UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2017~~2018

¨ 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~~10,805,220 shares

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

(Number of shares outstanding, by class, as of ~~November 1, 2017)~~October 31, 2018)

INDEX



		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Unaudited)	5

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

	Consolidated Statements of Cash Flows (Unaudited)	67

	Notes to Consolidated Financial Statements (Unaudited)	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4341

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6762

Item 4.	Controls and Procedures	6762

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	6962

Item 1A.	Risk Factors	6962

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6963

Item 6.	Exhibits	6963

PART I


Item 1.	Financial Statements

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Balance Sheets


(Dollars in thousands, unaudited)	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Assets
Cash and due from banks	$	296,386		$	539,741		$	262,525		$	336,150
Overnight investments	2,432,233			1,872,594			943,025			1,387,927
Investment in marketable equity securities							109,907			—
Investment securities available for sale	6,992,877			7,006,580			4,677,351			7,180,180
Investment securities held to maturity	78			98			2,253,416			76
Loans held for sale	70,803			74,401			46,082			51,179
Loans and leases	23,149,073			21,737,878			24,886,347			23,596,825
Allowance for loan and lease losses	(231,842		)	(218,795		)	(219,197		)	(221,893		)
Net loans and leases	22,917,231			21,519,083			24,667,150			23,374,932
Premises and equipment	1,131,558			1,133,044			1,167,329			1,138,431
Other real estate owned	53,988			61,231			43,601			51,097
Income earned not collected	90,821			79,839			105,616			95,249
FDIC shared-loss receivable	4,610			4,172
Goodwill	150,601			150,601			208,217			150,601
Other intangible assets	77,491			78,040			72,748			73,096
Other assets	365,477			471,412			397,692			688,594
Total assets	$	34,584,154		$	32,990,836		$	34,954,659		$	34,527,512
Liabilities
Deposits:
Noninterest-bearing	$	11,483,033		$	10,130,549		$	12,212,144		$	11,237,375
Interest-bearing	17,850,916			18,030,794			17,951,393			18,028,900
Total deposits	29,333,949			28,161,343			30,163,537			29,266,275
Short-term borrowings	679,280			603,487			687,749			693,807
Long-term obligations	866,123			832,942			297,487			870,240
FDIC shared-loss payable	100,203			97,008			104,576			101,342
Other liabilities	290,768			283,629			202,297			261,784
Total liabilities	31,270,323			29,978,409			31,455,646			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 September 30, 2017 and December 31, 2016)	11,005			11,005
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2017 and December 31, 2016)	1,005			1,005
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016)	—			—
Class A - $1 par value (16,000,000 shares authorized; 10,880,220 and 11,005,220 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)							10,880			11,005
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 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 September 30, 2018 and December 31, 2017)							—			—
Surplus	658,918			658,918			600,957			658,918
Retained earnings	2,735,227			2,476,691			3,133,746			2,785,430
Accumulated other comprehensive loss	(92,324		)	(135,192		)	(247,575		)	(122,294		)
Total shareholders’ equity	3,313,831			3,012,427			3,499,013			3,334,064
Total liabilities and shareholders’ equity	$	34,584,154		$	32,990,836		$	34,954,659		$	34,527,512

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Income


	Three months ended September 30						Nine months ended September 30						Three months ended September 30				Nine months ended September 30
(Dollars in thousands, except per share data, unaudited)	2017			2016			2017			2016			2018		2017		2018		2017
Interest income
Loans and leases	$	246,260		$	219,314		$	708,622		$	651,160		$	272,215	$	246,260	$	785,283	$	708,622
Investment securities and dividend income	29,706			23,395			89,863			71,139			38,770		29,706		110,969		89,863
Overnight investments	8,367			3,785			19,247			10,676			4,721		8,367		15,932		19,247
Total interest income	284,333			246,494			817,732			732,975			315,706		284,333		912,184		817,732
Interest expense
Deposits	3,839			4,457			12,407			13,717			5,147		3,839		13,424		12,407
Short-term borrowings	1,429			540			3,185			1,428			685		1,429		2,940		3,185
Long-term obligations	5,890			5,648			17,013			17,072			2,512		5,890		7,802		17,013
Total interest expense	11,158			10,645			32,605			32,217			8,344		11,158		24,166		32,605
Net interest income	273,175			235,849			785,127			700,758			307,362		273,175		888,018		785,127
Provision for loan and lease losses	7,946			7,507			28,501			16,912			840		7,946		16,883		28,501
Net interest income after provision for loan and lease losses	265,229			228,342			756,626			683,846			306,522		265,229		871,135		756,626
Noninterest income
Gain on acquisitions	—			837			134,745			5,831			—		—		—		134,745
Cardholder services	24,461			21,537			70,006			61,949
Merchant services	25,879			25,179			77,456			71,392
Cardholder services, net													14,678		15,487		44,385		42,848
Merchant services, net													5,857		5,528		18,512		17,085
Service charges on deposit accounts	25,951			23,154			73,955			66,888			25,994		25,951		78,489		73,955
Wealth management services	21,234			19,915			64,116			60,840			24,459		21,234		73,543		64,116
Securities gains	1,337			352			4,664			17,509
Securities gains, net													—		1,337		—		4,664
Marketable equity securities gains, net													3,854		—		9,265		—
Other service charges and fees	7,073			7,567			21,302			21,693			7,651		7,073		22,887		21,302
Mortgage income	6,775			6,692			19,317			12,540			4,123		6,775		13,063		19,317
Insurance commissions	2,894			2,755			9,015			8,198			2,755		2,894		9,471		9,015
ATM income	2,596			1,908			6,882			5,518			1,919		2,596		6,307		6,882
Adjustments to FDIC shared-loss receivable	(1,770		)	(2,773		)	(4,671		)	(7,673		)
Net impact from FDIC shared-loss agreement termination	—			—			(45		)	16,559
Gain on extinguishment of debt													703		—		26,517		—
Other	8,957			10,718			24,137			22,129			2,538		7,187		15,703		19,421
Total noninterest income	125,387			117,841			500,879			363,373			94,531		96,062		318,142		413,350
Noninterest expense
Salaries and wages	121,086			107,762			351,518			315,720			133,867		124,888		392,911		363,076
Employee benefits	27,030			26,750			83,418			79,761			28,850		25,416		90,656		77,976
Occupancy expense	26,594			24,857			77,415			74,824			26,632		26,594		80,686		77,415
Equipment expense	23,887			23,736			73,129			68,796			25,880		23,887		76,021		73,129
Merchant processing	19,653			18,686			57,624			52,924
Cardholder processing	8,576			7,416			23,092			22,075
FDIC insurance expense	5,449			5,796			16,747			15,173			5,186		5,449		16,411		16,747
Collection and foreclosure-related expenses	3,443			4,039			9,582			9,732			4,269		3,443		12,389		9,582
Merger-related expenses	562			3,764			8,248			5,187			1,126		562		4,136		8,248
Other	50,687			44,427			136,145			133,015			41,727		47,403		128,383		123,216
Total noninterest expense	286,967			267,233			836,918			777,207			267,537		257,642		801,593		749,389
Income before income taxes	103,649			78,950			420,587			270,012			133,516		103,649		387,684		420,587
Income taxes	36,585			27,546			151,242			97,220			16,198		36,585		76,844		151,242
Net income	$	67,064		$	51,404		$	269,345		$	172,792		$	117,318	$	67,064	$	310,840	$	269,345
Average shares outstanding	12,010,405			12,010,405			12,010,405			12,010,405			11,971,460		12,010,405		11,997,281		12,010,405
Net income per share	$	5.58		$	4.28		$	22.43		$	14.39		$	9.80	$	5.58	$	25.91	$	22.43

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income


	Three months ended September 30						Nine months ended September 30						Three months ended September 30						Nine months ended September 30
(Dollars in thousands, unaudited)	2017			2016			2017			2016			2018			2017			2018			2017
Net income	$	67,064		$	51,404		$	269,345		$	172,792		$	117,318		$	67,064		$	310,840		$	269,345
Other comprehensive income:
Unrealized gains (losses) on securities:
Change in unrealized securities gains (losses) arising during period	15,752			(1,577		)	65,619			90,631
Other comprehensive (loss) income:
Unrealized (losses) gains on securities available for sale:
Change in unrealized (losses) gains on securities available for sale arising during period													(13,810		)	15,752			(9,655		)	65,619
Tax effect	(5,857		)	855			(24,401		)	(34,250		)	3,175			(5,857		)	2,221			(24,401		)
Reclassification adjustment for net gains realized and included in income before income taxes	(1,337		)	(352		)	(4,664		)	(17,509		)
Reclassification adjustment for gains included in income before income taxes													—			(1,337		)	—			(4,664		)
Tax effect	495			191			1,726			6,583			—			495			—			1,726
Total change in unrealized gains (losses) on securities, net of tax	9,053			(883		)	38,280			45,455
Change in fair value of cash flow hedges:
Change in unrecognized loss on cash flow hedges	—			—			—			1,429
Total change in unrealized (losses) gains on securities available for sale, net of tax													(10,635		)	9,053			(7,434		)	38,280
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		)	—
Tax effect	—			—			—			(537		)	—			—			25,186			—
Total change in unrecognized loss on cash flow hedges, net of tax	—			—			—			892
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity													6,502			—			10,975			—
Tax effect													(1,495		)	—			(2,523		)	—
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax													5,007			—			(75,869		)	—
Change in pension obligation:
Amortization of actuarial losses and prior service cost	2,330			1,768			7,290			5,302			3,495			2,330			10,486			7,290
Tax effect	(864		)	(642		)	(2,702		)	(1,993		)	(804		)	(864		)	(2,412		)	(2,702		)
Total change in pension obligation, net of tax	1,466			1,126			4,588			3,309			2,691			1,466			8,074			4,588
Other comprehensive income	10,519			243			42,868			49,656
Other comprehensive (loss) income													(2,937		)	10,519			(75,229		)	42,868
Total comprehensive income	$	77,583		$	51,647		$	312,213		$	222,448		$	114,381		$	77,583		$	235,611		$	312,213

See accompanying Notes to Consolidated Financial Statements.

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			Class A Common Stock			Class B Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity
Balance at December 31, 2015	$	11,005	$	1,005	$	658,918	$	2,265,621		$	(64,440	)	$	2,872,109
Net income	—		—		—		172,792			—			172,792
Other comprehensive income, net of tax	—		—		—		—			49,656			49,656
Cash dividends ($0.90 per share)	—		—		—		(10,809		)	—			(10,809		)
Balance at September 30, 2016	$	11,005	$	1,005	$	658,918	$	2,427,604		$	(14,784	)	$	3,083,748

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

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																—			—		—			310,840			—			310,840
Other comprehensive loss, net of tax																—			—		—			—			(75,229		)	(75,229		)
Repurchase of 125,000 shares of Class A common stock																(125		)	—		(57,961		)	—			—			(58,086		)
Cash dividends ($1.05 per share)																—			—		—			(12,576		)	—			(12,576		)
Balance at September 30, 2018																$	10,880		$	1,005	$	600,957		$	3,133,746		$	(247,575	)	$	3,499,013

See accompanying Notes to Consolidated Financial Statements.

First Citizens BancShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	Nine months ended September 30						Nine months ended September 30
(Dollars in thousands, unaudited)	2017			2016			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	269,345		$	172,792		$	310,840		$	269,345
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses	28,501			16,912			16,883			28,501
Deferred tax expense (benefit)	67,270			(13,328		)
Deferred tax expense							13,642			67,270
Net change in current taxes	17,115			(16,906		)	(21,266		)	17,115
Depreciation	67,749			66,400			71,484			67,749
Net increase (decrease) in accrued interest payable	401			(1,662		)
Net (decrease) increase in accrued interest payable							(1,552		)	401
Net increase in income earned not collected	(4,471		)	(2,899		)	(7,650		)	(4,471		)
Gain on acquisitions	(134,745		)	(5,831		)	—			(134,745		)
Securities gains	(4,664		)	(17,509		)
Loss on termination of FDIC shared-loss agreements	45			3,377
Securities gains, net							—			(4,664		)
Marketable equity securities gains, net							(9,265		)	—
Gain on extinguishment of debt							(26,517		)	—
Origination of loans held for sale	(471,862		)	(589,313		)	(456,193		)	(471,862		)
Proceeds from sale of loans held for sale	487,017			564,026			468,705			487,017
Gain on sale of loans held for sale	(11,317		)	(10,857		)	(8,640		)	(11,317		)
Gain on sale of portfolio loans	(1,007		)	(3,758		)	—			(1,007		)
Net write-downs/losses on other real estate	3,152			5,251			3,156			3,152
Gain on sales of premises and equipment	(490		)	—			(1,450		)	(490		)
Net accretion of premiums and discounts	(34,535		)	(32,924		)	(22,965		)	(34,535		)
Amortization of intangible assets	16,994			16,633			17,580			16,994
Reduction in FDIC receivable for shared-loss agreements	5,799			11,926
Net change in FDIC receivable for shared-loss agreements							—			5,799
Net change in FDIC payable for shared-loss agreements	3,195			(12,474		)	3,234			3,195
Net change in other assets	(9,566		)	17,120			339,289			(9,521		)
Net change in other liabilities	10,178			56,275			(53,708		)	10,178
Net cash provided by operating activities	304,104			223,251			635,607			304,104
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding	(771,593		)	(782,771		)	(702,356		)	(771,593		)
Purchases of investment securities available for sale	(1,891,967		)	(2,382,141		)	(979,495		)	(1,891,967		)
Purchases of investment securities held to maturity							(68,699		)	—
Purchases of marketable equity securities							(2,818		)	—
Proceeds from maturities/calls of investment securities held to maturity	20			130			196,146			20
Proceeds from maturities/calls of investment securities available for sale	1,436,113			1,213,333			946,293			1,436,113
Proceeds from sales of investment securities available for sale	538,317			1,802,155			119,273			538,317
Net increase in overnight investments	(458,027		)	(891,059		)
Proceeds from sales of marketable equity securities							9,503			—
Net decrease (increase) in overnight investments							455,295			(458,027		)
Proceeds from sales of portfolio loans	162,486			77,665			—			162,486
Cash paid to the FDIC for shared-loss agreements	(7,440		)	(16,701		)	—			(7,440		)
Net cash paid to the FDIC for termination of shared-loss agreements	(285		)	(20,115		)	—			(285		)
Proceeds from sales of other real estate	31,072			24,406			23,488			31,072
Proceeds from sales of premises and equipment	2,920			—			1,648			2,920
Purchases of premises and equipment	(60,090		)	(60,982		)	(88,270		)	(60,090		)
Business acquisitions, net of cash acquired	300,703			(727		)	(106,298		)	300,703
Net cash used in investing activities	(717,771		)	(1,036,807		)	(196,290		)	(717,771		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in time deposits	(469,540		)	(371,164		)	(218,826		)	(469,540		)
Net increase in demand and other interest-bearing deposits	538,084			917,382			496,499			538,084
Net change in short-term borrowings	(59,207		)	93,655
Net decrease in short-term borrowings							(127,547		)	(59,207		)
Repayment of long-term obligations	(6,819		)	(3,889		)	(717,370		)	(6,819		)
Origination of long-term obligations	175,000			150,000			125,000			175,000
Repurchase of common stock							(58,086		)	—
Cash dividends paid	(7,206		)	(10,809		)	(12,612		)	(7,206		)
Net cash provided by financing activities	170,312			775,175
Net cash (used in) provided by financing activities							(512,942		)	170,312
Change in cash and due from banks	(243,355		)	(38,381		)	(73,625		)	(243,355		)
Cash and due from banks at beginning of period	539,741			534,086			336,150			539,741
Cash and due from banks at end of period	$	296,386		$	495,705		$	262,525		$	296,386
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate	$	26,926		$	31,517		$	17,013		$	26,926
Dividends declared but not paid	3,603			—			4,168			3,603
Reclassification of portfolio loans to loans held for sale	161,719			—
Reclassification of portfolio loans (from) to loans held for sale							(2,016		)	161,719
Transfer of investment securities available for sale to held to maturity							2,485,761			—

See accompanying Notes to Consolidated Financial Statements.

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~~notes to consolidated financial statements included in BancShares' Annual Report on Form 10-K for the year ended December 31, ~~2016.~~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 ~~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.~~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 ~~mortgage servicing rights~~ and other intangible assets;

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

Income tax assets, liabilities and expense

Income Taxes

Income tax expense was $16.2 million and $36.6 million for the third quarter of 2018 and third quarter of 2017, representing effective tax rates of 12.1 percent and 35.3 percent during the respective periods. Income tax expense was $76.8 million and $151.2 million for the nine months ended September 30, 2018 and 2017, respectively, representing effective tax rates of 19.8 percent and 36.0 percent for the respective nine month periods. The income tax expense and effective tax rate decreases during the reported periods in 2018 compared to those in 2017 were primarily due to the impact of the Tax Cuts and Jobs Act of 2017 (Tax Act), which reduced the federal tax rate from 35.0 percent to 21.0 percent. Additional information was obtained in the third quarter of 2018 affecting the provisional amount initially recorded for the quarter ended December 31, 2017 to account for the effects of the Tax Act. The nature of the additional information primarily relates to a decision made by BancShares to accelerate deductions in its 2017 tax return which were effectuated by making an additional contribution to its pension plan and requesting an automatic change in its tax accounting method related to depreciation. As a result, a tax benefit of $15.7 million was recorded in the third quarter of 2018. The ultimate impact will be finalized in the fourth quarter and may differ due to additional analysis, changes in interpretations and assumptions as well as additional regulatory guidance that may be issued.

Per Share Data

During the third quarter of 2018, BancShares repurchased 125,000 shares of Class A common stock, of which 100,000 shares were repurchased from a related party, for approximately $58.1 million at an average cost per share of $464.68. Subsequent to quarter-end and through October 31, 2018, BancShares repurchased an additional 75,000 shares of Class A common stock for approximately $32.9 million at an average cost per share of $438.26. All of these shares were repurchased under the previously approved Board of Directors' (Board) authority that expires on October 31, 2018.

Share Repurchase Authority

On October 23, 2018, BancShares' Board of Directors authorized the purchase of up to 800,000 shares of BancShares' Class A common stock. Under that authority, BancShares may purchase shares from time to time from November 1, 2018 through October 31, 2019, on the open market or in privately negotiated transactions, and it may enter into a stock trading plan pursuant to the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934. The Board's action replaces existing authority to purchase shares approved during 2017 and that expires on October 31, 2018. It does not obligate BancShares to purchase any particular amount of shares, and purchases may be suspended or discontinued at any time.

Recently Adopted Accounting Pronouncements

~~Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-03,~~FASB ASU 2018-02, ~~Accounting Changes and Error Corrections~~Income Statement - Reporting Comprehensive Income (Topic ~~250) and Investments - Equity Method and Joint Ventures (Topic 323)~~220): ~~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~~Reclassification of Certain Tax Effects from ~~Contracts with Customers (Topic 606)~~Accumulated Other Comprehensive Income~~, 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.

This ASU ~~also addresses the accounting~~requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax ~~benefits~~effects resulting from ~~investments~~the newly enacted federal corporate income tax rate in ~~qualified affordable housing projects where~~ the ~~decision~~Tax Act, which was enacted on December 22, 2017. The Tax Act included a reduction to ~~apply~~ the ~~proportional amortization method of accounting is an accounting policy decision~~corporate income tax rate from 35 percent 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~~21 percent effective January 1, 2018. The amount of the ~~proportional amortization method.~~reclassification is 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 ~~upon issuance.~~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 ~~2017.~~2018. The ~~disclosures required by this ASU are included within~~change in accounting principle was accounted for as a cumulative-effect adjustment to the ~~“Recently Issued Accounting Pronouncements” section below. The adoption did not have an impact~~balance sheet resulting in a $31.3 million increase to retained earnings and a corresponding decrease to AOCI on ~~our consolidated financial position or consolidated results of operations.~~January 1, 2018.

FASB ASU ~~2016-17,~~2017-07, ~~Consolidation~~Compensation - Retirement Benefits (Topic ~~810)~~715): ~~Interests Held Through Related Parties That Are Under Common Control~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

This ASU ~~does not change~~requires employers to present the ~~characteristics~~service cost component of ~~a primary beneficiary~~the net periodic benefit cost in ~~current GAAP; however, it requires~~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 ~~a reporting entity, in determining whether it satisfies~~includes the ~~second characteristic~~service cost. In addition, only the service cost component 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 thatnet benefit cost 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.eligible for capitalization.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, ~~2016,~~2017, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of ~~2017.~~2018. The adoption did not have ana material 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~~

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

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

~~FASB ASU 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~

This ASU eliminates the delayed recognition of the full amount of credit losses until the loss was probable of occurring and instead will reflect an entity's current estimate of all expected credit losses. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.

The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. We will adopt the guidance by the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. For BancShares, the standard will apply to loans, unfunded loan commitments and debt securities held to maturity. We have formed a cross-functional team co-led by Finance and Risk Management and engaged a third party to assist with the adoption, which began with a readiness and data gap analysis. The implementation team has developed a high-level project plan and is staying informed about the broader industry's perspective and insights, and identifying and researching key decision points. We anticipate the gap analysis to be completed during the fourth quarter of 2017 which will determine our path going forward. We are currently evaluating the impact the new standard will have on our consolidated financial statements as the final impact will be dependent, among other items, upon the loan portfolio composition and quality at the adoption date, as well as economic conditions, financial models used and forecasts at that time.

~~FASB ASU 2016-02,~~ ~~Leases (Topic 842)~~

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

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

~~FASB ASU~~ 2016-01, Financial ~~Instruments—Overall~~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. ~~The ASU only permits early adoption of~~We adopted the ~~instrument-specific credit risk provision. We will adopt during~~guidance effective in the first quarter of ~~2018 with~~2018. The change in accounting principle was accounted for as a cumulative-effect adjustment ~~from accumulated other comprehensive income (AOCI)~~to the balance sheet resulting in an $18.7 million increase to retained earnings ~~as of the beginning of the year of adoption. We are currently evaluating the impact the new standard will have~~and a decrease to AOCI on ~~our consolidated financial statements. We anticipate~~January 1, 2018. With the adoption of this ASU, ~~will primarily impact~~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 ~~recognition~~ of ~~BancShares'~~ equity securities ~~portfolio. The cumulative-effect adjustment~~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 ~~adoption~~each reporting period. Under the measurement alternative these investments will be ~~determined by~~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 ~~equity securities portfolio composition~~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, ~~valuation at~~if the ~~date of adoption.~~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 ~~companies~~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. ~~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~~adopted the ~~ASU during~~guidance effective in the first quarter of ~~2018 with a cumulative-effect adjustment to opening retained earnings and the modified retrospective approach will likely be used if we determine there is a material impact.~~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, ~~cardholder and merchant income,~~ wealth ~~advisory~~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.

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 $20.4 million and $60.4 million have been reclassified and reported as a component of merchant services income for the three and nine months ended September 30, 2017, respectively. Cardholder processing expenses of $7.7 million and cardholder reward programs expense of $1.3 million have been reclassified and reported as a component of cardholder services income for the three months ended September 30, 2017. For the nine months ended September 30, 2017, cardholder processing expenses of $20.3 million and cardholder reward programs expense of $6.8 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. 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 fee income 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 from wealth management services is recognized over the period in which services are performed, and is based on a percentage of the value of the assets under management/administration. This revenue is either fixed or variable based on account type, or 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 requested service is provided to the customer 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 2014-09. The remaining miscellaneous ~~fees. We engaged~~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 2018-15 - Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a ~~third party~~Cloud Computing Arrangement That is a Service Contract

This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to ~~assist~~develop or obtain internal-use software (and hosting arrangements that include internal-use software license). This ASU requires entities to use the guidance in ~~developing processes~~FASB ASC 350-40, Intangibles - Goodwill and ~~procedures for gathering evidence~~Other - Internal Use Software, to determine whether to capitalize or expense implementation costs related to the service contract. This ASU also requires entities to (1) expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (2) present the expense related to the capitalized implementation costs in the same line item on the income statement as fees associated with the hosting element of the arrangement (3) classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element (4) present the capitalized implementation costs in the same balance sheet line item that a prepayment for the fees associated with the hosting arrangement would be presented.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. BancShares will adopt the amendments in this ASU during the first quarter of 2020. BancShares is currently evaluating the impact this new standard will have on its consolidated financial statements and ~~have performed~~the magnitude of the impact has not yet been determined.

FASB ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an ~~analysis~~explanation of ~~contracts~~the reasons for ~~wealth management income, customer service charges, ATM fees~~significant gains and ~~miscellaneous~~losses related to changes in the benefit obligation for the period.

The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020. Early adoption is permitted for all entities. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2021.

FASB ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. Early adoption is permitted upon issuance of the ASU. Entities are permitted to early adopt amendments that remove or modify disclosures and delay the adoption of the additional disclosures until their effective date. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the first quarter of 2020.

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 ~~we do~~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 ~~have a significant~~adopt the guidance for our annual impairment test in fiscal year 2020. BancShares does not anticipate any impact onto our consolidated financial position or consolidated results of ~~operations. We continue~~operations as a result of the adoption.

FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

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. BancShares 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. BancShares continues to evaluate the impact of the new standard will have on its consolidated financial statements but the magnitude of this impact has not been determined. The final impact will be dependent, among other ~~sources~~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 ~~our noninterest~~ 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 total risk-weighted assets used to determine our regulatory capital levels. Our impact analysis on ~~our presentation~~this change in accounting principle estimates an increase to the Consolidated Balance Sheets for total lease liability ranging between $65.0 million and ~~disclosures.~~$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

~~Guaranty~~Palmetto Heritage Bancshares, Inc.

On November 1, 2018, FCB completed the merger of Pawley's Island, South Carolina-based Palmetto Heritage Bancshares, Inc. (Palmetto Heritage) and its subsidiary, Palmetto Heritage Bank & Trust, into FCB. Under the terms of the agreement, cash consideration of $135.00 per share was paid to the shareholders of Palmetto Heritage for each share of Palmetto Heritage's common stock with total consideration paid of $30.4 million. The transaction was accounted for under the acquisition method of accounting. The merger allowed FCB to expand its presence and enhance banking efforts in the South Carolina coastal markets. As of September 30, 2018, Palmetto Heritage reported $164.9 million in consolidated assets, $136.4 million in loans and $123.1 million in deposits.

Capital Commerce Bancorp, Inc.

On October 2, 2018, FCB completed the merger of Milwaukee, Wisconsin-based Capital Commerce Bancorp, Inc. (Capital Commerce) and its subsidiary, Securant Bank & Trust, into FCB. Under the terms of the agreement, cash consideration of $4.75 per share was paid to the shareholders of Capital Commerce for each share of Capital Commerce's common stock totaling approximately $28.1 million. The transaction was accounted for under the acquisition method of accounting. The merger allowed FCB to expand its presence and enhance banking efforts in the Milwaukee market. As of September 30, 2018, Capital Commerce reported $222.3 million in consolidated assets, $189.6 million in loans and $171.9 million in deposits.

HomeBancorp, Inc.

On May ~~5, 2017,~~1, 2018, FCB ~~entered~~completed the merger of Tampa, Florida-based HomeBancorp, Inc. (HomeBancorp) and its subsidiary, HomeBanc, into anFCB. Under the terms of the merger agreement, ~~with~~cash consideration of $15.03 was paid to the ~~FDIC, as Receiver,~~shareholders of HomeBancorp for each share of HomeBancorp's common stock and total consideration was $112.7 million. The merger allowed FCB to ~~purchase certain assets~~expand its footprint in Florida by entering into two new markets in Tampa and ~~assume certain liabilities of Guaranty Bank (Guaranty) of Milwaukee, Wisconsin. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.~~Orlando.

The ~~Guaranty~~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 ~~$875.1~~$842.7 million, including ~~$574.6~~$550.6 million in non-purchased ~~credit-impaired~~credit impaired (non-PCI) loans, ~~$114.5~~$15.6 million in purchased ~~credit-impaired~~credit impaired (PCI) loans and $9.9 million in a core deposit ~~intangibles.~~intangible. Liabilities assumed were ~~$982.7~~$787.7 million, of which ~~$982.3~~$619.6 million were deposits. ~~The total gain on~~As a result of the transaction, ~~was $122.7~~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 ~~is included in noninterest income in the Consolidated Statements of Income.~~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).

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 as of the acquisition date.~~values.


(Dollars in thousands)	As recorded by FCB			As recorded by FCB
Purchase Price						$	112,657
Assets
Cash and due from banks	$	48,824		$	6,359
Overnight investments	94,134			10,393
Investment securities	12,140			200,918
Loans held for sale				791
Loans	689,086			566,173
Premises and equipment	8,603			6,542
Other real estate owned	55			2,135
Income earned not collected	6,720			2,717
Intangible assets	9,870			13,206
Other assets	5,693			33,459
Total assets acquired	875,125			842,693
Liabilities
Deposits	982,307			619,589
Short-term borrowings				108,973
Accrued interest payable				1,020
Long-term obligations				52,944
Other liabilities	440			5,126
Total liabilities assumed	982,747			$	787,652
Fair value of net liabilities assumed	(107,622		)
Cash received from FDIC	230,342
Due from FDIC	8
Gain on acquisition of Guaranty	$	122,728
Fair value of net assets assumed						55,041
Goodwill recorded for HomeBancorp						$	57,616

Merger-related expenses of ~~$562~~$210 thousand and ~~$7.2~~$1.9 million ~~from the Guaranty transaction~~ were recorded in the Consolidated Statements of Income for the three and nine months ended September 30, ~~2017, respectively.~~2018. Loan-related interest income generated from ~~Guaranty~~HomeBancorp was approximately ~~$8.5~~$6.8 million for the three months ended September 30, ~~2017~~2018 and ~~$13.5~~$11.8 million since the acquisition date.

~~Based on such credit factors as past due status, nonaccrual status, loan-to-value~~ The ongoing contributions of this transaction to BancShares' financial statements is not considered material, and ~~credit scores, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (included in PCI loans), and loans that do~~therefore pro forma financial data is 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.

~~for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.~~

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

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

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

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

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

NOTE C - INVESTMENTS

The amortized cost and fair value of investment securities classified as available for sale and held to maturity at September 30, ~~2017~~2018 and December 31, ~~2016, are~~2017, were as follows:


	September 30, 2017								September 30, 2018
(Dollars in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value		Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,619,343	$	—	$	3,019	$	1,616,324	$	1,509,432	$	—	$	3,998	$	1,505,434
Government agency									127,911		108		474		127,545
Mortgage-backed securities	5,240,922		3,256		43,837		5,200,341		3,004,219		891		85,314		2,919,796
Equity securities	82,314		31,336		—		113,650
Corporate bonds	54,412		471		10		54,873		119,717		413		197		119,933
Other	7,638		225		174		7,689		4,553		90		—		4,643
Total investment securities available for sale	$	7,004,629	$	35,288	$	47,040	$	6,992,877	$	4,765,832	$	1,502	$	89,983	$	4,677,351

	December 31, 2016								December 31, 2017
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value		Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury	$	1,650,675	$	579	$	935	$	1,650,319	$	1,658,410	$	—	$	546	$	1,657,864
Government agency	40,291		107		—		40,398		8,695		15		40		8,670
Mortgage-backed securities	5,259,466		2,809		86,850		5,175,425		5,419,379		1,529		80,152		5,340,756
Equity securities	71,873		11,634		—		83,507		75,471		29,737		—		105,208
Corporate bonds	49,367		195		—		49,562		59,414		557		8		59,963
Other	7,615		—		246		7,369		7,645		256		182		7,719
Total investment securities available for sale	$	7,079,287	$	15,324	$	88,031	$	7,006,580	$	7,229,014	$	32,094	$	80,928	$	7,180,180

	September 30, 2017								September 30, 2018
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value		Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities held to maturity
Mortgage-backed securities	$	78	$	6	$	—	$	84	$	2,253,416	$	441	$	15,193	$	2,238,664

	December 31, 2016								December 31, 2017
	Cost		Gross unrealized gains		Gross unrealized losses		Fair value		Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities held to maturity
Mortgage-backed securities	$	98	$	6	$	—	$	104	$	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 September 30, 2018 and December 31, 2017, we had $109.9 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 marketable equity securities ~~and corporate bonds~~ represent positions in securities of other financial institutions. Other ~~includes~~ investments ininclude trust preferred securities of financial institutions. BancShares holds approximately 298,000 shares of Visa Class B common stock. BancShares' Visa Class B shares are not considered to have a readily determinable fair value and are included in the Consolidated Balance Sheet at $0 fair value.

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.~~

balances, while repayments of certain corporate bonds are subject to call provisions that can be exercised by the issuer at their discretion.


	September 30, 2017				December 31, 2016				September 30, 2018				December 31, 2017
(Dollars in thousands)	Cost		Fair value		Cost		Fair value		Cost		Fair value		Cost		Fair value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less	$	749,215	$	748,157	$	842,798	$	842,947	$	1,260,166	$	1,256,660	$	808,768	$	808,301
One through five years	872,243		870,507		848,168		847,770		249,267		248,775		849,642		849,563
Five through 10 years	54,412		54,873		49,367		49,562		119,717		119,932		59,414		59,963
Over 10 years	5,523		5,349		7,615		7,369		4,552		4,643		7,645		7,719
Government agency									127,911		127,545		8,695		8,670
Mortgage-backed securities	5,240,922		5,200,341		5,259,466		5,175,425		3,004,219		2,919,796		5,419,379		5,340,756
Equity securities	82,314		113,650		71,873		83,507		—		—		75,471		105,208
Total investment securities available for sale	$	7,004,629	$	6,992,877	$	7,079,287	$	7,006,580	$	4,765,832	$	4,677,351	$	7,229,014	$	7,180,180
Investment securities held to maturity
Mortgage-backed securities held to maturity	$	78	$	84	$	98	$	104	$	2,253,416	$	2,238,664	$	76	$	81

~~For each period presented, realized~~There were no gross gains or losses on sales of investment securities available for sale for the three or nine months ended September 30, 2018. Gross gains ~~(losses) included~~on sales of investment securities available for sale was $1.3 million for the ~~following:~~three months ended September 30, 2017. There were no gross losses on sales of investment securities available for sale during this period. Gross gains and gross losses on sales of investment securities available for sale were $4.7 million and $29 thousand, respectively for the nine months ended September 30, 2017.

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

The following table provides the realized and unrealized gains or losses on marketable equity securities for the three and nine months ended September 30, 2017.



(Dollars in thousands)	Three months ended September 30, 2018		Nine months ended September 30, 2018
Marketable equity securities gains, net	$	3,854	$	9,265
Less net gains recognized on marketable equity securities sold	946		1,181
Unrealized gains recognized on marketable equity securities held	$	2,908	$	8,084

The following table provides information regarding securities with unrealized losses as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	September 30, 2017												September 30, 2018
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Investment securities available for sale:
U.S. Treasury	$	1,616,324	$	3,019	$	—	$	—	$	1,616,324	$	3,019	$	1,495,438	$	3,996	$	9,996	$	2	$	1,505,434	$	3,998
Government agency													103,883		432		2,707		42		106,590		474
Mortgage-backed securities	3,989,074		38,441		406,480		5,396		4,395,554		43,837		1,228,345		24,796		1,498,593		60,518		2,726,938		85,314
Corporate bonds	5,025		10				—		5,025		10		18,715		173		5,000		24		23,715		197
Other	5,349		174		—		—		5,349		174
Total	$	5,615,772	$	41,644	$	406,480	$	5,396	$	6,022,252	$	47,040	$	2,846,381	$	29,397	$	1,516,296	$	60,586	$	4,362,677	$	89,983
Investment securities held to maturity:
Mortgage-backed securities													$	2,124,316	$	14,907	$	10,549	$	286	$	2,134,865	$	15,193

	December 31, 2016												December 31, 2017
	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		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	$	1,408,166	$	345	$	249,698	$	201	$	1,657,864	$	546
Government agency													848		12		2,527		28		3,375		40
Mortgage-backed securities	4,442,700		82,161		362,351		4,689		4,805,051		86,850		2,333,254		20,911		2,723,406		59,241		5,056,660		80,152
Corporate bonds													5,025		8		—		—		5,025		8
Other	7,369		246		—		—		7,369		246		5,349		182		—		—		5,349		182
Total	$	5,257,891	$	83,342	$	362,351	$	4,689	$	5,620,242	$	88,031	$	3,752,642	$	21,458	$	2,975,631	$	59,470	$	6,728,273	$	80,928

~~Investment~~

As of September 30, 2018, there were 185 investment securities ~~with an aggregate fair value of $406.5 million and $362.4 million~~available for sale that had continuous ~~unrealized~~ losses for more than 12 months ~~with a corresponding aggregate unrealized loss~~ of ~~$5.4 million and $4.7 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, all 55 of these investments~~which 183 are government sponsored enterprise-issued mortgage-backed ~~securities.~~securities or government agency securities, 1 is a U.S. Treasury security 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 September 30, 2018.

None of the unrealized losses identified as of September 30, ~~2017~~2018 or December 31, ~~2016~~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 ~~investment~~debt securities were purchased. ~~For all periods presented,~~ BancShares ~~had~~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.

~~Investment~~Debt securities having an aggregate carrying value of ~~$4.51~~$3.53 billion at September 30, ~~2017~~2018 and ~~$4.55~~$4.59 billion at December 31, ~~2016~~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 ~~purchased credit-impaired (PCI)~~non-PCI or ~~non-PCI. Non-PCI~~PCI. Loans that are originated by FCB and 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~~are performing under their contractual obligations at acquisition are Non-PCI. Loans that ~~all required payments will not be collected~~show evidence of deterioration in ~~accordance with contractual terms~~credit quality at acquisition 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~~PCI. Acquired ~~with Deteriorated Credit Quality. PCI~~ loans are recorded at fair value at the date of ~~acquisition. No~~acquisition, with no corresponding 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.losses.

~~BancShares reports PCI and~~The non-PCI ~~loan portfolios separately, and each~~ portfolio is ~~further~~ divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

Commercial – Commercial ~~loans~~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 September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development	$	626,887	$	649,157	$	679,203	$	669,215
Commercial mortgage	9,510,158		9,026,220		10,486,372		9,729,022
Other commercial real estate	434,736		351,291		471,532		473,433
Commercial and industrial	2,654,898		2,567,501		3,189,337		2,730,407
Lease financing	866,804		826,270		616,951		894,801
Other	322,216		340,264		296,988		302,176
Total commercial loans	14,415,699		13,760,703		15,740,383		14,799,054
Noncommercial:
Residential mortgage	3,467,978		2,889,124		4,073,235		3,523,786
Revolving mortgage	2,692,558		2,601,344		2,570,096		2,701,525
Construction and land development	227,184		231,400		241,436		248,289
Consumer	1,511,487		1,446,138		1,623,179		1,561,173
Total noncommercial loans	7,899,207		7,168,006		8,507,946		8,034,773
Total non-PCI loans and leases	22,314,906		20,928,709		24,248,329		22,833,827
PCI loans:
Commercial:
Construction and land development	17,406		20,766
Commercial mortgage	393,557		453,013
Other commercial real estate	17,771		12,645
Commercial and industrial	7,064		11,844
Other	922		1,702
Total commercial loans	436,720		499,970
Noncommercial:
Residential mortgage	327,263		268,777
Revolving mortgage	67,847		38,650
Consumer	2,337		1,772
Total noncommercial loans	397,447		309,199
Total PCI loans	834,167		809,169		638,018		762,998
Total loans and leases	$	23,149,073	$	21,737,878	$	24,886,347	$	23,596,825

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

~~At September 30, 2017, $8.61~~2018, $9.07 billion in noncovered loans with a lendable collateral value of ~~$5.94~~$6.34 billion were used to secure ~~$835.2~~$264.7 million in Federal Home Loan Bank (FHLB) of Atlanta advances, resulting in additional borrowing capacity of ~~$5.10~~$6.08 billion. At December 31, ~~2016, $8.26~~2017, $8.75 billion in noncovered loans with a lendable collateral value of ~~$5.50~~$6.08 billion were used to secure ~~$660.2~~$835.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of ~~$4.84~~$5.24 billion. At September 30, ~~2017, $2.74~~2018, $2.91 billion in noncovered loans with a lendable collateral value of ~~$2.05~~$2.20 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). ~~There~~At December 31, 2017, $2.77 billion in noncovered loans with a lendable collateral value of $2.08 billion were ~~no loans~~ used to secure additional borrowing capacity at the ~~FRB at December 31, 2016.~~

Net deferred fees on originated non-PCI loans and leases, including unearned income and unamortized costs, fees, premiums and discounts, were $1.9 million and $6.7 million at September 30, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Guaranty, Cordia Bancorp Inc. (Cordia) and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $15.6 million, $3.1 million and $19.9 million at September 30, 2017, respectively. At December 31, 2016, the unamortized discount related to purchased non-PCI loans and leases from the Cordia and Bancorporation acquisitions was $4.2 million and $27.4 million, respectively. During the three months ended September 30, 2017 and September 30, 2016, accretion income on non-PCI loans and leases was $4.2 million and $3.6 million, respectively. During the nine months ended September 30, 2017 and September 30, 2016, accretion income on non-PCI loans and leases was $10.2 million and $9.7 million, respectively.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 $46.1 million and $51.2 million at September 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. ~~Loans~~

During the three and nine months ended September 30, 2018, total proceeds from sales of loans held for sale ~~totaled $70.8~~were $165.9 million at

~~September 30, 2017. During~~and $468.7 million, respectively, and there were no transfers to loans held for sale from the ~~third quarter of 2017, certain~~ residential mortgage portfolio for either period. For the three months ended September 30, 2017, total proceeds from sales of loans held for sale were $307.4 million of which $130.2 million in sales were ~~sold~~transferred to loans held for sale from the residential mortgage portfolio, resulting in a gain of $843 thousand. ~~During~~For the nine months ended September 30, 2017, ~~$162.7~~total proceeds from sales of loans held for sale were $649.5 million of ~~certain~~which $162.5 million in sales were transferred to loans held for sale from the residential mortgage portfolio, ~~loans were sold,~~ resulting in a gain of $1.0 million.

Net deferred fees on originated non-PCI loans and leases, including unearned income as well as unamortized costs and fees, were $196 thousand and $1.7 million at September 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 $6.7 million, $11.4 million, $1.5 million and $13.3 million, respectively, at September 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 September 30, 2018 and September 30, 2017, accretion income on purchased non-PCI loans and leases was $2.9 million and $4.2 million, respectively. During the nine months ended September 30, 2018 and September 30, 2017, accretion income on purchased non-PCI loans and leases was $9.9 million and $10.2 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. ~~Each commercial loan is~~Commercial loans are evaluated ~~annually~~periodically with more frequent ~~evaluation of~~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 noany potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at September 30, ~~2017~~2018 and December 31, ~~2016~~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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 by credit quality indicator are provided below:


	September 30, 2017														September 30, 2018
(Dollars in thousands)	Non-PCI commercial loans and leases														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		Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	616,505	$	9,321,377	$	430,282	$	2,448,998	$	855,877	$	317,991	$	13,991,030	$	675,138	$	10,287,536	$	466,685	$	2,948,053	$	611,413	$	294,358	$	15,283,183
Special mention	4,128		64,907		1,208		36,707		3,833		1,159		111,942		1,333		95,843		2,311		35,171		2,382		1,038		138,078
Substandard	6,193		123,327		3,246		21,215		6,824		3,066		163,871		2,566		101,384		2,536		25,489		3,156		1,592		136,723
Doubtful	61		292		—		47		—		—		400		—		969		—		390		—		—		1,359
Ungraded	—		255		—		147,931		270		—		148,456		166		640		—		180,234		—		—		181,040
Total	$	626,887	$	9,510,158	$	434,736	$	2,654,898	$	866,804	$	322,216	$	14,415,699	$	679,203	$	10,486,372	$	471,532	$	3,189,337	$	616,951	$	296,988	$	15,740,383

	December 31, 2016														December 31, 2017
	Non-PCI commercial loans and leases														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		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	$	665,197	$	9,521,019	$	468,942	$	2,511,307	$	883,779	$	298,064	$	14,348,308
Special mention	2,236		76,084		1,433		22,804		2,675		1,020		106,252		691		78,643		1,260		44,130		4,340		2,919		131,983
Substandard	1,683		126,863		2,349		17,870		5,415		3,413		157,593		3,327		128,848		3,224		18,617		6,585		1,193		161,794
Doubtful	6		334		—		8		—		—		348		—		262		—		385		—		—		647
Ungraded	—		1,500		—		124,160		172		—		125,832		—		250		7		155,968		97		—		156,322
Total	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	13,760,703	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	14,799,054


	September 30, 2017										September 30, 2018
	Non-PCI noncommercial loans and leases										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		Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	3,424,113	$	2,668,131	$	223,849	$	1,498,399	$	7,814,492	$	4,027,341	$	2,539,576	$	239,601	$	1,608,644	$	8,415,162
30-59 days past due	17,635		11,606		1,026		7,671		37,938		24,558		14,378		151		7,911		46,998
60-89 days past due	7,460		2,796		497		2,793		13,546		5,189		5,354		177		3,621		14,341
90 days or greater past due	18,770		10,025		1,812		2,624		33,231		16,147		10,788		1,507		3,003		31,445
Total	$	3,467,978	$	2,692,558	$	227,184	$	1,511,487	$	7,899,207	$	4,073,235	$	2,570,096	$	241,436	$	1,623,179	$	8,507,946

	December 31, 2016										December 31, 2017
	Non-PCI noncommercial loans and leases										Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total 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	$	3,465,935	$	2,674,390	$	239,648	$	1,546,473	$	7,926,446
30-59 days past due	27,760		14,290		1,139		6,775		49,964		27,886		13,428		7,154		8,812		57,280
60-89 days past due	7,039		2,698		598		2,779		13,114		8,064		3,485		108		2,893		14,550
90 days or greater past due	15,280		7,414		557		1,926		25,177		21,901		10,222		1,379		2,995		36,497
Total	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	7,168,006	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	8,034,773

PCI loans outstanding at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 by credit quality indicator are provided below:


	September 30, 2017												September 30, 2018		December 31, 2017
(Dollars in thousands)	PCI commercial loans												PCI commercial loans
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	6,781	$	202,496	$	14,323	$	4,464	$	274	$	228,338	$	156,092	$	201,332
Special mention	730		57,887		379		560		393		59,949		52,204		63,257
Substandard	7,651		123,909		2,291		1,707		255		135,813		103,986		117,068
Doubtful	2,244		9,265		778		297		—		12,584		4,701		11,735
Ungraded	—		—		—		36		—		36		31		27
Total	$	17,406	$	393,557	$	17,771	$	7,064	$	922	$	436,720	$	317,014	$	393,419

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

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

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



	September 30, 2018		December 31, 2017
	PCI noncommercial loans
(Dollars in thousands)
Current	$	282,965	$	318,632
30-59 days past due	10,138		13,343
60-89 days past due	5,968		6,212
90 days or greater past due	21,933		31,392
Total	$	321,004	$	369,579

The aging of the outstanding non-PCI loans and leases, by class, at September 30, ~~2017~~2018 and December 31, ~~2016 is~~2017 are provided in the ~~table~~tables below.

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


	September 30, 2017												September 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		30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	1,075	$	346	$	122	$	1,543	$	625,344	$	626,887	$	708	$	186	$	68	$	962	$	678,241	$	679,203
Commercial mortgage	7,661		2,272		10,447		20,380		9,489,778		9,510,158		15,768		2,830		5,326		23,924		10,462,448		10,486,372
Other commercial real estate	52		—		680		732		434,004		434,736		—		—		—		—		471,532		471,532
Commercial and industrial	10,322		2,459		1,217		13,998		2,640,900		2,654,898		8,078		2,592		2,140		12,810		3,176,527		3,189,337
Lease financing	1,752		932		833		3,517		863,287		866,804		3,090		102		928		4,120		612,831		616,951
Residential mortgage	17,635		7,460		18,770		43,865		3,424,113		3,467,978		24,558		5,189		16,147		45,894		4,027,341		4,073,235
Revolving mortgage	11,606		2,796		10,025		24,427		2,668,131		2,692,558		14,378		5,354		10,788		30,520		2,539,576		2,570,096
Construction and land development - noncommercial	1,026		497		1,812		3,335		223,849		227,184		151		177		1,507		1,835		239,601		241,436
Consumer	7,671		2,793		2,624		13,088		1,498,399		1,511,487		7,911		3,621		3,003		14,535		1,608,644		1,623,179
Other	—		—		155		155		322,061		322,216		141		63		—		204		296,784		296,988
Total non-PCI loans and leases	$	58,800	$	19,555	$	46,685	$	125,040	$	22,189,866	$	22,314,906	$	74,783	$	20,114	$	39,907	$	134,804	$	24,113,525	$	24,248,329

	December 31, 2016												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		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	$	491	$	442	$	357	$	1,290	$	667,925	$	669,215
Commercial mortgage	11,592		2,773		10,329		24,694		9,001,526		9,026,220		12,288		2,375		6,490		21,153		9,707,869		9,729,022
Other commercial real estate	310		—		—		310		350,981		351,291		107		—		75		182		473,251		473,433
Commercial and industrial	7,918		2,102		1,051		11,071		2,556,430		2,567,501		6,694		1,510		1,266		9,470		2,720,937		2,730,407
Lease financing	1,175		444		863		2,482		823,788		826,270		2,983		167		973		4,123		890,678		894,801
Residential mortgage	27,760		7,039		15,280		50,079		2,839,045		2,889,124		27,886		8,064		21,901		57,851		3,465,935		3,523,786
Revolving mortgage	14,290		2,698		7,414		24,402		2,576,942		2,601,344		13,428		3,485		10,222		27,135		2,674,390		2,701,525
Construction and land development - noncommercial	1,139		598		557		2,294		229,106		231,400		7,154		108		1,379		8,641		239,648		248,289
Consumer	6,775		2,779		1,926		11,480		1,434,658		1,446,138		8,812		2,893		2,995		14,700		1,546,473		1,561,173
Other	72		—		198		270		339,994		340,264		188		6		133		327		301,849		302,176
Total non-PCI loans and leases	$	72,876	$	18,472	$	37,904	$	129,252	$	20,799,457	$	20,928,709	$	80,031	$	19,050	$	45,791	$	144,872	$	22,688,955	$	22,833,827

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 for non-PCI loans and leases, were as follows:


	September 30, 2017				December 31, 2016				September 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		Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Non-PCI loans and leases:
Construction and land development - commercial	$	704	$	—	$	606	$	—	$	382	$	55	$	1,040	$	—
Commercial mortgage	23,992		1,395		26,527		482		19,009		—		22,625		397
Other commercial real estate	934		129		86		—		91		—		916		—
Commercial and industrial	3,727		198		4,275		440		3,533		439		2,884		428
Lease financing	1,622		4		359		683		1,105		—		1,992		—
Residential mortgage	35,355		—		32,470		37		33,796		—		38,942		—
Revolving mortgage	18,883		—		14,308		—		23,231		—		19,990		—
Construction and land development - noncommercial	2,601		—		1,121		—		1,912		—		1,989		—
Consumer	2,058		1,723		2,236		1,076		2,230		2,146		1,992		2,153
Other	188		—		319		—		130		—		164		—
Total non-PCI loans and leases	$	90,064	$	3,449	$	82,307	$	2,718	$	85,419	$	2,640	$	92,534	$	2,978

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

Purchased non-PCI loans and leases

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


(Dollars in thousands)
Contractually required payments	$	703,916	$	710,876
Cash flows not expected to be collected	16,073
Fair value of loans at acquisition	574,553
Contractual cash flows not expected to be collected			9,845
Fair value at acquisition date			550,618

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


(Dollars in thousands)
Commercial:
Construction and land development			$	525
Commercial mortgage	$	850	188,688
Other commercial real estate			55,183
Commercial and industrial	583		7,931
Other	183,816
Total commercial loans	185,249		252,327
Noncommercial:
Residential mortgage	309,612		296,273
Revolving mortgage	54,780		51
Consumer	24,912		1,967
Total noncommercial loans	389,304		298,291
Total non-PCI loans and leases	$	574,553
Total non-PCI loans			$	550,618

Purchased credit-impaired loans ~~(PCI) loans~~

The following table relates to PCI loans acquired in the ~~HCB and Guaranty acquisitions~~HomeBancorp transaction and summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected and the fair value of PCI loans at the acquisition ~~dates.~~date.


(Dollars in thousands)	HCB		Guaranty
Contractually required payments	$	111,250	$	158,456	$	26,651
Cash flows expected to be collected	101,802		142,000		19,697
Fair value of loans at acquisition	85,149		114,533		15,555

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


(Dollars in thousands)	HCB		Guaranty
Commercial:
Construction and land development	$	7,061	$	55
Commercial mortgage	21,836		644		$	7,815
Other commercial real estate	6,404		—
Commercial and industrial	19,675		2		423
Total commercial loans	54,976		701		8,238
Noncommercial:
Residential mortgage	25,857		80,475		7,317
Revolving mortgage	3,434		33,319
Construction and land development	—		26
Consumer	882		12
Total noncommercial loans	30,173		113,832		7,317
Total PCI loans	$	85,149	$	114,533	$	15,555

The following table provides changes in the carrying value of all ~~purchased credit-impaired~~PCI loans during the nine months ended September 30, ~~2017~~2018 and September 30, ~~2016:~~2017:


(Dollars in thousands)	2017			2016			2018			2017
Balance at January 1	$	809,169		$	950,516		$	762,998		$	809,169
Fair value of acquired loans	199,682			80,690			15,555			199,682
Accretion	59,039			59,066			45,699			59,039
Payments received and other changes, net	(233,723		)	(222,072		)	(186,234		)	(233,723		)
Balance at September 30	$	834,167		$	868,200		$	638,018		$	834,167
Unpaid principal balance at September 30	$	1,293,760		$	1,475,149		$	999,926		$	1,293,760

The carrying value of PCI loans on the cost recovery method was ~~$454 thousand~~$3.7 million at September 30, ~~2017~~2018 and ~~$498 thousand~~$1.1 million at December 31, ~~2016.~~2017. The cost recovery method is applied to loans when the timing of future cash flows ~~is not~~cannot be reasonably ~~estimable~~estimated due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. ~~Cash payments from cost recovery~~The recorded investment of PCI loans ~~are 100 percent applied to principal. After all the principal has been recovered, cash payments are then recorded to interest income.~~on nonaccrual status was $1.5 million and $624 thousand at September 30, 2018 and December 31, 2017, respectively.

During the three months ended September 30, ~~2017~~2018 and September 30, ~~2016,~~2017, accretion income on PCI loans was $13.5 million and $19.2 million, ~~and $17.2 million, respectively~~

~~The following table documents changes to~~respectively. During the ~~amount of accretable yield for the first~~ nine months ofended September 30, 2018 and September 30, 2017, accretion income on PCI loans was $45.7 million and ~~2016.~~$59.0 million, respectively.

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

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

The following table documents changes to the amount of accretable yield for the first nine months of 2018 and 2017.



(Dollars in thousands)	2018			2017
Balance at January 1	$	316,679		$	335,074
Additions from acquisitions	4,142			44,120
Accretion	(45,699		)	(59,039		)
Reclassifications from nonaccretable difference	5,866			16,947
Changes in expected cash flows that do not affect nonaccretable difference	42,214			4,596
Balance at September 30	$	323,202		$	341,698

NOTE E - ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

During the third quarter of 2018, BancShares (“the Company”) enhanced its allowance for loan and lease losses (“ALLL”) methodology. Specifically, the Company updated its credit quality indicators used in the ALLL estimation to aggregate credit quality by borrower classification code and add a facility risk rating which provides additional granularity of risks by collateral type. The enhancement to the ALLL is part of the Company’s planned transition to a dual risk grading process which will be implemented during the fourth quarter of 2018. Significant growth in the Company’s loan portfolios, both organically and through acquisitions, is prompting the need to enhance the credit grading process and provide additional granularity in assessing credit risks. This change in estimate resulted in an immaterial impact to the financial statements, which is reflected in the Allowance for loan and lease losses and Provision for loan and lease losses.

The following tables present the activity in the ALLL for non-PCI loan and lease losses by loan class for the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016:~~2017:


	Three months ended September 30, 2017																																	Three months ended September 30, 2018
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total			Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Non-PCI Loans
Allowance for loan and lease losses:
Balance at July 1	$	33,559		$	49,746		$	3,612		$	51,068		$	6,404		$	3,302		$	15,843		$	22,465		$	1,503		$	27,800		$	215,302		$	23,664		$	44,465		$	3,823		$	57,330		$	3,981		$	4,691		$	17,802		$	21,886		$	4,027		$	30,773		$	212,442
Provision	(5,150		)	(71		)	891			5,621			884			58			531			842			92			4,785			8,483			8,702			(2,870		)	(1,219		)	(9,271		)	4,011			(2,404		)	(1,828		)	465			(1,203		)	7,971			2,354
Charge-offs	(9		)	(39		)	—			(1,275		)	(687		)	(666		)	(604		)	(218		)	—			(4,996		)	(8,494		)	(35		)	(606		)	—			(1,256		)	(850		)	(56		)	(360		)	(759		)	—			(5,525		)	(9,447		)
Recoveries	56			1,446			8			433			3			123			92			228			—			1,203			3,592			136			99			1			494			3			117			128			712			—			1,249			2,939
Balance at September 30	$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883		$	32,467		$	41,088		$	2,605		$	47,297		$	7,145		$	2,348		$	15,742		$	22,304		$	2,824		$	34,468		$	208,288

	Three months ended September 30, 2016																																	Three months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total			Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Balance at July 1	$	17,169		$	71,613		$	2,138		$	43,908		$	5,766		$	1,755		$	16,076		$	16,728		$	1,653		$	19,647		$	196,453		$	33,559		$	49,746		$	3,612		$	51,068		$	6,404		$	3,302		$	15,843		$	22,465		$	1,503		$	27,800		$	215,302
Provision	835			(2,163		)	150			2,954			274			183			531			679			88			3,899			7,430			(5,150		)	(71		)	891			5,621			884			58			531			842			92			4,785			8,483
Charge-offs	(77		)	(461		)	—			(1,198		)	(132		)	—			(328		)	(391		)	—			(3,623		)	(6,210		)	(9		)	(39		)	—			(1,275		)	(687		)	(666		)	(604		)	(218		)	—			(4,996		)	(8,494		)
Recoveries	69			378			13			328			5			170			334			256			—			1,092			2,645			56			1,446			8			433			3			123			92			228			—			1,203			3,592
Balance at September 30	$	17,996		$	69,367		$	2,301		$	45,992		$	5,913		$	2,108		$	16,613		$	17,272		$	1,741		$	21,015		$	200,318		$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883

	Nine months ended September 30, 2017																																	Nine months ended September 30, 2018
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total			Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Balance at January 1	$	28,877		$	48,278		$	3,269		$	50,225		$	5,907		$	3,127		$	14,447		$	21,013		$	1,596		$	28,287		$	205,026		$	24,470		$	45,005		$	4,571		$	53,697		$	6,127		$	4,689		$	15,706		$	22,436		$	3,962		$	31,204		$	211,867
Provision	(242		)	574			1,228			10,181			1,645			299			2,037			2,446			(1		)	11,144			29,311			7,788			(3,369		)	(2,044		)	(4,026		)	3,119			(2,403		)	1,176			1,220			(1,046		)	15,468			15,883
Charge-offs	(499		)	(311		)	(5		)	(7,649		)	(957		)	(853		)	(1,076		)	(1,323		)	—			(14,015		)	(26,688		)	(43		)	(1,111		)	(69		)	(4,725		)	(2,149		)	(98		)	(1,455		)	(2,778		)	(219		)	(16,092		)	(28,739		)
Recoveries	320			2,541			19			3,090			9			244			454			1,181			—			3,376			11,234			252			563			147			2,351			48			160			315			1,426			127			3,888			9,277
Balance at September 30	$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883		$	32,467		$	41,088		$	2,605		$	47,297		$	7,145		$	2,348		$	15,742		$	22,304		$	2,824		$	34,468		$	208,288

	Nine months ended September 30, 2016																																	Nine months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total			Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Lease financing			Other			Residential mortgage			Revolving mortgage			Construction and land development - non- commercial			Consumer			Total
Balance at January 1	$	16,288		$	69,896		$	2,168		$	43,116		$	5,524		$	1,855		$	14,105		$	15,971		$	1,485		$	19,496		$	189,904		$	28,877		$	48,278		$	3,269		$	50,225		$	5,907		$	3,127		$	14,447		$	21,013		$	1,596		$	28,287		$	205,026
Provision	2,069			(1,067		)	(34		)	5,236			337			(109		)	2,794			3,306			253			8,193			20,978			(242		)	574			1,228			10,181			1,645			299			2,037			2,446			(1		)	11,144			29,311
Charge-offs	(639		)	(454		)	—			(3,690		)	(93		)	(22		)	(680		)	(2,507		)	—			(9,868		)	(17,953		)	(499		)	(311		)	(5		)	(7,649		)	(957		)	(853		)	(1,076		)	(1,323		)	—			(14,015		)	(26,688		)
Recoveries	278			992			167			1,330			145			384			394			502			3			3,194			7,389			320			2,541			19			3,090			9			244			454			1,181			—			3,376			11,234
Balance at September 30	$	17,996		$	69,367		$	2,301		$	45,992		$	5,913		$	2,108		$	16,613		$	17,272		$	1,741		$	21,015		$	200,318		$	28,456		$	51,082		$	4,511		$	55,847		$	6,604		$	2,817		$	15,862		$	23,317		$	1,595		$	28,792		$	218,883

The following tables present the allowance for non-PCI loan and lease losses and the recorded investment in loans, by loan class, based on impairment method as of September 30, ~~2017~~2018 and December 31, ~~2016:~~

2017:


	September 30, 2017																						September 30, 2018
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total		Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	91	$	3,916	$	204	$	1,260	$	223	$	—	$	1,907	$	1,784	$	94	$	653	$	10,132	$	296	$	2,983	$	46	$	1,133	$	135	$	18	$	2,791	$	2,759	$	501	$	763	$	11,425
ALLL for loans and leases collectively evaluated for impairment	28,365		47,166		4,307		54,587		6,381		2,817		13,955		21,533		1,501		28,139		208,751		32,171		38,105		2,559		46,164		7,010		2,330		12,951		19,545		2,323		33,705		196,863
Total allowance for loan and lease losses	$	28,456	$	51,082	$	4,511	$	55,847	$	6,604	$	2,817	$	15,862	$	23,317	$	1,595	$	28,792	$	218,883	$	32,467	$	41,088	$	2,605	$	47,297	$	7,145	$	2,348	$	15,742	$	22,304	$	2,824	$	34,468	$	208,288

Loans and leases:
Loans and leases individually evaluated for impairment	$	543	$	71,952	$	1,616	$	9,878	$	1,688	$	522	$	32,127	$	18,830	$	3,660	$	2,226	$	143,042	$	2,175	$	63,412	$	929	$	9,048	$	1,042	$	241	$	42,617	$	28,089	$	4,236	$	2,887	$	154,676
Loans and leases collectively evaluated for impairment	626,344		9,438,206		433,120		2,645,020		865,116		321,694		3,435,851		2,673,728		223,524		1,509,261		22,171,864		677,028		10,422,960		470,603		3,180,289		615,909		296,747		4,030,618		2,542,007		237,200		1,620,292		24,093,653
Total loan and leases	$	626,887	$	9,510,158	$	434,736	$	2,654,898	$	866,804	$	322,216	$	3,467,978	$	2,692,558	$	227,184	$	1,511,487	$	22,314,906	$	679,203	$	10,486,372	$	471,532	$	3,189,337	$	616,951	$	296,988	$	4,073,235	$	2,570,096	$	241,436	$	1,623,179	$	24,248,329

	December 31, 2016																						December 31, 2017
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total		Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Residential mortgage		Revolving mortgage		Construction and land development - non-commercial		Consumer		Total
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	151	$	3,488	$	152	$	1,732	$	75	$	23	$	2,447	$	366	$	109	$	667	$	9,210	$	185	$	3,648	$	209	$	665	$	397	$	—	$	2,733	$	1,085	$	68	$	738	$	9,728
ALLL for loans and leases collectively evaluated for impairment	28,726		44,790		3,117		48,493		5,832		3,104		12,000		20,647		1,487		27,620		195,816		24,285		41,357		4,362		53,032		5,730		4,689		12,973		21,351		3,894		30,466		202,139
Total allowance for loan and lease losses	$	28,877	$	48,278	$	3,269	$	50,225	$	5,907	$	3,127	$	14,447	$	21,013	$	1,596	$	28,287	$	205,026	$	24,470	$	45,005	$	4,571	$	53,697	$	6,127	$	4,689	$	15,706	$	22,436	$	3,962	$	31,204	$	211,867

Loans and leases:
Loans and leases individually evaluated for impairment	$	1,045	$	76,361	$	1,563	$	12,600	$	1,074	$	142	$	31,476	$	7,613	$	2,613	$	1,912	$	136,399	$	788	$	73,655	$	1,857	$	7,974	$	1,914	$	521	$	37,842	$	23,770	$	4,551	$	2,774	$	155,646
Loans and leases collectively evaluated for impairment	648,112		8,949,859		349,728		2,554,901		825,196		340,122		2,857,648		2,593,731		228,787		1,444,226		20,792,310		668,427		9,655,367		471,576		2,722,433		892,887		301,655		3,485,944		2,677,755		243,738		1,558,399		22,678,181
Total loan and leases	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	20,928,709	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	22,833,827

The following tables show the activity in the allowance for PCI loan losses ~~by loan class~~ for the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016.~~2017.


	Three months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total			Three months ended September 30, 2018			Three months ended September 30, 2017
PCI Loans
Allowance for loan and lease losses:
Balance at July 1	$	577		$	6,797		$	354		$	456		$	4,829		$	411		$	72		$	13,496		$	12,423		$	13,496
Provision	(78		)	(15		)	(146		)	(133		)	(184		)	(34		)	53			(537		)	(1,514		)	(537		)
Charge-offs	—			—			—			—			—			—			—			—			—			—
Recoveries	—			—			—			—			—			—			—			—			—			—
Balance at September 30	$	499		$	6,782		$	208		$	323		$	4,645		$	377		$	125		$	12,959		$	10,909		$	12,959

	Three months ended September 30, 2016																								Nine months ended September 30, 2018			Nine months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total
Balance at July 1	$	280		$	5,759		$	616		$	285		$	4,298		$	238		$	79		$	11,555
Provision	74			406			(378		)	101			(134		)	(21		)	29			77
Charge-offs	—			—			—			—			—			—			—			—
Recoveries	—			—			—			—			—			—			—			—
Balance at September 30	$	354		$	6,165		$	238		$	386		$	4,164		$	217		$	108		$	11,632

	Nine months ended September 30, 2017
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total
Balance at January 1	$	483		$	6,423		$	502		$	504		$	4,818		$	956		$	83		$	13,769		$	10,026		$	13,769
Provision	16			359			(294		)	(181		)	(173		)	(579		)	42			(810		)	1,000			(810		)
Charge-offs	—			—			—			—			—			—			—			—			(117		)	—
Recoveries	—			—			—			—			—			—			—			—			—			—
Balance at September 30	$	499		$	6,782		$	208		$	323		$	4,645		$	377		$	125		$	12,959		$	10,909		$	12,959

	Nine months ended September 30, 2016
(Dollars in thousands)	Construction and land development - commercial			Commercial mortgage			Other commercial real estate			Commercial and industrial			Residential mortgage			Revolving mortgage			Consumer and other			Total
Balance at January 1	$	1,082		$	7,838		$	773		$	445		$	5,398		$	523		$	253		$	16,312
Provision	(728		)	(1,508		)	(530		)	(59		)	(863		)	(306		)	(72		)	(4,066		)
Charge-offs	—			(165		)	(5		)	—			(371		)	—			(73		)	(614		)
Recoveries	—			—			—			—			—			—			—			—
Balance at September 30	$	354		$	6,165		$	238		$	386		$	4,164		$	217		$	108		$	11,632

The following table shows the ending balances of PCI loans and related allowance as of September 30, 2018 and December 31, 2017:



(Dollars in thousands)	September 30, 2018		December 31, 2017
ALLL for loans acquired with deteriorated credit quality	$	10,909	$	10,026
Loans acquired with deteriorated credit quality	638,018		762,998

As of September 30, ~~2017~~2018 and December 31, ~~2016, $310.0~~2017, $190.8 million and ~~$359.7~~$279.8 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. ~~The corresponding allowance for loan losses was $13.0 million and $13.8 million, respectively.~~

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

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

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

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

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

The following tables provide information on non-PCI impaired loans and leases ~~exclusive of loans and leases~~individually evaluated ~~collectively as a homogeneous group,~~ as of September 30, ~~2017~~2018 and December 31, ~~2016 including interest income recognized in the period during which the loans and leases were considered impaired.~~2017.


	September 30, 2017										September 30, 2018
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded		With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	526	$	17	$	543	$	648	$	91	$	2,175	$	—	$	2,175	$	2,600	$	296
Commercial mortgage	38,286		33,666		71,952		76,859		3,916		34,860		28,552		63,412		70,501		2,983
Other commercial real estate	1,254		362		1,616		1,939		204		199		730		929		1,104		46
Commercial and industrial	7,433		2,445		9,878		11,568		1,260		6,573		2,475		9,048		14,050		1,133
Lease financing	1,685		3		1,688		1,688		223		755		287		1,042		1,894		135
Other	—		522		522		522		—		241		—		241		246		18
Residential mortgage	18,840		13,287		32,127		33,712		1,907		40,128		2,489		42,617		45,528		2,791
Revolving mortgage	9,046		9,784		18,830		20,403		1,784		24,953		3,136		28,089		30,463		2,759
Construction and land development - noncommercial	781		2,879		3,660		4,365		94		4,236		—		4,236		4,527		501
Consumer	1,527		699		2,226		2,445		653		2,799		88		2,887		3,198		763
Total non-PCI impaired loans and leases	$	79,378	$	63,664	$	143,042	$	154,149	$	10,132	$	116,919	$	37,757	$	154,676	$	174,111	$	11,425

	December 31, 2016										December 31, 2017
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded		With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	1,002	$	43	$	1,045	$	1,172	$	151	$	788	$	—	$	788	$	1,110	$	185
Commercial mortgage	42,875		33,486		76,361		82,658		3,488		39,135		34,520		73,655		78,936		3,648
Other commercial real estate	1,279		284		1,563		1,880		152		1,351		506		1,857		2,267		209
Commercial and industrial	8,920		3,680		12,600		16,637		1,732		6,326		1,648		7,974		10,475		665
Lease financing	1,002		72		1,074		1,074		75		1,890		24		1,914		2,571		397
Other	142		—		142		233		23		—		521		521		521		—
Residential mortgage	20,269		11,207		31,476		32,588		2,447		19,135		18,707		37,842		39,946		2,733
Revolving mortgage	1,825		5,788		7,613		8,831		366		5,875		17,895		23,770		25,941		1,085
Construction and land development - noncommercial	645		1,968		2,613		3,030		109		592		3,959		4,551		5,224		68
Consumer	1,532		380		1,912		2,086		667		2,107		667		2,774		3,043		738
Total non-PCI impaired loans and leases	$	79,491	$	56,908	$	136,399	$	150,189	$	9,210	$	77,199	$	78,447	$	155,646	$	170,034	$	9,728

Non-PCI impaired loans less than $500,000 that are collectively evaluated were $43.8 million and $49.1 million at September 30, 2018 and December 31, 2017, respectively.

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016:~~2017:


	Three months ended September 30, 2017				Three months ended September 30, 2016				Three months ended September 30, 2018				Three months ended September 30, 2017
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized		Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	754	$	8	$	3,297	$	44	$	2,101	$	27	$	754	$	8
Commercial mortgage	73,099		653		78,994		642		63,752		583		73,099		653
Other commercial real estate	1,720		8		1,571		13		950		10		1,720		8
Commercial and industrial	9,501		96		9,676		84		8,278		83		9,501		96
Lease financing	1,752		12		1,169		14		1,032		9		1,752		12
Other	557		8		569		6		205		1		557		8
Residential mortgage	31,290		228		28,008		214		42,601		330		31,290		228
Revolving mortgage	18,066		150		7,373		48		27,503		234		18,066		150
Construction and land development - noncommercial	3,676		35		408		5		3,190		42		3,676		35
Consumer	2,233		27		1,507		20		2,769		31		2,233		27
Total non-PCI impaired loans and leases	$	142,648	$	1,225	$	132,572	$	1,090	$	152,381	$	1,350	$	142,648	$	1,225

	Nine months ended September 30, 2017				Nine months ended September 30, 2016				Nine months ended September 30, 2018				Nine months ended September 30, 2017
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized		Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Construction and land development - commercial	$	926	$	31	$	3,232	$	125	$	1,580	$	55	$	926	$	31
Commercial mortgage	74,177		1,946		83,794		2,024		68,043		1,953		74,177		1,946
Other commercial real estate	1,610		25		957		25		1,336		33		1,610		25
Commercial and industrial	10,396		298		11,722		319		7,796		235		10,396		298
Lease financing	1,744		40		1,347		49		1,704		34		1,744		40
Other	396		15		818		30		90		1		396		15
Residential mortgage	33,673		753		25,497		564		41,124		903		33,673		753
Revolving mortgage	11,506		269		6,701		120		26,228		657		11,506		269
Construction and land development - noncommercial	3,155		101		459		16		3,607		134		3,155		101
Consumer	2,062		74		1,398		58		2,644		87		2,062		74
Total non-PCI impaired loans and leases	$	139,645	$	3,552	$	135,925	$	3,330	$	154,152	$	4,092	$	139,645	$	3,552

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (TDRs). In general, the modification or restructuring of a loan is considered a TDR if, for economic reasons or legal reasons related to a borrower's financial difficulties, a concession is granted to the borrower that creditors would not otherwise ~~grant.~~consider. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. ~~In accordance~~The majority of TDRs are included in the special mention, substandard or doubtful credit quality indicators, which results in more elevated loss expectations when projecting the expected cash flows that are used to determine the allowance for loan losses associated with ~~GAAP, acquired loans accounted~~these loans. The lower the credit quality indicator, the lower the estimated expected cash flows and the greater the allowance recorded. All TDRs are individually evaluated for ~~under ASC 310-30,~~ ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality,~~ ~~are not initially considered to be TDRs, but can be classified as such if a modification is made subsequent to acquisition. Subsequent modifications~~impairment through review of ~~a PCI loan accounted for in a pool that would otherwise meet the definition~~collateral values or analysis of ~~a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from the scope of TDR accounting.~~cash flows at least annually.

The following table provides a summary of total TDRs by accrual status. Total TDRs included $18.4 million of PCI TDRs at both September 30, 2018 and December 31, 2017.


	September 30, 2017						December 31, 2016						September 30, 2018						December 31, 2017
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial loans
Construction and land development - commercial	$	2,824	$	334	$	3,158	$	3,292	$	308	$	3,600	$	2,020	$	330	$	2,350	$	4,089	$	483	$	4,572
Commercial mortgage	63,027		16,056		79,083		70,263		14,435		84,698		55,362		12,302		67,664		62,358		15,863		78,221
Other commercial real estate	702		834		1,536		1,635		80		1,715		899		30		929		1,012		788		1,800
Commercial and industrial	7,155		1,625		8,780		9,193		1,436		10,629		7,762		1,557		9,319		7,598		910		8,508
Lease financing	775		913		1,688		882		192		1,074		628		319		947		722		1,048		1,770
Other	522		—		522		64		78		142		119		123		242		521		—		521
Total commercial TDRs	75,005		19,762		94,767		85,329		16,529		101,858		66,790		14,661		81,451		76,300		19,092		95,392
Noncommercial
Residential mortgage	31,398		7,286		38,684		34,012		5,117		39,129		38,169		8,723		46,892		34,067		9,475		43,542
Revolving mortgage	15,124		3,347		18,471		6,346		1,431		7,777		20,577		7,340		27,917		17,673		5,180		22,853
Construction and land development - noncommercial	234		—		234		240		—		240		2,673		151		2,824		—		—		—
Consumer and other	1,903		323		2,226		1,603		309		1,912		2,402		485		2,887		2,351		423		2,774
Total noncommercial TDRs	48,659		10,956		59,615		42,201		6,857		49,058		63,821		16,699		80,520		54,091		15,078		69,169
Total TDRs	$	123,664	$	30,718	$	154,382	$	127,530	$	23,386	$	150,916	$	130,611	$	31,360	$	161,971	$	130,391	$	34,170	$	164,561

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

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

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

The following ~~tables provide~~table provides the types of ~~non-PCI~~ TDRs made during the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016,~~2017, as well as a summary of loans that were modified as a TDR during the twelve month periods ended September 30, ~~2017~~2018 and September 30, ~~2016~~2017 that subsequently defaulted during the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016.~~2017. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.

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

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

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

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



	Three months ended September 30, 2018						Three months ended September 30, 2017
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Loans and leases
Interest only	1	$	300	—	$	—	3	$	696	—	$	—
Loan term extension	9	2,565		2	327		6	156		—	—
Below market interest rate	56	7,109		32	2,832		63	6,859		27	1,956
Discharged from bankruptcy	38	1,833		16	607		43	5,469		40	2,315
Total restructurings	104	$	11,807	50	$	3,766	115	$	13,180	67	$	4,271

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

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

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

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

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



	Nine months ended September 30, 2018						Nine months ended September 30, 2017
	All restructurings			Restructurings with payment default			All restructurings			Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end
Loans and leases
Interest only	3	$	1,136	2	$	836	6	$	1,180	1	$	328
Loan term extension	32	4,414		9	943		31	2,787		1	31
Below market interest rate	211	24,245		82	6,098		238	19,526		75	5,332
Discharged from bankruptcy	139	7,360		69	3,595		151	9,681		78	4,802
Total restructurings	385	$	37,155	162	$	11,472	426	$	33,174	155	$	10,493

For the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016,~~2017, the pre-modification and post-modification outstanding recorded investments of loans modified as TDRs were not materially different.

NOTE F - OTHER REAL ESTATE OWNED (OREO)

The following table explains changes in other real estate owned during the nine months ended September 30, ~~2017~~2018 and September 30, ~~2016.~~2017.

(Dollars in thousands) Covered Noncovered Total
Balance at December 31, 2015 $ 6,817
$ 58,742
$ 65,559
Additions 4,851
26,666
31,517
Additions acquired in the Cordia Bancorp, Inc. acquisition —
1,170
1,170
Additions acquired in the First CornerStone Bank acquisition —
375
375
Sales (781 ) (23,402 ) (24,183 )
Write-downs (580 ) (4,894 ) (5,474 )
Transfers⁽¹⁾
(9,716 ) 9,716
—
Balance at September 30, 2016 $ 591
$ 68,373
$ 68,964

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

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



(Dollars in thousands)	Total
Balance at December 31, 2016	$	61,231
Additions	26,926
Additions acquired in the Guaranty Bank acquisition	55
Sales	(31,072		)
Write-downs	(3,152		)
Balance at September 30, 2017	$	53,988

Balance at December 31, 2017	$	51,097
Additions	17,013
Additions acquired in the HomeBanc acquisition	2,135
Sales	(23,488		)
Write-downs	(3,156		)
Balance at September 30, 2018	$	43,601

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, BancShares had ~~$19.4~~$14.3 million and ~~$15.0~~$19.8 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was ~~$27.7~~$25.1 million and ~~$21.8~~$26.9 million at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

NOTE G - FDIC SHARED-LOSS ~~RECEIVABLE AND~~ PAYABLE

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

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

As of September 30, ~~2017,~~2018, shared-loss ~~agreements are still active for First Regional Bank (FRB), Georgian Bank (GB) and United Western Bank (UWB). Shared-loss~~ protection remains for single family residential loans acquired ~~from UWB and GB~~ in the amount of ~~$70.4~~$58.9 million. ~~FRB remains in a recovery period, where any recoveries are shared with the FDIC, until March 2020.~~

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

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

The shared-loss agreements for two FDIC-assisted transactions ~~FRB and UWB,~~ include provisions related to payments that may be owed to the FDIC at the termination of the agreements (clawback liability). The clawback liability represents a payment by BancShares to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition and is recorded in the Consolidated Balance Sheets as a payable to the FDIC under the relevant shared-loss agreements. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the estimated clawback liability was ~~$100.2~~$104.6 million and ~~$97.0~~$101.3 million, respectively. The clawback liability payment dates ~~for FRB and UWB~~ are March 2020 and March ~~2021, respectively.~~2021.

The following table provides changes in the FDIC shared-loss payable for the three and nine months ended September 30, 2018 and September 30, 2017.



	Three months ended September 30				Nine months ended September 30
(Dollars in thousands)	2018		2017		2018		2017
Beginning balance	$	103,487	$	99,126	$	101,342	$	97,008
Amortization	1,009		973		3,002		2,890
Adjustments related to changes in assumptions	80		104		232		305
Ending balance	$	104,576	$	100,203	$	104,576	$	100,203

NOTE H - MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was ~~$2.75~~$2.91 billion and ~~$2.49~~$2.81 billion as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. These loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. These retained servicing rights are recorded as a servicing asset and reported in other intangible assets on the Consolidated Balance Sheets. The mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair market value.

The activity of the servicing asset for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 is presented in the following table:


	Three months ended September 30						Nine months ended September 30						Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Beginning balance	$	20,524		$	16,824		$	20,415		$	19,351		$	21,657		$	20,524		$	21,945		$	20,415
Servicing rights originated	2,896			1,923			5,721			4,251			1,396			2,896			4,026			5,721
Amortization	(1,417		)	(1,377		)	(4,137		)	(3,978		)	(1,420		)	(1,417		)	(4,338		)	(4,137		)
Valuation allowance (provision) reversal	—			360			4			(1,894		)
Valuation allowance reversal													—			—			—			4
Ending balance	$	22,003		$	17,730		$	22,003		$	17,730		$	21,633		$	22,003		$	21,633		$	22,003

The ~~following table presents the activity~~amortization expense related to mortgage servicing rights is included as a reduction of mortgage income in the ~~servicing asset valuation allowance for the three and nine months ended September 30, 2017 and 2016:~~

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

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended September 30, 2018 and 2017 ~~and 2016~~ were ~~$1.7~~$1.9 million and ~~$1.5~~$1.7 million, respectively, and reported in mortgage income in the Consolidated Statements of Income. For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, contractually specified mortgage servicing fees, late fees and ancillary fees earned were ~~$5.2~~$5.6 million and ~~$4.3 million, respectively.~~

The amortization expense related to mortgage servicing rights, included as a reduction of mortgage income in the Consolidated Statements of Income, was $1.4 million for both the three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, amortization expense related to mortgage servicing rights was $4.1 million and $4.0 million, respectively. Mortgage income included an impairment reversal for the three months ended September 30, 2016 of $360 thousand. For the nine months ended September 30, 2017 and 2016, mortgage income included an impairment reversal of $4 thousand and an impairment of $1.9$5.2 million, respectively.

Valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. Key economic assumptions used to value mortgage servicing rights as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows:


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Discount rate - conventional fixed loans	9.33		%	9.45		%	10.06		%	9.41		%
Discount rate - all loans excluding conventional fixed loans	10.33		%	10.45		%	11.06		%	10.41		%
Weighted average constant prepayment rate	11.39		%	10.42		%	8.38		%	10.93		%
Weighted average cost to service a loan	$	64.11		$	62.75		$	72.67		$	64.03

The discount rate is based on the 10-year U.S. Treasury rate plus 700 basis points for conventional fixed loans and 800 basis points for all other loans. The 700 and 800 basis points are used as a risk premium when calculating the discount rate. The repayment rate is derived from the Public Securities Association Standard Prepayment model. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.

NOTE I - REPURCHASE AGREEMENTS

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

BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements was ~~$659.6~~$597.4 million and ~~$690.8~~$684.2 million at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included ~~in borrowings on the Consolidated Balance Sheets as of~~overnight and continuous U.S. Treasury securities totaling $567.4 million at September 30, ~~2017~~2018 and $556.2 million at December 31, ~~2016 is presented in the following tables.~~2017. At December 31, 2017, there also were U.S. Treasury securities with a remaining contractual maturity of 30-90 days totaling $30.0 million for a gross amount of $586.2 million.

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

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

NOTE J - ESTIMATED FAIR VALUES

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

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

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

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

Level 3 values are ~~generated~~derived from ~~model-based~~valuation techniques ~~that use at least~~in which one or more significant ~~assumption~~inputs or assumptions are not observable in the market. These unobservable inputs and assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.

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

~~BancShares~~ management reviews any changes to its valuation methodologies to ensure they are appropriate and ~~justified,~~supportable, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:

Investment securities available for sale. Investment securities available for sale are carried at fair value. U.S. Treasury, government agency ~~mortgage-backed securities, municipal securities, corporate bonds~~ and ~~trust preferred~~mortgage-backed securities are generally measured at fair value using a third party pricing ~~service or recent~~service. The third party provider evaluates securities based on comparable investments with trades and market ~~transactions in similar or identical~~data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level ~~2 instruments.~~2. Corporate bonds and trust preferred securities are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3.

Marketable equity securities. Equity securities are measured at fair value using observable closing prices and the valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded ~~on a heavily~~in an active market and as Level 2 if the observable closing price is from a less than active market.

Loans held for sale. Certain residential real estate loans that are originated to be sold to investors ~~which~~ are carried at fair value ~~as BancShares elected the fair value option on originated loans held for sale. The fair value is~~ based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs. Portfolio loans ~~with the intent~~that are subsequently transferred to held for sale to be sold in the secondary market are ~~transferred to loans held for sale~~carried at the lower of amortized cost or fair value. The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input.

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

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

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

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

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

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

Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, short-term borrowings and accrued interest payable are considered Level 2. ~~Lastly,~~

The table presents the ~~receivable from the FDIC~~carrying values and estimated fair values for ~~shared-loss agreements is designated~~financial instruments as ~~Level 3.~~of September 30, 2018 and December 31, 2017.


(Dollars in thousands)	September 30, 2017				December 31, 2016				September 30, 2018				December 31, 2017
	Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	296,386	$	296,386	$	539,741	$	539,741	$	262,525	$	262,525	$	336,150	$	336,150
Overnight investments	2,432,233		2,432,233		1,872,594		1,872,594		943,025		943,025		1,387,927		1,387,927
Investment securities available for sale	6,992,877		6,992,877		7,006,580		7,006,580		4,677,351		4,677,351		7,180,180		7,180,180
Investment securities held to maturity	78		84		98		104		2,253,416		2,238,664		76		81
Marketable equity securities									109,907		109,907		—		—
Loans held for sale	70,803		70,803		74,401		74,401		46,082		46,082		51,179		51,179
Net loans and leases	22,917,231		21,941,561		21,519,083		20,614,548		24,667,150		23,955,732		23,374,932		22,257,803
Receivable from the FDIC for shared-loss agreements	4,610		4,610		4,172		4,172
Income earned not collected	90,821		90,821		79,839		79,839		105,616		105,616		95,249		95,249
Federal Home Loan Bank stock	52,685		52,685		43,495		43,495		28,438		28,438		52,685		52,685
Mortgage servicing rights	22,003		25,597		20,415		24,446		21,633		28,829		21,945		26,170
Deposits	29,333,949		29,302,361		28,161,343		28,135,698		30,163,537		30,115,380		29,266,275		29,230,768
Short-term borrowings	679,280		679,280		603,487		603,487		687,749		687,749		693,807		693,807
Long-term obligations	866,123		865,876		832,942		832,201		297,487		303,935		870,240		852,112
Payable to the FDIC for shared-loss agreements	100,203		102,603		97,008		100,069		104,576		104,615		101,342		102,684
Accrued interest payable	4,198		4,198		3,797		3,797		2,400		2,400		3,952		3,952

Among BancShares' assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	September 30, 2017								September 30, 2018
			Fair value measurements using:								Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,616,324	$	—	$	1,616,324	$	—	$	1,505,434	$	—	$	1,505,434	$	—
Government agency	—		—		—		—		127,545		—		127,545		—
Mortgage-backed securities	5,200,341		—		5,200,341		—		2,919,796		—		2,919,796		—
Equity securities	113,650		31,739		81,911		—
Corporate bonds	54,873		—		54,873		—		119,933		—		—		119,933
Other	7,689		—		7,689		—		4,643		—		—		4,643
Total investment securities available for sale	$	6,992,877	$	31,739	$	6,961,138	$	—	$	4,677,351	$	—	$	4,552,775	$	124,576
Marketable equity securities									$	109,907	$	20,242	$	89,665	$	—
Loans held for sale	$	70,803	$	—	$	70,803	$	—	$	46,082	$	—	$	46,082	$	—

	December 31, 2016								December 31, 2017
			Fair value measurements using:								Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,650,319	$	—	$	1,650,319	$	—	$	1,657,864	$	—	$	1,657,864	$	—
Government agency	40,398		—		40,398		—		8,670		—		8,670		—
Mortgage-backed securities	5,175,425		—		5,175,425		—		5,340,756		—		5,340,756		—
Equity securities	83,507		29,145		54,362		—		105,208		19,341		85,867		—
Corporate bonds	49,562		—		49,562		—		59,963		—		59,963		—
Other	7,369		—		7,369		—		7,719		—		7,719		—
Total investment securities available for sale	$	7,006,580	$	29,145	$	6,977,435	$	—	$	7,180,180	$	19,341	$	7,160,839	$	—
Loans held for sale	$	74,401	$	—	$	74,401	$	—	$	51,179	$	—	$	51,179	$	—

During the three months ended September 30, 2018, there were no transfers between levels. For the nine months ended September 30, 2018, there were transfers from Level 2 to Level 3 of $59.7 million and $5.6 million of corporate bonds and other investment securities available for sale, respectively. The transfers were due to a lack of observable inputs and trade activity for those securities. There were no transfers between levels ~~during~~for the three orand nine months ended September 30, 2017.

The following tables summarize activity for Level 3 assets:



	Three months ended September 30, 2018
(Dollars in thousands)	Corporate bonds		Other
Balance at July 1, 2018	$	108,790	$	5,643
Amounts included in net income	69		7
Unrealized net gains (losses) included in other comprehensive income	74		(7		)
Purchases	11,000		—
Sales / Calls	—		(1,000		)
Balance at September 30, 2018	$	119,933	$	4,643



	Nine months ended September 30, 2018
(Dollars in thousands)	Corporate bonds			Other
Balance at January 1, 2018	$	—		$	—
Transfers in	59,653			5,618
Amounts included in net income	117			14
Unrealized net (losses) gains included in other comprehensive income	(23		)	11
Purchases	62,591			—
Sales / Calls	(2,405		)	(1,000		)
Balance at September 30, 2018	$	119,933		$	4,643

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at September 30, 2018.



(Dollars in thousands)			September 30, 2018
Level 3 assets	Valuation technique	Significant unobservable input	Fair Value
Corporate bonds	Indicative bid provided by broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company	$	119,933
Other	Indicative bid provided by broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company	4,643

Fair Value Option

BancShares has elected the fair value option for ~~originated~~ residential real estate loans ~~held for sale.~~originated to be sold. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value are recorded as a component of mortgage income and included a loss of $773 thousand and a gain of $104 thousand for the three months ended September 30, 2018 and September 30, 2017, respectively. For the nine months ended September 30, 2018 and 2017, the changes in fair value were a loss of $528 thousand and a gain of $3.6 million, respectively.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for ~~originated~~ residential real estate ~~loans held~~originated for sale measured at fair value as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	September 30, 2017							September 30, 2018
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference			Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	70,803	$	68,739	$	2,064		$	46,082	$	45,221	$	861

	December 31, 2016							December 31, 2017
	Fair Value		Aggregate Unpaid Principal Balance		Difference			Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	74,401	$	75,893	$	(1,492	)	$	51,179	$	49,796	$	1,383

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, ~~2017~~2018 or December 31, ~~2016.~~

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

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

2017.

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

Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 86 and 1211 percent applied for estimated ~~holding and~~ selling costs and other external factors that may impact the marketability of the property. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate generally ranges between 2 and 1618 percent.

OREO that has been acquired or written down in the current year is ~~measured and reported~~deemed to be at fair value, ~~using~~which uses asset valuations. Asset values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 86 and 1211 percent applied for estimated ~~holding and~~ selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information. ~~OREO that has been acquired or written down in the current year is deemed to be at fair value and included in the table below.~~

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

For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	September 30, 2017								September 30, 2018
			Fair value measurements using:								Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	71,068	$	—	$	—	$	71,068	$	107,614	$	—	$	—	$	107,614
Other real estate remeasured during current year	38,533		—		—		38,533		27,027		—		—		27,027

	December 31, 2016								December 31, 2017
			Fair value measurements using:								Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	70,977	$	—	$	—	$	70,977	$	72,539	$	—	$	—	$	72,539
Other real estate remeasured during current year	45,402		—		—		45,402		40,167		—		—		40,167
Mortgage servicing rights	342		—		—		342

No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, ~~2017~~2018 and December 31, ~~2016~~.2017.

NOTE K - EMPLOYEE BENEFIT PLANS

BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees (BancShares Plan) and former First Citizens Bancorporation, Inc. employees (Bancorporation Plan). ~~Net~~The service cost component of net periodic benefit cost is ~~a component of employee benefits~~included in salaries and wages while all other non-service cost components are included in other noninterest expense.

BancShares Plan

For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the components of net periodic benefit cost are as follows:


	Three months ended September 30						Nine months ended September 30						Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Service cost	$	3,180		$	3,153		$	9,490		$	9,463		$	3,396		$	3,180		$	10,187		$	9,490
Interest cost	7,283			7,218			21,732			21,668			7,093			7,283			21,281			21,732
Expected return on assets	(10,589		)	(9,155		)	(31,594		)	(27,481		)	(11,966		)	(10,589		)	(35,899		)	(31,594		)
Amortization of prior service cost	53			54			158			158			19			53			59			158
Amortization of net actuarial loss	2,214			1,714			6,641			5,144			3,398			2,214			10,192			6,641
Net periodic benefit cost	$	2,141		$	2,984		$	6,427		$	8,952		$	1,940		$	2,141		$	5,820		$	6,427

Bancorporation Plan

For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the components of net periodic benefit cost are as follows:


	Three months ended September 30						Nine months ended September 30						Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Service cost	$	569		$	642		$	1,910		$	1,925		$	643		$	569		$	1,929		$	1,910
Interest cost	1,624			1,694			4,989			5,081			1,588			1,624			4,767			4,989
Expected return on assets	(2,783		)	(2,775		)	(8,375		)	(8,325		)	(3,106		)	(2,783		)	(9,322		)	(8,375		)
Amortization of net actuarial loss	63			—			491			—			78			63			235			491
Net periodic benefit cost	$	(527	)	$	(439	)	$	(985	)	$	(1,319	)	$	(797	)	$	(527	)	$	(2,391	)	$	(985	)

NoDiscretionary contributions of $50.0 million were made ~~during the three and nine months ended September 30, 2017~~ to the BancShares ~~or Bancorporation~~ pension ~~plans. BancShares expects to contribute $50.0 million~~plan on September 10, 2018 for the 2017 plan year. Management evaluates the need for its pension plan contributions on a periodic basis based upon numerous factors including, but not limited to, the funded status of and returns on the BancShares ~~Plan during 2017.~~pension plan, discount rates and the current economic environment. No contribution is expected to be made to either pension plan for the ~~Bancorporation Plan in 2017.~~2018 plan year.

NOTE L - COMMITMENTS AND CONTINGENCIES

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

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

Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing ~~arrangements.~~arrangements, and the fair value of those commitments is not material. To mitigate its risk, BancShares’ ~~follows its~~ credit policies ingovern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as that involved in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.

The following table presents the commitments to extend credit and unfunded commitments as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
Unused commitments to extend credit	$	9,428,471	$	8,808,218	$	9,801,361	$	9,629,365
Standby letters of credit	75,257		83,750		87,858		81,530
Unfunded commitments for investments in affordable housing projects	57,725		57,079		74,777		61,819

Affordable housing project investments were ~~$124.1~~$151.5 million and ~~$109.8~~$128.0 million as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, and are included in other assets on the Consolidated Balance Sheets.

Pursuant to standard representations and warranties relating to residential mortgage loan sales, contingent obligations exist for various events that may occur following the loan sale. If underwriting or documentation deficiencies are discovered at any point in the life of the loan or if the loan fails to perform per the terms of the loan purchase agreement, typically within 180 days from the date of sale, the investor may require BancShares to repurchase the loan or to repay a portion of the sale proceeds. Other liabilities included reserves of $3.0 million as of September 30, 2017 and December 31, 2016 for estimated losses arising from these standard representation and warranty provisions.

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

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

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

BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various merger transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.

NOTE M - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

Accumulated other comprehensive loss included the following as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017:


	September 30, 2017									December 31, 2016									September 30, 2018									December 31, 2017
(Dollars in thousands)	Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax			Accumulated other comprehensive loss			Deferred tax benefit			Accumulated other comprehensive loss, net of tax
Unrealized losses on investment securities available for sale	$	(11,752	)	$	(4,157	)	$	(7,595	)	$	(72,707	)	$	(26,832	)	$	(45,875	)
Unrealized losses on securities available for sale																			$	(88,481	)	$	(20,350	)	$	(68,131	)	$	(48,834	)	$	(17,889	)	$	(30,945	)
Unrealized losses on securities available for sale transferred to held to maturity																			(98,532		)	(22,663		)	(75,869		)	—			—			—
Funded status of defined benefit plans	(134,484		)	(49,755		)	(84,729		)	(141,774		)	(52,457		)	(89,317		)	(134,513		)	(30,938		)	(103,575		)	(144,999		)	(53,650		)	(91,349		)
Total	$	(146,236	)	$	(53,912	)	$	(92,324	)	$	(214,481	)	$	(79,289	)	$	(135,192	)	$	(321,526	)	$	(73,951	)	$	(247,575	)	$	(193,833	)	$	(71,539	)	$	(122,294	)

The following table highlights changes in accumulated other comprehensive income (loss) ~~income~~ by component for the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016:~~2017:


	Three months ended September 30, 2017												Three months ended September 30, 2018
(Dollars in thousands)	Unrealized (losses) gains on available for sale securities¹			(Losses) gains on cash flow hedges¹			Defined benefit pension items¹			Total			Unrealized (losses) gains on securities available for sale¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance	$	(16,648	)	$	—		$	(86,195	)	$	(102,843	)	$	(57,496	)	$	(80,876	)	$	(106,266	)	$	(244,638	)
Other comprehensive income before reclassifications	9,895			—			—			9,895
Amounts reclassified from accumulated other comprehensive (loss) income	(842		)	—			1,466			624
Net current period other comprehensive income	9,053			—			1,466			10,519
Ending balance	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)

	Three months ended September 30, 2016
	Unrealized gains (losses) on available for sale securities¹			(Losses) gains on cash flow hedges¹			Defined benefit pension items¹			Total
Beginning balance	$	31,213		$	—		$	(46,240	)	$	(15,027	)
Other comprehensive loss before reclassifications	(722		)	—			—			(722		)	(10,635		)	—			—			(10,635		)
Amounts reclassified from accumulated other comprehensive (loss) income	(161		)	—			1,126			965
Amounts reclassified from accumulated other comprehensive income													—			5,007			2,691			7,698
Net current period other comprehensive (loss) income	(883		)	—			1,126			243			(10,635		)	5,007			2,691			(2,937		)
Ending balance	$	30,330		$	—		$	(45,114	)	$	(14,784	)	$	(68,131	)	$	(75,869	)	$	(103,575	)	$	(247,575	)

	Nine months ended September 30, 2017												Three months ended September 30, 2017
	Unrealized (losses) gains on available for sale securities¹			(Losses) gains on cash flow hedges¹			Defined benefit pension items¹			Total			Unrealized (losses) gains on securities available for sale¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance	$	(45,875	)	$	—		$	(89,317	)	$	(135,192	)	$	(16,648	)	$	—		$	(86,195	)	$	(102,843	)
Other comprehensive income before reclassifications	41,218			—			—			41,218			9,895			—			—			9,895
Amounts reclassified from accumulated other comprehensive (loss) income	(2,938		)	—			4,588			1,650			(842		)	—			1,466			624
Net current period other comprehensive income	38,280			—			4,588			42,868			9,053			—			1,466			10,519
Ending balance	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)

	Nine months ended September 30, 2016												Nine months ended September 30, 2018
	Unrealized (losses) gains on available for sale securities¹			(Losses) gains on cash flow hedges¹			Defined benefit pension items¹			Total			Unrealized (losses) gains on securities¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance	$	(15,125	)	$	(892	)	$	(48,423	)	$	(64,440	)	$	(30,945	)	$	—		$	(91,349	)	$	(122,294	)
Cumulative effect adjustments													(29,752		)	—			(20,300		)	(50,052		)
Other comprehensive loss before reclassifications													(7,434		)	(84,321		)	—			(91,755		)
Amounts reclassified from accumulated other comprehensive income													—			8,452			8,074			16,526
Net current period other comprehensive (loss) income													(7,434		)	(75,869		)	8,074			(75,229		)
Ending balance													$	(68,131	)	$	(75,869	)	$	(103,575	)	$	(247,575	)

													Nine months ended September 30, 2017
													Unrealized (losses) gains on securities¹			Unrealized losses on securities available for sale transferred to held to maturity¹			Defined benefit pension items¹			Total
Beginning balance													$	(45,875	)	$	—		$	(89,317	)	$	(135,192	)
Other comprehensive income before reclassifications	56,381			892			—			57,273			41,218			—			—			41,218
Amounts reclassified from accumulated other comprehensive (loss) income	(10,926		)	—			3,309			(7,617		)	(2,938		)	—			4,588			1,650
Net current period other comprehensive income	45,455			892			3,309			49,656			38,280			—			4,588			42,868
Ending balance	$	30,330		$	—		$	(45,114	)	$	(14,784	)	$	(7,595	)	$	—		$	(84,729	)	$	(92,324	)

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

The following table presents the amounts reclassified from accumulated other comprehensive income (loss) ~~income~~ and the line item affected in the statement where net income is presented for the three and nine months ended September 30, ~~2017~~2018 and September 30, ~~2016:~~2017.

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

Three months ended September 30, 2016
Details about accumulated other comprehensive income (loss)
Amounts reclassified from accumulated other comprehensive income (loss)¹
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities $ 352
Securities gains
(191 ) Income taxes
$ 161
Net income
Amortization of defined benefit pension items
     Prior service costs $ (54 ) Employee benefits
     Actuarial losses (1,714 ) Employee benefits
(1,768 ) Employee benefits
642
Income taxes
$ (1,126 ) Net income
Total reclassifications for the period $ (965 )

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

Nine months ended September 30, 2016
Details about accumulated other comprehensive income (loss)
Amount reclassified from accumulated other comprehensive income (loss)¹
Affected line item in the statement where net income is presented
Unrealized gains and losses on available for sale securities $ 17,509
Securities gains
(6,583 ) Income taxes
$ 10,926
Net income
Amortization of defined benefit pension items
     Prior service costs $ (158 ) Employee benefits
     Actuarial losses (5,144 ) Employee benefits
(5,302 ) Employee benefits
1,993
Income taxes
$ (3,309 ) Net income
Total reclassifications for the period $ 7,617



(Dollars in thousands)	Three months ended September 30, 2018
Details about accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(6,502	)	Other
	1,495			Income taxes
	$	(5,007	)	Net Income
Amortization of defined benefit pension items
Prior service costs	$	(19	)	Salaries and wages
Actuarial losses	(3,476		)	Other
	(3,495		)	Income before income taxes
	804			Income taxes
	$	(2,691	)	Net income
Total reclassifications for the period	$	(7,698	)

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

	Nine months ended September 30, 2018
Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated other comprehensive income (loss)¹			Affected line item in the statement where net income is presented
Amortization of unrealized losses on securities available for sale transferred to held to maturity	$	(10,975	)	Other
	2,523			Income taxes
	$	(8,452	)	Net income
Amortization of defined benefit pension items
Prior service costs	$	(59	)	Salaries and wages
Actuarial losses	(10,427		)	Other
	(10,486		)	Employee benefits
	2,412			Income taxes
	$	(8,074	)	Net income
Total reclassifications for the period	$	(16,526	)

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

¹ Amounts in parentheses indicate debits to profit/loss.


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

Management’s discussion and analysis (MD&A) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this report along with our financial statements and related MD&A of financial condition and results of operations included in our ~~2016~~2017 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for ~~2017,~~2018, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares.

EXECUTIVE OVERVIEW

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

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

~~BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (FCB), a state-chartered bank organized under the laws~~ The fees and service charges generated from these products and services are primary sources of ~~the state~~noninterest income which is an essential component of ~~North Carolina.~~our total revenue.

Interest rates have presented significant challenges to commercial banks' efforts to generate earnings and shareholder value. Our strategy continues to focus on maintaining an interest rate risk profile that will benefit net interest income in a rising rate environment. Management drives to this goal by focusing on core customer deposits and loans in the targeted interest rate risk profile. Additionally, our initiatives focus on growth of noninterest income sources, control of noninterest expenses, optimization of our branch network, and further enhancements to our technology and delivery channels. Refer to our Form 10-K for the year ended December 31, ~~2016~~2017 for further discussion of our strategy.

Significant Events in ~~2017~~2018

~~In May 2017,~~On November 1, 2018, FCB ~~entered~~completed the merger of Pawley's Island, South Carolina-based Palmetto Heritage Bancshares, Inc. (Palmetto Heritage) and its subsidiary, Palmetto Heritage Bank and Trust, into ~~an agreement with~~FCB.

On October 2, 2018, FCB completed the ~~Federal Deposit Insurance Corporation (FDIC), as Receiver, to purchase certain assets and assume certain liabilities of Guaranty Bank (Guaranty)~~merger of Milwaukee, ~~Wisconsin. As a result~~Wisconsin-based Capital Commerce Bancorp, Inc. (Capital Commerce) and its subsidiary, Securant Bank and Trust, into FCB.

On May 1, 2018, FCB completed the merger of ~~the Guaranty transaction, FCB recorded loans with a fair value of $689.1 million~~Tampa, Florida-based HomeBancorp, Inc. (HomeBancorp) and investment securities with a fair value of $12.1 million. The fair value of deposits assumed was $982.3 million. In accordance with the acquisition method of accounting, all assets and liabilities were recorded at their fair values as of the acquisition date. As a result, an acquisition gain of $122.7 million was recorded in the second quarter of 2017.

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

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

RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS

Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. Third quarter ~~2017~~2018 national economic results indicate solid labor market conditions, strong gains in employment as well as strong growth rates in household spending and ~~moderate increases in economic activity.~~business capital spending. The national unemployment rate declined from ~~4.4~~4.0 percent in June ~~2017~~2018 to ~~4.2~~3.7 percent in September ~~2017.~~2018. According to the U.S. Department of Labor, the U.S. economy added approximately ~~274,000~~569,000 new nonfarm payroll jobs during the third quarter of ~~2017.~~2018. The U.S. housing market remains stable as a result of solid housing demand fueled by low mortgage interest rates, economic growth and job creation.

The Federal Reserve’s Federal Open Market Committee (FOMC) indicated in the third quarter that the U.S. labor market continued to strengthen and economic activity has ~~continued to expand~~been rising at a ~~modest pace.~~solid rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to ~~maintain~~raise the target range for the federal funds rate ~~at 1~~by 25 basis points to ~~1.25~~2.0 to 2.25 percent. In determining the timing and size of future adjustments to the target range for the federal funds rates, the FOMC will assess realized

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

The trends in the banking industry are similar to those of the broader economy as shown in the latest national banking results from the second quarter of ~~2017.~~2018. FDIC-insured institutions reported a ~~10.7~~25.1 percent increase in net income compared to the second quarter of ~~2016~~2017 as a result of growth in ~~interest-bearing assets generating higher~~ net interest income, higher noninterest income and ~~restrained growth~~a lower effective tax rate due to the Tax Cuts and Jobs Act of 2017 (Tax Act). Using the higher effective tax rate before the enactment of the Tax Act, estimated net income for the second quarter of 2018 would have increased 11.7 percent compared to the same period in ~~operating expenses.~~2017. Loan-loss provisions declined modestly by 2.0 percent while noninterest expense rose by 4.6 percent from a year earlier. Banking industry average net interest margin was 3.38 percent in the second quarter of 2018, up from 3.22 percent in the second quarter of 2017 ~~up from 3.08~~as growth in average asset yields outpaced average funding costs. Total loans and leases increased by 4.2 percent over the past twelve months due to growth in ~~the second quarter of 2016.~~commercial and industrial loans, residential mortgage loans, credit cards and nonfarm nonresidential loans.

EARNINGS PERFORMANCE SUMMARY

BancShares' consolidated net income for the third quarter of ~~2017~~2018 was ~~$67.1~~$117.3 million, or ~~$5.58~~$9.80 per share, compared to ~~$134.7~~$93.3 million, or ~~$11.21~~$7.77 per share, for the second quarter of ~~2017,~~2018, and ~~$51.4~~$67.1 million, or ~~$4.28~~$5.58 per share, for the corresponding period of ~~2016.~~2017. BancShares’ current quarter results generated an annualized return on average assets of ~~0.77~~1.33 percent and an annualized return on average equity of ~~8.10~~13.41 percent, compared to respective returns of ~~1.58~~1.08 percent and ~~17.10~~11.00 percent for the second quarter of ~~2017,~~2018, and ~~0.63~~0.77 percent and ~~6.69~~8.10 percent for the third quarter of ~~2016.~~2017. Net interest margin for the third quarter of ~~2017~~2018 was ~~3.35~~3.73 percent, compared to ~~3.28~~3.64 percent for the second quarter of ~~2017~~2018 and ~~3.10~~3.35 percent for the third quarter of the prior year.

For the nine months ended September 30, ~~2017,~~2018, net income was ~~$269.3~~$310.8 million, or ~~$22.43~~$25.91 per share, compared to ~~$172.8~~$269.3 million, or ~~$14.39~~$22.43 per share, reported for the same period of ~~2016.~~2017. Annualized returns on average assets and average equity were ~~1.06~~1.20 percent and ~~11.37~~12.22 percent, respectively, through September 30, ~~2017,~~2018, compared to ~~0.72~~1.06 percent and ~~7.73~~11.37 percent, respectively, for the same period a year earlier. Year-to-date ~~2017 pre-tax~~2018 earnings included a pre-tax gain of $26.5 million resulting from the extinguishment of Federal Home Loan Bank (FHLB) debt obligations as well as favorable impacts from the Tax Cuts and Jobs Act of 2017 (Tax Act). Year-to-date 2017 earnings included pre-tax acquisition gains of $134.7 million recognized in connection with the FDIC-assisted transactions of Guaranty Bank (Guaranty) and HCB and $4.7 million of securities gains. Year-to-date 2016 pre-tax earnings included $16.6 million of pre-tax income due to the early termination of certain FDIC shared-loss agreements, securities gains of $17.5 million and gains of $5.8 million recognized in connection with the FDIC-assisted transactions of North Milwaukee StateHarvest Community Bank ~~(NMSB) of Milwaukee, Wisconsin and First CornerStone Bank (FCSB) of King of Prussia, Pennsylvania.~~(HCB).

Key highlights in the third quarter of ~~2017~~2018 include:

Loans grew by ~~$277.6~~$347.9 million to ~~$23.15~~$24.89 billion, or by ~~4.8~~5.6 percent on an annualized basis, from June 30, 2018, primarily due to originated portfolio growth.

A tax benefit of $15.7 million was recorded during the third quarter of ~~2017,~~2018, as a result of ~~originated portfolio growth.~~updating the original provisional amount recorded for the effects of the Tax Act.

Net interest income increased ~~$11.6~~$11.1 million, or by ~~4.4~~3.8 percent, compared to the second quarter of ~~2017.~~2018. The increase was primarily due to ~~originated~~higher loan ~~growth~~balances and ~~higher interest income earned on non-purchased credit impaired (non-PCI) loans and overnight investments.~~yields, as well as improved investment yields.

The taxable-equivalent net interest margin increased 79 basis points to ~~3.35~~3.73 percent, compared to the second quarter of ~~2017,~~2018, primarily due to ~~an improvement in~~higher loan yields ~~higher loan~~and balances, ~~and a higher federal funds rate.~~as well as improved investment yields.

BancShares remained well capitalized ~~under Basel III capital requirements~~ with a Tier 1 risk-based capital ratio ~~of 12.95 percent,~~and common equity Tier 1 ratio of ~~12.95~~13.23 percent, total risk-based capital ratio of ~~14.34~~14.57 percent and leverage capital ratio of ~~9.43~~10.11 percent at September 30, ~~2017.~~2018.

Table 1

Selected Quarterly Data


	2017									2016						Nine months ended September 30						2018									2017							Nine months ended September 30
	Third			Second			First			Fourth			Third								Third			Second			First			Fourth				Third				Nine months ended September 30
(Dollars in thousands, except share data)	Quarter			Quarter			Quarter			Quarter			Quarter			Nine months ended September 30	2017			2016			Quarter			Quarter			Quarter			Quarter				Quarter			2018			2017
SUMMARY OF OPERATIONS
Interest income	$	284,333		$	272,542		$	260,857		$	254,782		$	246,494		$	817,732		$	732,975		$	315,706		$	303,877		$	292,601		$	285,958			$	284,333		$	912,184		$	817,732
Interest expense	11,158			10,933			10,514			10,865			10,645			32,605			32,217			8,344			7,658			8,164			11,189				11,158			24,166			32,605
Net interest income	273,175			261,609			250,343			243,917			235,849			785,127			700,758			307,362			296,219			284,437			274,769				273,175			888,018			785,127
Provision for loan and lease losses	7,946			12,324			8,231			16,029			7,507			28,501			16,912
Provision (credit) for loan and lease losses																						840			8,438			7,605			(2,809		)		7,946			16,883			28,501
Net interest income after provision for loan and lease losses	265,229			249,285			242,112			227,888			228,342			756,626			683,846			306,522			287,781			276,832			277,578				265,229			871,135			756,626
Gain on acquisitions	—			122,728			12,017			—			837			134,745			5,831			—			—			—			—				—			—			134,745
Noninterest income excluding gain on acquisitions	125,387			125,472			115,275			124,698			117,004			366,134			357,542			94,531			100,927			122,684			108,606				96,062			318,142			278,605
Noninterest expense	286,967			285,606			264,345			271,531			267,233			836,918			777,207			267,537			265,993			268,063			263,073				257,642			801,593			749,389
Income before income taxes	103,649			211,879			105,059			81,055			78,950			420,587			270,012			133,516			122,715			131,453			123,111				103,649			387,684			420,587
Income taxes	36,585			77,219			37,438			28,365			27,546			151,242			97,220			16,198			29,424			31,222			68,704				36,585			76,844			151,242
Net income	$	67,064		$	134,660		$	67,621		$	52,690		$	51,404		$	269,345		$	172,792		$	117,318		$	93,291		$	100,231		$	54,407			$	67,064		$	310,840		$	269,345
Net interest income, taxable equivalent	$	274,272		$	262,549		$	251,593		$	245,330		$	237,146		$	788,414		$	704,829		$	308,207		$	297,021		$	285,248		$	276,002			$	274,272		$	890,476		$	788,414
PER SHARE DATA
Net income	$	5.58		$	11.21		$	5.63		$	4.39		$	4.28		$	22.43		$	14.39		$	9.80		$	7.77		$	8.35		$	4.53			$	5.58		$	25.91		$	22.43
Cash dividends	0.30			0.30			0.30			0.30			0.30			0.90			0.90			0.35			0.35			0.35			0.35				0.30			1.05			0.90
Market price at period end (Class A)	373.89			372.70			335.37			355.00			293.89			373.89			293.89			452.28			403.30			413.24			403.00				373.89			452.28			373.89
Book value at period end	275.91			269.75			258.17			250.82			256.76			275.91			256.76			294.40			286.99			280.77			277.60				275.91			294.40			275.91
SELECTED QUARTERLY AVERAGE BALANCES	SELECTED QUARTERLY AVERAGE BALANCES																					SELECTED QUARTERLY AVERAGE BALANCES
Total assets	$	34,590,503		$	34,243,527		$	33,494,500		$	33,223,995		$	32,655,417		$	34,113,525		$	32,176,082		$	34,937,175		$	34,673,927		$	34,267,945		$	34,864,720			$	34,590,503		$	34,628,652		$	34,113,525
Investment securities	6,906,345			7,112,267			7,084,986			6,716,873			6,452,532			7,033,878			6,582,604			7,129,089			7,091,442			7,053,001			7,044,534				6,906,345			7,091,456			7,033,878
Loans and leases ⁽¹⁾	22,997,195			22,575,323			21,951,444			21,548,313			21,026,510			22,511,818			20,678,838			24,698,799			24,205,363			23,666,098			23,360,235				22,997,195			24,193,870			22,511,818
Interest-earning assets	32,555,597			32,104,717			31,298,970			31,078,428			30,446,592			31,991,031			29,995,602			32,886,276			32,669,810			32,320,431			32,874,233				32,555,597			32,627,578			31,991,031
Deposits	29,319,384			29,087,852			28,531,166			28,231,477			27,609,418			28,982,354			27,274,646			30,237,329			30,100,615			29,472,125			29,525,843				29,319,384			29,939,492			28,982,354
Long-term obligations	887,948			799,319			816,953			835,509			842,715			835,000			803,780			261,821			233,373			404,065			866,198				887,948			299,232			835,000
Interest-bearing liabilities	19,484,663			19,729,956			19,669,075			19,357,282			19,114,740			19,627,222			19,091,511			18,783,160			18,885,168			19,031,404			19,425,404				19,484,663			18,899,001			19,627,222
Shareholders' equity	$	3,284,044		$	3,159,004		$	3,061,099		$	3,056,426		$	3,058,155		$	3,167,684		$	2,987,455		$	3,470,368		$	3,400,867		$	3,333,114		$	3,329,562			$	3,284,044		$	3,401,450		$	3,167,684
Shares outstanding	12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			11,971,460			12,010,405			12,010,405			12,010,405				12,010,405			11,997,281			12,010,405
SELECTED QUARTER-END BALANCES	SELECTED QUARTER-END BALANCES																					SELECTED QUARTER-END BALANCES
Total assets	$	34,584,154		$	34,769,850		$	34,018,405		$	32,990,836		$	32,971,910		$	34,584,154		$	32,971,910		$	34,954,659		$	35,088,566		$	34,436,437		$	34,527,512			$	34,584,154		$	34,954,659		$	34,584,154
Investment securities	6,992,955			6,596,530			7,119,944			7,006,678			6,384,940			6,992,955			6,384,940			7,040,674			7,190,545			6,967,921			7,180,256				6,992,955			7,040,674			6,992,955
Loans and leases:
PCI	834,167			894,863			848,816			809,169			868,200			834,167			868,200			638,018			674,269			703,837			762,998				834,167			638,018			834,167
Non-PCI	22,314,906			21,976,602			21,057,633			20,928,709			20,428,780			22,314,906			20,428,780			24,248,329			23,864,168			22,908,140			22,833,827				22,314,906			24,248,329			22,314,906
Deposits	29,333,949			29,456,338			29,002,768			28,161,343			27,925,253			29,333,949			27,925,253			30,163,537			30,408,884			29,969,245			29,266,275				29,333,949			30,163,537			29,333,949
Long-term obligations	866,123			879,957			727,500			832,942			840,266			866,123			840,266			297,487			241,360			194,413			870,240				866,123			297,487			866,123
Shareholders' equity	$	3,313,831		$	3,239,851		$	3,100,696		$	3,012,427		$	3,083,748		$	3,313,831		$	3,083,748		$	3,499,013		$	3,446,886		$	3,372,114		$	3,334,064			$	3,313,831		$	3,499,013		$	3,313,831
Shares outstanding	12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			12,010,405			11,885,405			12,010,405			12,010,405			12,010,405				12,010,405			11,885,405			12,010,405
SELECTED RATIOS AND OTHER DATA	SELECTED RATIOS AND OTHER DATA																					SELECTED RATIOS AND OTHER DATA
Rate of return on average assets (annualized)	0.77		%	1.58		%	0.82		%	0.63		%	0.63		%	1.06		%	0.72		%	1.33		%	1.08		%	1.19		%	0.62			%	0.77		%	1.20		%	1.06		%
Rate of return on average shareholders' equity (annualized)	8.10			17.10			8.96			6.86			6.69			11.37			7.73			13.41			11.00			12.20			6.48				8.10			12.22			11.37
Net yield on interest-earning assets (taxable equivalent)	3.35			3.28			3.25			3.14			3.10			3.29			3.14			3.73			3.64			3.57			3.34				3.35			3.65			3.29
Allowance for loan and lease losses to total loans and leases:
PCI	1.55			1.51			1.29			1.70			1.34			1.55			1.34			1.71			1.84			1.75			1.31				1.55			1.71			1.55
Non-PCI	0.98			0.98			1.00			0.98			0.98			0.98			0.98			0.86			0.89			0.92			0.93				0.98			0.86			0.98
Total	1.00			1.00			1.01			1.01			1.00			1.00			1.00			0.88			0.92			0.94			0.94				1.00			0.88			1.00
Nonperforming assets to total loans and leases and other real estate at period end:
Ratio of covered nonperforming assets to covered loans, leases and other real estate owned	0.35			0.35			0.59			0.66			0.75			0.35			0.75
Ratio of noncovered nonperforming assets to noncovered loan, leases and other real estate owned	0.63			0.66			0.66			0.67			0.75			0.63			0.75
Total	0.63			0.65			0.66			0.67			0.75			0.63			0.75
Ratio of total nonperforming assets to total loans, leases and other real estate owned																						0.52			0.54			0.59			0.61				0.63			0.52			0.63
Tier 1 risk-based capital ratio	12.95			12.69			12.57			12.42			12.50			12.95			12.50			13.23			13.06			13.38			12.88				12.95			13.23			12.95
Common equity Tier 1 ratio	12.95			12.69			12.57			12.42			12.50			12.95			12.50			13.23			13.06			13.38			12.88				12.95			13.23			12.95
Total risk-based capital ratio	14.34			14.07			13.99			13.85			13.96			14.34			13.96			14.57			14.43			14.70			14.21				14.34			14.57			14.34
Leverage capital ratio	9.43			9.33			9.15			9.05			9.07			9.43			9.07			10.11			9.99			10.02			9.47				9.43			10.11			9.43
Dividend payout ratio	5.38			2.68			5.33			6.83			7.01			4.01			6.25			3.57			4.50			4.19			7.73				5.38			4.05			4.01
Average loans and leases to average deposits	78.44			77.61			76.94			76.33			76.16			77.67			75.82			81.68			80.41			80.30			79.12				78.44			80.81			77.67

⁽¹⁾~~Loans~~Average loan and ~~leases~~lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and ~~loans held for sale.~~leases.

BUSINESS COMBINATIONS

~~Guaranty~~Palmetto Heritage Bancshares, Inc.

Capital Commerce Bancorp, Inc.

On October 2, 2018, FCB completed the merger of Milwaukee, Wisconsin-based Capital Commerce Bancorp, Inc. (Capital Commerce) and its subsidiary, Securant Bank & Trust, into FCB. Under the terms of the agreement, cash consideration of $4.75 per share was paid to the shareholders of Capital Commerce for each share of Capital Commerce's common stock totaling approximately $28.1 million. The Capital Commerce transaction was accounted for under the acquisition method of accounting. The merger allowed FCB to expand its presence and enhance banking efforts in the Milwaukee market. As of September 30, 2018, Capital Commerce reported $222.3 million in consolidated assets, $189.6 million in loans and $171.9 million in deposits.

HomeBancorp, Inc.

On May ~~5, 2017,~~1, 2018, FCB ~~entered~~completed the merger of Tampa, Florida-based HomeBancorp, Inc. (HomeBancorp) and its subsidiary, HomeBanc, into anFCB. Under the terms of the merger agreement, ~~with~~cash consideration of $15.03 was paid to the ~~FDIC, as Receiver,~~shareholders of HomeBancorp for each share of HomeBancorp's common stock and total consideration was $112.7 million. The merger allowed FCB to ~~purchase certain assets~~expand its footprint in Florida by entering into two new markets in Tampa and assume certain liabilities of Guaranty. The acquisition provides FCB the opportunity to grow capital and enhance earnings. This was an FDIC-assisted transaction; however, it has no shared-loss agreement.Orlando.

The ~~Guaranty~~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~~value on the acquisition date. At the date of acquisition, non-PCI loans acquired were $550.6 million and PCI loans acquired were $15.6 million.

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

Table 2

HomeBancorp



(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

Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair values becomes available.

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

~~Table 2~~

~~Guaranty Bank~~

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

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

~~Harvest Community Bank~~

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

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

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

~~Table 3~~

~~Harvest Community Bank~~

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

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

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

FDIC-Assisted Transactions

BancShares completed ~~nine~~eleven FDIC-assisted transactions during the period beginning in 2009 through ~~2016, and it acquired HCB and Guaranty in its tenth and eleventh such transaction during~~ 2017. ~~These transactions provided significant contributions to our results of operations.~~ Prior to its merger into BancShares in 2014, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions. These transactions ~~between 2009~~provided us significant contributions to capital and ~~2011.~~earnings. Nine of the fourteen FDIC-assisted transactions (including the three completed by Bancorporation) included shared-loss agreements that, for their terms, ~~protected~~protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. ~~The Capitol City Bank & Trust, North Milwaukee State Bank, First CornerStone Bank, Harvest Community Bank and Guaranty Bank transactions did not include shared-loss agreements.~~

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

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

The shared-loss agreements for two FDIC-assisted transactions include provisions related to payments that may be owed to the FDIC ~~until~~at the termination of the agreements (clawback liability). As of September 30, 2018 and December 31, 2017, the estimated clawback liability was $104.6 million and $101.3 million, respectively. The clawback liability payment dates are March ~~2020.~~2020 and March 2021.

Table 43

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


	Three months ended																					Three months ended
	September 30, 2017							June 30, 2017							September 30, 2016							September 30, 2018							September 30, 2017
				Interest							Interest							Interest							Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	22,997,195		$	247,262	4.27	%	$	22,575,323		$	236,580	4.20	%	$	21,026,510		$	220,480	4.17	%	$	24,698,799		$	272,868	4.39	%	$	22,997,195		$	247,262	4.27	%
Investment securities:
U. S. Treasury	1,617,153			4,580		1.12		1,622,936			4,453		1.10		1,528,010			3,018		0.79		1,504,594			7,104		1.87		1,617,153			4,580		1.12
Government agency	41,001			171		1.66		52,049			203		1.56		321,664			711		0.88		129,634			840		2.59		41,001			171		1.66
Mortgage-backed securities	5,075,795			23,912		1.88		5,278,731			24,756		1.88		4,470,507			18,833		1.69		5,266,282			29,160		2.21		5,075,795			23,912		1.88
Corporate bonds	62,338			974		6.25		60,356			932		6.17		43,535			648		5.95
Other	110,058			164		0.59		98,195			154		0.63		88,816			316		1.41
Corporate bonds and other																						121,855			1,609		5.28		62,338			974		6.25
State, county and municipal																						—			—		—		—			—		—
Marketable equity securities																						106,724			249		0.93		110,058			164		0.59
Total investment securities	6,906,345			29,801		1.72		7,112,267			30,498		1.72		6,452,532			23,526		1.46		7,129,089			38,962		2.18		6,906,345			29,801		1.72
Overnight investments	2,652,057			8,367		1.25		2,417,127			6,404		1.06		2,967,550			3,785		0.51		1,058,388			4,721		1.77		2,652,057			8,367		1.25
Total interest-earning assets	32,555,597			$	285,430	3.48	%	32,104,717			$	273,482	3.42	%	30,446,592			$	247,791	3.24	%	32,886,276			$	316,551	3.83	%	32,555,597			$	285,430	3.48	%
Cash and due from banks	354,598							503,205							464,828							268,307							354,598
Premises and equipment	1,135,003							1,130,796							1,126,935							1,169,440							1,135,003
FDIC shared-loss receivable	4,687							5,207							6,784
Allowance for loan and lease losses	(229,354		)					(222,882		)					(209,547		)					(225,627		)					(229,354		)
Other real estate owned	56,815							57,044							67,583			��				45,037							56,815
Other assets	713,157							665,440							752,242							793,742							717,844
Total assets	$	34,590,503						$	34,243,527						$	32,655,417						$	34,937,175						$	34,590,503

Liabilities
Interest-bearing deposits:
Checking with interest	$	4,981,667		$	255	0.02	%	$	4,978,159		$	253	0.02	%	$	4,475,963		$	231	0.02	%	$	5,177,349		$	319	0.02	%	$	4,981,667		$	255	0.02	%
Savings	2,320,899			173		0.03		2,293,589			188		0.03		2,055,877			157		0.03		2,506,421			210		0.03		2,320,899			173		0.03
Money market accounts	8,053,197			1,690		0.08		8,107,107			1,688		0.08		8,060,290			1,568		0.08		7,878,484			2,455		0.12		8,053,197			1,690		0.08
Time deposits	2,559,977			1,721		0.27		2,745,473			2,003		0.29		2,900,840			2,501		0.34		2,367,980			2,163		0.36		2,559,977			1,721		0.27
Total interest-bearing deposits	17,915,740			3,839		0.09		18,124,328			4,132		0.09		17,492,970			4,457		0.10		17,930,234			5,147		0.11		17,915,740			3,839		0.09
Repurchase agreements	594,344			613		0.41		718,700			539		0.30		766,893			489		0.25		547,385			398		0.29		594,344			613		0.41
Other short-term borrowings	86,631			816		3.71		87,609			637		2.88		12,162			51		1.68		43,720			287		2.57		86,631			816		3.71
Long-term obligations	887,948			5,890		2.61		799,319			5,625		2.82		842,715			5,648		2.68		261,821			2,512		3.77		887,948			5,890		2.61
Total interest-bearing liabilities	19,484,663			11,158		0.22		19,729,956			10,933		0.22		19,114,740			10,645		0.22		18,783,160			8,344		0.18		19,484,663			11,158		0.22
Noninterest-bearing deposits	11,403,644							10,963,524							10,116,448							12,307,095							11,403,644
Other liabilities	418,152							391,043							366,074							376,552							418,152
Shareholders' equity	3,284,044							3,159,004							3,058,155							3,470,368							3,284,044
Total liabilities and shareholders' equity	$	34,590,503						$	34,243,527						$	32,655,417						$	34,937,175						$	34,590,503
Interest rate spread						3.26	%						3.20	%						3.02	%						3.65	%						3.26	%

Net interest income and net yield on interest-earning assets				$	274,272	3.35	%				$	262,549	3.28	%				$	237,146	3.10	%				$	308,207	3.73	%				$	274,272	3.35	%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0 percent, 21.0 percent and 35.0 percent ~~for each period and~~as well as state income tax rates of ~~3.1~~3.4 percent, ~~3.1~~3.4 percent and ~~5.5~~3.1 percent for the three months ended September 30, ~~2017,~~2018, June 30, ~~2017~~2018 and September 30, ~~2016,~~2017, respectively. The taxable-equivalent adjustment was ~~$1,097, $940~~$845, $802 and ~~$1,297~~$1,097 for the three months ended September 30, ~~2017,~~2018, June 30, ~~2017~~2018 and September 30, ~~2016,~~2017, respectively.

Table 54

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



	Nine months ended														Nine months ended
	September 30, 2017							September 30, 2016							September 30, 2018							September 30, 2017
				Interest							Interest							Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Loans and leases	$	22,511,818		$	711,634	4.23	%	$	20,678,838		$	654,824	4.23	%	$	24,193,870		$	787,198	4.35	%	$	22,511,818		$	711,634	4.23	%
Investment securities:
U.S. Treasury	1,628,129			13,232		1.09		1,533,881			8,891		0.77		1,534,720			21,016		1.83		1,628,129			13,232		1.09
Government agency	48,819			578		1.58		385,854			2,586		0.89		76,829			1,408		2.44		48,819			578		1.58
Mortgage-backed securities	5,198,001			72,990		1.87		4,574,755			58,399		1.70		5,277,376			84,438		2.13		5,198,001			72,990		1.87
Corporate bonds	59,952			2,886		6.42		22,320			1,011		6.04
Corporate bonds and other															94,293			3,917		5.54		59,952			2,886		6.42
State, county and municipal	—			—		—		65			1		2.74		254			8		4.07		—			—		—
Other	98,977			452		0.61		65,729			658		1.34
Marketable equity securities															107,984			725		0.90		98,977			452		0.61
Total investment securities	7,033,878			90,138		1.71		6,582,604			71,546		1.45		7,091,456			111,512		2.10		7,033,878			90,138		1.71
Overnight investments	2,445,335			19,247		1.05		2,734,160			10,676		0.52		1,342,252			15,932		1.59		2,445,335			19,247		1.05
Total interest-earning assets	31,991,031			$	821,019	3.43	%	29,995,602			$	737,046	3.28	%	32,627,578			$	914,642	3.75	%	31,991,031			$	821,019	3.43	%
Cash and due from banks	451,056							463,466							281,146							451,056
Premises and equipment	1,131,967							1,127,071							1,158,443							1,131,967
FDIC shared-loss receivable	5,114							7,969
Allowance for loan and lease losses	(224,380		)					(207,476		)					(223,835		)					(224,380		)
Other real estate owned	57,953							66,504							47,408							57,953
Other assets	700,784							722,946							737,912							705,898
Total assets	$	34,113,525						$	32,176,082						$	34,628,652						$	34,113,525

Liabilities
Interest-bearing deposits:
Checking with interest	$	4,932,073		$	760	0.02	%	$	4,413,467		$	649	0.02	%	$	5,166,255		$	926	0.02	%	$	4,932,073		$	760	0.02	%
Savings	2,258,979			545		0.03		2,005,873			453		0.03		2,451,667			575		0.03		2,258,979			545		0.03
Money market accounts	8,166,737			5,237		0.09		8,159,686			4,853		0.08		8,001,430			6,329		0.11		8,166,737			5,237		0.09
Time deposits	2,706,107			5,865		0.29		2,982,460			7,762		0.35		2,370,137			5,594		0.32		2,706,107			5,865		0.29
Total interest-bearing deposits	18,063,896			12,407		0.09		17,561,486			13,717		0.10		17,989,489			13,424		0.10		18,063,896			12,407		0.09
Repurchase agreements	660,712			1,556		0.31		720,460			1,376		0.26		549,863			1,319		0.32		660,712			1,556		0.31
Other short-term borrowings	67,614			1,629		3.18		5,785			52		1.21		60,417			1,621		3.55		67,614			1,629		3.18
Long-term obligations	835,000			17,013		2.69		803,780			17,072		2.83		299,232			7,802		3.44		835,000			17,013		2.69
Total interest-bearing liabilities	19,627,222			32,605		0.22		19,091,511			32,217		0.23		18,899,001			24,166		0.17		19,627,222			32,605		0.22
Noninterest-bearing deposits	10,918,458							9,713,160							11,950,003							10,918,458
Other liabilities	400,161							383,956							378,198							400,161
Shareholders' equity	3,167,684							2,987,455							3,401,450							3,167,684
Total liabilities and shareholders' equity	$	34,113,525						$	32,176,082						$	34,628,652						$	34,113,525
Interest rate spread						3.21	%						3.05	%						3.58	%						3.21	%

Net interest income and net yield on interest-earning assets				$	788,414	3.29	%				$	704,829	3.14	%				$	890,476	3.65	%				$	788,414	3.29	%

Loans and leases include PCI loans, non-PCI loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0 percent and 35.0 percent ~~for each period and~~as well as state income tax rates of ~~3.1~~3.4 percent and ~~5.5~~3.1 percent for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The taxable-equivalent adjustment was ~~$3,287~~$2,458 and ~~$4,071~~$3,287 for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

Table 65

Changes in Consolidated Taxable Equivalent Net Interest Income


	Three months ended September 30, 2017									Nine months ended September 30, 2017									Three months ended September 30, 2018									Nine months ended September 30, 2018
	Change from prior year period due to:									Change from prior year period due to:									Change from prior year period due to:									Change from prior year period due to:
(Dollars in thousands)	Volume			Yield/Rate			Total Change			Volume			Yield/Rate			Total Change			Volume			Yield/Rate			Total Change			Volume			Yield/Rate			Total Change
Assets
Loans and leases	$	21,098		$	5,684		$	26,782		$	57,401		$	(591	)	$	56,810		$	18,482		$	7,124		$	25,606		$	54,288		$	21,276		$	75,564
Investment securities:
U. S. Treasury	234			1,328			1,562			606			3,735			4,341			(425		)	2,949			2,524			(994		)	8,778			7,784
Government agency	(892		)	352			(540		)	(3,127		)	1,119			(2,008		)	471			198			669			424			406			830
Mortgage-backed securities	2,756			2,323			5,079			8,352			6,239			14,591			978			4,270			5,248			1,213			10,235			11,448
Corporate bonds	287			39			326			1,758			117			1,875
Corporate bonds and other																			858			(223		)	635			1,540			(509		)	1,031
State, county and municipal	—			—			—			(1		)	—			(1		)	—			—			—			8			—			8
Other	54			(206		)	(152		)	244			(450		)	(206		)
Marketable equity securities																			(7		)	92			85			49			224			273
Total investment securities	2,439			3,836			6,275			7,832			10,760			18,592			1,875			7,286			9,161			2,240			19,134			21,374
Overnight investments	(679		)	5,261			4,582			(1,695		)	10,266			8,571			(6,072		)	2,426			(3,646		)	(10,927		)	7,612			(3,315		)
Total interest-earning assets	$	22,858		$	14,781		$	37,639		$	63,538		$	20,435		$	83,973		$	14,285		$	16,836		$	31,121		$	45,601		$	48,022		$	93,623
Liabilities
Interest-bearing deposits:
Checking with interest	$	25		$	(1	)	$	24		$	94		$	17		$	111		$	37		$	27		$	64		$	101		$	65		$	166
Savings	18			(2		)	16			74			18			92			26			11			37			37			(7		)	30
Money market accounts	60			62			122			(111		)	495			384			(41		)	806			765			(120		)	1,212			1,092
Time deposits	(280		)	(500		)	(780		)	(641		)	(1,256		)	(1,897		)	(135		)	577			442			(803		)	532			(271		)
Total interest-bearing deposits	(177		)	(441		)	(618		)	(584		)	(726		)	(1,310		)	(113		)	1,421			1,308			(785		)	1,802			1,017
Repurchase agreements	(147		)	271			124			(103		)	283			180			(42		)	(173		)	(215		)	(272		)	35			(237		)
Other short-term borrowings	509			256			765			1,026			551			1,577			(341		)	(188		)	(529		)	(183		)	175			(8		)
Long-term obligations	346			(104		)	242			724			(783		)	(59		)	(5,019		)	1,641			(3,378		)	(12,358		)	3,147			(9,211		)
Total interest-bearing liabilities	531			(18		)	513			1,063			(675		)	388			(5,515		)	2,701			(2,814		)	(13,598		)	5,159			(8,439		)
Change in net interest income	$	22,327		$	14,799		$	37,126		$	62,475		$	21,110		$	83,585		$	19,800		$	14,135		$	33,935		$	59,199		$	42,863		$	102,062

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

RESULTS OF OPERATIONS

Net Interest Income and Margin

Third Quarter 2018 compared to Third Quarter 2017

~~Compared to the second quarter of 2017, net~~Net interest income ~~increased $11.6 million, or by 4.4 percent, to $273.2~~was $307.4 million for the third quarter of 2018, an increase of $34.2 million or 12.5 percent, compared to the third quarter of 2017. OnThis increase was primarily driven by a ~~taxable-equivalent basis,~~$25.9 million increase in net loan interest income as a result of loan growth and improved yields. Net interest income also benefited from improved yields on investment securities and a decline in interest expense largely related to lower borrowing costs as a result of debt extinguishments during 2018. These positive drivers were partially offset by a $3.6 million decrease in interest income earned on lower overnight investment balances.

The taxable equivalent net interest ~~income increased $11.7 million, or by 4.5~~margin was 3.73 percent, an increase of 38 basis points compared to ~~$274.3 million during~~ the third quarter of 2017. The increase was due to higher non-PCI loan interest income of $11.7 million and a $2.0 million increase in interest income earned on overnight investments. These increases were partially offset by a decrease in PCI loan interest income of $1.2 million, lower investment securities interest income of $700 thousand and an increase in interest expense of $225 thousand primarily related to higher rates paid on short-term borrowings. Net interest income attributed to Guaranty in the third quarter of 2017 was approximately $8.7 million.

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

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

balances and lower borrowing costs. Yields were positively impacted by the federal funds rate increases in December of 2017, and in each of March, June, and September of 2018 to end the period at 2.25 percent, as well as stabilized deposit and liability costs.

Average ~~quarter-to-date~~ interest earning assets increased by ~~$450.9~~$330.7 million, since the second quarter of 2017, reflecting a $421.9 million increase in average loans outstanding, due to originated loan growth, and a $234.9 million increase in average overnight investments, offset by a $205.9 million decrease in average investment securities. Average quarter-to-date interest earning assets increased by $2.11 billion compared to the ~~same~~third quarter in ~~the prior year. Within interest-earning assets,~~2017. Average loans ~~experienced the most significant increase,~~increased $1.70 billion primarily due to originated loan growth, particularly within the commercial loan segment, and contributions from the ~~acquisitions~~HomeBancorp acquisition. There was also an increase in average investment securities of ~~HCB and Guaranty contributing~~$222.7 million. Offsetting these increases was a ~~net increase~~decrease in average overnight investments of ~~$1.85 billion.~~$1.59 billion primarily related to the use of funds for the extinguishment of debt obligations in the first quarter of 2018 coupled with loan growth. The ~~rate~~yield on ~~interest-earnings~~interest-earning assets ~~was~~increased by 35 basis points from 3.48 percent ~~an increase from 3.42 percent and 3.24 percent for~~since the ~~second quarter of 2017 and~~ third quarter of ~~2016,~~2017. Yields on our loans and leases increased by 12 basis points primarily due to higher yielding commercial loans and equity lines. Yields on our investment securities portfolio and overnight investments increased by 46 basis points and 52 basis points, respectively. Higher yielding mortgage-backed securities was the primary driver to the yield increase in investment securities while the increase in the federal funds rate contributed to the yield increase in overnight investments.

Average interest-bearing liabilities decreased ~~by $245.3~~$701.5 million compared to the ~~second~~third quarter of ~~2017,~~2017. This decrease is primarily due to a ~~$208.6 million~~ decrease in average ~~interest-bearing deposits and a $125.3~~long-term obligations of $626.1 million largely related to the extinguishment of $745.0 million of FHLB debt during 2018, partially offset by $125.0 million in additional FHLB borrowings during 2018. Also contributing to the decrease were declines in average short-term borrowings ~~offset~~of $89.9 million. Rates on our interest bearing deposits and long-term borrowings increased by ~~an $88.6 million increase in average long-term obligations. When~~2 basis points and 116 basis points, respectively, driven by the addition of acquired HomeBanc accounts. Rates on short-term borrowings decreased by 37 basis points.

Nine Months of 2018 compared to ~~the same quarter in the prior year, average interest-bearing liabilities increased $369.9 million primarily due to growth in average interest-bearing deposits and the acquisitions~~Nine Months of ~~HCB and Guaranty. The rate on interest-bearing liabilities was 0.22 percent, unchanged from the second quarter of 2017 and third quarter of 2016.~~

~~Year-to-date~~ 2017

Net interest income for the ~~first~~ nine months ~~of 2017~~ended September 30, 2018, was ~~$785.1~~$888.0 million, ~~including $13.7 contributed from Guaranty,~~ an increase of ~~$84.4~~$102.9 million, or ~~12.0~~13.1 percent, compared to the same period of ~~2016. On a taxable-equivalent basis, net interest income was $788.4 million, an increase of $83.6 million, or 11.9 percent, from the same period of 2016.~~2017. Loan interest income increased ~~$57.5~~$76.7 million ~~from the same period of 2016~~ as a result of a ~~$58.0~~$90.1 million increase in non-PCI loan interest income primarily due to originated loan growth, particularly in the commercial mortgage as well as commercial and industrial loan portfolios, and loans acquired in the HomeBancorp acquisition coupled with improved loan yields, offset by a ~~$524 thousand~~$13.4 million decline in PCI loan interest income due to ~~continued~~PCI loan portfolio run-off. ~~Net~~Additionally, net interest income benefited from ~~an $18.7~~a $21.1 million improvement in investment securities interest income ~~higher income earned on overnight investments of $8.6 million,~~ and reduced ~~interest-bearing deposit~~borrowing costs of ~~$1.3~~$8.4 million. ~~Net interest income was negatively impacted by a $1.8 million increase in short-term borrowing costs.~~

The taxable-equivalent net interest margin for the nine months ended September 30, 2018, increased 1536 basis points to ~~3.29~~3.65 percent, ~~in the first nine months of 2017,~~ compared to the same period ~~of 2016.~~in 2017. The margin improvement was primarily due to ~~improved~~higher loan ~~and investment~~ yields and ~~higher loan and~~improved investment ~~balances. Interest income earned on overnight investments was positively~~yields. Yields for the first nine months of 2018 were also favorably impacted by ~~three 25 basis point~~incremental increases in the federal funds rate ~~since the first nine months of 2016.~~and Tax Act.

Average ~~year-to-date~~ interest earning assets for the nine months ended September 30, 2018, increased by ~~$2.00 billion in the first nine months of 2017~~$636.5 million compared to the same period ~~of 2016,~~in 2017. This increase was primarily due to a ~~$1.83~~$1.68 billion increase in average outstanding loans due to originated loan growth, ~~and~~particularly within the commercial loan portfolio, the impact of the ~~HCB~~HomeBancorp acquisition, and ~~Guaranty acquisitions. Average year-to-date interest earning~~a $57.6 million increase in average investment securities. These increases were offset by a decline in average overnight investments of $1.10 billion primarily related to the use of funds for the extinguishment of FHLB debt obligations. The yield on interest-earning assets ~~also~~was 3.75 percent for the nine months ended September 30, 2018, an increase from 3.43 percent compared to the same period in 2017. Yields on our loans and leases increased by 12 basis points, primarily due to higher ~~average~~yielding commercial loans and equity lines. Yields on our investment securities ~~of $451.3 million, partially offset~~portfolio and overnight investments increased by ~~a $288.8 million decline~~39 basis points and 54 basis points, respectively. Higher yielding mortgage-backed securities was the primary driver to the yield increase in ~~average~~investment securities while the increase in the federal funds rate contributed to the yield increase in overnight investments.

Average year-to-date interest-bearing liabilities ~~increased~~for the nine months ended September 30, 2018, decreased by ~~$535.7~~$728.2 million compared to the ~~first nine months of 2016,~~same period in 2017. This decrease was primarily due to a ~~$502.4~~decline of $535.8 million ~~increase in average interest-bearing deposits primarily due to organic growth and the HCB and Guaranty acquisitions. The $31.2 million increase~~ in average long-term obligations primarily related to the extinguishment of FHLB debt obligations, partially offset by additional FHLB borrowings and $21.5 million in senior subordinated debt acquired from HomeBancorp. The rate on interest-bearing liabilities for the nine months ended September 30, 2018 was 0.17 percent, a ~~$2.1 million increase in average~~decrease from 0.22 percent during the nine months ended September 30, 2017. Rates on our interest bearing deposits increased by 1 basis point while repurchase agreements, other short-term borrowings ~~are attributable to the year-to-date increase in average interest-bearing liabilities.~~and long-term borrowings increased by 1 basis point, 37 basis points and 75 basis points, respectively. The increase in ~~long-term obligations was primarily due~~borrowings for the nine months ended September 30, 2018, compared to the ~~addition of $175.0 million FHLB advances during~~corresponding period in 2017, to mitigate interest rate risk from long-term fixed rate loans, offset by certain obligations with maturities less than one year being reclassified to short-term borrowings. The increase in average short-term borrowings was due to ~~certain long-term obligations with maturities less than one year being reclassified to short-term borrowings.~~higher rates on remaining borrowings after the extinguishment of debt in the first quarter of 2018.

Noninterest Income

Table 6

Noninterest Income



	Three months ended					Nine months ended
(Dollars in thousands)	September 30, 2018			September 30, 2017		September 30, 2018		September 30, 2017
Gain on acquisitions	$	—		$	—	$	—	$	134,745
Cardholder services, net	14,678			15,487		44,385		42,848
Merchant services, net	5,857			5,528		18,512		17,085
Service charges on deposit accounts	25,994			25,951		78,489		73,955
Wealth management services	24,459			21,234		73,543		64,116
Securities gains, net	—			1,337		—		4,664
Marketable equity securities gains, net	3,854			—		9,265		—
Other service charges and fees	7,651			7,073		22,887		21,302
Mortgage income	4,123			6,775		13,063		19,317
Insurance commissions	2,755			2,894		9,471		9,015
ATM income	1,919			2,596		6,307		6,882
Recoveries of PCI loans previously charged off	2,751			5,235		13,582		14,769
Gain on extinguishment of debt	703			—		26,517		—
Other	(213		)	1,952		2,121		4,652
Total noninterest income	$	94,531		$	96,062	$	318,142	$	413,350

Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels. The primary sources of noninterest income ~~have~~ traditionally ~~consisted~~consist of fees and service charges generated from cardholder services, merchant services, ~~service charges on~~ deposit accounts, ~~and~~ wealth management ~~services. Recoveries~~services and mortgage lending and servicing. Other sources include gains on acquisitions, gains on the sale of investment securities and recoveries on PCI loans that have been previously ~~charged-off are additional sources~~charged-off. Noninterest income for the period ended September 30, 2018, includes a full nine months impact from the Guaranty Bank acquisition compared to five months of ~~noninterest income. BancShares records~~activity for the portion of recoveries not covered under shared-loss agreements as noninterest income rather than as an adjustment to the allowance for loan losses. Charge-offs on PCI loans are recorded against the discount recognized on the date of acquisition versus through the allowance for loan losses unless an allowance was established subsequent to acquisition date due to declining expected cash flow.

~~Table 7~~period ending September 30, 2017.

Noninterest ~~Income~~

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

~~Total noninterest~~ income for the third quarter of 2018 was $94.5 million, compared to $96.1 million for the same period of 2017, ~~was $125.4 million. Excluding acquisition gains~~a decrease of ~~$122.7~~$1.6 million, ~~noninterest income declined $85 thousand from the second quarter of 2017.~~or by 1.59 percent. The most significant components of the change were as follows:

~~Investment securities gains~~Mortgage income decreased ~~$2.0~~$2.7 million asprimarily due to a ~~result of~~decrease in gains on ~~mortgage backed securities~~ sales ~~in the second quarter.~~and lower hedge income driven by higher interest rates.

~~Mortgage~~Other income ~~increased $1.8~~decreased $2.2 million primarily ~~resulting from mortgage servicing rights retained related~~due to ~~the sale of certain residential mortgage loans.~~gains on loans sold in 2017 and a decrease in FHLB Stock dividends driven by a reduction in outstanding FHLB advances.

Wealth management fees increased by $3.2 million primarily due to higher product sales volume and higher trust income driven by growth in assets under management.

Noninterest income was $318.1 million for the ~~third quarter~~first nine months of 2018, compared to $413.4 million for the same period of 2017, ~~excluding~~a decrease of $95.3 million, or by 23.03 percent. Excluding acquisition gains of ~~$837 thousand,~~$134.7 million and gains on the extinguishment of FHLB obligations, total noninterest income increased $13.0 million, or by ~~$8.4 million from the third quarter of 2016.~~4.67 percent. The increase was primarily attributable to the following drivers:

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

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

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

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

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

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

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

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

~~An increase in wealth management services of $3.3~~$9.4 million primarily due to higher ~~annuity fees~~product sales volume and growth in assets under management.

Marketable equity securities gains, net was $9.3 million in 2018 due to the implementation of ASU 2016-01.

Service charges on deposit accounts increased ~~sales volume~~by $4.5 million primarily due to the Guaranty Bank acquisition and an increase in ~~net trust~~the volume of overdraft transactions.

Mortgage income decreased by $6.3 million resulting from ~~higher commissions earned.~~

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

~~Decrease in investment securities gains of $12.8 million~~lower hedge income primarily due to ~~lower investment portfolio sales~~higher interest rates as well as a reduction in ~~2017.~~

gains on sales.

Noninterest Expense

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

Table 87

Noninterest Expense


	Three months ended						Nine months ended				Three months ended				Nine months ended
(Dollars in thousands)	September 30, 2017		June 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Salaries and wages	$	121,086	$	118,169	$	107,762	$	351,518	$	315,720	$	133,867	$	124,888	$	392,911	$	363,076
Employee benefits	27,030		27,095		26,750		83,418		79,761		28,850		25,416		90,656		77,976
Occupancy expense	26,594		26,059		24,857		77,415		74,824		26,632		26,594		80,686		77,415
Equipment expense	23,887		24,654		23,736		73,129		68,796		25,880		23,887		76,021		73,129
Merchant processing	19,653		19,677		18,686		57,624		52,924
Cardholder processing	8,576		7,709		7,416		23,092		22,075
FDIC insurance expense	5,449		5,705		5,796		16,747		15,173		5,186		5,449		16,411		16,747
Collection and foreclosure-related expenses	3,443		2,376		4,039		9,582		9,732		4,269		3,443		12,389		9,582
Merger-related expenses	562		6,853		3,764		8,248		5,187		1,126		562		4,136		8,248
Processing fees paid to third parties	9,182		5,426		4,912		18,924		13,648		7,297		9,182		23,383		18,924
Cardholder reward programs	1,308		2,954		2,762		6,806		7,661
Telecommunications	3,227		3,224		3,589		10,063		10,641		2,832		3,227		8,176		10,063
Consultant expense	3,911		3,423		3,092		9,213		7,604		3,101		3,911		9,107		9,213
Advertising expense	2,789		2,947		2,689		8,236		7,557		2,713		2,789		7,806		8,236
Core deposit intangible amortization	4,532		4,404		4,121		12,857		12,655		4,366		4,532		12,876		12,857
Other	25,738		24,931		23,262		70,046		73,249		21,418		23,762		67,035		63,923
Total noninterest expense	$	286,967	$	285,606	$	267,233	$	836,918	$	777,207	$	267,537	$	257,642	$	801,593	$	749,389

Noninterest expense for the period ended September 30, 2018, includes a full nine months impact from the Guaranty Bank acquisition compared to five months of activity for the period ending September 30, 2017.

Noninterest expense was ~~$287.0~~$267.5 million in the third quarter of 2018, compared to $257.6 million for the same period in 2017, an increase of ~~$1.4~~$9.9 million, ~~from the second quarter of 2017.~~or by 3.84 percent. The change was primarily attributable to ~~the following drivers:~~

~~Processing fees paid to third parties~~personnel expenses that increased ~~$3.8~~by $12.4 million ~~primarily due to transaction-related services for Guaranty Bank.~~

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

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

~~Merger-related expenses decreased $6.3 million primarily related to non-recurring expenses incurred from~~headcount, which includes the effects of the Guaranty ~~acquisition during the second quarter.~~

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

Bank and HomeBancorp acquisitions, merit and incentive increases and higher benefit costs.

Noninterest expense was ~~$287.0~~$801.6 million infor the ~~third quarter~~first nine months of 2018, compared to $749.4 million for the same period in 2017, an increase of ~~$19.7~~$52.2 million, ~~from the same period of 2016.~~or by 6.97 percent. The ~~change~~increase was primarily attributable to the following drivers:

Personnel expense increased ~~by $13.6~~$42.5 million primarily due to ~~merit increases, acquisitions,~~ higher ~~incentive costs~~wages and ~~increased headcount.~~

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

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

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

~~Merger-related expenses decreased $3.2 million primarily related to non-recurring expenses incurred~~benefits from the ~~Cordia~~Guaranty Bank acquisition, ~~during~~increased headcount, which includes the ~~third quarter~~effect of ~~2016.~~

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

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

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

~~Equipment expense increased $4.3~~$4.5 million primarily due to ~~software maintenance~~core bank processing fees related to Guaranty Bank and ~~software projects placed into service over the past year~~an increase in bill pay services used by bank customers.

~~Merchant and cardholder processing~~

Occupancy expense increased ~~$5.7~~by $3.3 million ~~related to higher sales volume.~~

~~Merger-related expenses increased $3.1 million~~ primarily due to higher building maintenance and landscaping costs as well as new expenses related to the HomeBancorp and Guaranty ~~and HCB acquisitions in 2017.~~Bank acquisitions.

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

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

Income Taxes

Income tax expense was ~~$36.6 million, $77.2~~$16.2 million and ~~$27.5~~$36.6 million for the third quarter of ~~2017, second quarter of 2017~~2018 and third quarter of ~~2016,~~2017, representing effective tax rates of ~~35.3 percent, 36.4~~12.1 percent and ~~34.9~~35.3 percent during the respective periods. Income tax expense was ~~$151.2~~$76.8 million and ~~$97.2~~$151.2 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, representing aneffective tax rates of 19.8 percent and 36.0 percent for the respective nine month periods. The income tax expense and effective tax rate decreases during the reported periods in 2018 compared to those in 2017 were primarily due to the impact of ~~36.0~~the Tax Act, which reduced the federal tax rate from 35.0 percent to 21.0 percent. Additional information was obtained in the third quarter of 2018 affecting the provisional amount initially recorded for ~~both nine month periods.~~the quarter ended December 31, 2017 to account for the effects of the Tax Act. The nature of the additional information primarily relates to a decision made by BancShares to accelerate deductions in its 2017 tax return which were effectuated by making an additional contribution to its pension plan and requesting an automatic change in its tax accounting method related to depreciation. As a result, a tax benefit of $15.7 million was recorded in the third quarter of 2018. The ultimate impact will be finalized in the fourth quarter and may differ due to additional analysis, changes in interpretations and assumptions as well as additional regulatory guidance that may be issued.

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

INTEREST-EARNING ASSETS

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

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

Interest-earning assets averaged ~~$32.56~~$32.89 billion and ~~$31.08~~$32.87 billion for the quarters ended September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The ~~$1.48 billion~~$12.0 million increase from December 31, ~~2016~~2017 was ~~due to~~composed of a ~~$1.45~~$1.3 billion increase in loans and leases ~~primarily as a result of originated loan growth and the acquisitions of Guaranty and HCB, and a $189.5~~coupled with an $84.6 million increase in investment securities, offset by a ~~$161.2 million~~$1.41 billion decline in overnight ~~investments.~~

investments primarily related to the use of funds for the extinguishment of FHLB debt obligations during the first quarter of 2018.

Investment Securities

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

With the adoption of Accounting Standard Update (ASU) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, in the first quarter of 2018, marketable equity investments are no longer classified as investments available for sale and the fair value changes in those investments is reflected in the Consolidated Statements of Income. At adoption, we recorded a cumulative-effect adjustment to the balance sheet resulting in an $18.7 million increase to retained earnings and a decrease to accumulated other comprehensive income (AOCI) on January 1, 2018.

The fair value of total investment securities was ~~$6.99~~$7.03 billion at September 30, ~~2017,~~2018, a decrease of ~~$13.7~~$154.3 million, when compared to ~~$7.01~~$7.18 billion at December 31, ~~2016.~~2017. The decrease in the portfolio from December 31, ~~2016~~2017 was primarily attributable to ~~only~~

not reinvesting a portion of ~~the proceeds from sales,~~U.S. Treasury maturities and ~~pay downs into~~mortgage-backed securities principal paydowns over the ~~investment portfolio.~~period coupled with declines in mortgage-backed securities valuations due to higher interest rates. Investment securities increased ~~$608.1~~$33.0 million from September 30, ~~2016~~2017 to September 30, ~~2017~~2018 primarily due to ~~reinvesting proceeds~~the retention of a portion of HomeBancorp's investment portfolio.

On May 1, 2018, mortgage-backed securities with an amortized cost of $2.49 billion were transferred from ~~sales, maturities~~investments available for sale (AFS) to the held to maturity (HTM) portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $2.38 billion and ~~pay downs~~a weighted average maturity of 13 years. The unrealized loss on these securities ~~back~~at the date of transfer was $109.5 million and continues to be reported as a component of AOCI. This unrealized loss will be amortized out of AOCI into the ~~investment portfolio.~~consolidated statements of income over the remaining expected life of the securities offset by the amortization of the corresponding discount on the transferred securities. FCB has the intent and ability to retain these securities until maturity.

As of September 30, ~~2017,~~2018, investment securities available for sale had a net pre-tax unrealized loss of ~~$11.8~~$88.5 million, compared to a net pre-tax unrealized loss of ~~$72.7~~$48.8 million as of December 31, ~~2016~~2017 and a net pre-tax unrealized ~~gain~~loss of ~~$48.6~~$11.8 million as of September 30, ~~2016.~~2017. After evaluating the AFS securities with unrealized losses, management concluded that no other than temporary impairment existed as of September 30, 2018. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of ~~other comprehensive income,~~AOCI, net of deferred taxes. ~~After evaluating the~~The fair value of equity securities ~~with unrealized losses, management concluded that no other than temporary impairment existed as of~~was $109.9 million at September 30, ~~2017.~~

Sales of investment securities for the three months ended September 30, 2017 resulted in a net realized gain of $1.3 million compared to a net gain of $3.4 million and a net gain of $352 thousand for the three months ended June 30, 2017 and September 30, 2016, respectively. During the nine months ended September 30, 2017 we recognized $4.7 million in net realized gains on sales of investment securities compared to $17.5 million in net realized gains for the corresponding period of 2016.2018.

At September 30, ~~2017,~~2018, mortgage-backed securities represented ~~74.4~~73.4 percent of total investment securities, ~~available for sale,~~ compared to U.S. Treasury, ~~equity~~government agency securities, corporate bonds, other investments and ~~other,~~marketable equity securities, which represented ~~23.1~~21.4 percent, ~~1.6~~1.8 percent, ~~0.8~~1.7 percent, 0.1 percent and ~~0.1~~1.6 percent of the ~~portfolio,~~total investment securities, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.

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

Table 98

Investment Securities


	September 30, 2017				December 31, 2016				September 30, 2016				September 30, 2018				December 31, 2017				September 30, 2017
(Dollars in thousands)	Cost		Fair value		Cost		Fair value		Cost		Fair Value		Cost		Fair value		Cost		Fair value		Cost		Fair Value
Investment securities available for sale:
U.S. Treasury	$	1,619,343	$	1,616,324	$	1,650,675	$	1,650,319	$	1,547,501	$	1,549,530	$	1,509,432	$	1,505,434	$	1,658,410	$	1,657,864	$	1,619,343	$	1,616,324
Government agency	—		—		40,291		40,398		169,609		169,859		127,911		127,545		8,695		8,670		10,284		10,331
Mortgage-backed securities	5,240,922		5,200,341		5,259,466		5,175,425		4,487,083		4,528,370		3,004,219		2,919,796		5,419,379		5,340,756		5,230,638		5,190,010
Equity securities	82,314		113,650		71,873		83,507		88,526		93,011		—		—		75,471		105,208		82,314		113,650
Corporate bonds	54,412		54,873		49,367		49,562		41,363		41,945		119,717		119,933		59,414		59,963		54,412		54,873
Other	7,638		7,689		7,615		7,369		2,115		2,100		4,553		4,643		7,645		7,719		7,638		7,689
Total investment securities available for sale	7,004,629		6,992,877		7,079,287		7,006,580		6,336,197		6,384,815		4,765,832		4,677,351		7,229,014		7,180,180		7,004,629		6,992,877
Investment in marketable equity securities													74,008		109,907		—		—		—		—
Investment securities held to maturity:
Mortgage-backed securities	78		84		98		104		125		133		2,253,416		2,238,664		76		81		78		84
Total investment securities	$	7,004,707	$	6,992,961	$	7,079,385	$	7,006,684	$	6,336,322	$	6,384,948	$	7,093,256	$	7,025,922	$	7,229,090	$	7,180,261	$	7,004,707	$	6,992,961

Loans and Leases

Loans and leases were ~~$23.15~~$24.89 billion at September 30, ~~2017,~~2018, a net increase of ~~$1.41~~$1.29 billion compared to December 31, ~~2016,~~2017, representing growth of ~~8.7~~7.3 percent on an annualized basis. This increase was primarily driven by ~~$902.6~~$902.9 million of organic growth in the non-PCI portfolio and ~~$483.6~~$511.6 million in non-PCI loans acquired in the ~~Guaranty~~HomeBancorp acquisition, ~~at September 30, 2017.~~partially offset by run-off in equity lines of credit. The PCI portfolio ~~increased~~decreased over this period by ~~$25.0~~$125.0 million ~~reflecting~~due to PCI loan portfolio run-off, offset by net PCI loans acquired from ~~Guaranty and HCB of $104.3 million and $68.2 million, respectively, at September 30, 2017, offset by loan run-off of $147.5 million.~~HomeBancorp.

Non-PCI loans increased by ~~$1.89~~$1.93 billion, compared to September 30, ~~2016, reflecting~~2017, due to originated loan growth and loans acquired in the ~~Guaranty~~HomeBancorp transaction. PCI loans decreased ~~by $34.0~~$196.1 million from September 30, ~~2016,~~2017 due to continued pay downs, ~~in the PCI loan portfolio,~~ offset by the contributions from the ~~Guaranty and HCB acquisitions.~~HomeBancorp acquisition.

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

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

~~Non-PCI Loans and Leases~~

The non-PCI portfolio includes loans that management has the intent and ability to hold and are reported at the principal balance outstanding, net of deferred loan fees, including unearned income and unamortized costs, fees, premiums and discounts. Non-PCI loans include originated commercial loans and leases, originated noncommercial loans, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans are not impaired and, therefore, do not have a discount at least in part due to credit quality at the time of acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.

Non-PCI loans and leases at September 30, ~~2017~~2018 were ~~$22.31~~$24.25 billion, representing ~~96.4~~97.4 percent of total loans and leases, compared to ~~$20.93~~$22.83 billion and ~~$20.43~~$22.31 billion at December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively.

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

The non-PCI noncommercial loan portfolio is composed of Residential Mortgage, Revolving Mortgage, Consumer and Construction and Land Development loans. Non-PCI noncommercial loans were $7.90 billion at September 30, 2017, an increase of $731.2 million and $874.9 million compared to December 31, 2016 and September 30, 2016, respectively, resulting from originated loan growth and the Guaranty acquisition.

~~PCI Loans~~

The PCI portfolio includes loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. All nonrevolving loans are evaluated at acquisition and where a discount is required at least in part due to credit quality deterioration, the loans are accounted for under the guidance in ASC Topic 310-30. PCI loans are valued at fair value at the date of acquisition.

PCI loans at September 30, ~~2017~~2018 were ~~$834.2~~$638.0 million, representing ~~3.6~~2.6 percent of total loans and leases, compared to ~~$809.2~~$763.0 million and ~~$868.2~~$834.2 million at December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively.

~~PCI commercial loans were $436.7 million at September 30, 2017, a decrease~~Table 9 provides the composition of ~~$63.3 million since December 31, 2016~~non-PCI and ~~$107.0 million since September 30, 2016, reflecting continued loan run-off, offset by the net~~ PCI loans ~~acquired from Guaranty~~ and HCB. At September 30, 2017, PCI noncommercial loans were $397.4 million, an increase of $88.2 million and $73.0 million since December 31, 2016 and September 30, 2016, respectively, due to the contributions from the HCB and Guaranty acquisitions, offset by continued loan run-off.leases.

Table 109

Loans and Leases


(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2018		December 31, 2017		September 30, 2017
Non-PCI loans and leases:
Commercial:
Construction and land development	$	626,887	$	649,157	$	642,158	$	679,203	$	669,215	$	626,887
Commercial mortgage	9,510,158		9,026,220		8,779,132		10,486,372		9,729,022		9,510,158
Other commercial real estate	434,736		351,291		346,030		471,532		473,433		434,736
Commercial and industrial	2,654,898		2,567,501		2,507,167		3,189,337		2,730,407		2,654,898
Lease financing	866,804		826,270		803,601		616,951		894,801		866,804
Other	322,216		340,264		326,348		296,988		302,176		322,216
Total commercial loans	14,415,699		13,760,703		13,404,436		15,740,383		14,799,054		14,415,699
Noncommercial:
Residential mortgage	3,467,978		2,889,124		2,813,914		4,073,235		3,523,786		3,467,978
Revolving mortgage	2,692,558		2,601,344		2,573,086		2,570,096		2,701,525		2,692,558
Construction and land development	227,184		231,400		234,383		241,436		248,289		227,184
Consumer	1,511,487		1,446,138		1,402,961		1,623,179		1,561,173		1,511,487
Total noncommercial loans	7,899,207		7,168,006		7,024,344		8,507,946		8,034,773		7,899,207
Total non-PCI loans and leases	22,314,906		20,928,709		20,428,780		24,248,329		22,833,827		22,314,906
PCI loans:
Commercial:
Construction and land development	17,406		20,766		23,138
Commercial mortgage	393,557		453,013		491,180
Other commercial real estate	17,771		12,645		14,783
Commercial and industrial	7,064		11,844		11,437
Other	922		1,702		3,167
Total commercial loans	436,720		499,970		543,705
Noncommercial:
Residential mortgage	327,263		268,777		278,872
Revolving mortgage	67,847		38,650		43,509
Construction and land development	—		—		83
Consumer	2,337		1,772		2,031
Total noncommercial loans	397,447		309,199		324,495
Total PCI loans	834,167		809,169		868,200		638,018		762,998		834,167
Total loans and leases	$	23,149,073	$	21,737,878	$	21,296,980	$	24,886,347	$	23,596,825	$	23,149,073

Allowance for Loan and Lease Losses (ALLL)

The ALLL was ~~$231.8~~$219.2 million at September 30, ~~2017,~~2018, representing ~~an increase~~a decrease of ~~$13.0 million and $19.9~~$2.7 million since December 31, ~~2016~~2017 and a decrease of $12.6 million since September 30, ~~2016, respectively.~~2017. The ALLL as a percentage of total loans and leases was ~~1.00~~0.88 percent at September 30, ~~2017,~~2018, compared to ~~1.01~~0.94 percent and 1.00 percent at December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively.

At September 30, ~~2017,~~2018, the ALLL allocated to total non-PCI loans and leases was ~~$218.9~~$208.3 million, or ~~0.98~~0.86 percent of non-PCI loans and leases, compared to ~~$205.0~~$211.9 million, or ~~0.98~~0.93 percent, at December 31, ~~2016~~2017 and ~~$200.3~~$218.9 million, or 0.98 percent, at September 30, ~~2016.~~2017. The decline in the ALLL ~~for non-PCI loans and leases increased~~ from ~~September 30, 2016 primarily~~both periods was largely due to ~~continued~~sustained improvements in credit quality, partially offset by loan ~~growth with comparable credit quality.~~ growth.

The remaining ALLL of ~~$13.0~~$10.9 million relates to PCI loans at September 30, ~~2017,~~2018, compared to ~~$13.8~~$10.0 million and ~~$11.6~~$13.0 million at December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively. The ~~ALLL on~~increase from December 31, 2017 was primarily due to updated cash flow estimates and the decrease from September 30, 2017 was largely due to continued PCI loan portfolio ~~declined from December 31, 2016 primarily due~~run-off coupled with updated cash flow estimates.

BancShares recorded a net provision expense for loan and lease losses of $840 thousand and $16.9 million for the three and nine months ended September 30, 2018, respectively, compared to ~~favorable updates~~$7.9 million and $28.5 million for the three and nine months ended September 30, 2017, respectively. The decrease in ~~loss assumptions for certain pools~~net provision expense during both comparison periods was largely driven by the methodology enhancements as a result of ~~PCI loans based on actual experience. The ALLL on~~sustained credit quality improvements, partially offset by loan growth. There were also changes in the PCI ~~loan portfolio increased from September 30, 2016 primarily due to unfavorable updates in loss assumptions for certain pools of PCI loans based on actual experience, offset~~provision driven by ~~continued loan run-off.~~updated cash flow estimates.

~~The ALLL allocated to originated~~Provision expense for non-PCI loans and leases was ~~1.07 percent of originated non-PCI loans~~$2.4 million and ~~leases at~~$15.9 million for the three and nine months ended September 30, 2018, respectively, compared to $8.5 million and $29.3 million for the three and the nine months ended September 30, 2017, ~~compared to 1.09 percent and 1.10 percent at December 31, 2016 and September 30, 2016,~~ respectively. ~~Originated non-PCI~~

Provision credit for PCI loans were $20.34 billion, $18.82 billion and $18.10 billion at September 30, 2017, December 31, 2016 and September 30, 2016, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.

~~BancShares recorded net provision expense of $7.9 million for loan and lease losses for the third quarter of 2017, compared to $12.3~~was $1.5 million for the ~~second quarter of~~three months ended September 30, 2018 compared to $537 thousand for the three months ended September 30, 2017. ~~The $4.4 million decrease in net provision~~Provision expense was ~~due to lower PCI provision~~

~~expense of $3.1~~$1.0 million and lower non-PCI provision expense of $1.3 million. The decrease in PCI loan provision expense was primarily due to reversals of previously identified impairment as a result of favorable updates in default rates for certain pools of PCI loans based on actual experience. The decrease in non-PCI provision expense was primarily due to lower originated loan growth in the current quarter compared to the second quarter.

Net provision expense increased $439 thousand from the third quarter of 2016. Non-PCI provision expense increased $1.1 million primarily due to higher originated loan growth and higher net charge-offs. The PCI provision expense decreased $614 thousand due to favorable updates in loss assumptions for certain pools of PCI loans based on actual experience. Net provision expense for the nine months ended September 30, ~~2017 was $28.5 million,~~2018 compared to ~~$16.9 million~~a provision credit of $810 thousand for the ~~same period of 2016. The increase~~nine months ended September 30, 2017. These changes in provision ~~expense was primarily due to higher net charge-offs~~are driven by changes in expected cash flows which updates the resulting credit default rate and ~~lower credit quality improvements in~~is a product of loan performance. As such, the ~~current year.~~resulting period over period provision amounts for PCI loans can be volatile.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases for the third quarter of ~~2017~~2018 was ~~0.08~~0.10 percent ~~unchanged from the second quarter of 2017 and~~ compared to ~~0.07~~0.08 percent in the third quarter of ~~2016.~~2017. Net charge-offs for non-PCI loans and leases were $6.5 million during the third quarter of 2018, compared to $4.9 million during the third quarter of 2017, compared to $4.5 million and $3.6 million during the second quarter of 2017 and third quarter of 2016, respectively. On an annualized basis, non-PCI net charge-offs as a percentage of non-PCI average loans and leases during the third quarter of 2017 were 0.09 percent, compared to 0.08 percent in the second quarter of 2017 and 0.07 percent in the third quarter of 2016.2017.

The ~~unamortized~~ discount related to acquired non-PCI loans and leases at September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016~~2017 was $32.9 million, $35.0 million and $38.5 million, ~~$31.5 million and $36.1 million,~~ respectively. The ~~unamortized~~ discount related to PCI loans at September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016~~2017 was $98.0 million, $111.3 million and $121.1 million, ~~$118.9 million~~respectively.

Table 10

Allowance for Loan and ~~$127.2 million, respectively.~~Lease Losses Components by Loan Class

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



	Three months ended September 30						Nine months ended September 30

(Dollars in thousands)	2018			2017			2018			2017
Allowance for loan and lease losses at beginning of period	$	224,865		$	228,798		$	221,893		$	218,795
Non-PCI provision for loan and lease losses	2,354			8,483			15,883			29,311
PCI provision (credit) for loan losses	(1,514		)	(537		)	1,000			(810		)
Non-PCI Charge-offs:
Commercial:
Construction and land development	(35		)	(9		)	(43		)	(499		)
Commercial mortgage	(606		)	(39		)	(1,111		)	(311		)
Other commercial real estate	—			—			(69		)	(5		)
Commercial and industrial	(1,256		)	(1,275		)	(4,725		)	(7,649		)
Lease financing	(850		)	(687		)	(2,149		)	(957		)
Other	(56		)	(666		)	(98		)	(853		)
Total commercial	(2,803		)	(2,676		)	(8,195		)	(10,274		)
Noncommercial:
Residential mortgage	(360		)	(604		)	(1,455		)	(1,076		)
Revolving mortgage	(759		)	(218		)	(2,778		)	(1,323		)
Construction and land development	—			—			(219		)	—
Consumer	(5,525		)	(4,996		)	(16,092		)	(14,015		)
Total noncommercial	(6,644		)	(5,818		)	(20,544		)	(16,414		)
Total non-PCI charge-offs	(9,447		)	(8,494		)	(28,739		)	(26,688		)
Non-PCI Recoveries:
Commercial:
Construction and land development	136			56			252			320
Commercial mortgage	99			1,446			563			2,541
Other commercial real estate	1			8			147			19
Commercial and industrial	494			433			2,351			3,090
Lease financing	3			3			48			9
Other	117			123			160			244
Total commercial	850			2,069			3,521			6,223
Noncommercial:
Residential mortgage	128			92			315			454
Revolving mortgage	712			228			1,426			1,181
Construction and land development	—			—			127			—
Consumer	1,249			1,203			3,888			3,376
Total noncommercial	2,089			1,523			5,756			5,011
Total non-PCI recoveries	2,939			3,592			9,277			11,234
Non-PCI loans and leases charged off, net	(6,508		)	(4,902		)	(19,462		)	(15,454		)
PCI loans charged off, net	—			—			(117		)	—
Allowance for loan and lease losses at end of period	$	219,197		$	231,842		$	219,197		$	231,842
Reserve for unfunded commitments	$	1,089		$	1,309		$	1,089		$	1,309

Table 11

~~Allowance for Loan and Lease Losses~~ ~~Components by Loan Class~~

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

~~Third Quarter 2017 to Second Quarter 2017~~

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

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

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

~~Third Quarter 2017 to Third Quarter 2016~~

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

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

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

~~Year-to-date2017~~

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

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

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

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

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

~~Table 12~~

Allowance for Loan and Lease Losses Metrics and Ratios


	2017									2016						Nine months ended September 30						Three months ended September 30								Nine months ended September 30
	Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter				2017			2016				2018				2017				2018				2017
Average loans and leases:
PCI	$	865,580		$	858,053		$	857,501		$	831,858		$	892,115		$	860,408		$	921,151		$	652,983			$	865,580			$	689,482			$	860,408
Non-PCI	22,131,615			21,717,270			21,093,943			20,716,455			20,134,395			21,651,410			19,757,687			24,045,816				22,131,615				23,504,388				21,651,410
Loans and leases at period-end:
PCI	834,167			894,863			848,816			809,169			868,200			834,167			868,200			638,018				834,167				638,018				834,167
Non-PCI	22,314,906			21,976,602			21,057,633			20,928,709			20,428,780			22,314,906			20,428,780			24,248,329				22,314,906				24,248,329				22,314,906
Allowance for loan and lease losses allocated to loans and leases:
PCI	12,959			13,496			10,924			13,769			11,632			12,959			11,632			10,909				12,959				10,909				12,959
Non-PCI	218,883			215,302			210,019			205,026			200,318			218,883			200,318			208,288				218,883				208,288				218,883
Total	$	231,842		$	228,798		$	220,943		$	218,795		$	211,950		$	231,842		$	211,950		$	219,197			$	231,842			$	219,197			$	231,842
Net charge-offs (annualized) to average loans and leases:
PCI	—		%	—		%	—		%	—		%	—		%	—		%	0.09		%	—			%	—			%	0.02			%	—			%
Non-PCI	0.09			0.08			0.12			0.18			0.07			0.10			0.07			0.11				0.09				0.11				0.10
Total	0.08			0.08			0.11			0.17			0.07			0.09			0.07			0.10				0.08				0.11				0.09
ALLL to total loans and leases:
PCI	1.55			1.51			1.29			1.70			1.34			1.55			1.34			1.71				1.55				1.71				1.55
Non-PCI	0.98			0.98			1.00			0.98			0.98			0.98			0.98			0.86				0.98				0.86				0.98
Total	1.00			1.00			1.01			1.01			1.00			1.00			1.00			0.88				1.00				0.88				1.00

~~Nonperforming Assets~~

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

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

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

~~Table 13~~

Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases and OREO. At September 30, 2018, BancShares’ nonperforming assets were $130.6 million, down from $144.3 million and $145.1 million at December 31, 2017 at September 30, 2017, respectively.

Nonaccrual loans and leases at September 30, 2018 were $86.9 million reflecting decreases of $6.2 million and $4.1 million since December 31, 2017 and September 30, 2017, respectively. The declines in both periods were primarily due to commercial and residential mortgage loans returning to accrual status and payoffs, offset by an increase in nonaccrual revolving mortgage. At September 30, 2018, OREO totaled $43.6 million, representing declines of $7.5 million and $10.4 million since December 31, 2017 and September 30, 2017, respectively, as sales and write-downs outpaced additions.

Table 12

Nonperforming Assets


	2017									2016						2018									2017
	Third			Second			First			Fourth			Third			Third			Second			First			Fourth			Third
(Dollars in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
Nonaccrual loans and leases:
Non-PCI	$	90,064		$	88,067		$	86,086		$	82,307		$	87,043		$	85,419		$	85,055		$	89,260		$	92,534		$	90,064
PCI	1,017			1,312			1,458			3,451			4,142			1,530			1,570			1,580			624			1,017
Other real estate	53,988			60,781			56,491			61,231			68,964			43,601			46,633			48,089			51,097			53,988
Total nonperforming assets	$	145,069		$	150,160		$	144,035		$	146,989		$	160,149		$	130,550		$	133,258		$	138,929		$	144,255		$	145,069

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

Loans and leases:
Covered	$	70,386		$	73,170		$	75,895		$	84,821		$	91,469
Noncovered	23,078,687			22,798,295			21,830,554			21,653,057			21,205,511
Non-PCI																$	24,248,329		$	23,864,168		$	22,908,140		$	22,833,827		$	22,314,906
PCI																638,018			674,269			703,837			762,998			834,167
Total loans and leases																$	24,886,347		$	24,538,437		$	23,611,977		$	23,596,825		$	23,149,073

Accruing loans and leases 90 days or more past due
Non-PCI	3,449			4,192			2,982			2,718			1,879			$	2,640		$	3,179		$	3,030		$	2,978		$	3,449
PCI	64,801			72,586			75,576			65,523			67,433			38,073			41,266			48,229			58,740			64,801

Ratio of nonperforming assets to loans, leases and other real estate owned:
Ratio of covered nonperforming assets to covered loans, leases and other real estate owned	0.35		%	0.35		%	0.59		%	0.66		%	0.75		%
Ratio of noncovered nonperforming assets to noncovered loan, leases and other real estate owned	0.63			0.66			0.66			0.67			0.75
Ratio of total nonperforming assets to total loans, leases and other real estate owned	0.63		%	0.65		%	0.66		%	0.67		%	0.75		%	0.52		%	0.54		%	0.59		%	0.61		%	0.63		%

Troubled Debt Restructurings (TDRs)

~~Troubled debt restructurings (TDRs) are~~We have selectively ~~made~~agreed to modify existing loan terms to provide relief to customers who are experiencing ~~liquidity challenges~~financial difficulties or other circumstances that could affect their ability to meet ~~their~~ debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs that are not accruing interest ~~and~~ are included as nonperforming assets within nonaccrual loans and leases. TDRs ~~which~~that are accruing at the time of restructure and continue to perform based on the restructured terms are considered performing.

~~Total PCI and non-PCI~~ Loans acquired under ASC 310-30, excluding pooled loans, ~~and leases~~are not initially considered to be TDRs, but can be classified as ~~TDRs at September 30, 2017 were $154.4 million, compared~~such if a modification is made subsequent to ~~$150.9 million at December 31, 2016 and $149.4 million at September 30, 2016. Accruing TDRs were $123.7 million,~~acquisition. Subsequent modification of a ~~decline~~PCI loan accounted for in a pool that would otherwise meet the definition of ~~$3.9 million~~a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from ~~December 31, 2016 and an increase~~the scope of $1.3 million from September 30, 2016. At September 30, 2017, nonaccruing TDRs were $30.7 million, an increase of $7.3 million and $3.7 million from December 31, 2016 and September 30, 2016, respectively. The increase in nonaccruing TDRs from December 31, 2016 was primarily related to an increase in commercial, revolving and residential mortgage TDRs.

TDR accounting.

Table 1413

Troubled Debt Restructurings


(Dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2018		December 31, 2017		September 30, 2017
Accruing TDRs:
PCI	$	19,719	$	26,068	$	25,168	$	18,159	$	18,163	$	19,719
Non-PCI	103,945		101,462		97,200		112,452		112,228		103,945
Total accruing TDRs	123,664		127,530		122,368		130,611		130,391		123,664
Nonaccruing TDRs:
PCI	300		301		318		210		272		300
Non-PCI	30,418		23,085		26,739		31,150		33,898		30,418
Total nonaccruing TDRs	30,718		23,386		27,057		31,360		34,170		30,718
All TDRs:
PCI	20,019		26,369		25,486		18,369		18,435		20,019
Non-PCI	134,363		124,547		123,939		143,602		146,126		134,363
Total TDRs	$	154,382	$	150,916	$	149,425	$	161,971	$	164,561	$	154,382

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Interest-bearing liabilities were ~~$19.40~~$18.94 billion and ~~$19.47~~$19.59 billion at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The ~~$70.9~~$656.3 million decrease from December 31, ~~2016~~2017 was due to decreases in long-term obligations and short-term borrowings of $572.8 million and $6.1 million, respectively, coupled with a decrease in interest-bearing deposits of ~~$179.9~~$77.5 million. Interest-bearing liabilities were $18.94 billion at September 30, 2018, a decrease of $459.7 million from $19.40 billion at September 30, 2017 due to a ~~$75.8~~$568.6 million decrease in long-term obligations, offset by an $8.5 million increase in short-term borrowings and ~~a $33.2~~an increase of $100.5 million increase in long-term obligations. Interest-bearing liabilities increased $146.3 million to $19.40 billion at September 30, 2017 from $19.25 billion at September 30, 2016 due to a $171.3 million increase in interest-bearing ~~deposits, a $50.9 million decrease in short-term borrowings and a $25.9 million increase in long-term obligations.~~deposits.

Deposits

At September 30, ~~2017,~~2018, total deposits were ~~$29.33~~$30.16 billion, an increase of ~~$1.17 billion,~~$897.3 million, or ~~4.2~~3.1 percent, compared to December 31, ~~2016~~2017 and an increase of ~~$1.41 billion,~~$829.6 million, or ~~by 5.0~~2.8 percent, when compared to September 30, ~~2016.~~2017. The increase ~~from~~during both periods was primarily the result of organic growth in demand deposit ~~interest-bearing savings and checking~~ accounts ~~and~~as well as the ~~contributions~~deposit balances acquired from the ~~Guaranty and HCB acquisitions,~~HomeBancorp acquisition of $530.0 million at September 30, 2018. These positive drivers were offset by ~~runoff~~run-off in time deposits and lower money market ~~accounts.~~account balances.

Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe that traditional bank deposit products remain an attractive option for many customers but, as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost.

Table 14

Deposits



	September 30, 2018		December 31, 2017		September 30, 2017
Demand	$	12,212,144	$	11,237,375	$	11,483,033
Checking with interest	5,294,270		5,230,060		5,092,352
Money market	7,809,403		8,059,271		7,968,566
Savings	2,499,136		2,340,449		2,322,168
Time	2,348,584		2,399,120		2,467,830
Total deposits	$	30,163,537	$	29,266,275	$	29,333,949

Short-Term Borrowings

At September 30, ~~2017,~~2018, short-term borrowings were ~~$679.3~~$687.7 million compared to ~~$603.5~~$693.8 million and ~~$730.2~~$679.3 million at December 31, ~~2016~~2017 and September 30, ~~2016,~~2017, respectively. The ~~$75.8~~$6.1 million decrease from December 31, 2017 and the $8.5 million increase from ~~December 31, 2016 was~~September 30, 2017, were primarily due to FHLB ~~borrowings~~borrowing maturities of $90.0 million, ~~subordinated notes payable~~the maturity of a $30.0 million repurchase agreement and the maturity of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being reclassified from long-term obligations, offset by a FHLB borrowing maturity of $10.0 million and lower activity in customer repurchase agreements. The $50.9 million decrease from September 30, 2016 was due to a FHLB borrowing maturity of $10.0 million and lower activity in customer repurchase agreements,subordinated notes payable. These declines were primarily offset by FHLB borrowings of ~~$90.0 million, subordinated notes payable of $15.0~~$120.5 million and ahigher customer repurchase agreement ~~of $30.0 million with maturities less than one year being reclassified from long-term obligations.~~balances.

Long-Term Obligations

Long-term obligations ~~were $866.1 million~~ at September 30, ~~2017, up $33.2 million from~~2018 compared to December 31, ~~2016 due to~~2017 and September 30, 2017 declined $572.8 million and $568.6 million, respectively, because of the extinguishment of FHLB debt obligations totaling $745.0 million. This decrease was primarily offset by additional FHLB borrowings of ~~$175.0~~$144.0 million, ~~during 2017 to mitigate interest rate risk~~$21.5 million in senior subordinated debt acquired from ~~long-term fixed-rate loans. This increase was partially offset by FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million~~HomeBancorp, and a repurchase agreement of $30.0 million with maturities less than one year being reclassified from long-term obligations, as well as a redemption of $5.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/SC Capital Trust II. Long-term obligations increased $25.9 million from September 30, 2016 primarily due to additional FHLB borrowings of $175.0 million during 2017 to mitigate interest rate risk from long-term fixed-rate loans. This increase was partially offset by FHLB borrowings of $90.0 million, subordinated notes payable of $15.0 million and a repurchase agreement of $30.0 million with maturities less than one year being

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

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

Table 15

Trust Preferred Securities and Subordinated Debentures


	September 30, 2017				December 31, 2016				September 30, 2016					September 30, 2018				December 31, 2017				September 30, 2017
(Dollars in thousands)	Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Maturity Date	Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Subordinated Debentures Owed to Trust		Trust Preferred Securities of the Trusts		Maturity Date
FCB/NC Capital Trust III	$	90,206	$	87,500	$	90,206	$	87,500	$	96,392	$	93,500	June 30, 2036	$	88,145	$	85,500	$	90,207	$	87,500	$	90,206	$	87,500	June 30, 2036
FCB/SC Capital Trust II	19,588		19,000		24,743		24,000		25,774		25,000		June 15, 2034	19,588		19,000		19,588		19,000		19,588		19,000		June 15, 2034
SCB Capital Trust I	10,310		10,000		10,310		10,000		10,310		10,000		April 7, 2034	10,310		10,000		10,310		10,000		10,310		10,000		April 7, 2034
	$	120,104	$	116,500	$	125,259	$	121,500	$	132,476	$	128,500		$	118,043	$	114,500	$	120,105	$	116,500	$	120,104	$	116,500

Shareholders' Equity and Capital Adequacy

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

In accordance with accounting principles generally accepted in the United States of America (GAAP), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in ~~accumulated other comprehensive income (AOCI)~~AOCI within shareholders' equity. These amounts are excluded from shareholders' equity in the calculation of our capital ~~ratios. In~~ratios under current regulatory guidelines. Shareholders' equity was also impacted by first quarter 2018 cumulative effect adjustments of $50.0 million related to both the ~~aggregate,~~adoption of ASU 2016-01 for the accounting of equity investments which had an impact of $18.7 million and ASU 2018-02 for the accounting of stranded tax effects in AOCI resulting from the 2017 Tax Act which had an impact of $31.3 million.

During the second quarter of 2018, mortgage-backed securities were transferred from investments available for sale to the held to maturity portfolio. The unrealized loss on these ~~items represented a net reduction~~securities at the date of transfer was $109.5 million and will be amortized out of AOCI into the consolidated statements of income over the expected remaining life of the securities.

As of September 30, 2018, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. BancShares had no trust preferred capital securities included in ~~shareholders' equity of $92.3 million~~Tier 1 capital at September 30, ~~2017, compared to a net reduction of $135.2 million at~~2018 and December 31, ~~2016 and $14.8 million at September 30, 2016. The $42.9 million increase in AOCI from December 31, 2016 was primarily driven by~~2017 under Basel III guidelines. Trust preferred capital securities continue to be a ~~decrease in unrealized losses on investment securities as a result~~component of lower market interest rates. The $77.5 million decrease in AOCI from September 30, 2016 was primarily driven by the change in the discount rate used in our defined benefit pension plans and the unrealized loss position on our investment securities available for sale portfolio at September 30, 2017 as a result of higher market interest rates.total risk-based capital.

Table 16

Analysis of Capital Adequacy

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

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

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



	September 30, 2018		December 31, 2017		September 30, 2017		Regulatory minimum		Well-capitalized requirement
BancShares
Risk-based capital ratios
Tier 1 risk-based capital	13.23	%	12.88	%	12.95	%	6.00	%	8.00	%
Common equity Tier 1	13.23		12.88		12.95		4.50		6.50
Total risk-based capital	14.57		14.21		14.34		8.00		10.00
Tier 1 leverage ratio	10.11		9.47		9.43		4.00		5.00

Bank
Risk-based capital ratios
Tier 1 risk-based capital	12.91	%	12.54	%	12.82	%	6.00	%	8.00	%
Common equity Tier 1	12.91		12.54		12.82		4.50		6.50
Total risk-based capital	13.86		13.46		13.79		8.00		10.00
Tier 1 leverage ratio	9.89		9.22		9.34		4.00		5.00

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

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

RISK MANAGEMENT

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

The Board Risk Committee structure is designed to allow for information flow and timely escalation of risk related issues. ~~Among the responsibilities assigned by the Board of Directors, the~~The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic, legal, and reputational risks; review, approve and monitor adherence to the risk appetite and supporting risk tolerance ~~levels~~levels; and evaluate, monitor and oversee the adequacy and effectiveness of the Enterprise Risk Management Framework. The Board Risk Committee also reviews reports of examination by and communications from regulatory ~~agencies, and~~agencies; the results of internal and third party testing ~~analyses~~ and ~~reviews,~~assessments related to ~~risks,~~ risk ~~management,~~management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee ~~reviews and~~ monitors management's response to certain risk related regulatory orand audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee for the review of financial statements and related risks, information security and other areas of joint responsibility.

The Dodd-Frank Act mandated that stress tests be developed and performed to ensure that financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. Bank holding companies with total consolidated assets between $10 billion and $50 billion, including BancShares, will undergo annual company-run stress tests. As directed by the Federal Reserve, summaries of BancShares’ results in the severely adverse stress tests are available to the public. In combination with other risk management and monitoring practices, ~~the results of~~enterprise wide stress testing activities are ~~considered a key~~ part of our risk management program. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.

Enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run. Bank holding companies with assets of less than $100 billion, such as BancShares, are no longer subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of results. BancShares will continue to monitor and stress test its capital consistent with the safety and soundness expectations of the federal regulators, however, BancShares will no longer conduct company-run stress testing under the Dodd-Frank Act.

Credit risk management. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases, other than acquired loans, ~~were~~are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, ~~were~~regardless of whether PCI or non-PCI, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both acquired and originated loans to ensure compliance with credit policies and to monitor asset quality ~~trends.~~trends and borrower financial strength. The risk reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ALLL that accounts for losses that are inherent in the loan and lease portfolio.

Interest rate risk management. Interest rate risk (IRR) results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts, and from short-term and long-term interest rates changing in different magnitudes.

We assess our ~~short term~~short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecast net interest income assuming stable rates. Rate shock scenarios represent an instantaneous and parallel shift in rates, up or down, from a base yield curve. ~~Due to~~Despite the current ~~low level of~~increase in market interest rates, the overall rate on interest-bearing deposits remains relatively low and ~~competitive pressures that constrain our ability to further reduce deposit interest rates,~~as such, it is unlikely that the rates on most interest-bearing deposits can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration offrom low rate deposit instruments to intermediate term fixed rate instruments, such as certificates of deposit, as rates rise. Various other IRR scenarios are modeled to supplement shock scenarios. This may include interest rate ramps, changes in the shape of the yield curve and changes in the relationships of FCB rates to market rates.

Table 17

Net Interest Income Sensitivity Simulation Analysis

This table provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	Estimated increase in net interest income				Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis point)	September 30, 2017		December 31, 2016
Change in interest rate (basis points)					September 30, 2018		December 31, 2017
-100					(10.00	)%	(12.25	)%
+100	4.84	%	4.12	%	2.86		3.66
+200	6.77		5.06		2.93		4.61
+300	5.38		2.08		(0.14	)	2.43

~~The change in net~~Net interest income sensitivity metrics at September 30, ~~2017~~2018 compared to December 31, ~~2016 benefited from an increase~~2017 were primarily affected by a shift in ~~overnight~~the earning asset mix with a decrease in lower duration investments and growth in the fixed rate loan portfolio, partially offset by a favorable change in the deposit mix ~~from~~due to growth in non-interest ~~bearing~~ deposits.

Table 18

Economic Value of Equity Modeling Analysis

Long-term interest rate risk exposure is measured using the economic value of equity (EVE) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. This table presents the EVE profile as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	Estimated increase (decrease) in EVE				Estimated percentage increase (decrease) in EVE
Change in interest rate (basis point)	September 30, 2017		December 31, 2016
Change in interest rate (basis points)					September 30, 2018		December 31, 2017
-100					(14.19	)%	(15.44	)%
+100	4.93	%	3.10	%	2.84		3.38
+200	3.92		0.85		0.38		1.06
+300	(1.66	)	(5.44	)	(6.41	)	(5.52	)

The ~~improvement in the~~ economic value of equity metrics at September 30, ~~2017~~2018 compared to December 31, ~~2016 was~~2017 were primarily ~~due to an increase~~affected by a shift in the earning asset ~~sensitivity~~mix as stronger loan growth ~~was largely funded~~reduced overnight investments combined with higher market interest rates driven by ~~growth in non-interest bearing, checking and savings deposits.~~three federal funds rate hikes year to date.

We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk.

Liquidity risk management. Liquidity risk is the risk that an institution ~~will be~~is unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term ~~deposits~~borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, ~~operation,~~operational, legal and reputation risks that can affect an institution’s liquidity risk profile.

We utilize various limit-based measures to monitor, measure and control liquidity risk across three different types of liquidity:

Tactical liquidity measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;

Structural liquidity measures the amount by which illiquid assets are supported by long-term funding; and

Contingent liquidity utilizes cash flow stress testing across three crisis scenarios to determine the adequacy of our liquidity.

We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of

liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled ~~$4.49~~$3.87 billion at September 30, ~~2017~~2018 compared to ~~$3.88~~$3.70 billion at December 31, ~~2016.~~2017. Another source of available ~~liquidity~~funds is advances from the FHLB of Atlanta. Outstanding FHLB advances were ~~$835.2~~$264.7 million as of September 30, ~~2017,~~2018, and we had sufficient collateral pledged to secure ~~$5.10~~$6.08 billion of additional borrowings. Also, at September 30, ~~2017, $2.74~~2018, $2.91 billion in noncovered loans with a lendable collateral value of ~~$2.05~~$2.20 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines ~~and other borrowing facilities~~ which had ~~$665.0~~$690.0 million of available capacity at September 30, ~~2017.~~

We entered into forward-starting advances with the FHLB of Atlanta in June 2016 to receive $200.0 million of fixed rate long-term funding. There are two advances of $100.0 million each scheduled to fund in June 2018 with maturity dates of June 2026 and 2028.2018.

CRITICAL ACCOUNTING POLICIES

There have been no significant changes in our Critical Accounting Policies as described in our ~~2016~~2017 Annual Report on Form ~~10-K.~~10‑K.

FORWARD-LOOKING STATEMENTS

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

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

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

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the FDIC-assisted transactions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect.

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


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of September 30, ~~2017,~~2018, BancShares’ market risk profile has not changed significantly from December 31, ~~2016,~~2017, as discussed in the Form 10-K. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

Item 4. Controls and Procedures

BancShares' management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares' disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares' disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.

No ~~change~~changes in BancShares' internal control over financial reporting occurred during the third quarter of ~~2017~~2018 that ~~had~~have materially affected, or isare reasonably likely to materially affect, BancShares' internal control over financial reporting.

PART II

Item 1. Legal Proceedings

BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those ~~other~~ matters cannot be determined, in the opinion of management, ~~any such liability will not~~no legal actions currently exist that are expected to have a material effect on BancShares’ consolidated financial statements.

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


~~Item 1A.~~	~~Risk Factors~~

Item 1A. Risk Factors

BancShares ~~has been~~is currently monitoring ~~and evaluating~~ the ~~August and~~ September ~~2017~~2018 impact of ~~Hurricanes Harvey~~Hurricane Florence and ~~Irma~~the October 2018 impact of Hurricane Michael in our ~~affected~~ market ~~areas of Texas, Florida and Georgia.~~areas. We are ~~currently~~in the preliminary stages of assessing how ~~this situation has impacted~~these situations may impact our customers and the areas in which they operate. ~~We have not currently identified any significant~~The impact toof these hurricanes could affect the ~~credit quality~~company and our earnings but until more is known about the magnitude of the ~~loans~~situations, it is premature to reasonably assess that impact.

The risks described above, as well as the risks described in ~~these areas that would cause us to adjust the allowance for loan losses.~~

~~There have been no material changes from the risk factors previously disclosed in~~ our annual Form 10-K for the year ended December 31, ~~2016.~~2017 should be carefully considered. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.


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

~~On October 24, 2017,~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information concerning BancShares' ~~Board~~repurchases of ~~Directors authorized~~outstanding common stock during the ~~purchase of up~~three month period ended September 30, 2018, is included in the following table:



Issuer Purchases of Equity Securities
Period	Total Number of Class A Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1-31, 2018	—	$	—	—	800,000
August 1-31, 2018	100,000	465.00		100,000	700,000
September 1-30, 2018	25,000	463.39		25,000	625,000
Total	125,000	$	464.68	125,000	625,000

Subsequent to ~~800,000 shares of BancShares' Class A common stock. Under that authority, BancShares may purchase shares from time to time from November 1, 2017~~quarter-end and through October 31, 2018, ~~on the open market or in privately negotiated transactions, and it may enter into a~~BancShares repurchased an additional 75,000 shares of Class A common stock ~~trading plan pursuant to the guidelines specified under Rule 10b5-1~~for approximately $32.9 million at an average cost per share of the Securities Exchange Act of 1934. The board's action replaces existing authority to purchase shares approved during 2016 and that expires on October 31, 2017. It does not obligate BancShares to purchase any particular amount of shares, and purchases may be suspended or discontinued at any time. No shares were purchased under the previous plan that expired on October 31, 2017, and no shares have been purchased under the newly approved plan, which began November 1, 2017.

$438.26.

Item 6. Exhibits


~~Item 6.~~	~~Exhibits~~



31.1	Certification of Chief Executive Officer (filed herewith)~~(filed herewith)~~

31.2	Certification of Chief Financial Officer (filed herewith)~~(filed herewith)~~

32.1	Certification of Chief Executive Officer (filed herewith)~~(filed herewith)~~

32.2	Certification of Chief Financial Officer (filed herewith)~~(filed herewith)~~

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	November ~~2, 2017~~1, 2018		FIRST CITIZENS BANCSHARES, INC.
			(Registrant)

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

7064



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

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