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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, 2018
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 1, 2018)

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, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks
$
260,525

 
$
336,150

Overnight investments
1,223,311

 
1,387,927

Investment in marketable equity securities
107,264

 
—

Investment securities available for sale
4,783,507

 
7,180,180

Investment securities held to maturity
2,299,774

 
76

Loans held for sale
58,961

 
51,179

Loans and leases
24,538,437

 
23,596,825

Allowance for loan and lease losses
(224,865
)
 
(221,893
)
Net loans and leases
24,313,572

 
23,374,932

Premises and equipment
1,167,532

 
1,138,431

Other real estate owned
46,633

 
51,097

Income earned not collected
99,567

 
95,249

Goodwill
208,217

 
150,601

Other intangible assets
77,370

 
73,096

Other assets
442,333

 
688,594

Total assets
$
35,088,566

 
$
34,527,512

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
12,181,717

 
$
11,237,375

Interest-bearing
18,227,167

 
18,028,900

Total deposits
30,408,884

 
29,266,275

Short-term borrowings
613,993

 
693,807

Long-term obligations
241,360

 
870,240

FDIC shared-loss payable
103,487

 
101,342

Other liabilities
273,956

 
261,784

Total liabilities
31,641,680

 
31,193,448

Shareholders’ equity
 
 
 
Common stock:
 
 
 
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at June 30, 2018 and December 31, 2017)
11,005

 
11,005

Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at June 30, 2018 and December 31, 2017)
1,005

 
1,005

Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2018 and December 31, 2017)
—

 
—

Surplus
658,918

 
658,918

Retained earnings
3,020,596

 
2,785,430

Accumulated other comprehensive loss
(244,638
)
 
(122,294
)
Total shareholders’ equity
3,446,886

 
3,334,064

Total liabilities and shareholders’ equity
$
35,088,566

 
$
34,527,512


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)
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
Loans and leases
$
261,086

 
$
235,732

 
$
513,068

 
$
462,362

Investment securities and dividend income
37,179

 
30,406

 
72,199

 
60,157

Overnight investments
5,612

 
6,404

 
11,211

 
10,880

Total interest income
303,877

 
272,542

 
596,478

 
533,399

Interest expense
 
 
 
 
 
 
 
Deposits
4,521

 
4,132

 
8,277

 
8,568

Short-term borrowings
821

 
1,176

 
2,255

 
1,756

Long-term obligations
2,316

 
5,625

 
5,290

 
11,123

Total interest expense
7,658

 
10,933

 
15,822

 
21,447

Net interest income
296,219

 
261,609

 
580,656

 
511,952

Provision for loan and lease losses
8,438

 
12,324

 
16,043

 
20,555

Net interest income after provision for loan and lease losses
287,781

 
249,285

 
564,613

 
491,397

Noninterest income
 
 
 
 
 
 
 
Gain on acquisitions
—

 
122,728

 
—

 
134,745

Cardholder services, net
14,925

 
14,518

 
29,707

 
27,361

Merchant services, net
6,478

 
5,800

 
12,655

 
11,556

Service charges on deposit accounts
25,952

 
25,862

 
52,495

 
48,004

Wealth management services
25,515

 
21,920

 
49,084

 
42,882

Securities gains, net
—

 
3,351

 
—

 
3,327

Marketable equity securities gains, net
4,440

 
—

 
5,411

 
—

Other service charges and fees
7,756

 
6,628

 
15,236

 
14,229

Mortgage income
4,703

 
4,966

 
8,940

 
12,542

Insurance commissions
2,940

 
2,563

 
6,716

 
6,121

ATM income
2,217

 
2,513

 
4,388

 
4,286

Net impact from FDIC shared-loss agreement termination
—

 
—

 
—

 
(45
)
Gain on extinguishment of debt
—

 
—

 
25,814

 
—

Other
6,001

 
6,792

 
13,165

 
12,279

Total noninterest income
100,927

 
217,641

 
223,611

 
317,287

Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
129,841

 
121,826

 
259,044

 
238,188

Employee benefits
29,715

 
25,383

 
61,806

 
52,560

Occupancy expense
26,100

 
26,059

 
54,054

 
50,821

Equipment expense
25,167

 
24,654

 
50,141

 
49,242

FDIC insurance expense
5,492

 
5,705

 
11,225

 
11,298

Collection and foreclosure-related expenses
3,974

 
2,376

 
8,120

 
6,139

Merger-related expenses
2,412

 
6,853

 
3,010

 
7,686

Other
43,292

 
42,191

 
86,656

 
75,812

Total noninterest expense
265,993

 
255,047

 
534,056

 
491,746

Income before income taxes
122,715

 
211,879

 
254,168

 
316,938

Income taxes
29,424

 
77,219

 
60,646

 
114,657

Net income
$
93,291

 
$
134,660

 
$
193,522

 
$
202,281

Average shares outstanding
12,010,405

 
12,010,405

 
12,010,405

 
12,010,405

Net income per share
$
7.77

 
$
11.21

 
$
16.11

 
$
16.84


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)
2018
 
2017
 
2018
 
2017
Net income
$
93,291

 
$
134,660

 
$
193,522

 
$
202,281

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized gains on securities available for sale:
 
 
 
 
 
 
 
Change in unrealized securities available for sale gains arising during period
82,789

 
13,771

 
4,155

 
49,867

Tax effect
(19,042
)
 
(5,125
)
 
(954
)
 
(18,544
)
Reclassification adjustment for gains included in income before income taxes
—

 
(3,351
)
 
—

 
(3,327
)
Tax effect
—

 
1,240

 
—

 
1,231

Total change in unrealized gains on securities available for sale, net of tax
63,747

 
6,535

 
3,201

 
29,227

Unrealized losses on securities available for sale transferred to held to maturity:
 
 
 
 
 
 
 
Unrealized losses on securities available for sale transferred to held to maturity
(109,507
)
 
—

 
(109,507
)
 
—

Tax effect
25,186

 
—

 
25,186

 
—

Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity
4,473

 
—

 
4,473

 
—

Tax effect
(1,028
)
 
—

 
(1,028
)
 
—

Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax
(80,876
)
 
—

 
(80,876
)
 
—

Change in pension obligation:
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service cost
3,654

 
2,460

 
6,991

 
4,960

Tax effect
(840
)
 
(897
)
 
(1,608
)
 
(1,838
)
Total change in pension obligation, net of tax
2,814

 
1,563

 
5,383

 
3,122

Other comprehensive (loss) income
(14,315
)
 
8,098

 
(72,292
)
 
32,349

Total comprehensive income
$
78,976

 
$
142,758

 
$
121,230

 
$
234,630



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, 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

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
11,005

 
$
1,005

 
$
658,918

 
$
2,785,430

 
$
(122,294
)
 
$
3,334,064

Cumulative effect of adoption of ASU 2016-01
—

 
—

 
—

 
18,716

 
(18,716
)
 
—

Cumulative effect of adoption of ASU 2018-02
—

 
—

 
—

 
31,336

 
(31,336
)
 
—

Net income
—

 
—

 
—

 
193,522

 
—

 
193,522

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(72,292
)
 
(72,292
)
Cash dividends ($0.70 per share)
—

 
—

 
—

 
(8,408
)
 
—

 
(8,408
)
Balance at June 30, 2018
$
11,005

 
$
1,005

 
$
658,918

 
$
3,020,596

 
$
(244,638
)
 
$
3,446,886


See accompanying Notes to Consolidated Financial Statements.

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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
Six months ended June 30
(Dollars in thousands, unaudited)
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
193,522

 
$
202,281

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Provision for loan and lease losses
16,043

 
20,555

Deferred tax (benefit) expense
(2,835
)
 
45,628

Net change in current taxes
(16,609
)
 
17,404

Depreciation
47,343

 
45,420

Net (decrease) increase in accrued interest payable
(2,043
)
 
1,344

Net increase in income earned not collected
(1,601
)
 
(290
)
Gain on acquisitions
—

 
(134,745
)
Securities gains, net
—

 
(3,327
)
Marketable equity securities gains, net
(5,411
)
 
—

Gain on extinguishment of debt
(25,814
)
 
—

Loss on termination of FDIC shared-loss agreements
—

 
45

Origination of loans held for sale
(304,580
)
 
(299,136
)
Proceeds from sale of loans held for sale
302,766

 
309,791

Gain on sale of loans held for sale
(5,610
)
 
(6,279
)
Gain on sale of portfolio loans
—

 
(164
)
Net write-downs/losses on other real estate
2,698

 
2,160

Gain on sales of premises and equipment
—

 
(159
)
Net accretion of premiums and discounts
(17,240
)
 
(22,918
)
Amortization of intangible assets
11,562

 
11,045

Net change in FDIC receivable for shared-loss agreements
—

 
4,821

Net change in FDIC payable for shared-loss agreements
2,145

 
2,118

Net change in other assets
310,635

 
(34,340
)
Net change in other liabilities
14,998

 
29,647

Net cash provided by operating activities
519,969

 
190,901

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans outstanding
(360,764
)
 
(462,385
)
Purchases of investment securities available for sale
(920,356
)
 
(1,186,883
)
Purchases of marketable equity securities
(2,818
)
 
—

Proceeds from maturities/calls of investment securities held to maturity
78,384

 
18

Proceeds from maturities/calls of investment securities available for sale
797,739

 
1,140,459

Proceeds from sales of investment securities available for sale
119,273

 
517,588

Proceeds from sales of marketable equity securities
8,493

 
—

Net decrease (increase) in overnight investments
175,009

 
(908,583
)
Proceeds from sales of portfolio loans
—

 
32,294

Cash paid to the FDIC for shared-loss agreements
—

 
(5,197
)
Net cash paid to the FDIC for termination of shared-loss agreements
—

 
(285
)
Proceeds from sales of other real estate
15,769

 
20,236

Proceeds from sales of premises and equipment
198

 
2,305

Purchases of premises and equipment
(59,603
)
 
(35,912
)
Business acquisitions, net of cash acquired
(106,298
)
 
300,703

Net cash used in investing activities
(254,974
)
 
(585,642
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in time deposits
(181,889
)
 
(238,751
)
Net increase in demand and other interest-bearing deposits
704,909

 
429,684

Net (decrease) increase in short-term borrowings
(201,303
)
 
61,030

Repayment of long-term obligations
(653,929
)
 
(7,985
)
Origination of long-term obligations
—

 
175,000

Cash dividends paid
(8,408
)
 
(7,206
)
Net cash (used in) provided by financing activities
(340,620
)
 
411,772

Change in cash and due from banks
(75,625
)
 
17,031

Cash and due from banks at beginning of period
336,150

 
539,741

Cash and due from banks at end of period
$
260,525

 
$
556,772

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Transfers of loans to other real estate
$
11,868

 
$
21,891

Dividends declared but not paid
4,204

 
3,603

Reclassification of portfolio loans to loans held for sale
—

 
84,509

Transfer of investment securities available for sale to held to maturity
2,486,761

 
—


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 notes to consolidated financial statements included in BancShares' Annual Report on Form 10-K for the year ended December 31, 2017.

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 cash flows, 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 amounts reported. 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 its 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 (PCI) loans;
•
Goodwill and other intangible assets;
•
Federal Deposit Insurance Corporation (FDIC) shared-loss payable; and
•
Income tax assets, liabilities and expense
Recently Adopted Accounting Pronouncements
FASB ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This ASU requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (Tax Act), which was enacted on December 22, 2017. The Tax Act included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We adopted the guidance effective in the first quarter of 2018. The change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $31.3 million increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.

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FASB ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
This ASU requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers will present the other components separately from the line item that includes the service cost. In addition, only the service cost component of net benefit cost is eligible for capitalization.
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. We adopted the guidance effective in the first quarter of 2018. The adoption did not have a material impact on our consolidated financial position or consolidated results of operations.
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 most 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. We adopted the guidance effective in the first quarter of 2018. The change in accounting principle was accounted for as a cumulative-effect adjustment to the balance sheet resulting in an $18.7 million increase to retained earnings and a decrease to AOCI on January 1, 2018. With the adoption of this ASU equity securities can no longer be classified as available for sale, as such marketable equity securities are disclosed as a separate line item on the balance sheet with changes in the fair value of equity securities reflected in net income.
For equity investments without a readily determinable fair value, BancShares has elected to measure the equity investments using the measurement alternative which requires BancShares to make a qualitative assessment of whether the investment is impaired at each reporting period. Under the measurement alternative these investments will be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. If a qualitative assessment indicates that the investment is impaired, BancShares will estimate the investment's fair value in accordance with ASC 820 and, if the fair value is less than the investment's carrying value, recognize an impairment loss in net income equal to the difference between carrying value and fair value. Equity investments without a readily determinable fair value are recorded within other assets in the consolidated balance sheets.
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 a company 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, which provides a five step model to determine when and how revenue is recognized, also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements.
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. We adopted the guidance effective in the first quarter of 2018. Our revenue is comprised primarily 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 cardholder and merchant services income, service charges on deposit accounts, wealth management services income, other service charges and fees, insurance commissions, ATM income, sales of other real estate and other. Based on our overall assessment of revenue streams and review of related contracts affected by the ASU, the adoption of this guidance did not change the method in which we currently recognize revenue.

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We also completed an evaluation of the costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on this evaluation, we determined that the classification of cardholder and merchant processing costs as well as expenses for cardholder reward programs should be netted against cardholder and merchant services income. We used the full retrospective method of adoption and restated the prior financial statements to net the cardholder and merchant processing costs against the related cardholder and merchant services income. These classification changes resulted in changes to both noninterest income and noninterest expense, however, there was no change to previously reported net income. Merchant processing expenses of $20.8 million and $40.0 million have been reclassified and reported as a component of merchant services income for the three and six months ended June 30, 2017, respectively. Cardholder processing expenses of $6.8 million and cardholder reward programs expense of $3.0 million have been reclassified and reported as a component of cardholder services income for the three months ended June 30, 2017. For the six months ended June 30, 2017, cardholder processing expenses of $12.7 million and cardholder reward programs expense of $5.5 million were reclassified and reported as a component of cardholder services income.
Revenue Recognition
The standard requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
Descriptions of our noninterest revenue-generating activities that are within the scope of the new revenue ASU is broadly segregated as follows:
Cardholder and Merchant Services - These represent interchange fees from customer debit and credit card transactions that are earned at the time a cardholder engages in a transaction with a merchant as well as fees charged to merchants for providing them the ability to accept and process the debit and credit card transaction. Revenue is recognized when the performance obligation has been met as it is satisfied upon the completion of the card transaction. Additionally, ASU 2014-09 requires costs associated with cardholder and merchant services transactions to be netted against the fees from such transactions when an entity is acting as an agent in providing services to a customer.
Service Charges on Deposit Accounts - These deposit account-related fees represent monthly account maintenance and transaction-based service fees such as overdraft fees, stop payment fees and charges for issuing cashier's checks and money orders. For account maintenance services, revenue is recognized at the end of the statement period when our performance obligation has been satisfied. All other revenues from transaction-based services are recognized at a point in time when the performance obligation has been completed.
Wealth Management Services - These primarily represent annuity fees, sales commissions, management fees, insurance sales, and trust and asset management fees. The performance obligation for wealth management services is the provision of services to place annuity products issued by the counterparty to investors, and the provision of services to manage the client’s assets, including brokerage custodial and other management services. Revenue is recognized over the period in which services are performed, are based on a percentage of the value of the assets under management/administration, and are fixed or variable based on account type, or are transaction-based.
Other Service Charges and Fees - These include, but are not limited to, check cashing fees, international banking fees, internet banking fees, wire transfer fees and safe deposit fees. These fees are charged, and revenue is recognized, at the point in time the service being requested by the customer is provided thus satisfying our performance obligation.
Insurance Commissions - These represent commissions earned on the issuance of insurance products and services. The performance obligation is generally satisfied upon the issuance of the insurance policy and revenue is recognized when the commission payment is remitted by the insurance carrier or policy holder depending on if the billing is performed by FCB or the carrier.
ATM Income - These represent fees imposed on customers and non-customers for engaging in an ATM transaction. Revenue is recognized at the time of the transaction as the performance obligation of rendering the ATM service has been met.
Sales of Other Real Estate - ORE property consists of foreclosed real estate used as collateral for loans, closed branches, land acquired and no longer intended for future use by FCB, and other real estate purchased for resale as ORE. Revenue is generally recognized on the date of sale where the performance obligation of providing access and transferring control of the specified ORE property to the buyer in good faith and good title is satisfied. This is recorded as a component of other noninterest income.
Other - This consists of several forms of recurring revenue such as external rental income, parking income, FHLB dividends, and income earned on changes in the cash surrender value of bank-owned life insurance, all of which are outside the scope of ASU

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2014-09. The remaining miscellaneous income is the result of immaterial transactions where revenue is recognized when, or as, the performance obligation is satisfied.
Recently Issued Accounting Pronouncements
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.
This ASU will be effective for BancShares' annual or interim goodwill impairment tests 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. We expect to adopt the guidance for our annual impairment test in fiscal year 2020. BancShares does not anticipate any impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
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. A cross-functional team co-led by Corporate Finance and Risk Management is in place to implement the new standard. The team continues to work on critical activities such as building models, documenting accounting policies, reviewing data quality, and implementing a reporting and disclosure solution. We continue to evaluate the impact the new standard will have on our consolidated financial statements but the magnitude of this impact has not been determined. The final impact will be dependent, among other items, on loan portfolio composition and credit 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 all lease contracts on their balance sheet. This ASU requires lessees to classify leases as either operating or finance leases, which are substantially similar to the current operating and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of income and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We will adopt during the first quarter of 2019. 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

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total risk-weighted assets used to determine our regulatory capital levels. Our impact analysis on this change in accounting principle estimates an increase to the Consolidated Balance Sheets for total lease liability ranging between $65.0 million and $85.0 million, as the initial gross up of both assets and liabilities. Capital is expected to be adversely impacted by an estimated four to six basis points. These are preliminary estimates subject to change and will continue to be refined closer to adoption.
NOTE B - BUSINESS COMBINATIONS

Palmetto Heritage Bancshares, Inc.
On July 25, 2018, First Citizens Bank and Palmetto Heritage Bancshares, Inc. announced the signing of a definitive merger agreement. The agreement provides for the acquisition of Pawley's Island, SC-based Palmetto Heritage Bancshares. Under the terms of the agreement, cash consideration of $135.00 per share will be paid to the shareholders of Palmetto Heritage Bancshares for each share of Palmetto Heritage's common stock with total consideration paid of $30.3 million. The transaction is expected to close during the fourth quarter of 2018, subject to the receipt of regulatory approvals and the approval of Palmetto Heritage Bancshares’ shareholders. As of June 30, 2018, Palmetto Heritage Bancshares reported $167.9 million in consolidated assets, $137.8 million in loans and $126.4 million in deposits.

Capital Commerce Bancorp, Inc.
On June 27, 2018, FCB and Capital Commerce Bancorp, Inc. (Capital Commerce) entered into a definitive merger agreement. The agreement provides for the acquisition of Milwaukee, Wisconsin-based Capital Commerce by FCB. Under the terms of the agreement, cash consideration of $4.75 per share will be paid to the shareholders of Capital Commerce for each share of Capital Commerce's common stock totaling approximately $28.1 million. The transaction is expected to close no later than the fourth quarter of 2018, subject to the receipt of regulatory approvals and the approval of Capital Commerce's shareholders, and will be accounted for under the acquisition method of accounting. The merger will allow FCB to expand its presence and enhance banking efforts in the Milwaukee market. As of March 31, 2018, Capital Commerce reported $216.2 million in consolidated assets, $180.6 million in loans and $171.0 million in deposits.

HomeBancorp, Inc.
On May 1, 2018, FCB completed the merger of Tampa, Florida-based HomeBancorp, Inc. (HomeBancorp) and its subsidiary, HomeBanc, into FCB. Under the terms of the merger agreement, cash consideration of $15.03 was paid to the shareholders of HomeBancorp for each share of HomeBancorp's common stock and total consideration was $112.7 million. The merger allowed FCB to expand its footprint in Florida by entering into two new markets in Tampa and Orlando.
The HomeBancorp 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 $842.7 million, including $550.6 million in non-purchased credit impaired (non-PCI) loans, $15.6 million in purchased credit impaired (PCI) loans and $9.9 million in a core deposit intangible. Liabilities assumed were $787.7 million, of which $619.6 million were deposits. As a result of the transaction, FCB recorded $57.6 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a qualified stock purchase.
Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were separated into loans with evidence of credit deterioration, which are accounted for under ASC 310-30 (PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (non-PCI loans).


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The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.
(Dollars in thousands)
As recorded by FCB
Purchase Price
 
 
$
112,657

Assets
 
 
 
Cash and due from banks
$
6,359

 
 
Overnight investments
10,393

 
 
Investment securities
200,918

 
 
Loans held for sale
791

 
 
Loans
566,173

 
 
Premises and equipment
6,542

 
 
Other real estate owned
2,135

 
 
Income earned not collected
2,717

 
 
Intangible assets
13,206

 
 
Other assets
33,459

 
 
Total assets acquired
842,693

 
 
Liabilities
 
 
 
Deposits
619,589

 
 
Short-term borrowings
108,973

 
 
Accrued interest payable
1,020

 
 
Long-term obligations
52,944

 
 
Other liabilities
5,126

 
 
Total liabilities assumed
$
787,652

 
 
Fair value of net assets assumed
 
 
55,041

Goodwill recorded for HomeBancorp
 
 
$
57,616


Merger-related expenses of $1.5 million and $1.7 million were recorded in the Consolidated Statements of Income for the three and six months ended June 30, 2018. Loan-related interest income generated from HomeBancorp was approximately $5.0 million since the acquisition date. The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and therefore pro forma financial data is not included.


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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, 2018 and December 31, 2017, were as follows:
 
June 30, 2018
(Dollars in thousands)
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,508,435

 
$
—

 
$
4,461

 
$
1,503,974

Government agency
131,233

 
157

 
355

 
131,035

Mortgage-backed securities
3,104,316

 
1,621

 
71,872

 
3,034,065

Corporate bonds
108,649

 
391

 
250

 
108,790

Other
5,545

 
98

 
—

 
5,643

Total investment securities available for sale
$
4,858,178

 
$
2,267

 
$
76,938

 
$
4,783,507

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,658,410

 
$
—

 
$
546

 
$
1,657,864

Government agency
8,695

 
15

 
40

 
8,670

Mortgage-backed securities
5,419,379

 
1,529

 
80,152

 
5,340,756

Equity securities
75,471

 
29,737

 
—

 
105,208

Corporate bonds
59,414

 
557

 
8

 
59,963

Other
7,645

 
256

 
182

 
7,719

Total investment securities available for sale
$
7,229,014

 
$
32,094

 
$
80,928

 
$
7,180,180

 
 
 
 
 
 
 
 
 
June 30, 2018
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,299,774

 
$
3,778

 
$
1,459

 
$
2,302,093

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Cost
 
Gross
unrealized gains
 
Gross unrealized
losses
 
Fair
value
Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities
$
76

 
$
5

 
$
—

 
$
81


As a result of adopting ASU 2016-01 in the first quarter of 2018, investments in marketable equity securities are no longer classified as investments available for sale. At June 30, 2018 and December 31, 2017, we had $107.3 million and $105.2 million, respectively, in marketable equity securities recorded at fair value. Prior to January 1, 2018 equity securities were classified as available for sale and stated at fair value with unrealized gains and losses reported in accumulated other comprehensive income. A cumulative-effect adjustment of $18.7 million was recorded on January 1, 2018 to reclassify the net unrealized gains from accumulated other comprehensive income to retained earnings with subsequent changes in fair value recognized in the Consolidated Statements of Income.
On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from investments available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $2.38 billion and a weighted average contractual maturity of 13 years. The unrealized loss on these securities at the date of transfer was $109.5 million and continues to be reported as a component of AOCI. This unrealized loss will be accreted over the remaining expected life of the securities as an adjustment of yield and is offset by the amortization of the corresponding discount on the transferred securities. FCB has the intent and ability to retain these securities until maturity.
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 government agency securities represent securities issued by the United States Small Business Administration. Investments in corporate bonds and

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marketable equity securities represent positions in securities of other financial institutions. Other investments include 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.
 
June 30, 2018
 
December 31, 2017
(Dollars in thousands)
Cost
 
Fair
value
 
Cost
 
Fair
value
Investment securities available for sale
 
 
 
 
 
 
 
Non-amortizing securities maturing in:
 
 
 
 
 
 
 
One year or less
$
1,255,746

 
$
1,252,487

 
$
808,768

 
$
808,301

One through five years
252,689

 
251,487

 
849,642

 
849,563

Five through 10 years
108,649

 
108,790

 
59,414

 
59,963

Over 10 years
5,545

 
5,643

 
7,645

 
7,719

Government agency
131,233

 
131,035

 
8,695

 
8,670

Mortgage-backed securities
3,104,316

 
3,034,065

 
5,419,379

 
5,340,756

Equity securities
—

 
—

 
75,471

 
105,208

Total investment securities available for sale
$
4,858,178

 
$
4,783,507

 
$
7,229,014

 
$
7,180,180

Investment securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities held to maturity
$
2,299,774

 
$
2,302,093

 
$
76

 
$
81

There were no gross gains or losses on sales of investment securities available for sale for the three or six months ended June 30, 2018. Gross gains and gross losses on sales of investment securities available for sale were $3.4 million and $2 thousand, respectively for the three months ended June 30, 2017. Gross gains and gross losses on sales of investment securities available for sale were $3.4 million and $29 thousand, respectively for the six months ended June 30, 2017.
 
 
 
 
 
 
 
 
The following table provides the realized and unrealized gains or losses on marketable equity securities for the three and six months ended June 30, 2018.
(Dollars in thousands)
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
Marketable equity securities gains, net
 
$
4,440

 
$
5,411

Less net gains recognized on marketable equity securities sold
 
139

 
235

Unrealized gains recognized on marketable equity securities held
 
$
4,301

 
$
5,176



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The following table provides information regarding securities available for sale with unrealized losses as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
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
$
1,503,974

 
$
4,461

 
$
—

 
$
—

 
$
1,503,974

 
$
4,461

Government agency
83,383

 
328

 
2,004

 
27

 
85,387

 
355

Mortgage-backed securities
1,923,954

 
50,765

 
654,212

 
21,107

 
2,578,166

 
71,872

Corporate bonds
24,673

 
248

 
5,025

 
2

 
29,698

 
250

Total
$
3,535,984

 
$
55,802

 
$
661,241

 
$
21,136

 
$
4,197,225

 
$
76,938

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,126,683

 
$
1,249

 
$
11,219

 
$
210

 
$
1,137,902

 
$
1,459

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,408,166

 
$
345

 
$
249,698

 
$
201

 
$
1,657,864

 
$
546

Government agency
848

 
12

 
2,527

 
28

 
3,375

 
40

Mortgage-backed securities
2,333,254

 
20,911

 
2,723,406

 
59,241

 
5,056,660

 
80,152

Corporate bonds
5,025

 
8

 
—

 
—

 
5,025

 
8

Other
5,349

 
182

 
—

 
—

 
5,349

 
182

Total
$
3,752,642

 
$
21,458

 
$
2,975,631

 
$
59,470

 
$
6,728,273

 
$
80,928


As of June 30, 2018, there were 120 investment securities available for sale that had continuous losses for more than 12 months of which 119 are government sponsored enterprise-issued mortgage-backed securities or government agency securities and 1 is a corporate bond. There were 2 investment securities held to maturity, which were government sponsored enterprise-issued mortgage securities, that had continuous losses for more than 12 months at June 30, 2018.
None of the unrealized losses identified as of June 30, 2018 or December 31, 2017 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 debt securities were purchased. BancShares has 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.
Debt securities having an aggregate carrying value of $3.67 billion at June 30, 2018 and $4.59 billion at December 31, 2017 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 non-PCI or PCI. For loans to be included as non-PCI, they are either originated by FCB or 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 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 subsequently recorded if there is additional credit deterioration after the acquisition date.
BancShares reports non-PCI and PCI loan portfolios separately, and the non-PCI 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.

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Commercial – Commercial loan classes 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 loan classes 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.

Loans and leases outstanding included the following at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
June 30, 2018
 
December 31, 2017
Non-PCI loans and leases:
 
 
 
Commercial:
 
 
 
Construction and land development
$
715,011

 
$
669,215

Commercial mortgage
10,278,741

 
9,729,022

Other commercial real estate
473,452

 
473,433

Commercial and industrial
3,097,541

 
2,730,407

Lease financing
613,377

 
894,801

Other
296,614

 
302,176

Total commercial loans
15,474,736

 
14,799,054

Noncommercial:
 
 
 
Residential mortgage
3,980,845

 
3,523,786

Revolving mortgage
2,604,955

 
2,701,525

Construction and land development
250,704

 
248,289

Consumer
1,552,928

 
1,561,173

Total noncommercial loans
8,389,432

 
8,034,773

Total non-PCI loans and leases
23,864,168

 
22,833,827

PCI loans:
 
 
 
Total PCI loans
674,269

 
762,998

Total loans and leases
$
24,538,437

 
$
23,596,825



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At June 30, 2018, $9.08 billion in noncovered loans with a lendable collateral value of $6.22 billion were used to secure $128.7 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of $6.09 billion. At December 31, 2017, $8.75 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $835.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $5.24 billion. At June 30, 2018, $2.88 billion in noncovered loans with a lendable collateral value of $2.17 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). At December 31, 2017, $2.77 billion in noncovered loans with a lendable collateral value of $2.08 billion were used to secure additional borrowing capacity at the FRB.
Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. Loans held for sale totaled $59.0 million and $51.2 million at June 30, 2018 and December 31, 2017, respectively. 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. During the three and six months ended June 30, 2018, total proceeds from sales of loans held for sale were $164.2 million and $302.8 million, respectively, and there were no transfers to loans held for sale from the residential mortgage portfolio for either period. For the three months ended June 30, 2017, total proceeds from sales of loans held for sale which did not include any loans transferred from the residential mortgage portfolio were $147.0 million. For the six months ended June 30, 2017, total proceeds from sales of loans held for sale were $342.1 million of which $32.3 million in sales were transferred to loans held for sale from the residential mortgage portfolio, resulting in a gain of $164 thousand.
Net deferred fees on originated non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were $1.2 million and $1.7 million at June 30, 2018 and December 31, 2017, respectively. The unamortized discount related to purchased non-PCI loans and leases in the HomeBancorp, Guaranty Bank (Guaranty), Cordia Bancorp Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $7.0 million, $12.3 million, $1.9 million and $14.7 million, respectively, at June 30, 2018. At December 31, 2017, the unamortized discount related to purchased non-PCI loans and leases from the Guaranty, Cordia and Bancorporation acquisitions was $14.2 million, $2.7 million and $18.1 million, respectively. During the three months ended June 30, 2018 and June 30, 2017, accretion income on purchased non-PCI loans and leases was $4.1 million and $3.0 million, respectively. During the six months ended June 30, 2018 and June 30, 2017, accretion income on purchased non-PCI loans and leases was $7.0 million and $6.0 million, respectively.
 
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. Commercial loans are evaluated periodically with more frequent evaluations done on 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 any 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.


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Table of Contents

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, 2018 and December 31, 2017 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.

Non-PCI loans and leases outstanding at June 30, 2018 and December 31, 2017 by credit quality indicator are provided below:
 
June 30, 2018
(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
$
703,034

 
$
10,083,382

 
$
470,236

 
$
2,868,180

 
$
603,760

 
$
293,804

 
$
15,022,396

Special mention
352

 
88,157

 
1,159

 
35,636

 
3,916

 
1,258

 
130,478

Substandard
3,195

 
105,647

 
2,057

 
21,265

 
5,701

 
1,552

 
139,417

Doubtful
—

 
999

 
—

 
365

 
—

 
—

 
1,364

Ungraded
8,430

 
556

 
—

 
172,095

 
—

 
—

 
181,081

Total
$
715,011

 
$
10,278,741

 
$
473,452

 
$
3,097,541

 
$
613,377

 
$
296,614

 
$
15,474,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
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
$
665,197

 
$
9,521,019

 
$
468,942

 
$
2,511,307

 
$
883,779

 
$
298,064

 
$
14,348,308

Special mention
691

 
78,643

 
1,260

 
44,130

 
4,340

 
2,919

 
131,983

Substandard
3,327

 
128,848

 
3,224

 
18,617

 
6,585

 
1,193

 
161,794

Doubtful
—

 
262

 
—

 
385

 
—

 
—

 
647

Ungraded
—

 
250

 
7

 
155,968

 
97

 
—

 
156,322

Total
$
669,215

 
$
9,729,022

 
$
473,433

 
$
2,730,407

 
$
894,801

 
$
302,176

 
$
14,799,054


 
June 30, 2018
 
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
$
3,936,065

 
$
2,581,818

 
$
248,343

 
$
1,541,465

 
$
8,307,691

30-59 days past due
21,032

 
9,864

 
1,839

 
6,013

 
38,748

60-89 days past due
6,291

 
3,367

 
51

 
2,729

 
12,438

90 days or greater past due
17,457

 
9,906

 
471

 
2,721

 
30,555

Total
$
3,980,845

 
$
2,604,955

 
$
250,704

 
$
1,552,928

 
$
8,389,432

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Non-PCI noncommercial loans and leases
 
Residential
mortgage
 
Revolving
mortgage
 
Construction
and land
development
 
Consumer
 
Total non-PCI noncommercial
loans and leases
Current
$
3,465,935

 
$
2,674,390

 
$
239,648

 
$
1,546,473

 
$
7,926,446

30-59 days past due
27,886

 
13,428

 
7,154

 
8,812

 
57,280

60-89 days past due
8,064

 
3,485

 
108

 
2,893

 
14,550

90 days or greater past due
21,901

 
10,222

 
1,379

 
2,995

 
36,497

Total
$
3,523,786

 
$
2,701,525

 
$
248,289

 
$
1,561,173

 
$
8,034,773




19
Table of Contents

 PCI loans outstanding at June 30, 2018 and December 31, 2017 by credit quality indicator are provided below:
 
June 30, 2018
 
December 31, 2017
(Dollars in thousands)
PCI commercial loans
Grade:

 
 
Pass
$
165,578

 
$
201,332

Special mention
58,024

 
63,257

Substandard
105,937

 
117,068

Doubtful
6,536

 
11,735

Ungraded
34

 
27

Total
$
336,109

 
$
393,419

 
June 30, 2018
 
December 31, 2017
 
PCI noncommercial loans
(Dollars in thousands)

 
 
Current
$
299,579

 
$
318,632

30-59 days past due
12,146

 
13,343

60-89 days past due
4,167

 
6,212

90 days or greater past due
22,268

 
31,392

Total
$
338,160

 
$
369,579


The aging of the outstanding non-PCI loans and leases, by class, at June 30, 2018 and December 31, 2017 are provided in the tables below. 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, 2018
(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
$
466

 
$
264

 
$
132

 
$
862

 
$
714,149

 
$
715,011

Commercial mortgage
10,120

 
5,021

 
5,599

 
20,740

 
10,258,001

 
10,278,741

Other commercial real estate
1,568

 
—

 
18

 
1,586

 
471,866

 
473,452

Commercial and industrial
6,445

 
3,743

 
1,155

 
11,343

 
3,086,198

 
3,097,541

Lease financing
3,062

 
1,167

 
951

 
5,180

 
608,197

 
613,377

Residential mortgage
21,032

 
6,291

 
17,457

 
44,780

 
3,936,065

 
3,980,845

Revolving mortgage
9,864

 
3,367

 
9,906

 
23,137

 
2,581,818

 
2,604,955

Construction and land development - noncommercial
1,839

 
51

 
471

 
2,361

 
248,343

 
250,704

Consumer
6,013

 
2,729

 
2,721

 
11,463

 
1,541,465

 
1,552,928

Other
42

 
17

 
—

 
59

 
296,555

 
296,614

Total non-PCI loans and leases
$
60,451

 
$
22,650

 
$
38,410

 
$
121,511

 
$
23,742,657

 
$
23,864,168

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
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
$
491

 
$
442

 
$
357

 
$
1,290

 
$
667,925

 
$
669,215

Commercial mortgage
12,288

 
2,375

 
6,490

 
21,153

 
9,707,869

 
9,729,022

Other commercial real estate
107

 
—

 
75

 
182

 
473,251

 
473,433

Commercial and industrial
6,694

 
1,510

 
1,266

 
9,470

 
2,720,937

 
2,730,407

Lease financing
2,983

 
167

 
973

 
4,123

 
890,678

 
894,801

Residential mortgage
27,886

 
8,064

 
21,901

 
57,851

 
3,465,935

 
3,523,786

Revolving mortgage
13,428

 
3,485

 
10,222

 
27,135

 
2,674,390

 
2,701,525

Construction and land development - noncommercial
7,154

 
108

 
1,379

 
8,641

 
239,648

 
248,289

Consumer
8,812

 
2,893

 
2,995

 
14,700

 
1,546,473

 
1,561,173

Other
188

 
6

 
133

 
327

 
301,849

 
302,176

Total non-PCI loans and leases
$
80,031

 
$
19,050

 
$
45,791

 
$
144,872

 
$
22,688,955

 
$
22,833,827


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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 June 30, 2018 and December 31, 2017 for non-PCI loans and leases, were as follows:
 
June 30, 2018
 
December 31, 2017
(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
$
420

 
$
—

 
$
1,040

 
$
—

Commercial mortgage
18,457

 
839

 
22,625

 
397

Other commercial real estate
103

 
—

 
916

 
—

Commercial and industrial
3,168

 
319

 
2,884

 
428

Lease financing
1,755

 
—

 
1,992

 
—

Residential mortgage
35,173

 
—

 
38,942

 
—

Revolving mortgage
22,500

 
—

 
19,990

 
—

Construction and land development - noncommercial
1,012

 
—

 
1,989