risk management program.~~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 be subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of ~~results.~~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, however, BancShares will no longer conduct company-run stress testing under the Dodd-Frank Act.~~regulators.

Credit risk ~~management.~~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 ~~other than acquired loans,~~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 ~~acquired~~originated and ~~originated~~acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. ~~The risk~~These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ALLL that accounts for losses that are inherent in the loan and lease portfolio.

Interest rate risk management

. Interest rate risk (IRR) results principally ~~from~~from: assets and liabilities maturing or repricing at different points in time, ~~from~~ assets and liabilities repricing at the same point in time but in different amounts, and ~~from~~ short-term and long-term interest rates changing in different magnitudes.

We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to ~~forecast~~forecasted net interest income, assuming stable rates. ~~Rate shock~~IRR scenarios ~~represent an instantaneous~~modeled, include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and ~~parallel shift~~changes in the relationships of our rates ~~up or down, from a base yield curve.~~to market rates. Despite ~~the current increase~~recent increases in market interest rates, the overall rate on interest-bearing deposits remains relatively low and, as such, it is unlikely that ~~the~~these rates ~~on most interest-bearing deposits~~ can decline materially from current levels. ~~Our shock~~Additionally, our projections incorporate an internal rate outlook and assumptions of ~~likely~~ customer migration from low rate deposit instruments to intermediate term fixed rate instruments ~~such as certificates of deposit,~~ as rates rise. ~~Various other IRR scenarios~~

~~are modeled to supplement shock scenarios. This may include interest rate ramps, changes in the shape of the yield curve and changes in the relationships of FCB rates to market rates.~~

Table 17

~~Net Interest Income Sensitivity Simulation Analysis~~

~~This table~~16 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

Table 16

NET INTEREST INCOME SENSITIVITY ANALYSIS


	Estimated percentage increase (decrease) in net interest income				Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis points)	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
-100	(10.45	)%	(12.25	)%	(10.67	)%	(10.67	)%
+100	3.13		3.66		3.05		2.38
+200	3.56		4.61		3.85		1.66
+300	1.06		2.43

Net interest income sensitivity metrics at ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017~~2018 were primarily affected by a ~~shift~~reduction in the ~~earning asset mix with a decrease in overnight investments~~forecast for both the number of offerings and ~~growth in the fixed rate loan portfolio, partially offset by a favorable change in the deposit mix from growth in non-interest bearing~~promotional rates paid on time deposits.

~~Table 18~~

~~Economic Value of Equity Modeling Analysis~~

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

Table 17 table presents the EVE profile as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

Table 17

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS


	Estimated percentage increase (decrease) in EVE				Estimated percentage increase (decrease) in EVE
Change in interest rate (basis points)	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
-100	(15.10	)%	(15.44	)%	(18.08	)%	(15.14	)%
+100	3.36		3.38		5.45		3.34
+200	1.06		1.06		5.14		1.40
+300	(5.22	)	(5.52	)

The economic value of equity metrics at ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017 remained relatively stable with increases~~2018 were primarily affected by strong growth in ~~the scenarios due primarily to a change in decay assumptions used for~~ non-maturity deposits ~~beginning~~coupled with a sharp decline in ~~the second quarter of 2018 being offset by the prepayment of eight FHLB debt obligations totaling $675.0 million~~market discount rates resulting in ~~the first quarter of 2018.~~

higher valuations.

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.

Liquidity risk ~~management.~~management

Liquidity risk is the risk that 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 that can affect 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 liquidity 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 liquidity measures the amount by which illiquid assets are supported by long-term funding; and

Contingent liquidity utilizes cash flow stress testing across three crisis scenarios to determine the adequacy of our liquidity.

We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $4.21 billion at ~~June 30, 2018~~March 31, 2019 compared to ~~$3.70~~$3.11 billion at December 31, ~~2017.~~2018. Another source of available funds is advances from the FHLB of Atlanta. Outstanding FHLB advances were ~~$128.7~~$189.7 million as of ~~June 30, 2018,~~March 31, 2019, and we had sufficient collateral pledged to secure ~~$6.09~~$6.18 billion of additional borrowings. Also, at ~~June 30, 2018, $2.88~~March 31, 2019, $2.93 billion in ~~noncovered~~non-PCI loans with a lendable collateral value of ~~$2.17~~$2.23 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines which had ~~$615.0~~$690.0 million of available capacity at ~~June 30, 2018.~~

March 31, 2019.

CRITICAL ACCOUNTING ~~POLICIES~~ESTIMATES

There have been no significant changes in our Critical Accounting ~~Policies~~Estimates as described in our ~~2017~~2018 Annual Report on Form ~~10-K.~~10‑K.

FORWARD-LOOKING STATEMENTS

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.

Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the ~~FDIC-assisted transactions,~~acquisitions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect.

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


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of ~~June 30, 2018,~~March 31, 2019, BancShares’ market risk profile has not changed significantly from December 31, ~~2017, as~~2018 and discussed in the Form 10-K. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4. Controls and Procedures

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

No changes in BancShares' internal control over financial reporting occurred during the ~~second~~first quarter of ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, BancShares' internal control over financial reporting.

PART II

Item 1. Legal Proceedings

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts 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 currently exist that are expected to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note L of BancShares' Notes to Unaudited Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes from ~~the~~ risk factors ~~previously disclosed~~described in our annual Form 10-K for the year ended December 31, ~~2017.~~2018. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.

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

~~None~~Information concerning BancShares' repurchases of outstanding common stock during the three month period ended March 31, 2019, is included in the following table:



Shares of Class A common stock purchased by BancShares during the period ended March 31, 2019
Class A common stock	Total Number of Class A Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
Purchases from January 1, 2019 to January 31, 2019	71,100	$	400.28	71,100	546,900
Purchases from February 1, 2019 to February 28, 2019	58,300	426.36		58,300	488,600
Purchases from March 1, 2019 to March 31, 2019	113,600	417.49		113,600	375,000
Total	243,000	$	414.58	243,000	375,000

Subsequent to quarter-end and through May 6, 2019, BancShares repurchased an additional 63,400 shares of Class A common stock for approximately $27.4 million at an average cost per share of $432.78.

Item 6. Exhibits



31.1	Certification of Chief Executive Officer (filed herewith)

31.2	Certification of Chief Financial Officer (filed herewith)

32.1	Certification of Chief Executive Officer (filed herewith)

32.2	Certification of Chief Financial Officer (filed herewith)

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

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



Date:	~~August 2, 2018~~May 8, 2019		FIRST CITIZENS BANCSHARES, INC.
			(Registrant)

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

6554



(Dollars in thousands)	As recorded by FCB
Purchase Price			$	112,657
Assets
Cash and due from banks	$	6,359
Overnight investments	10,393
Investment securities	200,918
Loans held for sale	791
Loans	566,173
Premises and equipment	6,542
Other real estate owned	2,135
Income earned not collected	2,717
Intangible assets	13,206
Other assets	33,459
Total assets acquired	842,693
Liabilities
Deposits	619,589
Short-term borrowings	108,973
Accrued interest payable	1,020
Long-term obligations	52,944
Other liabilities	5,126
Total liabilities assumed	$	787,652
Fair value of net assets assumed			55,041
Goodwill recorded for HomeBancorp			$	57,616



(Dollars in thousands)
Contractually required payments	$	710,876
Contractual cash flows not expected to be collected	$	9,845
Fair value at acquisition date	$	550,618



(Dollars in thousands)
Contractually required payments	$	26,651
Cash flows expected to be collected	$	19,697
Fair value of loans at acquisition	$	15,555