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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 June 30, 2017
or
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware
56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices)
(Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Class A Common Stock—$1 Par Value—11,005,220 shares
Class B Common Stock—$1 Par Value—1,005,185 shares
(Number of shares outstanding, by class, as of August 2, 2017)

Table of Contents

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

2
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PART I
 
Item 1.
Financial Statements


First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, unaudited)
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
556,772

 
$
539,741

Overnight investments
2,882,789

 
1,872,594

Investment securities available for sale
6,596,450

 
7,006,580

Investment securities held to maturity
80

 
98

Loans held for sale ($70,025 and $74,401 at fair value at June 30, 2017 and December 31, 2016, respectively)
154,534

 
74,401

Loans and leases
22,871,465

 
21,737,878

Allowance for loan and lease losses
(228,798
)
 
(218,795
)
Net loans and leases
22,642,667

 
21,519,083

Premises and equipment
1,129,993

 
1,133,044

Other real estate owned
60,781

 
61,231

Income earned not collected
86,640

 
79,839

FDIC shared-loss receivable
3,766

 
4,172

Goodwill
150,601

 
150,601

Other intangible assets
80,544

 
78,040

Other assets
424,233

 
471,412

Total assets
$
34,769,850

 
$
32,990,836

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
11,175,581

 
$
10,130,549

Interest-bearing
18,280,757

 
18,030,794

Total deposits
29,456,338

 
28,161,343

Short-term borrowings
784,517

 
603,487

Long-term obligations
879,957

 
832,942

FDIC shared-loss payable
99,126

 
97,008

Other liabilities
310,061

 
283,629

Total liabilities
31,529,999

 
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 June 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 June 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 June 30, 2017 and December 31, 2016)
—

 
—

Surplus
658,918

 
658,918

Retained earnings
2,671,766

 
2,476,691

Accumulated other comprehensive loss
(102,843
)
 
(135,192
)
Total shareholders’ equity
3,239,851

 
3,012,427

Total liabilities and shareholders’ equity
$
34,769,850

 
$
32,990,836


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three months ended June 30
 
Six months ended June 30
(Dollars in thousands, except per share data, unaudited)
2017
 
2016
 
2017
 
2016
Interest income
 
 
 
 
 
 
 
Loans and leases
$
235,732

 
$
215,442

 
$
462,362

 
$
431,846

Investment securities and dividend income
30,406

 
24,702

 
60,157

 
47,744

Overnight investments
6,404

 
3,225

 
10,880

 
6,891

Total interest income
272,542

 
243,369

 
533,399

 
486,481

Interest expense
 
 
 
 
 
 
 
Deposits
4,132

 
4,601

 
8,568

 
9,260

Short-term borrowings
1,176

 
454

 
1,756

 
888

Long-term obligations
5,625

 
6,125

 
11,123

 
11,424

Total interest expense
10,933

 
11,180

 
21,447

 
21,572

Net interest income
261,609

 
232,189

 
511,952

 
464,909

Provision for loan and lease losses
12,324

 
4,562

 
20,555

 
9,405

Net interest income after provision for loan and lease losses
249,285

 
227,627

 
491,397

 
455,504

Noninterest income
 
 
 
 
 
 
 
Gain on acquisitions
122,728

 
3,290

 
134,745

 
4,994

Cardholder services
24,287

 
21,054

 
45,545

 
40,412

Merchant services
26,590

 
24,236

 
51,577

 
46,213

Service charges on deposit accounts
25,862

 
21,884

 
48,004

 
43,734

Wealth management services
21,920

 
21,291

 
42,882

 
40,925

Securities gains
3,351

 
12,529

 
3,327

 
17,157

Other service charges and fees
6,628

 
7,137

 
14,229

 
14,126

Mortgage income
4,966

 
4,537

 
12,542

 
5,848

Insurance commissions
2,563

 
2,265

 
6,121

 
5,443

ATM income
2,513

 
1,845

 
4,286

 
3,610

Adjustments to FDIC shared-loss receivable
(1,273
)
 
(2,367
)
 
(2,901
)
 
(4,900
)
Net impact from FDIC shared-loss agreement termination
—

 
16,559

 
(45
)
 
16,559

Other
8,065

 
5,990

 
15,180

 
11,411

Total noninterest income
248,200

 
140,250

 
375,492

 
245,532

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
118,169

 
104,059

 
230,432

 
207,958

Employee benefits
27,095

 
25,661

 
56,388

 
53,011

Occupancy expense
26,059

 
24,955

 
50,821

 
49,967

Equipment expense
24,654

 
22,715

 
49,242

 
45,060

Merchant processing
19,677

 
17,925

 
37,971

 
34,238

Cardholder processing
7,709

 
7,372

 
14,516

 
14,659

FDIC insurance expense
5,705

 
4,588

 
11,298

 
9,377

Foreclosure-related expenses
580

 
(1,116
)
 
3,051

 
615

Merger-related expenses
6,853

 
1,385

 
7,686

 
1,423

Other
49,105

 
50,759

 
88,546

 
93,666

Total noninterest expense
285,606

 
258,303

 
549,951

 
509,974

Income before income taxes
211,879

 
109,574

 
316,938

 
191,062

Income taxes
77,219

 
40,258

 
114,657

 
69,674

Net income
$
134,660

 
$
69,316

 
$
202,281

 
$
121,388

Average shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

Net income per share
$
11.21

 
$
5.77

 
$
16.84

 
$
10.11


See accompanying Notes to Consolidated Financial Statements.

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

 
Three months ended June 30
 
Six months ended June 30
(Dollars in thousands, unaudited)
2017
 
2016
 
2017
 
2016
Net income
$
134,660

 
$
69,316

 
$
202,281

 
$
121,388

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains on securities:
 
 
 
 
 
 
 
Change in unrealized securities gains arising during period
13,771

 
24,176

 
49,867

 
92,209

Tax effect
(5,125
)
 
(9,261
)
 
(18,544
)
 
(35,277
)
Reclassification adjustment for net gains realized and included in income before income taxes
(3,351
)
 
(12,529
)
 
(3,327
)
 
(17,157
)
Tax effect
1,240

 
4,793

 
1,231

 
6,563

Total change in unrealized gains on securities, net of tax
6,535

 
7,179

 
29,227

 
46,338

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

 
729

 
—

 
1,429

Tax effect
—

 
(274
)
 
—

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

 
455

 
—

 
892

Change in pension obligation:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service cost
2,460

 
1,882

 
4,960

 
3,534

Tax effect
(897
)
 
(719
)
 
(1,838
)
 
(1,351
)
Total change in pension obligation, net of tax
1,563

 
1,163

 
3,122

 
2,183

Other comprehensive income
8,098

 
8,797

 
32,349

 
49,413

Total comprehensive income
$
142,758

 
$
78,113

 
$
234,630

 
$
170,801



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
—

 
—

 
—

 
121,388

 
—

 
121,388

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
49,413

 
49,413

Cash dividends ($0.60 per share)
—

 
—

 
—

 
(7,206
)
 
—

 
(7,206
)
Balance at June 30, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,379,803

 
$
(15,027
)
 
$
3,035,704

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
11,005

 
$
1,005

 
$
658,918

 
$
2,476,691

 
$
(135,192
)
 
$
3,012,427

Net income
—

 
—

 
—

 
202,281

 
—

 
202,281

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
32,349

 
32,349

Cash dividends ($0.60 per share)
—

 
—

 
—

 
(7,206
)
 
—

 
(7,206
)
Balance at June 30, 2017
$
11,005

 
$
1,005

 
$
658,918

 
$
2,671,766

 
$
(102,843
)
 
$
3,239,851


See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows 
 
Six months ended June 30
(Dollars in thousands, unaudited)
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
202,281

 
$
121,388

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
20,555

 
9,405

Deferred tax expense (benefit)
45,628

 
(8,501
)
Net change in current taxes
17,404

 
(5,757
)
Depreciation
45,420

 
44,476

Net increase in accrued interest payable
1,344

 
624

Net increase in income earned not collected
(290
)
 
(1,872
)
Gain on acquisitions
(134,745
)
 
(4,994
)
Securities gains
(3,327
)
 
(17,157
)
Loss on termination of FDIC shared-loss agreements
45

 
3,377

Origination of loans held for sale
(299,136
)
 
(361,652
)
Proceeds from sale of loans held for sale
309,791

 
342,505

Gain on sale of loans held for sale
(6,279
)
 
(5,882
)
Gain on sale of portfolio loans
(164
)
 
—

Net write-downs/losses on other real estate
2,160

 
3,884

Gain on sales of premises and equipment
(159
)
 
—

Net accretion of premiums and discounts
(22,918
)
 
(23,859
)
Amortization of intangible assets
11,045

 
11,135

Reduction in FDIC receivable for shared-loss agreements
4,821

 
7,571

Net change in FDIC payable for shared-loss agreements
2,118

 
(14,001
)
Net change in other assets
(34,340
)
 
(25,924
)
Net change in other liabilities
29,647

 
19,718

Net cash provided by operating activities
190,901

 
94,484

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(462,385
)
 
(416,812
)
Purchases of investment securities available for sale
(1,186,883
)
 
(1,966,181
)
Proceeds from maturities/calls of investment securities held to maturity
18

 
99

Proceeds from maturities/calls of investment securities available for sale
1,140,459

 
627,971

Proceeds from sales of investment securities available for sale
517,588

 
1,370,768

Net increase in overnight investments
(908,583
)
 
(173,134
)
Proceeds from sales of portfolio loans
32,294

 
13,328

Cash paid to the FDIC for shared-loss agreements
(5,197
)
 
(13,502
)
Net cash paid to the FDIC for termination of shared-loss agreements
(285
)
 
(20,115
)
Proceeds from sales of other real estate
20,236

 
16,010

Proceeds from sales of premises and equipment
2,305

 
—

Purchases of premises and equipment
(35,912
)
 
(29,617
)
Net cash acquired in business acquisitions
300,703

 
27,943

Net cash used by investing activities
(585,642
)
 
(563,242
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in time deposits
(238,751
)
 
(250,151
)
Net increase in demand and other interest-bearing deposits
429,684

 
421,082

Net increase in short-term borrowings
61,030

 
132,167

Repayment of long-term obligations
(7,985
)
 
(3,651
)
Origination of long-term obligations
175,000

 
150,000

Cash dividends paid
(7,206
)
 
(7,206
)
Net cash provided by financing activities
411,772

 
442,241

Change in cash and due from banks
17,031

 
(26,517
)
Cash and due from banks at beginning of period
539,741

 
534,086

Cash and due from banks at end of period
$
556,772

 
$
507,569

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
21,891

 
$
21,280

Dividends declared but not paid
3,603

 
3,603

Unsettled sales of investment securities
—

 
361,225

Reclassification of portfolio loans to loans held for sale
84,509

 
—

See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements


NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION

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

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

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

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and different assumptions in the application of these policies could result in material changes in BancShares' consolidated financial position, the consolidated results of operations or related disclosures. Material estimates that are particularly susceptible to significant change include:
•
Allowance for loan and lease losses;
•
Fair value of financial instruments, including acquired assets and assumed liabilities;
•
Pension plan assumptions;
•
Cash flow estimates on purchased credit-impaired loans;
•
Goodwill, 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.

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This ASU also addresses the accounting for tax benefits resulting from investments in qualified affordable housing projects where the decision to apply the proportional amortization method of accounting is an accounting policy decision to be applied consistently to all investments that meet the conditions, rather than a decision to be applied to individual investments that qualify for the use of the proportional amortization method.
The amendments in this ASU are effective upon issuance. We adopted the guidance effective in the first quarter of 2017. The disclosures required by this ASU are included within the “Recently Issued Accounting Pronouncements” section below. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control
This ASU does not change the characteristics of a primary beneficiary in current GAAP; however, it requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have an impact on our consolidated financial position or consolidated results of operations.
FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Further, the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.
The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have 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 available for sale. 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 will begin with a detailed process 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 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 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 developed a preliminary inventory of all leases and their terms that are currently being evaluated. We are still evaluating service contracts to identify 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.
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

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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. 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, 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.
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

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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
226,233

Due from FDIC
4,117

Gain on acquisition of Guaranty
$
122,728


Merger-related expenses of $6.7 million from the Guaranty transaction were recorded in the Consolidated Statements of Income for the three and six months ended June 30, 2017. Loan-related interest income generated from Guaranty was approximately $4.9 million during the second quarter 2017.

Based on such factors as past due status, nonaccrual status, loan-to-value, credit scores and credit risk ratings, 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.

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

The fair value of the assets acquired was $111.6 million, including $85.1 million in purchased credit-impaired (PCI) loans and $850 thousand 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.


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

Merger-related expenses were immaterial for the three months ended June 30, 2017 and $698 thousand were recorded in the Consolidated Statements of Income for the six months ended June 30, 2017. Loan-related interest income generated from HCB was approximately $1.8 million and $2.8 million for the three and six months ended June 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 June 30, 2017 and December 31, 2016, are as follows:
 
June 30, 2017
(Dollars in thousands)
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,619,225

 
$
—

 
$
3,091

 
$
1,616,134

Government agency
40,080

 
1

 
—

 
40,081

Mortgage-backed securities
4,822,517

 
1,951

 
52,226

 
4,772,242

Equity securities
78,753

 
27,106

 
—

 
105,859

Corporate bonds
54,412

 
331

 
38

 
54,705

Other
7,630

 
15

 
216

 
7,429

Total investment securities available for sale
$
6,622,617

 
$
29,404

 
$
55,571

 
$
6,596,450

 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
June 30, 2017
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
80

 
$
6

 
$
—

 
$
86

 
 
 
 
 
 
 
 
 
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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June 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
$
549,914

 
$
548,822

 
$
842,798

 
$
842,947

One through five years
1,109,391

 
1,107,393

 
848,168

 
847,770

Five through 10 years
54,412

 
54,705

 
49,367

 
49,562

Over 10 years
7,630

 
7,429

 
7,615

 
7,369

Mortgage-backed securities
4,822,517

 
4,772,242

 
5,259,466

 
5,175,425

Equity securities
78,753

 
105,859

 
71,873

 
83,507

Total investment securities available for sale
$
6,622,617

 
$
6,596,450

 
$
7,079,287

 
$
7,006,580

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
80

 
$
86

 
$
98

 
$
104

For each period presented, realized securities gains (losses) included the following:
 
Three months ended June 30
 
Six months ended June 30
(Dollars in thousands)
2017
 
2016
 
2017
 
2016
Gross gains on sales of investment securities available for sale
$
3,353

 
$
12,555

 
$
3,356

 
$
17,488

Gross losses on sales of investment securities available for sale
(2
)
 
(26
)
 
(29
)
 
(331
)
Total realized securities gains
$
3,351

 
$
12,529

 
$
3,327

 
$
17,157


The following table provides information regarding securities with unrealized losses as of June 30, 2017 and December 31, 2016.
 
June 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
$
1,616,134

 
$
3,091

 
$
—

 
$
—

 
$
1,616,134

 
$
3,091

Mortgage-backed securities
4,101,002

 
47,735

 
339,826

 
4,491

 
4,440,828

 
52,226

Corporate bonds
5,000

 
38

 
—

 
—

 
5,000

 
38

Other
5,299

 
216

 
—

 
—

 
5,299

 
216

Total
$
5,727,435

 
$
51,080

 
$
339,826

 
$
4,491

 
$
6,067,261

 
$
55,571

 
 
 
 
 
 
 
 
 
 
 
 
 
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 $339.8 million and $362.4 million had continuous unrealized losses for more than 12 months with a corresponding aggregate unrealized loss of $4.5 million and $4.7 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, all 52 of these investments are government sponsored enterprise-issued mortgage-backed securities. None of the unrealized losses identified as of June 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.
Investment securities having an aggregate carrying value of $4.71 billion at June 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.

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NOTE D - LOANS AND LEASES
BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have any credit deterioration at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered impaired and, therefore, classified as PCI loans. PCI loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans and leases are recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk 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, 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 June 30, 2017 and December 31, 2016:
(Dollars in thousands)
June 30, 2017
 
December 31, 2016
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
740,291

 
$
649,157

Commercial mortgage
9,301,154

 
9,026,220

Other commercial real estate
363,339

 
351,291

Commercial and industrial
2,553,612

 
2,567,501

Lease financing
853,943

 
826,270

Other
486,573

 
340,264

Total commercial loans
14,298,912

 
13,760,703

Noncommercial:
 
 
 
Residential mortgage
3,305,361

 
2,889,124

Revolving mortgage
2,678,686

 
2,601,344

Construction and land development
218,233

 
231,400

Consumer
1,475,410

 
1,446,138

Total noncommercial loans
7,677,690

 
7,168,006

Total non-PCI loans and leases
21,976,602

 
20,928,709

PCI loans:
 
 
 
Commercial:
 
 
 
Construction and land development
18,660

 
20,766

Commercial mortgage
426,778

 
453,013

Other commercial real estate
21,409

 
12,645

Commercial and industrial
9,307

 
11,844

Other
903

 
1,702

Total commercial loans
477,057

 
499,970

Noncommercial:
 
 
 
Residential mortgage
350,038

 
268,777

Revolving mortgage
65,949

 
38,650

Consumer
1,819

 
1,772

Total noncommercial loans
417,806

 
309,199

Total PCI loans
894,863

 
809,169

Total loans and leases
$
22,871,465

 
$
21,737,878

At June 30, 2017, $73.2 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 June 30, 2017, $8.80 billion in noncovered loans with a lendable collateral value of $5.56 billion were used to secure $835.2 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $4.72 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 June 30, 2017, $2.89 billion in noncovered loans with a lendable collateral value of $1.99 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 $3.8 million and $6.7 million at June 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 $17.3 million, $3.3 million and $22.3 million at June 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 June 30, 2017 and June 30, 2016, accretion income on non-PCI loans and leases was $3.0 million and $2.9 million, respectively. During the six months ended June 30, 2017 and June 30, 2016, accretion income on non-PCI loans and leases was $6.0 million and $6.1 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 $154.5 million at June 30, 2017, which included $70.0 million of originated loans held for sale at fair value and $84.5 million of portfolio loans

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transferred to loans held for sale during the second quarter of 2017. In the first quarter of 2017, certain residential mortgage portfolio loans of $32.5 million were sold, resulting in a gain of $164 thousand.

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 June 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.


17
Table of Contents

Non-PCI loans and leases outstanding at June 30, 2017 and December 31, 2016 by credit quality indicator are provided below:
 
June 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
$
733,587

 
$
9,107,385

 
$
358,889

 
$
2,371,181

 
$
842,476

 
$
480,223

 
$
13,893,741

Special mention
960

 
69,690

 
1,366

 
30,180

 
5,056

 
992

 
108,244

Substandard
5,699

 
123,629

 
3,084

 
16,655

 
6,411

 
5,358

 
160,836

Doubtful
45

 
291

 
—

 
6

 
—

 
—

 
342

Ungraded
—

 
159

 
—

 
135,590

 
—

 
—

 
135,749

Total
$
740,291

 
$
9,301,154

 
$
363,339

 
$
2,553,612

 
$
853,943

 
$
486,573

 
$
14,298,912

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


 
June 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
$
3,259,647

 
$
2,656,372

 
$
215,354

 
$
1,462,603

 
$
7,593,976

30-59 days past due
21,478

 
10,819

 
1,252

 
8,179

 
41,728

60-89 days past due
7,412

 
3,176

 
111

 
2,310

 
13,009

90 days or greater past due
16,824

 
8,319

 
1,516

 
2,318

 
28,977

Total
$
3,305,361

 
$
2,678,686

 
$
218,233

 
$
1,475,410

 
$
7,677,690

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

 
$
2,576,942

 
$
229,106

 
$
1,434,658

 
$
7,079,751

30-59 days past due
27,760

 
14,290

 
1,139

 
6,775

 
49,964

60-89 days past due
7,039

 
2,698

 
598

 
2,779

 
13,114

90 days or greater past due
15,280

 
7,414

 
557

 
1,926

 
25,177

Total
$
2,889,124

 
$
2,601,344

 
$
231,400

 
$
1,446,138

 
$
7,168,006




18
Table of Contents

 PCI loans outstanding at June 30, 2017 and December 31, 2016 by credit quality indicator are provided below:
 
June 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
$
8,004

 
$
228,746

 
$
16,998

 
$
6,605

 
$
306

 
$
260,659

Special mention
1,608

 
58,942

 
688

 
646

 
331

 
62,215

Substandard
6,511

 
125,348

 
3,029

 
1,764

 
266

 
136,918

Doubtful
2,537

 
13,742

 
694

 
264

 
—

 
17,237

Ungraded
—

 
—

 
—

 
28

 
—

 
28

Total
$
18,660

 
$
426,778

 
$
21,409

 
$
9,307

 
$
903

 
$
477,057

 
 
 
 
 
 
 
 
 
 
 
 
 
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


 
June 30, 2017
 
PCI noncommercial loans
(Dollars in thousands)
Residential
mortgage
 
Revolving
mortgage
 
Consumer
 
Total PCI noncommercial
loans
Current
$
305,156

 
$
60,006

 
$
1,685

 
$
366,847

30-59 days past due
10,089

 
2,033

 
58

 
12,180

60-89 days past due
5,420

 
405

 
22

 
5,847

90 days or greater past due
29,373

 
3,505

 
54

 
32,932

Total
$
350,038

 
$
65,949

 
$
1,819

 
$
417,806

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

 
$
33,827

 
$
1,637

 
$
265,529

30-59 days past due
9,595

 
618

 
68

 
10,281

60-89 days past due
6,528

 
268

 
4

 
6,800

90 days or greater past due
22,589

 
3,937

 
63

 
26,589

Total
$
268,777

 
$
38,650

 
$
1,772

 
$
309,199





19
Table of Contents

The aging of the outstanding non-PCI loans and leases, by class, at June 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.
 
June 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
$
954

 
$
18

 
$
119

 
$
1,091

 
$
739,200

 
$
740,291

Commercial mortgage
7,696

 
2,480

 
11,108

 
21,284

 
9,279,870

 
9,301,154

Other commercial real estate
132

 
—

 
642

 
774

 
362,565

 
363,339

Commercial and industrial
7,702

 
1,808

 
2,399

 
11,909

 
2,541,703

 
2,553,612

Lease financing
1,879

 
416

 
339

 
2,634

 
851,309

 
853,943

Residential mortgage
21,478

 
7,412

 
16,824

 
45,714

 
3,259,647

 
3,305,361

Revolving mortgage
10,819

 
3,176

 
8,319

 
22,314

 
2,656,372

 
2,678,686

Construction and land development - noncommercial
1,252

 
111

 
1,516

 
2,879

 
215,354

 
218,233

Consumer
8,179

 
2,310

 
2,318

 
12,807

 
1,462,603

 
1,475,410

Other
441

 
—

 
158

 
599

 
485,974

 
486,573

Total non-PCI loans and leases
$
60,532

 
$
17,731

 
$
43,742

 
$
122,005

 
$
21,854,597

 
$
21,976,602

 
 
 
 
 
 
 
 
 
 
 
 
 
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