Document
Table of Contents

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 September 30, 2016
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of ‘accelerated filer’ and ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Class A Common Stock—$1 Par Value—11,005,220 shares
Class B Common Stock—$1 Par Value—1,005,185 shares
(Number of shares outstanding, by class, as of October 28, 2016)

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)
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Cash and due from banks
$
495,705

 
$
534,086

Overnight investments
2,997,086

 
2,063,132

Investment securities available for sale
6,384,815

 
6,861,293

Investment securities held to maturity
125

 
255

Loans held for sale
95,910

 
59,766

Loans and leases
21,296,980

 
20,239,990

Allowance for loan and lease losses
(211,950
)
 
(206,216
)
Net loans and leases
21,085,030

 
20,033,774

Premises and equipment
1,134,562

 
1,135,829

Other real estate owned
68,964

 
65,559

Income earned not collected
74,933

 
70,036

FDIC loss share receivable
3,108

 
4,054

Goodwill
150,601

 
139,773

Other intangible assets
79,550

 
90,986

Other assets
401,521

 
417,391

Total assets
$
32,971,910

 
$
31,475,934

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
10,245,674

 
$
9,274,470

Interest-bearing
17,679,579

 
17,656,285

Total deposits
27,925,253

 
26,930,755

Short-term borrowings
730,214

 
594,733

Long-term obligations
840,266

 
704,155

FDIC loss share payable
95,779

 
126,453

Other liabilities
296,650

 
247,729

Total liabilities
29,888,162

 
28,603,825

Shareholders’ equity
 
 
 
Common stock:
 
 
 
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at September 30, 2016 and December 31, 2015)
11,005

 
11,005

Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2016 and December 31, 2015)
1,005

 
1,005

Surplus
658,918

 
658,918

Retained earnings
2,427,604

 
2,265,621

Accumulated other comprehensive loss
(14,784
)
 
(64,440
)
Total shareholders’ equity
3,083,748

 
2,872,109

Total liabilities and shareholders’ equity
$
32,971,910

 
$
31,475,934


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands, except per share data, unaudited)
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans and leases
$
219,314

 
$
224,631

 
$
651,160

 
$
658,175

Investment securities and dividend income
23,395

 
24,020

 
71,139

 
65,136

Overnight investments
3,785

 
1,174

 
10,676

 
4,037

Total interest income
246,494

 
249,825

 
732,975

 
727,348

Interest expense
 
 
 
 
 
 
 
Deposits
4,457

 
5,216

 
13,717

 
16,379

Short-term borrowings
540

 
590

 
1,428

 
4,182

Long-term obligations
5,648

 
4,648

 
17,072

 
12,601

Total interest expense
10,645

 
10,454

 
32,217

 
33,162

Net interest income
235,849

 
239,371

 
700,758

 
694,186

Provision for loan and lease losses
7,507

 
107

 
16,912

 
13,618

Net interest income after provision for loan and lease losses
228,342

 
239,264

 
683,846

 
680,568

Noninterest income
 
 
 
 
 
 
 
Gain on acquisitions
837

 
—

 
5,831

 
42,930

Cardholder services
21,537

 
19,588

 
61,949

 
57,203

Merchant services
25,179

 
22,005

 
71,392

 
62,955

Service charges on deposit accounts
23,154

 
23,153

 
66,888

 
67,572

Wealth management services
19,915

 
22,223

 
60,840

 
64,658

Securities gains
352

 
5,564

 
17,509

 
10,837

Other service charges and fees
7,567

 
6,208

 
21,693

 
17,443

Mortgage income
6,692

 
4,852

 
12,540

 
14,972

Insurance commissions
2,755

 
2,945

 
8,198

 
8,698

ATM income
1,908

 
1,800

 
5,518

 
5,289

Adjustments to FDIC loss share receivable
(2,773
)
 
(4,130
)
 
(7,673
)
 
(9,730
)
Net impact from FDIC loss share termination
—

 
—

 
16,559

 
—

Other
10,718

 
5,542

 
22,129

 
25,126

Total noninterest income
117,841

 
109,750

 
363,373

 
367,953

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
107,762

 
108,992

 
315,720

 
324,358

Employee benefits
26,750

 
27,121

 
79,761

 
86,341

Occupancy expense
24,857

 
22,260

 
74,824

 
73,412

Equipment expense
23,736

 
22,447

 
68,796

 
69,284

FDIC insurance expense
5,796

 
4,933

 
15,173

 
13,755

Foreclosure-related expenses
2,016

 
1,087

 
2,631

 
4,663

Merger-related expenses
3,764

 
3,679

 
5,187

 
11,249

Other
72,552

 
69,653

 
215,115

 
199,967

Total noninterest expense
267,233

 
260,172

 
777,207

 
783,029

Income before income taxes
78,950

 
88,842

 
270,012

 
265,492

Income taxes
27,546

 
32,884

 
97,220

 
97,854

Net income
$
51,404

 
$
55,958

 
$
172,792

 
$
167,638

Average shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

Net income per share
$
4.28

 
$
4.66

 
$
14.39

 
$
13.96


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 September 30
 
Nine months ended September 30
(Dollars in thousands, unaudited)
2016
 
2015
 
2016
 
2015
Net income
$
51,404

 
$
55,958

 
$
172,792

 
$
167,638

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (losses) gains on securities:
 
 
 
 
 
 
 
Change in unrealized securities (losses) gains arising during period
(1,577
)
 
28,231

 
90,631

 
29,420

Tax effect
855

 
(10,737
)
 
(34,250
)
 
(11,198
)
Reclassification adjustment for net gains realized and included in income before income taxes
(352
)
 
(5,564
)
 
(17,509
)
 
(10,837
)
Tax effect
191

 
2,094

 
6,583

 
4,145

Total change in unrealized (losses) gains on securities, net of tax
(883
)
 
14,024

 
45,455

 
11,530

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

 
721

 
1,429

 
2,006

Tax effect
—

 
(300
)
 
(537
)
 
(796
)
Total change in unrecognized loss on cash flow hedges, net of tax
—

 
421

 
892

 
1,210

Change in pension obligation:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service cost
1,768

 
2,916

 
5,302

 
8,689

Tax effect
(642
)
 
(1,078
)
 
(1,993
)
 
(3,324
)
Total change in pension obligation, net of tax
1,126

 
1,838

 
3,309

 
5,365

Other comprehensive income
243

 
16,283

 
49,656

 
18,105

Total comprehensive income
$
51,647

 
$
72,241

 
$
222,448

 
$
185,743



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, 2014
$
11,005

 
$
1,005

 
$
658,918

 
$
2,069,647

 
$
(52,981
)
 
$
2,687,594

Net income
—

 
—

 
—

 
167,638

 
—

 
167,638

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
18,105

 
18,105

Cash dividends ($0.90 per share)
—

 
—

 
—

 
(10,809
)
 
—

 
(10,809
)
Balance at September 30, 2015
$
11,005

 
$
1,005

 
$
658,918

 
$
2,226,476

 
$
(34,876
)
 
$
2,862,528

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
11,005

 
$
1,005

 
$
658,918

 
$
2,265,621

 
$
(64,440
)
 
$
2,872,109

Net income
—

 
—

 
—

 
172,792

 
—

 
172,792

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
49,656

 
49,656

Cash dividends ($0.90 per share)
—

 
—

 
—

 
(10,809
)
 
—

 
(10,809
)
Balance at September 30, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,427,604

 
$
(14,784
)
 
$
3,083,748


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
Nine months ended September 30
(Dollars in thousands, unaudited)
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
172,792

 
$
167,638

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
16,912

 
13,618

Deferred tax benefit
(13,328
)
 
(3,941
)
Net change in current taxes
(16,906
)
 
(26,195
)
Depreciation
66,400

 
65,559

Net change in accrued interest payable
(1,662
)
 
(2,244
)
Net increase in income earned not collected
(2,899
)
 
(10,114
)
Gain on acquisitions
(5,831
)
 
(42,930
)
Securities gains
(17,509
)
 
(10,837
)
Loss on termination of FDIC loss share agreements
3,377

 
—

Origination of loans held for sale
(589,313
)
 
(542,836
)
Proceeds from sale of loans held for sale
564,026

 
540,737

Gain on sale of loans held for sale
(10,857
)
 
(6,079
)
Gain on sale of portfolio loans
(3,758
)
 
—

Net write-downs/losses on other real estate
5,251

 
4,355

Net accretion of premiums and discounts
(32,924
)
 
(70,150
)
Amortization of intangible assets
16,633

 
11,765

Reduction in FDIC receivable for loss share agreements
11,926

 
35,395

Net change in FDIC payable for loss share agreements
(12,474
)
 
7,503

Net change in other assets
17,120

 
29,225

Net change in other liabilities
56,275

 
37,077

Net cash provided by operating activities
223,251

 
197,546

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(782,771
)
 
(928,132
)
Purchases of investment securities available for sale
(2,382,141
)
 
(1,887,604
)
Proceeds from maturities/calls of investment securities held to maturity
130

 
217

Proceeds from maturities/calls of investment securities available for sale
1,213,333

 
1,139,053

Proceeds from sales of investment securities available for sale
1,802,155

 
1,036,254

Net increase in overnight investments
(891,059
)
 
(643,213
)
Proceeds from sales of portfolio loans
77,665

 
45,862

Cash paid to the FDIC for loss share agreements
(16,701
)
 
(24,805
)
Net cash paid to the FDIC for termination of loss share agreements
(20,115
)
 
—

Proceeds from sales of other real estate
24,406

 
63,446

Additions to premises and equipment
(60,982
)
 
(55,575
)
Business acquisitions, net of cash acquired
(727
)
 
123,137

Net cash used by investing activities
(1,036,807
)
 
(1,131,360
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in time deposits
(235,164
)
 
(405,160
)
Net increase in demand and other interest-bearing deposits
781,382

 
1,179,606

Net change in short-term borrowings
93,655

 
(232,928
)
Repayment of long-term obligations
(3,889
)
 
(4,633
)
Origination of long-term obligations
150,000

 
350,000

Cash dividends paid
(10,809
)
 
(10,809
)
Net cash provided by financing activities
775,175

 
876,076

Change in cash and due from banks
(38,381
)
 
(57,738
)
Cash and due from banks at beginning of period
534,086

 
604,182

Cash and due from banks at end of period
$
495,705

 
$
546,444

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
31,517

 
$
44,065

Dividends declared but not paid
—

 
3,603

Unsettled sales of investment securities
—

 
236,617


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, 2015.

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
•
Receivable from and payable to the Federal Deposit Insurance Corporation (FDIC) for loss share agreements
•
Income tax assets, liabilities and expense
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
This ASU eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination and requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts must be calculated as if the accounting had been completed at the acquisition date.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. We adopted the guidance effective in the first quarter of 2016.
During the third quarter of 2016, adjustments were made to the acquisition fair value for the FDIC-assisted acquisition of First CornerStone Bank (FCSB) of King of Prussia, Pennsylvania. The adjustments were primarily based upon updated collateral

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valuations, resulting in an increase of $837 thousand to the gain on acquisition reflected in the three months ended September 30, 2016. These adjustments brought the total gain on the transaction to $3.0 million and are included in noninterest income in the Consolidated Statements of Income.
During the second quarter of 2016, adjustments were made to the acquisition fair values for the FDIC-assisted acquisition of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin, primarily based upon updated collateral valuations, resulting in an increase of $1.2 million to the gain on acquisition reflected in the three months ended June 30, 2016. These adjustments brought the total gain on the transaction to $2.9 million which is included in noninterest income in the Consolidated Statements of Income.
FASB ASU 2015-03, Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.
This ASU is effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years, and is to be applied retrospectively. We adopted the guidance effective in the first quarter of 2016. The initial adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
This ASU improves targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard places more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 for public business entities, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2016. The initial adoption did not have an impact on our consolidated financial position or consolidated results of operations.
Recently Issued Accounting Pronouncements
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.
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 are currently evaluating the impact of the new standard and we will adopt the guidance during the first quarter of 2018.
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. We are currently evaluating the impact of the new standard and we will adopt the guidance by the first quarter of 2020.

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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. Early adoption is permitted. We will adopt the guidance during the first quarter of 2017. BancShares does not anticipate any effect on our consolidated financial position or consolidated results of operations as a result of adoption.
FASB ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
This ASU clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. When a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.
The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We will adopt the guidance during the first quarter of 2017. BancShares does not anticipate any effect on our consolidated financial position or consolidated results of operations as a result of adoption.
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. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2019.
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.

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Table of Contents

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 are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2018.
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.
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. We are currently evaluating the impact of the new standard and we will adopt during the first quarter of 2018 using one of two retrospective application methods.
NOTE B - BUSINESS COMBINATIONS
Cordia Bancorp Inc.
On September 1, 2016, First Citizens Bank completed the merger of Midlothian, Virginia-based Cordia Bancorp, Inc. (Cordia) and its subsidiary, Bank of Virginia (BVA) into First Citizens Bank. Under the terms of the merger agreement, cash consideration of $5.15 was paid to Cordia’s shareholders for each of their shares of Cordia’s common stock, with total consideration paid of $37.1 million. The merger allowed FCB to strengthen its presence in the greater Richmond, Virginia area as Cordia operated six BVA branches in Richmond, Midlothian, Chesterfield, Colonial Heights and Chester, Virginia.

The Cordia 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 assets acquired was $349.3 million, including $241.4 million in loans and $2.2 million of identifiable intangible assets. Liabilities assumed were $323.1 million of which $292.2 million were deposits. As a result of the transaction, FCB recorded $10.8 million of goodwill. The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired. This premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a tax-free exchange.
















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Table of Contents

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.
(Dollars in thousands)
As recorded by FCB
Purchase price
 
$
37,053

Assets
 
 
Cash and cash equivalents
$
8,383

 
Overnight investments
3,081

 
Investment securities
76,633

 
Loans
241,392

 
Premises and equipment
4,151

 
Other real estate owned
1,170

 
Income earned not collected
1,990

 
Intangible assets
2,210

 
Other assets
10,318

 
Total assets acquired
349,328

 
Liabilities
 
 
Deposits
292,192

 
Short-term borrowings
30,164

 
Other liabilities
747

 
Total liabilities assumed
$
323,103

 
Fair value of net assets acquired
 
26,225

Goodwill recorded for Cordia
 
$
10,828


Merger-related expenses of $3.6 million and $3.8 million from the Cordia transaction were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. Loan-related interest income generated from Cordia was approximately $1.0 million since the acquisition date.

Due to the immaterial amount of loans resulting from the Cordia transaction that had evidence of credit quality deterioration, all loans are accounted for as non-purchased credit-impaired (non-PCI) loans under ASC 310-20.
First CornerStone Bank
On May 6, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of FCSB of King of Prussia, Pennsylvania. The acquisition provided FCB the opportunity to grow capital and enhance earnings.

The FCSB 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 $87.4 million, including $43.8 million in loans and $390 thousand of identifiable intangible assets. Liabilities assumed were $96.9 million of which the majority were deposits. During the third quarter of 2016, adjustments were made to the acquisition fair values primarily based upon updated collateral valuations resulting in an increase of $837 thousand to the gain on acquisition reflected in the three months ended September 30, 2016. These adjustments brought the total gain on the transaction to $3.0 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
$
748

Overnight investments
37,540

Investment securities
4,564

Loans
43,776

Other real estate owned
375

Income earned not collected
8

Intangible assets
390

Other assets
13

Total assets acquired
87,414

Liabilities
 
Deposits
96,882

Other liabilities
23

Total liabilities assumed
96,905

Fair value of net liabilities assumed
(9,491
)
Cash received from FDIC
12,450

Gain on acquisition of FCSB
$
2,959

Merger-related expenses of $130 thousand and $923 thousand from the FCSB transaction were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. Loan-related interest income generated from FCSB was approximately $573 thousand for the three months ended September 30, 2016 and $897 thousand since the acquisition date.
All loans resulting from the FCSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality, and are therefore accounted for as purchased credit-impaired (PCI) loans under ASC 310-30.
North Milwaukee State Bank
On March 11, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of NMSB with two branches in Milwaukee, Wisconsin. The acquisition provided FCB with the opportunity to grow capital and enhance earnings.

The NMSB 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 $53.6 million, including $36.9 million in loans and $240 thousand of identifiable intangible assets. Liabilities assumed were $60.9 million of which $59.2 million were deposits. During the second quarter of 2016, adjustments were made to the acquisition fair values primarily based upon updated collateral valuations resulting in an increase of $1.2 million to the gain on acquisition reflected in the three months ended June 30, 2016. These adjustments brought the total gain on the transaction to $2.9 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
$
4,545

Overnight investments
2,274

Investment securities
9,425

Loans
36,914

Intangible assets
240

Other assets
216

Total assets acquired
53,614

Liabilities
 
Deposits
59,206

Short-term borrowings
1,662

Other liabilities
74

Total liabilities assumed
60,942

Fair value of net liabilities assumed
(7,328
)
Cash received from FDIC
10,200

Gain on acquisition of NMSB
$
2,872

Merger-related expenses of $35 thousand and $511 thousand from the NMSB transaction were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. Loan-related interest income generated from NMSB was approximately $699 thousand for the third quarter of 2016 and $1.5 million since the acquisition date.
All loans resulting from the NMSB 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 loans under ASC 310-30.


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Table of Contents

NOTE C - INVESTMENTS
The amortized cost and fair value of investment securities classified as available for sale and held to maturity at September 30, 2016 and December 31, 2015, are as follows:
 
September 30, 2016
(Dollars in thousands)
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,547,501

 
$
2,030

 
$
1

 
$
1,549,530

Government agency
169,609

 
250

 
—

 
169,859

Mortgage-backed securities
4,487,083

 
44,570

 
3,283

 
4,528,370

Equity securities
88,526

 
4,653

 
168

 
93,011

Corporate bonds
41,363

 
582

 
—

 
41,945

Other
2,115

 
—

 
15

 
2,100

Total investment securities available for sale
$
6,336,197

 
$
52,085

 
$
3,467

 
$
6,384,815

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
U.S. Treasury
$
1,675,996

 
$
4

 
$
1,118

 
$
1,674,882

Government agency
498,804

 
230

 
374

 
498,660

Mortgage-backed securities
4,692,447

 
5,120

 
29,369

 
4,668,198

Equity securities
7,935

 
968

 
10

 
8,893

Corporate bonds
8,500

 
—

 
—

 
8,500

Other
2,115

 
45

 
—

 
2,160

Total investment securities available for sale
$
6,885,797

 
$
6,367

 
$
30,871

 
$
6,861,293

 
 
 
 
 
 
 
 
 
September 30, 2016
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
125

 
$
8

 
$
—

 
$
133

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Mortgage-backed securities
$
255

 
$
10

 
$
—

 
$
265


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. 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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Table of Contents

 
September 30, 2016
 
December 31, 2015
(Dollars in thousands)
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
$
1,367,521

 
$
1,369,117

 
$
1,255,714

 
$
1,255,094

One through five years
349,589

 
350,272

 
919,086

 
918,448

Five through 10 years
41,363

 
41,945

 
8,500

 
8,500

Over 10 years
2,115

 
2,100

 
2,115

 
2,160

Mortgage-backed securities
4,487,083

 
4,528,370

 
4,692,447

 
4,668,198

Equity securities
88,526

 
93,011

 
7,935

 
8,893

Total investment securities available for sale
$
6,336,197

 
$
6,384,815

 
$
6,885,797

 
$
6,861,293

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
125

 
$
133

 
$
255

 
$
265

For each period presented, securities gains (losses) included the following:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Gross gains on sales of investment securities available for sale
$
452

 
$
5,564

 
$
17,940

 
$
10,850

Gross losses on sales of investment securities available for sale
(100
)
 
—

 
(431
)
 
(13
)
Total securities gains
$
352

 
$
5,564

 
$
17,509

 
$
10,837


The following table provides information regarding securities with unrealized losses as of September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
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
$
9,995

 
$
1

 
$
—

 
$
—

 
$
9,995

 
$
1

Mortgage-backed securities
356,758

 
1,111

 
289,161

 
2,172

 
645,919

 
3,283

Equity securities
23,131

 
168

 
—

 
—

 
23,131

 
168

Other
2,100

 
15

 
—

 
—

 
2,100

 
15

Total
$
391,984

 
$
1,295

 
$
289,161

 
$
2,172

 
$
681,145

 
$
3,467

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$
1,539,637

 
$
1,118

 
$
—

 
$
—

 
$
1,539,637

 
$
1,118

Government agency
229,436

 
374

 
—

 
—

 
229,436

 
374

Mortgage-backed securities
3,570,470

 
23,275

 
280,126

 
6,094

 
3,850,596

 
29,369

Equity securities
728

 
10

 
—

 
—

 
728

 
10

Total
$
5,340,271

 
$
24,777

 
$
280,126

 
$
6,094

 
$
5,620,397

 
$
30,871

Investment securities with an aggregate fair value of $289.2 million and $280.1 million had continuous unrealized losses for more than 12 months with a corresponding aggregate unrealized loss of $2.2 million and $6.1 million as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, all 40 of these investments are government sponsored enterprise-issued mortgage-backed securities. None of the unrealized losses identified as of September 30, 2016 or December 31, 2015 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.

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Table of Contents

Investment securities having an aggregate carrying value of $4.67 billion at September 30, 2016 and $4.73 billion at December 31, 2015 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
NOTE D - LOANS AND LEASES
BancShares' accounting methods for loans and leases differ depending on whether they are 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 a discount due, at least in part, to credit quality 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 PCI loans. PCI loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the nonrevolving 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, 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.

Noncommercial – Noncommercial 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 September 30, 2016 and December 31, 2015:
(Dollars in thousands)
September 30, 2016
 
December 31, 2015
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
642,158

 
$
620,352

Commercial mortgage
8,779,132

 
8,274,548

Other commercial real estate
346,030

 
321,021

Commercial and industrial
2,507,167

 
2,368,958

Lease financing
803,601

 
730,778

Other
326,348

 
314,832

Total commercial loans
13,404,436

 
12,630,489

Noncommercial:
 
 
 
Residential mortgage
2,813,914

 
2,695,985

Revolving mortgage
2,573,086

 
2,523,106

Construction and land development
234,383

 
220,073

Consumer
1,402,961

 
1,219,821

Total noncommercial loans
7,024,344

 
6,658,985

Total non-PCI loans and leases
20,428,780

 
19,289,474

PCI loans:
 
 
 
Commercial:
 
 
 
Construction and land development
23,138

 
33,880

Commercial mortgage
491,180

 
525,468

Other commercial real estate
14,783

 
17,076

Commercial and industrial
11,437

 
15,182

Other
3,167

 
2,008

Total commercial loans
543,705

 
593,614

Noncommercial:
 
 
 
Residential mortgage
278,872

 
302,158

Revolving mortgage
43,509

 
52,471

Construction and land development
83

 
—

Consumer
2,031

 
2,273

Total noncommercial loans
324,495

 
356,902

Total PCI loans
868,200

 
950,516

Total loans and leases
$
21,296,980

 
$
20,239,990

At September 30, 2016, $91.5 million of total loans and leases were covered under loss share agreements, compared to $272.6 million at December 31, 2015. The decline was primarily due to the expiration and termination of certain loss share agreements during 2016.
At September 30, 2016, $8.37 billion in noncovered loans with a lendable collateral value of $5.96 billion were used to secure $660.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $5.29 billion. At December 31, 2015, $8.58 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $510.3 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $5.57 billion.

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $8.8 million and $16.6 million at September 30, 2016 and December 31, 2015, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Cordia transaction was $4.7 million at September 30, 2016. The unamortized discount related to purchased non-PCI loans and leases from the First Citizens Bancorporation, Inc. merger was $31.4 million and $41.1 million at September 30, 2016 and December 31, 2015, respectively. During the three months ended September 30, 2016 and September 30, 2015, accretion income on non-PCI loans was $3.6 million and $4.5 million, respectively. During the nine months ended September 30, 2016 and September 30, 2015, accretion income on non-PCI loans was $9.7 million and $15.6 million, respectively.
During the third quarter of 2016, certain residential mortgage loans totaling $64.3 million were sold, resulting in a gain of $3.8 million.


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Table of Contents

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 September 30, 2016 and December 31, 2015 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 and other commercial real estate loans.


19
Table of Contents

Non-PCI loans and leases outstanding at September 30, 2016 and December 31, 2015 by credit quality indicator are provided below:
 
September 30, 2016
(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
$
639,530

 
$
8,558,376

 
$
341,038

 
$
2,347,031

 
$
795,879

 
$
322,292

 
$
13,004,146

Special mention
842

 
84,948

 
1,502

 
15,675

 
2,985

 
1,034

 
106,986

Substandard
1,786

 
133,316

 
2,347

 
20,585

 
4,737

 
2,793

 
165,564

Doubtful
—

 
377

 
—

 
15

 
—

 
229

 
621

Ungraded
—

 
2,115

 
1,143

 
123,861

 
—

 
—

 
127,119

Total
$
642,158

 
$
8,779,132

 
$
346,030

 
$
2,507,167

 
$
803,601

 
$
326,348

 
$
13,404,436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$
611,314

 
$
8,024,831

 
$
318,187

 
$
2,219,606

 
$
719,338

 
$
311,401

 
$
12,204,677

Special mention
5,191

 
100,220

 
475

 
19,361

 
4,869

 
1,905

 
132,021

Substandard
3,847

 
146,071

 
959

 
21,322

 
6,375

 
1,526

 
180,100

Doubtful
—

 
599

 
—

 
408

 
169

 
—

 
1,176

Ungraded
—

 
2,827

 
1,400

 
108,261

 
27

 
—

 
112,515

Total
$
620,352

 
$
8,274,548

 
$
321,021

 
$
2,368,958

 
$
730,778

 
$
314,832

 
$
12,630,489


 
September 30, 2016
 
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
$
2,773,431

 
$
2,555,674

 
$
231,164

 
$
1,393,611

 
$
6,953,880

30-59 days past due
18,992

 
8,039

 
2,405

 
4,675

 
34,111

60-89 days past due
5,822

 
2,359

 
53

 
2,476

 
10,710

90 days or greater past due
15,669

 
7,014

 
761

 
2,199

 
25,643

Total
$
2,813,914

 
$
2,573,086

 
$
234,383

 
$
1,402,961

 
$
7,024,344

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Non-PCI noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total non-PCI noncommercial
loans and leases
Current
$
2,651,209

 
$
2,502,065

 
$
214,555

 
$
1,210,832

 
$
6,578,661

30-59 days past due
23,960

 
11,706

 
3,211

 
5,545

 
44,422

60-89 days past due
7,536

 
3,704

 
669

 
1,822

 
13,731

90 days or greater past due
13,280

 
5,631

 
1,638

 
1,622

 
22,171

Total
$
2,695,985

 
$
2,523,106

 
$
220,073

 
$
1,219,821

 
$
6,658,985




20
Table of Contents

 PCI loans outstanding at September 30, 2016 and December 31, 2015 by credit quality indicator are provided below:
 
September 30, 2016
(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
$
11,740

 
$
255,822

 
$
9,891

 
$
6,679

 
$
2,040

 
$
286,172

Special mention
655

 
81,955

 
55

 
558

 
—

 
83,223

Substandard
7,738

 
142,291

 
3,427

 
3,588

 
1,127

 
158,171

Doubtful
3,005

 
11,088

 
1,169

 
311

 
—

 
15,573

Ungraded
—

 
24

 
241

 
301

 
—

 
566

Total
$
23,138

 
$
491,180

 
$
14,783

 
$
11,437

 
$
3,167

 
$
543,705

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
PCI commercial loans
 
Construction
and land
development
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Other
 
Total PCI commercial
loans
Pass
$
14,710

 
$
262,579

 
$
7,366

 
$
9,302

 
$
706

 
$
294,663

Special mention
758

 
87,870

 
60

 
937

 
—

 
89,625

Substandard
14,131

 
163,801

 
9,229

 
4,588

 
1,302

 
193,051

Doubtful
4,281

 
10,875

 
—

 
282

 
—

 
15,438

Ungraded
—

 
343

 
421

 
73

 
—

 
837

Total
$
33,880

 
$
525,468

 
$
17,076

 
$
15,182

 
$
2,008

 
$
593,614


 
September 30, 2016
 
PCI noncommercial loans
(Dollars in thousands)
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total PCI noncommercial
loans
Current
$
241,341

 
$
39,006

 
$
83

 
$
1,908

 
$
282,338

30-59 days past due
9,719

 
705

 
—

 
82

 
10,506

60-89 days past due
4,837

 
338

 
—

 
18

 
5,193

90 days or greater past due
22,975

 
3,460

 
—

 
23

 
26,458

Total
$
278,872

 
$
43,509

 
$
83

 
$
2,031

 
$
324,495

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
PCI noncommercial loans
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total PCI noncommercial
loans
Current
$
257,207

 
$
47,901

 
$
—

 
$
1,981

 
$
307,089

30-59 days past due
12,318

 
1,127

 
—

 
86

 
13,531

60-89 days past due
4,441

 
501

 
—

 
132

 
5,074

90 days or greater past due
28,192

 
2,942

 
—

 
74

 
31,208

Total
$
302,158

 
$
52,471

 
$
—

 
$
2,273

 
$
356,902





21
Table of Contents

The aging of the outstanding non-PCI loans and leases, by class, at September 30, 2016 and December 31, 2015 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.
 
September 30, 2016
(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
$
1,357

 
$
4

 
$
320

 
$
1,681

 
$
640,477

 
$
642,158

Commercial mortgage
10,877

 
3,014

 
12,854

 
26,745

 
8,752,387

 
8,779,132

Other commercial real estate
989

 
—

 
—

 
989

 
345,041

 
346,030

Commercial and industrial
4,061

 
1,402

 
907

 
6,370

 
2,500,797

 
2,507,167

Lease financing
1,152

 
588

 
341

 
2,081

 
801,520

 
803,601

Residential mortgage
18,992

 
5,822

 
15,669

 
40,483

 
2,773,431

 
2,813,914

Revolving mortgage
8,039

 
2,359

 
7,014

 
17,412

 
2,555,674

 
2,573,086

Construction and land development - noncommercial
2,405

 
53

 
761

 
3,219

 
231,164

 
234,383

Consumer
4,675

 
2,476

 
2,199

 
9,350

 
1,393,611

 
1,402,961

Other
319

 
158

 
165

 
642

 
325,706

 
326,348

Total non-PCI loans and leases
$
52,866

 
$
15,876

 
$
40,230

 
$
108,972

 
$
20,319,808

 
$
20,428,780

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$
987

 
$
283

 
$
463

 
$
1,733

 
$
618,619

 
$
620,352

Commercial mortgage
13,023

 
3,446

 
14,495

 
30,964

 
8,243,584

 
8,274,548

Other commercial real estate
884

 
—

 
142

 
1,026

 
319,995

 
321,021

Commercial and industrial
2,133

 
1,079

 
1,780

 
4,992

 
2,363,966

 
2,368,958

Lease financing
2,070

 
2

 
164

 
2,236

 
728,542

 
730,778

Residential mortgage
23,960

 
7,536

 
13,280

 
44,776

 
2,651,209

 
2,695,985

Revolving mortgage
11,706

 
3,704

 
5,631

 
21,041

 
2,502,065

 
2,523,106

Construction and land development - noncommercial
3,211

 
669

 
1,638

 
5,518

 
214,555

 
220,073

Consumer
5,545

 
1,822

 
1,622

 
8,989

 
1,210,832

 
1,219,821

Other
3

 
164

 
134

 
301

 
314,531

 
314,832

Total non-PCI loans and leases
$
63,522

 
$
18,705

 
$
39,349

 
$
121,576

 
$
19,167,898

 
$
19,289,474



22
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 September 30, 2016 and December 31, 2015 for non-PCI loans and leases, were as follows:
 
September 30, 2016
 
December 31, 2015
(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
$
472

 
$
—

 
$
425

 
$
273

Commercial mortgage
31,681

 
288

 
42,116

 
242

Other commercial real estate
93

 
—

 
239

 
—

Commercial and industrial
3,621

 
206

 
6,235

 
953

Lease financing
666

 
182

 
389

 
—

Residential mortgage
33,206

 
40

 
29,977

 
838

Revolving mortgage
13,700

 
—

 
12,704

 
—

Construction and land development - noncommercial
1,434

 
—

 
2,164

 
—

Consumer
1,924

 
1,163

 
1,472

 
1,007

Other
246

 
—

 
133

 
2

Total non-PCI loans and leases
$
87,043

 
$
1,879

 
$
95,854

 
$
3,315

Purchased credit-impaired loans (PCI) loans
The following table relates to PCI loans acquired in the NMSB and FCSB acquisitions 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
$
108,649

Cash flows expected to be collected
$
93,178

Fair value of loans at acquisition
$
80,690

The recorded fair values of PCI loans acquired in the NMSB and FCSB acquisitions as of the acquisition date were as follows:
(Dollars in thousands)
 
Commercial:
 
Construction and land development
$
684

Commercial mortgage
50,372

Other commercial real estate
2,629

Commercial and industrial
3,630

Other
1,619

Total commercial loans
58,934

Noncommercial:
 
Residential mortgage
18,934

Revolving mortgage
1,238

Construction and land development
340

Consumer
1,244

Total noncommercial loans
21,756

Total PCI loans
$
80,690

The following table provides changes in the carrying value of all purchased credit-impaired loans during the nine months ended September 30, 2016 and September 30, 2015:
(Dollars in thousands)
2016
 
2015
Balance at January 1
$
950,516

 
$
1,186,498

Fair value of acquired loans
80,690

 
154,496

Accretion
59,066

 
91,642

Payments received and other changes, net
(222,072
)
 
(388,572
)
Balance at September 30
$
868,200

 
$
1,044,064

Unpaid principal balance at September 30
$
1,475,149

 
$
1,788,136


23
Table of Contents

The carrying value of loans on the cost recovery method was $545 thousand at September 30, 2016 and $5.3 million at December 31, 2015. 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. The recorded investment of PCI loans on nonaccrual status was $4.1 million and $7.6 million at September 30, 2016 and December 31, 2015, respectively.

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

The following table documents changes to the amount of accretable yield for the first nine months of 2016 and 2015.
(Dollars in thousands)
2016
 
2015
Balance at January 1
$
343,856

 
$
418,160

Additions from acquisitions
12,488

 
53,192

Accretion
(59,066
)
 
(91,642
)
Reclassifications from nonaccretable difference
25,595

 
15,687

Changes in expected cash flows that do not affect nonaccretable difference
28,633

 
(53,458
)
Balance at September 30
$
351,506

 
$
341,939


During the three months ended September 30, 2016 and September 30, 2015, accretion income on PCI loans was $17.2 million and $32.5 million, respectively.
Purchased non-PCI loans and leases
The following table relates to purchased non-PCI loans and leases from the Cordia transaction and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of acquired loans at the acquisition date.
(Dollars in thousands)
 
Contractually required payments
$
296,529

Cash flows not expected to be collected
$
2,678

Fair value of loans at acquisition
$
241,392

The recorded fair values of purchased non-PCI loans and leases acquired in the Cordia transaction as of the acquisition date are as follows:
(Dollars in thousands)
 
Commercial:
 
Construction and land development
$
3,066

Commercial mortgage
77,455

Other commercial real estate
22,174

Commercial and industrial
31,773

Total commercial loans
134,468

Noncommercial:
 
Residential mortgage
16,839

Revolving mortgage
9,867

Consumer
80,218

Total noncommercial loans
106,924

Total non-PCI loans and leases
$
241,392



24
Table of Contents

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 and nine months ended September 30, 2016 and September 30, 2015:
 
Three months ended September 30, 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
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1
$
17,169

 
$
71,613

 
$
2,138

 
$
43,908

 
$
5,766

 
$
1,755

 
$
16,076

 
$
16,728

 
$
1,653

 
$
19,647

 
$
196,453

Provision
835

 
(2,163
)
 
150

 
2,954

 
274

 
183

 
531

 
679

 
88

 
3,899

 
7,430

Charge-offs
(77
)
 
(461
)
 
—

 
(1,198
)
 
(132
)
 
—

 
(328
)
 
(391
)
 
—

 
(3,623
)
 
(6,210
)
Recoveries
69

 
378

 
13

 
328

 
5

 
170

 
334

 
256

 
—

 
1,092

 
2,645

Balance at September 30
$
17,996

 
$
69,367

 
$
2,301

 
$
45,992

 
$
5,913

 
$
2,108

 
$
16,613

 
$
17,272

 
$
1,741

 
$
21,015

 
$
200,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
(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 July 1
$
13,079

 
$
80,436

 
$
804

 
$
39,392

 
$
4,706

 
$
1,188

 
$
12,705

 
$
17,290

 
$
1,133

 
$
22,116

 
$
192,849

Provision
1,189

 
(5,664
)
 
291

 
(799
)
 
424

 
(58
)
 
520

 
871

 
114

 
450

 
(2,662
)
Charge-offs
(336
)
 
(411
)
 
—

 
(784
)
 
(7
)
 
—

 
(394
)
 
(677
)
 
—

 
(2,409
)
 
(5,018
)
Recoveries
129

 
794

 
15

 
296

 
16

 
45

 
314

 
363

 
3

 
762

 
2,737

Balance at September 30
$
14,061

 
$
75,155

 
$
1,110

 
$
38,105

 
$
5,139

 
$
1,175

 
$
13,145

 
$
17,847

 
$
1,250

 
$
20,919

 
$
187,906

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 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
2,069

 
(1,067
)
 
(34
)
 
5,236

 
337

 
(109
)
 
2,794

 
3,306

 
253

 
8,193

 
20,978

Charge-offs
(639
)
 
(454
)
 
—

 
(3,690
)
 
(93
)
 
(22
)
 
(680
)
 
(2,507
)
 
—

 
(9,868
)
 
(17,953
)
Recoveries
278

 
992

 
167

 
1,330

 
145

 
384

 
394

 
502

 
3

 
3,194

 
7,389

Balance at September 30
$
17,996

 
$
69,367

 
$
2,301

 
$
45,992

 
$
5,913

 
$
2,108

 
$
16,613

 
$
17,272

 
$
1,741

 
$
21,015

 
$
200,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
(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
$
11,961

 
$
85,189

 
$
732

 
$
30,727

 
$
4,286

 
$
3,184

 
$
10,661

 
$
18,650

 
$
892

 
$
16,555

 
$
182,837

Provision
2,380

 
(11,221
)
 
522

 
11,294

 
843

 
(2,100
)
 
2,495

 
440

 
306

 
10,029

 
14,988

Charge-offs
(575
)
 
(691
)
 
(178
)
 
(4,815
)
 
(28
)
 
—

 
(768
)
 
(2,086
)
 
(22
)
 
(7,935
)
 
(17,098
)
Recoveries
295

 
1,878

 
34

 
899

 
38

 
91

 
757

 
843

 
74

 
2,270

 
7,179

Balance at September 30
$
14,061

 
$
75,155

 
$
1,110

 
$
38,105

 
$
5,139

 
$
1,175

 
$
13,145

 
$
17,847

 
$
1,250

 
$
20,919

 
$
187,906



25
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 September 30, 2016 and December 31, 2015:
 
September 30, 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
$
239

 
$
3,126

 
$
118

 
$
1,059

 
$
45

 
$
22

 
$
2,077

 
$
1,046

 
$
—

 
$
640

 
$
8,372

ALLL for loans and leases collectively evaluated for impairment
17,757

 
66,241

 
2,183

 
44,933

 
5,868

 
2,086

 
14,536

 
16,226

 
1,741

 
20,375

 
191,946

Total allowance for loan and lease losses
$
17,996

 
$
69,367

 
$
2,301

 
$
45,992

 
$
5,913

 
$
2,108

 
$
16,613

 
$
17,272

 
$
1,741

 
$
21,015

 
$
200,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
3,304

 
$
79,833

 
$
1,601

 
$
10,672

 
$
1,146

 
$
443

 
$
29,327

 
$
7,708

 
$
406

 
$
1,560

 
$
136,000

Loans and leases collectively evaluated for impairment
638,854

 
8,699,299

 
344,429

 
2,496,495

 
802,455

 
325,905

 
2,784,587

 
2,565,378

 
233,977

 
1,401,401

 
20,292,780

Total loan and leases
$
642,158

 
$
8,779,132

 
$
346,030

 
$
2,507,167

 
$
803,601

 
$
326,348

 
$
2,813,914

 
$
2,573,086

 
$
234,383

 
$
1,402,961

 
$
20,428,780

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(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
$
123

 
$
3,370

 
$
289

 
$
1,118

 
$
213

 
$
—

 
$
1,212

 
$
299

 
$
49

 
$
527

 
$
7,200

ALLL for loans and leases collectively evaluated for impairment
16,165

 
66,526

 
1,879

 
41,998

 
5,311

 
1,855

 
12,893

 
15,672

 
1,436

 
18,969

 
182,704

Total allowance for loan and lease losses
$
16,288

 
$
69,896

 
$
2,168

 
$
43,116

 
$
5,524

 
$
1,855

 
$
14,105

 
$
15,971

 
$
1,485

 
$
19,496

 
$
189,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
3,094

 
$
95,107

 
$
427

 
$
17,910

 
$
1,755

 
$
1,183

 
$
22,986

 
$
5,883

 
$
784

 
$
1,238

 
$
150,367

Loans and leases collectively evaluated for impairment
617,258

 
8,179,441

 
320,594

 
2,351,048

 
729,023

 
313,649

 
2,672,999

 
2,517,223

 
219,289

 
1,218,583

 
19,139,107

Total loan and leases
$
620,352

 
$
8,274,548

 
$
321,021

 
$
2,368,958

 
$
730,778

 
$
314,832

 
$
2,695,985

 
$
2,523,106

 
$
220,073

 
$
1,219,821

 
$
19,289,474



26
Table of Contents

The following tables show the activity in the allowance for PCI loan and lease losses by loan class for the three and nine months ended September 30, 2016 and September 30, 2015.
 
Three months ended September 30, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1
$
280

 
$
5,759

 
$
616

 
$
285

 
$
4,298

 
$
238

 
$
—

 
$
79

 
$
11,555

Provision
74

 
406

 
(378
)
 
101

 
(134
)
 
(21
)
 
—

 
29

 
77

Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 30
$
354

 
$
6,165

 
$
238

 
$
386

 
$
4,164

 
$
217

 
$
—

 
$
108

 
$
11,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
Balance at July 1
$
569

 
$
6,428

 
$
69

 
$
323

 
$
5,842

 
$
2,051

 
$
—

 
$
186

 
$
15,468

Provision
632

 
2,187

 
235

 
118

 
(281
)
 
(151
)
 
—

 
29

 
2,769

Charge-offs
—

 
(48
)
 
—

 
(39
)
 
(15
)
 
(577
)
 
—

 
(1
)
 
(680
)
Recoveries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 30
$
1,201

 
$
8,567

 
$
304

 
$
402

 
$
5,546

 
$
1,323

 
$
—

 
$
214

 
$
17,557

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
Balance at January 1
$
1,082

 
$
7,838

 
$
773

 
$
445

 
$
5,398

 
$
523

 
$
—

 
$
253

 
$
16,312

Provision
(728
)
 
(1,508
)
 
(530
)
 
(59
)
 
(863
)
 
(306
)
 
—

 
(72
)
 
(4,066
)
Charge-offs
—

 
(165
)
 
(5
)
 
—

 
(371
)
 
—

 
—

 
(73
)
 
(614
)
Recoveries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 30
$
354

 
$
6,165

 
$
238

 
$
386

 
$
4,164

 
$
217

 
$
—

 
$
108

 
$
11,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
Balance at January 1
$
150

 
$
10,135

 
$
75

 
$
1,240

 
$
5,820

 
$
3,999

 
$
183

 
$
27

 
$
21,629

Provision
1,148

 
(803
)
 
229

 
(514
)
 
21

 
(1,918
)
 
(183
)
 
650

 
(1,370
)
Charge-offs
(97
)
 
(765
)
 
—

 
(324
)
 
(295
)
 
(758
)
 
—

 
(463
)
 
(2,702
)
Recoveries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 30
$
1,201

 
$
8,567

 
$
304

 
$
402

 
$
5,546

 
$
1,323

 
$
—

 
$
214

 
$
17,557



27
Table of Contents

The following tables show the ending balances of PCI loans and leases and related allowance by class of loans as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
354

 
$
6,165

 
$
238

 
$
386

 
$
4,164

 
$
217

 
$
—

 
$
108

 
$
11,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
23,138

 
491,180

 
14,783

 
11,437

 
278,872

 
43,509

 
83

 
5,198

 
868,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(Dollars in thousands)
Construction
and land
development -
commercial
 
Commercial
mortgage
 
Other
commercial
real estate
 
Commercial
and
industrial
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development -
noncommercial
 
Consumer
and other
 
Total
ALLL for loans and leases acquired with deteriorated credit quality
$
1,082

 
$
7,838

 
$
773

 
$
445

 
$
5,398

 
$
523

 
$
—

 
$
253

 
$
16,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases acquired with deteriorated credit quality
33,880

 
525,468

 
17,076

 
15,182

 
302,158

 
52,471

 
—

 
4,281

 
950,516

As of September 30, 2016, and December 31, 2015, $325.9 million and $469.3 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding valuation reserve was $11.6 million and $16.3 million, respectively.

28
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 September 30, 2016 and December 31, 2015 including interest income recognized in the period during which the loans and leases were considered impaired.
 
September 30, 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
$
1,824

 
$
1,480

 
$
3,304

 
$
3,819

 
$
239

Commercial mortgage
35,987

 
43,846

 
79,833

 
86,354

 
3,126

Other commercial real estate
585

 
1,016

 
1,601

 
1,923

 
118

Commercial and industrial
6,518

 
4,154

 
10,672

 
11,133

 
1,059

Lease financing
1,003

 
143

 
1,146

 
1,153

 
45

Other
125

 
318

 
443

 
532

 
22

Residential mortgage
16,897

 
12,430

 
29,327

 
30,353

 
2,077

Revolving mortgage
5,266

 
2,442

 
7,708

 
9,245

 
1,046

Construction and land development - noncommercial
163

 
243

 
406

 
406

 
—

Consumer
1,383

 
177

 
1,560

 
1,655

 
640

Total non-PCI impaired loans and leases
$
69,751

 
$
66,249

 
$
136,000

 
$
146,573

 
$
8,372

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
(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
$
1,623

 
$
1,471

 
$
3,094

 
$
4,428

 
$
123

Commercial mortgage
41,793

 
53,314

 
95,107

 
103,763

 
3,370

Other commercial real estate
305

 
122

 
427

 
863

 
289

Commercial and industrial
8,544

 
9,366

 
17,910

 
21,455

 
1,118

Lease financing
1,651

 
104

 
1,755

 
1,956

 
213

Other
—

 
1,183

 
1,183

 
1,260

 
—

Residential mortgage
10,097

 
12,889

 
22,986

 
25,043

 
1,212

Revolving mortgage
1,105

 
4,778

 
5,883

 
7,120

 
299

Construction and land development - noncommercial
693

 
91

 
784

 
784

 
49

Consumer
1,050

 
188

 
1,238

 
1,294

 
527

Total non-PCI impaired loans and leases
$
66,861

 
$
83,506

 
$
150,367

 
$
167,966

 
$
7,200



29
Table of Contents

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2016 and September 30, 2015:
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Construction and land development - commercial
$
3,297

 
$
44

 
$
3,257

 
$
37

Commercial mortgage
78,994

 
642

 
99,613

 
803

Other commercial real estate
1,571

 
13

 
539

 
6

Commercial and industrial
9,676

 
84

 
17,005

 
130

Lease financing
1,169

 
14

 
1,939

 
21

Other
569

 
6

 
1,543

 
20

Residential mortgage
28,008

 
214

 
19,945

 
141

Revolving mortgage
7,373

 
48

 
5,064

 
29

Construction and land development - noncommercial
408

 
5

 
1,027

 
12

Consumer
1,507

 
20

 
1,176

 
19

Total non-PCI impaired loans and leases
$
132,572

 
$
1,090

 
$
151,108

 
$
1,218

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
(Dollars in thousands)
Average
balance
 
Interest income recognized
 
Average
balance
 
Interest income recognized
Non-PCI impaired loans and leases:
 
 
 
 
 
 
 
Construction and land development - commercial
$
3,232

 
$
125

 
$
3,148

 
$
107

Commercial mortgage
83,794

 
2,024

 
88,614

 
2,405

Other commercial real estate
957

 
25

 
498

 
7

Commercial and industrial
11,722

 
319

 
13,815

 
379

Lease financing
1,347

 
49

 
1,664

 
55

Other
818

 
30

 
1,789

 
20

Residential mortgage
25,497

 
564

 
17,376

 
401

Revolving mortgage
6,701

 
120

 
4,022

 
68

Construction and land development - noncommercial
459

 
16

 
821

 
28

Consumer
1,398

 
58

 
1,117

 
58

Total non-PCI impaired loans and leases
$
135,925

 
$
3,330

 
$
132,864

 
$
3,528



30
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.
 
September 30, 2016
 
December 31, 2015
(Dollars in thousands)
Accruing
 
 Nonaccruing
 
 Total
 
 Accruing
 
 Nonaccruing
 
 Total
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development -
commercial
$
3,244

 
$
257

 
$
3,501

 
$
3,624

 
$
257

 
$
3,881

Commercial mortgage
69,056

 
15,948

 
85,004

 
65,812

 
18,728

 
84,540

Other commercial real estate
1,793

 
88

 
1,881

 
1,751

 
89

 
1,840

Commercial and industrial
7,384

 
2,489

 
9,873

 
8,833

 
3,341

 
12,174

Lease financing
917

 
124

 
1,041

 
1,191

 
169

 
1,360

Other
362

 
81

 
443

 
1,183

 
—

 
1,183

Total commercial TDRs
82,756

 
18,987

 
101,743

 
82,394

 
22,584

 
104,978

Noncommercial
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
31,463

 
6,598

 
38,061

 
25,427

 
7,129

 
32,556

Revolving mortgage
6,402

 
1,255

 
7,657

 
3,600

 
1,705

 
5,305

Construction and land development -
noncommercial
406

 
—

 
406

 
784

 
—

 
784

Consumer and other
1,341

 
217

 
1,558

 
1,091

 
129

 
1,220

Total noncommercial TDRs
39,612

 
8,070

 
47,682

 
30,902

 
8,963

 
39,865

Total TDRs
$
122,368

 
$
27,057

 
$
149,425

 
$
113,296

 
$
31,547

 
$
144,843

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. Further, TDRs over $500,000 and graded substandard or lower 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)
September 30, 2016
 
December 31, 2015
Accruing TDRs:
 
 
 
PCI
$
25,168

 
$
29,231

Non-PCI
97,200

 
84,065

Total accruing TDRs
122,368

 
113,296

Nonaccruing TDRs:
 
 
 
PCI
318

 
1,420

Non-PCI
26,739

 
30,127

Total nonaccruing TDRs
27,057

 
31,547

All TDRs:
 
 
 
PCI
25,486

 
30,651

Non-PCI
123,939

 
114,192

Total TDRs
$
149,425

 
$
144,843


31
Table of Contents

The following tables provide the types of TDRs made during the three and nine months ended September 30, 2016 and September 30, 2015, as well as a summary of loans that were modified as a TDR during the twelve month periods ended September 30, 2016 and September 30, 2015 that subsequently defaulted during the three and nine months ended September 30, 2016 and September 30, 2015. 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 September 30, 2016
 
Three months ended September 30, 2015
 
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
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
1

$
124

 
1

$
124

 
—

$
—

 
—

$
—

Construction and land development - noncommercial
—

—

 
—
—

 
1

92

 
—

—

Total interest only
1

124

 
1

124

 
1

92

 
—

—

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
3

1,321

 
—

—

 
1

75

 
—

—

Commercial and industrial
1

22

 
—

—

 
3

1,445

 
—

—

Residential mortgage
4

572

 
—

—

 
—

—

 
—

—

Consumer
1

9

 
—

—

 
—

—

 
—

—

Total loan term extension
9

1,924

 
—

—

 
4

1,520

 
—

—

 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
7

128

 
2

16

 
4

193

 
—

—

Commercial mortgage
6

2,651

 
1

32

 
8

1,248

 
—

—

Other commercial real estate
2

178

 
—

—

 
2

124

 
—

—

Commercial and industrial
12

2,340

 
5

569

 
3

1,797

 
1

1,757

Lease financing
2

81

 
2

81

 
—

—

 
—

—

Residential mortgage
37

2,449

 
13

849

 
25

1,592

 
4

158

Revolving mortgage
1

12

 
—

—

 
1

37

 
—

—

Consumer
3

31

 
2

17

 
2

17

 
—

—

Other
1

44

 
—

—

 
—

—

 
—

—

Total below market interest rate
71

7,914

 
25

1,564

 
45

5,008

 
5

1,915

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

23

 
1

23

 
2

21

 
—

—

Commercial mortgage
1

13

 
1

13

 
2

965

 
1

275

Commercial and industrial
—

—

 
—

—

 
2

148

 
—

—

Residential mortgage
2

29

 
6

143

 
6

395

 
—

—

Revolving mortgage
9

407

 
3

37

 
9

666

 
2

162

Consumer
11

150

 
5

74

 
6

91

 
2

39

Total discharged from bankruptcy
24

622

 
16

290

 
27

2,286

 
5

476

 
 
 
 
 
 
 
 
 
 
 
 
Total non-PCI restructurings
105

$
10,584

 
42

$
1,978

 
77

$
8,906

 
10

$
2,391


32
Table of Contents

 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
 
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

$
245

 
1

$
245

 
2

$
68

 
—

$
—

Commercial and industrial
—

—

 
—

—

 
2

1,112

 
1

—

Residential mortgage
1

124

 
1

124

 
—

—

 
—

—

Construction and land development - noncommercial
—

—

 
—

—

 
1

92

 
—

—

Total interest only
2

369

 
2

369

 
5

1,272

 
1

—

 
 
 
 
 
 
 
 
 
 
 
 
Loan term extension
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
2

424

 
—

—

 
1

204

 
1

204

Commercial mortgage
7

2,407

 
—

—

 
7

1,406

 
—

—

Other commercial real estate
1

743

 
—

—

 
—

—

 
—

—

Commercial and industrial
1

22

 
1

—

 
4

1,473

 
—

—

Residential mortgage
11

1,539

 
—

—

 
—

—

 
—

—

Revolving mortgage
—

—

 
—

—

 
1

9

 
—

—

Consumer
1

9

 
—

—

 
1

5

 
—

—

Total loan term extension
23

5,144

 
1

—

 
14

3,097

 
1

204

 
 
 
 
 
 
 
 
 
 
 
 
Below market interest rate
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
14

510

 
4

43

 
14

626

 
—

—

Commercial mortgage
34

8,983

 
11

1,719

 
31

7,880

 
1

1,757

Other commercial real estate
3

652

 
1

9

 
2

124

 
—

—

Commercial and industrial
26

3,086

 
12

2,121

 
13

2,476

 
—

—

Lease financing
2

81

 
2

81

 
—

—

 
—

—

Residential mortgage
137

8,703

 
37

2,301

 
90

4,946

 
7

213

Revolving mortgage
5

109

 
—

—

 
6

140

 
—

—

Construction and land development - noncommercial
—

—

 
—

—

 
2

253

 
—

—

Consumer
6

49

 
3

17

 
13

120

 
—

—

Other
2

125

 
1

81

 
1

1,464

 
—

—

Total below market interest rate
229

22,298

 
71

6,372

 
172

18,029

 
8

1,970

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Construction and land development - commercial
1

23

 
1

23

 
2

21

 
—

—

Commercial mortgage
3

291

 
1

13

 
3

1,562

 
1

275

Commercial and industrial
3

135

 
—

—

 
3

148

 
—

—

Residential mortgage
18

1,030

 
14

647

 
20

938

 
—

—

Revolving mortgage
42

2,564

 
13

177

 
47

2,230

 
6

320

Consumer
40

467

 
12

137

 
16

187

 
2

39

Total discharged from bankruptcy
107

4,510

 
41

997

 
91

5,086

 
9

634

 
 
 
 
 
 
 
 
 
 
 
 
Total non-PCI restructurings
361

$
32,321

 
115

$
7,738

 
282

$
27,484

 
19

$
2,808

 
 
 
 
 
 
 
 
 
 
 
 

33
Table of Contents

 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
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
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
2

$
140

 
1

$
79

 
3

$
223

 
1

$
47

Total below market interest rate
2

140

 
1

79

 
3

223

 
1

47

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
1

2,985

 
—

—

 
—

—

 
—

—

Revolving mortgage
—

—

 
—

—

 
1

105

 
—

—

Total discharged from bankruptcy
1

2,985

 
—

—

 
1

105

 
—

—

Total PCI restructurings
3

$
3,125

 
1

$
79

 
4

$
328

 
1

$
47


 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
 
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

$
53

 
—

$
—

 
—

$
—

 
—

$
—

Commercial mortgage
3

2,026

 
—

—

 
—

—

 
—

—

Residential mortgage
3

188

 
1

79

 
11

766

 
1

47

Total below market interest rate
7

2,267

 
1

79

 
11

766

 
1

47

 
 
 
 
 
 
 
 
 
 
 
 
Discharged from bankruptcy
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
1

2,985

 
—

—

 
—

—

 
—

—

Residential mortgage
—

—

 
—

—

 
1

78

 
—

—

Revolving mortgage
—

—

 
—

—

 
1

105

 
—

—

Total discharged from bankruptcy
1

2,985

 
—

—

 
2

183

 
—

—

Total PCI restructurings
8

$
5,252

 
1

$
79

 
13

$
949

 
1

$
47

 
 
 
 
 
 
 
 
 
 
 
 
For the three and nine months ended September 30, 2016 and September 30, 2015, 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 nine months ended September 30, 2016 and September 30, 2015.
(Dollars in thousands)
Covered
 
Noncovered
 
Total
Balance at December 31, 2014
$
22,982

 
$
70,454

 
$
93,436

Additions
6,202

 
38,022

 
44,224

Sales
(17,539
)
 
(46,612
)
 
(64,151
)
Write-downs
(1,387
)
 
(2,263
)
 
(3,650
)
Transfers (1)
(2,106
)
 
2,106

 
—

Balance at September 30, 2015
$
8,152

 
$
61,707

 
$
69,859

 
 
 
 
 
 
Balance at December 31, 2015
$
6,817

 
$
58,742

 
$
65,559

Additions
4,851

 
26,666

 
31,517

Additions acquired in the Cordia Bancorp, Inc. acquisition
—

 
1,170

 
1,170

Additions acquired in the First CornerStone Bank acquisition
—

 
375

 
375

Sales
(781
)
 
(23,402
)
 
(24,183
)
Write-downs
(580
)
 
(4,894
)
 
(5,474
)
Transfers (1)
(9,716
)
 
9,716

 
—

Balance at September 30, 2016
$
591

 
$
68,373

 
$
68,964

(1) Transfers include OREO balances associated with expired or terminated loss share agreements.
At September 30, 2016 and December 31, 2015, BancShares had $14.8 million and $16.1 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 $20.7 million and $15.6 million at September 30, 2016 and December 31, 2015, respectively.
NOTE G - FDIC LOSS SHARE RECEIVABLE AND PAYABLE

BancShares completed six FDIC-assisted transactions with loss share 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 loss share agreements: Georgian Bank (acquired in 2009); Williamsburg First National Bank (acquired in 2010); and Atlantic Bank & Trust (acquired in 2011).

During the second quarter of 2016, FCB entered into an agreement with the FDIC to terminate five of FCB's nine loss share agreements, including Temecula Valley Bank, Sun American Bank (SAB), Williamsburg First National Bank, Atlantic Bank & Trust, and Colorado Capital Bank (CCB). Under the terms of the agreement, FCB made a net payment of $20.1 million to the FDIC as consideration for early termination of the loss share agreements. Also, FCB wrote-off $1.5 million of the FDIC loss share receivable and released $18.2 million of the FDIC loss share payable associated with the terminated agreements. As a result, FCB recognized a $3.4 million loss on the termination of the loss share agreements.

The early termination agreement eliminated FCB's FDIC loss share payable for SAB and CCB. The remaining FDIC loss share payable balance at September 30, 2016 was $95.8 million. In conjunction with the early termination, FCB adjusted the FDIC loss share payable under the two remaining loss share agreements with clawback provisions and released other related reserves. The clawback liabilities were adjusted in order to conform to the methodology used to determine the net termination payment. The adjustment to the clawback liabilities is accounted for by management as a change in estimate. The total one-time pre-tax benefit of these adjustments was $20.0 million. The resulting positive net impact to pre-tax earnings from the early termination of the FDIC loss share agreements was $16.6 million during the second quarter of 2016. See Note L for further information related to FCB's payable to the FDIC for loss share agreements.

The remaining receivable from the FDIC for the United Western Bank (UWB), First Regional Bank (FRB), Venture Bank (VB) and Georgian Bank (GB) loss share agreements is measured separately from the related covered assets and is recorded at fair value at the acquisition date using projected cash flows based on the expected reimbursements for losses and the applicable loss share percentages. Amortization reflects changes in the FDIC loss share receivable due to credit improvement. Cash payments to FDIC represent the net impact of loss share loan recoveries, charge-offs and related expenses as calculated and reported in FDIC loss share certificates. Post-acquisition adjustments represent the net change in loss claim estimates related to acquired loans and OREO

35
Table of Contents

still subject to loss share reporting requirements. At the beginning of the second quarter of 2016, the loss share protection expired for non-single family residential loans acquired from UWB. As of September 30, 2016, loss share protection has expired or has been terminated for all non-single family residential loans. Loss share protection remains only for single family residential loans acquired from UWB, VB and GB in the amount of $91.5 million.

The following table provides changes in the receivable from the FDIC for the three and nine months ended September 30, 2016 and September 30, 2015.
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Beginning balance
$
5,281

 
$
5,808

 
$
4,054

 
$
28,701

Amortization
(1,017
)
 
(2,343
)
 
(4,259
)
 
(8,835
)
Net cash payments to FDIC
3,199

 
13,915

 
16,701

 
24,805

Post-acquisition adjustments
(4,355
)
 
(8,104
)
 
(11,926
)
 
(35,395
)
Termination of FDIC loss share agreements
—

 
—

 
(1,462
)
 
—

Ending balance
$
3,108

 
$
9,276

 
$
3,108

 
$
9,276


NOTE H - MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.39 billion and $2.15 billion as of September 30, 2016 and December 31, 2015, respectively.  These loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset on the Consolidated Balance Sheets and are initially recorded at fair value.

The activity of the servicing asset for the three and nine months ended September 30, 2016 and 2015 is presented in the following table:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Beginning balance
$
16,824

 
$
18,162

 
$
19,351

 
$
16,688

Servicing rights originated
1,923

 
1,857

 
4,251

 
4,446

Amortization
(1,377
)
 
(695
)
 
(3,978
)
 
(2,657
)
Valuation allowance reversal (provision)
360

 
3

 
(1,894
)
 
850

Ending balance
$
17,730

 
$
19,327

 
$
17,730

 
$
19,327


The following table presents the activity in the servicing asset valuation allowance for the three and nine months ended September 30, 2016 and 2015:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Beginning balance
$
2,349

 
$
3

 
$
95

 
$
850

Valuation allowance (reversal) provision
(360
)
 
(3
)
 
1,894

 
(850
)
Ending balance
$
1,989

 
$
—

 
$
1,989

 
$
—

As of September 30, 2016, the carrying value of BancShares' mortgage servicing rights was $17.7 million. Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended September 30, 2016 and 2015 were $1.5 million and $904 thousand, respectively. For the nine months ended September 30, 2016 and 2015, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $4.3 million and $3.6 million, respectively, and are included 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 $695 thousand for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, amortization expense related to mortgage servicing rights was $4.0 million and $2.7 million, respectively. Mortgage income included an impairment reversal of $360 thousand and $3 thousand for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, mortgage income included an impairment of $1.9 million and an impairment reversal of $850 thousand, respectively.

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Table of Contents

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 September 30, 2016 and December 31, 2015 were as follows:
 
September 30, 2016
 
December 31, 2015
Discount rate - conventional fixed loans
8.60
%
 
9.31
%
Discount rate - all loans excluding conventional fixed loans
9.60
%
 
10.31
%
Weighted average constant prepayment rate
14.83
%
 
11.01
%
Weighted average cost to service a loan
$
62.75

 
$
56.61


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 $826.0 million and $722.0 million at September 30, 2016 and December 31, 2015, respectively.
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 September 30, 2016 and December 31, 2015 is presented in the following tables.
 
September 30, 2016
 
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
$
717,429

 
$
—

 
$
—

 
$
25,716

 
$
743,145

Government agency
—

 
—

 
—

 
4,284

 
4,284

Total borrowings
$
717,429

 
$
—

 
$
—

 
$
30,000

 
$
747,429

Gross amount of recognized liabilities for repurchase agreements
 
$
747,429

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$
592,182

 
$
—

 
$
—

 
$
25,724

 
$
617,906

Government agency
—

 
—

 
—

 
4,276

 
4,276

Total borrowings
$
592,182

 
$
—

 
$
—

 
$
30,000

 
$
622,182

Gross amount of recognized liabilities for repurchase agreements
 
$
622,182

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.


37
Table of Contents

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.

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.    


38
Table of Contents

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 loss share agreements. The fair value of the payable to the FDIC for loss share agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the loss share agreements. Cash flows are discounted 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.

Interest rate swap. Under the terms of the previous cash flow hedge, BancShares paid a fixed payment to the counterparty in exchange for receipt of a variable payment that was determined based on the three-month LIBOR rate. The fair value of the cash flow hedge was, therefore, based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, were subject to adjustment due to pricing considerations for the specific instrument. The interest rate swap agreement expired in June 2016. The inputs used in the fair value measurement of the interest rate swap were considered level 2 inputs.

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.
 
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2016 and December 31, 2015. 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 loss share agreements is designated as level 3.
(Dollars in thousands)
September 30, 2016
 
December 31, 2015
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
495,705

 
$
495,705

 
$
534,086

 
$
534,086

Overnight investments
2,997,086

 
2,997,086

 
2,063,132

 
2,063,132

Investment securities available for sale
6,384,815

 
6,384,815

 
6,861,293

 
6,861,293

Investment securities held to maturity
125

 
133

 
255

 
265

Loans held for sale
95,910

 
95,910

 
59,766

 
59,766

Net loans and leases
21,085,030

 
20,531,249

 
20,033,774

 
19,353,325

Receivable from the FDIC for loss share agreements
3,108

 
3,108

 
4,054

 
4,054

Income earned not collected
74,933

 
74,933

 
70,036

 
70,036

Federal Home Loan Bank stock
43,495

 
43,495

 
37,511

 
37,511

Mortgage servicing rights
17,730

 
17,965

 
19,351

 
19,495

Deposits
27,925,253

 
27,913,775

 
26,930,755

 
26,164,472

Short-term borrowings
730,214

 
730,214

 
594,733

 
594,733

Long-term obligations
840,266

 
870,386

 
704,155

 
718,102

Payable to the FDIC for loss share agreements
95,779

 
101,117

 
126,453

 
131,894

Accrued interest payable
4,051

 
4,051

 
5,713

 
5,713

Interest rate swap (1)
—

 
—

 
1,429

 
1,429

(1) The interest rate swap agreement expired in June 2016.


39
Table of Contents

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 September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
 
 
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
$
1,549,530

 
$
—

 
$
1,549,530

 
$
—

Government agency
169,859

 
—

 
169,859

 
—

Mortgage-backed securities
4,528,370

 
—

 
4,528,370

 
—

Equity securities
93,011

 
25,437

 
67,574

 
—

Corporate bonds
41,945

 
—

 
41,945

 
—

Other
2,100

 
—

 
2,100

 
—

Total investment securities available for sale
$
6,384,815

 
$
25,437

 
$
6,359,378

 
$
—

Loans held for sale
$
95,910

 
$
—

 
$
95,910

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
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
$
1,674,882

 
$
—

 
$
1,674,882

 
$
—

Government agency
498,660

 
—

 
498,660

 
—

Mortgage-backed securities
4,668,198

 
—

 
4,668,198

 
—

Equity securities
8,893

 
1,668

 
7,225

 
—

Corporate bonds
8,500

 
—

 
8,500

 
—

Other
2,160

 
—

 
2,160

 
—

Total investment securities available for sale
$
6,861,293

 
$
1,668

 
$
6,859,625

 
$
—

Loans held for sale
$
59,766

 
$
—

 
$
59,766

 
$
—

Liabilities measured at fair value
 
 
 
 
 
 
 
Interest rate swaps accounted for as cash flow hedges
$
1,429

 
$
—

 
$
1,429

 
$
—

There were no transfers between levels during the three or nine months ended September 30, 2016.
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.
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 September 30, 2016 and December 31, 2015.
 
September 30, 2016
(Dollars in thousands)
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
95,910

 
$
93,447

 
$
2,463

 
 
 
 
 
 
 
December 31, 2015
 
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Loans held for sale
$
59,766

 
$
58,890

 
$
876

No loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2016 or December 31, 2015.

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The changes in fair value for residential real estate loans held for sale for which we elected the fair value option are included in the table below for the three and nine months ended September 30, 2016 and 2015.
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
(Losses) gains from fair value changes on loans held for sale
$
(51
)
 
$
1,347

 
$
1,588

 
$
1,316

The changes in fair value in the table above are recorded as a component of mortgage income on the Consolidated Statements of Income.
Certain other assets are adjusted to their fair value on a nonrecurring basis, including impaired loans, OREO, 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 10 and 14 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 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. 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.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
61,379

 
$
—

 
$
—

 
$
61,379

Other real estate not covered under loss share agreements remeasured during current year
45,564

 
—

 
—

 
45,564

Other real estate covered under loss share agreements remeasured during current year
401

 
—

 
—

 
401

Mortgage servicing rights
16,688

 
—

 
—

 
16,688

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1 inputs
 
Level 2 inputs
 
Level 3 inputs
Impaired loans
$
64,197

 
$
—

 
$
—

 
$
64,197

Other real estate not covered under loss share agreements remeasured during current year
44,571

 
—

 
—

 
44,571

Other real estate covered under loss share agreements remeasured during current year
4,403

 
—

 
—

 
4,403

Mortgage servicing rights
17,997

 
—

 
—

 
17,997

No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.


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NOTE K - EMPLOYEE BENEFIT PLANS
BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and legacy Bancorporation employees (Bancorporation Plan). Net periodic benefit cost is a component of employee benefits expense.
BancShares Plan
For the three and nine months ended September 30, 2016 and 2015, the components of net periodic benefit cost are as follows:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
3,153

 
$
3,358

 
$
9,463

 
$
10,561

Interest cost
7,218

 
6,732

 
21,668

 
20,230

Expected return on assets
(9,155
)
 
(8,302
)
 
(27,481
)
 
(24,896
)
Amortization of prior service cost
54

 
53

 
158

 
158

Amortization of net actuarial loss
1,714

 
2,863

 
5,144

 
8,531

Net periodic benefit cost
$
2,984

 
$
4,704

 
$
8,952

 
$
14,584

Bancorporation Plan
For the three and nine months ended September 30, 2016 and 2015, the components of net periodic benefit cost are as follows:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
642

 
$
641

 
$
1,925

 
$
2,506

Interest cost
1,694

 
1,540

 
5,081

 
4,795

Expected return on assets
(2,775
)
 
(2,873
)
 
(8,325
)
 
(8,612
)
Net periodic benefit cost
$
(439
)
 
$
(692
)
 
$
(1,319
)
 
$
(1,311
)
No contributions were made during the three and nine months ended September 30, 2016 to the BancShares or Bancorporation pension plans. BancShares does not expect to make any contributions to either of the defined benefit pension plans during 2016.
NOTE L - COMMITMENTS AND CONTINGENCIES
To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, standby letters of credit and recourse obligations on mortgage loans sold. These instruments involve elements of credit, interest rate or liquidity risk.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment, including cash deposits, securities and other assets. At September 30, 2016, BancShares had unused commitments that were $8.70 billion, compared to $7.95 billion at December 31, 2015. Total unfunded commitments relating to investments in affordable housing projects was $52.8 million and $41.8 million at September 30, 2016 and December 31, 2015, respectively, and are included in other liabilities on BancShares' Consolidated Balance Sheets. Affordable housing project investments were $104.8 million and $85.6 million at September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015, BancShares had standby letters of credit amounting to $78.1 million and $77.9 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 September 30, 2016 and December 31, 2015 for estimated losses arising from these standard representation and warranty provisions.

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BancShares recorded a receivable from the FDIC totaling $3.1 million and $4.1 million as of September 30, 2016 and December 31, 2015, respectively, for the expected reimbursement of losses on assets covered under various loss share agreements. These loss share agreements impose certain obligations on us that, in the event of noncompliance, could result in the delay or disallowance of some or all of our rights under those agreements. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed for noncompliance. The loss share agreements are subject to interpretation by both the FDIC and BancShares, and disagreements may arise regarding coverage of losses, expenses and contingencies. See Note G for additional information on the receivable from the FDIC regarding the early termination of five loss share agreements during the second quarter of 2016.

The loss share 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 loss share agreements. As of September 30, 2016 and December 31, 2015, the estimated clawback liability was $95.8 million and $126.5 million, respectively. See Note G for additional information on the clawback liability regarding the early termination of the five loss share agreements during the second quarter of 2016.

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.
NOTE M - DERIVATIVES
BancShares had an interest rate swap entered into during 2011 that qualified as a cash flow hedge under GAAP. BancShares' interest rate swap agreement expired in June 2016. At December 31, 2015, the fair value of the outstanding derivative was included in other liabilities in the Consolidated Balance Sheet, and the net change in fair value is included in the Consolidated Statements of Cash Flows under the caption net change in other liabilities.
The following table provides the notional amount of the interest rate swap and the fair value of the liability as of December 31, 2015.
 
December 31, 2015
(Dollars in thousands)
Notional  amount
 
Estimated fair value of liability
2011 interest rate swap hedging variable rate exposure on
trust preferred securities 2011-2016
$
93,500

 
$
1,429

The interest rate swap was used for interest rate risk management purposes and converted variable-rate exposure on outstanding debt to a fixed rate.
BancShares’ interest rate swap was fully effective since inception. Therefore, changes in the fair value of the interest rate swap had no impact on net income. For the three months ended September 30, 2015, BancShares recognized interest expense of $829 thousand, and for the nine months ended September 30, 2016 and 2015, BancShares recognized interest expense of $1.5 million and $2.5 million, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.


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NOTE N - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) included the following as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
(Dollars in thousands)
Accumulated
other
comprehensive
income (loss)
 
Deferred
tax expense
(benefit)
 
Accumulated
other
comprehensive
income (loss),
net of tax
 
Accumulated
other
comprehensive
loss
 
Deferred
tax benefit
 
Accumulated
other
comprehensive
loss,
net of tax
Unrealized gains (losses) on investment securities available for sale, net
$
48,618

 
$
18,288

 
$
30,330

 
$
(24,504
)
 
$
(9,379
)
 
$
(15,125
)
Unrealized loss on cash flow hedge
—

 
—

 
—

 
(1,429
)
 
(537
)
 
(892
)
Funded status of defined benefit plans
(73,117
)
 
(28,003
)
 
(45,114
)
 
(78,419
)
 
(29,996
)
 
(48,423
)
Total
$
(24,499
)
 
$
(9,715
)
 
$
(14,784
)
 
$
(104,352
)
 
$
(39,912
)
 
$
(64,440
)

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The following table highlights changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2016 and September 30, 2015:
 
Three months ended September 30, 2016
(Dollars in thousands)
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
31,213

 
$
—

 
$
(46,240
)
 
$
(15,027
)
Other comprehensive loss before reclassifications
(722
)
 
—

 
—

 
(722
)
Amounts reclassified from accumulated other comprehensive income (loss)
(161
)
 
—

 
1,126

 
965

Net current period other comprehensive (loss) income
(883
)
 
—

 
1,126

 
243

Ending balance
$
30,330

 
$
—

 
$
(45,114
)
 
$
(14,784
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
 
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
2,604

 
$
(1,875
)
 
$
(51,888
)
 
$
(51,159
)
Other comprehensive income before reclassifications
17,494

 
421

 
—

 
17,915

Amounts reclassified from accumulated other comprehensive income (loss)
(3,470
)
 
—

 
1,838

 
(1,632
)
Net current period other comprehensive income
14,024

 
421

 
1,838

 
16,283

Ending balance
$
16,628

 
$
(1,454
)
 
$
(50,050
)
 
$
(34,876
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
(15,125
)
 
$
(892
)
 
$
(48,423
)
 
$
(64,440
)
Other comprehensive income before reclassifications
56,381

 
892

 
—

 
57,273

Amounts reclassified from accumulated other comprehensive income (loss)
(10,926
)
 
—

 
3,309

 
(7,617
)
Net current period other comprehensive income
45,455

 
892

 
3,309

 
49,656

Ending balance
$
30,330

 
$
—

 
$
(45,114
)
 
$
(14,784
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
Unrealized gains (losses) on available for sale securities1
 
Gains (losses) on cash flow hedges1
 
Defined benefit pension items1
 
Total
Beginning balance
$
5,098

 
$
(2,664
)
 
$
(55,415
)
 
$
(52,981
)
Other comprehensive income before reclassifications
18,222

 
1,210

 
—

 
19,432

Amounts reclassified from accumulated other comprehensive income (loss)
(6,692
)
 
—

 
5,365

 
(1,327
)
Net current period other comprehensive income
11,530

 
1,210

 
5,365

 
18,105

Ending balance
$
16,628

 
$
(1,454
)
 
$
(50,050
)
 
$
(34,876
)
1 All amounts are net of tax. Amounts in parentheses indicate debits.

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Table of Contents

The following table presents the amounts reclassified from accumulated other comprehensive income (loss) and the line item affected in the statement where net income is presented for the three and nine months ended September 30, 2016 and September 30, 2015:
(Dollars in thousands)
 
Three months ended September 30, 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
 
$
352

 
Securities gains
 
 
(191
)
 
Income taxes
 
 
$
161

 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(54
)
 
Employee benefits
     Actuarial losses
 
(1,714
)
 
Employee benefits
 
 
(1,768
)
 
Employee benefits
 
 
642

 
Income taxes
 
 
$
(1,126
)
 
Net income
Total reclassifications for the period
 
$
(965
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
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
 
$
5,564

 
Securities gains
 
 
(2,094
)
 
Income taxes
 
 
$
3,470

 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(53
)
 
Employee benefits
     Actuarial losses
 
(2,863
)
 
Employee benefits
 
 
(2,916
)
 
Employee benefits
 
 
1,078

 
Income taxes
 
 
$
(1,838
)
 
Net income
Total reclassifications for the period
 
$
1,632

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
Details about accumulated other comprehensive income (loss)
 
Amount reclassified from accumulated other comprehensive income (loss)1
 
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities
 
$
17,509

 
Securities gains
 
 
(6,583
)
 
Income taxes
 
 
$
10,926

 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(158
)
 
Employee benefits
     Actuarial losses
 
(5,144
)
 
Employee benefits
 
 
(5,302
)
 
Employee benefits
 
 
1,993

 
Income taxes
 
 
$
(3,309
)
 
Net income
Total reclassifications for the period
 
$
7,617

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
Details about accumulated other comprehensive income (loss)
 
Amount reclassified from accumulated other comprehensive income (loss)1
 
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities
 
$
10,837

 
Securities gains
 
 
(4,145
)
 
Income taxes
 
 
$
6,692

 
Net income
Amortization of defined benefit pension items
 
 
 
 
     Prior service costs
 
$
(158
)
 
Employee benefits
     Actuarial losses
 
(8,531
)
 
Employee benefits
 
 
(8,689
)
 
Employee benefits
 
 
3,324

 
Income taxes
 
 
$
(5,365
)
 
Net income
Total reclassifications for the period
 
$
1,327

 
 
1 Amounts in parentheses indicate debits to profit/loss.

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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 2015 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 2016, the reclassifications had no material effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms "we," "us" and "BancShares" refer to the consolidated financial position and consolidated results of operations for BancShares.
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.
Management has embarked on several strategic initiatives to better position the company to counter challenges to generate earnings and shareholder value presented by the interest rate environment. The initiatives focus on core revenue growth through broader products and services, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology. Additionally, we continue to pursue strategic acquisitions and mergers to expand our customer base and increase efficiency and productivity. Refer to our Form 10-K for the year ended December 31, 2015 for further discussion of our strategy.
Significant Events in 2016
On September 1, 2016, First Citizens Bank completed the merger of Midlothian, Virginia-based Cordia Bancorp, Inc. (Cordia) and its subsidiary, Bank of Virginia (BVA) into FCB. Under the terms of the merger agreement, cash consideration of $5.15 was paid to Cordia’s shareholders for each of their shares of Cordia’s common stock, with total consideration paid of $37.1 million. The Cordia acquisition contributed $241.4 million in loans and leases, $292.2 million in deposit balances and $10.8 million of goodwill at the acquisition date.
On June 14, 2016, FCB entered into an agreement with the FDIC to terminate five of FCB's nine loss share agreements with the FDIC, including Temecula Valley Bank (TVB), Sun American Bank (SAB), Williamsburg First National Bank (WFNB), Atlantic Bank & Trust (ABT), and Colorado Capital Bank (CCB). Under the terms of the agreement, FCB made a net payment of $20.1 million to the FDIC as consideration for early termination of the loss share agreements. The early termination resulted in a one-time expense of $3.4 million during the second quarter of 2016. In conjunction with the early termination, FCB adjusted its clawback liabilities under the two remaining loss share agreements with clawback provisions and released other related reserves. The clawback liabilities were adjusted in order to conform to the methodology used to determine the net termination payment. The total one-time pre-tax benefit of these adjustments was $20.0 million. The resulting positive net impact to pre-tax earnings from the early termination of the FDIC loss share agreements was $16.6 million during the second quarter of 2016.
On May 6, 2016, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to purchase certain assets and assume certain liabilities of First CornerStone Bank (FCSB) of King of Prussia, Pennsylvania. As a result of the transaction, FCB recorded loans with a fair value of $43.8 million and investment securities with a fair value of $4.6 million. The fair value of deposits assumed was $96.9 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, FCB recorded a gain on the acquisition of $2.1 million which was recorded in the second quarter of 2016. In the third quarter of 2016, refinements were made to the initial fair values primarily based upon updated collateral valuations resulting in an increase of $837 thousand to the gain on acquisition recognized in the three months ended September 30, 2016. These adjustments brought the total gain on the transaction to $3.0 million recognized in noninterest income for the nine months ended September 30, 2016.
In March 2016, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of North Milwaukee State Bank of Milwaukee, Wisconsin (NMSB). As a result of the NMSB transaction, FCB recorded loans with a fair value of $36.9 million and investment securities with a fair value of $9.4 million. The fair value of deposits assumed was $59.2

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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 $1.7 million was recorded in the first quarter of 2016. In the second quarter of 2016, refinements were made to the initial fair values primarily based upon updated collateral valuations resulting in an increase of $1.2 million to the gain on acquisition recognized in the three months ended June 30, 2016. These adjustments brought the total gain on the transaction to $2.9 million recognized in noninterest income for the nine months ended September 30, 2016.
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. Third quarter 2016 results indicate relatively solid labor conditions and global economic conditions have stabilized following the June 2016 United Kingdom referendum to leave the European Union. The national unemployment rate increased slightly to 5.0 percent as more people returned to the job market amid a record number of positions available. According to the U.S. Department of Labor, the U.S. economy added approximately 575,000 new nonfarm payroll jobs during the third quarter of 2016. The U.S. housing market remains solid as a result of strong 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 third quarter that the U.S. labor market continued to improve and growth of economic activity has increased from the modest pace during the first half of 2016. The FOMC decided to maintain the target range for the federal funds rate and will continue to assess realized and expected economic conditions relative to its objectives of maximum employment and 2.0 percent inflation in determining the timing and size of future adjustments to the target range. The FOMC continues to closely monitor inflation indicators and global economic and financial developments.
The trends in the banking industry are similar to those of the broader economy as shown in the latest national banking results from the second quarter of 2016. FDIC-insured institutions reported a 1.4 percent increase in net income compared to the second quarter of 2015 as a result of loan growth generating higher net interest income. Banking industry average net interest margin was 3.08 percent in the second quarter of 2016, up slightly from 3.07 percent in the second quarter of 2015. The second quarter of 2016 was the third consecutive quarter that net charge-offs posted a year-over-year increase, following 21 quarters in a row when net charge-offs decreased.
EARNINGS PERFORMANCE SUMMARY
BancShares' consolidated net income for the third quarter of 2016 was $51.4 million, or $4.28 per share, compared to $69.3 million, or $5.77 per share, for the second quarter of 2016, and $56.0 million, or $4.66 per share, for the corresponding period of 2015. BancShares’ current quarter results generated an annualized return on average assets of 0.63 percent and an annualized return on average equity of 6.69 percent, compared to respective returns of 0.87 percent and 9.33 percent for the second quarter of 2016, and 0.71 percent and 7.86 percent for the third quarter of 2015. Net interest margin for the third quarter of 2016 was 3.10 percent, compared to 3.13 percent for the second quarter of 2016 and 3.29 percent for the third quarter of the prior year.
For the nine months ended September 30, 2016, net income was $172.8 million, or $14.39 per share, compared to $167.6 million, or $13.96 per share, reported for the same period of 2015. Annualized returns on average assets and average equity were 0.72 percent and 7.73 percent, respectively, through September 30, 2016, compared to 0.73 percent and 8.07 percent, respectively, for the same period a year earlier. Year-to-date 2016 earnings included a pre-tax benefit of $16.6 million resulting from the early termination of FDIC loss share agreements during the second quarter of 2016 and pre-tax gains of $5.8 million recognized in connection with the NMSB and FCSB acquisitions. Year-to-date 2015 earnings included a pre-tax $42.9 million gain on the February 13, 2015 acquisition of Capitol City Bank & Trust (CCBT) of Atlanta, Georgia. Net interest margin for the nine months ended September 30, 2016 was 3.14 percent, compared to 3.26 percent for the same period of 2015.
Key highlights in the third quarter of 2016 include:
•
FCB completed the merger of Cordia which contributed $241.4 million in loans and leases and $292.2 million in deposit balances at the acquisition date.
•
Loans grew by $554.4 million to $21.30 billion during the third quarter of 2016, reflecting solid originated portfolio growth and the Cordia acquisition.
•
Deposits increased $667.5 million, or by 9.7 percent on an annualized basis, from June 30, 2016, primarily due to organic growth in low-cost demand deposit accounts and the deposit balances acquired from Cordia.
•
Net interest income increased $3.7 million, or by 1.6 percent, from the second quarter of 2016. The increase was primarily due to higher loan interest income related to originated loan volume.
•
BancShares remained well-capitalized at September 30, 2016 under Basel III capital requirements with a Tier 1 risk-based capital ratio of 12.50 percent, common equity Tier 1 ratio of 12.50 percent, total risk-based capital ratio of 13.96 percent and leverage capital ratio of 9.07 percent.

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Table 1
Selected Quarterly Data
 
2016
 
2015
 
Nine months ended September 30
 
 
Third
 
Second
 
First
 
Fourth
 
Third
 
 
(Dollars in thousands, except share data)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
2016
 
2015
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
246,494

 
$
243,369

 
$
243,112

 
$
241,861

 
$
249,825

 
$
732,975

 
$
727,348

 
Interest expense
10,645

 
11,180

 
10,392

 
11,142

 
10,454

 
32,217

 
33,162

 
Net interest income
235,849

 
232,189

 
232,720

 
230,719

 
239,371

 
700,758

 
694,186

 
Provision for loan and lease losses
7,507

 
4,562

 
4,843

 
7,046

 
107

 
16,912

 
13,618

 
Net interest income after provision for loan and
lease losses
228,342

 
227,627

 
227,877

 
223,673

 
239,264

 
683,846

 
680,568

 
Gain on acquisitions
837

 
3,290

 
1,704

 
—

 
—

 
5,831

 
42,930

 
Noninterest income excluding gain on acquisitions
117,004

 
136,960

 
103,578

 
99,135

 
109,750

 
357,542

 
325,023

 
Noninterest expense
267,233

 
258,303

 
251,671

 
255,886

 
260,172

 
777,207

 
783,029

 
Income before income taxes
78,950

 
109,574

 
81,488

 
66,922

 
88,842

 
270,012

 
265,492

 
Income taxes
27,546

 
40,258

 
29,416

 
24,174

 
32,884

 
97,220

 
97,854

 
Net income
$
51,404

 
$
69,316

 
$
52,072

 
$
42,748

 
$
55,958

 
$
172,792

 
$
167,638

 
Net interest income, taxable equivalent
$
237,146

 
$
233,496

 
$
234,187

 
$
232,147

 
$
240,930

 
$
704,829

 
$
698,836

 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income
$
4.28

 
$
5.77

 
$
4.34

 
$
3.56

 
$
4.66

 
$
14.39

 
$
13.96

 
 Cash dividends
0.30

 
0.30

 
0.30

 
0.30

 
0.30

 
0.90

 
0.90

 
 Market price at period end (Class A)
293.89

 
258.91

 
251.07

 
258.17

 
226.00

 
293.89

 
226.00

 
 Book value at period end
256.76

 
252.76

 
246.55

 
239.14

 
238.34

 
256.76

 
238.34

 
SELECTED QUARTERLY AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total assets
$
32,655,417

 
$
32,161,905

 
$
31,705,658

 
$
31,753,223

 
$
31,268,774

 
$
32,176,082

 
$
30,842,745

 
 Investment securities
6,452,532

 
6,786,463

 
6,510,248

 
6,731,183

 
7,275,290

 
6,582,604

 
7,106,322

 
 Loans and leases (1)
21,026,510

 
20,657,094

 
20,349,091

 
20,059,556

 
19,761,145

 
20,678,838

 
19,349,072

 
 Interest-earning assets
30,446,592

 
29,976,629

 
29,558,629

 
29,565,715

 
29,097,839

 
29,995,602

 
28,666,506

 
 Deposits
27,609,418

 
27,212,814

 
26,998,026

 
27,029,650

 
26,719,713

 
27,274,646

 
26,301,783

 
 Long-term obligations
842,715

 
817,750

 
750,446

 
704,465

 
548,214

 
803,780

 
494,441

 
 Interest-bearing liabilities
19,114,740

 
19,092,287

 
19,067,251

 
18,933,443

 
18,911,455

 
19,091,511

 
19,004,721

 
 Shareholders' equity
$
3,058,155

 
$
2,989,097

 
$
2,920,611

 
$
2,867,177

 
$
2,823,967

 
$
2,987,455

 
$
2,775,873

 
 Shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

 
SELECTED QUARTER-END BALANCES
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total assets
$
32,971,910

 
$
32,230,403

 
$
32,195,657

 
$
31,475,934

 
$
31,449,824

 
$
32,971,910

 
$
31,449,824

 
 Investment securities
6,384,940

 
6,557,736

 
6,687,483

 
6,861,548

 
6,690,879

 
6,384,940

 
6,690,879

 
 Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
868,200

 
921,467

 
945,887

 
950,516

 
1,044,064

 
868,200

 
1,044,064

 
Non-PCI
20,428,780

 
19,821,104

 
19,471,802

 
19,289,474

 
18,811,742

 
20,428,780

 
18,811,742

 
 Deposits
27,925,253

 
27,257,774

 
27,365,245

 
26,930,755

 
26,719,375

 
27,925,253

 
26,719,375

 
 Long-term obligations
840,266

 
850,504

 
779,087

 
704,155

 
705,418

 
840,266

 
705,418

 
 Shareholders' equity
$
3,083,748

 
$
3,035,704

 
$
2,961,194

 
$
2,872,109

 
$
2,862,528

 
$
3,083,748

 
$
2,862,528

 
 Shares outstanding
12,010,405

 
12,010,405

 
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)
0.63

%
0.87

%
0.66

%
0.53

%
0.71

%
0.72

%
0.73

%
Rate of return on average shareholders' equity (annualized)
6.69

 
9.33

 
7.17

 
5.92

 
7.86

 
7.73

 
8.07

 
Net yield on interest-earning assets (taxable equivalent)
3.10

 
3.13

 
3.18

 
3.12

 
3.29

 
3.14

 
3.26

 
Allowance for loan and lease losses to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
1.34

 
1.25

 
1.45

 
1.72

 
1.68

 
1.34

 
1.68

 
Non-PCI
0.98

 
0.99

 
0.99

 
0.98

 
1.00

 
0.98

 
1.00

 
Total
1.00

 
1.00

 
1.01

 
1.02

 
1.03

 
1.00

 
1.03

 
Nonperforming assets to total loans and leases and other real estate at period end:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Covered
0.75

 
1.17

 
4.74

 
3.51

 
3.72

 
0.75

 
3.72

 
Noncovered
0.75

 
0.77

 
0.74

 
0.79

 
0.77

 
0.75

 
0.77

 
Total
0.75

 
0.77

 
0.80

 
0.83

 
0.82

 
0.75

 
0.82

 
Tier 1 risk-based capital ratio
12.50

 
12.63

 
12.58

 
12.65

 
12.77

 
12.50

 
12.77

 
Common equity Tier 1 ratio
12.50

 
12.63

 
12.58

 
12.51

 
12.63

 
12.50

 
12.63

 
Total risk-based capital ratio
13.96

 
14.10

 
14.09

 
14.03

 
14.18

 
13.96

 
14.18

 
Leverage capital ratio
9.07

 
9.09

 
9.00

 
8.96

 
8.97

 
9.07

 
8.97

 
Dividend payout ratio
7.01

 
5.20

 
6.91

 
8.43

 
6.44

 
6.25

 
6.45

 
Average loans and leases to average deposits
76.16

 
75.91

 
75.37

 
74.21

 
73.96

 
75.82

 
73.57

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


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BUSINESS COMBINATIONS
Cordia Bancorp Inc.
In September 2016, FCB completed the merger of Cordia and its subsidiary, BVA into FCB. Under the terms of the agreement, cash consideration of $5.15 was paid to Cordia’s shareholders for each of their shares of Cordia’s common stock. Total consideration paid was $37.1 million. The merger allowed FCB to strengthen its presence in the greater Richmond, Virginia area as Cordia operated six BVA branches in Richmond, Midlothian, Chesterfield, Colonial Heights and Chester, Virginia.

The Cordia 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
Cordia Bancorp
(Dollars in thousands)
As recorded by FCB
Purchase price
 
$
37,053

Assets
 
 
Cash and cash equivalents
$
8,383

 
Overnight investments
3,081

 
Investment securities
76,633

 
Loans
241,392

 
Premises and equipment
4,151

 
Other real estate owned
1,170

 
Income earned not collected
1,990

 
Intangible assets
2,210

 
Other assets
10,318

 
Total assets acquired
349,328

 
Liabilities
 
 
Deposits
292,192

 
Short-term borrowings
30,164

 
Other liabilities
747

 
Total liabilities assumed
$
323,103

 
Fair value of net assets acquired
 
26,225

Goodwill recorded for Cordia
 
$
10,828


Merger-related expenses of $3.6 million and $3.8 million from the Cordia transaction were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. Loan-related interest income generated from Cordia was approximately $1.0 million since the acquisition date.

Due to the immaterial amount of loans resulting from the Cordia transaction that had evidence of credit quality deterioration, all loans are accounted for as non-purchased credit-impaired (non-PCI) loans under ASC 310-20.
First CornerStone Bank
In May 2016, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of FCSB. The acquisition provided FCB the opportunity to grow capital and enhance earnings. This is an FDIC-assisted transaction; however, it has no loss share agreement.

During the third quarter of 2016, adjustments were made to the acquisition fair values primarily based upon updated collateral valuations resulting in an increase of $837 thousand to the gain on acquisition reflected in the three months ended September 30, 2016. These adjustments brought the total gain on the transaction to $3.0 million which is included in noninterest income in the Consolidated Statements of Income.

The FCSB 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

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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 3
First CornerStone Bank
(Dollars in thousands)
As recorded by FCB
Assets
 
Cash and cash equivalents
$
748

Overnight investments
37,540

Investment securities
4,564

Loans
43,776

Other real estate owned
375

Income earned not collected
8

Intangible assets
390

Other assets
13

Total assets acquired
87,414

Liabilities
 
Deposits
96,882

Other liabilities
23

Total liabilities assumed
96,905

Fair value of net liabilities assumed
(9,491
)
Cash received from FDIC
12,450

Gain on acquisition of FCSB
$
2,959


Merger-related expenses of $130 thousand and $923 thousand were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016. Loan-related interest income generated from FCSB was approximately $573 thousand for the third quarter of 2016 and $897 thousand since the acquisition date.
All loans resulting from the FCSB 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.

North Milwaukee State Bank
In March 2016, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of NMSB. The acquisition provided FCB the opportunity to grow capital and enhance earnings. This was an FDIC-assisted transaction; however, it has no loss share agreement.

During the second quarter of 2016, refinements were made to initial fair values primarily based upon updated collateral valuations resulting in an increase of $1.2 million to the gain on acquisition. These adjustments brought the total gain on the transaction to $2.9 million which is included in noninterest income on the Consolidated Statement of Income.

The NMSB 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.


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Table of Contents

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

Table 4
North Milwaukee State Bank
(Dollars in thousands)
As recorded by FCB
Assets
 
Cash and cash equivalents
$
4,545

Overnight investments
2,274

Investment securities
9,425

Loans
36,914

Intangible assets
240

Other assets
216

Total assets acquired
53,614

Liabilities
 
Deposits
59,206

Short-term borrowings
1,662

Other liabilities
74

Total liabilities assumed
60,942

Fair value of net liabilities assumed
(7,328
)
Cash received from FDIC
10,200

Gain on acquisition of NMSB
$
2,872

Merger-related expenses of $35 thousand and $511 thousand were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. Loan-related interest income generated from NMSB was approximately $699 thousand for the third quarter of 2016 and $1.5 million since the acquisition date.
All loans resulting from the NMSB 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 seven FDIC-assisted transactions during the period beginning in 2009 through 2015, and it acquired NMSB and FCSB in its eighth and ninth such transaction during 2016. 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 twelve FDIC-assisted transactions (including the three completed by Bancorporation) included loss share agreements that, for their terms, protected us from a portion of the credit and asset quality risk we would otherwise incur. The CCBT, NMSB and FCSB transactions did not include loss share agreements.

During the second quarter of 2016, FCB entered into an agreement with the FDIC to terminate five of FCB's loss share agreements with the FDIC, including TVB, SAB, WFNB, ABT and CCB. All rights and obligations of FCB and the FDIC under the loss share agreements, including the clawback provisions and the settlement of outstanding loss share claims, have been resolved and terminated under the termination agreement. The termination of the FDIC loss share 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.
Under the terms of the agreement, FCB made a net payment of $20.1 million to the FDIC as consideration for early termination of the loss share agreements. Also, FCB wrote-off $1.5 million of the FDIC loss share receivable and $18.2 million of the FDIC loss share payable associated with the terminated agreements. As a result, FCB recognized a $3.4 million loss on the termination of the loss share agreements. In conjunction with the early termination, FCB adjusted its clawback liabilities under the two remaining loss share agreements with clawback provisions and released other related reserves. The clawback liabilities were adjusted in order to conform to the methodology used to determine the net termination payment. The adjustment to the clawback liabilities is accounted for by management as a change in estimate. The total one-time pre-tax benefit of these adjustments was $20.0 million. The resulting positive net impact to pre-tax earnings from the early termination of the FDIC loss share agreements was $16.6 million during the second quarter of 2016.

During the second quarter of 2016, loss share protection expired for non-single family residential loans acquired from United Western Bank (UWB). The loan balance for the expired agreements from UWB was $104.5 million at September 30, 2016. At

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Table of Contents

June 30, 2016, loss share protection expired or was terminated for all non-single family residential loans and loss share protection remains only for single family residential loans within the United Western Bank, Venture Bank and Georgian Bank loss share transactions which were not terminated. We will process all necessary filings in accordance with the agreements before expiration to collect the earned loss share receivables. Going forward, we will continue to manage these loans and loan relationships for which loss share has expired in accordance with our standard credit administration policies and procedures. For those acquired loans with loss share agreements remaining, generally, losses on single family residential loans are covered for ten years. All other loans are generally covered for five years. At September 30, 2016, $91.5 million of total loans and leases remain covered under loss share agreements.
 
 
 
 
 
 
 
 
 


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Table of Contents

Table 5
Consolidated Quarter-to-Date Average Taxable-Equivalent Balance Sheets
 
Three months ended
 
 
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
 
 
 
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
$
21,026,510


$
220,480


4.17

%
$
20,657,094

 
$
216,612

 
4.22

%
$
19,761,145

 
$
225,955

 
4.54

%
Investment securities:





 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
1,528,010


3,018


0.79

 
1,540,669

 
2,993

 
0.78

 
2,004,586

 
3,887

 
0.77

 
Government agency
321,664


711


0.88

 
373,006

 
844

 
0.91

 
756,474

 
1,922

 
1.02

 
Mortgage-backed securities
4,470,507


18,833


1.69

 
4,787,719

 
20,554

 
1.72

 
4,514,212

 
18,446

 
1.63

 
Corporate bonds
43,535

 
648

 
5.95

 
12,533

 
197

 
6.27

 
—

 
—

 
—

 
Other
88,816


316


1.41

 
72,536

 
251

 
1.40

 
18

 
—

 
—

 
Total investment securities
6,452,532


23,526


1.46

 
6,786,463

 
24,839

 
1.47

 
7,275,290

 
24,255

 
1.33

 
Overnight investments
2,967,550


3,785


0.51

 
2,533,072

 
3,225

 
0.51

 
2,061,404

 
1,174

 
0.23

 
Total interest-earning assets
30,446,592


$
247,791


3.24

%
29,976,629

 
$
244,676

 
3.28

%
29,097,839

 
$
251,384

 
3.43

%
Cash and due from banks
464,828

 
 
 
 
 
455,394

 
 
 
 
 
466,996

 
 
 
 
 
Premises and equipment
1,126,935

 
 
 
 
 
1,123,042

 
 
 
 
 
1,125,654

 
 
 
 
 
FDIC loss share receivable
6,784

 
 
 
 
 
8,396

 
 
 
 
 
13,801

 
 
 
 
 
Allowance for loan and lease losses
(209,547
)
 
 
 
 
 
(206,518
)
 
 
 
 
 
(209,578
)
 
 
 
 
 
Other real estate owned
67,583

 
 
 
 
 
66,300

 
 
 
 
 
66,951

 
 
 
 
 
Other assets
752,242

 
 
 
 
 
738,662

 
 
 
 
 
707,111

 
 
 
 
 
 Total assets
$
32,655,417

 
 
 
 
 
$
32,161,905

 
 
 
 
 
$
31,268,774

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
4,475,963


$
231


0.02

%
$
4,446,454

 
$
218

 
0.02

%
$
4,180,364

 
$
225

 
0.02

%
Savings
2,055,877


157


0.03

 
2,016,387

 
151

 
0.03

 
1,866,161

 
119

 
0.03

 
Money market accounts
8,060,290


1,568


0.08

 
8,084,829

 
1,644

 
0.08

 
8,229,793

 
1,788

 
0.09

 
Time deposits
2,900,840


2,501


0.34

 
2,986,103

 
2,588

 
0.35

 
3,312,291

 
3,084

 
0.37

 
Total interest-bearing deposits
17,492,970


4,457


0.10

 
17,533,773

 
4,601

 
0.11

 
17,588,609

 
5,216

 
0.12

 
Repurchase agreements
766,893


489


0.25

 
738,191

 
453

 
0.25

 
762,081

 
502

 
0.26

 
Other short-term borrowings
12,162


51


1.68

 
2,573

 
1

 
0.13

 
12,551

 
88

 
2.84

 
Long-term obligations
842,715


5,648


2.68

 
817,750

 
6,125

 
3.00

 
548,214

 
4,648

 
3.39

 
Total interest-bearing liabilities
19,114,740


10,645


0.22

 
19,092,287

 
11,180

 
0.23


18,911,455

 
10,454

 
0.22

 
Demand deposits
10,116,448

 
 
 
 
 
9,679,041

 
 
 
 
 
9,131,104

 
 
 
 
 
Other liabilities
366,074

 
 
 
 
 
401,480

 
 
 
 
 
402,248

 
 
 
 
 
Shareholders' equity
3,058,155

 
 
 
 
 
2,989,097

 
 
 
 
 
2,823,967

 
 
 
 
 
 Total liabilities and shareholders'
 equity
$
32,655,417

 
 
 
 
 
$
32,161,905

 
 
 
 
 
$
31,268,774

 
 
 
 
 
Interest rate spread




3.02

%




3.05

%




3.21

%
 


















Net interest income and net yield on interest-earning assets


$
237,146


3.10

%


$
233,496


3.13

%


$
240,930


3.29

%
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 5.5 percent, 5.5 percent and 6.0 percent for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, respectively. The taxable-equivalent adjustment was $1,297, $1,307 and $1,559 for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, respectively.

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Table of Contents

Table 6
Consolidated Year-to-Date Average Taxable-Equivalent Balance Sheets
 
Nine months ended
 
 
September 30, 2016
 
September 30, 2015
 
 
 
 
Interest
 
 
 
 
 
Interest
 
 
 
 
Average
 
Income/
 
 Yield/
 
Average
 
Income/
 
Yield/
 
(Dollars in thousands)
Balance
 
Expense
 
 Rate
 
Balance
 
Expense
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
20,678,838

 
$
654,824

 
4.23

%
$
19,349,072

 
$
662,085

 
4.57

%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
1,533,881

 
8,891

 
0.77

 
2,193,633

 
12,826

 
0.78

 
Government agency
385,854

 
2,586

 
0.89

 
869,602

 
5,813

 
0.89

 
Mortgage-backed securities
4,574,755

 
58,399

 
1.70

 
4,041,874

 
47,184

 
1.56

 
Corporate bonds
22,320

 
1,011

 
6.04

 
—

 
—

 
—

 
State, county and municipal
65

 
1

 
2.74

 
1,207

 
53

 
5.84

 
Other
65,729

 
658

 
1.34

 
6

 
—

 
—

 
Total investment securities
6,582,604

 
71,546

 
1.45

 
7,106,322

 
65,876

 
1.24

 
Overnight investments
2,734,160

 
10,676

 
0.52

 
2,211,112

 
4,037

 
0.24

 
Total interest-earning assets
29,995,602

 
$
737,046

 
3.28

%
28,666,506

 
$
731,998

 
3.41

%
Cash and due from banks
463,466

 
 
 
 
 
461,387

 
 
 
 
 
Premises and equipment
1,127,071

 
 
 
 
 
1,123,593

 
 
 
 
 
FDIC loss share receivable
7,969

 
 
 
 
 
20,950

 
 
 
 
 
Allowance for loan and lease losses
(207,476
)
 
 
 
 
 
(206,500
)
 
 
 
 
 
Other real estate owned
66,504

 
 
 
 
 
80,822

 
 
 
 
 
Other assets
722,946

 
 
 
 
 
695,987

 
 
 
 
 
Total assets
$
32,176,082

 
 
 
 
 
$
30,842,745

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
4,413,467

 
$
649

 
0.02

%
$
4,149,182

 
$
652

 
0.02

%
Savings
2,005,873

 
453

 
0.03

 
1,822,022

 
336

 
0.02

 
Money market accounts
8,159,686

 
4,853

 
0.08

 
8,256,694

 
5,446

 
0.09

 
Time deposits
2,982,460

 
7,762

 
0.35

 
3,413,525

 
9,945

 
0.39

 
Total interest-bearing deposits
17,561,486

 
13,717

 
0.10

 
17,641,423

 
16,379

 
0.12

 
Repurchase agreements
720,460

 
1,376

 
0.26

 
565,186

 
1,010

 
0.24

 
Other short-term borrowings
5,785

 
52

 
1.21

 
303,671

 
3,172

 
1.39

 
Long-term obligations
803,780

 
17,072

 
2.83

 
494,441

 
12,601

 
3.40

 
Total interest-bearing liabilities
19,091,511

 
32,217

 
0.23

 
19,004,721

 
33,162

 
0.23

 
Demand deposits
9,713,160

 
 
 
 
 
8,660,360

 
 
 
 
 
Other liabilities
383,956

 
 
 
 
 
401,791

 
 
 
 
 
Shareholders' equity
2,987,455

 
 
 
 
 
2,775,873

 
 
 
 
 
 Total liabilities and shareholders' equity
$
32,176,082

 
 
 
 
 
$
30,842,745

 
 
 
 
 
Interest rate spread
 
 
 
 
3.05

%
 
 
 
 
3.18

%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income and net yield on interest-earning assets
 
 
$
704,829

 
3.14

%
 
 
$
698,836

 
3.26

%
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 5.5 percent and 6.0 percent for the nine months ended September 30, 2016 and 2015, respectively. The taxable-equivalent adjustment was $4,071 and $4,650 for the nine months ended September 30, 2016 and 2015, respectively.


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Table of Contents

Table 7
Changes in Consolidated Taxable Equivalent Net Interest Income
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
 
 
Change from prior year period due to:
 
Change from prior year period due to:
 
(Dollars in thousands)
Volume
 
Yield/Rate
 
Total Change
 
Volume
 
Yield/Rate
 
Total Change
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
13,672

 
$
(19,147
)
 
$
(5,475
)
 
$
43,742

 
$
(51,003
)
 
$
(7,261
)
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury
(946
)
 
77

 
(869
)
 
(3,812
)
 
(123
)
 
(3,935
)
 
Government agency
(1,028
)
 
(183
)
 
(1,211
)
 
(3,228
)
 
1

 
(3,227
)
 
Mortgage-backed securities
(234
)
 
621

 
387

 
6,603

 
4,612

 
11,215

 
Corporate bonds
648

 
—

 
648

 
1,011

 
—

 
1,011

 
State, county and municipal
—

 
—

 
—

 
(37
)
 
(15
)
 
(52
)
 
Other
316

 
—

 
316

 
658

 
—

 
658

 
Total investment securities
(1,244
)
 
515

 
(729
)
 
1,195

 
4,475

 
5,670

 
Overnight investments
842

 
1,769

 
2,611

 
1,472

 
5,167

 
6,639

 
Total interest-earning assets
$
13,270

 
$
(16,863
)
 
$
(3,593
)
 
$
46,409

 
$
(41,361
)
 
$
5,048

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Checking with interest
$
10

 
$
(4
)
 
$
6

 
$
18

 
$
(21
)
 
$
(3
)
 
Savings
26

 
12

 
38

 
4

 
113

 
117

 
Money market accounts
(26
)
 
(194
)
 
(220
)
 
(20
)
 
(573
)
 
(593
)
 
Time deposits
(358
)
 
(225
)
 
(583
)
 
(1,210
)
 
(973
)
 
(2,183
)
 
Total interest-bearing deposits
(348
)
 
(411
)
 
(759
)
 
(1,208
)
 
(1,454
)
 
(2,662
)
 
Repurchase agreements
5

 
(18
)
 
(13
)
 
280

 
86

 
366

 
Other short-term borrowings
(2
)
 
(35
)
 
(37
)
 
(2,905
)
 
(215
)
 
(3,120
)
 
Long-term obligations
2,234

 
(1,234
)
 
1,000

 
7,236

 
(2,765
)
 
4,471

 
Total interest-bearing liabilities
1,889

 
(1,698
)
 
191

 
3,403

 
(4,348
)
 
(945
)
 
Change in net interest income
$
11,381

 
$
(15,165
)
 
$
(3,784
)
 
$
43,006

 
$
(37,013
)
 
$
5,993

 
The rate/volume variance is allocated equally between the changes in volume and rate.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Third Quarter 2016
Net interest income increased $3.7 million, or by 1.6 percent, to $235.8 million from the second quarter of 2016. On a taxable-equivalent basis, net interest income increased $3.7 million, or by 1.6 percent, from $233.5 million during the second quarter of 2016. The increase was primarily due to higher non-PCI loan interest income of $7.0 million related to originated loan volume, a $560 thousand increase in interest income earned on overnight investments and a decrease in interest expense of $535 thousand. These favorable impacts were offset by a $3.1 million decrease in PCI loan interest income due to runoff in the portfolio and lower investment securities interest income of $1.3 million as proceeds from sales, maturities and paydowns during the year have not been redeployed into the securities portfolio pending market opportunities.
Net interest income was $235.8 million, a decrease of $3.5 million, or 1.5 percent, from the third quarter of 2015. On a taxable-equivalent basis, net interest income was $237.1 million, a decrease of $3.8 million, or 1.6 percent, from the third quarter of 2015. The decrease was primarily due to lower PCI loan income of $15.2 million as a result of PCI loan portfolio runoff, a $625 thousand decrease in investment securities interest income and a $191 thousand increase in interest expense. These declines in net interest income were offset by a $9.9 million increase in non-PCI loan interest income due to originated loan volume and a $2.6 million increase in interest income earned on excess cash held in overnight investments. The December 2015 federal funds rate increase of 25 basis points contributed to higher interest income earned on overnight investments in the current quarter.
The taxable-equivalent net interest margin was 3.10 percent for the third quarter of 2016, a decrease of 3 basis points from the second quarter of 2016 and a decrease of 19 basis points from the same quarter in the prior year. The margin compression for both periods was primarily due to continued PCI loan portfolio runoff, offset by originated loan growth and lower rates on interest-bearing deposits.

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Table of Contents

Average quarter-to-date interest earning assets increased by $470.0 million since the second quarter of 2016, reflecting a $369.4 million increase in average outstanding loans, due to originated loan growth and loans acquired in the Cordia acquisitions and a $434.5 million increase in average overnight investments, partially offset by a $333.9 million reduction in average investment securities. Average quarter-to-date interest earning assets increased by $1.35 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 experienced the most significant increase, primarily due to originated loan growth of $1.38 billion and the NMSB, FCSB and Cordia acquisitions.
Average interest-bearing liabilities increased by $22.5 million compared to the second quarter of 2016, due to a $38.3 million increase in average short-term borrowings and a $25.0 million increase in average long-term obligations, partially offset by a $40.8 million decrease in average interest-bearing deposits due to a shift to low-cost demand deposit accounts. The increase in short-term borrowings was due to higher average repurchase obligations and the increase in long-term obligations was due to the addition of $75.0 million Federal Home Loan Bank (FHLB) advances during the second quarter of 2016. When compared to the same quarter in the prior year, average interest-bearing liabilities increased $203.3 million primarily due to the addition of $150.0 million FHLB advances in 2016 and $230.0 million FHLB advances in the third quarter of 2015. The rate on interest-bearing liabilities was unchanged at 0.22 percent as lower deposit funding costs in the third quarter of 2016 offset higher borrowing costs resulting from the additional FHLB advances.
Year-to-date 2016
Net interest income for the first nine months of 2016 was $700.8 million, an increase of $6.6 million, or 0.9 percent, compared to the same period of 2015. On a taxable-equivalent basis, net interest income was $704.8 million, an increase of $6.0 million, or 0.9 percent, from the same period of 2015. Loan interest income decreased $7.0 million from the same period of 2015 as a result of a $32.1 million decline in PCI loan interest income due to PCI loan runoff, offset by an increase in non-PCI loan interest income of $25.1 million due to originated loan growth. Net interest income benefited from a $6.0 million improvement in investment securities interest income, higher income earned on overnight investments and lower interest expense due to reduced interest-bearing deposit costs. Investment securities interest income improved as maturities were reinvested into higher yielding investments and sales proceeds were redeployed at levels above prior yields. Overnight investments benefited as a result of the December 2015 federal funds rate increase.
The taxable-equivalent net interest margin decreased 12 basis points to 3.14 percent in the first nine months of 2016, compared to the same period of 2015. The margin compression was due to PCI loan portfolio runoff, offset by continued originated loan growth and improvement in investment yields. The December 2015 federal funds rate increase of 25 basis points contributed to higher interest income earned on overnight investments.
Average year-to-date interest earning assets increased by $1.33 billion in the first nine months of 2016 compared to the same period of 2015, primarily due to a $1.33 billion increase in average outstanding loans due to originated loan growth and the impact of the NMSB, FCSB and Cordia acquisitions. Average year-to-date interest earning assets also increased due to higher average overnight investments of $523.0 million, partially offset by a $523.7 million decline in average investment securities as sales, maturities and paydowns exceeded purchases during the period.
Average year-to-date interest-bearing liabilities increased by $86.8 million compared to the first nine months of 2015, due to a $309.3 million increase in average long-term obligations, partially offset by a $142.6 million decline in average short-term borrowings and a $79.9 million decrease in average interest-bearing deposits. The increase in long-term obligations was primarily due to the addition of $150.0 million FHLB advances during 2016 to mitigate interest rate risk from long-term fixed rate loans, while the decline in short-term borrowings was due to maturities of subordinated debt of $199.9 million during the second quarter of 2015.
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 loss share 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.


57
Table of Contents

Table 8
Noninterest Income
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Gain on acquisitions
$
837

 
$
3,290

 
$
—

 
$
5,831

 
$
42,930

Cardholder services
21,537

 
21,054

 
19,588

 
61,949

 
57,203

Merchant services
25,179

 
24,236

 
22,005

 
71,392

 
62,955

Service charges on deposit accounts
23,154

 
21,884

 
23,153

 
66,888

 
67,572

Wealth management services
19,915

 
21,291

 
22,223

 
60,840

 
64,658

Securities gains
352

 
12,529

 
5,564

 
17,509

 
10,837

Other service charges and fees
7,567

 
7,137

 
6,208

 
21,693

 
17,443

Mortgage income
6,692

 
4,537

 
4,852

 
12,540

 
14,972

Insurance commissions
2,755

 
2,265

 
2,945

 
8,198

 
8,698

ATM income
1,908

 
1,845

 
1,800

 
5,518

 
5,289

Adjustments to FDIC receivable for loss share agreements
(2,773
)
 
(2,367
)
 
(4,130
)
 
(7,673
)
 
(9,730
)
Net impact from FDIC loss share termination
—

 
16,559

 
—

 
16,559

 
—

Recoveries of PCI loans previously charged off
4,803

 
4,219

 
2,544

 
11,906

 
15,960

Other
5,915

 
1,771

 
2,998

 
10,223

 
9,166

Total noninterest income
$
117,841

 
$
140,250

 
$
109,750

 
$
363,373

 
$
367,953

In the third quarter of 2016, noninterest income was $117.8 million, a decline of $22.4 million from the second quarter of 2016. The change was attributable to the following drivers:
•
The $16.6 million impact of the early termination of the FDIC loss share agreements in the second quarter of 2016.
•
Lower gains on sales of investment securities of $12.2 million.
•
The $2.5 million decrease on acquisition gains related to FCSB and NMSB. The third quarter of 2016 included an additional $837 thousand gain on the FCSB acquisition due to a refinement of initial fair values.
•
Gain of $3.8 million on sale of certain residential mortgage loans totaling $64.3 million in the current quarter.
•
Mortgage income increased $2.2 million due to increased production and lower impairment charges on mortgage servicing assets.
•
Merchant and cardholder services increased $1.4 million as a result of higher sales volume.
Noninterest income excluding acquisition gains was $117.0 million for the third quarter of 2016 compared to $109.8 million for the same period of 2015. The increase was primarily driven by higher merchant and cardholder income of $5.1 million due to increased sales volume, the $3.8 million gain on the sale of certain residential mortgage loans during the current quarter, a $2.3 million increase in recoveries of PCI loans previously charged off, higher mortgage income of $1.8 million, and an increase in other service charges and fees of $1.4 million. These favorable impacts were offset by a $5.2 million reduction in securities gains and a $2.3 million decline in wealth management income as increased annuity sales were more than offset by a decline in trust income.
Noninterest income excluding acquisition gains was $357.5 million for first nine months of 2016 compared to $325.0 million for the same period of 2015. The increase was primarily driven by the $16.6 million impact from the early termination of the FDIC loss share agreements, higher merchant and cardholder income of $13.2 million due to increased sales volume, a $6.7 million increase in securities gains and an increase in other service charges and fees of $4.3 million. These increases were offset by a $4.1 million decline in recoveries of PCI loans previously charged off and a $3.8 million reduction in wealth management income primarily as a result of lower fees collected on trust accounts due to asset mix.

58
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 9
Noninterest Expense
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Salaries and wages
$
107,762

 
$
104,059

 
$
108,992

 
$
315,720

 
$
324,358

Employee benefits
26,750

 
25,661

 
27,121

 
79,761

 
86,341

Occupancy expense
24,857

 
24,955

 
22,260

 
74,824

 
73,412

Equipment expense
23,736

 
22,715

 
22,447

 
68,796

 
69,284

FDIC insurance expense
5,796

 
4,588

 
4,933

 
15,173

 
13,755

Foreclosure-related expenses
2,016

 
(1,116
)
 
1,087

 
2,631

 
4,663

Merger-related expenses
3,764

 
1,385

 
3,679

 
5,187

 
11,249

Merchant processing expense
17,174

 
16,517

 
15,103

 
48,778

 
44,091

Processing fees paid to third parties
4,912

 
4,634

 
4,338

 
13,648

 
14,510

Card processing expense
6,134

 
6,321

 
5,468

 
18,539

 
15,890

Consultant expense
3,092

 
2,741

 
2,048

 
7,604

 
6,424

Collection expense
2,023

 
2,497

 
2,242

 
7,101

 
7,127

Advertising expense
2,689

 
2,813

 
3,438

 
7,557

 
7,675

Core deposit intangible amortization
4,121

 
4,216

 
4,629

 
12,655

 
14,404

Other
32,407

 
36,317

 
32,387

 
99,233

 
89,846

Total noninterest expense
$
267,233

 
$
258,303

 
$
260,172

 
$
777,207

 
$
783,029

Noninterest expense was $267.2 million in the third quarter of 2016, an increase of $8.9 million from the second quarter of 2016. The following items impacted various noninterest expense categories:
•
Personnel expenses increased $4.8 million as a result of higher health insurance expense and lower salary deferrals due primarily to the refinement of certain loan origination costs.
•
Foreclosure-related expenses increased $3.1 million primarily due to lower reimbursements on Small Business Administration (SBA) guaranteed loans.
•
Merger-related expenses increased $2.4 million primarily related to the Cordia acquisition.
•
Other expense decreased primarily as a result of certain litigation related costs of $2.3 million recognized in the second quarter of 2016.
Noninterest expense for the third quarter of 2016 was $267.2 million compared to $260.2 million for the same period of 2015. The increase was primarily driven by increases in merchant and card processing expenses of $2.7 million related to higher sales volume, an increase in occupancy expense of $2.6 million due to a one-time depreciation adjustment related to a system conversion during the third quarter of 2015, an increase in equipment expense of $1.3 million, higher consultant expense of $1.0 million, and a $929 thousand increase in foreclosure-related expenses. These increases were partially offset by a decline in personnel expenses of $1.6 million related to lower pension costs and increased deferrals of salary costs related to higher loan origination activity.
Noninterest expense for the first nine months of 2016 was $777.2 million compared to $783.0 million for the same period of 2015. The decrease was primarily driven by a reduction in personnel expense of $15.2 million related to lower pension costs and higher deferrals of salary costs related to increased loan origination activity and a decline in merger expense of $6.1 million. These decreases were partially offset by an increase in merchant and card processing expenses of $7.3 million due to higher sales volume and an increase in other expense primarily as a result of higher fraud losses on credit and debit cards of $4.0 million and certain litigation costs of $2.3 million recognized in 2016.


59
Table of Contents

Income Taxes
Income tax expense was $27.5 million, $40.3 million and $32.9 million for the third quarter of 2016, second quarter of 2016 and third quarter of 2015, representing effective tax rates of 34.9 percent, 36.7 percent and 37.0 percent during the respective periods. The decline in the effective tax rate in the third quarter of 2016 was primarily attributable to increased nontaxable income relative to taxable income. Income tax expense was $97.2 million and $97.9 million for the nine months ended September 30, 2016 and 2015, respectively, representing effective tax rates of 36.0 percent and 36.9 percent for the respective nine month periods. During the third quarter of 2016, BancShares adjusted its net deferred tax asset as a result of a reduction in the North Carolina corporate income tax rate that will become effective January 1, 2017. The lower state corporate income tax rate did not have a material impact on tax expense for the quarter.
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.

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

We 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. Our focus on asset quality also influences the composition of our investment securities portfolio.

Interest-earning assets averaged $30.45 billion and $28.89 billion for the quarters ended September 30, 2016 and December 31, 2015, respectively. The $1.56 billion increase from December 31, 2015 was due to a $1.50 billion increase in loans and leases primarily as a result of originated loan growth and the NMSB, FCSB and Cordia acquisitions, and a $614.3 million increase in overnight investments, offset by a $559.2 million decline in investment securities.

Investment Securities

Investment securities were $6.38 billion at September 30, 2016, compared to $6.86 billion and $6.69 billion at December 31, 2015 and September 30, 2015, respectively. The $476.5 million and $305.8 million decrease in the portfolio from December 31, 2015 and September 30, 2015, respectively, was attributable to reinvesting a portion of the proceeds from sales, maturities and paydowns into overnight investments pending reinvestment. The yield on overnight investments benefited from the December 2015 increase in the federal funds rate of 25 basis points.

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. As of September 30, 2016, investment securities available for sale had a net pre-tax unrealized gain of $48.6 million, compared to a net pre-tax unrealized loss of $24.5 million as of December 31, 2015 and a net pre-tax unrealized gain of $26.9 million as of September 30, 2015. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of September 30, 2016.

Sales of investment securities for the three months ended September 30, 2016 resulted in a net realized gain of $352 thousand compared to a net gain of $5.6 million for same period of 2015. During the nine months ended September 30, 2016 we recognized $17.5 million in net realized gains on sales of investment securities compared to $10.8 million in net realized gains for the corresponding period of 2015.

At September 30, 2016, mortgage-backed securities represented 70.9 percent of investment securities available for sale, compared to U.S. Treasury, government agency securities, equity securities, corporate bonds and other, which represented 24.3 percent, 2.7 percent, 1.4 percent, 0.6 percent and 0.1 percent of the portfolio, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

Since December 31, 2015, 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. Remaining proceeds from accumulated sales, maturities and paydowns that are included in overnight investments are expected to be deployed back into the securities portfolio

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in the near term, as market opportunities present themselves. The carrying value of equity securities and corporate bonds increased by $84.1 million and $33.4 million, respectively, while U.S. Treasury, government agency and mortgage-backed securities declined $125.4 million, $328.8 million and $139.8 million, respectively, since December 31, 2015.

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.

Table 10
Investment Securities
 
September 30, 2016
 
December 31, 2015
 
September 30, 2015
(Dollars in thousands)
 Cost
 
 Fair value
 
 Cost
 
Fair value
 
Cost
 
Fair Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,547,501

 
$
1,549,530

 
$
1,675,996

 
$
1,674,882

 
$
1,685,794

 
$
1,691,502

Government agency
169,609

 
169,859

 
498,804

 
498,660

 
633,162

 
634,904

Mortgage-backed securities
4,487,083

 
4,528,370

 
4,692,447

 
4,668,198

 
4,343,105

 
4,362,561

Equity securities
88,526

 
93,011

 
7,935

 
8,893

 
1,591

 
1,611

Corporate bonds
41,363

 
41,945

 
8,500

 
8,500

 
—

 
—

Other
2,115

 
2,100

 
2,115

 
2,160

 
—

 
—

Total investment securities available for sale
6,336,197

 
6,384,815

 
6,885,797

 
6,861,293

 
6,663,652

 
6,690,578

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
125

 
133

 
255

 
265

 
301

 
314

Total investment securities
$
6,336,322

 
$
6,384,948

 
$
6,886,052

 
$
6,861,558

 
$
6,663,953

 
$
6,690,892


Loans and Leases
Loans at September 30, 2016, were $21.30 billion, a net increase of $1.06 billion compared to December 31, 2015, representing growth of 7.0 percent on an annualized basis. Growth was primarily driven by $901.9 million of organic growth in the non-PCI portfolio and the Cordia acquisition impact of $237.4 million at September 30, 2016. The PCI portfolio declined over this period by $82.3 million, reflecting continued loan run-off of $152.8 million offset by net loans acquired from NMSB and FCSB, which were $31.8 million and $38.7 million, respectively, at September 30, 2016.
Non-PCI loans increased by $1.62 billion, compared to September 30, 2015, reflecting originated loan growth and the Cordia acquisition impact. PCI loans decreased by $175.9 million from September 30, 2015, due to continued pay downs in the PCI loan portfolio, offset by the contributions from the NMSB and FCSB acquisitions with loan balances of $31.8 million and $38.7 million, respectively, at September 30, 2016.

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 11 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.


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PCI loans at September 30, 2016 were $868.2 million, representing 4.1 percent of total loans and leases, compared to $950.5 million and $1.04 billion at December 31, 2015 and September 30, 2015, respectively.

PCI commercial loans were $543.7 million at September 30, 2016, a decrease of $49.9 million since December 31, 2015 and a decrease of $103.3 million since September 30, 2015. At September 30, 2016, PCI noncommercial loans were $324.5 million, a decrease of $32.4 million and $72.6 million since December 31, 2015 and September 30, 2015, respectively. The runoff in the PCI loan portfolio was offset by the contributions from the NMSB and FCSB 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 that the loans 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 September 30, 2016 were $20.43 billion, representing 95.9 percent of total loans and leases, compared to $19.29 billion and $18.81 billion at December 31, 2015 and September 30, 2015, 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 $13.40 billion at September 30, 2016, an increase of $773.9 million and $1.18 billion, compared to December 31, 2015 and September 30, 2015, respectively, resulting from originated loan growth and 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 $7.02 billion at September 30, 2016, an increase of $365.4 million and $432.0 million compared to December 31, 2015 and September 30, 2015, respectively.


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Table 11
Loans and Leases
(Dollars in thousands)
September 30, 2016
 
December 31, 2015
 
September 30, 2015
Non-PCI loans and leases:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
$
642,158

 
$
620,352

 
$
563,926

Commercial mortgage
8,779,132

 
8,274,548

 
8,076,946

Other commercial real estate
346,030

 
321,021

 
316,924

Commercial and industrial
2,507,167

 
2,368,958

 
2,211,973

Lease financing
803,601

 
730,778

 
691,915

Other
326,348

 
314,832

 
357,760

Total commercial loans
13,404,436

 
12,630,489

 
12,219,444

Noncommercial:
 
 
 
 
 
Residential mortgage
2,813,914

 
2,695,985

 
2,659,821

Revolving mortgage
2,573,086

 
2,523,106

 
2,519,972

Construction and land development
234,383

 
220,073

 
220,493

Consumer
1,402,961

 
1,219,821

 
1,192,012

Total noncommercial loans
7,024,344

 
6,658,985

 
6,592,298

Total non-PCI loans and leases
20,428,780

 
19,289,474

 
18,811,742

PCI loans:
 
 
 
 
 
Commercial:
 
 
 
 
 
Construction and land development
23,138

 
33,880

 
41,582

Commercial mortgage
491,180

 
525,468

 
568,256

Other commercial real estate
14,783

 
17,076

 
18,013

Commercial and industrial
11,437

 
15,182

 
17,023

Other
3,167

 
2,008

 
2,087

Total commercial loans
543,705

 
593,614

 
646,961

Noncommercial:
 
 
 
 
 
Residential mortgage
278,872

 
302,158

 
334,518

Revolving mortgage
43,509

 
52,471

 
59,695

Construction and land development
83

 
—

 
347

Consumer
2,031

 
2,273

 
2,543

Total noncommercial loans
324,495

 
356,902

 
397,103

Total PCI loans
868,200

 
950,516

 
1,044,064

Total loans and leases
$
21,296,980

 
$
20,239,990

 
$
19,855,806



Allowance for Loan and Lease Losses (ALLL)

The ALLL was $212.0 million at September 30, 2016, representing increases of $5.7 million and $6.5 million since December 31, 2015 and September 30, 2015, respectively. The ALLL as a percentage of total loans and leases was 1.00 percent at September 30, 2016, compared to 1.01 percent and 1.03 percent at December 31, 2015 and September 30, 2015, respectively. The decline in the ALLL ratio from both periods was primarily due to lower reserves on PCI loans due to runoff in the portfolio.

At September 30, 2016, the ALLL allocated to non-PCI loans and leases was $200.3 million, or 0.98 percent of non-PCI loans and leases, compared to $189.9 million, or 0.99 percent, at December 31, 2015 and $187.9 million, or 1.00 percent, at September 30, 2015. BancShares continues to experience improvement in credit quality indicators which have reduced the ALLL ratio since September 30, 2015. In the commercial non-PCI loan portfolio, credit quality improvements included low net charge-off ratios and migration of loans with higher credit risk ratings to lower ratings. The noncommercial non-PCI loan portfolio also experienced lower delinquency trends. The ALLL for non-PCI loans and leases increased from both December 31, 2015 and September 30, 2015 primarily due to loan growth. An additional ALLL of $11.6 million relates to PCI loans at September 30, 2016, compared to $16.3 million and $17.6 million at December 31, 2015 and September 30, 2015, respectively. The ALLL on the PCI loan portfolio declined from both periods due to the runoff of this portfolio.

The ALLL allocated to originated non-PCI loans and leases was 1.10 percent of originated non-PCI loans and leases at September 30, 2016, compared to 1.14 percent and 1.18 percent at December 31, 2015 and September 30, 2015, respectively. Originated non-PCI loans were $18.10 billion, $16.60 billion and $15.89 billion at September 30, 2016, December 31, 2015 and September 30, 2015, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.

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BancShares recognized $7.5 million net provision expense for loan and lease losses during the third quarter of 2016, compared to $4.6 million in the second quarter of 2016. The increase of $2.9 million was due to higher originated loan growth and lower impairment reversals on PCI loans, offset by changes in reserves on impaired non-PCI loans and leases. Compared to the third quarter of 2015, provision expense increased $7.4 million primarily due to a $4.1 million reversal of previously recorded specific reserves on impaired non-PCI loans in the prior year as a result of refined loss estimates and lower credit quality improvements in the current quarter. On an annualized basis, total net charge-offs as a percentage of total average loans and leases for the third quarter of 2016 was 0.07 percent, compared to 0.06 percent in the second quarter of 2016 and 0.06 percent in the third quarter of 2015.

Net provision expense for the nine months ended September 30, 2016 was $16.9 million, compared to $13.6 million for the same period of 2015. The increase in provision expense was primarily due to slowing of credit quality improvements in the non-PCI portfolio and changes in reserves on impaired non-PCI loans and leases, offset by higher impairment reversals on PCI loans in 2016.

Provision expense for non-PCI loan and leases was $7.4 million during the third quarter of 2016, compared to $6.7 million in the second quarter of 2016 and a net provision credit of $2.7 million in the third quarter of 2015. The increase in provision expense from both periods was due to originated loan growth. The net provision credit in the prior year primarily resulted from a $4.1 million reversal of previously recorded specific reserves on impaired non-PCI loans in the prior year due to refined loss estimates. Net charge-offs for non-PCI loans and leases were $3.6 million during the third quarter of 2016, compared to $3.3 million and $2.3 million during the second quarter of 2016 and third quarter of 2015, respectively. On an annualized basis, non-PCI net charge-offs as a percentage of non-PCI average loans and leases during the third quarter of 2016 were 0.07 percent, unchanged from the second quarter of 2016 and compared to 0.05 percent in the third quarter of 2015.

PCI loan provision expense was $77 thousand during the third quarter of 2016, compared to a net provision credit of $2.1 million and provision expense of $2.8 million for the second quarter of 2016 and third quarter of 2015, respectively.

Management considers the ALLL adequate to absorb estimated inherent losses that relate to loans and leases outstanding at September 30, 2016, 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 12
Allowance for Loan and Lease Losses Components by Loan Class
 
2016
 
2015
 
Nine months ended September 30
 
Third
 
Second
 
First
 
Fourth
 
Third
 
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
2016
 
2015
Allowance for loan and lease losses at beginning of period
$
208,008

 
$
206,783

 
$
206,216

 
$
205,463

 
$
208,317

 
$
206,216

 
$
204,466

Non-PCI provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
835

 
291

 
943

 
2,393

 
1,189

 
2,069

 
2,380

Commercial mortgage
(2,163
)
 
701

 
394

 
(4,600
)
 
(5,664
)
 
(1,067
)
 
(11,221
)
Other commercial real estate
150

 
(79
)
 
(104
)
 
1,047

 
291

 
(34
)
 
522

Commercial and industrial
2,954

 
81

 
2,201

 
6,137

 
(799
)
 
5,236

 
11,294

Lease financing
274

 
343

 
(282
)
 
759

 
424

 
337

 
843

Other
183

 
37

 
(328
)
 
680

 
(58
)
 
(109
)
 
(2,100
)
Total commercial loans
2,233

 
1,374

 
2,824

 
6,416

 
(4,617
)
 
6,432

 
1,718

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
531

 
1,487

 
776

 
1,707

 
520

 
2,794

 
2,495

Revolving mortgage
679

 
1,470

 
1,158

 
(1,366
)
 
871

 
3,306

 
440

Construction and land development
88

 
78

 
87

 
235

 
114

 
253

 
306

Consumer
3,899

 
2,299

 
1,995

 
957

 
450

 
8,193

 
10,029

Total noncommercial loans
5,197

 
5,334

 
4,016

 
1,533

 
1,955

 
14,546

 
13,270

Total non-PCI provision
7,430

 
6,708

 
6,840

 
7,949

 
(2,662
)
 
20,978

 
14,988

PCI provision for loan losses
77

 
(2,146
)
 
(1,997
)
 
(903
)
 
2,769

 
(4,066
)
 
(1,370
)
Non-PCI Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
(77
)
 
(136
)
 
(426
)
 
(437
)
 
(336
)
 
(639
)
 
(575
)
Commercial mortgage
(461
)
 
(44
)
 
(90
)
 
(809
)
 
(411
)
 
(454
)
 
(691
)
Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
(178
)
Commercial and industrial
(1,198
)
 
(1,177
)
 
(1,317
)
 
(1,137
)
 
(784
)
 
(3,690
)
 
(4,815
)
Lease financing
(132
)
 
—

 
—

 
(374
)
 
(7
)
 
(93
)
 
(28
)
Other
—

 
(88
)
 
(71
)
 
—

 
—

 
(22
)
 
—

Total commercial loans
(1,868
)
 
(1,445
)
 
(1,904
)
 
(2,757
)
 
(1,538
)
 
(4,898
)
 
(6,287
)
Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
(328
)
 
(179
)
 
(174
)
 
(851
)
 
(394
)
 
(680
)
 
(768
)
Revolving mortgage
(391
)
 
(1,081
)
 
(1,036
)
 
(840
)
 
(677
)
 
(2,507
)
 
(2,086
)
Construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
(22
)
Consumer
(3,623
)
 
(3,136
)
 
(3,108
)
 
(3,761
)
 
(2,409
)
 
(9,868
)
 
(7,935
)
Total noncommercial loans
(4,342
)
 
(4,396
)
 
(4,318
)
 
(5,452
)
 
(3,480
)
 
(13,055
)
 
(10,811
)
Total non-PCI charge-offs
(6,210
)
 
(5,841
)
 
(6,222
)
 
(8,209
)
 
(5,018
)
 
(17,953
)
 
(17,098
)
Non-PCI Recoveries:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
69

 
129

 
80

 
271

 
129

 
278

 
295

Commercial mortgage
378

 
500

 
256

 
150

 
794

 
992

 
1,878

Other commercial real estate
13

 
10

 
143

 
11

 
15

 
167

 
34

Commercial and industrial
328

 
525

 
479

 
11

 
296

 
1,330

 
899

Lease financing
5

 
1

 
180

 
—

 
16

 
145

 
38

Other
170

 
29

 
321

 
—

 
45

 
384

 
91

Total commercial loans
963

 
1,194

 
1,459

 
443

 
1,295

 
3,296

 
3,235

Noncommercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
334

 
41

 
20

 
104

 
314

 
394

 
757

Revolving mortgage
256

 
214

 
32

 
330

 
363

 
502

 
843

Construction and land development
—

 
—

 
3

 
—

 
3

 
3

 
74

Consumer
1,092

 
1,111

 
990

 
1,381

 
762

 
3,194

 
2,270

Total noncommercial loans
1,682

 
1,366

 
1,045

 
1,815

 
1,442

 
4,093

 
3,944

Total non-PCI recoveries
2,645

 
2,560

 
2,504

 
2,258

 
2,737

 
7,389

 
7,179

Non-PCI loans and leases charged off, net
(3,565
)
 
(3,281
)
 
(3,718
)
 
(5,951
)
 
(2,281
)
 
(10,564
)
 
(9,919
)
PCI loans charged off, net
—

 
(56
)
 
(558
)
 
(342
)
 
(680
)
 
(614
)
 
(2,702
)
Allowance for loan and lease losses at end of period
$
211,950

 
$
208,008

 
$
206,783

 
$
206,216

 
$
205,463

 
$
211,950

 
$
205,463

Reserve for unfunded commitments
$
379

 
$
399

 
$
407

 
$
379

 
$
411

 
$
379

 
$
411

The net provision credit for commercial mortgage non-PCI loans and leases was $2.2 million and $1.1 million for the three and nine months ended September 30, 2016, compared to net provision credits of $5.7 million and $11.2 million for the same periods of 2015. The net provision credit in 2016 was due to a provision release for one relationship upgraded to a lower risk rating. The net provision credit in 2015 was primarily the result of a provision release for individually evaluated loans due to improved credit trends.
The provision expense for commercial and industrial non-PCI loans and leases was $3.0 million and $5.2 million for the three and nine months ended September 30, 2016, compared to a net provision credit of $799 thousand and provision expense of $11.3 million for the same periods of 2015. The increase in provision expense for the three months ended September 30, 2016 was primarily due to higher loan growth in the current quarter and a provision release in the prior quarter related to individually

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evaluated loans. Year-to-date provision expense was the result of loan growth, with lower loan growth in the first nine months of 2016 compared to the first nine months of 2015.
Other non-PCI loans and leases had provision expense of $183 thousand and a net provision credit of $109 thousand for the three and nine months ended September 30, 2016, compared to net provision credits of $58 thousand and $2.1 million for the same periods of 2015. The higher net provision credit for year-to-date 2015 was due to a provision release related to an individually evaluated loan due to improved credit quality.
Revolving mortgage non-PCI loans and leases had provision expense of $679 thousand and $3.3 million for the three and nine months ended September 30, 2016, compared to provision expense of $871 thousand and $440 thousand for the same periods of 2015. The increase in provision expense for year-to-date 2016 was due to higher originated loan growth and an increase in reserves on individually evaluated loans.
The provision expense for consumer non-PCI loans and leases was $3.9 million and $8.2 million for the three and nine months ended September 30, 2016, compared to $450 thousand and $10.0 million for the same periods of 2015. The increase in provision expense in the current quarter was due to 2016 loan growth coupled with a 2015 provision release due to an adjustment in the loss rate of certain consumer loans in the prior quarter.
Table 13
Allowance for Loan and Lease Losses Metrics and Ratios
 
2016
 
2015
 
Nine months ended September 30
 
 
Third
 
Second
 
First
 
Fourth
 
Third
 
 
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
 
2016
 
2015
 
Average loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
$
892,115

 
$
931,820

 
$
939,839

 
$
996,637

 
$
1,081,497

 
$
921,151

 
$
1,151,259

 
Non-PCI
20,134,395

 
19,725,274

 
19,409,252

 
19,062,919

 
18,679,648

 
19,757,687

 
18,197,813

 
Loans and leases at period-end:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
868,200

 
921,467

 
945,887

 
950,516

 
1,044,064

 
868,200

 
1,044,064

 
Non-PCI
20,428,780

 
19,821,104

 
19,471,802

 
19,289,474

 
18,811,742

 
20,428,780

 
18,811,742

 
Allowance for loan and lease losses allocated to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
11,632

 
11,555

 
13,757

 
16,312

 
17,557

 
11,632

 
17,557

 
Non-PCI
200,318

 
196,453

 
193,026

 
189,904

 
187,906

 
200,318

 
187,906

 
Total
$
211,950

 
$
208,008

 
$
206,783

 
$
206,216

 
$
205,463

 
$
211,950

 
$
205,463

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

%
0.02

%
0.24

%
0.14

%
0.25

%
0.09

%
0.31

%
Non-PCI
0.07

 
0.07

 
0.08

 
0.12

 
0.05

 
0.07

 
0.07

 
Total
0.07

 
0.06

 
0.08

 
0.12

 
0.06

 
0.07

 
0.09

 
ALLL to total loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PCI
1.34

 
1.25

 
1.45

 
1.72

 
1.68

 
1.34

 
1.68

 
Non-PCI
0.98

 
0.99

 
0.99

 
0.98

 
1.00

 
0.98

 
1.00

 
Total
1.00

 
1.00

 
1.01

 
1.02

 
1.03

 
1.00

 
1.03

 
The ALLL as a percentage of total loans and leases at September 30, 2016 was 1.00 percent, compared to 1.01 percent at December 31, 2015 and 1.03 percent at September 30, 2015.
The non-GAAP reconciliation in Table 14 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.

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Table 14
Adjusted Allowance for Loan and Lease Losses (Non-GAAP)
 
2016
 
2015
 
Third
 
Second
 
First
 
Fourth
 
Third
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
ALLL on non-PCI loans and leases (GAAP)
$
200,318

 
$
196,453

 
$
193,026

 
$
189,904

 
$
187,906

Unamortized discount related to non-PCI loans and leases (GAAP)
36,126

 
34,991

 
37,878

 
41,124

 
45,068

Adjusted ALLL on non-PCI loans and leases (non-GAAP)
236,444

 
231,444

 
230,904

 
231,028

 
232,974

 
 
 
 
 
 
 
 
 
 
ALLL on PCI loans (GAAP)
11,632

 
11,555

 
13,757

 
16,312

 
17,557

Unamortized discount related to PCI loans (GAAP)
127,200

 
136,516

 
140,379

 
137,819

 
154,624

Adjusted ALLL on PCI loans (non-GAAP)
138,832

 
148,071

 
154,136

 
154,131

 
172,181

 
 
 
 
 
 
 
 
 
 
Total ALLL (GAAP)
211,950

 
208,008

 
206,783

 
206,216

 
205,463

Net acquisition accounting fair value discounts on loans and leases (GAAP)
163,326

 
171,507

 
178,257

 
178,943

 
199,692

Adjusted ALLL (non-GAAP)
$
375,276

 
$
379,515

 
$
385,040

 
$
385,159

 
$
405,155

 
 
 
 
 
 
 
 
 
 
Adjusted ALLL to total loans and leases (non-GAAP):
 
 
 
 
 
 
 
 
 
Non-PCI
1.16
%
 
1.17
%
 
1.19
%
 
1.20
%
 
1.24
%
PCI
15.99

 
16.07

 
16.30

 
16.22

 
16.49

Total
1.76
%
 
1.83
%
 
1.89
%
 
1.90
%
 
2.04
%
The adjusted ALLL (non-GAAP), which includes the ALLL as well as remaining net acquisition fair value adjustments for acquired loans, declined to 1.76 percent of total loans and leases at September 30, 2016, from 1.90 percent and 2.04 percent of total loans and leases at December 31, 2015 and September 30, 2015, respectively. The reduction in the adjusted ALLL resulted primarily from credit quality improvements and 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 September 30, 2016, BancShares’ nonperforming assets were $160.1 million, a decline of $8.8 million from December 31, 2015 primarily due to reductions in commercial nonaccrual loans and leases. Nonperforming assets increased $2.3 million from September 30, 2015, related to an increase in OREO balances primarily from the Cordia transaction, offset by a decline in nonaccrual loans and leases.
OREO balances increased $3.4 million since December 31, 2015 and declined $895 thousand since September 30, 2015. Nonaccrual PCI loans at September 30, 2016 are down $3.4 million and $1.2 million from December 31, 2015 and September 30, 2015, respectively, due to resolutions of impaired loans. Nonaccrual non-PCI loans and leases at September 30, 2016 declined $8.8 million and $0.2 million from December 31, 2015 and September 30, 2015, respectively, as a result of problem asset resolutions primarily in the commercial loan portfolio.
Of the $160.1 million in nonperforming assets at September 30, 2016, $686 thousand related to loans and OREO covered by loss share agreements. Covered nonperforming assets continue to decline due to the expiration of FDIC loss share agreements, loan resolutions and the termination of five of FCB's nine loss share agreements with the FDIC during the second quarter of 2016.

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Table 15
Nonperforming Assets
 
2016
 
2015
 
Third
 
Second
 
First
 
Fourth
 
Third
(Dollars in thousands)
Quarter
 
Quarter
 
 Quarter
 
Quarter
 
 Quarter
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Non-PCI
$
87,043

 
$
89,006

 
$
90,455

 
$
95,854

 
$
87,276

PCI
4,142

 
3,759

 
7,319

 
7,579

 
5,329

Other real estate
68,964

 
67,089

 
65,068

 
65,559

 
69,859

Total nonperforming assets
$
160,149

 
$
159,854

 
$
162,842

 
$
168,992

 
$
162,464

 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases:
 
 
 
 
 
 
 
 
 
Covered under loss share agreements
$
95

 
$
637

 
$
2,968

 
$
2,992

 
$
3,171

Not covered under loss share agreements
91,090

 
92,128

 
94,806

 
100,441

 
89,434

Other real estate:
 
 
 
 
 
 
 
 
 
Covered
591

 
484

 
9,734

 
6,817

 
8,152

Noncovered
68,373

 
66,605

 
55,334

 
58,742

 
61,707

Total nonperforming assets
$
160,149

 
$
159,854

 
$
162,842

 
$
168,992

 
$
162,464

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Covered
$
91,469

 
$
95,534

 
$
258,179

 
$
272,554

 
$
296,476

Noncovered
21,205,511

 
20,647,037

 
20,159,510

 
19,967,436

 
19,559,330

 
 
 
 
 
 
 
 
 
 
Accruing loans and leases 90 days or more past due
 
 
 
 
 
 
 
 
 
Non-PCI
1,879

 
3,017

 
4,882

 
3,315

 
6,277

PCI
67,433

 
76,807

 
70,398

 
73,751

 
73,539

 
 
 
 
 
 
 
 
 
 
Ratio of nonperforming assets to total loans, leases and other real estate owned:
 
 
 
 
 
 
 
 
 
Covered
0.75
%
 
1.17
%
 
4.74
%
 
3.51
%
 
3.72
%
Noncovered
0.75

 
0.77

 
0.74

 
0.79

 
0.77

Total
0.75
%
 
0.77
%
 
0.80
%
 
0.83
%
 
0.82
%
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 September 30, 2016 were $149.4 million, compared to $144.8 million at December 31, 2015 and $145.7 million at September 30, 2015. Accruing TDRs were $122.4 million, increases of $9.1 million and $3.1 million from December 31, 2015 and September 30, 2015, respectively, due primarily to an increase in commercial and residential mortgage loan modifications. At September 30, 2016, nonaccruing TDRs were $27.1 million, a decrease of $4.5 million and an increase of $600 thousand from December 31, 2015 and September 30, 2015, respectively. The decrease in nonaccruing TDRs from December 31, 2015 was primarily related to payoffs in the commercial loan portfolio.

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Table 16
Troubled Debt Restructurings
(Dollars in thousands)
September 30, 2016
 
December 31, 2015
 
September 30, 2015
Accruing TDRs:
 
 
 
 
 
PCI
$
25,168

 
$
29,231

 
$
32,370

Non-PCI
97,200

 
84,065

 
86,892

Total accruing TDRs
122,368

 
113,296

 
119,262

Nonaccruing TDRs:
 
 
 
 
 
PCI
318

 
1,420

 
717

Non-PCI
26,739

 
30,127

 
25,740

Total nonaccruing TDRs
27,057

 
31,547

 
26,457

All TDRs:
 
 
 
 
 
PCI
25,486

 
30,651

 
33,087

Non-PCI
123,939

 
114,192

 
112,632

Total TDRs
$
149,425

 
$
144,843

 
$
145,719

INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities were $19.25 billion and $18.96 billion at September 30, 2016 and December 31, 2015, respectively. The $294.9 million increase from December 31, 2015 was primarily due to $150.0 million of new Federal Home Loan Bank (FHLB) borrowings in 2016, a $125.2 million increase in customer repurchase agreements, and an increase in interest-bearing deposits of $23.3 million. Interest-bearing liabilities increased $237.0 million from September 30, 2015 primarily due to $150.0 million in additional FHLB borrowings and a $131.7 million increase in interest-bearing deposits, offset by a $29.8 million reduction in customer repurchase agreements.
Deposits
At September 30, 2016, total deposits were $27.93 billion, an increase of $994.5 million, or 3.7 percent, when compared to December 31, 2015 and an increase of $1.21 billion, or by 4.5 percent, when compared to September 30, 2015. The increase from both periods was the result of organic growth in demand deposit, checking with interest and savings accounts and the contributions from the NMSB, FCSB and Cordia acquisitions, offset by runoff in time deposits and money market accounts.
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 September 30, 2016, short-term borrowings were $730.2 million compared to $594.7 million and $759.8 million at December 31, 2015 and September 30, 2015, respectively. The $135.5 million increase from December 31, 2015 was due to higher activity in customer repurchase agreements and FHLB borrowings of $10.0 million with maturities less than one year being reclassified from long-term obligations. The $29.5 million decrease from September 30, 2015 was due to a lower activity in customer repurchase agreements.
Long-Term Obligations
Long-term obligations were $840.3 million at September 30, 2016, up $136.1 million from December 31, 2015 and $134.8 million from September 30, 2015. The increase from both periods was primarily the result of incremental FHLB borrowings of $150.0 million during 2016 used to mitigate interest rate risk from long-term fixed rate loans.

At September 30, 2016, December 31, 2015 and September 30, 2015, long-term obligations included $132.5 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, FCB/SC Capital Trust II, and SCB Capital Trust I, special purpose entities and grantor trusts for $128.5 million of trust preferred securities. FCB/NC Capital Trust III, FCB/SC Capital Trust II, and SCB Capital Trust I's (the Trusts) trust preferred securities mature in 2036, 2034, and 2034, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.



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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 $14.8 million at September 30, 2016, compared to a net reduction of $64.4 million at December 31, 2015 and $34.9 million at September 30, 2015. The $49.7 million and $20.1 million changes in AOCI from December 31, 2015 and September 30, 2015, respectively, were primarily driven by an increase in unrealized gains on investment securities available for sale as a result of lower market interest rates.

Table 17
Analysis of Capital Adequacy
 
September 30, 2016
 
December 31, 2015
 
September 30, 2015
 
Regulatory
minimum
 
Well-capitalized requirement
BancShares
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.50
%
 
12.65
%
 
12.77
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.50

 
12.51

 
12.63

 
4.50

 
6.50

Total risk-based capital
13.96

 
14.03

 
14.18

 
8.00

 
10.00

Tier 1 leverage ratio
9.07

 
8.96

 
8.97

 
4.00

 
5.00

 
 
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
 
 
Risk-based capital ratios
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
12.35
%
 
12.64
%
 
12.73
%
 
6.00
%
 
8.00
%
Common equity Tier 1
12.35

 
12.64

 
12.73

 
4.50

 
6.50

Total risk-based capital
13.30

 
13.61

 
13.72

 
8.00

 
10.00

Tier 1 leverage ratio
8.96

 
8.95

 
8.95

 
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 new minimum requirements for both the quantity and quality of capital held by BancShares and included a new common equity Tier 1 capital to risk-weighted assets ratio. A new 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. BancShares and FCB had capital conservation buffers above minimum risk-based capital requirements of 5.96 percent and 5.30 percent, respectively, at September 30, 2016. The buffers exceed the 0.625 percent requirement and, therefore, result in no limit on distributions.
As of September 30, 2016, BancShares continues to exceed minimum capital standards and FCB remains well-capitalized under the new rules. BancShares remained well-capitalized with a leverage capital ratio of 9.07 percent, Tier 1 risk-based capital ratio of 12.50 percent, common equity Tier 1 ratio of 12.50 and total risk-based capital ratio of 13.96 percent under Basel III guidelines at September 30, 2016.
BancShares had no trust preferred capital securities included in Tier 1 capital at September 30, 2016, compared to $32.1 million at December 31, 2015. The decrease during 2016 was due to the implementation of Basel III. Effective January 1, 2015, 75 percent of our trust preferred capital securities were excluded from Tier 1 capital and the remaining 25 percent were phased out on January 1, 2016 under Basel III requirements. 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.

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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 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.

Table 18
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 September 30, 2016 and December 31, 2015.
 
Estimated increase (decrease) in net interest income
Change in interest rate (basis point)
September 30, 2016
 
December 31, 2015
+100
5.51
%
 
2.78
 %
+200
7.62

 
2.80

+300
5.40

 
(0.75
)
The change in net interest income sensitivity metrics at September 30, 2016 compared to December 31, 2015 was due to a shift in the earning asset mix with an increase in floating rate overnight investments and a reduction in fixed rate securities, and a decrease in intermediate and long-term treasury and swap rates which resulted in a change to the expected deposit mix.

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Table 19
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 September 30, 2016 and December 31, 2015.
 
Estimated increase (decrease) in EVE
Change in interest rate (basis point)
September 30, 2016
 
December 31, 2015
+100
8.98
%
 
3.18
 %
+200
11.28

 
1.53

+300
7.78

 
(3.92
)

The improvement in the economic value of equity metrics at September 30, 2016 compared to December 31, 2015 was primarily due to balance sheet changes including a decrease in fixed rate securities and an increase in demand deposits, and a decrease in intermediate and long-term treasury and swap rates which had a favorable impact on EVE risk related to deposits.

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 sources of liquidity are our retail deposit book due to the generally stable balances and low cost it offers, cash in excess of our reserve requirement at the Federal Reserve Bank and various other corresponding bank accounts and unencumbered securities, all of which were $4.42 billion at September 30, 2016 compared to $3.96 billion at December 31, 2015. Another source of available funds is advances from the FHLB of Atlanta. Outstanding FHLB advances were $670.2 million as of September 30, 2016, and we had sufficient collateral pledged to secure $5.29 billion of additional borrowings. We also maintain Federal Funds lines and other borrowing facilities which had $715.0 million of available capacity at September 30, 2016.

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 2015 Annual Report on Form 10-K.

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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 September 30, 2016, BancShares’ market risk profile has not changed significantly from December 31, 2015, 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.
No change in BancShares' internal control over financial reporting occurred during the third quarter of 2016 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

BancShares is currently monitoring the October 2016 impact of Hurricane Matthew in our market areas. We are in the preliminary stage of assessing how this situation may impact our customers and the areas in which they operate. The impact of this hurricane could affect the company and our earnings but until more is known about the magnitude of the situation, it is premature to reasonably assess that impact.

The risks described below, as well as the risks described in our annual Form 10-K for the year ended December 31, 2015 should be carefully considered. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.
We may be adversely affected by risks associated with completed, pending or any potential future acquisitions.
We plan to continue to grow our business organically. However, we have pursued and expect to pursue additional acquisition opportunities that we believe support our business strategies and may enhance our profitability. We must generally satisfy a number of material conditions prior to consummating any acquisition, including, in many cases, federal and state regulatory approval. We may fail to complete strategic and competitively significant business opportunities as a result of our inability to obtain any required regulatory approvals in a timely manner or at all.
Acquisitions of financial institutions involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities, exposure to unexpected asset quality problems that require write downs or write-offs, difficulty retaining key employees and customers and other issues that could negatively affect our results of operations and financial condition.
We may not be able to realize projected cost savings, synergies or other benefits associated with any such acquisition. Failure to efficiently integrate any acquired entities into our existing operations could increase our operating costs significantly and have material adverse effects on our financial condition and results of operations. There can be no assurance that we will be successful in identifying or consummating any potential acquisitions.
The performance of equity securities and corporate bonds in the investment portfolio could be adversely impacted by the soundness and fluctuations in the market values of other financial institutions.
Our investment securities portfolio contains certain equity securities and corporate bonds of other financial institutions. As a result, a portion of our investment securities portfolio is subject to fluctuation due to changes in the financial stability and market value of other financial institutions. Such fluctuations could have an adverse effect on our results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 27, 2015, the Board of Directors approved a stock trading plan that provides for the purchase of up to 200,000 shares of Registrant's Class A common stock. The shares may be purchased from time to time from November 1, 2015 through October 31, 2016. The board's action approving share purchases does not obligate BancShares to acquire any particular amount of shares and purchases may be suspended or discontinued at any time. Any shares of stock that are purchased will be canceled. On October 25, 2016, the Board adopted a resolution approving a new plan to purchase 200,000 of Registrant's Class A shares; the new plan will be effective November 1, 2016 and will expire on October 31, 2017.


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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:
October 31, 2016
 
 
FIRST CITIZENS BANCSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ CRAIG L. NIX
 
 
 
 
Craig L. Nix
 
 
 
 
Chief Financial Officer

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