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FIRST CITIZENS BANCSHARES INC /DE/ - Quarter Report: 2017 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Class B Common Stock—$1 Par Value—1,005,185 shares
(Number of shares outstanding, by class, as of May 3, 2017)


Table of Contents

INDEX
 
 
 
Page No.
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

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PART I
 
Item 1.
Financial Statements


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, unaudited)
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
502,273

 
$
539,741

Overnight investments
2,736,514

 
1,872,594

Investment securities available for sale
7,119,861

 
7,006,580

Investment securities held to maturity
83

 
98

Loans held for sale
49,952

 
74,401

Loans and leases
21,906,449

 
21,737,878

Allowance for loan and lease losses
(220,943
)
 
(218,795
)
Net loans and leases
21,685,506

 
21,519,083

Premises and equipment
1,123,838

 
1,133,044

Other real estate owned
56,491

 
61,231

Income earned not collected
80,456

 
79,839

FDIC shared-loss receivable
3,981

 
4,172

Goodwill
150,601

 
150,601

Other intangible assets
75,325

 
78,040

Other assets
433,524

 
471,412

Total assets
$
34,018,405

 
$
32,990,836

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
10,797,613

 
$
10,130,549

Interest-bearing
18,205,155

 
18,030,794

Total deposits
29,002,768

 
28,161,343

Short-term borrowings
795,587

 
603,487

Long-term obligations
727,500

 
832,942

FDIC shared-loss payable
98,013

 
97,008

Other liabilities
293,841

 
283,629

Total liabilities
30,917,709

 
29,978,409

Shareholders’ equity
 
 
 
Common stock:
 
 
 
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at March 31, 2017 and December 31, 2016)
11,005

 
11,005

Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 31, 2017 and December 31, 2016)
1,005

 
1,005

Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at March 31, 2017 and December 31, 2016)

 

Surplus
658,918

 
658,918

Retained earnings
2,540,709

 
2,476,691

Accumulated other comprehensive loss
(110,941
)
 
(135,192
)
Total shareholders’ equity
3,100,696

 
3,012,427

Total liabilities and shareholders’ equity
$
34,018,405

 
$
32,990,836


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended March 31
(Dollars in thousands, except per share data, unaudited)
2017
 
2016
Interest income
 
 
 
Loans and leases
$
226,630

 
$
216,404

Investment securities and dividend income
29,751

 
23,042

Overnight investments
4,476

 
3,666

Total interest income
260,857

 
243,112

Interest expense
 
 
 
Deposits
4,436

 
4,659

Short-term borrowings
580

 
434

Long-term obligations
5,498

 
5,299

Total interest expense
10,514

 
10,392

Net interest income
250,343

 
232,720

Provision for loan and lease losses
8,231

 
4,843

Net interest income after provision for loan and lease losses
242,112

 
227,877

Noninterest income
 
 
 
Gain on acquisitions
12,017

 
1,704

Cardholder services
21,258

 
19,358

Merchant services
24,987

 
21,977

Service charges on deposit accounts
22,142

 
21,850

Wealth management services
20,962

 
19,634

Securities (losses) gains
(24
)
 
4,628

Other service charges and fees
7,601

 
6,989

Mortgage income
7,576

 
1,311

Insurance commissions
3,558

 
3,178

ATM income
1,773

 
1,765

Adjustments to FDIC shared-loss receivable
(1,628
)
 
(2,533
)
Net impact from FDIC shared-loss agreement termination
(45
)
 

Other
7,115

 
5,421

Total noninterest income
127,292

 
105,282

Noninterest expense
 
 
 
Salaries and wages
112,263

 
103,899

Employee benefits
29,293

 
27,350

Occupancy expense
24,762

 
25,012

Equipment expense
24,588

 
22,345

Merchant processing
16,783

 
15,087

Cardholder processing
5,553

 
6,084

FDIC insurance expense
5,593

 
4,789

Foreclosure-related expenses
2,471

 
1,731

Merger-related expenses
833

 
38

Other
42,206

 
45,336

Total noninterest expense
264,345

 
251,671

Income before income taxes
105,059

 
81,488

Income taxes
37,438

 
29,416

Net income
$
67,621

 
$
52,072

Average shares outstanding
12,010,405

 
12,010,405

Net income per share
$
5.63

 
$
4.34


See accompanying Notes to Consolidated Financial Statements.

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

 
Three months ended March 31
(Dollars in thousands, unaudited)
2017
 
2016
Net income
$
67,621

 
$
52,072

Other comprehensive income:
 
 
 
Unrealized gains on securities:
 
 
 
Change in unrealized securities gains arising during period
36,096

 
68,033

Tax effect
(13,419
)
 
(26,016
)
Reclassification adjustment for net losses (gains) realized and included in income before income taxes
24

 
(4,628
)
Tax effect
(9
)
 
1,770

Total change in unrealized gains on securities, net of tax
22,692

 
39,159

Change in fair value of cash flow hedges:
 
 
 
Change in unrecognized loss on cash flow hedges

 
700

Tax effect

 
(263
)
Total change in unrecognized loss on cash flow hedges, net of tax

 
437

Change in pension obligation:
 
 
 
Amortization of actuarial losses and prior service cost
2,500

 
1,652

Tax effect
(941
)
 
(632
)
Total change in pension obligation, net of tax
1,559

 
1,020

Other comprehensive income
24,251

 
40,616

Total comprehensive income
$
91,872

 
$
92,688



See accompanying Notes to Consolidated Financial Statements.


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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
Balance at December 31, 2015
$
11,005

 
$
1,005

 
$
658,918

 
$
2,265,621

 
$
(64,440
)
 
$
2,872,109

Net income

 

 

 
52,072

 

 
52,072

Other comprehensive income, net of tax

 

 

 

 
40,616

 
40,616

Cash dividends ($0.30 per share)

 

 

 
(3,603
)
 

 
(3,603
)
Balance at March 31, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,314,090

 
$
(23,824
)
 
$
2,961,194

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,476,691

 
$
(135,192
)
 
$
3,012,427

Net income

 

 

 
67,621

 

 
67,621

Other comprehensive income, net of tax

 

 

 

 
24,251

 
24,251

Cash dividends ($0.30 per share)

 

 

 
(3,603
)
 

 
(3,603
)
Balance at March 31, 2017
$
11,005

 
$
1,005

 
$
658,918

 
$
2,540,709

 
$
(110,941
)
 
$
3,100,696


See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
Three months ended March 31
(Dollars in thousands, unaudited)
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
67,621

 
$
52,072

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
8,231

 
4,843

Deferred tax expense (benefit)
6,693

 
(8,806
)
Net change in current taxes
27,462

 
35,678

Depreciation
22,616

 
22,053

Net increase in accrued interest payable
150

 
324

Net increase in income earned not collected
(617
)
 
(3,482
)
Gain on acquisitions
(12,017
)
 
(1,704
)
Securities losses (gains)
24

 
(4,628
)
Loss on termination of FDIC shared-loss agreement
45

 

Origination of loans held for sale
(134,932
)
 
(144,895
)
Proceeds from sale of loans held for sale
162,837

 
140,160

Gain on sale of loans held for sale
(3,456
)
 
(2,487
)
Gain on sale of portfolio loans
(164
)
 

Net write-downs/losses on other real estate
1,717

 
2,599

Gain/loss on sales of premises and equipment
(156
)
 

Net accretion of premiums and discounts
(10,985
)
 
(12,201
)
Amortization of intangible assets
5,271

 
5,586

Reduction in FDIC receivable for shared-loss agreements
2,591

 
4,076

Net increase in FDIC payable for shared-loss agreements
1,005

 
1,790

Net change in other assets
(15,078
)
 
(19,678
)
Net change in other liabilities
8,741

 
3,857

Net cash provided by operating activities
137,599

 
75,157

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(105,100
)
 
(131,923
)
Purchases of investment securities available for sale
(871,698
)
 
(1,139,933
)
Proceeds from maturities/calls of investment securities held to maturity
15

 
61

Proceeds from maturities/calls of investment securities available for sale
787,182

 
396,211

Proceeds from sales of investment securities available for sale
14,162

 
987,260

Net increase in overnight investments
(856,442
)
 
(805,699
)
Proceeds from sales of portfolio loans
32,294

 

Cash paid to the FDIC for shared-loss agreements
(2,760
)
 
(9,871
)
Net cash paid to the FDIC for termination of shared-loss agreement
(285
)
 

Proceeds from sales of other real estate
8,845

 
8,202

Proceeds from sales of premises and equipment
2,205

 

Purchases of premises and equipment
(15,459
)
 
(13,595
)
Net cash acquired in business acquisitions
25,646

 
14,745

Net cash used by investing activities
(981,395
)
 
(694,542
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in time deposits
(107,339
)
 
(84,802
)
Net increase in demand and other interest-bearing deposits
827,009

 
460,086

Net increase in short-term borrowings
87,100

 
92,841

Repayment of long-term obligations
(442
)
 
(68
)
Origination of long-term obligations

 
75,000

Net cash provided by financing activities
806,328

 
543,057

Change in cash and due from banks
(37,468
)
 
(76,328
)
Cash and due from banks at beginning of period
539,741

 
534,086

Cash and due from banks at end of period
$
502,273

 
$
457,758

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
5,822

 
$
9,980

Dividends declared but not paid
3,603

 
3,603


See accompanying Notes to Consolidated Financial Statements.

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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 footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2016.

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

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position, the consolidated results of operations or related disclosures. Material estimates that are particularly susceptible to significant change include:
Allowance for loan and lease losses;
Fair value of financial instruments, including acquired assets and assumed liabilities;
Pension plan assumptions;
Cash flow estimates on purchased credit-impaired loans;
Goodwill and other intangible assets;
Federal Deposit Insurance Corporation (FDIC) shared-loss payable; and
Income tax assets, liabilities and expense
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
This ASU adds an SEC paragraph and amends other Topics pursuant to an SEC Staff Announcement that states a registrant should evaluate ASUs that have not yet been adopted, including ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842), and ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced are expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact the adoption will have on the financial statements, and a comparison to the registrant's current accounting policies. A registrant should describe the status of its process to implement the new standards and the significant matters yet to be addressed.

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This ASU also addresses the accounting for tax benefits resulting from investments in qualified affordable housing projects where the decision to apply the proportional amortization method of accounting is an accounting policy decision to be applied consistently to all investments that meet the conditions, rather than a decision to be applied to individual investments that qualify for the use of the proportional amortization method.
The amendments in this ASU are effective upon issuance. We adopted the guidance effective in the first quarter of 2017. The disclosures required by this ASU are included within the “Recently Issued Accounting Pronouncements” section below. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control
This ASU does not change the characteristics of a primary beneficiary in current GAAP; however, it requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Further, the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have any impact on our consolidated financial position or consolidated results of operations.
Recently Issued Accounting Pronouncements
FASU ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business
This ASU provides a more robust framework to use in determining when a set of assets and activities is a business, including narrowing the definition of outputs and align it with how outputs are described in Topic 606. This ASU provides a screen to determine when an integrated set of assets and activities (collectively referred to as a "set") is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The framework includes two sets of criteria to consider that depend on whether a set has outputs.
The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard is not expected to have an impact on our consolidated financial position or results of operation and we will adopt the guidance during the first quarter of 2018.
FASB ASU 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
This ASU requires that an employer report the service cost component in the same line item or line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are

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required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization.
The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual reporting period. The amendments shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The adoption of this standard is not expected to have a significant impact on our consolidated financial position or results of operation and we will adopt the guidance during the first quarter of 2018.
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 in fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have an impact on our consolidated financial position or results of operation and we expect to adopt the guidance for our annual impairment test in fiscal year 2020.
FASB ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU does not provide a definition of restricted cash or restricted cash equivalents.
This ASU is effective for fiscal years beginning after December 15, 2017 for public business entities, including interim periods within those fiscal years. The adoption of this standard is not expected to have an impact on our Consolidated Statements of Cash Flows.
FASB ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory, such as intellectual property or property, plant and equipment, when the transfer occurs. This ASU does not change GAAP for an intra-entity transfer of inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, and should be applied on a modified retrospective basis. The adoption of this standard is not expected to have an impact on our consolidated financial position or results of operation and we will adopt the guidance during the first quarter of 2018.
FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU addresses the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU provide guidance on (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.

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The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance requires application using a retrospective transition method. We will adopt the guidance during the first quarter of 2018. The adoption of this standard is not expected to have a significant impact on our Consolidated Statements of Cash Flows.
FASB ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU eliminates the delayed recognition of the full amount of credit losses until the loss was probable of occurring and instead will reflect an entity's current estimate of all expected credit losses. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. 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. For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities available for sale. We will adopt the guidance by the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact the new standard will have on our consolidated financial statement as the final impact will be dependent, among other items, upon the loan portfolio composition and quality at the adoption date, as well as economic conditions and forecasts 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 on their balance sheet all lease contracts. An entity may make an accounting election by classification to not recognize leases with terms less than 12 months on their balance sheet. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, 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. For BancShares, the impact of this ASU will primarily relate to its accounting and reporting of leases as a lessee. We will adopt during the first quarter of 2019. While we are currently evaluating the impact of the new standard, 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.
FASB ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of certain financial instruments. The amendments in this ASU (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without a readily determinable fair value; (3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate 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 presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at 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.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. We will adopt during the first quarter of 2018 with a cumulative-effect adjustment from accumulated other comprehensive income (AOCI) to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact the new standard

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will have on our consolidated financial statements. The cumulative-effect adjustment will be impacted by the equity securities portfolio composition and valuation at the date of adoption.
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 companies 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 also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify guidance for identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify and improve the guidance for certain aspects of Topic 606. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to clarify guidance for certain aspects of Topic 606.
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. Early adoption is permitted for fiscal periods beginning after December 15, 2016. Our revenue is comprised 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 service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. We continue to evaluate the impact of the new standard on our noninterest income and on our presentation and disclosures. We expect to adopt the ASU during the first quarter of 2018 with a cumulative-effect adjustment to opening retained earnings and the modified retrospective approach will likely be used.
NOTE B - BUSINESS COMBINATIONS

Harvest Community Bank
On January 13, 2017, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of Harvest Community Bank (HCB) of Pennsville, New Jersey. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.

The HCB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

The fair value of the assets acquired was $111.6 million, including $85.1 million in purchased credit-impaired (PCI) loans and $850 thousand of identifiable intangible assets. Liabilities assumed were $121.8 million of which the majority were deposits. As a result of the transaction, FCB recorded a gain on the acquisition of $12.0 million which is included in noninterest income in the Consolidated Statements of Income.


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The following table provides the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.
(Dollars in thousands)
As recorded by FCB
Assets
 
Cash and cash equivalents
$
3,350

Overnight investments
7,478

Investment securities
14,455

Loans
85,149

Income earned not collected
31

Intangible assets
850

Other assets
237

Total assets acquired
111,550

Liabilities
 
Deposits
121,755

Other liabilities
74

Total liabilities assumed
121,829

Fair value of net liabilities assumed
(10,279
)
Cash received from FDIC
22,296

Gain on acquisition of HCB
$
12,017

Merger-related expenses of $735 thousand were recorded in the Consolidated Statements of Income for the three months ended March 31, 2017. Loan-related interest income generated from HCB was approximately $1.0 million for the first quarter of 2017.
All loans resulting from the HCB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality, and are therefore accounted for as PCI under ASC 310-30.


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NOTE C - INVESTMENTS
The amortized cost and fair value of investment securities classified as available for sale and held to maturity at March 31, 2017 and December 31, 2016, are as follows:
 
March 31, 2017
(Dollars in thousands)
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,619,380

 
$
342

 
$
1,554

 
$
1,618,168

Government agency
40,185

 
36

 

 
40,221

Mortgage-backed securities
5,363,747

 
2,946

 
60,586

 
5,306,107

Equity securities
72,064

 
22,201

 

 
94,265

Corporate bonds
49,370

 
220

 
25

 
49,565

Other
11,702

 
45

 
212

 
11,535

Total investment securities available for sale
$
7,156,448

 
$
25,790

 
$
62,377

 
$
7,119,861

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
U.S. Treasury
$
1,650,675

 
$
579

 
$
935

 
$
1,650,319

Government agency
40,291

 
107

 

 
40,398

Mortgage-backed securities
5,259,466

 
2,809

 
86,850

 
5,175,425

Equity securities
71,873

 
11,634

 

 
83,507

Corporate bonds
49,367

 
195

 

 
49,562

Other
7,615

 

 
246

 
7,369

Total investment securities available for sale
$
7,079,287

 
$
15,324

 
$
88,031

 
$
7,006,580

 
 
 
 
 
 
 
 
 
March 31, 2017
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
83

 
$
6

 
$

 
$
89

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Mortgage-backed securities
$
98

 
$
6

 
$

 
$
104


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 equity securities and corporate bonds represent positions in securities of other financial institutions. Other includes investments in trust preferred securities of financial institutions. The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Repayments of mortgage-backed securities are dependent on the repayments of the underlying loan balances. Equity securities do not have a stated maturity date.

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March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
$
550,275

 
$
549,566

 
$
842,798

 
$
842,947

One through five years
1,109,290

 
1,108,823

 
848,168

 
847,770

Five through 10 years
49,370

 
49,565

 
49,367

 
49,562

Over 10 years
11,702

 
11,535

 
7,615

 
7,369

Mortgage-backed securities
5,363,747

 
5,306,107

 
5,259,466

 
5,175,425

Equity securities
72,064

 
94,265

 
71,873

 
83,507

Total investment securities available for sale
$
7,156,448

 
$
7,119,861

 
$
7,079,287

 
$
7,006,580

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
83

 
$
89

 
$
98

 
$
104

For each period presented, realized securities gains (losses) included the following:
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Gross gains on sales of investment securities available for sale
$
3

 
$
4,933

Gross losses on sales of investment securities available for sale
(27
)
 
(305
)
Total realized securities (losses) gains
$
(24
)
 
$
4,628


The following table provides information regarding securities with unrealized losses as of March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,068,144

 
$
1,554

 
$

 
$

 
$
1,068,144

 
$
1,554

Mortgage-backed securities
4,318,258

 
56,017

 
361,488

 
4,569

 
4,679,746

 
60,586

Corporate bonds
9,975

 
25

 

 

 
9,975

 
25

Other
5,294

 
212

 

 

 
5,294

 
212

Total
$
5,401,671

 
$
57,808

 
$
361,488

 
$
4,569

 
$
5,763,159

 
$
62,377

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
807,822

 
$
935

 
$

 
$

 
$
807,822

 
$
935

Mortgage-backed securities
4,442,700

 
82,161

 
362,351

 
4,689

 
4,805,051

 
86,850

Other
7,369

 
246

 

 

 
7,369

 
246

Total
$
5,257,891

 
$
83,342

 
$
362,351

 
$
4,689

 
$
5,620,242

 
$
88,031

Investment securities with an aggregate fair value of $361.5 million and $362.4 million had continuous unrealized losses for more than 12 months with a corresponding aggregate unrealized loss of $4.6 million and $4.7 million as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, all 52 of these investments are government sponsored enterprise-issued mortgage-backed securities. None of the unrealized losses identified as of March 31, 2017 or December 31, 2016 relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased. For all periods presented, BancShares had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Therefore, none of the securities were deemed to be other than temporarily impaired.
Investment securities having an aggregate carrying value of $5.01 billion at March 31, 2017 and $4.55 billion at December 31, 2016 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

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NOTE D - LOANS AND LEASES
BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have any credit deterioration at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered impaired and, therefore, classified as PCI loans. PCI loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans and leases are recorded at fair value at the date of acquisition. No 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. An allowance is recorded if there is additional credit deterioration after the acquisition date.
BancShares reports PCI and non-PCI loan portfolios separately, and each 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, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.
Commercial Commercial loans 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.

NoncommercialNoncommercial 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.



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Loans and leases outstanding included the following at March 31, 2017 and December 31, 2016:
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
683,415

 
$
649,157

Commercial mortgage
9,173,612

 
9,026,220

Other commercial real estate
364,862

 
351,291

Commercial and industrial
2,477,911

 
2,567,501

Lease financing
840,201

 
826,270

Other
321,352

 
340,264

Total commercial loans
13,861,353

 
13,760,703

Noncommercial:
 
 
 
Residential mortgage
2,945,361

 
2,889,124

Revolving mortgage
2,604,156

 
2,601,344

Construction and land development
218,103

 
231,400

Consumer
1,428,660

 
1,446,138

Total noncommercial loans
7,196,280

 
7,168,006

Total non-PCI loans and leases
21,057,633

 
20,928,709

PCI loans:
 
 
 
Commercial:
 
 
 
Construction and land development
26,542

 
20,766

Commercial mortgage
455,551

 
453,013

Other commercial real estate
18,723

 
12,645

Commercial and industrial
27,794

 
11,844

Other
1,244

 
1,702

Total commercial loans
529,854

 
499,970

Noncommercial:
 
 
 
Residential mortgage
275,904

 
268,777

Revolving mortgage
40,345

 
38,650

Consumer
2,713

 
1,772

Total noncommercial loans
318,962

 
309,199

Total PCI loans
848,816

 
809,169

Total loans and leases
$
21,906,449

 
$
21,737,878

At March 31, 2017, $75.9 million of total loans and leases were covered under shared-loss agreements with the FDIC, compared to $84.8 million at December 31, 2016. The shared-loss agreements, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.
At March 31, 2017, $8.32 billion in noncovered loans with a lendable collateral value of $5.57 billion were used to secure $660.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $4.91 billion. At December 31, 2016, $8.26 billion in noncovered loans with a lendable collateral value of $5.50 billion were used to secure $660.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $4.84 billion. At March 31, 2017, $2.66 billion in noncovered loans with a lendable collateral value of $1.98 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). There were no loans used to secure additional borrowing capacity at the FRB at December 31, 2016.

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $5.0 million and $6.7 million at March 31, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Cordia transaction was $3.7 million and $4.2 million at March 31, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases from the First Citizens Bancorporation, Inc. merger was $24.7 million and $27.4 million at March 31, 2017 and December 31, 2016, respectively. During both the three months ended March 31, 2017 and March 31, 2016, accretion income on non-PCI loans was $3.2 million.
During the first quarter of 2017, certain residential mortgage loans totaling $32.5 million were sold, resulting in a gain of $164 thousand.


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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 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. Each commercial loan is evaluated annually with more frequent evaluation of more severely criticized loans or leases. The credit quality indicators for non-PCI and PCI noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

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

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

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

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

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full 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 March 31, 2017 and December 31, 2016 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.


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Non-PCI loans and leases outstanding at March 31, 2017 and December 31, 2016 by credit quality indicator are provided below:
 
March 31, 2017
(Dollars in thousands)
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
Pass
$
675,254

 
$
8,977,705

 
$
360,981

 
$
2,303,778

 
$
829,872

 
$
314,857

 
$
13,462,447

Special mention
2,144

 
72,007

 
592

 
23,335

 
3,560

 
1,006

 
102,644

Substandard
5,979

 
123,588

 
3,289

 
19,585

 
6,761

 
5,488

 
164,690

Doubtful
38

 
312

 

 
7

 

 

 
357

Ungraded

 

 

 
131,206

 
8

 
1

 
131,215

Total
$
683,415

 
$
9,173,612

 
$
364,862

 
$
2,477,911

 
$
840,201

 
$
321,352

 
$
13,861,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
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
Pass
$
645,232

 
$
8,821,439

 
$
347,509

 
$
2,402,659

 
$
818,008

 
$
335,831

 
$
13,370,678

Special mention
2,236

 
76,084

 
1,433

 
22,804

 
2,675

 
1,020

 
106,252

Substandard
1,683

 
126,863

 
2,349

 
17,870

 
5,415

 
3,413

 
157,593

Doubtful
6

 
334

 

 
8

 

 

 
348

Ungraded

 
1,500

 

 
124,160

 
172

 

 
125,832

Total
$
649,157

 
$
9,026,220

 
$
351,291

 
$
2,567,501

 
$
826,270

 
$
340,264

 
$
13,760,703


 
March 31, 2017
 
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
$
2,899,295

 
$
2,582,739

 
$
215,112

 
$
1,418,899

 
$
7,116,045

30-59 days past due
27,662

 
11,702

 
610

 
5,661

 
45,635

60-89 days past due
3,885

 
3,162

 
1,378

 
2,214

 
10,639

90 days or greater past due
14,519

 
6,553

 
1,003

 
1,886

 
23,961

Total
$
2,945,361

 
$
2,604,156

 
$
218,103

 
$
1,428,660

 
$
7,196,280

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Non-PCI noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total non-PCI noncommercial
loans and leases
Current
$
2,839,045

 
$
2,576,942

 
$
229,106

 
$
1,434,658

 
$
7,079,751

30-59 days past due
27,760

 
14,290

 
1,139

 
6,775

 
49,964

60-89 days past due
7,039

 
2,698

 
598

 
2,779

 
13,114

90 days or greater past due
15,280

 
7,414

 
557

 
1,926

 
25,177

Total
$
2,889,124

 
$
2,601,344

 
$
231,400

 
$
1,446,138

 
$
7,168,006




18

Table of Contents

 PCI loans outstanding at March 31, 2017 and December 31, 2016 by credit quality indicator are provided below:
 
March 31, 2017
(Dollars in thousands)
PCI commercial loans
Grade:
Construction
and land
development
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Other
 
Total PCI commercial
loans
Pass
$
11,129

 
$
243,473

 
$
14,896

 
$
18,204

 
$
642

 
$
288,344

Special mention
1,509

 
66,969

 
641

 
2,449

 

 
71,568

Substandard
10,776

 
131,350

 
2,516

 
2,901

 
602

 
148,145

Doubtful
3,128

 
13,759

 
670

 
4,215

 

 
21,772

Ungraded

 

 

 
25

 

 
25

Total
$
26,542

 
$
455,551

 
$
18,723

 
$
27,794

 
$
1,244

 
$
529,854

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
PCI commercial loans
 
Construction
and land
development
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Other
 
Total PCI commercial
loans
Pass
$
8,103

 
$
234,023

 
$
8,744

 
$
7,253

 
$
696

 
$
258,819

Special mention
950

 
67,848

 
102

 
620

 

 
69,520

Substandard
7,850

 
138,312

 
3,462

 
3,648

 
1,006

 
154,278

Doubtful
3,863

 
12,830

 
337

 
303

 

 
17,333

Ungraded

 

 

 
20

 

 
20

Total
$
20,766

 
$
453,013

 
$
12,645

 
$
11,844

 
$
1,702

 
$
499,970


 
March 31, 2017
 
PCI noncommercial loans
(Dollars in thousands)
Residential
mortgage
 
Revolving
mortgage
 
Consumer
 
Total PCI noncommercial
loans
Current
$
236,294

 
$
34,868

 
$
2,541

 
$
273,703

30-59 days past due
10,017

 
1,231

 
48

 
11,296

60-89 days past due
4,935

 
349

 
3

 
5,287

90 days or greater past due
24,658

 
3,897

 
121

 
28,676

Total
$
275,904

 
$
40,345

 
$
2,713

 
$
318,962

 
 
 
 
 
 
 
 
 
December 31, 2016
 
PCI noncommercial loans
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
 
Total PCI noncommercial
loans
Current
$
230,065

 
$
33,827

 
$
1,637

 
$
265,529

30-59 days past due
9,595

 
618

 
68

 
10,281

60-89 days past due
6,528

 
268

 
4

 
6,800

90 days or greater past due
22,589

 
3,937

 
63

 
26,589

Total
$
268,777

 
$
38,650

 
$
1,772

 
$
309,199





19

Table of Contents

The aging of the outstanding non-PCI loans and leases, by class, at March 31, 2017 and December 31, 2016 is provided in the table below.
The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current 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.
 
March 31, 2017
(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:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
3,897

 
$
2

 
$
102

 
$
4,001

 
$
679,414

 
$
683,415

Commercial mortgage
16,294

 
3,633

 
8,750

 
28,677

 
9,144,935

 
9,173,612

Other commercial real estate
181

 
172

 
530

 
883

 
363,979

 
364,862

Commercial and industrial
9,543

 
1,576

 
3,229

 
14,348

 
2,463,563

 
2,477,911

Lease financing
992

 
733

 
290

 
2,015

 
838,186

 
840,201

Residential mortgage
27,662

 
3,885

 
14,519

 
46,066

 
2,899,295

 
2,945,361

Revolving mortgage
11,702

 
3,162

 
6,553

 
21,417

 
2,582,739

 
2,604,156

Construction and land development - noncommercial
610

 
1,378

 
1,003

 
2,991

 
215,112

 
218,103

Consumer
5,661

 
2,214

 
1,886

 
9,761

 
1,418,899

 
1,428,660

Other
194

 

 
161

 
355

 
320,997

 
321,352

Total non-PCI loans and leases
$
76,736

 
$
16,755

 
$
37,023

 
$
130,514

 
$
20,927,119

 
$
21,057,633

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
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:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,845

 
$
39

 
$
286

 
$
2,170

 
$
646,987

 
$
649,157

Commercial mortgage
11,592

 
2,773

 
10,329

 
24,694

 
9,001,526

 
9,026,220

Other commercial real estate
310

 

 

 
310

 
350,981

 
351,291

Commercial and industrial
7,918

 
2,102

 
1,051

 
11,071

 
2,556,430

 
2,567,501

Lease financing
1,175

 
444

 
863

 
2,482

 
823,788

 
826,270

Residential mortgage
27,760

 
7,039

 
15,280

 
50,079

 
2,839,045

 
2,889,124

Revolving mortgage
14,290

 
2,698

 
7,414

 
24,402

 
2,576,942

 
2,601,344

Construction and land development - noncommercial
1,139

 
598

 
557

 
2,294

 
229,106

 
231,400

Consumer
6,775

 
2,779

 
1,926

 
11,480

 
1,434,658

 
1,446,138

Other
72

 

 
198

 
270

 
339,994

 
340,264

Total non-PCI loans and leases
$
72,876

 
$
18,472

 
$
37,904

 
$
129,252

 
$
20,799,457

 
$
20,928,709



20

Table of Contents

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at March 31, 2017 and December 31, 2016 for non-PCI loans and leases, were as follows:
 
March 31, 2017
 
December 31, 2016
(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
$
778

 
$

 
$
606

 
$

Commercial mortgage
25,709

 
962

 
26,527

 
482

Other commercial real estate
687

 

 
86

 

Commercial and industrial
4,023

 
584

 
4,275

 
440

Lease financing
1,281

 

 
359

 
683

Residential mortgage
36,257

 
191

 
32,470

 
37

Revolving mortgage
13,931

 

 
14,308

 

Construction and land development - noncommercial
1,315

 

 
1,121

 

Consumer
1,830

 
1,245

 
2,236

 
1,076

Other
275

 

 
319

 

Total non-PCI loans and leases
$
86,086

 
$
2,982

 
$
82,307

 
$
2,718

Purchased credit-impaired loans (PCI) loans
The following table relates to PCI loans acquired in the HCB acquisition 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
$
111,250

Cash flows expected to be collected
101,802

Fair value of loans at acquisition
85,149

The recorded fair values of PCI loans acquired in the HCB acquisition as of the acquisition date were as follows:
(Dollars in thousands)
 
Commercial:
 
Construction and land development
$
7,061

Commercial mortgage
21,836

Other commercial real estate
6,404

Commercial and industrial
19,675

Total commercial loans
54,976

Noncommercial:
 
Residential mortgage
25,857

Revolving mortgage
3,434

Consumer
882

Total noncommercial loans
30,173

Total PCI loans
$
85,149

The following table provides changes in the carrying value of all purchased credit-impaired loans during the three months ended March 31, 2017 and March 31, 2016:
(Dollars in thousands)
2017
 
2016
Balance at January 1
$
809,169

 
$
950,516

Fair value of acquired loans
85,149

 
35,416

Accretion
19,351

 
21,398

Payments received and other changes, net
(64,853
)
 
(61,443
)
Balance at March 31
$
848,816

 
$
945,887

Unpaid principal balance at March 31
$
1,155,034

 
$
1,665,896

The carrying value of loans on the cost recovery method was $480 thousand at March 31, 2017 and $498 thousand at December 31, 2016. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. Cash payments from cost recovery loans are 100 percent

21

Table of Contents

applied to principal. The recorded investment of PCI loans on nonaccrual status was $1.5 million and $3.5 million at March 31, 2017 and December 31, 2016, respectively.

During the three months ended March 31, 2017 and March 31, 2016, accretion income on PCI loans was $19.4 million and $21.4 million, respectively.

The following table documents changes to the amount of accretable yield for the first three months of 2017 and 2016.
(Dollars in thousands)
2017
 
2016
Balance at January 1
$
335,074

 
$
343,856

Additions from acquisitions
16,653

 
6,176

Accretion
(19,351
)
 
(21,398
)
Reclassifications from nonaccretable difference
11,277

 
9,905

Changes in expected cash flows that do not affect nonaccretable difference
(2,179
)
 
4,418

Balance at March 31
$
341,474

 
$
342,957

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flows not related to credit improvements or deterioration do not affect the nonaccretable difference.
 
 
 
 
NOTE E - ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

The following tables present the activity in the ALLL for non-PCI loan and lease losses by loan class for the three months ended March 31, 2017 and March 31, 2016:
 
Three months ended March 31, 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
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
28,877

 
$
48,278

 
$
3,269

 
$
50,225

 
$
5,907

 
$
3,127

 
$
23,094

 
$
12,366

 
$
1,596

 
$
28,287

 
$
205,026

Provision
2,536

 
6

 
304

 
3,592

 
575

 
517

 
1,061

 
840

 
(83
)
 
1,728

 
11,076

Charge-offs
(77
)
 
(37
)
 
(5
)
 
(3,253
)
 
(173
)
 
(123
)
 
(250
)
 
(825
)
 

 
(3,966
)
 
(8,709
)
Recoveries
55

 
364

 
4

 
265

 
6

 
13

 
287

 
552

 

 
1,080

 
2,626

Balance at March 31
$
31,391

 
$
48,611

 
$
3,572

 
$
50,829

 
$
6,315

 
$
3,534

 
$
24,192

 
$
12,933

 
$
1,513

 
$
27,129

 
$
210,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
(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
$
16,288

 
$
69,896

 
$
2,168

 
$
43,116

 
$
5,524

 
$
1,855

 
$
14,105

 
$
15,971

 
$
1,485

 
$
19,496

 
$
189,904

Provision
943

 
394

 
(104
)
 
2,201

 
(282
)
 
(328
)
 
776

 
1,158

 
87

 
1,995

 
6,840

Charge-offs
(426
)
 
(90
)
 

 
(1,317
)
 

 
(71
)
 
(174
)
 
(1,036
)
 

 
(3,108
)
 
(6,222
)
Recoveries
80

 
256

 
143

 
479

 
180

 
321

 
20

 
32

 
3

 
990

 
2,504

Balance at March 31
$
16,885

 
$
70,456

 
$
2,207

 
$
44,479

 
$
5,422

 
$
1,777

 
$
14,727

 
$
16,125

 
$
1,575

 
$
19,373

 
$
193,026



22

Table of Contents

The following tables present the allowance for non-PCI loan losses and the recorded investment in loans, by loan class, based on impairment method as of March 31, 2017 and December 31, 2016:
 
March 31, 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
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
151

 
$
3,122

 
$
132

 
$
1,043

 
$
213

 
$
21

 
$
3,189

 
$
287

 
$
103

 
$
591

 
$
8,852

ALLL for loans and leases collectively evaluated for impairment
31,240

 
45,489

 
3,440

 
49,786

 
6,102

 
3,513

 
21,003

 
12,646

 
1,410

 
26,538

 
201,167

Total allowance for loan and lease losses
$
31,391

 
$
48,611

 
$
3,572

 
$
50,829

 
$
6,315

 
$
3,534

 
$
24,192

 
$
12,933

 
$
1,513

 
$
27,129

 
$
210,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
1,058

 
$
74,788

 
$
1,497

 
$
10,864

 
$
2,054

 
$
259

 
$
34,484

 
$
8,272

 
$
2,577

 
$
1,858

 
$
137,711

Loans and leases collectively evaluated for impairment
682,357

 
9,098,824

 
363,365

 
2,467,047

 
838,147

 
321,093

 
2,910,877

 
2,595,884

 
215,526

 
1,426,802

 
20,919,922

Total loan and leases
$
683,415

 
$
9,173,612

 
$
364,862

 
$
2,477,911

 
$
840,201

 
$
321,352

 
$
2,945,361

 
$
2,604,156

 
$
218,103

 
$
1,428,660

 
$
21,057,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(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
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLL for loans and leases individually evaluated for impairment
$
151

 
$
3,488

 
$
152

 
$
1,732

 
$
75

 
$
23

 
$
2,447

 
$
366

 
$
109

 
$
667

 
$
9,210

ALLL for loans and leases collectively evaluated for impairment
28,726

 
44,790

 
3,117

 
48,493

 
5,832

 
3,104

 
20,647

 
12,000

 
1,487

 
27,620

 
195,816

Total allowance for loan and lease losses
$
28,877

 
$
48,278

 
$
3,269

 
$
50,225

 
$
5,907

 
$
3,127

 
$
23,094

 
$
12,366

 
$
1,596

 
$
28,287

 
$
205,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
1,045

 
$
76,361

 
$
1,563

 
$
12,600

 
$
1,074

 
$
142

 
$
31,476

 
$
7,613

 
$
2,613

 
$
1,912

 
$
136,399

Loans and leases collectively evaluated for impairment
648,112

 
8,949,859

 
349,728

 
2,554,901

 
825,196

 
340,122

 
2,857,648

 
2,593,731

 
228,787

 
1,444,226

 
20,792,310

Total loan and leases
$
649,157

 
$
9,026,220

 
$
351,291

 
$
2,567,501

 
$
826,270

 
$
340,264

 
$
2,889,124

 
$
2,601,344

 
$
231,400

 
$
1,446,138

 
$
20,928,709



23

Table of Contents

The following tables show the activity in the allowance for PCI loan and lease losses by loan class for the three months ended March 31, 2017 and March 31, 2016.
 
Three months ended March 31, 2017
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
483

 
$
6,423

 
$
502

 
$
504

 
$
4,818

 
$
956

 
$
83

 
$
13,769

Provision
(186
)
 
(1,230
)
 
(158
)
 
(142
)
 
(545
)
 
(550
)
 
(34
)
 
(2,845
)
Charge-offs

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

Balance at March 31
$
297

 
$
5,193

 
$
344

 
$
362

 
$
4,273

 
$
406

 
$
49

 
$
10,924

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
Balance at January 1
$
1,082

 
$
7,838

 
$
773

 
$
445

 
$
5,398

 
$
523

 
$
253

 
$
16,312

Provision
(349
)
 
(980
)
 
2

 
(220
)
 
(347
)
 
(108
)
 
5

 
(1,997
)
Charge-offs

 
(108
)
 
(5
)
 

 
(371
)
 

 
(74
)
 
(558
)
Recoveries

 

 

 

 

 

 

 

Balance at March 31
$
733

 
$
6,750

 
$
770

 
$
225

 
$
4,680

 
$
415

 
$
184

 
$
13,757

As of March 31, 2017, and December 31, 2016, $275.8 million and $359.7 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding valuation reserve was $10.9 million and $13.8 million, respectively.
The following tables show the ending balances of PCI loans and leases and related allowance by class of loans as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
297

 
$
5,193

 
$
344

 
$
362

 
$
4,273

 
$
406

 
$
49

 
$
10,924

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
26,542

 
455,551

 
18,723

 
27,794

 
275,904

 
40,345

 
3,957

 
848,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
483

 
$
6,423

 
$
502

 
$
504

 
$
4,818

 
$
956

 
$
83

 
$
13,769

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
20,766

 
453,013

 
12,645

 
11,844

 
268,777

 
38,650

 
3,474

 
809,169



24

Table of Contents

The following tables provide information on non-PCI impaired loans and leases, exclusive of loans and leases evaluated collectively as a homogeneous group, as of March 31, 2017 and December 31, 2016 including interest income recognized in the period during which the loans and leases were considered impaired.
 
March 31, 2017
(Dollars in thousands)
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
$
750

 
$
308

 
$
1,058

 
$
1,191

 
$
151

Commercial mortgage
38,730

 
36,058

 
74,788

 
81,232

 
3,122

Other commercial real estate
1,052

 
445

 
1,497

 
1,810

 
132

Commercial and industrial
8,053

 
2,811

 
10,864

 
13,244

 
1,043

Lease financing
1,808

 
246

 
2,054

 
2,054

 
213

Other
116

 
143

 
259

 
274

 
21

Residential mortgage
21,606

 
12,878

 
34,484

 
35,863

 
3,189

Revolving mortgage
1,627

 
6,645

 
8,272

 
9,535

 
287

Construction and land development - noncommercial
862

 
1,715

 
2,577

 
3,044

 
103

Consumer
1,425

 
433

 
1,858

 
2,056

 
591

Total non-PCI impaired loans and leases
$
76,029

 
$
61,682

 
$
137,711

 
$
150,303

 
$
8,852

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(Dollars in thousands)
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
$
1,002

 
$
43

 
$
1,045

 
$
1,172

 
$
151

Commercial mortgage
42,875

 
33,486

 
76,361

 
82,658

 
3,488

Other commercial real estate
1,279

 
284

 
1,563

 
1,880

 
152

Commercial and industrial
8,920

 
3,680

 
12,600

 
16,637

 
1,732

Lease financing
1,002

 
72

 
1,074

 
1,074

 
75

Other
142

 

 
142

 
233

 
23

Residential mortgage
20,269

 
11,207

 
31,476

 
32,588

 
2,447

Revolving mortgage
1,825

 
5,788

 
7,613

 
8,831

 
366

Construction and land development - noncommercial
645

 
1,968

 
2,613

 
3,030

 
109

Consumer
1,532

 
380

 
1,912

 
2,086

 
667

Total non-PCI impaired loans and leases
$
79,491

 
$
56,908

 
$
136,399

 
$
150,189

 
$
9,210


The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2017 and March 31, 2016:
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Construction and land development - commercial
$
1,055

 
$
12

 
$
3,164

 
$
41

Commercial mortgage
75,310

 
642

 
92,945

 
766

Other commercial real estate
1,584

 
8

 
423

 
5

Commercial and industrial
11,529

 
104

 
15,551

 
151

Lease financing
1,568

 
14

 
1,657

 
20

Other
196

 
2

 
1,072

 
14

Residential mortgage
32,963

 
253

 
23,500

 
172

Revolving mortgage
7,969

 
57

 
6,309

 
32

Construction and land development - noncommercial
2,605

 
33

 
556

 
6

Consumer
1,900

 
23

 
1,265

 
18

Total non-PCI impaired loans and leases
$
136,679

 
$
1,148

 
$
146,442

 
$
1,225



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Table of Contents

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 grant. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. In accordance with GAAP, acquired loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modifications 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.

The following table provides a summary of total TDRs by accrual status.
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Accruing
 
 Nonaccruing
 
 Total
 
 Accruing
 
 Nonaccruing
 
 Total
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development -
commercial
$
3,228

 
$
329

 
$
3,557

 
$
3,292

 
$
308

 
$
3,600

Commercial mortgage
64,447

 
15,282

 
79,729

 
70,263

 
14,435

 
84,698

Other commercial real estate
863

 
608

 
1,471

 
1,635

 
80

 
1,715

Commercial and industrial
9,124

 
652

 
9,776

 
9,193

 
1,436

 
10,629

Lease financing
1,135

 
917

 
2,052

 
882

 
192

 
1,074

Other
184

 
74

 
258

 
64

 
78

 
142

Total commercial TDRs
78,981

 
17,862

 
96,843

 
85,329

 
16,529

 
101,858

Noncommercial
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
35,292

 
6,374

 
41,666

 
34,012

 
5,117

 
39,129

Revolving mortgage
6,712

 
1,725

 
8,437

 
6,346

 
1,431

 
7,777

Construction and land development -
noncommercial
240

 

 
240

 
240

 

 
240

Consumer and other
1,531

 
326

 
1,857

 
1,603

 
309

 
1,912

Total noncommercial TDRs
43,775

 
8,425

 
52,200

 
42,201

 
6,857

 
49,058

Total TDRs
$
122,756

 
$
26,287

 
$
149,043

 
$
127,530

 
$
23,386

 
$
150,916

The majority of TDRs are included in the special mention, substandard or doubtful grading categories. When a restructured loan subsequently defaults, it is evaluated and downgraded if appropriate. The more severely graded the loan, the lower the estimated expected cash flows and the greater the allowance recorded. TDRs are evaluated individually for impairment through a review of collateral values or analysis of cash flows.
The following table shows the accrual status of non-PCI and PCI TDRs.
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
Accruing TDRs:
 
 
 
PCI
$
20,296

 
$
26,068

Non-PCI
102,460

 
101,462

Total accruing TDRs
122,756

 
127,530

Nonaccruing TDRs:
 
 
 
PCI
298

 
301

Non-PCI
25,989

 
23,085

Total nonaccruing TDRs
26,287

 
23,386

All TDRs:
 
 
 
PCI
20,594

 
26,369

Non-PCI
128,449

 
124,547

Total TDRs
$
149,043

 
$
150,916


26

Table of Contents

The following table provides the types of non-PCI TDRs made during the three months ended March 31, 2017 and March 31, 2016, as well as a summary of loans that were modified as a TDR during the twelve month periods ended March 31, 2017 and March 31, 2016 that subsequently defaulted during the three months ended March 31, 2017 and March 31, 2016. 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 March 31, 2017
 
Three months ended March 31, 2016
 
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 loans and leases
 
 
 
 
 
 
 
 
 
 
 
Interest only period provided
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage

$

 

$

 
1

$
252

 
1

$
252

Total interest only


 


 
1

252

 
1

252

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial


 


 
1

404

 


Commercial mortgage


 


 
1


 


Other commercial real estate


 
1

530

 


 


Commercial and industrial
2

94

 


 


 


Residential mortgage
1

32

 
1

47

 
1

34

 


Consumer
2

14

 


 


 


Total loan term extension
5

140

 
2

577

 
3

438

 


 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

60

 


 
1

18

 
1

18

Commercial mortgage
10

2,512

 
1

92

 
10

1,422

 
4

511

Other commercial real estate
1

4

 


 


 


Commercial and industrial
3

108

 
1


 
3

12

 


Lease financing
3

839

 
2

769

 


 


Residential mortgage
30

1,543

 
15

824

 
46

3,288

 
13

841

Construction and land development - noncommercial
2

412

 


 


 


Consumer
2

14

 


 
2

73

 


Other
1

143

 


 


 


Total below market interest rate
53

5,635

 
19

1,685

 
62

4,813

 
18

1,370

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial


 


 


 
1

16

Commercial mortgage


 
1

190

 


 


Lease financing
16

227

 


 


 


Residential mortgage
3

140

 
1

978

 
1

144

 


Revolving mortgage
4

99

 
9

649

 
8

347

 
8

277

Consumer
18

193

 
10

128

 
7

68

 
4

59

Total discharged from bankruptcy
41

659

 
21

1,945

 
16

559

 
13

352

Total non-PCI restructurings
99

$
6,434

 
42

$
4,207

 
82

$
6,062

 
32

$
1,974

 
 
 
 
 
 
 
 
 
 
 
 

27

Table of Contents

The following table provides the types of PCI TDRs made during the three months ended March 31, 2017 and March 31, 2016, as well as a summary of loans that were modified as a TDR during the twelve month periods ended March 31, 2017 and March 31, 2016 that subsequently defaulted during the three months ended March 31, 2017 and March 31, 2016.
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
 
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
PCI loans
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial

$

 

$

 
1

$
14

 

$

Commercial mortgage


 


 
3

2,016

 


Residential mortgage
2

181

 
1

73

 


 


Total below market interest rate
2

181

 
1

73

 
4

2,030

 


Total PCI restructurings
2

$
181

 
1

$
73

 
4

$
2,030

 

$

 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2017 and March 31, 2016, the pre-modification and post-modification outstanding recorded investments of loans modified as TDRs were not materially different.


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Table of Contents

NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in other real estate owned during the three months ended March 31, 2017 and March 31, 2016.
(Dollars in thousands)
Covered
 
Noncovered
 
Total
Balance at December 31, 2015
$
6,817

 
$
58,742

 
$
65,559

Additions
3,936

 
6,044

 
9,980

Additions acquired in the North Milwaukee State Bank acquisition

 
330

 
330

Sales
(523
)
 
(7,547
)
 
(8,070
)
Write-downs
(496
)
 
(2,235
)
 
(2,731
)
Balance at March 31, 2016
$
9,734

 
$
55,334

 
$
65,068

 
 
 
 
 
 
Balance at December 31, 2016
$
472

 
$
60,759

 
$
61,231

Additions

 
5,822

 
5,822

Sales
(71
)
 
(9,048
)
 
(9,119
)
Write-downs
(52
)
 
(1,391
)
 
(1,443
)
Balance at March 31, 2017
$
349

 
$
56,142

 
$
56,491

At March 31, 2017 and December 31, 2016, BancShares had $15.2 million and $15.0 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $21.8 million at both March 31, 2017 and December 31, 2016.
NOTE G - FDIC SHARED-LOSS RECEIVABLE AND 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, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions with shared-loss agreements: Georgian Bank (acquired in 2009); Williamsburg First National Bank (acquired in 2010); and Atlantic Bank & Trust (acquired in 2011).

During the first quarter of 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture
Bank (VB). Under the terms of the agreement, FCB made a payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in an adjustment of $240 thousand to the FDIC shared-loss receivable and a $45 thousand loss on the termination of the shared-loss agreement. In addition to the shared-loss agreement termination for VB, FCB terminated five shared-loss agreements in 2016, including Temecula Valley Bank, Sun American Bank, Williamsburg First National Bank, Atlantic Bank & Trust and Colorado Capital Bank.

As of March 31, 2017, shared-loss protection has expired or has been terminated for all non-single family residential loans. Shared-loss protection remains only for $75.9 million of single family residential loans acquired from United Western Bank and Georgian Bank.

The following table provides changes in the receivable from the FDIC for the three months ended March 31, 2017 and March 31, 2016.
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Beginning balance
$
4,172

 
$
4,054

Amortization
(600
)
 
(2,375
)
Net cash payments to FDIC
2,760

 
9,871

Post-acquisition adjustments
(2,591
)
 
(4,076
)
Termination of FDIC shared-loss agreement
240

 

Ending balance
$
3,981

 
$
7,474


NOTE H - MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.55 billion and $2.49 billion as of March 31, 2017 and December 31, 2016, respectively.  These loans were originated by BancShares and sold to third parties on a non-recourse basis

29

Table of Contents

with servicing rights retained.  These retained servicing rights are recorded as a servicing asset and reported in other intangible assets on the Consolidated Balance Sheets. 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 months ended March 31, 2017 and 2016 is presented in the following table:
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Beginning balance
$
20,415

 
$
19,351

Servicing rights originated
1,702

 
977

Amortization
(1,350
)
 
(1,268
)
Valuation allowance reversal (provision)
4

 
(1,874
)
Ending balance
$
20,771

 
$
17,186


The following table presents the activity in the servicing asset valuation allowance for the three months ended March 31, 2017 and 2016:
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Beginning balance
$
4

 
$
95

Valuation allowance (reversal) provision
(4
)
 
1,874

Ending balance
$

 
$
1,969

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended March 31, 2017 and 2016 were $1.7 million and $1.4 million, respectively, and reported in mortgage income in the Consolidated Statements of Income.
The amortization expense related to mortgage servicing rights, included as a reduction of mortgage income in the Consolidated Statements of Income, was $1.4 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively. Mortgage income included an impairment reversal of $4 thousand for the three months ended March 31, 2017 and an impairment of $1.9 million for the three months ended March 31, 2016.
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 March 31, 2017 and December 31, 2016 were as follows:
 
March 31, 2017
 
December 31, 2016
Discount rate - conventional fixed loans
9.39
%
 
9.45
%
Discount rate - all loans excluding conventional fixed loans
10.39
%
 
10.45
%
Weighted average constant prepayment rate
9.82
%
 
10.42
%
Weighted average cost to service a loan
$
63.84

 
$
62.75


NOTE I - REPURCHASE AGREEMENTS
BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure short-term funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates BancShares to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are generally reflected as short-term borrowings on the Consolidated Balance Sheets.
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 $769.8 million and $690.8 million at March 31, 2017 and December 31, 2016, respectively.

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Table of Contents

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 is presented in the following tables.
 
March 31, 2017
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Repurchase agreements
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
677,603

 
$

 
$

 
$
30,000

 
$
707,603

Total borrowings
$
677,603

 
$

 
$

 
$
30,000

 
$
707,603

Gross amount of recognized liabilities for repurchase agreements
 
$
707,603

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Remaining Contractual Maturity of the Agreements
 
Overnight and continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Repurchase agreements
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
590,772

 
$

 
$

 
$
30,000

 
$
620,772

Total borrowings
$
590,772

 
$

 
$

 
$
30,000

 
$
620,772

Gross amount of recognized liabilities for repurchase agreements
 
$
620,772

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

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 generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

Valuation adjustments, such as those pertaining to counterparty and BancShares' own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty's credit quality. As determined by BancShares management, liquidity valuation adjustments may be made to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when recent market transactions for identical or similar instruments are not observed.

BancShares management reviews any changes to its valuation methodologies to ensure they are appropriate and justified, 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.


31

Table of Contents

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:
Investment securities available for sale. U.S. Treasury, government agency, mortgage-backed securities, municipal securities, corporate bonds and trust preferred securities are generally measured at fair value using a third party pricing service or recent comparable market transactions in similar or identical securities and are classified as level 2 instruments. 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 on a heavily 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 are originated to be sold to investors, which are carried at fair value as BancShares elected the fair value option on loans held for sale. The fair value is based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of residential real estate loans held for sale are classified as level 2 inputs.

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. An additional valuation adjustment is made for liquidity. 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 servicing rights. Mortgage 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 asset cost. The fair value of mortgage 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 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. For fixed rate trust preferred securities, the fair values are determined based on recent trades of the actual security if available. For other long-term obligations, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for long-term obligations 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 March 31, 2017 and December 31, 2016. 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 and accrued interest payable are considered level 2. Lastly, the receivable from the FDIC for shared-loss agreements is designated as level 3.

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Table of Contents

(Dollars in thousands)
March 31, 2017
 
December 31, 2016
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
502,273

 
$
502,273

 
$
539,741

 
$
539,741

Overnight investments
2,736,514

 
2,736,514

 
1,872,594

 
1,872,594

Investment securities available for sale
7,119,861

 
7,119,861

 
7,006,580

 
7,006,580

Investment securities held to maturity
83

 
89

 
98

 
104

Loans held for sale
49,952

 
49,952

 
74,401

 
74,401

Net loans and leases
21,685,506

 
20,727,792

 
21,519,083

 
20,614,548

Receivable from the FDIC for shared-loss agreements
3,981

 
3,981

 
4,172

 
4,172

Income earned not collected
80,456

 
80,456

 
79,839

 
79,839

Federal Home Loan Bank stock
43,495

 
43,495

 
43,495

 
43,495

Mortgage servicing rights
20,771

 
25,690

 
20,415

 
24,446

Deposits
29,002,768

 
28,976,211

 
28,161,343

 
28,135,698

Short-term borrowings
795,587

 
795,587

 
603,487

 
603,487

Long-term obligations
727,500

 
713,402

 
832,942

 
832,201

Payable to the FDIC for shared-loss agreements
98,013

 
100,948

 
97,008

 
100,069

Accrued interest payable
3,947

 
3,947

 
3,797

 
3,797


Among BancShares' assets and liabilities, investment securities available for sale, loans held for sale and interest rates swaps accounted for as cash flow hedges 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 March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,618,168

 
$

 
$
1,618,168

 
$

Government agency
40,221

 

 
40,221

 

Mortgage-backed securities
5,306,107

 

 
5,306,107

 

Equity securities
94,265

 
30,345

 
63,920

 

Corporate bonds
49,565

 

 
49,565

 

Other
11,535

 

 
11,535

 

Total investment securities available for sale
$
7,119,861

 
$
30,345

 
$
7,089,516

 
$

Loans held for sale
$
49,952

 
$

 
$
49,952

 
$

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,650,319

 
$

 
$
1,650,319

 
$

Government agency
40,398

 

 
40,398

 

Mortgage-backed securities
5,175,425

 

 
5,175,425

 

Equity securities
83,507

 
29,145

 
54,362

 

Corporate bonds
49,562

 

 
49,562

 

Other
7,369

 

 
7,369

 

Total investment securities available for sale
$
7,006,580

 
$
29,145

 
$
6,977,435

 
$

Loans held for sale
$
74,401

 
$

 
$
74,401

 
$

There were no transfers between levels during the three months ended March 31, 2017.
Fair Value Option
BancShares has elected the fair value option for residential real estate loans held for sale. 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.

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The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate loans held for sale measured at fair value as of March 31, 2017 and December 31, 2016.
 
March 31, 2017
(Dollars in thousands)
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
49,952

 
$
48,283

 
$
1,669

 
 
 
 
 
 
 
December 31, 2016
 
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
74,401

 
$
75,893

 
$
(1,492
)
No loans held for sale were 90 or more days past due or on nonaccrual status as of March 31, 2017 or December 31, 2016.
The changes in fair value for residential real estate loans held for sale for which the fair value option was elected are recorded as a component of mortgage income on the Consolidated Statements of Income and are included in the table below for the three months ended March 31, 2017 and 2016.
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Gains from fair value changes on loans held for sale
$
3,161

 
$
763


Certain other assets are adjusted to their 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 the 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.
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 8 and 12 percent 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 2 and 16 percent.
OREO is measured and reported at fair value using asset valuations. Asset values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 8 and 12 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. 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. OREO that has been acquired or written down in the current year is deemed to be at fair value and included in the table below.
Mortgage servicing rights are carried at the lower of cost or market and are, therefore, carried at fair value only when fair value is less than the amortized asset cost. The fair value of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value.

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For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
67,235

 
$

 
$

 
$
67,235

Other real estate not covered under shared-loss agreements remeasured during current year
12,874

 

 

 
12,874

Other real estate covered under shared-loss agreements remeasured during current year
122

 

 

 
122

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
70,977

 
$

 
$

 
$
70,977

Other real estate not covered under shared-loss agreements remeasured during current year
44,963

 

 

 
44,963

Other real estate covered under shared-loss agreements remeasured during current year
439

 

 

 
439

Mortgage servicing rights
342

 

 

 
342

No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016.
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). Net periodic benefit cost is a component of employee benefits expense.
BancShares Plan
For the three months ended March 31, 2017 and 2016, the components of net periodic benefit cost are as follows:
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Service cost
$
3,376

 
$
3,220

Interest cost
7,380

 
7,180

Expected return on assets
(10,698
)
 
(9,159
)
Amortization of prior service cost
52

 
52

Amortization of net actuarial loss
2,234

 
1,600

Net periodic benefit cost
$
2,344

 
$
2,893

Bancorporation Plan
For the three months ended March 31, 2017 and 2016, the components of net periodic benefit cost are as follows:
 
Three months ended March 31
(Dollars in thousands)
2017
 
2016
Service cost
$
671

 
$
650

Interest cost
1,683

 
1,675

Expected return on assets
(2,796
)
 
(2,779
)
Amortization of net actuarial loss
214

 

Net periodic benefit cost
$
(228
)
 
$
(454
)
No contributions were made during the three months ended March 31, 2017 to the BancShares or Bancorporation pension plans. BancShares does not expect to make any contributions to either of the defined benefit pension plans during 2017.
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.

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Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets. At March 31, 2017, BancShares had unused commitments that were $9.03 billion, compared to $8.81 billion at December 31, 2016. Total unfunded commitments relating to investments in affordable housing projects was $61.9 million and $57.1 million at March 31, 2017 and December 31, 2016, respectively, and are included in other liabilities on BancShares' Consolidated Balance Sheets. Affordable housing project investments were $116.7 million and $109.8 million at March 31, 2017 and December 31, 2016, respectively, and are included in other assets on the Consolidated Balance Sheets.

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ follows its credit policies in the issuance of standby letters of credit. At March 31, 2017 and December 31, 2016, BancShares had standby letters of credit amounting to $80.3 million and $83.8 million, respectively. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.

Pursuant to standard representations and warranties relating to residential mortgage loan sales, 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 $3.0 million as of March 31, 2017 and December 31, 2016 for estimated losses arising from these standard representation and warranty provisions.

BancShares has a receivable from the FDIC totaling $4.0 million and $4.2 million as of March 31, 2017 and December 31, 2016, respectively, for the expected reimbursement of losses on assets covered under various shared-loss agreements. The shared-loss agreements are subject to interpretation by both the FDIC and BancShares, and disagreements may arise regarding coverage of losses, expenses and contingencies and requests for reimbursement may be delayed or disallowed for noncompliance. See Note G for additional information on the receivable from the FDIC regarding the early termination of a shared-loss agreement during the first quarter of 2017.

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). 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. The clawback liability is estimated by discounting estimated future payments and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. As of March 31, 2017 and December 31, 2016, the estimated clawback liability was $98.0 million and $97.0 million, respectively.

BancShares entered into forward-starting advances with the FHLB of Atlanta in June 2016 to receive $200.0 million of fixed rate long-term funding. There are two advances of $100.0 million each scheduled to fund in June 2018 with maturity dates of June 2026 and 2028.

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. 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.


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NOTE M - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive loss included the following as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
(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
Unrealized losses on investment securities available for sale
$
(36,587
)
 
$
(13,404
)
 
$
(23,183
)
 
$
(72,707
)
 
$
(26,832
)
 
$
(45,875
)
Funded status of defined benefit plans
(139,274
)
 
(51,516
)
 
(87,758
)
 
(141,774
)
 
(52,457
)
 
(89,317
)
Total
$
(175,861
)
 
$
(64,920
)
 
$
(110,941
)
 
$
(214,481
)
 
$
(79,289
)
 
$
(135,192
)

The following table highlights changes in accumulated other comprehensive (loss) income by component for the three months ended March 31, 2017 and March 31, 2016:
 
Three months ended March 31, 2017
(Dollars in thousands)
Unrealized (losses) gains on available for sale securities1
 
(Losses) gains on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
(45,875
)
 
$

 
$
(89,317
)
 
$
(135,192
)
Other comprehensive income before reclassifications
22,677

 

 

 
22,677

Amounts reclassified from accumulated other comprehensive (loss) income
15

 

 
1,559

 
1,574

Net current period other comprehensive income
22,692

 

 
1,559

 
24,251

Ending balance
$
(23,183
)
 
$

 
$
(87,758
)
 
$
(110,941
)
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
Unrealized (losses) gains on available for sale securities1
 
(Losses) gains on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
(15,125
)
 
$
(892
)
 
$
(48,423
)
 
$
(64,440
)
Other comprehensive income before reclassifications
42,017

 
437

 

 
42,454

Amounts reclassified from accumulated other comprehensive (loss) income
(2,858
)
 

 
1,020

 
(1,838
)
Net current period other comprehensive income
39,159

 
437

 
1,020

 
40,616

Ending balance
$
24,034

 
$
(455
)
 
$
(47,403
)
 
$
(23,824
)
1 All amounts are net of tax. Amounts in parentheses indicate debits.

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The following table presents the amounts reclassified from accumulated other comprehensive (loss) income and the line item affected in the statement where net income is presented for the three months ended March 31, 2017 and March 31, 2016:
(Dollars in thousands)
 
Three months ended March 31, 2017
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 available for sale securities
 
$
(24
)
 
Securities (losses) gains
 
 
9

 
Income taxes
 
 
$
(15
)
 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(52
)
 
Employee benefits
     Actuarial losses
 
(2,234
)
 
Employee benefits
 
 
(2,500
)
 
Employee benefits
 
 
941

 
Income taxes
 
 
$
(1,559
)
 
Net income
Total reclassifications for the period
 
$
(1,574
)
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
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 available for sale securities
 
$
4,628

 
Securities (losses) gains
 
 
(1,770
)
 
Income taxes
 
 
$
2,858

 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(52
)
 
Employee benefits
     Actuarial losses
 
(1,600
)
 
Employee benefits
 
 
(1,652
)
 
Employee benefits
 
 
632

 
Income taxes
 
 
$
(1,020
)
 
Net income
Total reclassifications for the period
 
$
1,838

 
 
1 Amounts in parentheses indicate debits to profit/loss.

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 2016 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 2017, 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’ earnings and cash flows are primarily derived from 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.
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.
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 control of noninterest expenses, optimization of our branch network, and further enhancements to our

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technology and delivery channels. Refer to our Form 10-K for the year ended December 31, 2016 for further discussion of our strategy.
Significant Events in 2017
In March 2017, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to terminate the shared-loss agreement for Venture Bank. Under the terms of the agreement, FCB made a net payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in a one-time expense of $45 thousand during the first quarter of 2017.
In January 2017, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to purchase certain assets and assume certain liabilities of Harvest Community Bank (HCB) of Pennsville, New Jersey. As a result of the HCB transaction, FCB recorded loans with a fair value of $85.1 million and investment securities with a fair value of $14.5 million. The fair value of deposits assumed was $121.8 million. 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, an acquisition gain of $12.0 million was recorded in the first quarter of 2017.
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. First quarter 2017 national results indicate solid labor conditions and a moderate rise in household spending, while business capital spending has remained soft. The national unemployment rate declined from 4.7 percent in December 2016 to 4.5 percent in March 2017. According to the U.S. Department of Labor, the U.S. economy added approximately 533,000 new nonfarm payroll jobs during the first quarter of 2017. 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 first quarter that the U.S. labor market continued to strengthen and growth of economic activity has continued to expand at a modest pace. In light of the cumulative progress made, the FOMC decided to raise the target range for the federal funds rate by 25 basis points. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC will assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0 percent inflation. The FOMC expects that economic activity will expand at a moderate pace and labor market conditions will continue to strengthen with gradual increases in the federal funds rate in the future.
The trends in the banking industry are similar to those of the broader economy as shown in the latest national banking results from the fourth quarter of 2016. FDIC-insured institutions reported a 7.7 percent increase in net income compared to the fourth quarter of 2015 as a result of growth in interest-bearing assets generating higher net interest income. Banking industry average net interest margin was 3.13 percent in the fourth quarter of 2016, up from 3.07 percent in the fourth quarter of 2015. Total loans and leases increased by 0.8 percent from the same quarter a year ago primarily due to growth in credit cards, loans secured by nonfarm nonresidential real estate and real estate construction development loans.
EARNINGS PERFORMANCE SUMMARY
BancShares' consolidated net income for the first quarter of 2017 was $67.6 million, or $5.63 per share, compared to $52.7 million, or $4.39 per share, for the fourth quarter of 2016, and $52.1 million, or $4.34 per share, for the corresponding period of 2016. BancShares’ current quarter results generated an annualized return on average assets of 0.82 percent and an annualized return on average equity of 8.96 percent, compared to respective returns of 0.63 percent and 6.86 percent for the fourth quarter of 2016, and 0.66 percent and 7.17 percent for the first quarter of 2016. Net interest margin for the first quarter of 2017 was 3.25 percent, compared to 3.14 percent for the fourth quarter of 2016 and 3.18 percent for the first quarter of the prior year.
Earnings for the first quarter of 2017 included a pre-tax acquisition gain of $12.0 million recognized in connection with the January 13, 2017, FDIC-assisted transaction involving certain assets and liabilities assumed of Harvest Community Bank (HCB) of Pennsville, New Jersey. Earnings before income taxes for the same period in 2016 included $4.6 million in investment securities gains and a $1.7 million gain recognized in connection with the March 11, 2016, acquisition of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin.
Key highlights in the first quarter of 2017 include:
FCB completed the acquisition of HCB which contributed $82.5 million in loans and leases and $106.8 million in deposit balances at March 31, 2017.
Loans grew by $168.6 million to $21.91 billion, or by 3.2 percent on an annualized basis, during the first quarter of 2017, reflecting originated portfolio growth and the HCB acquisition.

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Deposits increased $841.4 million, or by 12.1 percent on an annualized basis, from December 31, 2016, primarily due to organic growth in low-cost demand deposit accounts and the deposit balances acquired from HCB.
Net interest income increased $6.4 million, or by 2.6 percent, compared to the fourth quarter of 2016. The increase was primarily due to higher interest income earned on purchased credit impaired (PCI) loans and investment securities.
The taxable-equivalent net interest margin increased 11 basis points to 3.25 percent, compared to the fourth quarter of 2016. The most significant components of the increase were improved investment yields, higher investment portfolio balances and higher non-PCI loan balances.
Net charge-offs on total loans and leases were $6.1 million, or 0.11 percent of average loans and leases on an annualized basis, compared to $9.2 million, or 0.17 percent, during the fourth quarter of 2016.
BancShares remained well capitalized at March 31, 2017, under Basel III capital requirements with a Tier 1 risk-based capital ratio of 12.57 percent, common equity Tier 1 ratio of 12.57 percent, total risk-based capital ratio of 13.99 percent and leverage capital ratio of 9.15 percent.

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Table 1
Selected Quarterly Data
 
2017
 
2016
 
 
First
 
Fourth
 
Third
 
Second
 
First
 
(Dollars in thousands, except share data)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Interest income
$
260,857

 
$
254,782

 
$
246,494

 
$
243,369

 
$
243,112

 
Interest expense
10,514

 
10,865

 
10,645

 
11,180

 
10,392

 
Net interest income
250,343

 
243,917

 
235,849

 
232,189

 
232,720

 
Provision for loan and lease losses
8,231

 
16,029

 
7,507

 
4,562

 
4,843

 
Net interest income after provision for loan and lease losses
242,112

 
227,888

 
228,342

 
227,627

 
227,877

 
Gain on acquisitions
12,017

 

 
837

 
3,290

 
1,704

 
Noninterest income excluding gain on acquisitions
115,275

 
124,698

 
117,004

 
136,960

 
103,578

 
Noninterest expense
264,345

 
271,531

 
267,233

 
258,303

 
251,671

 
Income before income taxes
105,059

 
81,055

 
78,950

 
109,574

 
81,488

 
Income taxes
37,438

 
28,365

 
27,546

 
40,258

 
29,416

 
Net income
$
67,621

 
$
52,690

 
$
51,404

 
$
69,316

 
$
52,072

 
Net interest income, taxable equivalent
$
251,593

 
$
245,330

 
$
237,146

 
$
233,496

 
$
234,187

 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 Net income
$
5.63

 
$
4.39

 
$
4.28

 
$
5.77

 
$
4.34

 
 Cash dividends
0.30

 
0.30

 
0.30

 
0.30

 
0.30

 
 Market price at period end (Class A)
335.37

 
355.00

 
293.89

 
258.91

 
251.07

 
 Book value at period end
258.17

 
250.82

 
256.76

 
252.76

 
246.55

 
SELECTED QUARTERLY AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 Total assets
$
33,494,500

 
$
33,223,995

 
$
32,655,417

 
$
32,161,905

 
$
31,705,658

 
 Investment securities
7,084,986

 
6,716,873

 
6,452,532

 
6,786,463

 
6,510,248

 
 Loans and leases (1)
21,951,444

 
21,548,313

 
21,026,510

 
20,657,094

 
20,349,091

 
 Interest-earning assets
31,298,970

 
31,078,428

 
30,446,592

 
29,976,629

 
29,558,629

 
 Deposits
28,531,166

 
28,231,477

 
27,609,418

 
27,212,814

 
26,998,026

 
 Long-term obligations
816,953

 
835,509

 
842,715

 
817,750

 
750,446

 
 Interest-bearing liabilities
19,669,075

 
19,357,282

 
19,114,740

 
19,092,287

 
19,067,251

 
 Shareholders' equity
$
3,061,099

 
$
3,056,426

 
$
3,058,155

 
$
2,989,097

 
$
2,920,611

 
 Shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
SELECTED QUARTER-END BALANCES
 
 
 
 
 
 
 
 
 
 Total assets
$
34,018,405

 
$
32,990,836

 
$
32,971,910

 
$
32,230,403

 
$
32,195,657

 
 Investment securities
7,119,944

 
7,006,678

 
6,384,940

 
6,557,736

 
6,687,483

 
 Loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
848,816

 
809,169

 
868,200

 
921,467

 
945,887

 
Non-PCI
21,057,633

 
20,928,709

 
20,428,780

 
19,821,104

 
19,471,802

 
 Deposits
29,002,768

 
28,161,343

 
27,925,253

 
27,257,774

 
27,365,245

 
 Long-term obligations
727,500

 
832,942

 
840,266

 
850,504

 
779,087

 
 Shareholders' equity
$
3,100,696

 
$
3,012,427

 
$
3,083,748

 
$
3,035,704

 
$
2,961,194

 
 Shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
SELECTED RATIOS AND OTHER DATA
 
 
 
 
 
 
 
 
 
Rate of return on average assets (annualized)
0.82

%
0.63

%
0.63

%
0.87

%
0.66

%
Rate of return on average shareholders' equity (annualized)
8.96

 
6.86

 
6.69

 
9.33

 
7.17

 
Net yield on interest-earning assets (taxable equivalent)
3.25

 
3.14

 
3.10

 
3.13

 
3.18

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
1.29

 
1.70

 
1.34

 
1.25

 
1.45

 
Non-PCI
1.00

 
0.98

 
0.98

 
0.99

 
0.99

 
Total
1.01

 
1.01

 
1.00

 
1.00

 
1.01

 
Nonperforming assets to total loans and leases and other real estate at period end:
 
 
 
 
 
 
 
 
 
 
Covered
0.59

 
0.66

 
0.75

 
1.17

 
4.74

 
Noncovered
0.66

 
0.67

 
0.75

 
0.77

 
0.74

 
Total
0.66

 
0.67

 
0.75

 
0.77

 
0.80

 
Tier 1 risk-based capital ratio
12.57

 
12.42

 
12.50

 
12.63

 
12.58

 
Common equity Tier 1 ratio
12.57

 
12.42

 
12.50

 
12.63

 
12.58

 
Total risk-based capital ratio
13.99

 
13.85

 
13.96

 
14.10

 
14.09

 
Leverage capital ratio
9.15

 
9.05

 
9.07

 
9.09

 
9.00

 
Dividend payout ratio
5.33

 
6.83

 
7.01

 
5.20

 
6.91

 
Average loans and leases to average deposits
76.94

 
76.33

 
76.16

 
75.91

 
75.37

 
(1) Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale.


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BUSINESS COMBINATIONS
Harvest Community Bank
In January 2017, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of HCB. The acquisition provides FCB the opportunity to grow capital and enhance earnings. This was an FDIC-assisted transaction; however, it has no shared-loss agreement.

The HCB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

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

Table 2
Harvest Community Bank
(Dollars in thousands)
As recorded by FCB
Assets
 
Cash and cash equivalents
$
3,350

Overnight investments
7,478

Investment securities
14,455

Loans
85,149

Income earned not collected
31

Intangible assets
850

Other assets
237

Total assets acquired
111,550

Liabilities
 
Deposits
121,755

Other liabilities
74

Total liabilities assumed
121,829

Fair value of net liabilities assumed
(10,279
)
Cash received from FDIC
22,296

Gain on acquisition of HCB
$
12,017

Merger-related expenses of $735 thousand were recorded in the Consolidated Statements of Income for the first quarter of 2017. Loan-related interest income generated from HCB was approximately $1.0 million since the acquisition date.
All loans resulting from the HCB transaction were recognized upon acquisition date with a discount attributable, at least in part, to credit quality, and are therefore accounted for as PCI loans.
FDIC-Assisted Transactions
BancShares completed nine FDIC-assisted transactions during the period beginning in 2009 through 2016, and it acquired HCB in its tenth such transaction during 2017. These transactions provided significant contributions to our results of operations. Prior to its merger into BancShares, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions: Georgian Bank of Atlanta, Georgia (acquired in 2009); Williamsburg First National Bank of Williamsburg, South Carolina (acquired in 2010); and Atlantic Bank & Trust of Charleston, South Carolina (acquired in 2011). Nine of the thirteen FDIC-assisted transactions (including the three completed by Bancorporation) included shared-loss agreements that, for their terms, protected us from a portion of the credit and asset quality risk we would otherwise incur. The Capitol City Bank & Trust, North Milwaukee State Bank, First CornerStone Bank and Harvest Community Bank transactions did not include shared-loss agreements.

During the first quarter of 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture
Bank (VB). Under the terms of the agreement, FCB made a payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in an adjustment of $240 thousand to the FDIC shared-loss receivable and a $45 thousand loss on the termination of the shared-loss agreement. In addition to the shared-loss agreement termination for VB, FCB terminated five share-loss agreements in 2016, including Temecula Valley Bank, Sun American Bank, Williamsburg First National Bank, Atlantic Bank & Trust and Colorado Capital Bank. All rights and obligations of FCB and the FDIC under the shared-loss agreements, including the clawback provisions and the settlement of outstanding shared-loss claims,

42

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have been resolved and terminated under the termination agreements. The termination of the FDIC shared-loss agreements had no impact on the yields of the loans that were previously covered under these agreements. FCB will recognize all future recoveries, losses and expenses related to the previously covered assets since the FDIC will no longer share in those amounts.

As of March 31, 2017, shared-loss protection has expired or has been terminated for all non-single family residential loans. Shared-loss protection remains only for single family residential loans acquired from United Western Bank and Georgian Bank in the amount of $75.9 million. For those acquired loans with shared-loss agreements remaining, generally, losses on single family residential loans are covered for ten years.


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Table 3
Consolidated Quarter-to-Date Average Taxable-Equivalent Balance Sheets
 
Three months ended
 
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
(Dollars in thousands)
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
21,951,444


$
227,792


4.20

%
$
21,548,313

 
$
226,651

 
4.19

%
$
20,349,091

 
$
217,732

 
4.30

%
Investment securities:





 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
1,644,598


4,199


1.04

 
1,593,610

 
3,328

 
0.83

 
1,533,028

 
2,880

 
0.76

 
Government agency
53,545


205


1.53

 
172,037

 
396

 
0.92

 
463,597

 
1,031

 
0.89

 
Mortgage-backed securities
5,241,296


24,322


1.86

 
4,802,198

 
20,937

 
1.74

 
4,467,186

 
19,012

 
1.70

 
Corporate bonds
57,104

 
980

 
6.87

 
54,255

 
772

 
5.69

 
10,659

 
166

 
6.23

 
State, county and municipal





 

 

 

 
196

 
1

 
2.73

 
Other
88,443


133


0.61

 
94,773

 
253

 
1.06

 
35,582

 
91

 
1.02

 
Total investment securities
7,084,986


29,839


1.69

 
6,716,873

 
25,686

 
1.53

 
6,510,248

 
23,181

 
1.43

 
Overnight investments
2,262,540


4,476


0.80

 
2,813,242

 
3,858

 
0.55

 
2,699,290

 
3,666

 
0.54

 
Total interest-earning assets
31,298,970


$
262,107


3.39

%
31,078,428

 
$
256,195

 
3.28

%
29,558,629

 
$
244,579

 
3.32

%
Cash and due from banks
496,929

 
 
 
 
 
478,779

 
 
 
 
 
470,159

 
 
 
 
 
Premises and equipment
1,130,049

 
 
 
 
 
1,134,228

 
 
 
 
 
1,131,235

 
 
 
 
 
FDIC shared-loss receivable
5,456

 
 
 
 
 
5,584

 
 
 
 
 
8,742

 
 
 
 
 
Allowance for loan and lease losses
(220,811
)
 
 
 
 
 
(214,463
)
 
 
 
 
 
(206,338
)
 
 
 
 
 
Other real estate owned
60,034

 
 
 
 
 
65,670

 
 
 
 
 
65,616

 
 
 
 
 
Other assets
723,873

 
 
 
 
 
675,769

 
 
 
 
 
677,615

 
 
 
 
 
 Total assets
$
33,494,500

 
 
 
 
 
$
33,223,995

 
 
 
 
 
$
31,705,658

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
4,834,779


$
252


0.02

%
$
4,696,279

 
$
261

 
0.02

%
$
4,317,299

 
$
200

 
0.02

%
Savings
2,160,689


184


0.03

 
2,080,598

 
161

 
0.03

 
1,944,805

 
145

 
0.03

 
Money market accounts
8,343,092


1,859


0.09

 
8,113,686

 
1,619

 
0.08

 
8,335,030

 
1,642

 
0.08

 
Time deposits
2,815,682


2,141


0.31

 
2,892,143

 
2,411

 
0.33

 
3,061,333

 
2,672

 
0.35

 
Total interest-bearing deposits
18,154,242


4,436


0.10

 
17,782,706

 
4,452

 
0.10

 
17,658,467

 
4,659

 
0.11

 
Repurchase agreements
669,923


404


0.24

 
726,318

 
485

 
0.27

 
655,787

 
433

 
0.27

 
Other short-term borrowings
27,957


176


2.51

 
12,749

 
52

 
1.63

 
2,551

 
1

 
0.12

 
Long-term obligations
816,953


5,498


2.69

 
835,509

 
5,876

 
2.81

 
750,446

 
5,299

 
2.82

 
Total interest-bearing liabilities
19,669,075


10,514


0.22

 
19,357,282

 
10,865

 
0.22


19,067,251

 
10,392

 
0.22

 
Demand deposits
10,376,924

 
 
 
 
 
10,448,771

 
 
 
 
 
9,339,559

 
 
 
 
 
Other liabilities
387,402

 
 
 
 
 
361,516

 
 
 
 
 
378,237

 
 
 
 
 
Shareholders' equity
3,061,099

 
 
 
 
 
3,056,426

 
 
 
 
 
2,920,611

 
 
 
 
 
 Total liabilities and shareholders'
 equity
$
33,494,500

 
 
 
 
 
$
33,223,995

 
 
 
 
 
$
31,705,658

 
 
 
 
 
Interest rate spread




3.17

%




3.06

%




3.10

%
 


















Net interest income and net yield on interest-earning assets


$
251,593


3.25

%


$
245,330


3.14

%


$
234,187


3.18

%
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 35.0 percent for each period and state income tax rates of 3.1 percent, 3.1 percent and 5.5 percent for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016, respectively. The taxable-equivalent adjustment was $1,250, $1,413 and $1,467 for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 



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Table 4
Changes in Consolidated Taxable Equivalent Net Interest Income
 
Three months ended March 31, 2017
 
Change from prior year period due to:
(Dollars in thousands)
Volume
 
Yield/Rate
 
Total Change
Assets
 
 
 
 
 
Loans and leases
$
16,033

 
$
(5,973
)
 
$
10,060

Investment securities:
 
 
 
 
 
U. S. Treasury
235

 
1,084

 
1,319

Government agency
(1,240
)
 
414

 
(826
)
Mortgage-backed securities
3,407

 
1,903

 
5,310

Corporate bonds
760

 
54

 
814

State, county and municipal
(1
)
 

 
(1
)
Other
105

 
(63
)
 
42

Total investment securities
3,266

 
3,392

 
6,658

Overnight investments
(751
)
 
1,561

 
810

Total interest-earning assets
$
18,548

 
$
(1,020
)
 
$
17,528

Liabilities
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Checking with interest
$
39

 
$
13

 
$
52

Savings
27

 
12

 
39

Money market accounts
7

 
210

 
217

Time deposits
(221
)
 
(310
)
 
(531
)
Total interest-bearing deposits
(148
)
 
(75
)
 
(223
)
Repurchase agreements
14

 
(43
)
 
(29
)
Other short-term borrowings
84

 
91

 
175

Long-term obligations
456

 
(257
)
 
199

Total interest-bearing liabilities
406

 
(284
)
 
122

Change in net interest income
$
18,142

 
$
(736
)
 
$
17,406

The rate/volume variance is allocated equally between the changes in volume and rate.
RESULTS OF OPERATIONS
Net Interest Income and Margin
First Quarter 2017
Compared to the fourth quarter of 2016, net interest income increased $6.4 million, or by 2.6 percent, to $250.3 million for the first quarter of 2017. On a taxable-equivalent basis, net interest income increased $6.3 million, or by 2.6 percent, from $245.3 million during the fourth quarter of 2016. The increase was due to higher investment securities interest income of $4.1 million, an increase in PCI loan interest income of $2.3 million, a $618 thousand increase in interest income earned on overnight investments and a decrease in interest expense of $351 thousand, partially offset by a decrease in non-PCI loan interest income of $1.0 million.
Compared to the first quarter of 2016, net interest income increased by $17.6 million, or 7.6 percent. On a taxable-equivalent basis, net interest income was $251.6 million, an increase of $17.4 million, or 7.4 percent, from the first quarter of 2016. The increase was primarily due to a $12.8 million increase in non-PCI loan interest income due to originated loan volume, a $6.7 million increase in investment securities interest income and an $810 thousand increase in interest income earned on excess cash held in overnight investments. These increases in net interest income were offset by a decline in PCI loan income of $2.6 million resulting from continued PCI loan portfolio run-off and a $122 thousand increase in interest expense.
The taxable-equivalent net interest margin was 3.25 percent for the first quarter of 2017, an increase of 11 basis points from the fourth quarter of 2016 and an increase of 7 basis points from the same quarter in the prior year. The margin improvement for both periods was primarily due to improved investment yields, as well as higher non-PCI loan and investment portfolio balances.
Average quarter-to-date interest earning assets increased by $220.5 million since the fourth quarter of 2016, reflecting a $403.1 million increase in average outstanding loans, due to originated loan growth and loans acquired in the HCB acquisition and a $368.1 million increase in average investment securities, partially offset by a $550.7 million reduction in average overnight investments. Average quarter-to-date interest earning assets increased by $1.74 billion compared to the same quarter in the prior year. Growth in average interest-earning assets was primarily funded by growth in deposits. Within interest-earning assets, loans

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Table of Contents

experienced the most significant increase, primarily due to originated loan growth of $1.38 billion and the acquisitions of First CornerStone Bank (FCSB), Cordia Bancorp, Inc. (Cordia) and HCB.
Average interest-bearing liabilities increased by $311.8 million compared to the fourth quarter of 2016, due to a $371.5 million increase in average interest-bearing deposits resulting from organic growth and the HCB acquisition, offset by a $41.2 million decrease in average short-term borrowings and an $18.6 million decrease in average long-term obligations. When compared to the same quarter in the prior year, average interest-bearing liabilities increased $601.8 million primarily due to growth in average interest-bearing deposits and the acquisitions of FCSB, Cordia and HCB. The rate on interest-bearing liabilities was unchanged at 0.22 percent as lower deposit funding costs in the first quarter of 2017 offset higher borrowing costs resulting from additional FHLB advances during 2016 to mitigate interest rate risk from long-term fixed-rate loans.
Noninterest Income
Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. The primary sources of noninterest income have traditionally consisted of cardholder services income, merchant services income, service charges on deposit accounts and revenues derived from wealth management services. Recoveries on PCI loans that have been previously charged-off are additional sources of noninterest income. BancShares records the portion of recoveries not covered under shared-loss agreements as noninterest income rather than as an adjustment to the allowance for loan losses. Charge-offs on PCI loans are recorded against the discount recognized on the date of acquisition versus through the allowance for loan losses unless an allowance was established subsequent to acquisition date due to declining expected cash flow.

Table 5
Noninterest Income
 
Three months ended
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
 
March 31, 2016
Gain on acquisitions
$
12,017

 
$

 
$
1,704

Cardholder services
21,258

 
21,468

 
19,358

Merchant services
24,987

 
24,382

 
21,977

Service charges on deposit accounts
22,142

 
22,471

 
21,850

Wealth management services
20,962

 
19,381

 
19,634

Securities (losses) gains
(24
)
 
9,164

 
4,628

Other service charges and fees
7,601

 
6,708

 
6,989

Mortgage income
7,576

 
7,808

 
1,311

Insurance commissions
3,558

 
2,952

 
3,178

ATM income
1,773

 
1,765

 
1,765

Adjustments to FDIC receivable for shared-loss agreements
(1,628
)
 
(2,052
)
 
(2,533
)
Net impact from FDIC shared-loss termination
(45
)
 

 

Recoveries of PCI loans previously charged off
5,224

 
8,220

 
2,884

Other
1,891

 
2,431

 
2,537

Total noninterest income
$
127,292

 
$
124,698

 
$
105,282

In the first quarter of 2017, noninterest income was $127.3 million, an increase of $2.6 million from the fourth quarter of 2016. The increase was driven primarily by the $12.0 million gain on the acquisition of HCB, higher wealth management services fees of $1.6 million and an increase in other service charges and fees of $893 thousand. These increases were partially offset by lower investment securities gains of $9.2 million and a $3.0 million decline in recoveries of PCI loans previously charged-off.
Noninterest income excluding acquisition gains was $115.3 million for the first quarter of 2017 compared to $103.6 million for the same period of 2016. The increase was driven by higher mortgage income of $6.3 million due primarily to a favorable interest rate lock commitment position in the current quarter and an impairment charge of $1.9 million on mortgage servicing assets recognized in the first quarter of 2016. Noninterest income also benefited from a $3.0 million increase in merchant services as a result of higher sales volume and a $1.9 million increase in cardholder income due to higher sales volume and a rewards product launch, a $2.3 million increase in recoveries of PCI loans previously charged off, a $1.3 million increase in wealth management services fees, and lower FDIC receivable adjustments of $905 thousand. These favorable impacts were offset by a $4.7 million reduction in securities gains.


46

Table of Contents

Noninterest Expense
The primary components of noninterest expense are salaries and related employee benefits, occupancy costs, facilities and equipment expense and merchant processing expenses.
Table 6
Noninterest Expense
 
Three months ended
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
 
March 31, 2016
Salaries and wages
$
112,263

 
$
112,631

 
$
103,899

Employee benefits
29,293

 
24,757

 
27,350

Occupancy expense
24,762

 
27,785

 
25,012

Equipment expense
24,588

 
23,705

 
22,345

Merchant processing
16,783

 
16,662

 
15,087

Cardholder processing
5,553

 
5,935

 
6,084

FDIC insurance expense
5,593

 
5,794

 
4,789

Foreclosure-related expenses
2,471

 
1,859

 
1,731

Merger-related expenses
833

 
154

 
38

Processing fees paid to third parties
4,316

 
5,328

 
4,102

Cardholder reward programs
2,544

 
2,953

 
2,120

Telecommunications
3,612

 
3,855

 
3,589

Consultant expense
1,879

 
3,327

 
1,771

Collection expense
1,292

 
1,788

 
2,581

Advertising expense
2,500

 
2,682

 
2,055

Core deposit intangible amortization
3,921

 
4,196

 
4,318

Other
22,142

 
28,120

 
24,800

Total noninterest expense
$
264,345

 
$
271,531

 
$
251,671

Noninterest expense was $264.3 million in the first quarter of 2017, a decrease of $7.2 million from the fourth quarter of 2016. The change was attributable to the following drivers:
Occupancy expense declined $3.0 million. The largest component of the decline was related to building repairs as a result of Hurricane Matthew recognized in the fourth quarter of 2016.
Consultant expense declined $1.4 million primarily due to non-recurring expenses recognized in the fourth quarter of 2016.
Processing fees paid to third parties declined $1.0 million primarily due to conversion and contract termination costs recognized in the fourth quarter of 2016.
Other expense declined primarily as a result of a $1.2 million reversal of a repurchase reserve on a Small Business Administration (SBA) guaranteed loan, lower losses on asset sales of $528 thousand, lower operational losses of $423 thousand, a decline in appraisal expense of $332 thousand and an increase to the unfunded commitment reserve of $754 thousand recorded in the fourth quarter of 2016.
Employee benefits increased by $4.5 million as a result of higher payroll taxes and health care costs.
Noninterest expense was $264.3 million in the first quarter of 2017, an increase of $12.7 million from the same period of 2016. The change was attributable to the following drivers:
Personnel expense, which includes salaries, wages and employee benefits, increased by $10.3 million primarily due to merit increases, increased headcount and higher payroll incentives.
Equipment expense increased by $2.2 million due to software maintenance and software projects placed into service over the past year.
Merchant processing expense increased by $1.7 million related to higher sales volume.
Collection expense declined $1.3 million resulting from managing fewer nonperforming assets.

Income Taxes
Income tax expense was $37.4 million, $28.4 million and $29.4 million for the first quarter of 2017, fourth quarter of 2016 and first quarter of 2016, representing effective tax rates of 35.6 percent, 35.0 percent and 36.1 percent during the respective periods.
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

47

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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 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 assets typically carry a higher interest rate but expose us to higher levels of market risk.

We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. 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 risk of this industry concentration is mitigated through our underwriting policies that emphasize reliance on adequate borrower cash flow rather than underlying collateral value and our preference for financing secured by owner-occupied real property. Our focus on asset quality also influences the composition of our investment securities portfolio.

Interest-earning assets averaged $31.30 billion and $31.08 billion for the quarters ended March 31, 2017 and December 31, 2016, respectively. The $220.5 million increase from December 31, 2016 was due to a $403.1 million increase in loans and leases primarily as a result of originated loan growth and the HCB acquisition, and a $368.1 million increase in investment securities, offset by a $550.7 million decline in overnight investments.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk and low to moderate interest rate risk. Other objectives include acting as a stable source of 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 have been made largely under a long term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. 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.

Investment securities were $7.12 billion at March 31, 2017, compared to $7.01 billion and $6.69 billion at December 31, 2016 and March 31, 2016, respectively. The $113.3 million and $432.6 million increase in the portfolio from December 31, 2016 and March 31, 2016, respectively, was attributable to continued progress in reinvesting proceeds from prior sales, maturities and paydowns of securities back into the investment portfolio.

As of March 31, 2017, investment securities available for sale had a net pre-tax unrealized loss of $36.6 million, compared to a net pre-tax unrealized loss of $72.7 million as of December 31, 2016 and a net pre-tax unrealized gain of $38.9 million as of March 31, 2016. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of March 31, 2017. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.

Sales of investment securities for the three months ended March 31, 2017 resulted in a net realized loss of $24 thousand compared to a net gain of $9.2 million and $4.6 million for three months ended December 31, 2016 and March 31, 2016, respectively.

At March 31, 2017, mortgage-backed securities represented 74.5 percent of investment securities available for sale, compared to U.S. Treasury, government agency securities, equity securities, corporate bonds and other, which represented 22.7 percent, 0.6 percent, 1.3 percent, 0.7 percent and 0.2 percent of the portfolio, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

Since December 31, 2016, cash flows from sales, maturities and paydowns of U.S. Treasury, government agency securities, and mortgage-backed securities have largely been reinvested into similar securities. The carrying value of mortgage-backed securities and equity securities increased by $130.7 million and $10.8 million, respectively, while U.S. Treasury and government agency securities declined $32.2 million and $177 thousand, respectively, since December 31, 2016.

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Table 7
Investment Securities
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
(Dollars in thousands)
 Cost
 
 Fair value
 
 Cost
 
Fair value
 
Cost
 
Fair Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,619,380

 
$
1,618,168

 
$
1,650,675

 
$
1,650,319

 
$
1,538,907

 
$
1,541,215

Government agency
40,185

 
40,221

 
40,291

 
40,398

 
355,488

 
356,157

Mortgage-backed securities
5,363,747

 
5,306,107

 
5,259,466

 
5,175,425

 
4,693,313

 
4,727,282

Equity securities
72,064

 
94,265

 
71,873

 
83,507

 
50,066

 
52,095

Corporate bonds
49,370

 
49,565

 
49,367

 
49,562

 
8,500

 
8,500

Other
11,702

 
11,535

 
7,615

 
7,369

 
2,115

 
2,040

Total investment securities available for sale
7,156,448

 
7,119,861

 
7,079,287

 
7,006,580

 
6,648,389

 
6,687,289

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
83

 
89

 
98

 
104

 
194

 
203

Total investment securities
$
7,156,531

 
$
7,119,950

 
$
7,079,385

 
$
7,006,684

 
$
6,648,583

 
$
6,687,492


Loans and Leases
Loans were $21.91 billion at March 31, 2017, a net increase of $168.6 million compared to December 31, 2016, representing growth of 3.2 percent on an annualized basis. Originated loans increased by $161.4 million primarily related to growth in the commercial portfolio. Originated loan growth was partially offset by the sale of certain residential mortgage loans totaling $32.5 million, which resulted in a gain of $164 thousand. PCI loans increased by $39.6 million reflecting net loans acquired from HCB of $82.5 million at March 31, 2017, offset by loan run-off of $42.9 million.
Non-PCI loans increased by $1.59 billion, compared to March 31, 2016, reflecting originated loan growth and the Cordia acquisition impact. PCI loans decreased by $97.1 million from March 31, 2016, due to continued pay downs in the PCI loan portfolio, offset by the contributions from the FCSB and HCB acquisitions.

BancShares reports PCI and non-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 8 provides the composition of PCI and non-PCI loans and leases.

PCI Loans
The PCI portfolio includes loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. 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 and leases are valued at fair value at the date of acquisition.

PCI loans at March 31, 2017 were $848.8 million, representing 3.9 percent of total loans and leases, compared to $809.2 million and $945.9 million at December 31, 2016 and March 31, 2016, respectively.

PCI commercial loans were $529.8 million at March 31, 2017, an increase of $29.9 million since December 31, 2016 and a decrease of $64.4 million since March 31, 2016. At March 31, 2017, PCI noncommercial loans were $319.0 million, an increase of $9.8 million and a decrease of $32.7 million since December 31, 2016 and March 31, 2016, respectively. The increases from December 31, 2016 reflect net loans acquired from HCB, offset by continued loan run-off. The decreases from March 31, 2016 were due to the run-off in the PCI loan portfolio, offset by the contributions from the FCSB and HCB acquisitions.

Non-PCI Loans and Leases
The non-PCI portfolio includes loans that management has the intent and ability to hold and are reported at the principal balance outstanding, net of deferred loan fees, including unearned income and unamortized costs, fees, premiums and discounts. Non-PCI loans include originated commercial loans and leases, originated noncommercial loans, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined

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that the loans are not impaired and, therefore, do not have a discount at least in part due to credit quality at the time of acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.

Non-PCI loans at March 31, 2017 were $21.06 billion, representing 96.1 percent of total loans and leases, compared to $20.93 billion and $19.47 billion at December 31, 2016 and March 31, 2016, 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 $13.86 billion at March 31, 2017, an increase of $100.7 million and $1.07 billion, compared to December 31, 2016 and March 31, 2016, respectively, resulting from originated loan growth. The increase from March 31, 2016 was also attributable to the impact of the Cordia acquisition.

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 $7.20 billion at March 31, 2017, an increase of $28.3 million and $514.4 million compared to December 31, 2016 and March 31, 2016, respectively, resulting from originated loan growth. The increase from March 31, 2016 was also attributable to the impact of the Cordia acquisition.

Table 8
Loans and Leases
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
 
March 31, 2016
Non-PCI loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
$
683,415

 
$
649,157

 
$
626,311

Commercial mortgage
9,173,612

 
9,026,220

 
8,353,631

Other commercial real estate
364,862

 
351,291

 
324,858

Commercial and industrial
2,477,911

 
2,567,501

 
2,389,946

Lease financing
840,201

 
826,270

 
751,292

Other
321,352

 
340,264

 
343,877

Total commercial loans
13,861,353

 
13,760,703

 
12,789,915

Noncommercial:
 
 
 
 
 
Residential mortgage
2,945,361

 
2,889,124

 
2,718,208

Revolving mortgage
2,604,156

 
2,601,344

 
2,521,902

Construction and land development
218,103

 
231,400

 
213,232

Consumer
1,428,660

 
1,446,138

 
1,228,545

Total noncommercial loans
7,196,280

 
7,168,006

 
6,681,887

Total non-PCI loans and leases
21,057,633

 
20,928,709

 
19,471,802

PCI loans:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
26,542

 
20,766

 
32,799

Commercial mortgage
455,551

 
453,013

 
526,776

Other commercial real estate
18,723

 
12,645

 
18,050

Commercial and industrial
27,794

 
11,844

 
14,742

Other
1,244

 
1,702

 
1,860

Total commercial loans
529,854

 
499,970

 
594,227

Noncommercial:
 
 
 
 
 
Residential mortgage
275,904

 
268,777

 
298,662

Revolving mortgage
40,345

 
38,650

 
50,574

Consumer
2,713

 
1,772

 
2,424

Total noncommercial loans
318,962

 
309,199

 
351,660

Total PCI loans
848,816

 
809,169

 
945,887

Total loans and leases
$
21,906,449

 
$
21,737,878

 
$
20,417,689




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Allowance for Loan and Lease Losses (ALLL)

The ALLL was $220.9 million at March 31, 2017, representing increases of $2.1 million and $14.2 million since December 31, 2016 and March 31, 2016, respectively. The ALLL as a percentage of total loans and leases was 1.01 percent at March 31, 2017, unchanged from December 31, 2016 and March 31, 2016.

BancShares credit quality trends have stabilized since March 31, 2016; however, the commercial non-PCI loan portfolio experienced select credit downgrades during the current quarter. However, the noncommercial non-PCI loan portfolio sustained low charge-off and delinquency trends. At March 31, 2017, the ALLL allocated to non-PCI loans and leases was $210.0 million, or 1.00 percent of non-PCI loans and leases, compared to $205.0 million, or 0.98 percent, at December 31, 2016 and $193.0 million, or 0.99 percent, at March 31, 2016. The ALLL for non-PCI loans and leases increased from both December 31, 2016 and March 31, 2016 primarily due to select downgrades in the commercial portfolio and continued loan growth. An additional ALLL of $10.9 million relates to PCI loans at March 31, 2017, compared to $13.8 million at both December 31, 2016 and March 31, 2016. The ALLL on the PCI loan portfolio declined from both periods due to continued loan run-off and certain loan factors related to defaults and prepayments were updated during the first quarter of 2017, resulting in a net provision credit in the current period.

The ALLL allocated to originated non-PCI loans and leases was 1.09 percent of originated non-PCI loans and leases at March 31, 2017, compared to 1.09 percent and 1.14 percent at December 31, 2016 and March 31, 2016, respectively. Originated non-PCI loans were $19.24 billion, $18.82 billion and $16.98 billion at March 31, 2017, December 31, 2016 and March 31, 2016, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.

BancShares recognized $8.2 million net provision expense for loan and lease losses during the first quarter of 2017, compared to $16.0 million in the fourth quarter of 2016 and $4.8 million in the first quarter of 2016. Provision expense for non-PCI loan and leases was $11.0 million in the first quarter of 2017, compared to $13.9 million in the fourth quarter of 2016 and $6.8 million in the first quarter of 2016. The $2.8 million decrease in non-PCI provision expense from the fourth quarter of 2016 was due to lower originated loan growth and lower net charge-offs, offset by select downgrades in the commercial portfolio during the current quarter. The $4.3 million increase in non-PCI provision expense from the first quarter of 2016 was due to higher net charge-offs and select downgrades in the commercial portfolio, offset by lower originated loan growth in the current quarter.

PCI loan net provision credit was $2.8 million during the first quarter of 2017, compared to a provision expense of $2.1 million and a net provision credit of $2.0 million for the fourth quarter of 2016 and first quarter of 2016, respectively. In accordance with our ALLL methodology, certain loan factors related to defaults and prepayments were updated during the first quarter of 2017, resulting in the net provision credit in the current period.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases for the first quarter of 2017 was 0.11 percent, compared to 0.17 percent in the fourth quarter of 2016 and 0.08 percent in the first quarter of 2016. Net charge-offs for non-PCI loans and leases were $6.1 million during the first quarter of 2017, compared to $9.2 million and $3.7 million during the fourth quarter of 2016 and first quarter of 2016, respectively. On an annualized basis, non-PCI net charge-offs as a percentage of non-PCI average loans and leases during the first quarter of 2017 were 0.12 percent, compared to 0.18 percent in the fourth quarter of 2016 and 0.08 percent in the first quarter of 2016.

Management considers the ALLL adequate to absorb estimated inherent losses that relate to loans and leases outstanding at March 31, 2017, 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 ALLL. Such agencies may require adjustments to the ALLL based on information available to them at the time of their examination.


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Table 9
Allowance for Loan and Lease Losses Components by Loan Class
 
2017
 
2016
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Allowance for loan and lease losses at beginning of period
$
218,795

 
$
211,950

 
$
208,008

 
$
206,783

 
$
206,216

Non-PCI provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
2,536

 
10,802

 
835

 
291

 
943

Commercial mortgage
6

 
(20,844
)
 
(2,163
)
 
701

 
394

Other commercial real estate
304

 
958

 
150

 
(79
)
 
(104
)
Commercial and industrial
3,592

 
9,347

 
2,954

 
81

 
2,201

Lease financing
575

 
300

 
274

 
343

 
(282
)
Other
517

 
985

 
183

 
37

 
(328
)
Total commercial loans
7,530

 
1,548

 
2,233

 
1,374

 
2,824

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
1,061

 
6,654

 
531

 
1,487

 
776

Revolving mortgage
840

 
(4,541
)
 
679

 
1,470

 
1,158

Construction and land development
(83
)
 
(208
)
 
88

 
78

 
87

Consumer
1,728

 
10,439

 
3,899

 
2,299

 
1,995

Total noncommercial loans
3,546

 
12,344

 
5,197

 
5,334

 
4,016

Total non-PCI provision
11,076

 
13,892

 
7,430

 
6,708

 
6,840

PCI provision for loan losses
(2,845
)
 
2,137

 
77

 
(2,146
)
 
(1,997
)
Non-PCI Charge-offs:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
(77
)
 
(41
)
 
(77
)
 
(136
)
 
(426
)
Commercial mortgage
(37
)
 
(392
)
 
(461
)
 
(44
)
 
(90
)
Other commercial real estate
(5
)
 

 

 

 

Commercial and industrial
(3,253
)
 
(5,321
)
 
(1,198
)
 
(1,177
)
 
(1,317
)
Lease financing
(173
)
 
(310
)
 
(132
)
 

 

Other
(123
)
 
15

 

 
(88
)
 
(71
)
Total commercial loans
(3,668
)
 
(6,049
)
 
(1,868
)
 
(1,445
)
 
(1,904
)
Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
(250
)
 
(245
)
 
(328
)
 
(179
)
 
(174
)
Revolving mortgage
(825
)
 
(779
)
 
(391
)
 
(1,081
)
 
(1,036
)
Construction and land development

 

 

 

 

Consumer
(3,966
)
 
(4,241
)
 
(3,623
)
 
(3,136
)
 
(3,108
)
Total noncommercial loans
(5,041
)
 
(5,265
)
 
(4,342
)
 
(4,396
)
 
(4,318
)
Total non-PCI charge-offs
(8,709
)
 
(11,314
)
 
(6,210
)
 
(5,841
)
 
(6,222
)
Non-PCI Recoveries:
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Construction and land development
55

 
120

 
69

 
129

 
80

Commercial mortgage
364

 
147

 
378

 
500

 
256

Other commercial real estate
4

 
10

 
13

 
10

 
143

Commercial and industrial
265

 
207

 
328

 
525

 
479

Lease financing
6

 
4

 
5

 
1

 
180

Other
13

 
19

 
170

 
29

 
321

Total commercial loans
707

 
507

 
963

 
1,194

 
1,459

Noncommercial:
 
 
 
 
 
 
 
 
 
Residential mortgage
287

 
72

 
334

 
41

 
20

Revolving mortgage
552

 
414

 
256

 
214

 
32

Construction and land development

 
63

 

 

 
3

Consumer
1,080

 
1,074

 
1,092

 
1,111

 
990

Total noncommercial loans
1,919

 
1,623

 
1,682

 
1,366

 
1,045

Total non-PCI recoveries
2,626

 
2,130

 
2,645

 
2,560

 
2,504

Non-PCI loans and leases charged off, net
(6,083
)
 
(9,184
)
 
(3,565
)
 
(3,281
)
 
(3,718
)
PCI loans charged off, net

 

 

 
(56
)
 
(558
)
Allowance for loan and lease losses at end of period
$
220,943

 
$
218,795

 
$
211,950

 
$
208,008

 
$
206,783

Reserve for unfunded commitments
$
1,198

 
$
1,133

 
$
379

 
$
399

 
$
407

First Quarter 2017 to Fourth Quarter 2016
Provision expense for non-PCI commercial loans was $7.5 million in the first quarter of 2017, compared to $1.5 million for the fourth quarter of 2016. The increase in provision expense was primarily due to select credit downgrades in the commercial portfolio and the impact of updating loan loss factors for this portfolio primarily related to loss experience in accordance with our ALLL methodology in the fourth quarter of 2016.

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The provision expense for non-PCI noncommercial loans was $3.5 million in the first quarter of 2017, compared to $12.3 million for the fourth quarter of 2016. The decline in provision expense was due to lower loan growth in the current quarter compared to the prior quarter and the result of updating loan loss factors primarily related to delinquency trends for this portfolio in accordance with our ALLL methodology.
First Quarter 2017 to First Quarter 2016
Provision expense for non-PCI commercial construction and land development loans was $2.5 million in the first quarter of 2017, compared to $943 thousand for the same period of 2016. The increase in provision expense was due to higher loan growth in 2017 compared to the prior year and the result of updating loan loss factors for this portfolio during the fourth quarter of 2016 given an increase in loss experience in accordance with our ALLL methodology.
Provision expense for non-PCI commercial and industrial loans was $3.6 million for the first quarter of 2017, compared to $2.2 million for the same period of 2016. The increase in provision expense was due to select credit downgrades related to medical and dental borrowers during the current quarter, offset by lower loan growth in 2017 compared to the prior year.
Table 10
Allowance for Loan and Lease Losses Metrics and Ratios
 
2017
 
2016
 
 
First
 
Fourth
 
Third
 
Second
 
First
 
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
Average loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
$
857,501

 
$
831,858

 
$
892,115

 
$
931,820

 
$
939,839

 
Non-PCI
21,093,943

 
20,716,455

 
20,134,395

 
19,725,274

 
19,409,252

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
 
 
PCI
848,816

 
809,169

 
868,200

 
921,467

 
945,887

 
Non-PCI
21,057,633

 
20,928,709

 
20,428,780

 
19,821,104

 
19,471,802

 
Allowance for loan and lease losses allocated to loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
10,924

 
13,769

 
11,632

 
11,555

 
13,757

 
Non-PCI
210,019

 
205,026

 
200,318

 
196,453

 
193,026

 
Total
$
220,943

 
$
218,795

 
$
211,950

 
$
208,008

 
$
206,783

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

%

%

%
0.02

%
0.24

%
Non-PCI
0.12

 
0.18

 
0.07

 
0.07

 
0.08

 
Total
0.11

 
0.17

 
0.07

 
0.06

 
0.08

 
ALLL to total loans and leases:
 
 
 
 
 
 
 
 
 
 
PCI
1.29

 
1.70

 
1.34

 
1.25

 
1.45

 
Non-PCI
1.00

 
0.98

 
0.98

 
0.99

 
0.99

 
Total
1.01

 
1.01

 
1.00

 
1.00

 
1.01

 
The ALLL as a percentage of total loans and leases at March 31, 2017 was 1.01 percent, unchanged from December 31, 2016 and March 31, 2016.

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The non-GAAP reconciliation in Table 11 provides a calculation of the adjusted ALLL and the related adjusted ALLL as a percentage of total loans and leases for the periods presented. Management uses these non-GAAP financial measures to monitor performance and believes this measure provides meaningful information as the remaining unamortized discounts provide coverage for losses similar to the ALLL. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of BancShares' results or financial condition as reported under GAAP.

Table 11
Adjusted Allowance for Loan and Lease Losses (Non-GAAP)
 
2017
 
2016
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
ALLL on non-PCI loans and leases (GAAP)
$
210,019

 
$
205,026

 
$
200,318

 
$
196,453

 
$
193,026

Unamortized discount related to non-PCI loans and leases (GAAP)
28,402

 
31,525

 
36,126

 
34,991

 
37,878

Adjusted ALLL on non-PCI loans and leases (non-GAAP)
238,421

 
236,551

 
236,444

 
231,444

 
230,904

 
 
 
 
 
 
 
 
 
 
ALLL on PCI loans (GAAP)
10,924

 
13,769

 
11,632

 
11,555

 
13,757

Unamortized discount related to PCI loans (GAAP)
120,879

 
118,946

 
127,200

 
136,516

 
140,379

Adjusted ALLL on PCI loans (non-GAAP)
131,803

 
132,715

 
138,832

 
148,071

 
154,136

 
 
 
 
 
 
 
 
 
 
Total ALLL (GAAP)
220,943

 
218,795

 
211,950

 
208,008

 
206,783

Net acquisition accounting fair value discounts on loans and leases (GAAP)
149,281

 
150,471

 
163,326

 
171,507

 
178,257

Adjusted ALLL (non-GAAP)
$
370,224

 
$
369,266

 
$
375,276

 
$
379,515

 
$
385,040

 
 
 
 
 
 
 
 
 
 
Adjusted ALLL to total loans and leases (non-GAAP):
 
 
 
 
 
 
 
 
 
Non-PCI
1.13
%
 
1.13
%
 
1.16
%
 
1.17
%
 
1.19
%
PCI
15.53

 
16.40

 
15.99

 
16.07

 
16.30

Total
1.69
%
 
1.70
%
 
1.76
%
 
1.83
%
 
1.89
%
The adjusted ALLL (non-GAAP), which includes the ALLL as well as remaining net acquisition fair value adjustments for acquired loans, declined to 1.69 percent of total loans and leases at March 31, 2017, from 1.70 percent and 1.89 percent of total loans and leases at December 31, 2016 and March 31, 2016, respectively. The reduction in the adjusted ALLL resulted primarily from continued accretion of acquisition accounting fair value adjustments.
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases and OREO resulting from both PCI and non-PCI loans. At March 31, 2017, BancShares’ nonperforming assets were $144.0 million, down from $147.0 million and $162.8 million at December 31, 2016 and March 31, 2016, respectively.
At March 31, 2017, OREO totaled $56.5 million, representing declines of $4.7 million and $8.6 million since December 31, 2016 and March 31, 2016, respectively, as sales outpaced additions. Nonaccrual PCI loans at March 31, 2017 were down $2.0 million and $5.9 million from December 31, 2016 and March 31, 2016, respectively, due to resolutions of impaired loans. Nonaccrual non-PCI loans and leases at March 31, 2017 increased $3.8 million compared to December 31, 2016 primarily due to residential mortgage loans. Nonaccrual non-PCI loans and leases declined $4.4 million from March 31, 2016 as a result of problem asset resolutions primarily in the commercial loan portfolio.
Of the $144.0 million in nonperforming assets at March 31, 2017, $447 thousand related to loans and OREO covered by shared-loss agreements. Covered nonperforming assets continue to decline due to loan resolutions, the termination of certain shared-loss agreements and the expiration of FDIC shared-loss agreements.

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Table 12
Nonperforming Assets
 
2017
 
2016
 
First
 
Fourth
 
Third
 
Second
 
First
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Non-PCI
$
86,086

 
$
82,307

 
$
87,043

 
$
89,006

 
$
90,455

PCI
1,458

 
3,451

 
4,142

 
3,759

 
7,319

Other real estate
56,491

 
61,231

 
68,964

 
67,089

 
65,068

Total nonperforming assets
$
144,035

 
$
146,989

 
$
160,149

 
$
159,854

 
$
162,842

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Covered under shared-loss agreements
$
98

 
$
93

 
$
95

 
$
637

 
$
2,968

Not covered under shared-loss agreements
87,446

 
85,665

 
91,090

 
92,128

 
94,806

Other real estate:
 
 
 
 
 
 
 
 
 
Covered
349

 
472

 
591

 
484

 
9,734

Noncovered
56,142

 
60,759

 
68,373

 
66,605

 
55,334

Total nonperforming assets
$
144,035

 
$
146,989

 
$
160,149

 
$
159,854

 
$
162,842

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Covered
$
75,895

 
$
84,821

 
$
91,469

 
$
95,534

 
$
258,179

Noncovered
21,830,554

 
21,653,057

 
21,205,511

 
20,647,037

 
20,159,510

 
 
 
 
 
 
 
 
 
 
Accruing loans and leases 90 days or more past due
 
 
 
 
 
 
 
 
 
Non-PCI
2,982

 
2,718

 
1,879

 
3,017

 
4,882

PCI
75,576

 
65,523

 
67,433

 
76,807

 
70,398

 
 
 
 
 
 
 
 
 
 
Ratio of nonperforming assets to total loans, leases and other real estate owned:
 
 
 
 
 
 
 
 
 
Covered
0.59
%
 
0.66
%
 
0.75
%
 
1.17
%
 
4.74
%
Noncovered
0.66

 
0.67

 
0.75

 
0.77

 
0.74

Total
0.66
%
 
0.67
%
 
0.75
%
 
0.77
%
 
0.80
%
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 at the time of restructure and continue to perform based on the restructured terms are considered performing.
Total PCI and non-PCI loans and leases classified as TDRs at March 31, 2017 were $149.0 million, compared to $150.9 million at December 31, 2016 and $141.4 million at March 31, 2016. Accruing TDRs were $122.8 million, a decline of $4.8 million from December 31, 2016 and an increase $9.0 million from March 31, 2016. At March 31, 2017, nonaccruing TDRs were $26.3 million, an increase of $2.9 million and a decrease of $1.4 million from December 31, 2016 and March 31, 2016, respectively. The increase in nonaccruing TDRs from December 31, 2016 was primarily related to an increase in residential mortgage TDRs.

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Table 13
Troubled Debt Restructurings
(Dollars in thousands)
March 31, 2017
 
December 31, 2016
 
March 31, 2016
Accruing TDRs:
 
 
 
 
 
PCI
$
20,296

 
$
26,068

 
$
29,410

Non-PCI
102,460

 
101,462

 
84,319

Total accruing TDRs
122,756

 
127,530

 
113,729

Nonaccruing TDRs:
 
 
 
 
 
PCI
298

 
301

 
923

Non-PCI
25,989

 
23,085

 
26,745

Total nonaccruing TDRs
26,287

 
23,386

 
27,668

All TDRs:
 
 
 
 
 
PCI
20,594

 
26,369

 
30,333

Non-PCI
128,449

 
124,547

 
111,064

Total TDRs
$
149,043

 
$
150,916

 
$
141,397

INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities were $19.73 billion and $19.47 billion at March 31, 2017 and December 31, 2016, respectively. The $261.0 million increase from December 31, 2016 was primarily due to an $86.8 million increase in customer repurchase agreements and an increase in interest-bearing deposits of $174.4 million. Interest-bearing liabilities increased $556.1 million from March 31, 2016 primarily due to $75.0 million in additional FHLB borrowings during 2016 to mitigate interest rate risk from long-term fixed-rate loans and organic growth in interest-bearing deposits.
Deposits
At March 31, 2017, total deposits were $29.00 billion, an increase of $841.4 million, or 3.0 percent, compared to December 31, 2016 and an increase of $1.64 billion, or by 6.0 percent, when compared to March 31, 2016. The increase from both periods was the result of organic growth in demand deposit, checking with interest and savings accounts and the contribution from the HCB acquisition, offset by runoff in time deposits and money market accounts. The increase from March 31, 2016 also resulted from the contributions from the FCSB and Cordia acquisitions.
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.
Short-Term Borrowings
At March 31, 2017, short-term borrowings were $795.6 million compared to $603.5 million and $689.2 million at December 31, 2016 and March 31, 2016, respectively. The $192.1 million increase from December 31, 2016 was due to higher activity in customer repurchase agreements, FHLB borrowings of $75.0 million with maturities less than one year being reclassified from long-term obligations and a repurchase agreement of $30.0 million with a maturity less than one year being reclassified from long-term obligations. The $106.4 million increase from March 31, 2016 was due to FHLB borrowings of $85.0 million with maturities less than one year being reclassified from long-term obligations and a repurchase agreement of $30.0 million with a maturity less than one year being reclassified from long-term obligations, offset by lower activity in customer repurchase agreements.
Long-Term Obligations
Long-term obligations were $727.5 million at March 31, 2017, down $105.4 million from December 31, 2016 due to FHLB borrowings of $75.0 million with maturities less than one year being reclassified to short-term borrowings and a repurchase agreement of $30.0 million with a maturity less than one year being reclassified to short-term borrowings. Long-term obligations declined $51.6 million from March 31, 2016 primarily due to FHLB borrowings of $85.0 million with maturities less than one year being reclassified to short-term borrowings and a repurchase agreement of $30.0 million with a maturity less than one year being reclassified to short-term borrowings, offset by $75.0 million in additional FHLB borrowings during 2016 to mitigate interest rate risk from long-term fixed-rate loans.

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 included junior subordinated debentures representing obligations to the Trusts, which may be

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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:
 
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
 
(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
FCB/NC Capital Trust III
 
$
90,206

 
$
87,500

 
$
90,206

 
$
87,500

 
$
96,392

 
$
93,500

 
June 30, 2036
FCB/SC Capital Trust II
 
24,743

 
24,000

 
24,743

 
24,000

 
25,774

 
25,000

 
June 15, 2034
SCB Capital Trust I
 
10,310

 
10,000

 
10,310

 
10,000

 
10,310

 
10,000

 
April 7, 2034
 
 
$
125,259

 
$
121,500

 
$
125,259

 
$
121,500

 
$
132,476

 
$
128,500

 
 

Shareholders' Equity and Capital Adequacy

BancShares and FCB are required to meet minimum capital 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.

In accordance with accounting principles generally accepted in the United States of America (GAAP), unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive income (AOCI) within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios. In the aggregate, these items represented a net reduction in shareholders' equity of $110.9 million at March 31, 2017, compared to a net reduction of $135.2 million at December 31, 2016 and $23.8 million at March 31, 2016. The $24.3 million increase in AOCI from December 31, 2016 was primarily driven by a decrease in unrealized losses on investment securities as a result of lower market interest rates. The $87.1 million decrease in AOCI from March 31, 2016 was primarily driven by the change in the funded status of our defined benefit pension plans and the unrealized loss position on our investment securities available for sale portfolio at March 31, 2017 as a result of higher market interest rates.

Table 14
Analysis of Capital Adequacy
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Regulatory
minimum
 
Well-capitalized requirement
BancShares
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.57
%
 
12.42
%
 
12.58
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.57

 
12.42

 
12.58

 
4.50

 
6.50

Total risk-based capital
13.99

 
13.85

 
14.09

 
8.00

 
10.00

Tier 1 leverage ratio
9.15

 
9.05

 
9.00

 
4.00

 
5.00

 
 
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.41
%
 
12.25
%
 
12.35
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.41

 
12.25

 
12.35

 
4.50

 
6.50

Total risk-based capital
13.37

 
13.21

 
13.32

 
8.00

 
10.00

Tier 1 leverage ratio
9.04

 
8.94

 
8.84

 
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 1.25 percent effective January 1, 2017. BancShares and FCB had capital conservation buffers above minimum risk-based capital requirements of 5.99 percent and 5.37 percent, respectively, at March 31, 2017. The buffers exceeded the 1.25 percent requirement and, therefore, resulted in no limit on distributions.
As of March 31, 2017, 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 March 31, 2017 and

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December 31, 2016 under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.
RISK MANAGEMENT
Risk is inherent in any business and, as is the case with other management functions, senior management has primary responsibility for day-to-day management of the risks we face.  The Board of Directors strive to ensure that risk management is part of the business culture and that policies and procedures for assessing, monitoring, and limiting risk are part of the daily decision-making process. The Board of Director’s role in risk oversight is an integral part of our overall enterprise risk management 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 and escalation of risk related issues. Among the duties and responsibilities as may be assigned from time to time by the Board of Directors, the Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, liquidity, operational, compliance, legal, strategic and reputational risks; review, approve and monitor adherence to risk appetite and supporting risk tolerance levels; evaluate, monitor and oversee the adequacy and effectiveness of the risk management framework; and review reports of examination by and communications from regulatory agencies, and the results of internal and third party testing, analyses and reviews, related to risks, risk management, and any other matters within the scope of the Board Risk Committee’s oversight responsibilities, and monitor and review management’s response to any noted issues. In addition, the Board Risk Committee may coordinate with the Audit Committee for the review of financial statements and related risks and other areas of joint responsibility.
The Dodd-Frank Act mandated that stress tests be developed and performed to ensure that financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. Bank holding companies with total consolidated assets between $10 billion and $50 billion, including BancShares, will undergo annual company-run stress tests. As directed by the Federal Reserve, summaries of BancShares’ results in the severely adverse stress tests are available to the public. In combination with other risk management and monitoring practices, the results of stress testing activities will be considered as part of our risk management program.

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, other than acquired loans, 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 an adequate ALLL that accounts for losses 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 IRR by forecasting net interest income over 24 months 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 current low level of interest rates and competitive pressures that constrain our ability to further reduce deposit interest rates, it is unlikely that the rates on most interest-bearing liabilities can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration of 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.


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Table 15
Net Interest Income Sensitivity Simulation Analysis
This table provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of March 31, 2017 and December 31, 2016.
 
Estimated increase (decrease) in net interest income
Change in interest rate (basis point)
March 31, 2017
 
December 31, 2016
+100
4.34
%
 
4.12
%
+200
5.40

 
5.06

+300
2.60

 
2.08

The change in net interest income sensitivity metrics at March 31, 2017 compared to December 31, 2016 benefited from an increase in floating rate overnight investments resulting from favorable deposit growth.
Table 16
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 presents the EVE profile as of March 31, 2017 and December 31, 2016.
 
Estimated increase (decrease) in EVE
Change in interest rate (basis point)
March 31, 2017
 
December 31, 2016
+100
3.93
 %
 
3.10
 %
+200
2.13

 
0.85

+300
(3.92
)
 
(5.44
)

The improvement in the economic value of equity metrics at March 31, 2017 compared to December 31, 2016 was primarily due to the growth in demand deposits and checking accounts which offset a smaller detrimental impact from the growth in fixed rate securities.

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. Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term 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.

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 $4.62 billion at March 31, 2017 compared to $3.88 billion at December 31, 2016. Another source of available liquidity is advances from the FHLB of Atlanta. Outstanding FHLB advances were $670.2 million as of March 31, 2017, and we had sufficient collateral pledged to secure $4.91 billion of additional borrowings. Also, at March 31, 2017, $2.66 billion

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in noncovered loans with a lendable collateral value of $1.98 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines and other borrowing facilities which had $715.0 million of available capacity at March 31, 2017.

We entered into forward-starting advances with the FHLB of Atlanta in June 2016 to receive $200.0 million of fixed rate long-term funding. There are two advances of $100.0 million each scheduled to fund in June 2018 with maturity dates of June 2026 and 2028.

CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our Critical Accounting Policies as described in our 2016 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

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

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

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the 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.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of March 31, 2017, BancShares’ market risk profile has not changed significantly from December 31, 2016, as discussed in the Form 10-K. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4.
Controls and Procedures
BancShares' management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares' disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.
During the first quarter of 2017, BancShares implemented an enterprise resource planning system (ERP), which will serve as our new general ledger, accounts payable and asset management system going forward. The implementation of this ERP system provides a more technologically advanced information technology architecture that can be utilized throughout the organization and leveraged to interface with other systems. The implementation of the ERP system has enhanced reporting capabilities, eliminated certain manual processes and interfaces, and automated and streamlined certain tasks.

Other than as mentioned above, there were no changes in BancShares' internal control over financial reporting during the first quarter of 2017 that had materially affected, or is reasonably likely to materially affect, BancShares' internal control over financial reporting.

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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 other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

Additional information relating to legal proceedings is set forth in Note 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 in our Form 10-K for the year ended December 31, 2016.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.

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


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
May 4, 2017
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ CRAIG L. NIX
 
 
 
 
Craig L. Nix
 
 
 
 
Chief Financial Officer

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