News Column

FIRST CITIZENS BANCSHARES INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 7, 2014

INTRODUCTION

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 2013 Annual Report in 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 2014, the reclassifications have no material effect on shareholders' equity or net income as previously reported. Unless otherwise noted, the terms "we," "us" and "BancShares" refer to the consolidated financial position and consolidated results of operations for BancShares. BancShares is a financial holding company headquartered in Raleigh, North Carolina, that offers full-service banking through its wholly-owned banking subsidiary, First-Citizens Bank & Trust Company (FCB). FCB is a state-chartered bank organized under the laws of the state of North Carolina. As of May 7, 2014, FCB operated 401 branches in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Washington, California, Florida, Georgia, Texas, Arizona, New Mexico, Oregon, Colorado, Oklahoma, Kansas, Missouri, and Washington, DC.



EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

BancShares' earnings and cash flows are primarily derived from its commercial 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 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. Beginning in 2009, leveraging on our strong capital and liquidity positions, we participated in six FDIC-assisted transactions involving distressed financial institutions. Each of the FDIC-assisted transactions include indemnification assets, or loss share agreements, that protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. Under accounting principles generally accepted in the United States of America (GAAP), acquired assets, assumed liabilities and the indemnification asset are recorded at their fair values as of the acquisition date. Subsequent to the acquisition date, the amortization and accretion of premiums and discounts, the recognition of post-acquisition improvement and deterioration, and the related accounting for the FDIC loss share agreements have contributed to significant income statement volatility. On January 1, 2014, FCB completed its merger with1st Financial Services Corporation (1st Financial) and its wholly-owned banking subsidiary Mountain 1st Bank & Trust Company. In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair value as of the acquisition date. As a result of the 1st Financial transaction, during the first quarter of 2014, FCB recorded loans with a fair value of $316.3 million, investment securities with a fair value of $237.4 million and other real estate with a fair value of $11.6 million. The fair value of deposits assumed totaled $631.9 million. FCB paid $10.0 million to acquire 1st Financial, including $8.0 million to acquire and subsequently retire the 1st Financial securities that had been issued under the Troubled Asset Relief Program. As a result of the transaction, FCB recorded $24.5 million of goodwill and $3.8 million in core deposit intangibles. BancShares and FCB remain well-capitalized following the 1st Financial merger. Various external factors influence the focus of our business efforts, and the results of our operations can change significantly based on those external factors. US economic conditions are improving, but unemployment rates remain high. The rate of economic growth continued at a modest rate in the first quarter of 2014. Consumer confidence continues to improve, with consumer spending at the highest level of growth in three years. Continued growth in household net worth, driven by increases in home, stock and other asset values, is believed to have positively influenced consumer confidence. As a result of perceived strength in the economy, the Federal Reserve has begun to taper its bond-buying program during the first quarter of 2014. The target asset purchase amount has continued to decline as the Federal Reserve seeks to gradually reduce stimulus efforts. 38



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We believe improved economic stability has contributed to modest loan growth during the first quarter of 2014. However, low interest rates and competitive loan and deposit pricing continue to constrain interest margins. Additionally, we have experienced improved loan demand during late 2013 and early 2014, as well as improved credit quality quarter over quarter. BancShares' consolidated net income during the first quarter of 2014 equaled $22.4 million, a decrease of $4.9 million from the $27.2 million earned during the fourth quarter of 2013 and a decrease of $33.2 million from the $55.6 million earned during the first quarter of 2013. The annualized returns on average assets and equity amounted to 0.41 percent and 4.33 percent, respectively, during the first quarter of 2014, compared to 0.50 percent and 5.37 percent during the fourth quarter of 2013 and 1.07 percent and 12.01 percent during the first quarter of 2013. Net income per share during the first quarter of 2014 totaled $2.33, compared to $2.83 and $5.78 during the fourth and first quarters of 2013, respectively. The decrease in net income during 2014 was primarily a result of lower net interest income driven by nonrecurring adjustments and expected declining loan balances within the FDIC-assisted loan portfolio. This decrease was partially offset by improved investment yields and the reduction of funding costs. As discussed more fully under the caption Business Combinations-Income statement impact, net income during the first quarter of 2014 has been influenced by various post-acquisition events affecting acquired loans. These events, which are not predictable, include unexpected repayments of loans outstanding and improvements in future cash flow projections. Reductions in acquired loan balances have led to a reduction in accretion income when compared to the first quarter of 2013. Unscheduled repayments have also resulted in credits to provision for loan and lease losses due to reversal of previously-identified impairment, although the first quarter 2014 credits were significantly less than those recorded during the first quarter of 2013. Lower amortization of the FDIC receivable during 2014, when compared to the first quarter of 2013, has contributed to a favorable variance in noninterest income. Net income generated by our non-acquired bank operations has been positive during the first quarter of 2014. Originated loan provision for loan and lease losses declined significantly for the first quarter of 2014 compared to the sequential quarter and the same quarter in the prior year due to credit quality improvements in the originated portfolio and lower net charge-offs. Originated loan growth with declining provision expense and improved yield on investments contributed to higher net interest income after provision, despite a reduction in originated loan yields for the current quarter compared to the fourth and first quarters of 2013. Net interest income decreased $15.7 million to $160.9 million in the first quarter of 2014 from $176.6 million in the fourth quarter of 2013 and decreased $44.0 million from $204.9 million in the first quarter of 2013, primarily due to FDIC-assisted loan portfolio changes including sustained loan runoff over all periods and nonrecurring acquisition accounting adjustments recognized during the first quarter of 2013. The taxable-equivalent yield on interest-earning assets was 3.26 percent during the first quarter of 2014, compared to 3.55 percent for the fourth quarter of 2013, a decline of 29 basis points, and 4.35 percent for the first quarter of 2013, a decline of 109 basis points. The yield on interest-earning assets remains volatile due to the unpredictable nature of unscheduled repayments of acquired loans. BancShares recorded a $1.9 million credit to provision for loan and lease losses during the first quarter of 2014, compared to provision expense of $7.3 million in the fourth quarter of 2013 and a credit to provision of $18.6 million during the first quarter of 2013. The credit for acquired loans totaled $2.3 million during the first quarter of 2014, compared to credits of $0.8 million and $22.6 million during the fourth and first quarters of 2013, respectively, the result of loan runoff, repayment and other adjustments. Provision expense for originated loans totaled $0.4 million during the first quarter of 2014 compared to $8.1 million and $4.0 million during the fourth and first quarters of 2013, respectively, the result of credit quality improvements in the originated loan portfolio. During the first quarter of 2014, noninterest income decreased $8.0 million compared to the fourth quarter of 2013, and increased $3.7 million compared to the first quarter of 2013. The $8.0 million decrease is the result of lower fees from processing services, reductions in other noninterest income and net adjustments to the FDIC receivable in the fourth quarter of 2013, compared to the current quarter. The increase when compared to the first quarter of 2013 is due to improved merchant and cardholder services and net adjustments to the FDIC receivable, partially offset by lower mortgage income and reductions in other income. Noninterest expense totaled $191.0 million in the first quarter of 2014, a decrease of $5.3 million compared to the fourth quarter of 2013, due to lower collection costs and advertising and other expenses, partially offset by increased third party processing fees. Noninterest expense decreased $3.3 million in the first quarter of 2014 compared to the first quarter of 2013, the result of reductions in employee benefits, collections and a fixed asset write-offs that were recorded in the first quarter of 2013 related to the client bank processing relationships that were sold, partially offset by higher salaries and wages. 39



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Income tax expense in the first quarter of 2014 totaled $10.6 million compared to $15.0 million for the fourth quarter and $31.1 million for the first quarter of 2013, representing effective tax rates of 32.2 percent, 35.5 percent and 35.8 percent during the respective periods. The decreased effective tax rate for the first quarter of 2014 is a result of the impact of permanent differences on lower pre-tax earnings. Investment securities available for sale totaled $5.7 billion at March 31, 2014, an increase of $288.5 million or 5.4 percent compared to December 31, 2013. Investment securities acquired in the 1st Financial merger totaled $237.4 million. Acquired loans and leases increased $241.4 million since December 31, 2013, the result of the acquisition of $316.3 million in the 1st Financial merger. Originated loans and leases increased $95.9 million, or 0.8 percent, since December 31, 2013 to $12.2 billion at March 31, 2014. Total deposits increased $889.5 million during the first quarter of 2014, with increases in both demand and time deposit balances. Deposits resulting from the 1st Financial merger totaled $593.3 million at March 31, 2014. BancShares remains well-capitalized, with a tier 1 leverage ratio of 9.66 percent at March 31, 2014, compared to 9.82 percent at December 31, 2013, both comfortably above the published well-capitalized minimum of 5.00 percent. The total risk-based capital ratio was 16.05 percent at March 31, 2014, compared to 16.42 percent at December 31, 2013, both of which compare favorably to the published well-capitalized minimum of 10.00 percent. The risk-based capital ratio decrease during the first quarter was primarily driven by the addition of $24.5 million in goodwill and $3.8 million in core deposit intangibles from the 1st Financial merger. 40



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Table of Contents Table 1 SELECTED QUARTERLY DATA 2014 2013 First Fourth Third Second First (Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter SUMMARY OF OPERATIONS Interest income $ 173,394$ 189,640$ 192,634$ 193,926$ 220,604 Interest expense 12,463 13,047 13,451 14,398 15,722 Net interest income 160,931 176,593 179,183 179,528 204,882 Provision (credit) for loan and lease losses (1,903 ) 7,276 (7,683 ) (13,242 ) (18,606 ) Net interest income after provision for loan and lease losses 162,834 169,317 186,866 192,770 223,488 Noninterest income 61,181 69,177 71,918 64,995 57,513 Noninterest expense 191,030 196,315 192,143 188,567 194,355 Income before income taxes 32,985 42,179 66,641 69,198 86,646 Income taxes 10,619 14,953 25,659 25,292 31,061 Net income $ 22,366$ 27,226$ 40,982$ 43,906$ 55,585 Net interest income, taxable equivalent $ 161,694$ 177,280$ 179,823$ 180,188$ 205,553 PER SHARE DATA Net income $ 2.33$ 2.83$ 4.26$ 4.56$ 5.78 Cash dividends 0.30 0.30 0.30 0.30 0.30 Market price at period end (Class A) 240.75 222.63 205.60 192.05 182.70 Book value at period end 218.82 215.89 206.06 201.62 199.46



SELECTED PERIOD AVERAGE BALANCES

Total assets $ 21,872,343$ 21,562,920 $



21,260,384 $ 21,224,412$ 21,150,143

Investment securities 5,606,723 5,285,783



5,177,729 5,162,893 5,196,930

Loans and leases (acquired and originated) 13,459,945 13,088,636



13,111,710 13,167,580 13,289,828

Interest-earning assets 20,139,131 19,787,236



19,428,949 19,332,679 19,180,308

Deposits 18,492,310 18,102,752



17,856,882 17,908,705 17,922,665

Long-term obligations 500,805 510,871



449,013 443,804 444,539

Interest-bearing liabilities 14,189,227 13,790,088 13,757,983 13,958,137 14,140,511

Shareholders' equity $ 2,094,557$ 2,010,191 $



1,953,128 $ 1,929,621$ 1,877,445

Shares outstanding 9,618,941 9,618,941 9,618,941 9,618,941 9,618,985 SELECTED PERIOD-END BALANCES Total assets $ 22,154,997$ 21,199,091 $



21,511,352 $ 21,308,822$ 21,351,012

Investment securities 5,677,019 5,388,610



5,162,598 5,186,106 5,280,907

Loans and leases: Acquired 1,270,818 1,029,426 1,188,281 1,443,336 1,621,327 Originated 12,200,226 12,104,298 11,884,585 11,655,469 11,509,080 Deposits 18,763,545 17,874,066 18,063,319 18,018,015 18,064,921 Long-term obligations 440,300 510,769



510,963 443,313 444,252

Shareholders' equity $ 2,104,830$ 2,076,675 $



1,982,057 $ 1,939,330$ 1,918,581

Shares outstanding 9,618,941 9,618,941 9,618,941 9,618,941 9,618,941 SELECTED RATIOS AND OTHER DATA Rate of return on average assets (annualized) 0.41 % 0.50 % 0.76 % 0.83 % 1.07 % Rate of return on average shareholders' equity (annualized) 4.33 5.37 8.32 9.13 12.01 Net yield on interest-earning assets (taxable equivalent) 3.26 3.55 3.67 3.74 4.35 Allowance for loan and lease losses to total loans and leases: Acquired 3.54 5.20 5.01 5.30 5.95 Originated 1.46 1.49 1.50 1.56 1.53 Nonperforming assets to total loans and leases and other real estate at period end: Acquired covered 9.34 7.02 7.05 8.62 8.46 Acquired not covered 3.36 - - - - Originated 0.66 0.74 0.90 0.91 1.10 Tier 1 risk-based capital ratio 14.56 14.92 15.04 14.91 14.72 Total risk-based capital ratio 16.05 16.42 16.54 16.41 16.41 Leverage capital ratio 9.66 9.82 9.84 9.68 9.53 Dividend payout ratio 12.88 10.60 7.04 6.58 5.19 Average loans and leases to average deposits 72.79 72.30 73.43 73.53 74.15



Average loan and lease balances include nonaccrual loans and leases.

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Table of Contents BUSINESS COMBINATIONS FDIC-assisted transactions occurring between 2009 and 2011 provided us significant growth opportunities and continue to provide significant contributions to our results of operations. These transactions allowed us to increase our presence in existing markets and to expand our banking presence to adjacent markets. Each of the FDIC-assisted transactions included loss share agreements that, for the term of the loss share agreement, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. Two of the loss share agreements expire during the third quarter of 2014. We will process all necessary filings in accordance with the agreements before expiration to collect the earned loss share receivables. Going forward, we will continue to manage these loans and loan relationships in accordance with our standard credit administration policies and procedures. In January 2014, FCB completed its merger with 1st Financial Services Corporation (1st Financial) and its wholly-owned banking subsidiary, Mountain 1st Bank & Trust Company. The merger allowed FCB to expand its presence in Western North Carolina, within the communities of Columbus, Etowah, Hendersonville, Shelby and Waynesville. This merger was not an FDIC-assisted transaction and, therefore, it has no loss share agreements.



Table 2 FAIR VALUE OF 1ST FINANCIAL SERVICES ACQUIRED ASSETS AND LIABILITIES (Dollars in thousands)

January 1, 2014



Assets

Cash and cash equivalents $ 28,194 Investment securities available for sale 237,438 Loans and leases 316,327 Other real estate owned 11,591 Intangible assets 3,780 Other assets 23,991 Total assets acquired $ 621,321 Liabilities Deposits: Noninterest-bearing $ 152,444 Interest-bearing 479,427 Total deposits 631,871 Federal Funds purchased 406 Other liabilities 3,559 Total liabilities assumed 635,836 Net liabilities acquired 14,515 Cash paid to 1st Financial shareholders 2,000 Cash paid to U.S. Treasury for TARP securities 8,000 Goodwill recorded $ 24,515 Income statement impact. The 1st Financial merger was accretive to net interest income during the first quarter of 2014 and is expected to continue to be accretive going forward. The nonrecurring merger related costs are in line with original expectations totaling approximately $6 million to $7 million. Revenue generated from 1st Financial was approximately $6.9 million for the first quarter of 2014. When comparing the current quarter to the first quarter of 2013, acquired loans had an unfavorable impact on earnings. Unfavorable variances were noted in interest income and provision for loan and lease losses, partially offset by improved noninterest income. The decrease in interest income, and overall earnings, for the first quarter of 2014 compared to the same quarter in the prior year is driven by sustained runoff in the acquired loan portfolio and nonrecurring FDIC-assisted acquisition accounting adjustments recorded during the the first quarter of 2013. Due to various factors that affect income or expense 42



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related to acquired loans recognized in a given period, these components of net income are not easily predictable for future periods. Variations among these items may affect the comparability of various components of net income. Acquired loan accretion income, which is included in interest income, may be accelerated in the event of unscheduled repayments and various other post-acquisition events. During the three months ended March 31, 2014, accretion income on acquired loans equaled $30.2 million, compared to $44.9 million during the fourth quarter and $79.9 million during the first quarter of 2013. Accretion income during the first quarter of 2013 was impacted by a higher volume of repayments and nonrecurring acquisition accounting adjustments related to the FDIC-assisted transactions. During the three months ended March 31, 2014, we recorded a credit to provision for loan and lease losses for acquired loans totaling $2.3 million compared to a credit of $22.6 million during the same period of 2013. During both periods, unscheduled loan payments resulted in the reversal of previously-recognized impairment, although as expected, the volume of repayments during the first quarter of 2014 was significantly less than repayments during the first quarter of 2013. During the three-month period ended March 31, 2014, the net adjustment to the FDIC receivable resulted in a reduction to noninterest income of $12.3 million, compared to a corresponding reduction in noninterest income of $24.1 million during the same period of 2013. The smaller impact during 2014 primarily results from lower amortization expense of the FDIC receivable as the expiration dates of the loss share agreements approach. Receivable from the FDIC for loss share agreements. The various terms of each loss share agreement and the components of the receivable from the FDIC is provided in Table 3. As of March 31, 2014, the FDIC receivable included $37.3 million of expected FDIC cash receipts and $37.5 million we expect to recover through prospective amortization of the asset due to post-acquisition improvements in the related loans. Generally, losses on single family residential loans are covered for ten years. All other loans are generally covered for five years. During the third quarter of 2014, loss share protection will expire for non-single family residential loans acquired from Temecula Valley Bank (TVB) and Venture Bank (VB). During the first quarter of 2015, loss share protection will expire for loans acquired from First Regional Bank (FRB) and for non-single family residential loans acquired from Sun American Bank (SAB). Protection for all other covered assets extends beyond December 31, 2015. Table 3 LOSS SHARE PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS Current Carrying value at portion of March 31, 2014 receivable due (Dollars in Losses/expenses Cumulative amount from (to) FDIC Prospective



thousands) Fair value at incurred through reimbursed by FDIC Receivable from Payable to for 3/31/2014 amortization

Entity acquisition date 3/31/2014 through 3/31/2014 FDIC FDIC filings (accretion) TVB - combined losses $ 103,558 $ 195,585 $ 832 $ 8,374 $ - $ 1,026 $ 5,906 VB - combined losses 138,963 156,480 125,004 1,051 - 180 (607 ) FRB - combined losses 378,695 248,893 169,331 10,632 77,474 (3,670 ) 11,300 SAB - combined losses 89,734 97,764 76,701 12,712 1,491 1,510 6,487 United Western Non-single family residential losses 112,672 111,035 89,014 13,535 17,014 (134 ) 6,266 Single family residential losses 24,781 4,679 3,623 10,876 - 120 189 Colorado Capital - combined losses 155,070 186,504 149,256 17,604 15,360 108 7,940 Total $ 1,003,473 $ 1,000,940 $ 613,761 $ 74,784$ 111,339$ (860 )$ 37,481



Fair value at acquisition date represents the initial fair value of the receivable from FDIC, excluding the payable to FDIC. Prospective amortization (accretion) reflects balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period.

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Table of Contents INTEREST-EARNING ASSETS Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to potentially higher levels of default. We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures and corresponding tighter margins. We avoid high-risk industry concentrations, but we do maintain a concentration of owner-occupied real estate loans to borrowers in medical and medical-related fields. The credit department actively monitors all loan concentrations to ensure potential risks are identified timely and managed accordingly. Our focus on asset quality also influences the composition of our investment securities portfolio. At March 31, 2014, mortgage-backed securities and government agency securities represented 45.2 percent and 31.9 percent of investment securities available for sale, respectively, compared to U.S. Treasury securities, which represented 22.4 percent of the portfolio. Investments in mortgage-backed securities primarily represent securities issued by government entities. The balance of the available-for-sale portfolio includes common stock of other financial institutions, municipal securities and a subordinated debenture issued by another financial institution. Overnight investments include interest-bearing deposits at the Federal Reserve Bank and other financial institutions and federal funds sold. Interest-earning assets averaged $20.14 billion for the first quarter of 2014, compared to $19.79 billion and $19.18 billion for the fourth and first quarters of 2013, respectively. The 2014 increase results from higher levels of investment securities, overnight investments and originated loans and leases.



LOANS AND LEASES

Originated loans increased $691.1 million from $11.51 billion at March 31, 2013 to $12.20 billion at March 31, 2014 and increased $95.9 million since December 31, 2013. Acquired loans totaled $1.27 billion at March 31, 2014, compared to $1.03 billion at December 31, 2013, and $1.62 billion at March 31, 2013. 44



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Table of Contents Table 4 LOANS AND LEASES (Dollars in thousands) March 31, 2014 December 31, 2013 March 31, 2013 Acquired loans: Commercial: Construction and land development $ 106,670 $ 78,915 $ 204,524 Commercial mortgage 728,872 642,891 948,452 Other commercial real estate 47,826 41,381 93,232 Commercial and industrial 38,838 17,254 45,693 Other 870 866 1,042 Total commercial loans 923,076 781,307 1,292,943 Noncommercial: Residential mortgage 291,254 213,851 278,997 Revolving mortgage 25,776 30,834 37,139 Construction and land development 28,151 2,583 11,024 Consumer 2,561 851 1,224 Total noncommercial loans 347,742 248,119 328,384 Total acquired loans 1,270,818 1,029,426 1,621,327 Originated loans and leases: Commercial: Construction and land development 335,271 319,847 300,497 Commercial mortgage 6,330,843 6,362,490 5,352,594 Other commercial real estate 177,082 178,754 176,456 Commercial and industrial 1,175,543 1,081,158 1,662,124 Lease financing 394,268 381,763 336,329 Other 179,725 175,336 194,186 Total commercial loans 8,592,732 8,499,348 8,022,186



Noncommercial:

Residential mortgage 1,030,032 982,421 834,879 Revolving mortgage 2,091,000 2,113,285 2,150,800 Construction and land development 119,049 122,792 115,628 Consumer 367,413 386,452 385,587 Total noncommercial loans 3,607,494 3,604,950 3,486,894 Total originated loans and leases 12,200,226 12,104,298 11,509,080 Total loans and leases $ 13,471,044 $



13,133,724 $ 13,130,407

At March 31, 2014, total acquired loans increased $241.4 million, or 23.4 percent, compared to the fourth quarter of 2013 due to the 1st Financial acquisition. Conversely, acquired loans decreased $591.9 million, or 36.5 percent, at December 31, 2013, compared to March 31, 2013, due to continued loan runoff. At March 31, 2014, total originated loans increased $95.9 million, or 0.8 percent, compared to December 31, 2013, primarily driven by increases in commercial and industrial and residential mortgage loans. Total originated loans for the first quarter of 2014 increased $691.1 million, or 6.0 percent, compared to March 31, 2013, driven primarily by increases in commercial mortgage and residential mortgage, offset by decreases in commercial and industrial and revolving mortgage loans. While management recognizes that economic conditions continue to suppress loan demand, we believe the first quarter 2014 growth points to general improvement in consumer confidence, and we expect originated loan growth to continue for the remainder of 2014. 45



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INVESTMENT SECURITIES

Investment securities available for sale equaled $5.68 billion at March 31, 2014, compared to $5.39 billion at December 31, 2013. Available for sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of March 31, 2014, investment securities available for sale had a net unrealized loss of $4.7 million, compared to a net unrealized loss of $16.6 million as of December 31, 2013. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of March 31, 2014. Changes in the amount of our investment securities portfolio result from balance sheet trends including loans and leases, deposits and short-term borrowings. When inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds in the securities portfolio. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities to fund loan demand. Details of investment securities at March 31, 2014, December 31, 2013 and March 31, 2013 are provided in Table 5. Table 5 INVESTMENT SECURITIES March 31, 2014 December 31, 2013 March 31, 2013 (Dollars in thousands) Cost Fair value Cost Fair value Cost Fair value Investment securities available for sale: U.S. Treasury $ 1,274,716$ 1,273,221$ 373,223



$ 373,437$ 749,284$ 749,757

Government agency 1,811,889 1,812,774 2,543,223 2,544,229 3,147,363 3,150,041 Mortgage-backed securities 2,592,766 2,566,666 2,486,297



2,446,873 1,348,765 1,358,102

Equity securities 543 22,560 543 22,147 543 20,403 Municipal securities 186 186 186 187 546 547 Other 870 830 863 830 844 828 Total investment securities available for sale 5,680,970 5,676,237 5,404,335



5,387,703 5,247,345 5,279,678

Investment securities held to maturity: Mortgage-backed securities 782 835 907 974 1,229 1,322 Total investment securities $ 5,681,752$ 5,677,072$ 5,405,242$ 5,388,677$ 5,248,574$ 5,281,000



INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities totaled $14.19 billion as of March 31, 2014, an increase of $539.3 million since December 31, 2013 and $26.5 million from March 31, 2013. The increase in the first quarter of 2014 is the result of increases in interest-bearing deposits and short-term borrowings, much of which relates to the 1st Financial merger, partially offset by a decrease in long-term obligations.



DEPOSITS

At March 31, 2014, total deposits equaled $18.76 billion, an increase of $889.5 million, or 5.0 percent, since December 31, 2013 and an increase of $698.6 million, or 3.9 percent, since March 31, 2013. The increase during both periods resulted from $593.3 million from the 1st Financial merger and additional organic growth in legacy markets. 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 dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost. 46



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SHORT-TERM BORROWINGS

At March 31, 2014, short-term borrowings totaled $617.8 million compared to $511.4 million at December 31, 2013 and $573.1 million at March 31, 2013. The increase in short-term borrowings since December 31, 2013 is due to higher customer balances in our business and treasury services sweep products and the reclassification of long-term obligations to short-term borrowings for debt maturing in less than one year.



LONG-TERM OBLIGATIONS

Long-term obligations equaled $440.3 million at March 31, 2014, down $70.5 million from December 31, 2013, and $4.0 million from March 31, 2013. The decrease since December 31, 2013 is a result of FHLB borrowings with maturities less than one year being reclassified to short-term borrowings.

At March 31, 2014, December 31, 2013 and March 31, 2013, long-term obligations included $96.4 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, a special purpose entity and the grantor trust for $93.5 million of trust preferred securities. FCB/NC Capital Trust III's trust preferred securities mature in 2036 and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of FCB/NC Capital Trust III. The proceeds from the trust preferred securities were used to purchase the junior subordinated debentures issued by BancShares.



NET INTEREST INCOME

Net interest income for the first quarter of 2014 totaled $160.9 million, a $44.0 million decrease from the first quarter of 2013. This reduction was primarily due to a $54.1 million reduction in interest income on acquired loans, excluding 1st Financial, resulting from the sustained runoff and nonrecurring FDIC-assisted acquisition accounting adjustments recorded during the first quarter of 2013. The reduction was offset by $4.4 million and $3.3 million increases in interest income from the 1st Financial loan portfolio and the investment portfolio, respectively, as well as a $3.3 million reduction in interest expense when comparing the first quarter of 2014 to the same quarter of the prior year. The taxable-equivalent net interest margin for the first quarter of 2014 was 3.26 percent, a decrease of 29 basis points on a sequential basis from 3.55 percent, and a 109 basis point decrease from 4.35 percent when compared to the first quarter of 2013. While margin compression is a continuing concern in the current interest rate environment, the majority of our margin compression during the current and prior quarter was a direct result of the acquired loan portfolio runoff. Taxable-equivalent net interest margin, excluding acquired loans for the current quarter of 2014, sequential quarter and the same quarter in the prior year was 2.83 percent, 2.81 percent and 2.90 percent. Interest-earning assets averaged $20.14 billion in the first quarter of 2014, an increase of $351.9 million and $958.8 million since the fourth and first quarter of 2013, respectively. When compared to both the fourth and first quarters of 2013, average earning assets during the first quarter of 2014 have increased due to the 1st Financial merger and growth among investment securities, overnight borrowings and originated loans. Interest income totaled $173.4 million for the first quarter of 2014, a $16.2 million and a $47.2 million decrease from the fourth and first quarters of 2013, respectively. The taxable-equivalent yield on earning assets was 3.50 percent for the first quarter of 2014, declining 118 basis points since the first quarter of 2013 and declining 31 basis points since the fourth quarter of 2013. The decrease in interest income and earning asset margins is due to the significant reduction in the acquired loan portfolio which are being replaced by lower yielding assets. Average loans and leases increased $371.3 million and $170.1 million comparing the first quarter of 2014 to the fourth and first quarters of 2013, respectively. However, interest income earned from loans and leases for the first quarter of 2014 decreased $17.0 million and $50.6 million when compared to the sequential quarter and the same quarter in the prior year. The taxable-equivalent yield for total loans also decreased during the first quarter of 2014 by 54 basis points and 161 basis points compared to the sequential quarter and the same quarter in the prior year. The yield reduction was due to lower acquired loan accretion income. Accretion income on acquired loans totaled $30.2 million during the first quarter of 2014 compared to $44.9 million and $79.9 million during the fourth and first quarters of 2013, respectively. Loan yields are also down for originated loans due to pricing competition and general market conditions. Taxable equivalent yield on originated loans for the first quarter of 2014 was 4.38 percent compared to 4.43 percent and 4.61 percent for the fourth and first quarters of 2013, respectively. Interest income earned on the investment securities portfolio totaled $11.7 million during the first quarter of 2014 compared to $10.6 million and $8.5 million during the fourth and first quarters of 2013, respectively. This increase is the result of an increase in average balances and higher yields on certain investments. Average investment securities increased $320.9 million and $409.8 million since the fourth and first quarters of 2013, respectively, with a 4 and 18 basis point increase in the taxable-equivalent yield for the respective periods. Average investment balances continue to increase as cash provided by acquired loan repayments and increased deposits are redeployed. 47



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Interest expense amounted to $12.5 million during the first quarter of 2014, a $0.6 million and $3.3 million decrease from the fourth and first quarters of 2013, respectively. The rate on average interest-bearing liabilities equaled 0.35 percent during the first quarter of 2014, a 3 and 10 basis point decrease from the fourth and first quarter of 2013, respectively. Average interest-bearing liabilities increased $399.1 million from the fourth quarter of 2013 to $14.19 billion during the first quarter of 2014 and $48.7 million from the first quarter of 2013 to the first quarter of 2014 due to higher long-term obligations. Average interest-bearing deposits equaled $13.14 billion during the first quarter of 2014, an increase of $463.7 million and $8.2 million from the fourth and first quarter of 2013, respectively. This increase includes deposits acquired in the 1st Financial merger of $593.3 million at March 31, 2014, as well as recurring seasonal trends. For the quarters ended March 31, 2014, December 31, 2013 and March 31, 2013, short-term borrowings averaged $543.9 million, $597.4 million and $559.6 million, respectively. 48



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Table 6 CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - THREE MONTHS 2014 2013 Increase (decrease) due to: Interest Interest Average Income/ Yield/ Average Income/ Yield/ Yield/ Total (Dollars in thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change Assets Loans and leases $ 13,459,945$ 161,636 4.87 % $ 13,289,828$ 212,271 6.48 % $ 2,421$ (53,056 )$ (50,635 ) Investment securities: U. S. Treasury 778,145 1,085 0.57 803,803 517 0.26 (31 ) 599 568 Government agency 2,279,973 2,962 0.52 3,096,761 3,466 0.45 (982 ) 478 (504 ) Mortgage-backed securities 2,525,288 7,763 1.23 1,278,491 4,579 1.45 4,168 (984 ) 3,184 State, county and municipal 186 3 6.45 549 9 6.65 (6 ) - (6 ) Other 23,131 96 1.68 17,326 76 1.78 25 (5 ) 20 Total investment securities 5,606,723 11,909 0.85 5,196,930 8,647 0.67 3,174 88 3,262 Overnight investments 1,072,463 612 0.23 693,550 357 0.21 209 46 255 Total interest-earning assets 20,139,131 $ 174,157 3.50 % 19,180,308 $ 221,275 4.68 % $ 5,804$ (52,922 )$ (47,118 ) Cash and due from banks 478,044 508,417 Premises and equipment 877,414 881,023 Receivable from FDIC for loss share agreements 87,550 234,670 Allowance for loan and lease losses (225,139 ) (282,977 ) Other real estate owned 90,900 150,870 Other assets 424,443 477,832 Total assets $ 21,872,343$ 21,150,143 Liabilities Interest-bearing deposits:



Checking With Interest $ 2,494,679$ 153 0.02 % $ 2,283,684$ 143 0.03 % $ 41$ (31 )$ 10 Savings

1,180,244 291 0.10 928,485 114 0.05 47 130 177 Money market accounts 6,355,681 1,888 0.12 6,463,186 3,185 0.20 (38 ) (1,259 ) (1,297 ) Time deposits 3,113,965 4,493 0.59 3,460,968 6,871 0.81 (597 ) (1,781 ) (2,378 ) Total interest-bearing deposits 13,144,569 6,825 0.21 13,136,323 10,313 0.32 (547 ) (2,941 ) (3,488 ) Short-term borrowings 543,853 585 0.44 559,649 704 0.51 (21 ) (98 ) (119 ) Long-term obligations 500,805 5,053 4.04 444,539 4,705 4.23 577 (229 ) 348 Total interest-bearing liabilities 14,189,227 $ 12,463 0.35 % 14,140,511 $ 15,722 0.45 % $ 9$ (3,268 )$ (3,259 ) Demand deposits 5,347,741 4,786,342 Other liabilities 240,818 345,845 Shareholders' equity 2,094,557 1,877,445 Total liabilities and shareholders' equity $ 21,872,343$ 21,150,143 Interest rate spread 3.15 % 4.23 % Net interest income and net yield on interest-earning assets $ 161,694 3.26 % $ 205,553 4.35 % $ 5,795$ (49,654 )$ (43,859 ) Loans and leases include acquired loans, originated 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 35.0 percent for each period and state income tax rates of 6.0 percent and 6.9 percent for 2014 and 2013, respectively. The taxable-equivalent adjustment was $763 and $671 for 2014 and 2013, respectively. The rate/volume variance is allocated equally between the changes in volume and rate. 49



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The primary sources of noninterest income have traditionally consisted of cardholder services income, merchant services income, service charges on deposit accounts and revenues derived from wealth management services.

FDIC-assisted acquired loan recoveries and related adjustments in the FDIC receivable and payable is another source of noninterest income. As the loss share agreements begin to expire in the third quarter of 2014, we expect the impact on noninterest income to be reduced going forward.

Table 7 NONINTEREST INCOME Three months ended March 31 Change (Dollars in thousands) 2014 2013 $ % Cardholder services $ 11,832$ 11,071$ 761 6.9 % Merchant services 13,521 12,486 1,035 8.3 Service charges on deposit accounts 14,440 14,999 (559 ) (3.7 ) Wealth management services 14,880 14,515 365 2.5 Fees from processing services 4,861 5,619 (758 ) (13.5 ) Other service charges and fees 3,944 3,766 178 4.7 Mortgage income 955 3,788 (2,833 ) (74.8 ) Insurance commissions 3,287 2,980 307 10.3 ATM income 1,202 1,168 34 2.9 Adjustments to FDIC receivable for loss share agreements (12,349 ) (24,053 ) 11,704 (48.7 ) Other 4,608 11,174 (6,566 ) (58.8 ) Total noninterest income $ 61,181$ 57,513$ 3,668 6.4 %



During the first three months of 2014, noninterest income amounted to $61.2 million, compared to $69.2 million and $57.5 million during the fourth and first quarters of 2013, respectively.

When comparing the first quarter of 2014 to the first quarter of 2013, noninterest income improved due to $11.7 million in favorable adjustments to the FDIC receivable for loss share agreements, and $1.8 million increase in merchant services and cardholder services. FDIC adjustments are a result of acquired portfolio performance, while the changes in service charges are directly related to account activity. These first quarter improvements were partially offset by a $2.8 million reduction in mortgage income and a $6.6 million reduction in other noninterest income. The decrease in mortgage fee income was due to reduced mortgage originations and the decrease in the other category is the result of a $7.5 million gain generated from the sale of our rights and most of our obligations under various service agreements with client banks during the first quarter of 2013.



The decrease in noninterest income from the first quarter of 2014 compared to the sequential quarter is primarily driven by a $2.8 million reduction in processing service fees, $1.8 million unfavorable adjustment to the FDIC receivable, and $2.5 million reduction in other noninterest income due to a decrease in acquired loan recoveries for loans that had been fully charged off.

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Table of Contents NONINTEREST EXPENSE The primary components of noninterest expense are salaries and related employee benefits, occupancy costs for branch offices and support facilities and equipment and software costs for our branch offices and our technology and operations infrastructure. Table 8 NONINTEREST EXPENSE Three months ended March 31 Change (Dollars in thousands) 2014 2013 $ % Salaries and wages $ 79,874$ 76,119$ 3,755 4.9 % Employee benefits 20,100 25,019 (4,919 ) (19.7 ) Occupancy expense 20,425 18,809 1,616 8.6 Equipment expense 18,791 18,946 (155 ) (0.8 ) FDIC insurance expense 2,636 2,666 (30 ) (1.1 ) Foreclosure-related expenses 5,410 4,305 1,105 25.7 Merchant processing 8,481 8,234 247 3.0 Processing fees paid to third parties 5,125 4,381 744 17.0 Card processing 2,597 3,077 (480 ) (15.6 ) Consultant 2,231 1,626 605 37.2 Collection 1,835 5,274 (3,439 ) (65.2 ) Advertising 1,289 297 992 (a) Other 22,236 25,602 (3,366 ) (13.1 ) Total noninterest expense $ 191,030$ 194,355$ (3,325 ) (1.7 ) % (a) not meaningful Noninterest expense decreased $5.3 million in the first quarter of 2014 to $191.0 million when compared to $196.3 million in the sequential quarter, and decreased $3.3 million when compared to $194.4 million in the first quarter of 2013. The $5.3 million decrease in first quarter 2014 compared to the fourth quarter 2013, is primarily driven by decreases in collection and advertising expenses, partially offset by an increase in processing fees paid to third parties. When comparing the first quarter of 2014 to the first quarter of 2013, employee benefit expense decreased $4.9 million due to lower pension and health claims expenses resulting from a higher discount rate used to calculate pension expense during 2014. Collection costs decreased $3.4 million during the first quarter of 2014, when compared to the same period of 2013 due to lower nonperforming assets. These favorable variances were partially offset by higher salaries and wages, occupancy costs and foreclosure-related expenses.



INCOME TAXES

We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors. Income tax expense totaled $10.6 million, $15.0 million and $31.1 million for the first quarter of 2014 and the fourth and first quarters of 2013, respectively, representing effective tax rates of 32.2 percent, 35.45 percent and 35.8 percent during the respective periods. The decrease in the effective tax rate for the first quarter 2014 results from the impact of permanent differences on lower pre-tax earnings. 51



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SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

BancShares and FCB are required to meet minimum requirements imposed by regulatory authorities. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.

Under GAAP, unrealized gains and losses on certain assets and liabilities and adjustment for pension funded status, net of deferred taxes, are included in accumulated other comprehensive income within shareholder's equity and directly impact the calculation of our capital ratios. In the aggregate, these items represented a net reduction in shareholders' equity of $16.6 million at March 31, 2014, compared to $25.3 million at December 31, 2013, and $79.9 million at March 31, 2013. The $8.7 million reduction in shareholders' equity from December 31, 2013, resulted from a reduction in unrealized losses on investment securities available for sale arising due to interest rate changes during 2013. The $63.3 million reduction in shareholders' equity from March 31, 2013 reflects the combined impact of lower unrealized losses on investment securities available for sale and changes in the funded status of the pension plan. Table 9 ANALYSIS OF CAPITAL ADEQUACY Regulatory Well-capitalized March 31, 2014 December 31, 2013 March 31, 2013 minimum requirement BancShares Risk-based capital ratios Tier 1 capital 14.56 % 14.92 % 14.72 % 4.00 % 6.00 % Total capital 16.05 16.42 16.41 8.00 10.00 Tier 1 leverage ratio 9.66 9.82 9.53 3.00 5.00 Bank Risk-based capital ratios Tier 1 capital 13.78 % 14.14 % 14.31 % 4.00 % 6.00 % Total capital 15.21 15.57 15.95 8.00 10.00 Tier 1 leverage ratio 9.21 9.36 9.31 3.00 5.00



BancShares continues to exceed minimum capital standards and FCB remains well-capitalized.

In July 2013, Bank regulatory agencies approved new global regulatory capital guidelines (Basel) aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. BancShares will be subject to the requirements of Basel effective January 1, 2015, subject to a transition period for several aspects of the rule. Under the revised rules, BancShares' tier 1 common equity ratio based on the current tier 1 capital and risk-weighted assets calculations, excluding trust preferred securities, would be 13.91 percent at March 31, 2014, compared to the fully phased-in, well-capitalized minimum of 9.0 percent, which includes the 2.5 percent minimum conservation buffer. Management continues to monitor Basel developments and remains committed to managing our capital levels in a prudent manner. The proposed tier 1 common equity ratio is calculated in Table 10. Table 10 TIER 1 COMMON EQUITY (Dollars in thousands) March 31, 2014 Tier 1 capital $ 2,101,125 Less: restricted core capital 93,500 Tier 1 common equity $ 2,007,625 Risk-adjusted assets $ 14,429,905 Tier 1 common equity ratio 13.91 % 52



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Table 11 describes the minimum and well-capitalized requirements for the transitional period beginning during 2016 and the fully phased-in requirements that become effective during 2019.

Table 11 BASEL CAPITAL REQUIREMENTS BaselBaselBasel minimum well-capitalized



Basel minimum well-capitalized

Basel final rules requirement 2016 2016 requirement 2019 2019 Leverage ratio 4.00 % 5.00 % 4.00 % 5.00 % Common equity tier 1 4.50 6.50 4.50 6.50 Common equity plus conservation buffer 5.13 7.13 7.00 9.00 Tier 1 capital ratio 6.00 8.00 6.00 8.00 Total capital ratio 8.00 10.00 8.00 10.00 Total capital ratio plus conservation buffer 8.63 10.63 10.50 12.50 RISK MANAGEMENT Effective risk management is critical to our success. The Dodd-Frank Act required that banks with total assets in excess of $10 billion establish an enterprise-wide risk committee consisting of members of its board of directors. At its July 2013 meeting, the board of directors established a Risk Committee that provides oversight of enterprise-wide risk management. The Risk Committee is responsible for establishing risk appetite and supporting tolerances for credit, market and operational risk and ensuring that risk is managed within those tolerances, monitoring compliance with laws and regulations, reviewing the investment securities portfolio to ensure that portfolio returns are managed within market risk tolerance and monitoring our legal activity and associated risk. With guidance from and oversight by the Risk Committee, management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes. Mortgage reform rules mandated by the Dodd-Frank Act became effective in January 2014, requiring lenders to make a reasonable, good faith determination of a borrower's ability to repay any consumer credit transaction secured by a dwelling and to limit prepayment penalties. Increased risks of legal challenge, private right of action and regulatory enforcement are presented by these rules. BancShares implemented the required system, process, procedural and product changes prior to the effective date of the new rules. We have modified our underwriting standards to ensure compliance with the ability to repay requirements and have determined that we will continue to offer both qualified and non-qualified mortgage products. Historical performance and conservative underwriting of impacted loan portfolios mitigates the risks of non-compliance. Credit risk management. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Loans and leases not covered by loss share agreements with the FDIC were underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans were 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 and originated loans to ensure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan and lease losses that are inherent in the loan and lease portfolio. Interest rate risk management. Interest rate risk (IRR) results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. We assess our short term interest rate risk by forecasting net interest income under various interest rate scenarios and comparing those results to forecast net interest income assuming stable rates. Rate shock scenarios represent an instantaneous and parallel shift in rates, up or down, from a base yield curve. Due to the existence of contractual floors on certain loans, competitive pressures that constrain our ability to reduce deposit interest rates and the extraordinarily low current level of interest rates, it is unlikely that the rates on most interest-earning assets and interest-bearing liabilities can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration of short-term deposit instruments to long-term, higher rate instruments as rates rise. Various other IRR scenarios are modeled to supplement shock 53



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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 12 provides the impact on net interest income resulting from various interest rate scenarios as of March 31, 2014 and December 31, 2013.

Table 12 NET INTEREST INCOME SENSITIVITY SIMULATION ANALYSIS Estimated increase (decrease) in net interest income Change in interest rate (basis point) March 31, 2014 December 31, 2013 +100 2.77 % 2.95 % +200 4.37 4.56 +300 3.66 3.62 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 involves discounting present values of all cash flows of balance sheet items under different interest rate scenarios. 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. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Table 13 presents the EVE profile as of March 31, 2014 and December 31, 2013. Table 13 ECONOMIC VALUE OF EQUITY MODELING ANALYSIS Estimated increase (decrease) in



EVE

Change in interest rate (basis point) March 31, 2014 December 31, 2013 +100 1.46 % 2.68 % +200 0.53 0.70 +300 (2.19 ) (3.05 ) We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk. However, we have entered into an interest rate swap to synthetically convert the variable rate on $93.5 million of junior subordinated debentures to a fixed rate of 5.50 percent through June 2016. The interest rate swap qualifies as a hedge under GAAP. See Note L "Derivative" in the Notes to Consolidated Financial Statements for additional discussion of this interest rate swap. Liquidity risk 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 deposits (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, operation, legal and reputation risks that can affect an institution's liquidity risk profile. 54



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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 existing and potential liquidity sources to support the liquidity management function. At its core is a reliance on the retail deposit book, due to the generally stable balances and low cost it offers. Other sources of liquidity include asset-based liquidity in the form of cash and unencumbered securities, as well as access to wholesale funding from external counterparties, primarily FHLB advances and Federal Funds lines. We aim to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature (i.e. secured versus unsecured). One of our principal sources of noncore funding is advances from the FHLB of Atlanta. Outstanding FHLB advances equaled $275.3 million as of March 31, 2014, and we had sufficient collateral pledged to secure $1.03 billion of additional borrowings. Additionally, we maintain Federal Funds lines and other borrowing facilities. At March 31, 2014, BancShares had access to $665.0 million in unsecured borrowings through various sources. Free liquidity includes cash on deposit at various banks, overnight investments and the unpledged portion of investment securities available for sale, all of which can be easily converted to cash. Free liquidity totaled $3.94 billion at March 31, 2014 compared to $3.39 billion at December 31, 2013 and $3.13 billion at March 31, 2013. NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans and leases and OREO resulting from both acquired and originated loans. At March 31, 2014, BancShares' nonperforming assets amounted to $185.4 million, or 1.37 percent, of total loans and leases plus OREO, compared to $165.6 million, or 1.25 percent, at December 31, 2013. Acquired nonaccrual loans equaled $52.1 million as of March 31, 2014, compared to $28.5 million at December 31, 2013, an increase due to one large commercial loan being placed on nonaccrual in the first quarter of 2014. Originated nonaccrual loans decreased $6.2 million from December 31, 2013 to $47.0 million at March 31, 2014, due to lower nonaccrual commercial mortgage and commercial and industrial loans. At March 31, 2014, total OREO was $86.4 million, compared to $84.0 million at December 31, 2013. OREO includes foreclosed property and branch facilities that we have closed but not sold. Noncovered OREO totaled $44.5 million at March 31, 2014, compared to $36.9 million at December 31, 2013. 55



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Table of Contents Table 14 NONPERFORMING ASSETS 2014 2013 First Fourth Third Second First (Dollars in thousands) Quarter Quarter Quarter Quarter Quarter Risk Elements Nonaccrual loans and leases: Acquired $ 52,108$ 28,493$ 29,194$ 46,892$ 43,882 Originated 46,952 53,170 66,840 69,133 82,583 Other real estate: Covered under loss share agreements 41,855 47,081 58,769 84,833 101,901 Not covered under loss share agreements 44,504 36,898 40,338 36,942 44,828 Total nonperforming assets $ 185,419$ 165,642$ 195,141$ 237,800$ 273,194 Nonperforming assets: Acquired covered $ 93,963$ 75,574$ 87,963$ 131,725$ 145,783 Acquired not covered 10,664 - - - - Originated 80,792 90,068 107,178 106,075 127,411 Total nonperforming assets $ 185,419$ 165,642$ 195,141$ 237,800$ 273,194 Accruing loans and leases greater than 90 days past due: Acquired $ 137,102$ 193,892$ 205,847$ 253,935$ 278,687 Originated 9,471 8,784 9,363 11,187 12,301 Nonperforming assets to total loans and leases plus other real estate: Acquired covered 9.34 % 7.02 % 7.05 % 8.62 % 8.46 % Acquired not covered 3.36 - - - - Originated 0.66 0.74 0.90 0.91 1.10 Total 1.37 1.25 1.48 1.80 2.06 TROUBLED DEBT RESTRUCTURINGS Troubled debt restructurings (TDRs) are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans and leases. TDRs, which are accruing interest based on the restructured terms, are considered performing. 56



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Table 15 TROUBLED DEBT RESTRUCTURINGS (Dollars in thousands) March 31, 2014 December 31, 2013 March 31, 2013 Accruing TDRs: Acquired $ 105,642 $ 90,829 $ 156,862 Originated 93,016 85,126 85,621 Total accruing TDRs 198,658 175,955 242,483 Nonaccruing TDRs: Acquired 11,626 11,479 25,549 Originated 20,717 19,322 52,610 Total nonaccruing TDRs 32,343 30,801 78,159 All TDRs: Acquired 117,268 102,308 182,411 Originated 113,733 104,448 138,231 Total TDRs $ 231,001 $ 206,756 $ 320,642



ALLOWANCE FOR LOAN AND LEASE LOSSES

At March 31, 2014, the allowance for loan and lease losses allocated to originated loans totaled $177.9 million, or 1.46 percent, of originated loans and leases compared to $179.9 million, or 1.49 percent, at December 31, 2013. An additional allowance of $45.0 million relates to acquired loans at March 31, 2014, compared to $53.5 million at December 31, 2013. Management considers the allowance adequate to absorb estimated inherent losses that relate to loans and leases outstanding at March 31, 2014, although future adjustments may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. Such agencies may require adjustments to the allowance based on information available to them at the time of their examination. The provision for originated loan and lease losses recorded during the first quarter of 2014 equaled $0.4 million compared to $4.0 million during the first quarter of 2013. The reduction in provision for originated loans and leases was primarily the result of lower charge-offs and improved credit quality. During the first quarter of 2014, we recorded a credit to provision expense of $2.3 million for acquired loans compared to a credit of $22.6 million recorded during the first quarter of 2013, the result of payoffs of acquired loans and nonrecurring adjustments. Net charge-offs for originated loans equaled $2.3 million during the first quarter of 2014, compared to $6.5 million during the first quarter of 2013. On an annualized basis, net charge-offs represented 0.08 percent of average originated loans and leases during the first quarter of 2014 compared to 0.23 percent during the first quarter of 2013. Net charge-offs on acquired loans equaled $6.3 million in the first quarter of 2014 compared to $20.9 million recorded in the first quarter of 2013. Loss estimates for most acquired loans are made at the individual loan level using loan-specific information. Therefore, fluctuations in charge-off levels on acquired loans are indicative of updated cash flow information but are not indicative of future performance of other acquired loans. 57



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Table 16 provides details concerning the allowance for loan and lease losses during the past five quarters.

Table 16 ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL) 2014 2013 First Fourth Third Second First (Dollars in thousands) Quarter Quarter Quarter Quarter Quarter ALLL at beginning of period $ 233,394$ 237,799$ 258,316$ 273,019$ 319,018 Reclassification of reserve due to implementation of enhanced model (1) - - - 7,368 - Provision (credit) for loan and lease losses: Acquired loans (2,273 ) (834 ) (12,615 ) (15,473 ) (22,622 ) Originated loans 370 8,110 4,932 2,231 4,016 Net charge-offs of loans and leases: Charge-offs (10,676 ) (13,494 ) (14,628 ) (10,960 ) (28,944 ) Recoveries 2,127 1,813 1,794 2,131 1,551



Net charge-offs of loans and leases (8,549 ) (11,681 ) (12,834 ) (8,829 ) (27,393 ) ALLL at end of period

$ 222,942$ 233,394$ 237,799$ 258,316$ 273,019 ALLL at end of period allocated to loans and leases: Acquired $ 44,993$ 53,520$ 59,517$ 76,534$ 96,473 Originated 177,949 179,874 178,282 181,782 176,546 ALLL at end of period $ 222,942$ 233,394$ 237,799$ 258,316$ 273,019 Net charge-offs of loans and leases: Acquired $ 6,254$ 5,163$ 4,402$ 4,466$ 20,877 Originated 2,295 6,518 8,432 4,363 6,516 Total net charge-offs $ 8,549$ 11,681$ 12,834$ 8,829$ 27,393 Reserve for unfunded commitments (1) $ 324$ 357$ 375$ 376$ 7,744 Average loans and leases: Acquired $ 1,282,816$ 1,086,469$ 1,310,010$ 1,535,796$ 1,697,776 Originated 12,177,129 12,002,167 11,801,700 11,631,784 11,592,052 Loans and leases at period-end: Acquired 1,270,818 1,029,426 1,188,281 1,443,336 1,621,327 Originated 12,200,226 12,104,298 11,884,585 11,655,469 11,509,080 Ratios Net charge-offs (annualized) to average loans and leases: Acquired 1.98 % 1.89 % 1.33 % 1.17 % 4.99 % Originated 0.08 0.22 0.28 0.15 0.23 ALLL to total loans and leases: Acquired 3.54 5.20 5.01 5.30 5.95 Originated 1.46 1.49 1.50 1.56 1.53 (1) During the second quarter of 2013, BancShares enhanced its ALLL model that included estimated losses on unfunded commitments. As a result of these modifications, $7.4 million of the balance previously reported as a reserve of unfunded commitments was reclassified to the ALLL.



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. 58



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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 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.


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