FCNCA 10-Q Quarterly Report Sept. 30, 2017

FIRST CITIZENS BANCSHARES INC /DE/

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10-Q 1 fcnca_10qx09302017.htm 10-Q 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, 2017

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

Commission File Number: 001-16715

____________________________________________________

First Citizens BancShares, Inc.

(Exact name of Registrant as specified in its charter)

____________________________________________________



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

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

(919) 716-7000

(Registrant’s telephone number, including area code)

____________________________________________________

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

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

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



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Class A Common Stock—$1 Par Value— 11,005,220 shares

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

(Number of shares outstanding, by class, as of November 1, 2017 )

Table of Contents

INDEX



		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Unaudited)	5

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

	Consolidated Statements of Cash Flows (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	67

Item 4.	Controls and Procedures	67

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	69

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 6.	Exhibits	69

Table of Contents

PART I


Item 1.	Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets



(Dollars in thousands, unaudited)	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	296,386		$	539,741
Overnight investments	2,432,233			1,872,594
Investment securities available for sale	6,992,877			7,006,580
Investment securities held to maturity	78			98
Loans held for sale	70,803			74,401
Loans and leases	23,149,073			21,737,878
Allowance for loan and lease losses	(231,842		)	(218,795		)
Net loans and leases	22,917,231			21,519,083
Premises and equipment	1,131,558			1,133,044
Other real estate owned	53,988			61,231
Income earned not collected	90,821			79,839
FDIC shared-loss receivable	4,610			4,172
Goodwill	150,601			150,601
Other intangible assets	77,491			78,040
Other assets	365,477			471,412
Total assets	$	34,584,154		$	32,990,836
Liabilities
Deposits:
Noninterest-bearing	$	11,483,033		$	10,130,549
Interest-bearing	17,850,916			18,030,794
Total deposits	29,333,949			28,161,343
Short-term borrowings	679,280			603,487
Long-term obligations	866,123			832,942
FDIC shared-loss payable	100,203			97,008
Other liabilities	290,768			283,629
Total liabilities	31,270,323			29,978,409
Shareholders’ equity
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at September 30, 2017 and December 31, 2016)	11,005			11,005
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2017 and December 31, 2016)	1,005			1,005
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016)	—			—
Surplus	658,918			658,918
Retained earnings	2,735,227			2,476,691
Accumulated other comprehensive loss	(92,324		)	(135,192		)
Total shareholders’ equity	3,313,831			3,012,427
Total liabilities and shareholders’ equity	$	34,584,154		$	32,990,836

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

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)	2017			2016			2017			2016
Interest income
Loans and leases	$	246,260		$	219,314		$	708,622		$	651,160
Investment securities and dividend income	29,706			23,395			89,863			71,139
Overnight investments	8,367			3,785			19,247			10,676
Total interest income	284,333			246,494			817,732			732,975
Interest expense
Deposits	3,839			4,457			12,407			13,717
Short-term borrowings	1,429			540			3,185			1,428
Long-term obligations	5,890			5,648			17,013			17,072
Total interest expense	11,158			10,645			32,605			32,217
Net interest income	273,175			235,849			785,127			700,758
Provision for loan and lease losses	7,946			7,507			28,501			16,912
Net interest income after provision for loan and lease losses	265,229			228,342			756,626			683,846
Noninterest income
Gain on acquisitions	—			837			134,745			5,831
Cardholder services	24,461			21,537			70,006			61,949
Merchant services	25,879			25,179			77,456			71,392
Service charges on deposit accounts	25,951			23,154			73,955			66,888
Wealth management services	21,234			19,915			64,116			60,840
Securities gains	1,337			352			4,664			17,509
Other service charges and fees	7,073			7,567			21,302			21,693
Mortgage income	6,775			6,692			19,317			12,540
Insurance commissions	2,894			2,755			9,015			8,198
ATM income	2,596			1,908			6,882			5,518
Adjustments to FDIC shared-loss receivable	(1,770		)	(2,773		)	(4,671		)	(7,673		)
Net impact from FDIC shared-loss agreement termination	—			—			(45		)	16,559
Other	8,957			10,718			24,137			22,129
Total noninterest income	125,387			117,841			500,879			363,373
Noninterest expense
Salaries and wages	121,086			107,762			351,518			315,720
Employee benefits	27,030			26,750			83,418			79,761
Occupancy expense	26,594			24,857			77,415			74,824
Equipment expense	23,887			23,736			73,129			68,796
Merchant processing	19,653			18,686			57,624			52,924
Cardholder processing	8,576			7,416			23,092			22,075
FDIC insurance expense	5,449			5,796			16,747			15,173
Collection and foreclosure-related expenses	3,443			4,039			9,582			9,732
Merger-related expenses	562			3,764			8,248			5,187
Other	50,687			44,427			136,145			133,015
Total noninterest expense	286,967			267,233			836,918			777,207
Income before income taxes	103,649			78,950			420,587			270,012
Income taxes	36,585			27,546			151,242			97,220
Net income	$	67,064		$	51,404		$	269,345		$	172,792
Average shares outstanding	12,010,405			12,010,405			12,010,405			12,010,405
Net income per share	$	5.58		$	4.28		$	22.43		$	14.39

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

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)	2017			2016			2017			2016
Net income	$	67,064		$	51,404		$	269,345		$	172,792
Other comprehensive income:
Unrealized gains (losses) on securities:
Change in unrealized securities gains (losses) arising during period	15,752			(1,577		)	65,619			90,631
Tax effect	(5,857		)	855			(24,401		)	(34,250		)
Reclassification adjustment for net gains realized and included in income before income taxes	(1,337		)	(352		)	(4,664		)	(17,509		)
Tax effect	495			191			1,726			6,583
Total change in unrealized gains (losses) on securities, net of tax	9,053			(883		)	38,280			45,455
Change in fair value of cash flow hedges:
Change in unrecognized loss on cash flow hedges	—			—			—			1,429
Tax effect	—			—			—			(537		)
Total change in unrecognized loss on cash flow hedges, net of tax	—			—			—			892
Change in pension obligation:
Amortization of actuarial losses and prior service cost	2,330			1,768			7,290			5,302
Tax effect	(864		)	(642		)	(2,702		)	(1,993		)
Total change in pension obligation, net of tax	1,466			1,126			4,588			3,309
Other comprehensive income	10,519			243			42,868			49,656
Total comprehensive income	$	77,583		$	51,647		$	312,213		$	222,448

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



(Dollars in thousands, unaudited)	Class A Common Stock		Class B Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity
Balance at December 31, 2015	$	11,005	$	1,005	$	658,918	$	2,265,621		$	(64,440	)	$	2,872,109
Net income	—		—		—		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

Balance at December 31, 2016	$	11,005	$	1,005	$	658,918	$	2,476,691		$	(135,192	)	$	3,012,427
Net income	—		—		—		269,345			—			269,345
Other comprehensive income, net of tax	—		—		—		—			42,868			42,868
Cash dividends ($0.90 per share)	—		—		—		(10,809		)	—			(10,809		)
Balance at September 30, 2017	$	11,005	$	1,005	$	658,918	$	2,735,227		$	(92,324	)	$	3,313,831

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



	Nine months ended September 30
(Dollars in thousands, unaudited)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	269,345		$	172,792
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses	28,501			16,912
Deferred tax expense (benefit)	67,270			(13,328		)
Net change in current taxes	17,115			(16,906		)
Depreciation	67,749			66,400
Net increase (decrease) in accrued interest payable	401			(1,662		)
Net increase in income earned not collected	(4,471		)	(2,899		)
Gain on acquisitions	(134,745		)	(5,831		)
Securities gains	(4,664		)	(17,509		)
Loss on termination of FDIC shared-loss agreements	45			3,377
Origination of loans held for sale	(471,862		)	(589,313		)
Proceeds from sale of loans held for sale	487,017			564,026
Gain on sale of loans held for sale	(11,317		)	(10,857		)
Gain on sale of portfolio loans	(1,007		)	(3,758		)
Net write-downs/losses on other real estate	3,152			5,251
Gain on sales of premises and equipment	(490		)	—
Net accretion of premiums and discounts	(34,535		)	(32,924		)
Amortization of intangible assets	16,994			16,633
Reduction in FDIC receivable for shared-loss agreements	5,799			11,926
Net change in FDIC payable for shared-loss agreements	3,195			(12,474		)
Net change in other assets	(9,566		)	17,120
Net change in other liabilities	10,178			56,275
Net cash provided by operating activities	304,104			223,251
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding	(771,593		)	(782,771		)
Purchases of investment securities available for sale	(1,891,967		)	(2,382,141		)
Proceeds from maturities/calls of investment securities held to maturity	20			130
Proceeds from maturities/calls of investment securities available for sale	1,436,113			1,213,333
Proceeds from sales of investment securities available for sale	538,317			1,802,155
Net increase in overnight investments	(458,027		)	(891,059		)
Proceeds from sales of portfolio loans	162,486			77,665
Cash paid to the FDIC for shared-loss agreements	(7,440		)	(16,701		)
Net cash paid to the FDIC for termination of shared-loss agreements	(285		)	(20,115		)
Proceeds from sales of other real estate	31,072			24,406
Proceeds from sales of premises and equipment	2,920			—
Purchases of premises and equipment	(60,090		)	(60,982		)
Business acquisitions, net of cash acquired	300,703			(727		)
Net cash used in investing activities	(717,771		)	(1,036,807		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in time deposits	(469,540		)	(371,164		)
Net increase in demand and other interest-bearing deposits	538,084			917,382
Net change in short-term borrowings	(59,207		)	93,655
Repayment of long-term obligations	(6,819		)	(3,889		)
Origination of long-term obligations	175,000			150,000
Cash dividends paid	(7,206		)	(10,809		)
Net cash provided by financing activities	170,312			775,175
Change in cash and due from banks	(243,355		)	(38,381		)
Cash and due from banks at beginning of period	539,741			534,086
Cash and due from banks at end of period	$	296,386		$	495,705
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	$	26,926		$	31,517
Dividends declared but not paid	3,603			—
Reclassification of portfolio loans to loans held for sale	161,719			—

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

First Citizens BancShares, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION

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

General

These consolidated financial statements and notes thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2016 .

Reclassifications

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

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position, the consolidated results of operations or related disclosures. Material estimates that are particularly susceptible to significant change include:


•	Allowance for loan and lease losses;


•	Fair value of financial instruments, including acquired assets and assumed liabilities;


•	Pension plan assumptions;


•	Cash flow estimates on purchased credit-impaired loans;


•	Goodwill, mortgage servicing rights and other intangible assets;


•	Federal Deposit Insurance Corporation (FDIC) shared-loss payable; and


•	Income tax assets, liabilities and expense

Recently Adopted Accounting Pronouncements

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)

This ASU adds an SEC paragraph and amends other Topics pursuant to an SEC Staff Announcement that states a registrant should evaluate ASUs that have not yet been adopted, including ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , ASU 2016-02, Leases (Topic 842) , and ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced are expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact the adoption will have on the financial statements, and a comparison to the registrant's current accounting policies. A registrant should describe the status of its process to implement the new standards and the significant matters yet to be addressed.

Table of Contents

This ASU also addresses the accounting for tax benefits resulting from investments in qualified affordable housing projects where the decision to apply the proportional amortization method of accounting is an accounting policy decision to be applied consistently to all investments that meet the conditions, rather than a decision to be applied to individual investments that qualify for the use of the proportional amortization method.

The amendments in this ASU are effective upon issuance. We adopted the guidance effective in the first quarter of 2017. The disclosures required by this ASU are included within the “Recently Issued Accounting Pronouncements” section below. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.

FASB ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control

This ASU does not change the characteristics of a primary beneficiary in current GAAP; however, it requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.

FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Further, the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.

Recently Issued Accounting Pronouncements

FASU ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business

This ASU provides a more robust framework to use in determining when a set of assets and activities is a business, including narrowing the definition of outputs and align it with how outputs are described in Topic 606. This ASU provides a screen to determine when an integrated set of assets and activities (collectively referred to as a "set") is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The framework includes two sets of criteria to consider that depend on whether a set has outputs.

The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard is not expected to have an impact on our consolidated financial position or results of operation and we will adopt the guidance during the first quarter of 2018.

FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business

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combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.

This ASU will be effective for BancShares' annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have an impact on our consolidated financial position or results of operation and we expect to adopt the guidance for our annual impairment test in fiscal year 2020.

FASB ASU 2016-13, 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 will adopt the guidance by the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities held to maturity. We have formed a cross-functional team co-led by Finance and Risk Management and engaged a third party to assist with the adoption, which began with a readiness and data gap analysis. The implementation team has developed a high-level project plan and is staying informed about the broader industry's perspective and insights, and identifying and researching key decision points. We anticipate the gap analysis to be completed during the fourth quarter of 2017 which will determine our path going forward. We are currently evaluating the impact the new standard will have on our consolidated financial statements as the final impact will be dependent, among other items, upon the loan portfolio composition and quality at the adoption date, as well as economic conditions, financial models used and forecasts at that time.

FASB ASU 2016-02, Leases (Topic 842)

This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts. An entity may make an accounting election by classification to not recognize leases with terms less than 12 months on their balance sheet. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation, are required to be recognized on the balance sheet of the lessee at lease commencement. Further, this ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For BancShares, the impact of this ASU will primarily relate to its accounting and reporting of leases as a lessee. We will adopt during the first quarter of 2019. We have engaged a third party and completed an inventory of all leases and their terms and service contracts with embedded leases. While we continue to evaluate the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases. Additionally, adding these assets to our balance sheet will impact our total risk-weighted assets used to determine our regulatory capital levels.

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FASB ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10) : Recognition and Measurement of Financial Assets and Financial Liabilities

This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of certain financial instruments. The amendments in this ASU (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without a readily determinable fair value; (3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use exit price notion, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (5) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (6) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (7) state that a valuation allowance on deferred tax assets related to available-for-sale securities should be evaluated in combination with other deferred tax assets.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU only permits early adoption of the instrument-specific credit risk provision. We will adopt during the first quarter of 2018 with a cumulative-effect adjustment from accumulated other comprehensive income (AOCI) to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact the new standard will have on our consolidated financial statements. We anticipate the adoption of this ASU will primarily impact the fair value recognition of BancShares' equity securities portfolio. The cumulative-effect adjustment at adoption will be determined by the equity securities portfolio composition and valuation at the date of adoption.

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

In May 2014, the FASB issued a standard on the recognition of revenue from contracts with customers with the core principle being for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations , to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , to clarify guidance for identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , to clarify and improve the guidance for certain aspects of Topic 606. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , to clarify guidance for certain aspects of Topic 606.

Per ASU 2015-14, Deferral of the Effective Date , this guidance was deferred and is effective for fiscal periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal periods beginning after December 15, 2016. We expect to adopt the ASU during the first quarter of 2018 with a cumulative-effect adjustment to opening retained earnings and the modified retrospective approach will likely be used if we determine there is a material impact. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are in scope of the guidance are primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. We engaged a third party to assist in developing processes and procedures for gathering evidence related to the implementation of this standard and have performed an analysis of contracts for wealth management income, customer service charges, ATM fees and miscellaneous income, for which we do not expect to have a significant impact on our results of operations. We continue to evaluate the impact of the new standard on other sources of our noninterest income and on our presentation and disclosures.

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NOTE B - BUSINESS COMBINATIONS

Guaranty Bank

On May 5, 2017, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of Guaranty Bank (Guaranty) of Milwaukee, Wisconsin. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.

The Guaranty 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 $875.1 million , including $574.6 million in non-purchased credit-impaired (non-PCI) loans, $114.5 million in purchased credit-impaired (PCI) loans and $9.9 million in core deposit intangibles. Liabilities assumed were $982.7 million , of which $982.3 million were deposits. The total gain on the transaction was $122.7 million which is included in noninterest income in the Consolidated Statements of Income.

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 due from banks	$	48,824
Overnight investments	94,134
Investment securities	12,140
Loans	689,086
Premises and equipment	8,603
Other real estate owned	55
Income earned not collected	6,720
Intangible assets	9,870
Other assets	5,693
Total assets acquired	875,125
Liabilities
Deposits	982,307
Other liabilities	440
Total liabilities assumed	982,747
Fair value of net liabilities assumed	(107,622		)
Cash received from FDIC	230,342
Due from FDIC	8
Gain on acquisition of Guaranty	$	122,728

Merger-related expenses of $562 thousand and $7.2 million from the Guaranty transaction were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2017 , respectively. Loan-related interest income generated from Guaranty was approximately $8.5 million for the three months ended September 30, 2017 and $13.5 million since the acquisition date.

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

Harvest Community Bank

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

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

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 due from banks	$	3,350
Overnight investments	7,478
Investment securities	14,455
Loans	85,149
Income earned not collected	31
Intangible assets	850
Other assets	237
Total assets acquired	111,550
Liabilities
Deposits	121,755
Other liabilities	74
Total liabilities assumed	121,829
Fair value of net liabilities assumed	(10,279		)
Cash received from FDIC	22,296
Gain on acquisition of HCB	$	12,017

No merger-related expenses were recorded for the three months ended September 30, 2017 and $698 thousand were recorded in the Consolidated Statements of Income for the nine months ended September 30, 2017 for the HCB transaction. Loan-related interest income generated from HCB was approximately $579 thousand and $3.4 million for the three and nine months ended September 30, 2017 , respectively.

All loans resulting from the HCB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI under ASC 310-30.

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NOTE C - INVESTMENTS

The amortized cost and fair value of investment securities classified as available for sale and held to maturity at September 30, 2017 and December 31, 2016 , are as follows:



	September 30, 2017
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,619,343	$	—	$	3,019	$	1,616,324
Mortgage-backed securities	5,240,922		3,256		43,837		5,200,341
Equity securities	82,314		31,336		—		113,650
Corporate bonds	54,412		471		10		54,873
Other	7,638		225		174		7,689
Total investment securities available for sale	$	7,004,629	$	35,288	$	47,040	$	6,992,877

	December 31, 2016
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
U.S. Treasury	$	1,650,675	$	579	$	935	$	1,650,319
Government agency	40,291		107		—		40,398
Mortgage-backed securities	5,259,466		2,809		86,850		5,175,425
Equity securities	71,873		11,634		—		83,507
Corporate bonds	49,367		195		—		49,562
Other	7,615		—		246		7,369
Total investment securities available for sale	$	7,079,287	$	15,324	$	88,031	$	7,006,580

	September 30, 2017
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities held to maturity
Mortgage-backed securities	$	78	$	6	$	—	$	84

	December 31, 2016
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Mortgage-backed securities	$	98	$	6	$	—	$	104

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

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	September 30, 2017				December 31, 2016
(Dollars in thousands)	Cost		Fair value		Cost		Fair value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	749,215	$	748,157	$	842,798	$	842,947
One through five years	872,243		870,507		848,168		847,770
Five through 10 years	54,412		54,873		49,367		49,562
Over 10 years	5,523		5,349		7,615		7,369
Mortgage-backed securities	5,240,922		5,200,341		5,259,466		5,175,425
Equity securities	82,314		113,650		71,873		83,507
Total investment securities available for sale	$	7,004,629	$	6,992,877	$	7,079,287	$	7,006,580
Investment securities held to maturity
Mortgage-backed securities held to maturity	$	78	$	84	$	98	$	104

For each period presented, realized securities gains (losses) included the following:



	Three months ended September 30					Nine months ended September 30
(Dollars in thousands)	2017		2016			2017			2016
Gross gains on sales of investment securities available for sale	$	1,337	$	452		$	4,693		$	17,940
Gross losses on sales of investment securities available for sale	—		(100		)	(29		)	(431		)
Total realized securities gains	$	1,337	$	352		$	4,664		$	17,509

The following table provides information regarding securities with unrealized losses as of September 30, 2017 and December 31, 2016 .



	September 30, 2017
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Investment securities available for sale:
U.S. Treasury	$	1,616,324	$	3,019	$	—	$	—	$	1,616,324	$	3,019
Mortgage-backed securities	3,989,074		38,441		406,480		5,396		4,395,554		43,837
Corporate bonds	5,025		10				—		5,025		10
Other	5,349		174		—		—		5,349		174
Total	$	5,615,772	$	41,644	$	406,480	$	5,396	$	6,022,252	$	47,040

	December 31, 2016
	Less than 12 months				12 months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Investment securities available for sale:
U.S. Treasury	$	807,822	$	935	$	—	$	—	$	807,822	$	935
Mortgage-backed securities	4,442,700		82,161		362,351		4,689		4,805,051		86,850
Other	7,369		246		—		—		7,369		246
Total	$	5,257,891	$	83,342	$	362,351	$	4,689	$	5,620,242	$	88,031

Investment securities with an aggregate fair value of $406.5 million and $362.4 million had continuous unrealized losses for more than 12 months with a corresponding aggregate unrealized loss of $5.4 million and $4.7 million as of September 30, 2017 and December 31, 2016 , respectively. As of September 30, 2017 , all 55 of these investments are government sponsored enterprise-issued mortgage-backed securities.

None of the unrealized losses identified as of September 30, 2017 or December 31, 2016 relate to the marketability of the securities or the issuers' ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the 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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Investment securities having an aggregate carrying value of $4.51 billion at September 30, 2017 and $4.55 billion at December 31, 2016 were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.

NOTE D - LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have any credit deterioration at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered impaired and, therefore, classified as PCI loans. PCI loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality . PCI loans 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 over the life of the loans. 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, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

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

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

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

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

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

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

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

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, 2017 and December 31, 2016 :



(Dollars in thousands)	September 30, 2017		December 31, 2016
Non-PCI loans and leases:
Commercial:
Construction and land development	$	626,887	$	649,157
Commercial mortgage	9,510,158		9,026,220
Other commercial real estate	434,736		351,291
Commercial and industrial	2,654,898		2,567,501
Lease financing	866,804		826,270
Other	322,216		340,264
Total commercial loans	14,415,699		13,760,703
Noncommercial:
Residential mortgage	3,467,978		2,889,124
Revolving mortgage	2,692,558		2,601,344
Construction and land development	227,184		231,400
Consumer	1,511,487		1,446,138
Total noncommercial loans	7,899,207		7,168,006
Total non-PCI loans and leases	22,314,906		20,928,709
PCI loans:
Commercial:
Construction and land development	17,406		20,766
Commercial mortgage	393,557		453,013
Other commercial real estate	17,771		12,645
Commercial and industrial	7,064		11,844
Other	922		1,702
Total commercial loans	436,720		499,970
Noncommercial:
Residential mortgage	327,263		268,777
Revolving mortgage	67,847		38,650
Consumer	2,337		1,772
Total noncommercial loans	397,447		309,199
Total PCI loans	834,167		809,169
Total loans and leases	$	23,149,073	$	21,737,878

At September 30, 2017 , $70.4 million of total residential loans and leases were covered under shared-loss agreements with the FDIC, compared to $84.8 million at December 31, 2016 . The shared-loss agreements, for their terms, protect BancShares from a substantial portion of the credit and asset quality risk that would otherwise be incurred.

At September 30, 2017 , $8.61 billion in noncovered loans with a lendable collateral value of $5.94 billion were used to secure $835.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $5.10 billion . At December 31, 2016 , $8.26 billion in noncovered loans with a lendable collateral value of $5.50 billion were used to secure $660.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $4.84 billion . At September 30, 2017 , $2.74 billion in noncovered loans with a lendable collateral value of $2.05 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). There were no loans used to secure additional borrowing capacity at the FRB at December 31, 2016 .

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $1.9 million and $6.7 million at September 30, 2017 and December 31, 2016 , respectively. The unamortized discount related to purchased non-PCI loans and leases in the Guaranty, Cordia Bancorp Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $15.6 million , $3.1 million and $19.9 million at September 30, 2017 , respectively. At December 31, 2016 , the unamortized discount related to purchased non-PCI loans and leases from the Cordia and Bancorporation acquisitions was $4.2 million and $27.4 million , respectively. During the three months ended September 30, 2017 and September 30, 2016 , accretion income on non-PCI loans and leases was $4.2 million and $3.6 million , respectively. During the nine months ended September 30, 2017 and September 30, 2016 , accretion income on non-PCI loans and leases was $10.2 million and $9.7 million , respectively.

Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. In addition, we may change our strategy for certain portfolio loans and sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at the lower of amortized cost or market. Loans held for sale totaled $70.8 million at

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September 30, 2017 . During the third quarter of 2017, certain residential mortgage portfolio loans of $130.2 million were sold resulting in a gain of $843 thousand . During the nine months ended September 30, 2017, $162.7 million of certain residential mortgage portfolio loans were sold, resulting in a gain of $1.0 million .

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, 2017 and December 31, 2016 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.

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Non-PCI loans and leases outstanding at September 30, 2017 and December 31, 2016 by credit quality indicator are provided below:



	September 30, 2017
(Dollars in thousands)	Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	616,505	$	9,321,377	$	430,282	$	2,448,998	$	855,877	$	317,991	$	13,991,030
Special mention	4,128		64,907		1,208		36,707		3,833		1,159		111,942
Substandard	6,193		123,327		3,246		21,215		6,824		3,066		163,871
Doubtful	61		292		—		47		—		—		400
Ungraded	—		255		—		147,931		270		—		148,456
Total	$	626,887	$	9,510,158	$	434,736	$	2,654,898	$	866,804	$	322,216	$	14,415,699

	December 31, 2016
	Non-PCI commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	645,232	$	8,821,439	$	347,509	$	2,402,659	$	818,008	$	335,831	$	13,370,678
Special mention	2,236		76,084		1,433		22,804		2,675		1,020		106,252
Substandard	1,683		126,863		2,349		17,870		5,415		3,413		157,593
Doubtful	6		334		—		8		—		—		348
Ungraded	—		1,500		—		124,160		172		—		125,832
Total	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	13,760,703



	September 30, 2017
	Non-PCI noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	3,424,113	$	2,668,131	$	223,849	$	1,498,399	$	7,814,492
30-59 days past due	17,635		11,606		1,026		7,671		37,938
60-89 days past due	7,460		2,796		497		2,793		13,546
90 days or greater past due	18,770		10,025		1,812		2,624		33,231
Total	$	3,467,978	$	2,692,558	$	227,184	$	1,511,487	$	7,899,207

	December 31, 2016
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,839,045	$	2,576,942	$	229,106	$	1,434,658	$	7,079,751
30-59 days past due	27,760		14,290		1,139		6,775		49,964
60-89 days past due	7,039		2,698		598		2,779		13,114
90 days or greater past due	15,280		7,414		557		1,926		25,177
Total	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	7,168,006

Table of Contents

PCI loans outstanding at September 30, 2017 and December 31, 2016 by credit quality indicator are provided below:



	September 30, 2017
(Dollars in thousands)	PCI commercial loans
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	6,781	$	202,496	$	14,323	$	4,464	$	274	$	228,338
Special mention	730		57,887		379		560		393		59,949
Substandard	7,651		123,909		2,291		1,707		255		135,813
Doubtful	2,244		9,265		778		297		—		12,584
Ungraded	—		—		—		36		—		36
Total	$	17,406	$	393,557	$	17,771	$	7,064	$	922	$	436,720

	December 31, 2016
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	8,103	$	234,023	$	8,744	$	7,253	$	696	$	258,819
Special mention	950		67,848		102		620		—		69,520
Substandard	7,850		138,312		3,462		3,648		1,006		154,278
Doubtful	3,863		12,830		337		303		—		17,333
Ungraded	—		—		—		20		—		20
Total	$	20,766	$	453,013	$	12,645	$	11,844	$	1,702	$	499,970



	September 30, 2017
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	283,789	$	60,334	$	2,179	$	346,302
30-59 days past due	8,379		2,410		62		10,851
60-89 days past due	4,234		1,542		28		5,804
90 days or greater past due	30,861		3,561		68		34,490
Total	$	327,263	$	67,847	$	2,337	$	397,447

	December 31, 2016
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Consumer		Total PCI noncommercial loans
Current	$	230,065	$	33,827	$	1,637	$	265,529
30-59 days past due	9,595		618		68		10,281
60-89 days past due	6,528		268		4		6,800
90 days or greater past due	22,589		3,937		63		26,589
Total	$	268,777	$	38,650	$	1,772	$	309,199

Table of Contents

The aging of the outstanding non-PCI loans and leases, by class, at September 30, 2017 and December 31, 2016 is provided in the table below.

The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.



	September 30, 2017
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	1,075	$	346	$	122	$	1,543	$	625,344	$	626,887
Commercial mortgage	7,661		2,272		10,447		20,380		9,489,778		9,510,158
Other commercial real estate	52		—		680		732		434,004		434,736
Commercial and industrial	10,322		2,459		1,217		13,998		2,640,900		2,654,898
Lease financing	1,752		932		833		3,517		863,287		866,804
Residential mortgage	17,635		7,460		18,770		43,865		3,424,113		3,467,978
Revolving mortgage	11,606		2,796		10,025		24,427		2,668,131		2,692,558
Construction and land development - noncommercial	1,026		497		1,812		3,335		223,849		227,184
Consumer	7,671		2,793		2,624		13,088		1,498,399		1,511,487
Other	—		—		155		155		322,061		322,216
Total non-PCI loans and leases	$	58,800	$	19,555	$	46,685	$	125,040	$	22,189,866	$	22,314,906

	December 31, 2016
	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	1,845	$	39	$	286	$	2,170	$	646,987	$	649,157
Commercial mortgage	11,592		2,773		10,329		24,694		9,001,526		9,026,220
Other commercial real estate	310		—		—		310		350,981		351,291
Commercial and industrial	7,918		2,102		1,051		11,071		2,556,430		2,567,501
Lease financing	1,175		444		863		2,482		823,788		826,270
Residential mortgage	27,760		7,039		15,280		50,079		2,839,045		2,889,124
Revolving mortgage	14,290		2,698		7,414		24,402		2,576,942		2,601,344
Construction and land development - noncommercial	1,139		598		557		2,294		229,106		231,400
Consumer	6,775		2,779		1,926		11,480		1,434,658		1,446,138
Other	72		—		198		270		339,994		340,264
Total non-PCI loans and leases	$	72,876	$	18,472	$	37,904	$	129,252	$	20,799,457	$	20,928,709

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, 2017 and December 31, 2016 for non-PCI loans and leases, were as follows:



	September 30, 2017				December 31, 2016
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Non-PCI loans and leases:
Construction and land development - commercial	$	704	$	—	$	606	$	—
Commercial mortgage	23,992		1,395		26,527		482
Other commercial real estate	934		129		86		—
Commercial and industrial	3,727		198		4,275		440
Lease financing	1,622		4		359		683
Residential mortgage	35,355		—		32,470		37
Revolving mortgage	18,883		—		14,308		—
Construction and land development - noncommercial	2,601		—		1,121		—
Consumer	2,058		1,723		2,236		1,076
Other	188		—		319		—
Total non-PCI loans and leases	$	90,064	$	3,449	$	82,307	$	2,718

The recorded investment of PCI loans on nonaccrual status was $1.0 million and $3.5 million at September 30, 2017 and December 31, 2016 , respectively.

Purchased non-PCI loans and leases

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



(Dollars in thousands)
Contractually required payments	$	703,916
Cash flows not expected to be collected	16,073
Fair value of loans at acquisition	574,553

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



(Dollars in thousands)
Commercial:
Commercial mortgage	$	850
Commercial and industrial	583
Other	183,816
Total commercial loans	185,249
Noncommercial:
Residential mortgage	309,612
Revolving mortgage	54,780
Consumer	24,912
Total noncommercial loans	389,304
Total non-PCI loans and leases	$	574,553

Purchased credit-impaired loans (PCI) loans

The following table relates to PCI loans acquired in the HCB and Guaranty 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 dates.



(Dollars in thousands)	HCB		Guaranty
Contractually required payments	$	111,250	$	158,456
Cash flows expected to be collected	101,802		142,000
Fair value of loans at acquisition	85,149		114,533

Table of Contents

The recorded fair values of PCI loans acquired in the HCB and Guaranty acquisitions as of the acquisition dates were as follows:



(Dollars in thousands)	HCB		Guaranty
Commercial:
Construction and land development	$	7,061	$	55
Commercial mortgage	21,836		644
Other commercial real estate	6,404		—
Commercial and industrial	19,675		2
Total commercial loans	54,976		701
Noncommercial:
Residential mortgage	25,857		80,475
Revolving mortgage	3,434		33,319
Construction and land development	—		26
Consumer	882		12
Total noncommercial loans	30,173		113,832
Total PCI loans	$	85,149	$	114,533

The following table provides changes in the carrying value of all purchased credit-impaired loans during the nine months ended September 30, 2017 and September 30, 2016 :



(Dollars in thousands)	2017			2016
Balance at January 1	$	809,169		$	950,516
Fair value of acquired loans	199,682			80,690
Accretion	59,039			59,066
Payments received and other changes, net	(233,723		)	(222,072		)
Balance at September 30	$	834,167		$	868,200
Unpaid principal balance at September 30	$	1,293,760		$	1,475,149

The carrying value of loans on the cost recovery method was $454 thousand at September 30, 2017 and $498 thousand at December 31, 2016 . The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. Cash payments from cost recovery loans are 100 percent applied to principal. After all the principal has been recovered, cash payments are then recorded to interest income.

During the three months ended September 30, 2017 and September 30, 2016 , accretion income on PCI loans was $19.2 million and $17.2 million , respectively

The following table documents changes to the amount of accretable yield for the first nine months of 2017 and 2016 .



(Dollars in thousands)	2017			2016
Balance at January 1	$	335,074		$	343,856
Additions from acquisitions	44,120			12,488
Accretion	(59,039		)	(59,066		)
Reclassifications from nonaccretable difference	16,947			25,595
Changes in expected cash flows that do not affect nonaccretable difference	4,596			28,633
Balance at September 30	$	341,698		$	351,506

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.

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, 2017 and September 30, 2016 :



	Three months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Balance at July 1	$	33,559		$	49,746		$	3,612		$	51,068		$	6,404		$	3,302		$	15,843		$	22,465		$	1,503		$	27,800		$	215,302
Provision	(5,150		)	(71		)	891			5,621			884			58			531			842			92			4,785			8,483
Charge-offs	(9		)	(39		)	—			(1,275		)	(687		)	(666		)	(604		)	(218		)	—			(4,996		)	(8,494		)
Recoveries	56			1,446			8			433			3			123			92			228			—			1,203			3,592
Balance at September 30	$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883

	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
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

	Nine months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Balance at January 1	$	28,877		$	48,278		$	3,269		$	50,225		$	5,907		$	3,127		$	14,447		$	21,013		$	1,596		$	28,287		$	205,026
Provision	(242		)	574			1,228			10,181			1,645			299			2,037			2,446			(1		)	11,144			29,311
Charge-offs	(499		)	(311		)	(5		)	(7,649		)	(957		)	(853		)	(1,076		)	(1,323		)	—			(14,015		)	(26,688		)
Recoveries	320			2,541			19			3,090			9			244			454			1,181			—			3,376			11,234
Balance at September 30	$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883

	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

Table of Contents

The following tables present the allowance for non-PCI loan and lease losses and the recorded investment in loans, by loan class, based on impairment method as of September 30, 2017 and December 31, 2016 :



	September 30, 2017
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	91	$	3,916	$	204	$	1,260	$	223	$	—	$	1,907	$	1,784	$	94	$	653	$	10,132
ALLL for loans and leases collectively evaluated for impairment	28,365		47,166		4,307		54,587		6,381		2,817		13,955		21,533		1,501		28,139		208,751
Total allowance for loan and lease losses	$	28,456	$	51,082	$	4,511	$	55,847	$	6,604	$	2,817	$	15,862	$	23,317	$	1,595	$	28,792	$	218,883

Loans and leases:
Loans and leases individually evaluated for impairment	$	543	$	71,952	$	1,616	$	9,878	$	1,688	$	522	$	32,127	$	18,830	$	3,660	$	2,226	$	143,042
Loans and leases collectively evaluated for impairment	626,344		9,438,206		433,120		2,645,020		865,116		321,694		3,435,851		2,673,728		223,524		1,509,261		22,171,864
Total loan and leases	$	626,887	$	9,510,158	$	434,736	$	2,654,898	$	866,804	$	322,216	$	3,467,978	$	2,692,558	$	227,184	$	1,511,487	$	22,314,906

	December 31, 2016
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	151	$	3,488	$	152	$	1,732	$	75	$	23	$	2,447	$	366	$	109	$	667	$	9,210
ALLL for loans and leases collectively evaluated for impairment	28,726		44,790		3,117		48,493		5,832		3,104		12,000		20,647		1,487		27,620		195,816
Total allowance for loan and lease losses	$	28,877	$	48,278	$	3,269	$	50,225	$	5,907	$	3,127	$	14,447	$	21,013	$	1,596	$	28,287	$	205,026

Loans and leases:
Loans and leases individually evaluated for impairment	$	1,045	$	76,361	$	1,563	$	12,600	$	1,074	$	142	$	31,476	$	7,613	$	2,613	$	1,912	$	136,399
Loans and leases collectively evaluated for impairment	648,112		8,949,859		349,728		2,554,901		825,196		340,122		2,857,648		2,593,731		228,787		1,444,226		20,792,310
Total loan and leases	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	20,928,709

Table of Contents

The following tables show the activity in the allowance for PCI loan losses by loan class for the three and nine months ended September 30, 2017 and September 30, 2016 .



	Three months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total
Balance at July 1	$	577		$	6,797		$	354		$	456		$	4,829		$	411		$	72		$	13,496
Provision	(78		)	(15		)	(146		)	(133		)	(184		)	(34		)	53			(537		)
Charge-offs	—			—			—			—			—			—			—			—
Recoveries	—			—			—			—			—			—			—			—
Balance at September 30	$	499		$	6,782		$	208		$	323		$	4,645		$	377		$	125		$	12,959

	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			Consumer and other			Total
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

	Nine months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total
Balance at January 1	$	483		$	6,423		$	502		$	504		$	4,818		$	956		$	83		$	13,769
Provision	16			359			(294		)	(181		)	(173		)	(579		)	42			(810		)
Charge-offs	—			—			—			—			—			—			—			—
Recoveries	—			—			—			—			—			—			—			—
Balance at September 30	$	499		$	6,782		$	208		$	323		$	4,645		$	377		$	125		$	12,959

	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			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

As of September 30, 2017 and December 31, 2016 , $310.0 million and $359.7 million , respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding allowance for loan losses was $13.0 million and $13.8 million , respectively.

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The following tables show the ending balances of PCI loans and related allowance by class of loans as of September 30, 2017 and December 31, 2016 :



	September 30, 2017
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Consumer and other		Total
ALLL for loans and leases acquired with deteriorated credit quality	$	499	$	6,782	$	208	$	323	$	4,645	$	377	$	125	$	12,959

Loans acquired with deteriorated credit quality	17,406		393,557		17,771		7,064		327,263		67,847		3,259		834,167

	December 31, 2016
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Residential mortgage		Revolving mortgage		Consumer and other		Total
ALLL for loans and leases acquired with deteriorated credit quality	$	483	$	6,423	$	502	$	504	$	4,818	$	956	$	83	$	13,769

Loans acquired with deteriorated credit quality	20,766		453,013		12,645		11,844		268,777		38,650		3,474		809,169

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, 2017 and December 31, 2016 including interest income recognized in the period during which the loans and leases were considered impaired.



	September 30, 2017
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	526	$	17	$	543	$	648	$	91
Commercial mortgage	38,286		33,666		71,952		76,859		3,916
Other commercial real estate	1,254		362		1,616		1,939		204
Commercial and industrial	7,433		2,445		9,878		11,568		1,260
Lease financing	1,685		3		1,688		1,688		223
Other	—		522		522		522		—
Residential mortgage	18,840		13,287		32,127		33,712		1,907
Revolving mortgage	9,046		9,784		18,830		20,403		1,784
Construction and land development - noncommercial	781		2,879		3,660		4,365		94
Consumer	1,527		699		2,226		2,445		653
Total non-PCI impaired loans and leases	$	79,378	$	63,664	$	143,042	$	154,149	$	10,132

	December 31, 2016
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	1,002	$	43	$	1,045	$	1,172	$	151
Commercial mortgage	42,875		33,486		76,361		82,658		3,488
Other commercial real estate	1,279		284		1,563		1,880		152
Commercial and industrial	8,920		3,680		12,600		16,637		1,732
Lease financing	1,002		72		1,074		1,074		75
Other	142		—		142		233		23
Residential mortgage	20,269		11,207		31,476		32,588		2,447
Revolving mortgage	1,825		5,788		7,613		8,831		366
Construction and land development - noncommercial	645		1,968		2,613		3,030		109
Consumer	1,532		380		1,912		2,086		667
Total non-PCI impaired loans and leases	$	79,491	$	56,908	$	136,399	$	150,189	$	9,210

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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, 2017 and September 30, 2016 :



	Three months ended September 30, 2017				Three months ended September 30, 2016
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	754	$	8	$	3,297	$	44
Commercial mortgage	73,099		653		78,994		642
Other commercial real estate	1,720		8		1,571		13
Commercial and industrial	9,501		96		9,676		84
Lease financing	1,752		12		1,169		14
Other	557		8		569		6
Residential mortgage	31,290		228		28,008		214
Revolving mortgage	18,066		150		7,373		48
Construction and land development - noncommercial	3,676		35		408		5
Consumer	2,233		27		1,507		20
Total non-PCI impaired loans and leases	$	142,648	$	1,225	$	132,572	$	1,090

	Nine months ended September 30, 2017				Nine months ended September 30, 2016
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	926	$	31	$	3,232	$	125
Commercial mortgage	74,177		1,946		83,794		2,024
Other commercial real estate	1,610		25		957		25
Commercial and industrial	10,396		298		11,722		319
Lease financing	1,744		40		1,347		49
Other	396		15		818		30
Residential mortgage	33,673		753		25,497		564
Revolving mortgage	11,506		269		6,701		120
Construction and land development - noncommercial	3,155		101		459		16
Consumer	2,062		74		1,398		58
Total non-PCI impaired loans and leases	$	139,645	$	3,552	$	135,925	$	3,330

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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, 2017						December 31, 2016
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial loans
Construction and land development - commercial	$	2,824	$	334	$	3,158	$	3,292	$	308	$	3,600
Commercial mortgage	63,027		16,056		79,083		70,263		14,435		84,698
Other commercial real estate	702		834		1,536		1,635		80		1,715
Commercial and industrial	7,155		1,625		8,780		9,193		1,436		10,629
Lease financing	775		913		1,688		882		192		1,074
Other	522		—		522		64		78		142
Total commercial TDRs	75,005		19,762		94,767		85,329		16,529		101,858
Noncommercial
Residential mortgage	31,398		7,286		38,684		34,012		5,117		39,129
Revolving mortgage	15,124		3,347		18,471		6,346		1,431		7,777
Construction and land development - noncommercial	234		—		234		240		—		240
Consumer and other	1,903		323		2,226		1,603		309		1,912
Total noncommercial TDRs	48,659		10,956		59,615		42,201		6,857		49,058
Total TDRs	$	123,664	$	30,718	$	154,382	$	127,530	$	23,386	$	150,916

The majority of TDRs are included in the special mention, substandard or doubtful grading categories. When a restructured loan subsequently defaults, it is evaluated and downgraded if appropriate. The more severely graded the loan, the lower the estimated expected cash flows and the greater the allowance recorded. TDRs are evaluated individually for impairment through a review of collateral values or analysis of cash flows.

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



(Dollars in thousands)	September 30, 2017		December 31, 2016
Accruing TDRs:
PCI	$	19,719	$	26,068
Non-PCI	103,945		101,462
Total accruing TDRs	123,664		127,530
Nonaccruing TDRs:
PCI	300		301
Non-PCI	30,418		23,085
Total nonaccruing TDRs	30,718		23,386
All TDRs:
PCI	20,019		26,369
Non-PCI	134,363		124,547
Total TDRs	$	154,382	$	150,916

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The following tables provide the types of non-PCI TDRs made during the three and nine months ended September 30, 2017 and September 30, 2016 , as well as a summary of loans that were modified as a TDR during the twelve month periods ended September 30, 2017 and September 30, 2016 that subsequently defaulted during the three and nine months ended September 30, 2017 and September 30, 2016 . BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.



	Three months ended September 30, 2017						Three months ended September 30, 2016
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Non-PCI loans and leases
Interest only period provided
Commercial mortgage	3	$	696	—	$	—	—	$	—	—	$	—
Residential mortgage	—	—		—	—		1	124		1	124
Total interest only	3	696		—	—		1	124		1	124

Loan term extension
Commercial mortgage	—	—		—	—		3	1,321		—	—
Commercial and industrial	1	10		—	—		1	22		—	—
Residential mortgage	2	123		—	—		4	572		—	—
Revolving mortgage	1	20		—	—		—	—		—	—
Consumer	2	3		—	—		1	9		—	—
Total loan term extension	6	156		—	—		9	1,924		—	—

Below market interest rate
Construction and land development - commercial	—	—		—	—		7	128		2	16
Commercial mortgage	10	3,643		5	701		6	2,651		1	32
Other commercial real estate	2	210		—	—		2	178		—	—
Commercial and industrial	4	230		2	30		12	2,340		5	569
Lease financing	—	—		—	—		2	81		2	81
Residential mortgage	28	1,850		9	936		37	2,449		13	849
Revolving mortgage	14	567		8	274		1	12		—	—
Construction and land development - noncommercial	2	33		1	11		—	—		—	—
Consumer	1	4		2	4		3	31		2	17
Other	—	—		—	—		1	44		—	—
Total below market interest rate	61	6,537		27	1,956		71	7,914		25	1,564

Discharged from bankruptcy
Construction and land development - commercial	—	—		—	—		1	23		1	23
Commercial mortgage	5	2,249		1	429		1	13		1	13
Commercial and industrial	9	865		6	809		—	—		—	—
Lease financing	—	—		15	180		—	—		—	—
Residential mortgage	6	1,357		2	186		2	29		6	143
Revolving mortgage	10	469		5	189		9	407		3	37
Consumer	10	161		9	99		11	150		5	74
Total discharged from bankruptcy	40	5,101		38	1,892		24	622		16	290
Total non-PCI restructurings	110	$	12,490	65	$	3,848	105	$	10,584	42	$	1,978

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	Nine months ended September 30, 2017						Nine months ended September 30, 2016
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Non-PCI loans and leases
Interest only period provided
Commercial mortgage	5	$	1,097	1	$	328	1	$	245	1	$	245
Residential mortgage	—	—		—	—		1	124		1	124
Revolving mortgage	1	83		—	—		—	—		—	—
Total interest only	6	1,180		1	328		2	369		2	369

Loan term extension
Construction and land development - commercial	—	—		—	—		2	424		—	—
Commercial mortgage	1	425		—	—		7	2,407		—	—
Other commercial real estate	—	—		—	—		1	743		—	—
Commercial and industrial	7	411		—	—		1	22		1	—
Residential mortgage	6	328		—	—		11	1,539		—	—
Revolving mortgage	10	1,059		1	31		—	—		—	—
Consumer	6	42		—	—		1	9		—	—
Other	1	522		—	—		—	—		—	—
Total loan term extension	31	2,787		1	31		23	5,144		1	—

Below market interest rate
Construction and land development - commercial	1	—		—	—		14	510		4	43
Commercial mortgage	33	8,580		11	1,185		34	8,983		11	1,719
Other commercial real estate	3	211		2	210		3	652		1	9
Commercial and industrial	19	884		5	314		26	3,086		12	2,121
Lease financing	3	755		2	701		2	81		2	81
Residential mortgage	81	4,570		29	2,216		137	8,703		37	2,301
Revolving mortgage	64	2,826		22	678		5	109		—	—
Construction and land development - noncommercial	10	696		1	11		—	—		—	—
Consumer	16	89		3	17		6	49		3	17
Other	1	—		—	—		2	125		1	81
Total below market interest rate	231	18,611		75	5,332		229	22,298		71	6,372

Discharged from bankruptcy
Construction and land development - commercial	1	16		1	16		1	23		1	23
Commercial mortgage	9	3,207		2	1,134		3	291		1	13
Commercial and industrial	10	865		7	809		3	135		—	—
Lease financing	16	180		15	180		—	—		—	—
Residential mortgage	25	2,443		10	1,134		18	1,030		14	647
Revolving mortgage	32	1,630		13	875		42	2,564		13	177
Construction and land development - noncommercial	1	19		1	19		—	—		—	—
Consumer	52	539		27	212		40	467		12	137
Total discharged from bankruptcy	146	8,899		76	4,379		107	4,510		41	997
Total non-PCI restructurings	414	$	31,477	153	$	10,070	361	$	32,321	115	$	7,738

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The following tables provide the types of PCI TDRs made during the three and nine months ended September 30, 2017 and September 30, 2016 , as well as a summary of loans that were modified as a TDR during the twelve month periods ended September 30, 2017 and September 30, 2016 that subsequently defaulted during the three and nine months ended September 30, 2017 and September 30, 2016 .



	Three months ended September 30, 2017						Three months ended September 30, 2016
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end
PCI loans
Below market interest rate
Commercial mortgage	1	$	260	—	$	—	—	$	—	—	$	—
Residential mortgage	1	62		—	—		2	140		1	79
Total below market interest rate	2	322		—	—		2	140		1	79

Discharged from bankruptcy
Commercial mortgage	2	280		1	257		1	2,985		—	—
Residential mortgage	1	88		1	166		—	—		—	—
Total discharged from bankruptcy	3	368		2	423		1	2,985		—	—
Total PCI restructurings	5	$	690	2	$	423	3	$	3,125	1	$	79



	Nine months ended September 30, 2017						Nine months ended September 30, 2016
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end
PCI loans
Below market interest rate
Construction and land development - commercial	—	$	—	—	$	—	1	$	53	—	$	—
Commercial mortgage	3	599		—	—		3	2,026		—	—
Residential mortgage	4	316		—	—		3	188		1	79
Total below market interest rate	7	915		—	—		7	2,267		1	79

Discharged from bankruptcy
Commercial mortgage	2	280		1	257		1	2,985		—	—
Residential mortgage	3	502		1	166		—	—		—	—
Total discharged from bankruptcy	5	782		2	423		1	2,985		—	—
Total PCI restructurings	12	$	1,697	2	$	423	8	$	5,252	1	$	79

For the three and nine months ended September 30, 2017 and September 30, 2016 , the pre-modification and post-modification outstanding recorded investments of loans modified as TDRs were not materially different.

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NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in other real estate owned during the nine months ended September 30, 2017 and September 30, 2016 .



(Dollars in thousands)	Covered			Noncovered			Total
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

Balance at December 31, 2016	$	472		$	60,759		$	61,231
Additions	97			26,829			26,926
Additions acquired in the Guaranty Bank acquisition	—			55			55
Sales	(369		)	(28,284		)	(28,653		)
Write-downs	(52		)	(5,519		)	(5,571		)
Balance at September 30, 2017	$	148		$	53,840		$	53,988

⁽¹⁾ Transfers include OREO balances associated with expired or terminated shared-loss agreements.

At September 30, 2017 and December 31, 2016 , BancShares had $19.4 million and $15.0 million , respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $27.7 million and $21.8 million at September 30, 2017 and December 31, 2016 , respectively.

NOTE G - FDIC SHARED-LOSS RECEIVABLE AND PAYABLE

BancShares completed six FDIC-assisted transactions with shared-loss agreements during the period beginning in 2009 through 2011. Prior to its merger into BancShares, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions with shared-loss agreements: Georgian Bank (acquired in 2009); Williamsburg First National Bank (acquired in 2010); and Atlantic Bank & Trust (acquired in 2011).

During the first quarter of 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture

As of September 30, 2017 , shared-loss agreements are still active for First Regional Bank (FRB), Georgian Bank (GB) and United Western Bank (UWB). Shared-loss protection remains for single family residential loans acquired from UWB and GB in the amount of $70.4 million . FRB remains in a recovery period, where any recoveries are shared with the FDIC, until March 2020.

The following table provides changes in the receivable from the FDIC for the three and nine months ended September 30, 2017 and September 30, 2016 .



	Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016
Beginning balance	$	3,766		$	5,281		$	4,172		$	4,054
Amortization	(421		)	(1,017		)	(1,443		)	(4,259		)
Net cash payments to FDIC	2,243			3,199			7,440			16,701
Post-acquisition adjustments	(978		)	(4,355		)	(5,799		)	(11,926		)
Termination of FDIC shared-loss agreements	—			—			240			(1,462		)
Ending balance	$	4,610		$	3,108		$	4,610		$	3,108

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The shared-loss agreements for two FDIC-assisted transactions, FRB and UWB, include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability) . The clawback liability represents a payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. As of September 30, 2017 and December 31, 2016 , the estimated clawback liability was $100.2 million and $97.0 million , respectively. The clawback liability payment dates for FRB and UWB are March 2020 and March 2021, respectively.

NOTE H - MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.75 billion and $2.49 billion as of September 30, 2017 and December 31, 2016 , 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 and reported in other intangible assets on the Consolidated Balance Sheets. The mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair market value.

The activity of the servicing asset for the three and nine months ended September 30 , 2017 and 2016 is presented in the following table:



	Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016
Beginning balance	$	20,524		$	16,824		$	20,415		$	19,351
Servicing rights originated	2,896			1,923			5,721			4,251
Amortization	(1,417		)	(1,377		)	(4,137		)	(3,978		)
Valuation allowance (provision) reversal	—			360			4			(1,894		)
Ending balance	$	22,003		$	17,730		$	22,003		$	17,730

The following table presents the activity in the servicing asset valuation allowance for the three and nine months ended September 30 , 2017 and 2016 :



	Three months ended September 30					Nine months ended September 30
(Dollars in thousands)	2017		2016			2017			2016
Beginning balance	$	—	$	2,349		$	4		$	95
Valuation allowance provision (reversal)	—		(360		)	(4		)	1,894
Ending balance	$	—	$	1,989		$	—		$	1,989

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended September 30, 2017 and 2016 were $1.7 million and $1.5 million , respectively, and reported in mortgage income in the Consolidated Statements of Income. For the nine months ended September 30, 2017 and 2016 , contractually specified mortgage servicing fees, late fees and ancillary fees earned were $5.2 million and $4.3 million , respectively.

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 for both the three months ended September 30, 2017 and 2016 . For the nine months ended September 30, 2017 and 2016 , amortization expense related to mortgage servicing rights was $4.1 million and $4.0 million , respectively. Mortgage income included an impairment reversal for the three months ended September 30, 2016 of $360 thousand . For the nine months ended September 30, 2017 and 2016 , mortgage income included an impairment reversal of $4 thousand and an impairment of $1.9 million , respectively.

Valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. Key economic assumptions used to value mortgage servicing rights as of September 30, 2017 and December 31, 2016 were as follows:



	September 30, 2017			December 31, 2016
Discount rate - conventional fixed loans	9.33		%	9.45		%
Discount rate - all loans excluding conventional fixed loans	10.33		%	10.45		%
Weighted average constant prepayment rate	11.39		%	10.42		%
Weighted average cost to service a loan	$	64.11		$	62.75

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NOTE I - REPURCHASE AGREEMENTS

BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure wholesale 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 $659.6 million and $690.8 million at September 30, 2017 and December 31, 2016 , respectively.

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in borrowings on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 is presented in the following tables.



	September 30, 2017
	Remaining Contractual Maturity of the Agreements
(Dollars in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. Treasury	$	541,559	$	—	$	—	$	30,000	$	571,559
Total borrowings	$	541,559	$	—	$	—	$	30,000	$	571,559
Gross amount of recognized liabilities for repurchase agreements									$	571,559

	December 31, 2016
	Remaining Contractual Maturity of the Agreements
	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. Treasury	$	590,772	$	—	$	—	$	30,000	$	620,772
Total borrowings	$	590,772	$	—	$	—	$	30,000	$	620,772
Gross amount of recognized liabilities for repurchase agreements									$	620,772

NOTE J - ESTIMATED FAIR VALUES

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

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


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


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

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•	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 originated 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 originated residential real estate loans held for sale are classified as Level 2 inputs. Portfolio loans with the intent to be sold in the secondary market are transferred to loans held for sale at the lower of amortized cost or fair value. The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input.

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

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

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

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

Long-term obligations. For fixed rate trust preferred securities, the fair values are determined based on recent trades of the actual security if available. For other long-term obligations, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for long-term obligations are considered Level 2 inputs.

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

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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, 2017 and December 31, 2016 . The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, short-term borrowings and accrued interest payable are considered Level 2. Lastly, the receivable from the FDIC for shared-loss agreements is designated as Level 3.



(Dollars in thousands)	September 30, 2017				December 31, 2016
	Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	296,386	$	296,386	$	539,741	$	539,741
Overnight investments	2,432,233		2,432,233		1,872,594		1,872,594
Investment securities available for sale	6,992,877		6,992,877		7,006,580		7,006,580
Investment securities held to maturity	78		84		98		104
Loans held for sale	70,803		70,803		74,401		74,401
Net loans and leases	22,917,231		21,941,561		21,519,083		20,614,548
Receivable from the FDIC for shared-loss agreements	4,610		4,610		4,172		4,172
Income earned not collected	90,821		90,821		79,839		79,839
Federal Home Loan Bank stock	52,685		52,685		43,495		43,495
Mortgage servicing rights	22,003		25,597		20,415		24,446
Deposits	29,333,949		29,302,361		28,161,343		28,135,698
Short-term borrowings	679,280		679,280		603,487		603,487
Long-term obligations	866,123		865,876		832,942		832,201
Payable to the FDIC for shared-loss agreements	100,203		102,603		97,008		100,069
Accrued interest payable	4,198		4,198		3,797		3,797

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Among BancShares' assets and liabilities, investment securities available for sale and loans held for sale are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, 2017 and December 31, 2016 .



	September 30, 2017
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,616,324	$	—	$	1,616,324	$	—
Government agency	—		—		—		—
Mortgage-backed securities	5,200,341		—		5,200,341		—
Equity securities	113,650		31,739		81,911		—
Corporate bonds	54,873		—		54,873		—
Other	7,689		—		7,689		—
Total investment securities available for sale	$	6,992,877	$	31,739	$	6,961,138	$	—
Loans held for sale	$	70,803	$	—	$	70,803	$	—

	December 31, 2016
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,650,319	$	—	$	1,650,319	$	—
Government agency	40,398		—		40,398		—
Mortgage-backed securities	5,175,425		—		5,175,425		—
Equity securities	83,507		29,145		54,362		—
Corporate bonds	49,562		—		49,562		—
Other	7,369		—		7,369		—
Total investment securities available for sale	$	7,006,580	$	29,145	$	6,977,435	$	—
Loans held for sale	$	74,401	$	—	$	74,401	$	—

There were no transfers between levels during the three or nine months ended September 30, 2017 .

Fair Value Option

BancShares has elected the fair value option for originated 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 originated residential real estate loans held for sale measured at fair value as of September 30, 2017 and December 31, 2016 .



	September 30, 2017
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	70,803	$	68,739	$	2,064

	December 31, 2016
	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	74,401	$	75,893	$	(1,492	)

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2017 or December 31, 2016 .

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The changes in fair value for originated residential real estate loans held for sale for which the fair value option was elected are recorded as a component of mortgage income on the Consolidated Statements of Income and are included in the table below for the three and nine months ended September 30, 2017 and 2016 .



	Three months ended September 30					Nine months ended September 30
(Dollars in thousands)	2017		2016			2017		2016
Gains (losses) from fair value changes on originated loans held for sale	$	104	$	(51	)	$	3,556	$	1,588

Certain other assets are adjusted to their fair value on a nonrecurring basis, including impaired loans, OREO, and goodwill, which are periodically tested for impairment, and mortgage servicing rights, which are carried at the lower of amortized cost or market. Non-impaired loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value.

Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 8 and 12 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate generally ranges between 2 and 16 percent.

OREO is measured and reported at fair value using asset valuations. Asset values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 8 and 12 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information. OREO that has been acquired or written down in the current year is deemed to be at fair value and included in the table below.

Mortgage servicing rights are carried at the lower of cost or market and are, therefore, carried at fair value only when fair value is less than the amortized asset cost. The fair value of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value.

For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2017 and December 31, 2016 .



	September 30, 2017
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	71,068	$	—	$	—	$	71,068
Other real estate remeasured during current year	38,533		—		—		38,533

	December 31, 2016
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	70,977	$	—	$	—	$	70,977
Other real estate remeasured during current year	45,402		—		—		45,402
Mortgage servicing rights	342		—		—		342

No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 .

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NOTE K - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and former First Citizens Bancorporation, Inc. employees (Bancorporation Plan). Net periodic benefit cost is a component of employee benefits expense.

BancShares Plan

For the three and nine months ended September 30, 2017 and 2016 , the components of net periodic benefit cost are as follows:



	Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016
Service cost	$	3,180		$	3,153		$	9,490		$	9,463
Interest cost	7,283			7,218			21,732			21,668
Expected return on assets	(10,589		)	(9,155		)	(31,594		)	(27,481		)
Amortization of prior service cost	53			54			158			158
Amortization of net actuarial loss	2,214			1,714			6,641			5,144
Net periodic benefit cost	$	2,141		$	2,984		$	6,427		$	8,952

Bancorporation Plan

For the three and nine months ended September 30, 2017 and 2016 , the components of net periodic benefit cost are as follows:



	Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016
Service cost	$	569		$	642		$	1,910		$	1,925
Interest cost	1,624			1,694			4,989			5,081
Expected return on assets	(2,783		)	(2,775		)	(8,375		)	(8,325		)
Amortization of net actuarial loss	63			—			491			—
Net periodic benefit cost	$	(527	)	$	(439	)	$	(985	)	$	(1,319	)

No contributions were made during the three and nine months ended September 30, 2017 to the BancShares or Bancorporation pension plans. BancShares expects to contribute $50.0 million to the BancShares Plan during 2017 . No contribution is expected to be made to the Bancorporation Plan in 2017 .

NOTE L - COMMITMENTS AND CONTINGENCIES

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

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

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

The following table presents the commitments to extend credit and unfunded commitments as of September 30, 2017 and December 31, 2016 :



(Dollars in thousands)	September 30, 2017		December 31, 2016
Unused commitments to extend credit	$	9,428,471	$	8,808,218
Standby letters of credit	75,257		83,750
Unfunded commitments for investments in affordable housing projects	57,725		57,079

Affordable housing project investments were $124.1 million and $109.8 million as of September 30, 2017 and December 31, 2016 , respectively, and are included in other assets on the Consolidated Balance Sheets.

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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, 2017 and December 31, 2016 for estimated losses arising from these standard representation and warranty provisions.

BancShares has a receivable from the FDIC totaling $4.6 million and $4.2 million as of September 30, 2017 and December 31, 2016 , respectively, for the expected reimbursement of losses on assets covered under various shared-loss agreements. The shared-loss agreements are subject to interpretation by both the FDIC and BancShares, and disagreements may arise regarding coverage of losses, expenses and contingencies and requests for reimbursement may be delayed or disallowed for noncompliance. See Note G for additional information on the receivable from the FDIC regarding the early termination of a shared-loss agreement during the first quarter of 2017.

The shared-loss agreements for two FDIC-assisted transactions, FRB and UWB, include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability) . The clawback liability represents a payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The clawback liability is estimated by discounting estimated future payments and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. As of September 30, 2017 and December 31, 2016 , the estimated clawback liability was $100.2 million and $97.0 million , respectively. The clawback liability payment dates for FRB and UWB are March 2020 and March 2021, respectively.

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

BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

NOTE M - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

Accumulated other comprehensive loss included the following as of September 30, 2017 and December 31, 2016 :



	September 30, 2017									December 31, 2016
(Dollars in thousands)	Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax
Unrealized losses on investment securities available for sale	$	(11,752	)	$	(4,157	)	$	(7,595	)	$	(72,707	)	$	(26,832	)	$	(45,875	)
Funded status of defined benefit plans	(134,484		)	(49,755		)	(84,729		)	(141,774		)	(52,457		)	(89,317		)
Total	$	(146,236	)	$	(53,912	)	$	(92,324	)	$	(214,481	)	$	(79,289	)	$	(135,192	)

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The following table highlights changes in accumulated other comprehensive (loss) income by component for the three and nine months ended September 30, 2017 and September 30, 2016 :



	Three months ended September 30, 2017
(Dollars in thousands)	Unrealized (losses) gains on available for sale securities ¹			(Losses) gains on cash flow hedges ¹			Defined benefit pension items ¹			Total
Beginning balance	$	(16,648	)	$	—		$	(86,195	)	$	(102,843	)
Other comprehensive income before reclassifications	9,895			—			—			9,895
Amounts reclassified from accumulated other comprehensive (loss) income	(842		)	—			1,466			624
Net current period other comprehensive income	9,053			—			1,466			10,519
Ending balance	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)

	Three months ended September 30, 2016
	Unrealized gains (losses) on available for sale securities ¹			(Losses) gains on cash flow hedges ¹			Defined benefit pension items ¹			Total
Beginning balance	$	31,213		$	—		$	(46,240	)	$	(15,027	)
Other comprehensive loss before reclassifications	(722		)	—			—			(722		)
Amounts reclassified from accumulated other comprehensive (loss) income	(161		)	—			1,126			965
Net current period other comprehensive (loss) income	(883		)	—			1,126			243
Ending balance	$	30,330		$	—		$	(45,114	)	$	(14,784	)

	Nine months ended September 30, 2017
	Unrealized (losses) gains on available for sale securities ¹			(Losses) gains on cash flow hedges ¹			Defined benefit pension items ¹			Total
Beginning balance	$	(45,875	)	$	—		$	(89,317	)	$	(135,192	)
Other comprehensive income before reclassifications	41,218			—			—			41,218
Amounts reclassified from accumulated other comprehensive (loss) income	(2,938		)	—			4,588			1,650
Net current period other comprehensive income	38,280			—			4,588			42,868
Ending balance	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)

	Nine months ended September 30, 2016
	Unrealized (losses) gains on available for sale securities ¹			(Losses) gains on cash flow hedges ¹			Defined benefit pension items ¹			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 (loss) income	(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	)

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

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The following table presents the amounts reclassified from accumulated other comprehensive (loss) income and the line item affected in the statement where net income is presented for the three and nine months ended September 30, 2017 and September 30, 2016 :



(Dollars in thousands)	Three months ended September 30, 2017
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss) ¹			Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities	$	1,337		Securities gains
	(495		)	Income taxes
	$	842		Net income
Amortization of defined benefit pension items
Prior service costs	$	(53	)	Employee benefits
Actuarial losses	(2,277		)	Employee benefits
	(2,330		)	Employee benefits
	864			Income taxes
	$	(1,466	)	Net income
Total reclassifications for the period	$	(624	)

	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	)

	Nine months ended September 30, 2017
Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated other comprehensive income (loss) ¹			Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities	$	4,664		Securities gains
	(1,726		)	Income taxes
	$	2,938		Net income
Amortization of defined benefit pension items
Prior service costs	$	(158	)	Employee benefits
Actuarial losses	(7,132		)	Employee benefits
	(7,290		)	Employee benefits
	2,702			Income taxes
	$	(4,588	)	Net income
Total reclassifications for the period	$	(1,650	)

	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

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 2016 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2017 , the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares.

EXECUTIVE OVERVIEW

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

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

Interest rates have presented significant challenges to commercial banks' efforts to generate earnings and shareholder value. Our strategy continues to focus on maintaining an interest rate risk profile that will benefit net interest income in a rising rate environment. Management drives to this goal by focusing on core customer deposits and loans in the targeted interest rate risk profile. Additionally, our initiatives focus on growth of noninterest income sources, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology and delivery channels. Refer to our Form 10-K for the year ended December 31, 2016 for further discussion of our strategy.

Significant Events in 2017

In May 2017, FCB entered into an agreement with the Federal Deposit Insurance Corporation (FDIC), as Receiver, to purchase certain assets and assume certain liabilities of Guaranty Bank (Guaranty) of Milwaukee, Wisconsin. As a result of the Guaranty transaction, FCB recorded loans with a fair value of $689.1 million and investment securities with a fair value of $12.1 million . The fair value of deposits assumed was $982.3 million . In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair values as of the acquisition date. As a result, an acquisition gain of $122.7 million was recorded in the second quarter of 2017 .

In March 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture Bank. Under the terms of the agreement, FCB made a net payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in a one-time expense of $45 thousand during the first quarter of 2017.

In January 2017, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of Harvest Community Bank (HCB) of Pennsville, New Jersey. As a result of the HCB transaction, FCB recorded loans with a fair value of $85.1 million and investment securities with a fair value of $14.5 million . The fair value of deposits assumed was $121.8 million . In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair values as of the acquisition date. As a result, an acquisition gain of $12.0 million was recorded in the first quarter of 2017 .

RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS

Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. Third quarter 2017 national economic results indicate solid labor market conditions and moderate increases in economic activity. The national unemployment rate declined from 4.4 percent in June 2017 to 4.2 percent in September 2017. According to the U.S. Department of Labor, the U.S. economy added approximately 274,000 new nonfarm payroll jobs during the third quarter of 2017 . The U.S. housing market remains stable as a result of solid housing demand fueled by low mortgage interest rates, economic growth and job creation.

The Federal Reserve’s Federal Open Market Committee (FOMC) indicated in the third quarter that the U.S. labor market continued to strengthen and economic activity has continued to expand at a modest pace. In view of realized and expected labor market conditions and inflation, the FOMC decided to maintain the target range for the federal funds rate at 1 to 1.25 percent. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC will assess realized

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and expected economic conditions relative to its objectives of maximum employment and 2.0 percent inflation. The FOMC expects that economic activity will expand at a moderate pace and labor market conditions will continue to strengthen with gradual increases in the federal funds rate.

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 2017 . FDIC-insured institutions reported a 10.7 percent increase in net income compared to the second quarter of 2016 as a result of growth in interest-bearing assets generating higher net interest income and restrained growth in operating expenses. Banking industry average net interest margin was 3.22 percent in the second quarter of 2017 , up from 3.08 percent in the second quarter of 2016.

EARNINGS PERFORMANCE SUMMARY

BancShares' consolidated net income for the third quarter of 2017 was $67.1 million , or $5.58 per share, compared to $134.7 million , or $11.21 per share, for the second quarter of 2017 , and $51.4 million , or $4.28 per share, for the corresponding period of 2016 . BancShares’ current quarter results generated an annualized return on average assets of 0.77 percent and an annualized return on average equity of 8.10 percent , compared to respective returns of 1.58 percent and 17.10 percent for the second quarter of 2017 , and 0.63 percent and 6.69 percent for the third quarter of 2016 . Net interest margin for the third quarter of 2017 was 3.35 percent, compared to 3.28 percent for the second quarter of 2017 and 3.10 percent for the third quarter of the prior year.

For the nine months ended September 30, 2017 , net income was $269.3 million , or $22.43 per share, compared to $172.8 million , or $14.39 per share, reported for the same period of 2016 . Annualized returns on average assets and average equity were 1.06 percent and 11.37 percent , respectively, through September 30, 2017 , compared to 0.72 percent and 7.73 percent , respectively, for the same period a year earlier. Year-to-date 2017 pre-tax earnings included gains of $134.7 million recognized in connection with the FDIC-assisted transactions of Guaranty and HCB and $4.7 million of securities gains. Year-to-date 2016 pre-tax earnings included $16.6 million of pre-tax income due to the early termination of certain FDIC shared-loss agreements, securities gains of $17.5 million and gains of $5.8 million recognized in connection with the FDIC-assisted transactions of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin and First CornerStone Bank (FCSB) of King of Prussia, Pennsylvania.

Key highlights in the third quarter of 2017 include:


•	Loans grew by $277.6 million to $23.15 billion , or by 4.8 percent on an annualized basis, during the third quarter of 2017 , as a result of originated portfolio growth.


•	Net interest income increased $11.6 million , or by 4.4 percent , compared to the second quarter of 2017 . The increase was primarily due to originated loan growth and higher interest income earned on non-purchased credit impaired (non-PCI) loans and overnight investments.


•	The taxable-equivalent net interest margin increased 7 basis points to 3.35 percent, compared to the second quarter of 2017 , primarily due to an improvement in loan yields, higher loan balances and a higher federal funds rate.


•	BancShares remained well capitalized under Basel III capital requirements with a Tier 1 risk-based capital ratio of 12.95 percent , common equity Tier 1 ratio of 12.95 percent, total risk-based capital ratio of 14.34 percent and leverage capital ratio of 9.43 percent at September 30, 2017 .

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Table 1

Selected Quarterly Data



	2017									2016						Nine months ended September 30
	Third			Second			First			Fourth			Third			Nine months ended September 30
(Dollars in thousands, except share data)	Quarter			Quarter			Quarter			Quarter			Quarter			2017			2016
SUMMARY OF OPERATIONS
Interest income	$	284,333		$	272,542		$	260,857		$	254,782		$	246,494		$	817,732		$	732,975
Interest expense	11,158			10,933			10,514			10,865			10,645			32,605			32,217
Net interest income	273,175			261,609			250,343			243,917			235,849			785,127			700,758
Provision for loan and lease losses	7,946			12,324			8,231			16,029			7,507			28,501			16,912
Net interest income after provision for loan and lease losses	265,229			249,285			242,112			227,888			228,342			756,626			683,846
Gain on acquisitions	—			122,728			12,017			—			837			134,745			5,831
Noninterest income excluding gain on acquisitions	125,387			125,472			115,275			124,698			117,004			366,134			357,542
Noninterest expense	286,967			285,606			264,345			271,531			267,233			836,918			777,207
Income before income taxes	103,649			211,879			105,059			81,055			78,950			420,587			270,012
Income taxes	36,585			77,219			37,438			28,365			27,546			151,242			97,220
Net income	$	67,064		$	134,660		$	67,621		$	52,690		$	51,404		$	269,345		$	172,792
Net interest income, taxable equivalent	$	274,272		$	262,549		$	251,593		$	245,330		$	237,146		$	788,414		$	704,829
PER SHARE DATA
Net income	$	5.58		$	11.21		$	5.63		$	4.39		$	4.28		$	22.43		$	14.39
Cash dividends	0.30			0.30			0.30			0.30			0.30			0.90			0.90
Market price at period end (Class A)	373.89			372.70			335.37			355.00			293.89			373.89			293.89
Book value at period end	275.91			269.75			258.17			250.82			256.76			275.91			256.76
SELECTED QUARTERLY AVERAGE BALANCES
Total assets	$	34,590,503		$	34,243,527		$	33,494,500		$	33,223,995		$	32,655,417		$	34,113,525		$	32,176,082
Investment securities	6,906,345			7,112,267			7,084,986			6,716,873			6,452,532			7,033,878			6,582,604
Loans and leases ⁽¹⁾	22,997,195			22,575,323			21,951,444			21,548,313			21,026,510			22,511,818			20,678,838
Interest-earning assets	32,555,597			32,104,717			31,298,970			31,078,428			30,446,592			31,991,031			29,995,602
Deposits	29,319,384			29,087,852			28,531,166			28,231,477			27,609,418			28,982,354			27,274,646
Long-term obligations	887,948			799,319			816,953			835,509			842,715			835,000			803,780
Interest-bearing liabilities	19,484,663			19,729,956			19,669,075			19,357,282			19,114,740			19,627,222			19,091,511
Shareholders' equity	$	3,284,044		$	3,159,004		$	3,061,099		$	3,056,426		$	3,058,155		$	3,167,684		$	2,987,455
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	$	34,584,154		$	34,769,850		$	34,018,405		$	32,990,836		$	32,971,910		$	34,584,154		$	32,971,910
Investment securities	6,992,955			6,596,530			7,119,944			7,006,678			6,384,940			6,992,955			6,384,940
Loans and leases:
PCI	834,167			894,863			848,816			809,169			868,200			834,167			868,200
Non-PCI	22,314,906			21,976,602			21,057,633			20,928,709			20,428,780			22,314,906			20,428,780
Deposits	29,333,949			29,456,338			29,002,768			28,161,343			27,925,253			29,333,949			27,925,253
Long-term obligations	866,123			879,957			727,500			832,942			840,266			866,123			840,266
Shareholders' equity	$	3,313,831		$	3,239,851		$	3,100,696		$	3,012,427		$	3,083,748		$	3,313,831		$	3,083,748
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)	0.77		%	1.58		%	0.82		%	0.63		%	0.63		%	1.06		%	0.72		%
Rate of return on average shareholders' equity (annualized)	8.10			17.10			8.96			6.86			6.69			11.37			7.73
Net yield on interest-earning assets (taxable equivalent)	3.35			3.28			3.25			3.14			3.10			3.29			3.14
Allowance for loan and lease losses to total loans and leases:
PCI	1.55			1.51			1.29			1.70			1.34			1.55			1.34
Non-PCI	0.98			0.98			1.00			0.98			0.98			0.98			0.98
Total	1.00			1.00			1.01			1.01			1.00			1.00			1.00
Nonperforming assets to total loans and leases and other real estate at period end:
Ratio of covered nonperforming assets to covered loans, leases and other real estate owned	0.35			0.35			0.59			0.66			0.75			0.35			0.75
Ratio of noncovered nonperforming assets to noncovered loan, leases and other real estate owned	0.63			0.66			0.66			0.67			0.75			0.63			0.75
Total	0.63			0.65			0.66			0.67			0.75			0.63			0.75
Tier 1 risk-based capital ratio	12.95			12.69			12.57			12.42			12.50			12.95			12.50
Common equity Tier 1 ratio	12.95			12.69			12.57			12.42			12.50			12.95			12.50
Total risk-based capital ratio	14.34			14.07			13.99			13.85			13.96			14.34			13.96
Leverage capital ratio	9.43			9.33			9.15			9.05			9.07			9.43			9.07
Dividend payout ratio	5.38			2.68			5.33			6.83			7.01			4.01			6.25
Average loans and leases to average deposits	78.44			77.61			76.94			76.33			76.16			77.67			75.82

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

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BUSINESS COMBINATIONS

Guaranty Bank

On May 5, 2017, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of Guaranty. The acquisition provides FCB the opportunity to grow capital and enhance earnings. This was an FDIC-assisted transaction; however, it has no shared-loss agreement.

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

Table 2

Guaranty Bank



(Dollars in thousands)	As recorded by FCB
Assets
Cash and due from banks	$	48,824
Overnight investments	94,134
Investment securities	12,140
Loans	689,086
Premises and equipment	8,603
Other real estate owned	55
Income earned not collected	6,720
Intangible assets	9,870
Other assets	5,693
Total assets acquired	875,125
Liabilities
Deposits	982,307
Other liabilities	440
Total liabilities assumed	982,747
Fair value of net liabilities assumed	(107,622		)
Cash received from FDIC	230,342
Due from FDIC	8
Gain on acquisition of Guaranty	$	122,728

Harvest Community Bank

On January 13, 2017, FCB entered into an agreement with the FDIC to purchase certain assets and assume certain liabilities of HCB. The acquisition provides FCB the opportunity to grow capital and enhance earnings. This was an FDIC-assisted transaction; however, it has no shared-loss agreement.

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

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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.

Table 3

Harvest Community Bank



(Dollars in thousands)	As recorded by FCB
Assets
Cash and cash equivalents	$	3,350
Overnight investments	7,478
Investment securities	14,455
Loans	85,149
Income earned not collected	31
Intangible assets	850
Other assets	237
Total assets acquired	111,550
Liabilities
Deposits	121,755
Other liabilities	74
Total liabilities assumed	121,829
Fair value of net liabilities assumed	(10,279		)
Cash received from FDIC	22,296
Gain on acquisition of HCB	$	12,017

All loans resulting from the HCB transaction were recognized upon acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI loans.

FDIC-Assisted Transactions

BancShares completed nine FDIC-assisted transactions during the period beginning in 2009 through 2016, and it acquired HCB and Guaranty in its tenth and eleventh such transaction during 2017. These transactions provided significant contributions to our results of operations. Prior to its merger into BancShares, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions between 2009 and 2011. Nine of the fourteen FDIC-assisted transactions (including the three completed by Bancorporation) included shared-loss agreements that, for their terms, protected us from a portion of the credit and asset quality risk we would otherwise incur. The Capitol City Bank & Trust, North Milwaukee State Bank, First CornerStone Bank, Harvest Community Bank and Guaranty Bank transactions did not include shared-loss agreements.

During the first quarter of 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture

Bank (VB). Under the terms of the agreement, FCB made a payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in an adjustment of $240 thousand to the FDIC shared-loss receivable and a $45 thousand loss on the termination of the shared-loss agreement. Additionally, FCB terminated five other shared-loss agreements, including Temecula Valley Bank, Sun American Bank, Williamsburg First National Bank, Atlantic Bank & Trust and Colorado Capital Bank, in the second quarter of 2016. The resulting net positive impact to pre-tax earnings from the early termination of the FDIC shared-loss agreements was $16.6 million in the second quarter of 2016. All rights and obligations of FCB and the FDIC under the shared-loss agreements, including the clawback provisions and the settlement of outstanding shared-loss claims, have been resolved and terminated under the termination agreements. The termination of the FDIC shared-loss agreements had no impact on the yields of the loans that were previously covered under these agreements. FCB will recognize all future recoveries, losses and expenses related to the previously covered assets since the FDIC will no longer share in those amounts.

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Table 4

Consolidated Quarter-to-Date Average Taxable-Equivalent Balance Sheets



	Three months ended
	September 30, 2017							June 30, 2017							September 30, 2016
				Interest							Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	22,997,195		$	247,262	4.27	%	$	22,575,323		$	236,580	4.20	%	$	21,026,510		$	220,480	4.17	%
Investment securities:
U. S. Treasury	1,617,153			4,580		1.12		1,622,936			4,453		1.10		1,528,010			3,018		0.79
Government agency	41,001			171		1.66		52,049			203		1.56		321,664			711		0.88
Mortgage-backed securities	5,075,795			23,912		1.88		5,278,731			24,756		1.88		4,470,507			18,833		1.69
Corporate bonds	62,338			974		6.25		60,356			932		6.17		43,535			648		5.95
Other	110,058			164		0.59		98,195			154		0.63		88,816			316		1.41
Total investment securities	6,906,345			29,801		1.72		7,112,267			30,498		1.72		6,452,532			23,526		1.46
Overnight investments	2,652,057			8,367		1.25		2,417,127			6,404		1.06		2,967,550			3,785		0.51
Total interest-earning assets	32,555,597			$	285,430	3.48	%	32,104,717			$	273,482	3.42	%	30,446,592			$	247,791	3.24	%
Cash and due from banks	354,598							503,205							464,828
Premises and equipment	1,135,003							1,130,796							1,126,935
FDIC shared-loss receivable	4,687							5,207							6,784
Allowance for loan and lease losses	(229,354		)					(222,882		)					(209,547		)
Other real estate owned	56,815							57,044							67,583
Other assets	713,157							665,440							752,242
Total assets	$	34,590,503						$	34,243,527						$	32,655,417

Liabilities
Interest-bearing deposits:
Checking with interest	$	4,981,667		$	255	0.02	%	$	4,978,159		$	253	0.02	%	$	4,475,963		$	231	0.02	%
Savings	2,320,899			173		0.03		2,293,589			188		0.03		2,055,877			157		0.03
Money market accounts	8,053,197			1,690		0.08		8,107,107			1,688		0.08		8,060,290			1,568		0.08
Time deposits	2,559,977			1,721		0.27		2,745,473			2,003		0.29		2,900,840			2,501		0.34
Total interest-bearing deposits	17,915,740			3,839		0.09		18,124,328			4,132		0.09		17,492,970			4,457		0.10
Repurchase agreements	594,344			613		0.41		718,700			539		0.30		766,893			489		0.25
Other short-term borrowings	86,631			816		3.71		87,609			637		2.88		12,162			51		1.68
Long-term obligations	887,948			5,890		2.61		799,319			5,625		2.82		842,715			5,648		2.68
Total interest-bearing liabilities	19,484,663			11,158		0.22		19,729,956			10,933		0.22		19,114,740			10,645		0.22
Noninterest-bearing deposits	11,403,644							10,963,524							10,116,448
Other liabilities	418,152							391,043							366,074
Shareholders' equity	3,284,044							3,159,004							3,058,155
Total liabilities and shareholders' equity	$	34,590,503						$	34,243,527						$	32,655,417
Interest rate spread						3.26	%						3.20	%						3.02	%

Net interest income and net yield on interest-earning assets				$	274,272	3.35	%				$	262,549	3.28	%				$	237,146	3.10	%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent for each period and state income tax rates of 3.1 percent, 3.1 percent and 5.5 percent for the three months ended September 30, 2017 , June 30, 2017 and September 30, 2016 , respectively. The taxable-equivalent adjustment was $1,097 , $940 and $1,297 for the three months ended September 30, 2017 , June 30, 2017 and September 30, 2016 , respectively.

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Table 5

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



	Nine months ended
	September 30, 2017							September 30, 2016
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	22,511,818		$	711,634	4.23	%	$	20,678,838		$	654,824	4.23	%
Investment securities:
U.S. Treasury	1,628,129			13,232		1.09		1,533,881			8,891		0.77
Government agency	48,819			578		1.58		385,854			2,586		0.89
Mortgage-backed securities	5,198,001			72,990		1.87		4,574,755			58,399		1.70
Corporate bonds	59,952			2,886		6.42		22,320			1,011		6.04
State, county and municipal	—			—		—		65			1		2.74
Other	98,977			452		0.61		65,729			658		1.34
Total investment securities	7,033,878			90,138		1.71		6,582,604			71,546		1.45
Overnight investments	2,445,335			19,247		1.05		2,734,160			10,676		0.52
Total interest-earning assets	31,991,031			$	821,019	3.43	%	29,995,602			$	737,046	3.28	%
Cash and due from banks	451,056							463,466
Premises and equipment	1,131,967							1,127,071
FDIC shared-loss receivable	5,114							7,969
Allowance for loan and lease losses	(224,380		)					(207,476		)
Other real estate owned	57,953							66,504
Other assets	700,784							722,946
Total assets	$	34,113,525						$	32,176,082

Liabilities
Interest-bearing deposits:
Checking with interest	$	4,932,073		$	760	0.02	%	$	4,413,467		$	649	0.02	%
Savings	2,258,979			545		0.03		2,005,873			453		0.03
Money market accounts	8,166,737			5,237		0.09		8,159,686			4,853		0.08
Time deposits	2,706,107			5,865		0.29		2,982,460			7,762		0.35
Total interest-bearing deposits	18,063,896			12,407		0.09		17,561,486			13,717		0.10
Repurchase agreements	660,712			1,556		0.31		720,460			1,376		0.26
Other short-term borrowings	67,614			1,629		3.18		5,785			52		1.21
Long-term obligations	835,000			17,013		2.69		803,780			17,072		2.83
Total interest-bearing liabilities	19,627,222			32,605		0.22		19,091,511			32,217		0.23
Noninterest-bearing deposits	10,918,458							9,713,160
Other liabilities	400,161							383,956
Shareholders' equity	3,167,684							2,987,455
Total liabilities and shareholders' equity	$	34,113,525						$	32,176,082
Interest rate spread						3.21	%						3.05	%

Net interest income and net yield on interest-earning assets				$	788,414	3.29	%				$	704,829	3.14	%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent for each period and state income tax rates of 3.1 percent and 5.5 percent for the nine months ended September 30, 2017 and 2016 , respectively. The taxable-equivalent adjustment was $3,287 and $4,071 for the nine months ended September 30, 2017 and 2016 , respectively.

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Table 6

Changes in Consolidated Taxable Equivalent Net Interest Income



	Three months ended September 30, 2017									Nine months ended September 30, 2017
	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	$	21,098		$	5,684		$	26,782		$	57,401		$	(591	)	$	56,810
Investment securities:
U. S. Treasury	234			1,328			1,562			606			3,735			4,341
Government agency	(892		)	352			(540		)	(3,127		)	1,119			(2,008		)
Mortgage-backed securities	2,756			2,323			5,079			8,352			6,239			14,591
Corporate bonds	287			39			326			1,758			117			1,875
State, county and municipal	—			—			—			(1		)	—			(1		)
Other	54			(206		)	(152		)	244			(450		)	(206		)
Total investment securities	2,439			3,836			6,275			7,832			10,760			18,592
Overnight investments	(679		)	5,261			4,582			(1,695		)	10,266			8,571
Total interest-earning assets	$	22,858		$	14,781		$	37,639		$	63,538		$	20,435		$	83,973
Liabilities
Interest-bearing deposits:
Checking with interest	$	25		$	(1	)	$	24		$	94		$	17		$	111
Savings	18			(2		)	16			74			18			92
Money market accounts	60			62			122			(111		)	495			384
Time deposits	(280		)	(500		)	(780		)	(641		)	(1,256		)	(1,897		)
Total interest-bearing deposits	(177		)	(441		)	(618		)	(584		)	(726		)	(1,310		)
Repurchase agreements	(147		)	271			124			(103		)	283			180
Other short-term borrowings	509			256			765			1,026			551			1,577
Long-term obligations	346			(104		)	242			724			(783		)	(59		)
Total interest-bearing liabilities	531			(18		)	513			1,063			(675		)	388
Change in net interest income	$	22,327		$	14,799		$	37,126		$	62,475		$	21,110		$	83,585

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

RESULTS OF OPERATIONS

Net Interest Income and Margin

Third Quarter 2017

Compared to the second quarter of 2017 , net interest income increased $11.6 million , or by 4.4 percent , to $273.2 million for the third quarter of 2017 . On a taxable-equivalent basis, net interest income increased $11.7 million , or by 4.5 percent , to $274.3 million during the third quarter of 2017 . The increase was due to higher non-PCI loan interest income of $11.7 million and a $2.0 million increase in interest income earned on overnight investments. These increases were partially offset by a decrease in PCI loan interest income of $1.2 million, lower investment securities interest income of $700 thousand and an increase in interest expense of $225 thousand primarily related to higher rates paid on short-term borrowings. Net interest income attributed to Guaranty in the third quarter of 2017 was approximately $8.7 million.

Compared to the third quarter of 2016 , net interest income increased $37.3 million , or by 15.8 percent . On a taxable-equivalent basis, net interest income was $274.3 million , an increase of $37.1 million , or by 15.7 percent , from the third quarter of 2016 . The increase was primarily due to a $24.9 million increase in non-PCI loan interest income due to originated loan volume and the contribution from the Guaranty acquisition, a $2.0 million increase in PCI loan interest income, a $6.3 million increase in investment securities interest income and a $4.6 million increase in interest income earned on excess cash held in overnight investments. Interest income earned on overnight investments was positively impacted by three 25 basis point increases in the federal funds rate since the third quarter of 2016 and an increase in average balances.

The taxable-equivalent net interest margin was 3.35 percent for the third quarter of 2017 , an increase of 7 basis points from the second quarter of 2017 and an increase of 25 basis points from the same quarter in the prior year. The margin improvement compared to the second quarter of 2017 was primarily due to an improvement in loan yields, higher loan balances and a higher federal funds rate. The margin improvement compared to third quarter of 2016 was primarily due to improved loan and investment yields and higher loan balances.

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Average quarter-to-date interest earning assets increased by $450.9 million since the second quarter of 2017 , reflecting a $421.9 million increase in average loans outstanding, due to originated loan growth, and a $234.9 million increase in average overnight investments, offset by a $205.9 million decrease in average investment securities. Average quarter-to-date interest earning assets increased by $2.11 billion compared to the same quarter in the prior year. Within interest-earning assets, loans experienced the most significant increase, primarily due to originated loan growth and the acquisitions of HCB and Guaranty contributing a net increase of $1.85 billion . The rate on interest-earnings assets was 3.48 percent, an increase from 3.42 percent and 3.24 percent for the second quarter of 2017 and third quarter of 2016 , respectively.

Average interest-bearing liabilities decreased by $245.3 million compared to the second quarter of 2017 , primarily due to a $208.6 million decrease in average interest-bearing deposits and a $125.3 million decrease in average short-term borrowings, offset by an $88.6 million increase in average long-term obligations. When compared to the same quarter in the prior year, average interest-bearing liabilities increased $369.9 million primarily due to growth in average interest-bearing deposits and the acquisitions of HCB and Guaranty. The rate on interest-bearing liabilities was 0.22 percent, unchanged from the second quarter of 2017 and third quarter of 2016 .

Year-to-date 2017

Net interest income for the first nine months of 2017 was $785.1 million , including $13.7 contributed from Guaranty, an increase of $84.4 million , or 12.0 percent , compared to the same period of 2016 . On a taxable-equivalent basis, net interest income was $788.4 million , an increase of $83.6 million , or 11.9 percent , from the same period of 2016 . Loan interest income increased $57.5 million from the same period of 2016 as a result of a $58.0 million increase in non-PCI loan interest income primarily due to originated loan growth, offset by a $524 thousand decline in PCI loan interest income due to continued loan run-off. Net interest income benefited from an $18.7 million improvement in investment securities interest income, higher income earned on overnight investments of $8.6 million , and reduced interest-bearing deposit costs of $1.3 million . Net interest income was negatively impacted by a $1.8 million increase in short-term borrowing costs.

The taxable-equivalent net interest margin increased 15 basis points to 3.29 percent in the first nine months of 2017 , compared to the same period of 2016 . The margin improvement was primarily due to improved loan and investment yields and higher loan and investment balances. Interest income earned on overnight investments was positively impacted by three 25 basis point increases in the federal funds rate since the first nine months of 2016 .

Average year-to-date interest earning assets increased by $2.00 billion in the first nine months of 2017 compared to the same period of 2016 , primarily due to a $1.83 billion increase in average outstanding loans due to originated loan growth and the impact of the HCB and Guaranty acquisitions. Average year-to-date interest earning assets also increased due to higher average investment securities of $451.3 million , partially offset by a $288.8 million decline in average overnight investments.

Average year-to-date interest-bearing liabilities increased by $535.7 million compared to the first nine months of 2016 , primarily due to a $502.4 million increase in average interest-bearing deposits primarily due to organic growth and the HCB and Guaranty acquisitions. The $31.2 million increase in average long-term obligations and a $2.1 million increase in average short-term borrowings are attributable to the year-to-date increase in average interest-bearing liabilities. The increase in long-term obligations was primarily due to the addition of $175.0 million FHLB advances during 2017 to mitigate interest rate risk from long-term fixed rate loans, offset by certain obligations with maturities less than one year being reclassified to short-term borrowings. The increase in average short-term borrowings was due to certain long-term obligations with maturities less than one year being reclassified to short-term borrowings.

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, merchant services, service charges on deposit accounts and wealth management services. Recoveries on PCI loans that have been previously charged-off are additional sources of noninterest income. BancShares records the portion of recoveries not covered under shared-loss agreements as noninterest income rather than as an adjustment to the allowance for loan losses. Charge-offs on PCI loans are recorded against the discount recognized on the date of acquisition versus through the allowance for loan losses unless an allowance was established subsequent to acquisition date due to declining expected cash flow.

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Table 7

Noninterest Income



	Three months ended									Nine months ended
(Dollars in thousands)	September 30, 2017			June 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Gain on acquisitions	$	—		$	122,728		$	837		$	134,745		$	5,831
Cardholder services	24,461			24,287			21,537			70,006			61,949
Merchant services	25,879			26,590			25,179			77,456			71,392
Service charges on deposit accounts	25,951			25,862			23,154			73,955			66,888
Wealth management services	21,234			21,920			19,915			64,116			60,840
Securities gains	1,337			3,351			352			4,664			17,509
Other service charges and fees	7,073			6,628			7,567			21,302			21,693
Mortgage income	6,775			4,966			6,692			19,317			12,540
Insurance commissions	2,894			2,563			2,755			9,015			8,198
ATM income	2,596			2,513			1,908			6,882			5,518
Adjustments to FDIC receivable for shared-loss agreements	(1,770		)	(1,273		)	(2,773		)	(4,671		)	(7,673		)
Net impact from FDIC shared-loss termination	—			—			—			(45		)	16,559
Recoveries of PCI loans previously charged off	5,235			4,310			4,803			14,769			11,906
Other	3,722			3,755			5,915			9,368			10,223
Total noninterest income	$	125,387		$	248,200		$	117,841		$	500,879		$	363,373

Total noninterest income for the third quarter of 2017 was $125.4 million . Excluding acquisition gains of $122.7 million , noninterest income declined $85 thousand from the second quarter of 2017 . The most significant components of the change were as follows:


•	Investment securities gains decreased $2.0 million as a result of gains on mortgage backed securities sales in the second quarter.


•	Mortgage income increased $1.8 million primarily resulting from mortgage servicing rights retained related to the sale of certain residential mortgage loans.

Noninterest income for the third quarter of 2017 , excluding acquisition gains of $837 thousand , increased by $8.4 million from the third quarter of 2016 . The increase was primarily attributable to the following drivers:


•	Higher merchant and cardholder income of $3.6 million resulting from higher sale volume.


•	Increase in service charges on deposit accounts of $2.8 million primarily related to the Guaranty acquisition.


•	Wealth management income increased $1.3 million as a result of higher trust income.


•	Investment securities gains increased $1.0 million due to equity securities sales in the third quarter of 2017.

Noninterest income excluding acquisition gains of $134.7 million and $5.8 million in 2017 and 2016 , respectively, was $366.1 million for first nine months of 2017 compared to $357.5 million for the same period of 2016 . The increase was primarily driven by the following:


•	Higher merchant and cardholder income of $14.1 million due to higher sales volume.


•	Increase in net service charges on deposit accounts of $7.1 million primarily as a result of $5.8 million in service charges related to the Guaranty acquisition.


•	Increase in mortgage income of $6.8 million primarily attributable to interest rate movements, mortgage servicing rights retained related to the sale of certain residential mortgage loans and an impairment charge of $1.9 million recognized in 2016.


•	An increase in wealth management services of $3.3 million primarily due to higher annuity fees on increased sales volume and an increase in net trust income from higher commissions earned.


•	Net impact from the FDIC shared-loss termination of $16.6 million recognized in 2016.


•	Decrease in investment securities gains of $12.8 million due to lower investment portfolio sales in 2017.

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Noninterest Expense

The primary components of noninterest expense are salaries and wages, and related employee benefits, occupancy costs, equipment expense, and merchant and cardholder processing expenses.

Table 8

Noninterest Expense



	Three months ended						Nine months ended
(Dollars in thousands)	September 30, 2017		June 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Salaries and wages	$	121,086	$	118,169	$	107,762	$	351,518	$	315,720
Employee benefits	27,030		27,095		26,750		83,418		79,761
Occupancy expense	26,594		26,059		24,857		77,415		74,824
Equipment expense	23,887		24,654		23,736		73,129		68,796
Merchant processing	19,653		19,677		18,686		57,624		52,924
Cardholder processing	8,576		7,709		7,416		23,092		22,075
FDIC insurance expense	5,449		5,705		5,796		16,747		15,173
Collection and foreclosure-related expenses	3,443		2,376		4,039		9,582		9,732
Merger-related expenses	562		6,853		3,764		8,248		5,187
Processing fees paid to third parties	9,182		5,426		4,912		18,924		13,648
Cardholder reward programs	1,308		2,954		2,762		6,806		7,661
Telecommunications	3,227		3,224		3,589		10,063		10,641
Consultant expense	3,911		3,423		3,092		9,213		7,604
Advertising expense	2,789		2,947		2,689		8,236		7,557
Core deposit intangible amortization	4,532		4,404		4,121		12,857		12,655
Other	25,738		24,931		23,262		70,046		73,249
Total noninterest expense	$	286,967	$	285,606	$	267,233	$	836,918	$	777,207

Noninterest expense was $287.0 million in the third quarter of 2017 , an increase of $1.4 million from the second quarter of 2017 . The change was attributable to the following drivers:


•	Processing fees paid to third parties increased $3.8 million primarily due to transaction-related services for Guaranty Bank.


•	Personnel expense, which includes salaries, wages and employee benefits, increased $2.9 million due to merit increases and increased headcount primarily from the Guaranty acquisition.


•	Collection and foreclosure-related expense increased $1.1 million primarily due to higher losses on other real estate owned (OREO) sales.


•	Merger-related expenses decreased $6.3 million primarily related to non-recurring expenses incurred from the Guaranty acquisition during the second quarter.


•	Cardholder reward programs expense decreased $1.5 million due to revisions in the card rewards model in the third quarter of 2017 resulting in a $1.7 million release of the cardholder rewards reserve.

Noninterest expense was $287.0 million in the third quarter of 2017 , an increase of $19.7 million from the same period of 2016 . The change was attributable to the following drivers:


•	Personnel expense increased by $13.6 million primarily due to merit increases, acquisitions, higher incentive costs and increased headcount.


•	Processing fees paid to third parties increased $4.3 million primarily due to transaction-related services for Guaranty Bank.


•	Merchant and cardholder processing expense increased by $2.1 million related to higher sales volume.


•	Occupancy expense increased $1.7 million due to higher building maintenance and property tax expenses.


•	Merger-related expenses decreased $3.2 million primarily related to non-recurring expenses incurred from the Cordia acquisition during the third quarter of 2016 .

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Noninterest expense was $836.9 million for the nine months ended September 30, 2017 , an increase of $59.7 million from the same period of 2016 . The increase was primarily attributed to the following:


•	Personnel expense increased by $39.5 million primarily due to merit increases, acquired bank personnel, promotions, an increase in incentives and higher insurance costs.


•	Processing fees paid to third parties increased by $5.3 million due to Guaranty Bank transaction services.


•	Equipment expense increased $4.3 million primarily due to software maintenance and software projects placed into service over the past year


•	Merchant and cardholder processing expense increased $5.7 million related to higher sales volume.


•	Merger-related expenses increased $3.1 million primarily due to the Guaranty and HCB acquisitions in 2017 .


•	Occupancy expense increased $2.6 million resulting from building maintenance.


•	Other expense decreased $3.2 million primarily due to a $2.0 million decline in operational losses and $1.0 million less in losses on asset sales.

Income Taxes

Income tax expense was $36.6 million , $77.2 million and $27.5 million for the third quarter of 2017 , second quarter of 2017 and third quarter of 2016 , representing effective tax rates of 35.3 percent , 36.4 percent and 34.9 percent during the respective periods. Income tax expense was $151.2 million and $97.2 million for the nine months ended September 30, 2017 and 2016 , respectively, representing an effective tax rate of 36.0 percent for both nine month periods.

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

INTEREST-EARNING ASSETS

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

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

Interest-earning assets averaged $32.56 billion and $31.08 billion for the quarters ended September 30, 2017 and December 31, 2016 , respectively. The $1.48 billion increase from December 31, 2016 was due to a $1.45 billion increase in loans and leases primarily as a result of originated loan growth and the acquisitions of Guaranty and HCB, and a $189.5 million increase in investment securities, offset by a $161.2 million decline in overnight investments.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares' objectives. Additionally, purchases of equities have been made largely under a long term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends among loans and leases, deposits and short-term borrowings. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand.

The fair value of investment securities was $6.99 billion at September 30, 2017 , a decrease of $13.7 million , when compared to $7.01 billion at December 31, 2016 . The decrease in the portfolio from December 31, 2016 was primarily attributable to only

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reinvesting a portion of the proceeds from sales, maturities and pay downs into the investment portfolio. Investment securities increased $608.1 million from September 30, 2016 to September 30, 2017 due to reinvesting proceeds from sales, maturities and pay downs of securities back into the investment portfolio.

As of September 30, 2017 , investment securities available for sale had a net pre-tax unrealized loss of $11.8 million , compared to a net pre-tax unrealized loss of $72.7 million as of December 31, 2016 and a net pre-tax unrealized gain of $48.6 million as of September 30, 2016 . 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. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of September 30, 2017 .

Sales of investment securities for the three months ended September 30, 2017 resulted in a net realized gain of $1.3 million compared to a net gain of $3.4 million and a net gain of $352 thousand for the three months ended June 30, 2017 and September 30, 2016 , respectively. During the nine months ended September 30, 2017 we recognized $4.7 million in net realized gains on sales of investment securities compared to $17.5 million in net realized gains for the corresponding period of 2016 .

At September 30, 2017 , mortgage-backed securities represented 74.4 percent of investment securities available for sale, compared to U.S. Treasury, equity securities, corporate bonds and other, which represented 23.1 percent , 1.6 percent, 0.8 percent and 0.1 percent of the portfolio, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

Due to lower market rates and spread tightening in mortgage-backed securities products since December 31, 2016 , the carrying value of mortgage-backed securities has increased by $24.9 million . U.S. Treasury and government agency securities decreased $34.0 million and $40.4 million , respectively, primarily due to a portion of maturities proceeds being reinvested into other types of securities in the investment portfolio. Equity securities, in which our investments are comprised of other financial institutions, increased $30.1 million since December 31, 2016 primarily on improved bank stock performance driven largely by an improvement in the banking environment.

Table 9

Investment Securities



	September 30, 2017				December 31, 2016				September 30, 2016
(Dollars in thousands)	Cost		Fair value		Cost		Fair value		Cost		Fair Value
Investment securities available for sale:
U.S. Treasury	$	1,619,343	$	1,616,324	$	1,650,675	$	1,650,319	$	1,547,501	$	1,549,530
Government agency	—		—		40,291		40,398		169,609		169,859
Mortgage-backed securities	5,240,922		5,200,341		5,259,466		5,175,425		4,487,083		4,528,370
Equity securities	82,314		113,650		71,873		83,507		88,526		93,011
Corporate bonds	54,412		54,873		49,367		49,562		41,363		41,945
Other	7,638		7,689		7,615		7,369		2,115		2,100
Total investment securities available for sale	7,004,629		6,992,877		7,079,287		7,006,580		6,336,197		6,384,815
Investment securities held to maturity:
Mortgage-backed securities	78		84		98		104		125		133
Total investment securities	$	7,004,707	$	6,992,961	$	7,079,385	$	7,006,684	$	6,336,322	$	6,384,948

Loans and Leases

Loans were $23.15 billion at September 30, 2017 , a net increase of $1.41 billion compared to December 31, 2016 , representing growth of 8.7 percent on an annualized basis. This increase was primarily driven by $902.6 million of organic growth in the non-PCI portfolio and $483.6 million in non-PCI loans acquired in the Guaranty acquisition at September 30, 2017 . The PCI portfolio increased over this period by $25.0 million , reflecting net PCI loans acquired from Guaranty and HCB of $104.3 million and $68.2 million , respectively, at September 30, 2017 , offset by loan run-off of $147.5 million.

Non-PCI loans increased by $1.89 billion , compared to September 30, 2016 , reflecting originated loan growth and loans acquired in the Guaranty transaction. PCI loans decreased by $34.0 million from September 30, 2016 , due to continued pay downs in the PCI loan portfolio, offset by the contributions from the Guaranty and HCB acquisitions.

BancShares reports non-PCI and PCI loan portfolios separately and each portfolio is further divided into commercial and non-commercial. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk

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characteristics, such as commercial real estate, commercial and industrial or residential mortgage. Table 10 provides the composition of PCI and non-PCI loans and leases.

Non-PCI Loans and Leases

The non-PCI portfolio includes loans that management has the intent and ability to hold and 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 are not impaired and, therefore, do not have a discount at least in part due to credit quality at the time of acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.

Non-PCI loans and leases at September 30, 2017 were $22.31 billion , representing 96.4 percent of total loans and leases, compared to $20.93 billion and $20.43 billion at December 31, 2016 and September 30, 2016 , respectively.

The non-PCI commercial loan portfolio is composed of Commercial Mortgage, Commercial and Industrial, Construction and Land Development, Lease Financing, Other Commercial Real Estate and Other Commercial loans. Non-PCI commercial loans were $14.42 billion at September 30, 2017 , an increase of $655.0 million and $1.01 billion , compared to December 31, 2016 and September 30, 2016 , respectively, primarily resulting from originated loan growth and the Guaranty 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 $7.90 billion at September 30, 2017 , an increase of $731.2 million and $874.9 million compared to December 31, 2016 and September 30, 2016 , respectively, resulting from originated loan growth and the Guaranty acquisition.

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 deterioration, the loans are accounted for under the guidance in ASC Topic 310-30. PCI loans are valued at fair value at the date of acquisition.

PCI loans at September 30, 2017 were $834.2 million , representing 3.6 percent of total loans and leases, compared to $809.2 million and $868.2 million at December 31, 2016 and September 30, 2016 , respectively.

PCI commercial loans were $436.7 million at September 30, 2017 , a decrease of $63.3 million since December 31, 2016 and $107.0 million since September 30, 2016 , reflecting continued loan run-off, offset by the net PCI loans acquired from Guaranty and HCB. At September 30, 2017 , PCI noncommercial loans were $397.4 million , an increase of $88.2 million and $73.0 million since December 31, 2016 and September 30, 2016 , respectively, due to the contributions from the HCB and Guaranty acquisitions, offset by continued loan run-off.

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Table 10

Loans and Leases



(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016
Non-PCI loans and leases:
Commercial:
Construction and land development	$	626,887	$	649,157	$	642,158
Commercial mortgage	9,510,158		9,026,220		8,779,132
Other commercial real estate	434,736		351,291		346,030
Commercial and industrial	2,654,898		2,567,501		2,507,167
Lease financing	866,804		826,270		803,601
Other	322,216		340,264		326,348
Total commercial loans	14,415,699		13,760,703		13,404,436
Noncommercial:
Residential mortgage	3,467,978		2,889,124		2,813,914
Revolving mortgage	2,692,558		2,601,344		2,573,086
Construction and land development	227,184		231,400		234,383
Consumer	1,511,487		1,446,138		1,402,961
Total noncommercial loans	7,899,207		7,168,006		7,024,344
Total non-PCI loans and leases	22,314,906		20,928,709		20,428,780
PCI loans:
Commercial:
Construction and land development	17,406		20,766		23,138
Commercial mortgage	393,557		453,013		491,180
Other commercial real estate	17,771		12,645		14,783
Commercial and industrial	7,064		11,844		11,437
Other	922		1,702		3,167
Total commercial loans	436,720		499,970		543,705
Noncommercial:
Residential mortgage	327,263		268,777		278,872
Revolving mortgage	67,847		38,650		43,509
Construction and land development	—		—		83
Consumer	2,337		1,772		2,031
Total noncommercial loans	397,447		309,199		324,495
Total PCI loans	834,167		809,169		868,200
Total loans and leases	$	23,149,073	$	21,737,878	$	21,296,980

Allowance for Loan and Lease Losses (ALLL)

The ALLL was $231.8 million at September 30, 2017 , representing an increase of $13.0 million and $19.9 million since December 31, 2016 and September 30, 2016 , respectively. The ALLL as a percentage of total loans and leases was 1.00 percent at September 30, 2017 , compared to 1.01 percent and 1.00 percent at December 31, 2016 and September 30, 2016 , respectively.

At September 30, 2017 , the ALLL allocated to non-PCI loans and leases was $218.9 million , or 0.98 percent of non-PCI loans and leases, compared to $205.0 million , or 0.98 percent , at December 31, 2016 and $200.3 million , or 0.98 percent , at September 30, 2016 . The ALLL for non-PCI loans and leases increased from September 30, 2016 primarily due to continued loan growth with comparable credit quality. The remaining ALLL of $13.0 million relates to PCI loans at September 30, 2017 , compared to $13.8 million and $11.6 million at December 31, 2016 and September 30, 2016 , respectively. The ALLL on the PCI loan portfolio declined from December 31, 2016 primarily due to favorable updates in loss assumptions for certain pools of PCI loans based on actual experience. The ALLL on the PCI loan portfolio increased from September 30, 2016 primarily due to unfavorable updates in loss assumptions for certain pools of PCI loans based on actual experience, offset by continued loan run-off.

The ALLL allocated to originated non-PCI loans and leases was 1.07 percent of originated non-PCI loans and leases at September 30, 2017 , compared to 1.09 percent and 1.10 percent at December 31, 2016 and September 30, 2016 , respectively. Originated non-PCI loans were $20.34 billion , $18.82 billion and $18.10 billion at September 30, 2017 , December 31, 2016 and September 30, 2016 , respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.

BancShares recorded net provision expense of $7.9 million for loan and lease losses for the third quarter of 2017 , compared to $12.3 million for the second quarter of 2017 . The $4.4 million decrease in net provision expense was due to lower PCI provision

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expense of $3.1 million and lower non-PCI provision expense of $1.3 million . The decrease in PCI loan provision expense was primarily due to reversals of previously identified impairment as a result of favorable updates in default rates for certain pools of PCI loans based on actual experience. The decrease in non-PCI provision expense was primarily due to lower originated loan growth in the current quarter compared to the second quarter.

Net provision expense increased $439 thousand from the third quarter of 2016 . Non-PCI provision expense increased $1.1 million primarily due to higher originated loan growth and higher net charge-offs. The PCI provision expense decreased $614 thousand due to favorable updates in loss assumptions for certain pools of PCI loans based on actual experience. Net provision expense for the nine months ended September 30, 2017 was $28.5 million , compared to $16.9 million for the same period of 2016 . The increase in provision expense was primarily due to higher net charge-offs and lower credit quality improvements in the current year.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases for the third quarter of 2017 was 0.08 percent , unchanged from the second quarter of 2017 and compared to 0.07 percent in the third quarter of 2016 . Net charge-offs for non-PCI loans and leases were $4.9 million during the third quarter of 2017 , compared to $4.5 million and $3.6 million during the second quarter of 2017 and third quarter of 2016 , respectively. On an annualized basis, non-PCI net charge-offs as a percentage of non-PCI average loans and leases during the third quarter of 2017 were 0.09 percent , compared to 0.08 percent in the second quarter of 2017 and 0.07 percent in the third quarter of 2016 .

The unamortized discount related to non-PCI loans and leases at September 30, 2017 , December 31, 2016 and September 30, 2016 was $38.5 million , $31.5 million and $36.1 million , respectively. The unamortized discount related to PCI loans at September 30, 2017 , December 31, 2016 and September 30, 2016 was $121.1 million , $118.9 million and $127.2 million , respectively.

Management considers the ALLL adequate to absorb estimated inherent losses that relate to loans and leases outstanding at September 30, 2017 , although future adjustments may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL. Such agencies may require adjustments to the ALLL based on information available to them at the time of their examination.

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Table 11

Allowance for Loan and Lease Losses Components by Loan Class



	2017									2016						Nine months ended September 30
	Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			2017			2016
Allowance for loan and lease losses at beginning of period	$	228,798		$	220,943		$	218,795		$	211,950		$	208,008		$	218,795		$	206,216
Non-PCI provision for loan and lease losses:
Commercial:
Construction and land development	(5,150		)	2,372			2,536			10,802			835			(242		)	2,069
Commercial mortgage	(71		)	639			6			(20,844		)	(2,163		)	574			(1,067		)
Other commercial real estate	891			33			304			958			150			1,228			(34		)
Commercial and industrial	5,621			968			3,592			9,347			2,954			10,181			5,236
Lease financing	884			186			575			300			274			1,645			337
Other	58			(214		)	517			985			183			299			(109		)
Total commercial loans	2,233			3,984			7,530			1,548			2,233			13,685			6,432
Noncommercial:
Residential mortgage	531			155			1,061			6,654			531			2,037			2,794
Revolving mortgage	842			1,054			840			(4,541		)	679			2,446			3,306
Construction and land development	92			(10		)	(83		)	(208		)	88			(1		)	253
Consumer	4,785			4,569			1,728			10,439			3,899			11,144			8,193
Total noncommercial loans	6,250			5,768			3,546			12,344			5,197			15,626			14,546
Total non-PCI provision	8,483			9,752			11,076			13,892			7,430			29,311			20,978
PCI provision for loan losses	(537		)	2,572			(2,845		)	2,137			77			(810		)	(4,066		)
Non-PCI Charge-offs:
Commercial:
Construction and land development	(9		)	(413		)	(77		)	(41		)	(77		)	(499		)	(639		)
Commercial mortgage	(39		)	(235		)	(37		)	(392		)	(461		)	(311		)	(454		)
Other commercial real estate	—			—			(5		)	—			—			(5		)	—
Commercial and industrial	(1,275		)	(3,121		)	(3,253		)	(5,321		)	(1,198		)	(7,649		)	(3,690		)
Lease financing	(687		)	(97		)	(173		)	(310		)	(132		)	(957		)	(93		)
Other	(666		)	(64		)	(123		)	15			—			(853		)	(22		)
Total commercial loans	(2,676		)	(3,930		)	(3,668		)	(6,049		)	(1,868		)	(10,274		)	(4,898		)
Noncommercial:
Residential mortgage	(604		)	(222		)	(250		)	(245		)	(328		)	(1,076		)	(680		)
Revolving mortgage	(218		)	(280		)	(825		)	(779		)	(391		)	(1,323		)	(2,507		)
Consumer	(4,996		)	(4,991		)	(3,966		)	(4,241		)	(3,623		)	(14,015		)	(9,868		)
Total noncommercial loans	(5,818		)	(5,493		)	(5,041		)	(5,265		)	(4,342		)	(16,414		)	(13,055		)
Total non-PCI charge-offs	(8,494		)	(9,423		)	(8,709		)	(11,314		)	(6,210		)	(26,688		)	(17,953		)
Non-PCI Recoveries:
Commercial:
Construction and land development	56			209			55			120			69			320			278
Commercial mortgage	1,446			731			364			147			378			2,541			992
Other commercial real estate	8			7			4			10			13			19			167
Commercial and industrial	433			2,392			265			207			328			3,090			1,330
Lease financing	3			—			6			4			5			9			145
Other	123			46			13			19			170			244			384
Total commercial loans	2,069			3,385			707			507			963			6,223			3,296
Noncommercial:
Residential mortgage	92			75			287			72			334			454			394
Revolving mortgage	228			401			552			414			256			1,181			502
Construction and land development	—			—			—			63			—			—			3
Consumer	1,203			1,093			1,080			1,074			1,092			3,376			3,194
Total noncommercial loans	1,523			1,569			1,919			1,623			1,682			5,011			4,093
Total non-PCI recoveries	3,592			4,954			2,626			2,130			2,645			11,234			7,389
Non-PCI loans and leases charged off, net	(4,902		)	(4,469		)	(6,083		)	(9,184		)	(3,565		)	(15,454		)	(10,564		)
PCI loans charged off, net	—			—			—			—			—			—			(614		)
Allowance for loan and lease losses at end of period	$	231,842		$	228,798		$	220,943		$	218,795		$	211,950		$	231,842		$	211,950
Reserve for unfunded commitments	$	1,309		$	1,133		$	1,198		$	1,133		$	379		$	1,309		$	379

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Third Quarter 2017 to Second Quarter 2017

Non-PCI commercial construction and land development loans had a net provision credit of $5.2 million in the third quarter of 2017 , compared to provision expense of $2.4 million in the second quarter of 2017 . The net provision credit in the current quarter was primarily due to the movement of construction loans to other loan categories upon completion of the temporary construction phase, partially offset by loan growth.

Non-PCI commercial mortgage loans had a net provision credit of $71 thousand in the third quarter of 2017 , compared to a provision expense of $639 thousand in the second quarter of 2017 . The net provision credit in the current quarter was primarily due to a large recovery on a loan in the portfolio.

Provision expense for non-PCI commercial and industrial loans was $5.6 million in the third quarter of 2017 , compared to $1.0 million in the second quarter of 2017 . The increase in provision expense was due to originated loan growth and select credit downgrades in the loan category.

Third Quarter 2017 to Third Quarter 2016

Non-PCI commercial construction and land development loans had a net provision credit of $5.2 million in the third quarter of 2017 , compared to provision expense of $835 thousand for the same period of 2016 . The net provision credit in the current quarter was primarily due to the movement of construction loans to other loan categories upon completion of the temporary construction phase partially offset by loan growth.

Provision expense for non-PCI commercial mortgage loans was a net credit of $71 thousand in the third quarter of 2017, compared to a net provision credit of $2.2 million for the same period of 2016 . The increase in provision expense was primarily due to credit quality improvements in the third quarter of 2016 related to a certain loan relationship.

Provision expense for non-PCI commercial and industrial loans was $5.6 million in the third quarter of 2017 , compared to $3.0 million in the same period of 2016 . The increase in provision expense was due to originated loan growth and select credit downgrades in the loan category.

Year-to-date 2017

Non-PCI commercial construction and land development loans had a net provision credit of $242 thousand in the first nine months of 2017 , compared to provision expense of $2.1 million for the same period of 2016 . The net provision credit in the current quarter was primarily due to the movement of construction loans to other loan categories upon completion of the temporary construction phase.

Provision expense for non-PCI commercial mortgage loans was $574 thousand in the first nine months of 2017 , compared to a net provision credit of $1.1 million for the same period of 2016 . The net provision credit in the prior year was primarily due to credit quality improvements in 2016 related to a certain loan relationship.

Provision expense for non-PCI other commercial real estate was $1.2 million in the first nine months of 2017 , compared to a net provision credit of $34 thousand for the same period of 2016 . The provision expense in the current year was primarily the result of originated loan growth.

Provision expense for non-PCI commercial and industrial loans was $10.2 million in the first nine months of 2017 , compared to $5.2 million for the same period of 2016 . The increase in provision expense was primarily due to originated loan growth in the current year.

Total net charge-offs for non-PCI loans were $15.5 million in the first nine months of 2017 , compared to $10.6 million for the same period of 2016 . The increase in net charge-offs was primarily due to certain charge-offs related to medical and dental borrowers.

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Table 12

Allowance for Loan and Lease Losses Metrics and Ratios



	2017									2016						Nine months ended September 30
	Third			Second			First			Fourth			Third			Nine months ended September 30
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			2017			2016
Average loans and leases:
PCI	$	865,580		$	858,053		$	857,501		$	831,858		$	892,115		$	860,408		$	921,151
Non-PCI	22,131,615			21,717,270			21,093,943			20,716,455			20,134,395			21,651,410			19,757,687
Loans and leases at period-end:
PCI	834,167			894,863			848,816			809,169			868,200			834,167			868,200
Non-PCI	22,314,906			21,976,602			21,057,633			20,928,709			20,428,780			22,314,906			20,428,780
Allowance for loan and lease losses allocated to loans and leases:
PCI	12,959			13,496			10,924			13,769			11,632			12,959			11,632
Non-PCI	218,883			215,302			210,019			205,026			200,318			218,883			200,318
Total	$	231,842		$	228,798		$	220,943		$	218,795		$	211,950		$	231,842		$	211,950
Net charge-offs (annualized) to average loans and leases:
PCI	—		%	—		%	—		%	—		%	—		%	—		%	0.09		%
Non-PCI	0.09			0.08			0.12			0.18			0.07			0.10			0.07
Total	0.08			0.08			0.11			0.17			0.07			0.09			0.07
ALLL to total loans and leases:
PCI	1.55			1.51			1.29			1.70			1.34			1.55			1.34
Non-PCI	0.98			0.98			1.00			0.98			0.98			0.98			0.98
Total	1.00			1.00			1.01			1.01			1.00			1.00			1.00

Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases and OREO from our PCI and non-PCI loan portfolios. At September 30, 2017 , BancShares’ nonperforming assets were $145.1 million , down from $147.0 million at December 31, 2016 and down from $160.1 million at September 30, 2016 , respectively.

At September 30, 2017 , OREO totaled $54.0 million , representing declines of $7.2 million and $15.0 million since December 31, 2016 and September 30, 2016 , respectively, as sales outpaced additions. Nonaccrual non-PCI loans and leases at September 30, 2017 increased $7.8 million to $90.1 million compared to $82.3 million at December 31, 2016 primarily due to revolving and residential mortgage loans moving to past due status. Nonaccrual non-PCI loans and leases increased $3.0 million from $87.0 million at September 30, 2016 as a result of an increase in revolving and residential mortgage loans moving to nonaccrual status, offset by problem asset resolutions in the commercial loan portfolio. Nonaccrual PCI loans at September 30, 2017 were down $2.4 million and $3.1 million from December 31, 2016 and September 30, 2016 , respectively, due to resolutions of impaired loans.

Of the $145.1 million in nonperforming assets at September 30, 2017 , $244 thousand were loans and OREO covered by shared-loss agreements. Covered nonperforming assets continue to decline due to loan resolutions and the termination of certain shared-loss agreements.

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Table 13

Nonperforming Assets



	2017									2016
	Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Nonaccrual loans and leases:
Non-PCI	$	90,064		$	88,067		$	86,086		$	82,307		$	87,043
PCI	1,017			1,312			1,458			3,451			4,142
Other real estate	53,988			60,781			56,491			61,231			68,964
Total nonperforming assets	$	145,069		$	150,160		$	144,035		$	146,989		$	160,149

Nonaccrual loans and leases:
Covered under shared-loss agreements	$	96		$	98		$	98		$	93		$	95
Not covered under shared-loss agreements	90,985			89,281			87,446			85,665			91,090
Other real estate:
Covered	148			162			349			472			591
Noncovered	53,840			60,619			56,142			60,759			68,373
Total nonperforming assets	$	145,069		$	150,160		$	144,035		$	146,989		$	160,149

Loans and leases:
Covered	$	70,386		$	73,170		$	75,895		$	84,821		$	91,469
Noncovered	23,078,687			22,798,295			21,830,554			21,653,057			21,205,511

Accruing loans and leases 90 days or more past due
Non-PCI	3,449			4,192			2,982			2,718			1,879
PCI	64,801			72,586			75,576			65,523			67,433

Ratio of nonperforming assets to loans, leases and other real estate owned:
Ratio of covered nonperforming assets to covered loans, leases and other real estate owned	0.35		%	0.35		%	0.59		%	0.66		%	0.75		%
Ratio of noncovered nonperforming assets to noncovered loan, leases and other real estate owned	0.63			0.66			0.66			0.67			0.75
Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.63		%	0.65		%	0.66		%	0.67		%	0.75		%

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, 2017 were $154.4 million , compared to $150.9 million at December 31, 2016 and $149.4 million at September 30, 2016 . Accruing TDRs were $123.7 million , a decline of $3.9 million from December 31, 2016 and an increase of $1.3 million from September 30, 2016 . At September 30, 2017 , nonaccruing TDRs were $30.7 million , an increase of $7.3 million and $3.7 million from December 31, 2016 and September 30, 2016 , respectively. The increase in nonaccruing TDRs from December 31, 2016 was primarily related to an increase in commercial, revolving and residential mortgage TDRs.

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Table 14

Troubled Debt Restructurings



(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016
Accruing TDRs:
PCI	$	19,719	$	26,068	$	25,168
Non-PCI	103,945		101,462		97,200
Total accruing TDRs	123,664		127,530		122,368
Nonaccruing TDRs:
PCI	300		301		318
Non-PCI	30,418		23,085		26,739
Total nonaccruing TDRs	30,718		23,386		27,057
All TDRs:
PCI	20,019		26,369		25,486
Non-PCI	134,363		124,547		123,939
Total TDRs	$	154,382	$	150,916	$	149,425

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities were $19.40 billion and $19.47 billion at September 30, 2017 and December 31, 2016 , respectively. The $70.9 million decrease from December 31, 2016 was due to a decrease in interest-bearing deposits of $179.9 million , a $75.8 million increase in short-term borrowings and a $33.2 million increase in long-term obligations. Interest-bearing liabilities increased $146.3 million to $19.40 billion at September 30, 2017 from $19.25 billion at September 30, 2016 due to a $171.3 million increase in interest-bearing deposits, a $50.9 million decrease in short-term borrowings and a $25.9 million increase in long-term obligations.

Deposits

At September 30, 2017 , total deposits were $29.33 billion , an increase of $1.17 billion , or 4.2 percent , compared to December 31, 2016 and an increase of $1.41 billion , or by 5.0 percent , when compared to September 30, 2016 . The increase from both periods was primarily the result of organic growth in demand deposit, interest-bearing savings and checking accounts and the contributions from the Guaranty and HCB 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, 2017 , short-term borrowings were $679.3 million compared to $603.5 million and $730.2 million at December 31, 2016 and September 30, 2016 , respectively. The $75.8 million increase from December 31, 2016 was due to FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being reclassified from long-term obligations, offset by a FHLB borrowing maturity of $10.0 million and lower activity in customer repurchase agreements. The $50.9 million decrease from September 30, 2016 was due to a FHLB borrowing maturity of $10.0 million and lower activity in customer repurchase agreements, offset by FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being reclassified from long-term obligations.

Long-Term Obligations

Long-term obligations were $866.1 million at September 30, 2017 , up $33.2 million from December 31, 2016 due to additional FHLB borrowings of $175.0 million during 2017 to mitigate interest rate risk from long-term fixed-rate loans. This increase was partially offset by FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being reclassified from long-term obligations, as well as a redemption of $5.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/SC Capital Trust II. Long-term obligations increased $25.9 million from September 30, 2016 primarily due to additional FHLB borrowings of $175.0 million during 2017 to mitigate interest rate risk from long-term fixed-rate loans. This increase was partially offset by FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being

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reclassified to short-term borrowings, as well as redemptions of $6.0 million and $6.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/SC Capital Trust II and FCB/NC Capital Trust III, respectively, since September 30, 2016 .

BancShares owns three special purpose entities – FCB/NC Capital Trust III, FCB/SC Capital Trust II, and SCB Capital Trust I (the Trusts). Long-term obligations included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. BancShares had the following issues of trust preferred securities and subordinated debentures owed to the Trusts:

Table 15

Trust Preferred Securities and Subordinated Debentures



	September 30, 2017				December 31, 2016				September 30, 2016
(Dollars in thousands)	Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Maturity Date
FCB/NC Capital Trust III	$	90,206	$	87,500	$	90,206	$	87,500	$	96,392	$	93,500	June 30, 2036
FCB/SC Capital Trust II	19,588		19,000		24,743		24,000		25,774		25,000		June 15, 2034
SCB Capital Trust I	10,310		10,000		10,310		10,000		10,310		10,000		April 7, 2034
	$	120,104	$	116,500	$	125,259	$	121,500	$	132,476	$	128,500

Shareholders' Equity and Capital Adequacy

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

In accordance with accounting principles generally accepted in the United States of America (GAAP), unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive income (AOCI) within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ratios. In the aggregate, these items represented a net reduction in shareholders' equity of $92.3 million at September 30, 2017 , compared to a net reduction of $135.2 million at December 31, 2016 and $14.8 million at September 30, 2016 . The $42.9 million increase in AOCI from December 31, 2016 was primarily driven by a decrease in unrealized losses on investment securities as a result of lower market interest rates. The $77.5 million decrease in AOCI from September 30, 2016 was primarily driven by the change in the discount rate used in our defined benefit pension plans and the unrealized loss position on our investment securities available for sale portfolio at September 30, 2017 as a result of higher market interest rates.

Table 16

Analysis of Capital Adequacy



	September 30, 2017		December 31, 2016		September 30, 2016		Regulatory minimum		Well-capitalized requirement
BancShares
Risk-based capital ratios
Tier 1 risk-based capital	12.95	%	12.42	%	12.50	%	6.00	%	8.00	%
Common equity Tier 1	12.95		12.42		12.50		4.50		6.50
Total risk-based capital	14.34		13.85		13.96		8.00		10.00
Tier 1 leverage ratio	9.43		9.05		9.07		4.00		5.00

Bank
Risk-based capital ratios
Tier 1 risk-based capital	12.82	%	12.25	%	12.35	%	6.00	%	8.00	%
Common equity Tier 1	12.82		12.25		12.35		4.50		6.50
Total risk-based capital	13.79		13.21		13.30		8.00		10.00
Tier 1 leverage ratio	9.34		8.94		8.96		4.00		5.00

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

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and was phased in beginning January 1, 2016 at 0.625 percent above minimum risk-based capital requirements and will increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.50 percent on January 1, 2019. As such, the capital conservation buffer requirement was 1.25 percent effective January 1, 2017. BancShares and FCB had capital conservation buffers above minimum risk-based capital requirements of 6.34 percent and 5.79 percent , respectively, at September 30, 2017 . The buffers exceeded the 1.25 percent requirement and, therefore, resulted in no limit on distributions.

As of September 30, 2017 , BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. BancShares had no trust preferred capital securities included in Tier 1 capital at September 30, 2017 and December 31, 2016 under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.

RISK MANAGEMENT

Risk is inherent in any business and, as is the case with other management functions, senior management has primary responsibility for day-to-day management of the risks we face with accountability and support from all company associates. The Board of Directors strive to ensure that risk management is part of the business culture and that policies and procedures for identifying, assessing, measuring, monitoring, and managing risk are part of the decision-making process. The Board of Director’s role in risk oversight is an integral part of our overall Enterprise Risk Management Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee.

The Board Risk Committee structure is designed to allow for information flow and escalation of risk related issues. Among the responsibilities assigned by the Board of Directors, the Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic, legal, and reputational risks; review, approve and monitor adherence to risk appetite and supporting risk tolerance levels and evaluate, monitor and oversee the adequacy and effectiveness of the Enterprise Risk Management Framework. The Board Risk Committee also reviews 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 Committee’s oversight responsibilities. The Board Risk Committee reviews and monitors management's response to certain risk related regulatory or audit 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 are considered a key 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 deposits can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration of low rate deposit instruments to intermediate term fixed rate instruments, such as certificates of deposit, as rates rise. Various other IRR scenarios are modeled to supplement shock scenarios. This may include interest rate ramps, changes in the shape of the yield curve and changes in the relationships of FCB rates to market rates.

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Table 17

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, 2017 and December 31, 2016 .



	Estimated increase in net interest income
Change in interest rate (basis point)	September 30, 2017		December 31, 2016
+100	4.84	%	4.12	%
+200	6.77		5.06
+300	5.38		2.08

The change in net interest income sensitivity metrics at September 30, 2017 compared to December 31, 2016 benefited from an increase in overnight investments and a favorable change in the deposit mix from growth in non-interest bearing deposits.

Table 18

Economic Value of Equity Modeling Analysis

Long-term interest rate risk exposure is measured using the economic value of equity (EVE) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. This table presents the EVE profile as of September 30, 2017 and December 31, 2016 .



	Estimated increase (decrease) in EVE
Change in interest rate (basis point)	September 30, 2017		December 31, 2016
+100	4.93	%	3.10	%
+200	3.92		0.85
+300	(1.66	)	(5.44	)

The improvement in the economic value of equity metrics at September 30, 2017 compared to December 31, 2016 was primarily due to an increase in asset sensitivity as loan growth was largely funded by growth in non-interest bearing, checking and savings 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 source of

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liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank and various other corresponding bank accounts and unencumbered securities, which totaled $4.49 billion at September 30, 2017 compared to $3.88 billion at December 31, 2016 . Another source of available liquidity is advances from the FHLB of Atlanta. Outstanding FHLB advances were $835.2 million as of September 30, 2017 , and we had sufficient collateral pledged to secure $5.10 billion of additional borrowings. Also, at September 30, 2017 , $2.74 billion in noncovered loans with a lendable collateral value of $2.05 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines and other borrowing facilities which had $665.0 million of available capacity at September 30, 2017 .

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

CRITICAL ACCOUNTING POLICIES

There have been no significant changes in our Critical Accounting Policies as described in our 2016 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

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

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

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

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

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


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of September 30, 2017 , BancShares’ market risk profile has not changed significantly from December 31, 2016 , as discussed in the Form 10-K. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

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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 2017 that had materially affected, or is reasonably likely to materially affect, BancShares' internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those other matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

Additional information relating to legal proceedings is set forth in Note L of BancShares' Notes to Unaudited Consolidated Financial Statements.


Item 1A.	Risk Factors

BancShares has been monitoring and evaluating the August and September 2017 impact of Hurricanes Harvey and Irma in our affected market areas of Texas, Florida and Georgia. We are currently assessing how this situation has impacted our customers and the areas in which they operate. We have not currently identified any significant impact to the credit quality of the loans in these areas that would cause us to adjust the allowance for loan losses.

There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2016 .


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

On October 24, 2017, BancShares' Board of Directors authorized the purchase of up to 800,000 shares of BancShares' Class A common stock. Under that authority, BancShares may purchase shares from time to time from November 1, 2017 through October 31, 2018, on the open market or in privately negotiated transactions, and it may enter into a stock trading plan pursuant to the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934. The board's action replaces existing authority to purchase shares approved during 2016 and that expires on October 31, 2017. It does not obligate BancShares to purchase any particular amount of shares, and purchases may be suspended or discontinued at any time. No shares were purchased under the previous plan that expired on October 31, 2017, and no shares have been purchased under the newly approved plan, which began November 1, 2017.


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:	November 2, 2017		FIRST CITIZENS BANCSHARES, INC.
			(Registrant)

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

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Part I Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

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)

FCNCA 10-Q Quarter ended Sept. 30, 2017

Exhibits