10-Q 1 cbf10-qfy2017xq3.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________
FORM 10-Q
______________________________________
  (Mark One)
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
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from              to             
Commission File Number 001-35655
 ________________________________________________
cbflogoa01a01a01a41.jpg 
(Exact name of registrant as specified in its charter)
  ________________________________________________
Delaware
 
27-1454759
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4725 Piedmont Row Drive Suite 110 Charlotte, North Carolina 28210
(Address of principal executive offices) (Zip Code)
(704) 554-5901
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 ________________________________________________

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 12 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 90 days:   ý  Yes    ¨  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 for such shorter period that the registrant was required to submit and post such files):   ý  Yes    ¨  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 definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
 
ý
  
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  ý    No
Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date:
Class A Voting Common Stock, $0.01 Par Value
 
41,616,875
Class B Non-Voting Common Stock, $0.01 Par Value
 
10,430,006
Class
 
Outstanding as of November 1, 2017
 

1

CAPITAL BANK FINANCIAL CORP.
FORM 10-Q
For the quarter ended September 30, 2017

INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Capital Bank Financial Corp.
Consolidated Balance Sheets
(Unaudited)
(Dollars and shares in thousands, except per share data)
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
97,147

 
$
107,707

Interest-bearing deposits in other banks
86,982

 
201,348

Total cash and cash equivalents
184,129

 
309,055

Trading securities
4,458

 
3,791

Investment securities available-for-sale at fair value (amortized cost $1,161,024 and $927,266, respectively)
1,155,694

 
912,250

Investment securities held-to-maturity at amortized cost (fair value $415,238 and $460,911, respectively)
412,051

 
463,959

Loans held for sale
3,060

 
12,874

Loans, net of deferred loan costs and fees
7,609,540

 
7,393,318

Less: Allowance for loan and lease losses
45,428

 
43,065

Loans, net
7,564,112

 
7,350,253

Other real estate owned
44,416

 
53,482

Premises and equipment held for sale
17,378

 
2,599

Premises and equipment, net
183,734

 
205,425

Goodwill
231,292

 
235,500

Intangible assets, net
27,938

 
33,370

Deferred income tax asset, net
113,073

 
150,272

Bank owned life insurance
100,611

 
99,702

Other assets
98,039

 
98,125

Total Assets
$
10,139,985

 
$
9,930,657

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing demand
$
1,631,526

 
$
1,590,164

Interest bearing demand
1,846,172

 
1,930,143

Money market
1,885,180

 
1,725,838

Savings
471,931

 
497,171

Time deposits
2,286,815

 
2,137,312

Total deposits
8,121,624

 
7,880,628

Federal Home Loan Bank advances
440,549

 
545,701

Short-term borrowings
34,802

 
19,157

Long-term borrowings
118,929

 
116,456

Accrued expenses and other liabilities
69,462

 
76,668

Total liabilities
8,785,366

 
8,638,610

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ equity
 
 
 
Preferred stock $0.01 par value: 50,000 shares authorized, 0 shares issued
—

 
—

Common stock-Class A $0.01 par value: 200,000 shares authorized, 50,632 issued and 39,366 outstanding, and 46,178 issued and 34,911 outstanding, respectively.
506

 
462

Common stock-Class B $0.01 par value: 200,000 shares authorized, 14,435 issued and 12,661 outstanding, and 18,627 issued and 16,854 outstanding, respectively.
144

 
186

Additional paid in capital
1,373,227

 
1,368,459

Retained earnings
299,432

 
247,758

Accumulated other comprehensive loss
(6,306
)
 
(12,434
)
Treasury stock, at cost, 13,040 and 13,040 shares, respectively
(312,384
)
 
(312,384
)
Total shareholders’ equity
1,354,619

 
1,292,047

Total Liabilities and Shareholders’ Equity
$
10,139,985

 
$
9,930,657


The accompanying notes are an integral part of these consolidated financial statements.

3

Capital Bank Financial Corp.
Consolidated Statements of Income
(Unaudited)

(Dollars and shares in thousands, except per share data)
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
89,527

 
$
63,662

 
$
258,663

 
$
188,944

Investment securities:
 
 
 
 
 
 
 
Taxable interest income
9,451

 
6,732

 
29,272

 
19,433

Tax-exempt interest income
158

 
118

 
467

 
359

Dividends
10

 
11

 
32

 
36

Interest-bearing deposits in other banks
198

 
69

 
388

 
227

Other earning assets
367

 
337

 
1,112

 
981

Total interest and dividend income
99,711

 
70,929

 
289,934

 
209,980

Interest expense
 
 
 
 
 
 
 
Deposits
9,862

 
6,082

 
25,743

 
18,147

Long-term borrowings
2,476

 
1,586

 
7,140

 
4,644

Federal Home Loan Bank advances
1,405

 
620

 
3,656

 
1,637

Other borrowings
52

 
14

 
121

 
43

Total interest expense
13,795

 
8,302

 
36,660

 
24,471

Net interest income
85,916

 
62,627

 
253,274

 
185,509

Provision for loan and lease losses
3,042

 
586

 
8,737

 
3,133

Net interest income after provision for loan and lease losses
82,874

 
62,041

 
244,537

 
182,376

Non-interest income
 
 
 
 
 
 
 
Service charges on deposit accounts
5,311

 
4,777

 
15,923

 
14,074

Debit card income
4,822

 
3,389

 
14,638

 
9,710

Fees on mortgage loans originated and sold
931

 
1,334

 
3,329

 
3,445

Investment advisory and trust fees
537

 
290

 
1,774

 
1,242

Termination of loss share agreements
—

 
—

 
—

 
(9,178
)
Investment securities gains, net
98

 
71

 
235

 
228

Other income
3,074

 
2,509

 
10,726

 
7,337

Total non-interest income
14,773

 
12,370

 
46,625

 
26,858

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
26,708

 
20,935

 
83,536

 
63,236

Stock-based compensation expense
1,441

 
790

 
3,305

 
1,574

Net occupancy and equipment expense
8,894

 
7,340

 
26,712

 
22,398

Computer services
3,794

 
3,153

 
11,947

 
10,002

Software expense
2,524

 
1,948

 
7,759

 
5,984

Telecommunication expense
1,968

 
1,790

 
6,331

 
4,880

OREO valuation expense
249

 
742

 
758

 
2,328

Net losses (gains) on sales of OREO
1

 
(159
)
 
(511
)
 
(1,251
)
Foreclosed asset related expense
487

 
397

 
1,227

 
1,081

Loan workout expense
281

 
206

 
763

 
521

Conversion and merger related expense, net
591

 
394

 
4,609

 
3,317

Professional fees
2,071

 
1,642

 
5,967

 
4,607

Legal settlement expense
—

 
1,500

 
45

 
1,500

Regulatory assessments
1,020

 
841

 
2,884

 
3,375

Restructuring charges, net
595

 
(113
)
 
5,485

 
34

Other expense
6,360

 
6,124

 
19,855

 
15,418

Total non-interest expense
56,984

 
47,530

 
180,672

 
139,004

Income before income taxes
40,663

 
26,881

 
110,490

 
70,230

Income tax expense
14,905

 
8,370

 
40,043

 
24,418

Net income
$
25,758

 
$
18,511

 
$
70,447

 
$
45,812

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.43

 
$
1.36

 
$
1.06

Diluted
$
0.48

 
$
0.42

 
$
1.32

 
$
1.04

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
51,705

 
43,028

 
51,674

 
43,033

Diluted
53,226

 
44,118

 
53,204

 
44,068


The accompanying notes are an integral part of these consolidated financial statements.


4

Capital Bank Financial Corp.
Consolidated Statements of Comprehensive Income
(Unaudited)

(Dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net Income
$
25,758

 
$
18,511

 
$
70,447

 
$
45,812

Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities available-for-sale
1,571

 
(141
)
 
9,685

 
16,474

Reclassification adjustment for gains realized in net income on securities available-for-sale
—

 
—

 
—

 
(92
)
Reclassification adjustment for losses amortized in net income on securities transferred from available-for-sale to held-to-maturity
304

 
363

 
906

 
1,052

Unrealized holding gains (losses) on cash flow hedges
(82
)
 
(1,336
)
 
117

 
6,345

Reclassification adjustments for net gains included in net income on cash flow hedges
(171
)
 
(613
)
 
(901
)
 
(1,891
)
Other comprehensive income (loss) before tax:
1,622

 
(1,727
)
 
9,807

 
21,888

Tax effect
(608
)
 
(95
)
 
(3,679
)
 
(9,071
)
Other comprehensive income (loss), net of tax:
1,014

 
(1,822
)
 
6,128

 
12,817

Comprehensive income
$
26,772

 
$
16,689

 
$
76,575

 
$
58,629

The accompanying notes are an integral part of these consolidated financial statements.


5

Capital Bank Financial Corp.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
(Dollars and shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
Common
Stock Class A
Outstanding
 
Class A
Stock
 
Shares
Common
Stock Class B
Outstanding
 
Class B
Stock
 
Additional
Paid in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Shareholders'
Equity
Balance, December 31, 2016
34,911

 
$
462

 
16,854

 
$
186

 
$
1,368,459

 
$
247,758

 
$
(12,434
)
 
$
(312,384
)
 
$
1,292,047

Net income
—

 
—

 
—

 
—

 
—

 
70,447

 
—

 
—

 
70,447

Dividends paid ($0.36 per share)
—

 
—

 
—

 
—

 
—

 
(18,773
)
 
—

 
—

 
(18,773
)
Other comprehensive income, net of tax expense of $3,679
—

 
—

 
—

 
—

 
—

 
—

 
6,128

 
—

 
6,128

Stock-based compensation
—

 
—

 
—

 
—

 
3,392

 
—

 
—

 
—

 
3,392

Restricted stock grants
175

 
2

 
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

Restricted stock cancelled
(26
)
 
—

 
—

 
—

 
(909
)
 
—

 
—

 
—

 
(909
)
Nonqualified stock option exercise
113

 
—

 
—

 
—

 
2,287

 
—

 
—

 
—

 
2,287

Conversion of shares
4,193

 
42

 
(4,193
)
 
(42
)
 
—

 
—

 
—

 
—

 
—

Balance, September 30, 2017
39,366

 
$
506

 
12,661

 
$
144

 
$
1,373,227

 
$
299,432

 
$
(6,306
)
 
$
(312,384
)
 
$
1,354,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
26,589

 
$
370

 
16,554

 
$
183

 
$
1,076,415

 
$
208,742

 
$
(5,196
)
 
$
(294,249
)
 
$
986,265

Net income
—

 
—

 
—

 
—

 
—

 
45,812

 
—

 
—

 
45,812

Dividends paid ($0.20 per share)
—

 
—

 
—

 
—

 
—

 
(12,918
)
 
—

 
—

 
(12,918
)
Other comprehensive income, net of tax expense of $9,071
—

 
—

 
—

 
—

 
—

 
—

 
12,817

 
—

 
12,817

Stock-based compensation
—

 
—

 
—

 
—

 
1,626

 
—

 
—

 
—

 
1,626

Restricted stock grants
209

 
3

 
—

 
—

 
(3
)
 
—

 
—

 
—

 
—

Nonqualified stock option exercise
36

 
—

 
—

 
—

 
648

 
—

 
—

 
—

 
648

Restricted stock cancelled
(5
)
 
—

 
—

 
—

 
(19
)
 
—

 
—

 
—

 
(19
)
Purchase of treasury stock
(148
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,390
)
 
(4,390
)
Conversion of shares
(300
)
 
—

 
300

 
3

 
(3
)
 
—

 
—

 
—

 
—

Balance, September 30, 2016
26,381

 
$
373

 
16,854

 
$
186

 
$
1,078,664

 
$
241,636

 
$
7,621

 
$
(298,639
)
 
$
1,029,841

The accompanying notes are an integral part of these consolidated financial statements.


6

Capital Bank Financial Corp.
Consolidated Statements of Cash Flows
(Unaudited)
 
(Dollars in thousands)
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
Cash flows from operating activities
 
 
 
Net income
$
70,447

 
$
45,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Accretion of purchased credit impaired loans
(56,831
)
 
(59,636
)
Depreciation and amortization
17,435

 
12,300

Impairment of premises and equipment
2,471

 
—

Provision for loan and lease losses
8,737

 
3,133

Deferred income tax
37,001

 
15,828

Net amortization of investment securities premium/discount
3,965

 
3,386

Net realized gains on investment securities
(235
)
 
(228
)
Stock-based compensation expense
3,391

 
1,626

Net gains on sales of OREO
(511
)
 
(1,251
)
OREO valuation expense
758

 
2,328

Other
(138
)
 
13

Net deferred loan origination fees
806

 
1,017

Mortgage loans originated for sale
(97,690
)
 
(111,289
)
Proceeds from sales of mortgage loans originated for sale
110,833

 
117,141

Origination of mortgage servicing rights
(223
)
 
—

Fees on mortgage loans originated and sold
(3,329
)
 
(3,445
)
Termination of loss share agreements
—

 
9,178

Gains on sales/disposals of premises and equipment
(303
)
 
(28
)
Net proceeds from FDIC loss share agreements
—

 
(186
)
Change in other assets
(2,921
)
 
(6,511
)
Change in accrued expenses and other liabilities
(7,722
)
 
8,369

Net cash provided by operating activities
85,941

 
37,557

Cash flows from investing activities
 
 
 
Purchases of investment securities available-for-sale
(359,231
)
 
(156,551
)
Purchases of investment securities held-to-maturity
—

 
(48,600
)
Proceeds from sale of investment securities available-for-sale
—

 
90,646

Repayments of principal and maturities of investment securities available-for-sale
122,441

 
63,232

Repayments of principal and maturities of investment securities held-to-maturity
51,447

 
55,689

Net sales (purchases) of FHLB and FRB stock
4,384

 
(5,440
)
Net increase in loans
(192,685
)
 
(257,132
)
Proceeds paid to FDIC for settlement of loss share agreements
—

 
(3,029
)
Proceeds from the sale of loans
14,500

 
—

Purchases of premises and equipment
(9,511
)
 
(7,353
)
Proceeds from sales of premises and equipment
1,502

 
3,127

Proceeds from sales of OREO
22,192

 
13,227

Net cash used in investing activities
(344,961
)
 
(252,184
)
Cash flows from financing activities
 
 
 
Net increase in demand, money market and savings accounts
91,493

 
251,581

Net increase (decrease) in time deposits
149,503

 
(78,534
)
Net increase in short-term borrowings
15,645

 
3,018

Proceeds from short-term FHLB advances
1,362,000

 
1,420,000

Repayment of short-term FHLB advances
(1,517,000
)
 
(1,480,000
)
Proceeds from long-term FHLB advances
75,000

 
175,000

Repayment of long-term FHLB advances
(25,152
)
 
(148
)
Proceeds from exercise of stock options
2,287

 
648

Restricted stock cancelled
(909
)
 
(19
)
Dividends paid
(18,773
)
 
(12,918
)
Purchases of treasury stock
—

 
(4,390
)
Net cash provided by financing activities
134,094

 
274,238

Net (decrease) increase in cash and cash equivalents
(124,926
)
 
59,611

Cash and cash equivalents at beginning of period
309,055

 
144,696

Cash and cash equivalents at end of period
$
184,129

 
$
204,307

 
 
 
 
Supplemental disclosures of cash:
 
 
 
Interest paid
$
33,763

 
$
23,969

Cash collections of contractual interest on purchased credit impaired loans
29,968

 
33,203

Income taxes paid
5,020

 
13,084

Supplemental disclosures of non-cash transactions:
 
 
 
OREO acquired through loan transfers
$
13,373

 
$
5,944

Transfers of other assets to OREO
—

 
1,590

Fixed Assets transfered to held for sale
18,084

 
87,091

The accompanying notes are an integral part of these consolidated financial statements.


7



1. Basis of Presentation
Nature of Operations and Principles of Consolidation
Capital Bank Financial Corp. (“CBF” or the “Company”; formerly known as North American Financial Holdings, Inc.) is a bank holding company incorporated in late 2009 in Delaware and headquartered in North Carolina whose business is conducted primarily through Capital Bank Corporation (“Capital Bank Corporation” or the “Bank”). The Company was incorporated with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. CBF has raised $955.6 million to make acquisitions through a series of private placements and an initial public offering of its common stock. Since inception, CBF has acquired eight depository institutions, including the assets and certain deposits from failed banks. CBF has a total of 178 full service banking offices located in Florida, North and South Carolina, Tennessee and Virginia. During the nine months ended September 30, 2017, the Company closed and consolidated 18 branches related to cost savings initiatives and the merger of CommunityOne. As such, the Company transferred $18.1 million from fixed assets to bank properties held for sale during the nine months ended September 30, 2017.
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statement presentation. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All significant inter-company accounts and transactions have been eliminated in consolidation. For further information, refer to the Company’s Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016.
Proposed merger with First Horizon National Corporation
On May 4, 2017, Capital Bank Financial Corp. issued a press release announcing the execution of an agreement and plan of merger with First Horizon National Corporation (the “First Horizon”) dated May 3, 2017, with First Horizon as the surviving corporation. Subject to terms and conditions of the Merger Agreement, each holder of Capital Bank common stock will be entitled to receive cash or stock with a value equivalent to 1.750 First Horizon shares and $7.90 in cash for each Capital Bank share held, subject to the election allocation and proration provisions of the merger agreement. The transaction has received shareholder approval as well as approval from the Federal Reserve, OCC, and North Carolina Office of the Commissioner of Banks, and remains subject to other customary closing conditions.
Hurricane Irma
On September 10, 2017, Hurricane Irma struck the south coast of Florida, temporarily disrupting our branch network. However within a matter of days, all but two of our offices were back open and assisting customers, while the remaining two offices will open during the fourth quarter. The Company incurred property costs associated with Hurricane Irma of approximately $0.2 million, which are reflected in third quarter results. The Company has also reviewed its lending and deposit portfolio and determined no impairment was indicated at this time as a result of Hurricane Irma. In working with its borrowers and depositors affected by this hurricane, the Company has entered into temporary payment deferral agreements of 90 days or less on loans covering $78.6 million of outstanding principle. Each of these loans were assessed individually and were determined to not be a troubled debt restructuring. The review process is on-going and we will continue to monitor the impact on our loan portfolio.
Use of Estimates and Assumptions
To prepare financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as presented in the financial statements. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update ("ASU") 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvement Activities”. The purpose of the amendments in this update is to better align an entity’s risk management activities and financial reporting for hedging relationships by changing both the designation and measurement guidance for hedging relationships qualification and hedge results presentation. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedge instrument and the hedged items in the financial statements. Further, the amendments in this update make certain improvements specifically targeted for simplifying hedge accounting application as well as hedge documentation requirements and assessment of hedge effectiveness. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation—Stock Compensation (Topic 718)". The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities". The amendments in this update affect all entities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. The objective is to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Securities held at a discount continue to be amortized to maturity. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)". The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)". The amendments in this update aim to simplify the subsequent measurement of goodwill. Under these amendments, 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. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805)". The amendments in this update provide a screen to determine when 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. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied prospectively on or after the effective date. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients". The amendments in this Update represent minor corrections or improvements to narrow aspects of Topic 606, as amended by ASU No. 2014-09, and do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09), which is not yet effective. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows—Credit Losses (Topic 230)". The amendments in this update provide guidance on the following eight specific cash flow issues: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; (8) Separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)". The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-9, "Compensation—Stock compensation (Topic 718)". Improvements to employee share-based payment accounting" which objective is the simplification through the identification, evaluation, and improvement of areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. We early adopted ASU 2016-09 during the fourth quarter of 2016 and prior periods were modified retrospectively. The adoption did not have a material impact on the Company's consolidated financial statements. The impact resulted in, among other items, a $0.1 million increase to net income for the nine months ended September 30, 2016. The Company reflected these adjustments in our disclosures including the consolidated financial statements, earnings per common share, business combination and acquisitions, stock-based compensation, and income taxes.
In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. The amendments in this update will clarify the implementation guidance on principal versus agent considerations. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09 listed below), which is not yet effective. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-7, "Investments—Equity Method and Joint Ventures (Topic 323)". The amendments in this update eliminate 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 amendments require 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. The amendments in this update require 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 holding 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 update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The adoption did not have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-6, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments". The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)" which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. This update, along with IFRS 16, Leases, are the results of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. The FASB and IASB decided to not fundamentally change lessor accounting with the amendments in this update. However, some changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and other areas within generally accepted accounting principles (GAAP), such as Topic 606, Revenue from Contracts with Customers. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. For public business entities, the amendments in ASU 2016-2 are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In January 2016, the FASB issued ASU 2016-1, "Financial instruments—Overall (Subtopic 825-10)" which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income 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 entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. For public business entities, the amendments in ASU 2016-1 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-1 is not expected to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In May 2014, the FASB issued ASU 2014-9, "Revenue from Contracts with Customers (Topic 606)". The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies the performance obligation. In August 2015, the FASB issued ASU 2015-14, "Revenue from contracts with customers (Topic 606) - Deferral of the Effective Date". The amendments in ASU 2015-14 establish December 15, 2017 as the effective date of the information related to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. While we anticipate some changes, the Company does not expect a material change from our current accounting for revenue as the majority of our interest and non-interest income is not in scope of Topic 606.

2. Earnings Per Common Share
Basic earnings per share is computed as net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under stock options and unvested restricted shares computed using the treasury stock method. Earnings per share have been computed based on the following:
(Shares in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
51,705

 
43,028

 
51,674

 
43,033

Dilutive effect of options outstanding
 
1,447

 
1,057

 
1,473

 
1,032

Dilutive effect of unvested restricted shares
 
74

 
33

 
57

 
3

Diluted
 
53,226

 
44,118

 
53,204

 
44,068

The dilutive effect of stock options and unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
Weighted average anti-dilutive stock options and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
(Shares in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Anti-dilutive stock options
 
—

 
37

 
—

 
34

Anti-dilutive unvested restricted shares
 
—

 
1

 
—

 
166

    


3. Business Combinations and Acquisitions
Acquisition of CommunityOne Bancorp
On October 26, 2016, the Company completed its acquisition of CommunityOne Bancorp (“CommunityOne”) whereby CommunityOne merged with and into the Company. CommunityOne was a North Carolina-based bank with $2.4 billion in assets and 45 full service banking branches as of October 26, 2016. The combination will strengthen Capital Bank’s franchise in North Carolina, particularly in Charlotte, as well as in Greensboro/Winston Salem and the Catawba/Caldwell county area.
The Company acquired 100% of the outstanding common stock of CommunityOne. The total purchase price for CommunityOne was $340.5 million, consisting of $51.9 million of cash, and the issuance of 8.9 million shares of Capital Bank Common Stock valued at $288.6 million based on the Company's stock on October 25, 2016.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As the fair value of consideration paid exceeded the estimated fair value of net assets acquired, nondeductible goodwill of $100.6 million was recorded. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available. During the nine months ended September 30, 2017, the Company adjusted the acquisition date balance sheet to reflect (1) a $1.9 million increase in loans due to recoveries on fully charged off loans; (2) a $0.9 million decrease in Premises and

8


Equipment due to updated appraisals on several properties; (3) a $3.3 million increase in the deferred tax asset; and (4) a $4.3 million decrease in Goodwill caused by the net effect of these adjustments. These adjustments are reflected in the table below.
The following table summarizes the Company's investment and CommunityOne's opening balance sheet as of October 26, 2016 adjusted to their preliminary fair value:
(Dollars in thousands)
 
Fair value of assets acquired:
October 26, 2016
Cash and cash equivalents
$
58,308

Investment securities
488,814

Loans
1,499,270

Premises and equipment
45,873

Goodwill
100,576

Other intangible assets
22,518

Deferred tax asset
62,967

Other assets
82,716

Total assets acquired
2,361,042

 
 
Fair value of liabilities assumed:
 
Deposits
1,892,443

Long term debt and other borrowings
105,720

Other liabilities
22,345

Total liabilities assumed
2,020,508

Net assets acquired
$
340,534

The following table summarizes the fair value of loans, the total contractual principal and interest payments, and management's estimate of expected total cash payments of purchase credit impaired loans:
(Dollars in thousands)

Fair Value of Acquired Loans
Gross Contractual Amounts Receivable
Best Estimate of Contractual Cash Flows not to be Collected
Loans acquired subject to ASC 310-30
$
130,247

$
183,852

$
34,219

In addition, the Bank acquired loans of $1.4 billion not determined to be purchase credit impaired at the time of acquisition. These loans have an estimated cash flow of $1.6 billion and management expects to collect contractual required payments from the borrower with similar characteristics as other non-impaired loans.
In the assumption of deposit liabilities, the Company estimated the fair value of the core deposits intangible asset to be $19.9 million, which will be amortized utilizing an accelerated amortization method over an estimated economic life of 10 years. Fair value estimates are based on factors such as type of deposit, retention rates, interest rates and customer relationships.
Pro-forma financial information
Pro-forma data for the nine months ended and September 30, 2016 listed in the table below presents pro-forma information as if the CommunityOne acquisition occurred at the beginning of 2016. The results include $3.9 million of transaction and integration expense incurred during the nine months ended September 30, 2016. The pro-forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

9


(Dollars and shares in thousands, except per share data)
For the three months ended September 30, 2016
For the nine months ended September 30, 2016
Net interest income
$
79,598

$
236,503

Net income
$
19,881

$
53,839

Basic earnings per share
$
0.39

$
1.04

Diluted earnings per share
$
0.38

$
1.02


4. Investment Securities
Trading securities totaled $4.5 million and $3.8 million at September 30, 2017 and December 31, 2016, respectively.
The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2017 and December 31, 2016, are presented below:
(Dollars in thousands)

September 30, 2017
 

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Available-for-Sale








Corporate bonds
 
$
60,161

 
$
3,847

 
$
—

 
$
64,008

State and political subdivisions—tax exempt
 
11,859

 
—

 
367

 
11,492

Mortgage-backed securities—residential issued by government sponsored entities
 
1,085,935

 
2,475

 
11,358

 
1,077,052

Industrial revenue bonds

3,069

 
73

 
—

 
3,142

Total

$
1,161,024

 
$
6,395

 
$
11,725

 
$
1,155,694

Held-to-Maturity

 
 
 
 
 
 
 
U.S. Government agencies

$
9,738

 
$
161

 
$
—

 
$
9,899

Corporate bonds

94,004

 
1,894

 
262

 
95,636

State and political subdivisions—tax exempt

8,252

 
616

 
—

 
8,868

State and political subdivisions—taxable

513

 
11

 
—

 
524

Mortgage-backed securities—residential issued by government sponsored entities

299,544

 
2,065

 
1,298

 
300,311

Total

$
412,051

 
$
4,747

 
$
1,560

 
$
415,238

(Dollars in thousands)

December 31, 2016
 

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Available-for-Sale








Corporate bonds
 
$
28,354

 
$
786

 
$
187

 
$
28,953

State and political subdivisions—tax exempt
 
11,871

 
—

 
794

 
11,077

Mortgage-backed securities—residential issued by government sponsored entities

883,802


1,644


16,524


868,922

Industrial revenue bonds

3,239


59


—


3,298

Total

$
927,266


$
2,489


$
17,505


$
912,250

Held-to-Maturity








U.S. Government agencies

$
11,234


$
77


$
—


$
11,311

Corporate bonds
 
94,010

 
279

 
2,301

 
91,988

State and political subdivisions—tax exempt

8,069


389


—


8,458

State and political subdivisions—taxable

520


13


—


533

Mortgage-backed securities—residential issued by government sponsored entities

350,126


1,081


2,586


348,621

Total

$
463,959


$
1,839


$
4,887


$
460,911


10


There were no sales of securities during the three and nine months ended September 30, 2017. There were no sales of securities during the three months ended September 30, 2016. Proceeds from sales of securities were $90.6 million for the nine months ended September 30, 2016. Gross gains of $0.2 million were realized on sales of these investments during the nine months ended September 30, 2016. Gross losses of $0.1 million were realized on sales of these investments during the nine months ended September 30, 2016.
The estimated fair value of investment securities at September 30, 2017, by contractual maturity, is shown in the table that follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. Debt securities not due at a single maturity date are shown separately.
(Dollars in thousands)

September 30, 2017
 

Amortized
Cost

Estimated
Fair Value

Yield
Available-for-Sale


 

 

Due in one year or less

$
—

 
$
—

 
—
%
Due after one year through five years

—

 
—

 
—
%
Due after five years through ten years

46,911

 
49,753

 
3.42
%
Due after ten years

28,178

 
28,889

 
2.77
%
Mortgage-backed securities—residential issued by government sponsored entities

1,085,935

 
1,077,052

 
2.27
%
Total

$
1,161,024

 
$
1,155,694

 
2.33
%
 
 
 
 
 
 
 
 

Amortized
Cost
 
Estimated
Fair Value
 
Yield
Held-to-Maturity


 

 

Due in one year or less

$
696

 
$
697

 
1.72
%
Due after one year through five years

59,803

 
60,250

 
4.90
%
Due after five years through ten years

42,270

 
44,081

 
5.02
%
Due after ten years

9,738

 
9,899

 
2.80
%
Mortgage-backed securities—residential issued by government sponsored entities

299,544

 
300,311

 
2.37
%
Total

$
412,051

 
$
415,238

 
3.02
%
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
(Dollars in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
September 30, 2017
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions—tax exempt
 
$
1,258

 
$
20

 
$
10,234

 
$
347

 
$
11,492

 
$
367

Mortgage-backed securities—residential issued by government sponsored entities
 
609,111

 
8,212

 
118,122

 
3,146

 
727,233

 
11,358

Total
 
$
610,369

 
$
8,232

 
$
128,356

 
$
3,493

 
$
738,725

 
$
11,725

Held-to-Maturity
 

 

 

 

 

 

U.S. government agencies
 
$
4,904

 
$
92

 
$
4,995

 
$
138

 
$
9,899

 
$
230

Corporate bonds
 
—

 
—

 
14,738

 
262

 
14,738

 
262

Mortgage-backed securities—residential issued by government sponsored entities
 
104,643

 
1,113

 
129,856

 
2,664

 
234,499

 
3,777

Total
 
$
109,547

 
$
1,205

 
$
149,589

 
$
3,064

 
$
259,136

 
$
4,269


11


(Dollars in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2016
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
—

 
$
—

 
$
8,412

 
$
187

 
$
8,412

 
$
187

State and political subdivisions - tax exempt
 
11,077

 
794

 
—

 
—

 
11,077

 
794

Mortgage-backed securities—residential issued by government sponsored entities
 
672,672

 
16,524

 
—

 
—

 
672,672

 
16,524

Total
 
$
683,749

 
$
17,318

 
$
8,412

 
$
187

 
$
692,161

 
$
17,505

Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S Government agencies
 
$
11,311

 
$
402

 
$
—

 
$
—

 
$
11,311

 
$
402

Corporate bonds
 
24,629

 
371

 
28,112

 
1,930

 
52,741

 
2,301

Mortgage-backed securities—residential issued by government sponsored entities
 
276,555

 
6,614

 
8,494

 
332

 
285,049

 
6,946

Total
 
$
312,495

 
$
7,387

 
$
36,606

 
$
2,262

 
$
349,101

 
$
9,649

As of September 30, 2017, the Company’s security portfolio consisted of 177 securities, 75 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed securities.
The corporate bonds in an unrealized loss position at September 30, 2017 and December 31, 2016 continue to perform and are expected to perform through maturity. Unrealized losses associated with these securities are primarily due to changes in interest rates and market volatility, and the corporate issuers have not experienced significant adverse events that would call into question their ability to repay those debt obligations according to contractual terms. Further, because the Company does not have the intent to sell these corporate bonds and it is more likely than not that it will not be required to sell the securities before their anticipated recovery of their amortized cost bases, the Company does not consider these securities to be other-than-temporarily impaired as of September 30, 2017 or December 31, 2016.
All of the mortgage-backed securities at September 30, 2017 and December 31, 2016 were issued by U.S. government-sponsored entities and agencies, which the government has affirmed its commitment to support. Unrealized losses associated with these securities are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017 or December 31, 2016.
Investment securities having carrying values of approximately $672.4 million and $621.8 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.

12


5. Loans
Major classifications of loans, including loans held for sale, are as follows:
(Dollars in thousands)

September 30, 2017
 
December 31, 2016
Non-owner occupied commercial real estate

$
1,293,647


$
1,130,883

Other commercial construction and land

402,250


327,622

Multifamily commercial real estate

148,192


117,515

1-4 family residential construction and land

143,807


140,030

Total commercial real estate

1,987,896


1,716,050

Owner occupied commercial real estate

1,226,211


1,321,405

Commercial and industrial

1,502,939


1,468,874

Total commercial

2,729,150

 
2,790,279

1-4 family residential

1,787,690


1,714,702

Home equity loans

481,696


507,759

Other consumer loans

384,728


448,972

Total consumer

2,654,114

 
2,671,433

Other

241,440


228,430

Total loans

$
7,612,600

 
$
7,406,192

Total loans include $3.1 million and $12.9 million of loans held for sale and $14.7 million and $15.5 million of net deferred loan origination costs and fees as of September 30, 2017 and December 31, 2016, respectively.
As of September 30, 2017, other loans include $41.3 million, $160.2 million and $1.5 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively. As of December 31, 2016, other loans include $41.9 million, $149.0 million and $1.6 million of farm land, state and political subdivision obligations and deposit customer overdrafts, respectively.
The Company designates purchased credit impaired loans as "PCI" by evaluating both qualitative and quantitative factors. At the time of acquisition, the Company accounted for the PCI loans by segregating each portfolio into loan pools with similar risk characteristics. Over the lives of the acquired PCI loans, the Company continues to estimate cash flows expected to be collected on each loan pool. The Company evaluates, at each balance sheet date, whether its estimates of the present value of the cash flows from the loan pools, determined using the effective interest rates, has decreased, such that the present value of such cash flows is less than the recorded investment of the pool, and if so, recognizes a provision for loan loss in its Consolidated Statements of Income, unless related to non-credit events.
Additionally, if the Company has favorable changes in estimates of cash flows expected to be collected for a loan pool such that the then-present value exceeds the recorded investment of that pool, the Company will first reverse any previously established allowance for loan and lease losses for the pool. If such estimate exceeds the amount of any previously established allowance, the Company will accrete future interest income over the remaining life of the pool at a rate which, when used to discount the expected cash flows, results in the then-present value of such cash flows equaling the recorded investment of the pool at the time of the revised estimate.
The table below presents a roll forward of accretable yield and income expected to be earned related to PCI loans. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the PCI loans. Nonaccretable difference represents estimated contractually required payments in excess of estimated cash flows expected to be collected. Other represents reductions of accretable yield due to non-credit events such as prepayment activity on PCI loans.

13


(Dollars in thousands)

Three Months Ended
 
Nine Months Ended
 

September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Accretable Yield

 
 
 
 
 
 
 
Balance at beginning of period

$
145,419

 
$
170,935

 
$
161,639

 
$
208,844

Accretion of income

(19,432
)
 
(18,870
)
 
(56,831
)
 
(59,636
)
Reclassification from nonaccretable difference

15,122

 
8,045

 
47,420

 
29,668

Other

(5,467
)
 
(4,815
)
 
(16,586
)
 
(23,581
)
Balance at end of period

$
135,642

 
$
155,295

 
$
135,642

 
$
155,295

The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:
•
The estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;
•
The estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and
•
Indices for PCI loans with variable rates of interest.
For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.
The following is a summary of the major categories of loans outstanding, as of September 30, 2017 and December 31, 2016:
(Dollars in thousands)

Non-PCI Loans

 

 
September 30, 2017

Originated
 
Acquired

PCI Loans
 
Total
Loans
Non-owner occupied commercial real estate

$
891,125

 
$
199,244

 
$
203,278

 
$
1,293,647

Other commercial construction and land

280,126

 
77,414

 
44,710

 
402,250

Multifamily commercial real estate

118,128

 
14,138

 
15,926

 
148,192

1-4 family residential construction and land

132,701

 
10,812

 
294

 
143,807

Total commercial real estate

1,422,080

 
301,608

 
264,208

 
1,987,896

Owner occupied commercial real estate

908,549

 
168,521

 
149,141

 
1,226,211

Commercial and industrial loans

1,367,979

 
75,988

 
58,972

 
1,502,939

Total commercial

2,276,528

 
244,509

 
208,113

 
2,729,150

1-4 family residential

1,129,241

 
478,755

 
179,694

 
1,787,690

Home equity loans

186,606

 
239,910

 
55,180

 
481,696

Other consumer loans

295,719

 
67,492

 
21,517

 
384,728

Total consumer

1,611,566

 
786,157

 
256,391

 
2,654,114

Other

207,672

 
7,286

 
26,482

 
241,440

Total loans

$
5,517,846

 
$
1,339,560

 
$
755,194

 
$
7,612,600



14


(Dollars in thousands)
 
Non-PCI Loans
 
 
 
 
December 31, 2016
 
Originated
 
Acquired
 
PCI Loans
 
Total
Loans
Non-owner occupied commercial real estate
 
$
680,044

 
$
221,304

 
$
229,535

 
$
1,130,883

Other commercial construction and land
 
182,486

 
73,248

 
71,888

 
327,622

Multifamily commercial real estate
 
77,694

 
19,108

 
20,713

 
117,515

1-4 family residential construction and land
 
105,816

 
33,831

 
383

 
140,030

Total commercial real estate
 
1,046,040

 
347,491

 
322,519

 
1,716,050

Owner occupied commercial real estate
 
901,957

 
239,982

 
179,466

 
1,321,405

Commercial and industrial loans
 
1,283,012

 
96,494

 
89,368

 
1,468,874

Total commercial
 
2,184,969

 
336,476

 
268,834

 
2,790,279

1-4 family residential
 
994,323

 
505,420

 
214,959

 
1,714,702

Home equity loans
 
172,883

 
268,093

 
66,783

 
507,759

Other consumer loans
 
330,423

 
88,134

 
30,415

 
448,972

Total consumer
 
1,497,629

 
861,647

 
312,157

 
2,671,433

Other
 
185,839

 
9,776

 
32,815

 
228,430

Total loans
 
$
4,914,477

 
$
1,555,390

 
$
936,325

 
$
7,406,192


15


The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of September 30, 2017:

(Dollars in thousands)
 
30-89 Days Past Due

Greater than 90 Days Past Due
and Still Accruing/Accreting

Non-accrual

Total
Non-purchased credit impaired loans


 

 

 
 
Non-owner occupied commercial real estate
 
$
—

 
$
—

 
$
2,220

 
$
2,220

Other commercial construction and land
 
183

 
—

 
47

 
230

Multifamily commercial real estate
 
—

 
—

 
—

 
—

1-4 family residential construction and land
 
—

 
—

 
—

 
—

Total commercial real estate
 
183

 
—

 
2,267

 
2,450

Owner occupied commercial real estate
 
162

 
—

 
4,336

 
4,498

Commercial and industrial loans
 
431

 
—

 
2,884

 
3,315

Total commercial
 
593

 
—

 
7,220

 
7,813

1-4 family residential
 
376

 
—

 
2,142

 
2,518

Home equity loans
 
2,428

 
—

 
2,895

 
5,323

Other consumer loans
 
9,234

 
—

 
3,602

 
12,836

Total consumer
 
12,038

 
—

 
8,639

 
20,677

Other
 
55

 
—

 
—

 
55

Total loans
 
$
12,869

 
$
—

 
$
18,126

 
$
30,995


(Dollars in thousands)
 
30-89 Days Past Due
 
Greater than 90 Days Past Due
and Still Accruing/Accreting
 
Non-accrual
 
Total
Purchased credit impaired loans (1)
 

 

 

 
 
Non-owner occupied commercial real estate
 
$
633

 
$
1,679

 
$
—

 
$
2,312

Other commercial construction and land
 
261

 
801

 
—

 
1,062

Multifamily commercial real estate
 
—

 
139

 
—

 
139

1-4 family residential construction and land
 
—

 
—

 
—

 
—

Total commercial real estate
 
894

 
2,619

 
—

 
3,513

Owner occupied commercial real estate
 
3,308

 
4,057

 
—

 
7,365

Commercial and industrial loans
 
3

 
222

 
—

 
225

Total commercial
 
3,311

 
4,279

 
—

 
7,590

1-4 family residential
 
1,835

 
1,687

 
—

 
3,522

Home equity loans
 
1,065

 
401

 
—

 
1,466

Other consumer loans
 
2,099

 
1,436

 
—

 
3,535

Total consumer
 
4,999

 
3,524

 
—

 
8,523

Other
 
109

 
100

 
—

 
209

Total loans
 
$
9,313

 
$
10,522

 
$
—

 
$
19,835


16


The following tables present the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2016:

(Dollars in thousands)
30-89 Days Past Due
 
Greater than 90 Days Past Due
and Still Accruing/Accreting
 
Non-accrual
 
Total
Non-purchased credit impaired loans
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
$
—

 
$
—

 
$
2,584

 
$
2,584

Other commercial construction and land
23

 
—

 
204

 
227

Multifamily commercial real estate
—

 
—

 
—

 
—

1-4 family residential construction and land
148

 
—

 
—

 
148

Total commercial real estate
171

 
—

 
2,788

 
2,959

Owner occupied commercial real estate
2,633

 
—

 
2,950

 
5,583

Commercial and industrial loans
169

 
—

 
698

 
867

Total commercial
2,802

 
—

 
3,648

 
6,450

1-4 family residential
493

 
—

 
1,048

 
1,541

Home equity loans
1,336

 
—

 
1,568

 
2,904

Other consumer loans
8,143

 
—

 
2,397

 
10,540

Total consumer
9,972

 
—

 
5,013

 
14,985

Other
—

 
—

 
—

 
—

Total loans
$
12,945

 
$
—

 
$
11,449

 
$
24,394


(Dollars in thousands)
30-89 Days Past Due
 
Greater than 90 Days Past Due
and Still Accruing/Accreting
 
Non-accrual
 
Total
Purchased credit impaired loans(1)
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
$
—

 
$
1,130

 
$
—

 
$
1,130

Other commercial construction and land
550

 
777

 
—

 
1,327

Multifamily commercial real estate
—

 
420

 
—

 
420

1-4 family residential construction and land
—

 
—

 
—

 
—

Total commercial real estate
550

 
2,327

 
—

 
2,877

Owner occupied commercial real estate
1,844

 
3,776

 
—

 
5,620

Commercial and industrial loans
592

 
509

 
—

 
1,101

Total commercial
2,436

 
4,285

 
—

 
6,721

1-4 family residential
4,288

 
6,060

 
—

 
10,348

Home equity loans
1,128

 
1,470

 
—

 
2,598

Other consumer loans
2,558

 
1,048

 
—

 
3,606

Total consumer
7,974

 
8,578

 
—

 
16,552

Other
87

 
716

 
—

 
803

Total loans
$
11,047

 
$
15,906

 
$
—

 
$
26,953


(1)Pooled PCI loans are not classified as nonaccrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments.

17


Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed at origination and upon identification of a material change for all loans, on an annual basis for commercial loans exceeding $0.5 million, and at least quarterly for commercial loans not rated pass. The Company uses the following definitions for risk ratings:
 
•
Pass —These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.
•
Special Mention —Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
•
Substandard —Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
•
Doubtful —Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following table summarizes loans, excluding PCI loans, by internal rating at September 30, 2017:
 
 
 
 
 
Substandard
 
 
 
 
(Dollars in thousands)
Pass
 
Special Mention
 
Accruing
 
Non-accrual
 
Doubtful
 
Total
Non-owner occupied commercial real estate
$
1,085,892

 
$
2,257

 
$
—

 
$
2,220

 
$
—

 
$
1,090,369

Other commercial construction and land
357,493

 
—

 
—

 
47

 
—

 
357,540

Multifamily commercial real estate
132,075

 
—

 
191

 
—

 
—

 
132,266

1-4 family residential construction and land
143,513

 
—

 
—

 
—

 
—

 
143,513

Total commercial real estate
1,718,973

 
2,257

 
191

 
2,267

 
—

 
1,723,688

Owner occupied commercial real estate
1,051,286

 
18,202

 
3,246

 
4,336

 
—

 
1,077,070

Commercial and industrial loans
1,429,031

 
516

 
11,536

 
2,884

 
—

 
1,443,967

Total commercial
2,480,317

 
18,718

 
14,782

 
7,220

 
—

 
2,521,037

1-4 family residential
1,602,050

 
1,699

 
2,105

 
2,142

 
—

 
1,607,996

Home equity loans
422,514

 
55

 
1,052

 
2,895

 
—

 
426,516

Other consumer loans
359,379

 
—

 
230

 
3,602

 
—

 
363,211

Total consumer
2,383,943

 
1,754

 
3,387

 
8,639

 
—

 
2,397,723

Other
214,958

 
—

 
—

 
—

 
—

 
214,958

Total loans
$
6,798,191

 
$
22,729

 
$
18,360

 
$
18,126

 
$
—

 
$
6,857,406



18


The following table summarizes loans, excluding PCI loans, by internal rating at December 31, 2016:
 
 
 
 
 
Substandard
 
 
 
 
(Dollars in thousands)
Pass
 
Special Mention
 
Accruing
 
Non-accrual
 
Doubtful
 
Total
Non-owner occupied commercial real estate
$
896,394

 
$
1,251

 
$
1,119

 
$
2,584

 
$
—

 
$
901,348

Other commercial construction and land
255,530

 
—

 
—

 
204

 
—

 
255,734

Multifamily commercial real estate
96,802

 
—

 
—

 
—

 
—

 
96,802

1-4 family residential construction and land
139,647

 
—

 
—

 
—

 
—

 
139,647

Total commercial real estate
1,388,373

 
1,251

 
1,119

 
2,788

 
—

 
1,393,531

Owner occupied commercial real estate
1,124,285

 
10,210

 
4,494

 
2,950

 
—

 
1,141,939

Commercial and industrial loans
1,351,581

 
16,709

 
10,518

 
698

 
—

 
1,379,506

Total commercial
2,475,866

 
26,919

 
15,012

 
3,648

 
—

 
2,521,445

1-4 family residential
1,495,653

 
899

 
2,143

 
1,048

 
—

 
1,499,743

Home equity loans
437,880

 
62

 
1,466

 
1,568

 
—

 
440,976

Other consumer loans
416,117

 
—

 
43

 
2,397

 
—

 
418,557

Total consumer
2,349,650

 
961

 
3,652

 
5,013

 
—

 
2,359,276

Other
195,615

 
—

 
—

 
—

 
—

 
195,615

Total loans
$
6,409,504

 
$
29,131

 
$
19,783

 
$
11,449

 
$
—

 
$
6,469,867




19


6. Allowance for Loan and Lease Losses
Activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2017 and 2016 is as follows:

(Dollars in thousands)

Three Months Ended
 
Nine Months Ended
 

September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Balance, beginning of period

$
44,638

 
$
44,883

 
$
43,065

 
$
45,034

Provision (reversal) for loan losses for PCI loans

167

 
(48
)
 
1,171

 
(835
)
Provision for loan losses for non-PCI loans

2,875

 
634

 
7,566

 
3,968

Non-PCI loans charged-off

(2,934
)
 
(1,954
)
 
(8,619
)
 
(6,094
)
Recoveries of non-PCI loans previously charged-off

682

 
469

 
2,245

 
1,911

Balance, end of period

$
45,428

 
$
43,984

 
$
45,428

 
$
43,984

The following tables present the roll forward of the allowance for loan and lease losses for the three and nine months ended September 30, 2017 by the class of loans against which the allowance is allocated:
(Dollars in thousands)
 
June 30, 2017
 
Provision/
(Reversals)
 
Net (Charge-offs)/
Recoveries
 
September 30, 2017
Non-owner occupied commercial real estate
 
$
1,252

 
$
263

 
$
(20
)
 
$
1,495

Other commercial construction and land
 
11,515

 
(1,669
)
 
1

 
9,847

Multifamily commercial real estate
 
193

 
9

 
—

 
202

1-4 family residential construction and land
 
591

 
(139
)
 
1

 
453

Total commercial real estate
 
13,551

 
(1,536
)
 
(18
)
 
11,997

Owner occupied commercial real estate
 
1,324

 
(345
)
 
13

 
992

Commercial and industrial loans
 
9,570

 
318

 
135

 
10,023

Total commercial
 
10,894

 
(27
)
 
148

 
11,015

1-4 family residential
 
9,416

 
(37
)
 
14

 
9,393

Home equity loans
 
1,197

 
(87
)
 
(83
)
 
1,027

Other consumer loans
 
9,222

 
4,417

 
(2,023
)
 
11,616

Total consumer
 
19,835

 
4,293

 
(2,092
)
 
22,036

Other
 
358

 
312

 
(290
)
 
380

Total loans
 
$
44,638

 
$
3,042

 
$
(2,252
)
 
$
45,428



20


(Dollars in thousands)
 
December 31, 2016
 
Provision/
(Reversals)
 
Net (Charge-offs)/
Recoveries
 
September 30, 2017
Non-owner occupied commercial real estate
 
$
1,989

 
$
(478
)
 
$
(16
)
 
$
1,495

Other commercial construction and land
 
12,692

 
(2,955
)
 
110

 
9,847

Multifamily commercial real estate
 
171

 
31

 
—

 
202

1-4 family residential construction and land
 
666

 
(218
)
 
5

 
453

Total commercial real estate
 
15,518

 
(3,620
)
 
99

 
11,997

Owner occupied commercial real estate
 
1,397

 
(455
)
 
50

 
992

Commercial and industrial loans
 
9,509

 
561

 
(47
)
 
10,023

Total commercial
 
10,906

 
106

 
3

 
11,015

1-4 family residential
 
9,188

 
143

 
62

 
9,393

Home equity loans
 
1,214

 
(107
)
 
(80
)
 
1,027

Other consumer loans
 
5,890

 
11,245

 
(5,519
)
 
11,616

Total consumer
 
16,292

 
11,281

 
(5,537
)
 
22,036

Other
 
349

 
970

 
(939
)
 
380

Total loans
 
$
43,065

 
$
8,737

 
$
(6,374
)
 
$
45,428

The following tables present the roll forward of the allowance for loan and lease losses for the three and nine months ended September 30, 2016 by the class of loans against which the allowance is allocated:
(Dollars in thousands)
 
June 30, 2016
 
Provision/
(Reversals)
 
Net(Charge-offs)/
Recoveries
 
September 30, 2016
Non-owner occupied commercial real estate
 
$
2,039

 
$
(27
)
 
$
2

 
$
2,014

Other commercial construction and land
 
12,757

 
345

 
37

 
13,139

Multifamily commercial real estate
 
153

 
3

 
—

 
156

1-4 family residential construction and land
 
958

 
(142
)
 
2

 
818

Total commercial real estate
 
15,907

 
179

 
41

 
16,127

Owner occupied commercial real estate
 
1,559

 
(179
)
 
—

 
1,380

Commercial and industrial loans
 
10,800

 
(573
)
 
16

 
10,243

Total commercial
 
12,359

 
(752
)
 
16

 
11,623

1-4 family residential
 
9,964

 
(579
)
 
(21
)
 
9,364

Home equity loans
 
1,361

 
(121
)
 
16

 
1,256

Other consumer loans
 
4,988

 
1,432

 
(1,129
)
 
5,291

Total consumer
 
16,313

 
732

 
(1,134
)
 
15,911

Other
 
304

 
427

 
(408
)
 
323

Total loans
 
$
44,883

 
$
586

 
$
(1,485
)
 
$
43,984



21



(Dollars in thousands)

December 31, 2015

Provision/
(Reversals)
 
Net(Charge-offs)/
Recoveries
 
September 30, 2016
Non-owner occupied commercial real estate

$
1,598

 
$
405

 
$
11

 
$
2,014

Other commercial construction and land

12,919

 
174

 
46

 
13,139

Multifamily commercial real estate

186

 
(30
)
 
—

 
156

1-4 family residential construction and land

1,275

 
(462
)
 
5

 
818

Total commercial real estate

15,978


87

 
62

 
16,127

Owner occupied commercial real estate

1,505

 
(45
)
 
(80
)
 
1,380

Commercial and industrial loans

9,627

 
1,045

 
(429
)
 
10,243

Total commercial

11,132


1,000

 
(509
)
 
11,623

1-4 family residential

11,057

 
(1,852
)
 
159

 
9,364

Home equity loans

1,853

 
(714
)
 
117

 
1,256

Other consumer loans

4,751

 
3,584

 
(3,044
)
 
5,291

Total consumer

17,661


1,018

 
(2,768
)
 
15,911

Other

263

 
1,028

 
(968
)
 
323

Total loans

$
45,034


$
3,133

 
$
(4,183
)
 
$
43,984


The following tables present the roll forward of the allowance for loan and lease losses for PCI and non-PCI loans for the three and nine months ended September 30, 2017 and 2016, by the class of loans against which the allowance is allocated:
















22


(Dollars in thousands)
Three Months Ended
 
September 30, 2017
 
September 30, 2016
 
Non-PCI
 
PCI
 
Total
 
Non-PCI
 
PCI
 
Total
Allowance for loan and lease losses at the beginning of the period
$
20,619

 
$
24,019

 
$
44,638

 
$
21,182

 
$
23,701

 
$
44,883

Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(22
)
 
—

 
(22
)
 
—

 
—

 
—

Other commercial construction and land
1

 
—

 
1

 
—

 
—

 
—

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
(21
)
 
—

 
(21
)
 
—

 
—

 
—

Owner occupied commercial real estate
1

 
—

 
1

 
—

 
—

 
—

Commercial and industrial loans
(133
)
 
—

 
(133
)
 
(6
)
 
—

 
(6
)
Total commercial
(132
)
 
—

 
(132
)
 
(6
)
 
—

 
(6
)
1-4 family residential
(1
)
 
—

 
(1
)
 
(47
)
 
—

 
(47
)
Home equity loans
(209
)
 
—

 
(209
)
 
(50
)
 
—

 
(50
)
Other consumer loans
(2,145
)
 
—

 
(2,145
)
 
(1,293
)
 
—

 
(1,293
)
Total consumer
(2,355
)
 
—

 
(2,355
)
 
(1,390
)
 
—

 
(1,390
)
Other
(426
)
 
—

 
(426
)
 
(558
)
 
—

 
(558
)
Total charge-offs
(2,934
)
 
—

 
(2,934
)
 
(1,954
)
 
—

 
(1,954
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
2

 
—

 
2

 
2

 
—

 
2

Other commercial construction and land
—

 
—

 
—

 
37

 
—

 
37

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
1

 
—

 
1

 
2

 
—

 
2

Total commercial real estate
3

 
—

 
3

 
41

 
—

 
41

Owner occupied commercial real estate
12

 
—

 
12

 
—

 
—

 
—

Commercial and industrial loans
268

 
—

 
268

 
22

 
—

 
22

Total commercial
280

 
—

 
280

 
22

 
—

 
22

1-4 family residential
15

 
—

 
15

 
26

 
—

 
26

Home equity loans
126

 
—

 
126

 
66

 
—

 
66

Other consumer loans
122

 
—

 
122

 
164

 
—

 
164

Total consumer
263

 
—

 
263

 
256

 
—

 
256

Other
136

 
—

 
136

 
150

 
—

 
150

Total recoveries
682

 
—

 
682

 
469

 
—

 
469

Net charge-offs
(2,252
)
 
—


(2,252
)
 
(1,485
)
 
—

 
(1,485
)
Provision (reversal) for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(88
)
 
351

 
263

 
(96
)
 
69

 
(27
)
Other commercial construction and land
(142
)
 
(1,527
)
 
(1,669
)
 
(102
)
 
447

 
345

Multifamily commercial real estate
(21
)
 
30

 
9

 
(9
)
 
12

 
3

1-4 family residential construction and land
(139
)
 
—

 
(139
)
 
(31
)
 
(111
)
 
(142
)
Total commercial real estate
(390
)
 
(1,146
)
 
(1,536
)
 
(238
)
 
417

 
179

Owner occupied commercial real estate
(119
)
 
(226
)
 
(345
)
 
(183
)
 
4

 
(179
)
Commercial and industrial loans
155

 
163

 
318

 
(695
)
 
122

 
(573
)
Total commercial
36

 
(63
)
 
(27
)
 
(878
)
 
126

 
(752
)
1-4 family residential
(272
)
 
235

 
(37
)
 
(148
)
 
(431
)
 
(579
)
Home equity loans
20

 
(107
)
 
(87
)
 
15

 
(136
)
 
(121
)
Other consumer loans
3,178

 
1,239

 
4,417

 
1,461

 
(29
)
 
1,432

Total consumer
2,926

 
1,367

 
4,293

 
1,328

 
(596
)
 
732

Other
303

 
9

 
312

 
422

 
5

 
427

Total provision (reversal) for loan and lease losses
2,875

 
167

 
3,042

 
634

 
(48
)
 
586

Allowance for loan and lease losses at the end of the period
$
21,242

 
$
24,186

 
$
45,428

 
$
20,331

 
$
23,653

 
$
43,984


23


(Dollars in thousands)
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
Non-PCI
 
PCI
 
Total
 
Non-PCI
 
PCI
 
Total
Allowance for loan and lease losses at the beginning of the period
$
20,050

 
$
23,015

 
$
43,065

 
$
20,546

 
$
24,488

 
$
45,034

Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(22
)
 
—

 
(22
)
 
(2
)
 
—

 
(2
)
Other commercial construction and land
(6
)
 
—

 
(6
)
 
—

 
—

 
—

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
(28
)
 
—

 
(28
)
 
(2
)
 
—

 
(2
)
Owner occupied commercial real estate
(5
)
 
—

 
(5
)
 
(80
)
 
—

 
(80
)
Commercial and industrial loans
(385
)
 
—

 
(385
)
 
(510
)
 
—

 
(510
)
Total commercial
(390
)
 
—

 
(390
)
 
(590
)
 
—

 
(590
)
1-4 family residential
(3
)
 
—

 
(3
)
 
(47
)
 
—

 
(47
)
Home equity loans
(365
)
 
—

 
(365
)
 
(224
)
 
—

 
(224
)
Other consumer loans
(6,340
)
 
—

 
(6,340
)
 
(3,633
)
 
—

 
(3,633
)
Total consumer
(6,708
)
 
—

 
(6,708
)
 
(3,904
)
 
—

 
(3,904
)
Other
(1,493
)
 
—

 
(1,493
)
 
(1,598
)
 
—

 
(1,598
)
Total charge-offs
(8,619
)
 
—

 
(8,619
)
 
(6,094
)
 
—

 
(6,094
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
6

 
—

 
6

 
13

 
—

 
13

Other commercial construction and land
116

 
—

 
116

 
46

 
—

 
46

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
5

 
—

 
5

 
5

 
—

 
5

Total commercial real estate
127

 
—

 
127

 
64

 
—

 
64

Owner occupied commercial real estate
55

 
—

 
55

 
—

 
—

 
—

Commercial and industrial loans
338

 
—

 
338

 
81

 
—

 
81

Total commercial
393

 
—

 
393

 
81

 
—

 
81

1-4 family residential
65

 
—

 
65

 
206

 
—

 
206

Home equity loans
285

 
—

 
285

 
341

 
—

 
341

Other consumer loans
821

 
—

 
821

 
589

 
—

 
589

Total consumer
1,171

 
—

 
1,171

 
1,136

 
—

 
1,136

Other
554

 
—

 
554

 
630

 
—

 
630

Total recoveries
2,245

 
—

 
2,245

 
1,911

 
—

 
1,911

Net charge-offs
(6,374
)
 
—

 
(6,374
)
 
(4,183
)
 
—

 
(4,183
)
Provision (reversal) for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(154
)
 
(324
)
 
(478
)
 
(323
)
 
728

 
405

Other commercial construction and land
(344
)
 
(2,611
)
 
(2,955
)
 
(19
)
 
193

 
174

Multifamily commercial real estate
18

 
13

 
31

 
(31
)
 
1

 
(30
)
1-4 family residential construction and land
(218
)
 
—

 
(218
)
 
55

 
(517
)
 
(462
)
Total commercial real estate
(698
)
 
(2,922
)
 
(3,620
)
 
(318
)
 
405

 
87

Owner occupied commercial real estate
(200
)
 
(255
)
 
(455
)
 
(145
)
 
100

 
(45
)
Commercial and industrial loans
(367
)
 
928

 
561

 
291

 
754

 
1,045

Total commercial
(567
)
 
673

 
106

 
146

 
854

 
1,000

1-4 family residential
(527
)
 
670

 
143

 
(433
)
 
(1,419
)
 
(1,852
)
Home equity loans
5

 
(112
)
 
(107
)
 
(69
)
 
(645
)
 
(714
)
Other consumer loans
8,415

 
2,830

 
11,245

 
3,628

 
(44
)
 
3,584

Total consumer
7,893

 
3,388

 
11,281

 
3,126

 
(2,108
)
 
1,018

Other
938

 
32

 
970

 
1,014

 
14

 
1,028

Total provision (reversal) for loan and lease losses
7,566

 
1,171

 
8,737

 
3,968

 
(835
)
 
3,133

Allowance for loan and lease losses at the end of the period
$
21,242

 
$
24,186

 
$
45,428

 
$
20,331

 
$
23,653

 
$
43,984


24


The following table presents the balance in the allowance for loan and lease losses and the recorded investment in loans by class of loan and by impairment evaluation method as of September 30, 2017:
(Dollars in thousands)
Allowance for Loan and Lease Losses
 
Loans
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
Purchased
Credit-
Impaired
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment (1)
 
Purchased
Credit-
Impaired
Non-owner occupied commercial real estate
$
—

 
$
789

 
$
706

 
$
2,732

 
$
1,087,637

 
$
203,278

Other commercial construction and land
17

 
1,447

 
8,383

 
109

 
357,431

 
44,710

Multifamily commercial real estate
—

 
67

 
135

 
—

 
132,266

 
15,926

1-4 family residential construction and land
—

 
453

 
—

 
—

 
143,513

 
294

Total commercial real estate
17

 
2,756

 
9,224

 
2,841

 
1,720,847

 
264,208

Owner occupied commercial real estate
—

 
992

 
—

 
8,502

 
1,068,568

 
149,141

Commercial and industrial loans
650

 
5,466

 
3,907

 
13,195

 
1,430,772

 
58,972

Total commercial
650

 
6,458

 
3,907

 
21,697

 
2,499,340

 
208,113

1-4 family residential
97

 
1,695

 
7,601

 
3,003

 
1,601,933

 
179,694

Home equity loans
117

 
444

 
466

 
1,916

 
424,600

 
55,180

Other consumer loans
27

 
8,679

 
2,910

 
368

 
362,843

 
21,517

Total consumer
241

 
10,818

 
10,977

 
5,287

 
2,389,376

 
256,391

Other
—

 
302

 
78

 
—

 
214,958

 
26,482

Total loans
$
908

 
$
20,334

 
$
24,186

 
$
29,825

 
$
6,824,521

 
$
755,194

 
(1) 
Loans collectively evaluated for impairment include $1.4 billion of acquired loans which are presented net of unamortized purchase discounts of $14.5 million.
The following table presents the balance in the allowance for loan and lease losses and the recorded investment in loans by class of loan and by impairment evaluation method as of December 31, 2016:
(Dollars in thousands)
Allowance for Loan and Lease Losses
 
Loans
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
Purchased
Credit-
Impaired
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment (1)
 
Purchased
Credit-
Impaired
Non-owner occupied commercial real estate
$
—

 
$
959

 
$
1,030

 
$
2,835

 
$
898,513

 
$
229,535

Other commercial construction and land
20

 
1,678

 
10,994

 
109

 
255,625

 
71,888

Multifamily commercial real estate
—

 
49

 
122

 
—

 
96,802

 
20,713

1-4 family residential construction and land
—

 
666

 
—

 
—

 
139,647

 
383

Total commercial real estate
20

 
3,352

 
12,146

 
2,944

 
1,390,587

 
322,519

Owner occupied commercial real estate
1

 
1,141

 
255

 
8,858

 
1,133,081

 
179,466

Commercial and industrial loans
6

 
6,524

 
2,979

 
9,548

 
1,369,958

 
89,368

Total commercial
7

 
7,665

 
3,234

 
18,406

 
2,503,039

 
268,834

1-4 family residential
121

 
2,136

 
6,931

 
1,963

 
1,484,906

 
214,959

Home equity loans
113

 
523

 
578

 
1,392

 
439,584

 
66,783

Other consumer loans
13

 
5,797

 
80

 
452

 
418,105

 
30,415

Total consumer
247

 
8,456

 
7,589

 
3,807

 
2,342,595

 
312,157

Other
—

 
303

 
46

 
—

 
195,615

 
32,815

Total loans
$
274

 
$
19,776

 
$
23,015

 
$
25,157

 
$
6,431,836

 
$
936,325

(1) 
Loans collectively evaluated for impairment include $1.6 billion of acquired loans which are presented net of unamortized purchase discounts of $20.0 million.


25


For the three and nine months ended September 30, 2017 and September 30, 2016, the amount of interest income recognized on loans that were impaired was not material.
Troubled Debt Restructuring
If a borrower is experiencing financial difficulty, the Bank may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. A troubled debt restructuring (“TDR”) typically involves either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date(s) with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Upon modification of a loan, the Bank measures the related impairment as the excess of the recorded investment in the loan over the discounted expected future cash flows. The present value of expected future cash flows is discounted at the loan’s effective interest rate. If the impairment analysis results in a loss, an allowance for loan and lease losses is established for the loan. During the nine months ended September 30, 2017 and 2016, loans modified in TDRs were nominal. Because of the insignificance of the amount and the nature of the modifications, the modifications did not have a material impact on the Company’s Consolidated Financial Statements or on the determination of the allowance for loan and lease losses at September 30, 2017 and 2016. The Company had loans modified in TDRs with recorded investments of $2.3 million, $2.7 million, and $2.3 million as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively.
Hurricane Irma
     On September 10, 2017, Hurricane Irma struck the south coast of Florida, temporarily disrupting our branch network. However within a matter of days, all but two of our offices were back open and assisting customers, while the remaining two offices will open during the fourth quarter. The Company incurred property costs associated with Hurricane Irma of approximately $0.2 million, which are reflected in third quarter results. The Company has also reviewed its lending and deposit portfolio and determined no impairment was indicated at this time as a result of Hurricane Irma. In working with its borrowers and depositors affected by this hurricane, the Company has entered into temporary payment deferral agreements of 90 days or less on loans covering $78.6 million of outstanding principle. Each of these loans were assessed individually and were determined to not be a troubled debt restructuring. The review process is on-going and we will continue to monitor the impact on our loan portfolio.

7. Other Real Estate Owned
The activity within Other Real Estate Owned (“OREO”) for the three and nine months ended September 30, 2017 and 2016 is presented in the table below.
For the three and nine months ended September 30, 2017 , proceeds on sales of OREO were $6.7 million and $22.2 million, respectively and net gains were $0.0 million and $0.5 million, respectively. For the three and nine months ended September 30, 2016, proceeds on sales of OREO were $1.4 million and $13.2 million, respectively and net gains were $0.2 million and $1.3 million, respectively.
(Dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Balance, beginning of period
$
41,364

 
$
44,236

 
$
53,482

 
$
52,776

Real estate acquired from borrowers and transfers from other assets
9,909

 
3,762

 
13,373

 
7,534

Valuation allowance
(249
)
 
(742
)
 
(758
)
 
(2,328
)
Properties sold
(6,608
)
 
(1,249
)
 
(21,681
)
 
(11,975
)
Balance, end of period
$
44,416

 
$
46,007

 
$
44,416

 
$
46,007

8. Federal Home Loan Bank Advances and Short-Term Borrowings
Short-term borrowings include securities sold under agreements to repurchase, cash received from counterparties as collateral for mark-to-market exposure on interest rate swaps, and advances from the Federal Home Loan Bank (“FHLB”) .

26


The Bank has securities sold under agreements to repurchase with customers. These overnight agreements are collateralized by investment securities of the United States Government or its agencies which are chosen by the Bank. The amounts outstanding at September 30, 2017 and December 31, 2016 were $34.6 million and $18.0 million, respectively, and were collateralized by $37.2 million and $27.6 million, respectively, of agency mortgage-backed securities.
The Bank has $0.3 million and $1.2 million of short term borrowings related to cash received from counterparties as collateral for mark-to-market exposure on interest rate swaps at September 30, 2017 and December 31, 2016, respectively.
The Bank invests in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral. The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage, multifamily, home equity line of credit and commercial real estate secured loans. The amounts of eligible collateral at September 30, 2017 and December 31, 2016 provided for incremental borrowing availability of up to $566.9 million and $415.9 million, respectively.
At September 30, 2017 and December 31, 2016, the Bank had $15.8 million and $15.4 million in letters of credit issued by the FHLB respectively, of which $15.0 million and $15.2 million are used as collateral for public funds deposits in lieu of pledging securities to the State of Florida, respectively.
The FHLB advances as of September 30, 2017 and December 31, 2016 consisted of the following:

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Contractual
Outstanding
Amount
 
 
 
 
 
September 30, 2017
 
Maturity Date
 
Interest Rate as of September 30, 2017
151

 
November 6, 2017
 
0.50%
 
50,000

 
November 20, 2017
 
1.19%
(1 Month FRC + 2 bps)*
50,000

 
November 23, 2018
 
1.19%
(1 Month FRC + 2 bps)*
50,000

 
December 31, 2019
 
1.17%
(1 Month FRC + 2 bps)*
60,000

 
May 28, 2020
 
1.18%
(1 Month FRC + 2 bps)*
80,000

 
September 20, 2021
 
1.25%
(1 Month FRC + 8 bps)*
75,000

 
September 29, 2021
 
1.23%
(1 Month FRC + 8 bps)*
75,000

 
January 20, 2022
 
1.25%
(1 Month FRC + 8 bps)*
398

 
February 10, 2026
 
—%
 
$
440,549

 
 
 
 
 

(*) FRC = FHLB Fixed Rate Credit interest rate.


27


(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Contractual
Outstanding
Amount
 
 
 
 
 
December 31, 2016
 
Maturity Date
 
Interest Rate as of December 31, 2016
$
25,000

 
January 20, 2017
 
0.63%
 
155,000

 
May 19, 2017
 
0.80%
 
271

 
November 6, 2017
 
0.50%
 
50,000

 
November 20, 2017
 
0.65%
(1 Month FRC + 2 bps)*
50,000

 
November 23, 2018
 
0.66%
(1 Month FRC + 2 bps)*
50,000

 
December 31, 2019
 
0.64%
(1 Month FRC + 2 bps)*
60,000

 
May 28, 2020
 
0.63%
(1 Month FRC + 2 bps)*
80,000

 
September 20, 2021
 
0.71%
(1 Month FRC + 8 bps)*
75,000

 
September 29, 2021
 
0.71%
(1 Month FRC + 8 bps)*
430

 
February 10, 2026
 
—%
 
$
545,701

 
 
 
 
 

(*) FRC = FHLB Fixed Rate Credit interest rate.


28


9. Long-Term Borrowings

Subordinated Debentures
Through its acquisitions of TIB Financial ("TIBB"), Capital Bank Corp. ("CBKN"), Green Bankshares ("GRNB"), Southern Community Financial ("SCMF" or "Southern Community"), and CommunityOne Bancorp ("COB" or "CommunityOne"), the Company assumed fourteen separate pooled offerings of trust preferred securities listed below. The Company is not considered the primary beneficiary of the trusts (variable interest entities), therefore the trusts are not consolidated in the Company’s Consolidated Financial Statements, but rather the subordinated debentures are presented as liabilities. The trusts consist of wholly-owned statutory trust subsidiaries for the purpose of issuing the trust preferred securities. The trusts used the proceeds from the issuance of trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend equal to the interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the trust, at their respective option after a period of time, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board (“FRB”), if then required. Deferral of interest payments on the trust preferred securities is allowed for up to 60 months without being considered an event of default.
The subordinated debentures are included in Tier 1 capital under the capital guidelines of the Dodd-Frank Act. The subordinated debentures as of September 30, 2017 and December 31, 2016 consisted of the following:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying Amount
 
 
 
 
 
Date of Offering
 
Face Amount
 
September 30, 2017
 
December 31, 2016
 
Interest Rate as of September 30, 2017
 
Maturity Date
July 31, 2001
 
$
5,000

 
$
4,064

 
$
4,018

 
4.89
%
(3 Month LIBOR + 358 bps)
 
July 31, 2031
July 31, 2001
 
4,000

 
2,882

 
2,831

 
4.89
%
(3 Month LIBOR + 358 bps)
 
July 31, 2031
December 20, 2002
 
5,000

 
3,597

 
3,544

 
4.65
%
(3 Month LIBOR + 335 bps)
 
December 30, 2032
June 26, 2003
 
10,000

 
6,320

 
6,231

 
4.43
%
(3 Month LIBOR + 310 bps)
 
June 26, 2033
September 25, 2003
 
10,000

 
6,941

 
6,823

 
4.15
%
(3 Month LIBOR + 285 bps)
 
October 8, 2033
December 30, 2003
 
10,000

 
6,110

 
6,020

 
4.16
%
(3 Month LIBOR + 285 bps)
 
December 30, 2033
June 28, 2005
 
3,000

 
1,737

 
1,697

 
3.00
%
(3 Month LIBOR + 168 bps)
 
June 28, 2035
November 4, 2005
 
20,000

 
10,365

 
10,085

 
2.69
%
(3 Month LIBOR + 137 bps)
 
December 15, 2035
December 22, 2005
 
10,000

 
4,968

 
4,863

 
2.72
%
(3 Month LIBOR + 140 bps)
 
March 15, 2036
December 28, 2005
 
13,000

 
7,278

 
7,107

 
2.86
%
(3 Month LIBOR + 154 bps)
 
March 15, 2036
April 27, 2006
 
30,000

 
15,229

 
14,816

 
2.62
%
(3 Month LIBOR + 132 bps)
 
June 30, 2036
June 23, 2006
 
20,000

 
12,326

 
12,092

 
2.85
%
(3 Month LIBOR + 155 bps)
 
July 7, 2036
May 16, 2007
 
56,000

 
31,380

 
30,685

 
2.97
%
(3 Month LIBOR + 165 bps)
 
June 15, 2037
June 15, 2007
 
10,000

 
5,732

 
5,644

 
2.75
%
(3 Month LIBOR + 143 bps)
 
September 6, 2037
Total
 
$
206,000

 
$
118,929

 
$
116,456

 
 
 
 
 



29


10. Shareholders’ Equity and Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
To be considered well capitalized or adequately capitalized as defined under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 common, Tier 1 risk-based and Total Risk-based ratios. At September 30, 2017 and December 31, 2016 the Bank maintained capital ratios exceeding the requirement to be considered well capitalized. These minimum ratios along with the actual ratios for the Company and the Bank are presented in the following tables:
(Dollars in thousands)
Well Capitalized
Requirement
 
Adequately Capitalized
Requirement
 
Actual
September 30, 2017
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
392,224

 
≥ 4.0%
 
$
1,176,655

 
12.0%
Bank
$
488,678

 
≥ 5.0%
 
$
390,943

 
≥ 4.0%
 
$
1,062,316

 
10.9%
Tier 1 Common Equity Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
378,507

 
≥ 4.5%
 
$
1,068,825

 
12.7%
Bank
$
544,345

 
≥ 6.5%
 
$
376,854

 
≥ 4.5%
 
$
1,062,316

 
12.7%
Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
504,676

 
≥ 6.0%
 
$
1,176,655

 
14.0%
Bank
$
669,963

 
≥ 8.0%
 
$
502,472

 
≥ 6.0%
 
$
1,062,316

 
12.7%
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
672,901

 
≥ 8.0%
 
$
1,222,487

 
14.5%
Bank
$
837,453

 
≥ 10.0%
 
$
669,963

 
≥ 8.0%
 
$
1,108,148

 
13.2%


30


(Dollars in thousands)
Well Capitalized
Requirement
 
Adequately Capitalized
Requirement
 
Actual
December 31, 2016
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
360,513

 
≥ 4.0%
 
$
1,101,743

 
12.2%
Bank
$
450,006

 
≥ 5.0%
 
$
360,005

 
≥ 4.0%
 
$
1,010,409

 
11.2%
Tier 1 Common Equity Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
367,521

 
≥ 4.5%
 
$
1,012,831

 
12.4%
Bank
$
529,887

 
≥ 6.5%
 
$
366,845

 
≥ 4.5%
 
$
1,010,409

 
12.4%
Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
490,028

 
≥ 6.0%
 
$
1,101,743

 
13.5%
Bank
$
652,169

 
≥ 8.0%
 
$
489,127

 
≥ 6.0%
 
$
1,010,409

 
12.4%
Total Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
N/A
 
$
653,371

 
≥ 8.0%
 
$
1,145,351

 
14.0%
Bank
$
815,211

 
≥ 10.0%
 
$
652,169

 
≥ 8.0%
 
$
1,054,016

 
12.9%
As of September 30, 2017 and December 31, 2016, the Company and the Bank met all capital requirements to which they were subject. Tier 1 Capital for the Company includes trust preferred securities to the extent allowable.
Dividends that may be paid by a national bank are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. The Company received dividends from the Bank totaling $8.0 million, $6.8 million, $4.2 million, $6.1 million, $5.7 million and $64.2 million, on July 28, 2017, May 2, 2017, January 31, 2017, January 24, 2017, October 19, 2016 and June 1, 2016, respectively. The Company may use these dividends for general corporate purposes including acquisitions, or as a return of capital to shareholders through future share repurchases or dividends.
In July 2013, the U.S. banking regulators adopted a final rule which implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and certain changes required by the Dodd-Frank Act. The final rule established an integrated regulatory capital framework and introduces the “Standardized Approach” for risk-weighted assets, which replaces the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015, the date the Company became subject to the new rules. Based on the Company's current capital composition and levels, the Company believes it is in compliance with the requirements as set forth in the final rules.
The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. As of September 30, 2017, our capital buffer is 6.5%; exceeding the 2.5% 2019 requirement.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a

31


new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

Dividend Program

On October 19, 2017, the Company's board of directors approved a quarterly common dividend of $0.12 per share payable on November 13, 2017, to shareholders of record as of November 3, 2017.
Share Repurchases
The Company’s board of directors has authorized stock repurchases of up to $400.0 million. Stock repurchases may be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase program does not obligate the Company to repurchase any particular amount of shares, and the program may be extended, modified, suspended, or discontinued at any time.
As of September 30, 2017, the Company has repurchased a total of $312.4 million, or 12,739,763 common shares at an average price of $24.52 per share with $87.6 million remaining under the current board authorized stock repurchase program.
The Company accounts for treasury stock using the cost method as a reduction of shareholders’ equity in the accompanying Consolidated Balance Sheets and Statements of Changes in Shareholders’ Equity.


32


11. Stock-Based Compensation
As of September 30, 2017, the Company had two compensation plans, the 2010 Equity Incentive Plan (the "2010 Plan") and the 2013 Omnibus Compensation Plan (the “2013 Plan”) under which shares of its common stock are issuable in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, stock bonus awards, and other incentive awards. The 2010 Plan was replaced by the 2013 Plan and no further awards may be made pursuant to the 2010 Plan.
The 2013 Plan was effective May 22, 2013 and expires on May 22, 2023, the tenth anniversary of the effective date. The maximum number of shares of common stock of the Company that may be optioned or awarded under this plan is 2,639,000 shares. Awards under this plan may be made to any person selected by the Compensation Committee.
The following table summarizes the components and classification of stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016:
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Stock options
 
$
28

 
$
14

 
$
80

 
$
35

Restricted stock
 
1,413

 
776

 
3,225

 
1,539

Total stock-based compensation expense
 
$
1,441

 
$
790

 
$
3,305

 
$
1,574

The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was $0.5 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively and $1.2 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Stock Options
Under the 2010 Plan and 2013 Plan, the exercise price for common stock must equal at least 100% of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10% of the common stock must equal at least 110% of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. Stock options have an expiration of ten years from the date it is granted. Under these plans, 112,271 options were exercised and 15,623 stock options were granted during the nine months ended September 30, 2017.
The fair value of each option is estimated as of the date of the grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan at the date of grant. The risk-free interest rate was developed using the U.S. Treasury yield curve for a period equal to the expected life of the options on the grant date. The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. The expected volatility assumption was based on the historical volatility of the Company's stock price.
ASC 718 requires the recognition of stock-based compensation expense for the number of awards that are ultimately expected to vest. During the nine months ended September 30, 2017 and 2016, stock based compensation expense was recorded based upon assumptions that the Company would experience no forfeitures. This assumption of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in assumptions will be accounted for prospectively in the period of change.
A summary of the stock option activity for the nine months ended September 30, 2017 and 2016 is as follows:

33


 
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
(Shares in thousands)
 
Shares    
 
    Weighted    
Average
Exercise Price Per Share
 
Shares    
 
Weighted    
Average
Exercise Price 
Per Share
Balance, January 1,
 
3,180

 
$
20.86

 
3,075

 
$
20.12

Granted
 
15

 
39.55

 
30

 
30.54

Exercised
 
(112
)
 
20.37

 
(36
)
 
18.00

Canceled, expired or forfeited
 
(4
)
 
82.09

 
(3
)
 
30.54

Balance, September 30,
 
3,079

 
$
20.85

 
3,066

 
$
20.24

At September 30, 2017, the weighted average remaining contractual life for outstanding stock options was approximately 3.10 years and the aggregate intrinsic values was $60.0 million for stock options outstanding and exercisable.
The intrinsic value for stock options is calculated as the difference between the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.
Options outstanding at September 30, 2017 were as follows:
(Shares in thousands)
 
Outstanding Options
 
Exercisable Options
Range of Exercise Prices
 
Shares    
 
Weighted
Average
Remaining
Contractual Life
 
Weighted
Average
Exercise Price
Per Share
 
Shares    
 
Weighted
Average
Exercise Price
Per Share
$18.00
 
119

 
5.64 years
 
$
18.00

 
119

 
$
18.00

$18.01 - $20.00
 
2,793

 
2.74 years
 
20.00

 
2,794

 
20.00

$20.98 - $1,095.00
 
167

 
7.45 years
 
37.08

 
114

 
37.75

$18.00 - $1,095.00
 
3,079

 
3.10 years
 
$
20.85

 
3,027

 
$
20.59


Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. The restricted stock vests ratably over a three-year period subject to continued employment with the company. The value of the restricted stock is being amortized on a straight-line basis over the implied service periods. There were 175,287 restricted stock awards granted under the 2013 Plan during the nine months ended September 30, 2017.
The following table summarizes unvested restricted stock activity for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
(Shares in thousands)
 
Shares    
 
Weighted
Average
Grant-Date
Fair Value
    Per Share     
 
Shares    
 
Weighted
Average
Grant-Date
Fair Value
    Per Share     
Balance, January 1,
 
197

 
$
30.10

 
—

 
$
—

Granted
 
175

 
39.53

 
199

 
30.54

Vested or released
 
(53
)
 
31.71

 
—

 
—

Canceled, expired or forfeited
 
(26
)
 
35.28

 
(4
)
 
30.54

Balance, September 30
 
293

 
$
35.59

 
195

 
$
30.54



34


12. Income Taxes
A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income tax expense reported for the three and nine months ended September 30, 2017 and 2016 is as follows:
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Income before income taxes
 
$
40,663

 
$
26,881

 
$
110,490

 
$
70,230

Income taxes computed at Federal statutory tax rate
 
14,232

 
9,408

 
38,671

 
24,581

Effect of:
 
 
 
 
 
 
 
 
State taxes (net of federal benefit)
 
767

 
822

 
2,540

 
2,143

State statutory rate change
 
66

 
356

 
527

 
356

Tax-exempt interest income, net
 
(435
)
 
(327
)
 
(1,151
)
 
(808
)
Other, net
 
275

 
(1,889
)
 
(544
)
 
(1,854
)
Total income tax expense
 
$
14,905

 
$
8,370

 
$
40,043

 
$
24,418

The Company uses an estimated annual effective tax rate method of computing its interim tax provision. The effective tax rate is based on forecasted annual pre-tax income, permanent differences and statutory tax rates. For the three and nine months ended September 30, 2017, the effective income tax rates were 37% and 36%, respectively. For the three and nine months ended September 30, 2016, the effective income tax rates were 31% and 35%.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the states of Florida, New York, South Carolina, North Carolina, and Tennessee. The net deferred tax assets as of September 30, 2017 and December 31, 2016 were $113.1 million and $150.3 million, respectively. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence in concluding that no valuation allowance was necessary at September 30, 2017 and December 31, 2016.
At September 30, 2017 and December 31, 2016, the Company had $480.7 million and $478.6 million of gross federal net operating loss carry-forwards, respectively, which begin to expire after 2028 and are subject to annual cumulative limitation of $28.5 million for tax year 2017.
At September 30, 2017 and December 31, 2016 the company had $499.3 million and $507.0 million of gross state net operating loss carry-forwards expected to be utilized, respectively.
At September 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits and no material amounts recorded for uncertain tax positions.


35


13. Fair Value
FASB guidance on fair value measurements defines fair value, establishes a framework for measuring fair value, and requires fair value disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis.
This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Cash & cash equivalents
Cash and cash equivalents include cash on hand and highly-liquid items with an original maturity of three months or less. Accordingly, the carrying amount of such instruments is considered to be a reasonable estimate of fair value.
Derivative financial instruments
Interest rate swaps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. Forward loan sales agreements are based upon the amounts required to settle the contracts. Fair values for commitments to originate loans held for sale are based on fees currently charged to enter into similar agreements. Fair values for fixed-rate commitments consider the difference between current levels of interest rates and the committed rates.
Valuation of Investment Securities
The fair values of available-for-sale, held-to-maturity and trading securities are determined by: 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs); 2) matrix pricing, which is a mathematical technique widely used in the financial markets to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs); and 3) for certain other debt securities that are not actively traded, custom discounted cash flow modeling (Level 3 inputs).
As of September 30, 2017, the Bank held industrial revenue bonds, which are floating rate issues. Since there is no active secondary market for the trading of the bonds, the Company has developed a model to estimate fair value. This model determines an appropriate discount rate for the bonds based on current market rates for liquid corporate bonds with an equivalent credit rating plus an estimated illiquidity factor, and calculates the present value of expected future cash flows using this discount rate.



36


Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustment for mortgage loans held for sale is classified as nonrecurring Level 2.
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan and lease losses and other real estate owned is generally based on recent real estate appraisals and other available observable market information. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The Company’s policy is to update appraisals, at a minimum, annually for classified assets, which include collateral dependent loans and OREO. The Company considers appraisals dated within the past 12 months to be current and do not typically make adjustments to such appraisals. In the Company’s process for reviewing third-party prepared appraisals, any differences of opinion on values, assumptions or adjustments to comparable sales data are typically reconciled directly with the independent appraiser prior to acceptance of the final appraisal.
Valuation of Premises and Equipment held for sale
Premises and equipment held for sale are carried at the lower of cost or estimated fair value. The fair values of premises and equipment held for sale are based on recent real estate appraisals and other available observable market information.
Mortgage Servicing Rights
As of September 30, 2017, the fair value of the Company's Level 3 mortgage servicing rights (“MSR”) was $2.3 million, none of which are currently impaired and therefore are carried at amortized cost. The assumptions used include the fee per loan, the cost to service, the expected loan prepayment rate, and the discount rate. In determining the fair value of the existing MSR, the Company reviews the key assumptions, analyzes pricing in the market for comparable MSR, and uses a third party provider to independently calculate the fair value of its MSR.
Sensitivity to Changes in Significant Unobservable Inputs
As discussed above, as of September 30, 2017, the Company owns industrial revenue bonds, which require recurring fair value estimates categorized within Level 3 of the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of these securities are incorporated in the discounted cash flow modeling valuation. Rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of other non-investment grade corporate debt. Significant changes in any inputs in isolation would result in significantly different fair value estimates.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 are summarized below:

37


(Dollars in thousands)
 
 
 
Fair Value Measurement Using:
 
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Trading securities
 
$
4,458

 
$
—

 
$
4,458

 
$
—

Available-for-sale securities:
 
 
 
 
 
 
 
 
Mortgage-backed securities—residential
 
$
1,077,052

 
$
—

 
$
1,077,052

 
$
—

State and political subdivisions—tax exempt
 
11,492

 
—

 
11,492

 
—

Industrial revenue bonds
 
3,142

 
—

 
—

 
3,142

Corporate bonds
 
64,008

 
—

 
64,008

 
—

Available-for-sale securities
 
$
1,155,694

 
$
—

 
$
1,152,552

 
$
3,142

Gross asset value of derivatives
 
$
1,194

 
$
—

 
$
1,194

 
$
—

Liabilities
 
 
 
 
 
 
 
 
Gross liability value of derivatives
 
$
2,178

 
$
—

 
$
2,178

 
$
—

There were no transfers of assets and liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2017.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 are summarized below:
(Dollars in thousands)
 
 
 
Fair Value Measurement Using:
 
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Trading securities
 
$
3,791

 
$
—

 
$
3,791

 
$
—

Available-for-sale securities:
 
 
 
 
 
 
 
 
Mortgage-backed securities-residential
 
$
868,922

 
$
—

 
$
868,922

 
$
—

State and political subdivisions - tax exempt
 
11,077

 
—

 
11,077

 
—

Industrial revenue bonds
 
3,298

 
—

 
—

 
3,298

Corporate bonds
 
28,953

 
—

 
28,953

 
—

Available-for-sale securities
 
$
912,250

 
$
—

 
$
908,952

 
$
3,298

Gross asset value of derivatives
 
$
1,078

 
$
—

 
$
1,078

 
$
—

Liabilities
 
 
 
 
 
 
 
 
Gross liability value of derivatives
 
$
1,354

 
$
—

 
$
1,354

 
$
—

There were no transfers of assets and liabilities between levels of the fair value hierarchy during the year ended December 31, 2016.
The table below presents the activity and income statement classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended and held at September 30, 2017 and 2016:

38


(Dollars in thousands)
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
Industrial
Revenue
Bonds
Beginning balance, July 1, 2017
$
3,137

Principal reduction
—

Included in other comprehensive income
5

Ending balance, September 30, 2017
$
3,142


(Dollars in thousands)
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
Industrial
Revenue
Bonds
Beginning balance, January 1, 2017
$
3,298

Principal reduction
(170
)
Included in other comprehensive income
14

Ending balance, September 30, 2017
$
3,142


(Dollars in thousands)
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
Industrial
Revenue
Bonds
Beginning balance, July 1, 2016
$
3,263

Principal reduction
—

Included in other comprehensive income
24

Ending balance, September 30, 2016
$
3,287



(Dollars in thousands)
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
Industrial
Revenue
Bonds
Beginning balance, January 1, 2016
$
3,437

Principal reduction
(170
)
Included in other comprehensive income
20

Ending balance, September 30, 2016
$
3,287



39



Quantitative Information about Recurring Level 3 Fair Value Measurements
(Dollars in thousands)
 
Fair Value at
September 30, 2017
 
Valuation Technique
 
Significant
Unobservable
Input
 
Range
Industrial revenue bonds
 
$
3,142

 
Discounted cash flow
 
Discount rate
 
3.03% - 3.05%
 
 
 
 
 
 
Illiquidity factor
 
0.5%

(Dollars in thousands)
 
Fair Value at
December 31, 2016
 
Valuation Technique
 
Significant
Unobservable
Input
 
Range
Industrial revenue bonds
 
$
3,298

 
Discounted cash flow
 
Discount rate
 
3.31% - 3.35%
 
 
 
 
 
 
Illiquidity factor
 
0.5%
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 are summarized below:
(Dollars in thousands)
 
Fair Value Measurement Using:
 
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
Other real estate owned
 
$
—

 
$
—

 
$
27,815

Premises and equipment held for sale
 
—

 
—

 
13,362

Other repossessed assets
 
332

 
—

 
—

Impaired loans
 
—

 
—

 
1,487

Other real estate owned measured at fair value as of September 30, 2017 had a gross amount of $35.1 million, less valuation allowances totaling $7.3 million and is made up of $23.2 million commercial properties, $4.0 million residential properties and $0.6 million farmland properties. Impairment charges resulting from the non-recurring changes in the fair value of OREO included in the consolidated statement of income for the three and nine months ended September 30, 2017 was $0.2 million and $0.8 million, respectively. Premises and equipment held for sale measured at fair value as of September 30, 2017 are primarily comprised of branch properties. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession. Impaired loans are primarily comprised of residential properties and are measured at fair value as of September 30, 2017.
Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2016 are summarized below:
(Dollars in thousands)
 
Fair Value Measurement Using:
 
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
Other real estate owned
 
$
—

 
$
—

 
$
41,168

Premises and equipment held for sale
 
—

 
—

 
2,599

Other repossessed assets
 
163

 
—

 
—

Impaired loans
 
—

 
—

 
1,420


40


Other real estate owned measured at fair value as of December 31, 2016 had a gross amount of $50.0 million, less valuation allowances totaling $8.9 million and is made up of $35.5 million commercial properties and $5.7 million residential properties. Premises and equipment held for sale measured at fair value as of December 31, 2016 are primarily comprised of branch properties. Other repossessed assets are primarily comprised of repossessed vehicles and equipment and are measured at fair value as of the date of repossession. Impaired loans are primarily comprised of residential properties and are measured at fair value as of December 31, 2016.
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements

(Dollars in thousands)
 
Fair Value at
September 30, 2017
 
Valuation Technique
 
Significant Unobservable Input
 
Weighted Average
Other real estate owned
 
$
27,815

 
Fair value of property
 
Appraised value and other market conditions
 
7.98%
Premises and equipment held for sale
 
13,362

 
Fair value of property
 
Appraised value and other market conditions
 
8.00%
Impaired loans
 
1,487

 
Fair value of collateral
 
Appraised value and other market conditions
 
7.46%

(Dollars in thousands)
 
Fair Value at
December 31, 2016
 
Valuation Technique
 
Significant Unobservable Input
 
Weighted Average
Other real estate owned
 
$
41,168

 
Fair value of property
 
Appraised value and other market conditions
 
7.91%
Premises and equipment held for sale
 
2,599

 
Fair value of property
 
Appraised value and other market conditions
 
8.00%
Impaired loans
 
1,420

 
Fair value of collateral
 
Appraised value and other market conditions
 
7.47%

Carrying amount and estimated fair values of financial instruments were as follows:
(Dollars in thousands)
 
Fair Value Measurement
September 30, 2017
 
Carrying Value
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
184,129

 
$
184,129

 
$
184,129

 
$
—

 
$
—

Trading securities
 
4,458

 
4,458

 
—

 
4,458

 
—

Investment securities available-for-sale
 
1,155,694

 
1,155,694

 
—

 
1,152,552

 
3,142

Investment securities held-to-maturity
 
412,051

 
415,238

 
—

 
415,238

 
—

Loans, net
 
7,567,172

 
7,581,657

 
—

 
3,060

 
7,578,597

Other earning assets (1)
 
27,666

 
27,666

 
—

 
—

 
27,666

Gross asset value of derivatives
 
1,194

 
1,194

 
—

 
1,194

 
—

Total financial assets
 
$
9,352,364

 
$
9,370,036

 
$
184,129

 
$
1,576,502

 
$
7,609,405

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Non-contractual deposits
 
$
5,834,809

 
$
5,834,809

 
$
—

 
$
5,834,809

 
$
—

Contractual deposits
 
2,286,815

 
2,267,172

 
—

 
2,267,172

 
—

Federal Home Loan Bank advances
 
440,549

 
440,144

 
—

 
440,144

 
—

Short-term borrowings
 
34,802

 
34,793

 
—

 
34,793

 
—

Subordinated debentures
 
118,929

 
117,282

 
—

 
—

 
117,282

Gross liability value of derivatives
 
2,178

 
2,178

 
—

 
2,178

 
—

Total financial liabilities
 
$
8,718,082

 
$
8,696,378

 
$
—

 
$
8,579,096

 
$
117,282

(1) 
Includes Federal Home Loan Bank stock.

41



(Dollars in thousands)
 
Fair Value Measurement
December 31, 2016
 
Carrying Value
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
309,055

 
$
309,055

 
$
309,055

 
$
—

 
$
—

Trading securities
 
3,791

 
3,791

 
—

 
3,791

 
—

Investment securities available-for-sale
 
912,250

 
912,250

 
—

 
908,952

 
3,298

Investment securities held-to-maturity
 
463,959

 
460,911

 
—

 
460,911

 
—

Loans, net
 
7,363,127

 
7,395,128

 
—

 
12,874

 
7,382,254

Other earning assets (1)
 
32,050

 
32,050

 
—

 
—

 
32,050

Gross asset value of derivatives
 
1,078

 
1,078

 
—

 
1,078

 
—

Total financial assets
 
$
9,085,310

 
$
9,114,263

 
$
309,055

 
$
1,387,606

 
$
7,417,602

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Non-contractual deposits
 
$
5,743,316

 
$
5,743,316

 
$
—

 
$
5,743,316

 
$
—

Contractual deposits
 
2,137,312

 
2,121,519

 
—

 
2,121,519

 
—

Federal Home Loan Bank advances
 
545,701

 
546,023

 
—

 
546,023

 
—

Short-term borrowings
 
19,157

 
19,154

 
—

 
19,154

 
—

Subordinated debentures
 
116,456

 
114,593

 
—

 
—

 
114,593

Gross liability value of derivatives
 
1,354

 
1,354

 
—

 
1,354

 
—

Total financial liabilities
 
$
8,563,296

 
$
8,545,959

 
$
—

 
$
8,431,366

 
$
114,593

(1) 
Includes Federal Home Loan Bank stock.
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, derivatives, noncontractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on transferability, the estimated fair value is equal to their carrying amount. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life, adjusted for the allowance for loan and lease losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans does not necessarily represent exit price. Fair value of long-term debt is based on current rates for similar financing. The fair value of off-balance sheet items that include commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.

42


14. Derivative and Hedging Activities
The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
During 2015, the company entered into LIBOR-based interest rate swaps with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. These interest rate swaps are designated as cash flow hedges involving the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of the derivatives is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.
During the next twelve months, the Company estimates that an additional $0.1 million will be reclassified as a decrease to interest income from amounts reported in accumulated comprehensive income. During the nine months ended September 30, 2017, no derivative position designated as cash flow hedges were discontinued and none of the gains and losses reported in other comprehensive income were reclassified into earnings as a result of discontinuance of cash flow hedges.
During the second quarter of 2016, the company implemented an interest rate swap program to allow customers to convert variable rate loans to fixed rates. The interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with its derivative counterparties. The changes in the fair value of the swaps offset each other, except for any differences in the credit risk of the counterparties. None of these interest rate swaps are designated or qualify as hedging relationships. As the interest rate swaps associated with this program do not meet hedge accounting requirements, changes in fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The Company recorded $0.2 million of customer swap fees in non-interest income for the nine months ended September 30, 2017.
The Company also enters into forward loan sales contracts, which are derived from loans held for sale, or in the Company’s pipeline, to enable those borrowers to manage their exposure to interest rate fluctuations. The forward loan sales derivative contracts are not designated as hedging instruments and all changes in fair value are recognized in non-interest income or non-interest expense during the period of change. For the nine months ended September 30, 2017, the Company recorded $27 thousand in non-interest income and $112 thousand in non-interest expense as a result of changes in fair value of derivatives. For the nine months ended September 30, 2016, the company recorded $27 thousand in non-interest income and $0.1 thousand in non-interest expense as a result of changes in fair value of derivatives.

43


The Company’s derivative instrument contracts at fair value as well as their classification on the Company's Consolidated Balance Sheet is presented below:

(Dollars in thousands)
 
 
 
September 30, 2017
 
December 31, 2016
 
Number of instruments
 
Balance Sheet Location
Fair Value
 
Notional
Amount
 
Fair Value
 
Notional
Amount
Asset derivatives
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate swap
—
 
Other assets
$
—

 
$
—

 
$
130

 
$
120,000

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Forward loan sales contracts
76
 
Other assets
40

 
13,091

 
13

 
4,205

Interest rate swap
7
 
Other assets
1,154

 
39,413

 
935

 
24,947

Total asset derivatives
 
 
 
$
1,194

 
$
52,504

 
$
1,078

 
$
149,152

 
 
 
 
 
 
 
 
 
 
 
Liability derivatives
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate swap
4
 
Other liabilities
$
1,031

 
$
235,000

 
$
378

 
$
115,000

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Forward loan sales contracts
6
 
Other liabilities
2

 
1,205

 
114

 
11,870

Interest rate swap
7
 
Other liabilities
1,145

 
39,413

 
862

 
24,947

Total liability derivatives
 
 
 
$
2,178

 
$
275,618

 
$
1,354

 
$
151,817


The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016:
(Dollars in thousands)
 
Three Months Ended September 30, 2017
Derivatives in Cash Flow Hedging Relationship
 
Amount of Loss Recognized in Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain Reclassified from Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
(82
)
 
Interest income
 
$
171

 
N/A
 
$
—

(Dollars in thousands)
 
Nine Months Ended September 30, 2017
Derivatives in Cash Flow Hedging Relationship
 
Amount of Gain Recognized in Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain Reclassified from Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
117

 
Interest income
 
$
901

 
N/A
 
$
—

(Dollars in thousands)
 
Three Months Ended September 30, 2016
Derivatives in Cash Flow Hedging Relationship
 
Amount of Loss Recognized in Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain Reclassified from Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Loss Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
(1,336
)
 
Interest income
 
$
613

 
N/A
 
$
—


44


(Dollars in thousands)
 
Nine Months Ended September 30, 2016
Derivatives in Cash Flow Hedging Relationship
 
Amount of Gain Recognized in Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain Reclassified from Accumulated OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Interest rate swap
 
$
6,345

 
Interest income
 
$
1,891

 
N/A
 
$
—

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2017:
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheets
 
 
(Dollars in thousands)
Gross Amount of Recognized Assets
 
Gross Amount Offset in the Balance Sheets
 
Net Amount of Assets Presented in the Balance Sheets
 
Financial Instruments
 
Cash Collateral
 
Net Amount
Offsetting of derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$
1,154

 
$
—

 
$
1,154

 
$
726

 
$
55

 
$
373

Total
$
1,154

 
$
—

 
$
1,154

 
$
726

 
$
55

 
$
373

 
 
 
 
 
 
 
 
 
 
 
 
Offsetting of derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
2,176

 
—

 
2,176

 
726

 
703

 
$
747

Total
$
2,176

 
$
—

 
$
2,176

 
$
726

 
$
703

 
$
747

The amount of collateral received and posted disclosed in the table above represents the offset of the assets and liabilities as of September 30, 2017. The actual cash collateral received and posted amounted to $0.3 million and $0.6 million, respectively.
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness or fails to maintain its status as a well-capitalized institution, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty and settle the termination value of derivatives in a liability position.
As of September 30, 2017, there were eleven derivatives in a $2.2 million net liability position, which includes accrued interest and excludes nonperformance risk, related to these agreements. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures and agreements that specify collateral levels to be maintained by the Company and the counterparties. The company has minimum collateral posting thresholds with certain derivative counterparties, and has posted $0.6 million of cash collateral against its obligations under these agreements as of September 30, 2017.


45

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results described in such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation: market and economic conditions, the management of our growth, the risks associated with Capital Bank Corporation's loan portfolio and real estate holdings, local economic conditions affecting retail and commercial real estate, the Company’s geographic concentration in the southeastern region of the United States, the acquisition method of accounting, competition within the industry, dependence on key personnel, government legislation and regulation, the risks associated with identification, completion and integration of any future acquisitions, and risks related to Capital Bank Corporation's technology and information systems. Additional factors that may cause actual results to differ materially from these forward looking statements, include but are not limited to, the risk factors described in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2016. All forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.
Our financial information is prepared in accordance with U.S. GAAP, for more information on our accounting
policies and estimates, refer to Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements
included in our annual report on Form 10-K for the fiscal year ended December 31, 2016. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our Consolidated Financial Statements and accompanying notes. For more information on our accounting policies and estimates, refer to the Company’s Consolidated Financial Statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.
The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of September 30, 2017, and statement of income for the three and nine months then ended.
The following discussion pertains to our historical results, which includes the operations of First National Bank of the South, Metro Bank, Turnberry Bank (collectively, the “Failed Banks”), TIB Financial, Capital Bank Corp., Green Bankshares, Southern Community Financial, and CommunityOne subsequent to our acquisition of each such entity. Throughout this discussion, we collectively refer to the above acquisitions as the “acquisitions” and loans acquired as “acquired loans”, and loans that are originated or purchased by Capital Bank Corporation as “originated” loans, and the Office of the Comptroller of the Currency as the “OCC”.
Overview
We are a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks, including failed, underperforming and undercapitalized banks. We have raised $955.6 million to make acquisitions through a series of private placements and an initial public offering of our common stock. Since inception, we have acquired eight depository institutions, including the assets and certain deposits from the Failed Banks. We operate 178 branches in Florida, North and South Carolina, Tennessee, and Virginia. During the nine months ended September 30, 2017, the Company closed and consolidated 18 branches related to cost savings initiatives and the merger of CommunityOne. As such, the Company transferred $18.1 million from fixed assets to premises and equipment held for sale during the nine months ended September 30, 2017.
Proposed merger with First Horizon National Corporation
On May 4, 2017, Capital Bank Financial Corp. issued a press release announcing the execution of an agreement and plan of merger with First Horizon National Corporation (the “First Horizon”) dated May 3, 2017, with First Horizon as the surviving corporation. Subject to terms and conditions of the Merger Agreement, each holder of Capital Bank common stock will be entitled to receive cash or stock with a value equivalent to 1.750 First Horizon shares and $7.90 in cash for each Capital Bank share held, subject to the election allocation and proration provisions of the merger agreement. The transaction has received shareholder

46

approval as well as approval from the Federal Reserve, OCC, and North Carolina Office of the Commissioner of Banks, and remains subject to other customary closing conditions.
Our Management Team
We were founded by a group of experienced bankers with a multi-decade record of leading, operating, acquiring and integrating financial institutions.
Our executive management team is led by our Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America Corp., where his career spanned 38 years and included responsibilities as Vice Chairman and President of the Consumer and Commercial Bank. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks, Inc.
Our Chief Financial Officer, Christopher G. Marshall, has over 34 years of financial and managerial experience, including serving as Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Chief Financial Officer of Fifth Third Bancorp and as the Chief Operations Executive for Bank of America’s Global Consumer and Small Business Bank. Mr. Marshall also served as Chief Financial Officer of Bank of America’s Consumer Products Group. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services.
Our Chief Credit Officer, R. Bruce Singletary, has over 36 years of experience, including 23 years of experience managing credit risk. He has served as Head of Credit for NationsBank Corp. for the Mid-Atlantic region. Mr. Singletary then relocated to Florida to establish a centralized underwriting function to serve middle market commercial clients in the southeastern region of the United States. Mr. Singletary also served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank and as Senior Credit Policy Executive of C&S Sovran (renamed NationsBank Corp.).
Our Chief of Strategic Planning and Investor Relations, Kenneth A. Posner, spent 13 years as an equity research analyst including serving as a Managing Director at Morgan Stanley focusing on a wide range of financial services firms. Mr. Posner also served in the United States Army, rising to the rank of Captain and has received professional designations as a Certified Public Accountant, as a Chartered Financial Analyst and for Financial Risk Management.
Primary Factors Used to Evaluate Our Business
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our Consolidated Balance Sheets and Statements of Income, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our budgeted performance and the financial condition and performance of comparable financial institutions in our region and nationally. Our financial information is prepared in accordance with U.S. GAAP. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the following discussion and in our Consolidated Financial Statements and accompanying notes. For more information on our accounting policies and estimates, refer to Note 1. Summary of Significant Accounting Policies to our Consolidated Financial Statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.
Quarterly Summary
For the three months ended September 30, 2017, the company recorded net income of $25.8 million, which increased 8% over the previous quarter. GAAP net income per diluted share was $0.48. Core net income decreased to $26.5 million, down 1% sequentially. Core net income per diluted share was $0.50. Core pre-tax adjustments for the third quarter of 2017 included $0.6 million of branch closure expenses and $0.6 million of merger related expenses, partially offset by $0.1 million gain on investment securities. The reconciliation of non-GAAP financial measures (including core net income, core net income per diluted share, and core ROA) are included in tabular form in the “Financial Condition” section below.

Highlights of the quarter include:

•
Reported ROA of 1.02%, up 7 bps quarter over quarter;
•
Reported efficiency ratio of 56.6%; down 365 bps quarter over quarter;
•
Sustained only temporary disruption in our branch network associated with Hurricane Irma and reopened all but two offices within a matter of days;
•
Shareholders voted to approve merger with First Horizon National Corporation; and
•
Declared quarterly dividend of $0.12 per common share.


47



Hurricane Irma
On September 10, 2017, Hurricane Irma struck the south coast of Florida, temporarily disrupting our branch network. However within a matter of days, all but two of our offices were back open and assisting customers, while the remaining two offices will open during the fourth quarter. The Company incurred property costs associated with Hurricane Irma of approximately $0.2 million, which are reflected in third quarter results. The Company has also reviewed its lending and deposit portfolio and determined no impairment was indicated at this time as a result of Hurricane Irma. In working with its borrowers and depositors affected by this hurricane, the Company has entered into temporary payment deferral agreements of 90 days or less on loans covering $78.6 million of outstanding principle. Each of these loans were assessed individually and were determined to not be a troubled debt restructuring. The review process is on-going and we will continue to monitor the impact on our loan portfolio.

Results of Operations
Net Interest Income
Net interest income is the largest component of our income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks and investment securities. Other earning assets include Federal Home Loan Bank stock. Our interest-bearing liabilities include deposits, subordinated debentures, repurchase agreements and other short-term borrowings.
In the net interest margin and rate/volume analyses below, interest income and rates include the effects of a tax equivalent adjustments using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis. In the rate/volume analyses, average loan volumes include non-performing assets which results in the impact of the non-accrual of interest being reflected in the change in average rate. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
Three months ended September 30, 2017 compared to three months ended June 30, 2017:
Net interest income for the three months ended September 30, 2017 increased by $0.7 million, or 0.8%, to $85.9 million from $85.2 million. The net interest margin declined four basis points to 3.71% from 3.75% and the net interest spread declined six basis points to 3.53% from 3.59%. Loan yields increased twelve basis points to 4.73% from 4.61%. During the quarter, we originated loans of $485.4 million with an average yield of 4.29%, compared to $481.9 million and 4.51% in the prior quarter. The cost of core deposits, which include all checking, savings and money market accounts, excluding brokered, increased two basis points to 0.24% from 0.22%. The cost of total deposits increased seven basis points to 0.48%.

48

(Dollars in thousands)
 
Three Months Ended 
September 30, 2017
 
Three Months Ended 
June 30, 2017
 
 
Average
Balances
 
Interest
 
Yield / Rate
 
Average
Balances
 
Interest
 
Yield / Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
7,557,263

 
$
90,064

 
4.73
%
 
$
7,515,169

 
$
86,405

 
4.61
%
Investment securities (1)
 
1,589,185

 
9,704

 
2.42
%
 
1,596,382

 
11,005

 
2.77
%
Interest bearing deposits in other banks
 
68,435

 
198

 
1.15
%
 
42,140

 
93

 
0.89
%
Other earning assets (2)
 
28,249

 
367

 
5.15
%
 
32,074

 
388

 
4.85
%
Total interest earning assets(1)
 
9,243,132

 
$
100,333

 
4.31
%
 
9,185,765

 
$
97,891

 
4.27
%
Non-interest earning assets
 
857,224

 
 
 
 
 
884,900

 
 
 
 
Total assets
 
$
10,100,356

 
 
 
 
 
$
10,070,665

 
 
 
 
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
2,274,258

 
$
5,896

 
1.03
%
 
$
2,152,086

 
$
4,789

 
0.89
%
Money market
 
1,858,223

 
2,451

 
0.52
%
 
1,787,200

 
1,963

 
0.44
%
Interest bearing demand
 
1,839,844

 
1,296

 
0.28
%
 
1,914,622

 
1,255

 
0.26
%
Savings
 
477,530

 
219

 
0.18
%
 
488,123

 
220

 
0.18
%
Total interest bearing deposits
 
6,449,855

 
9,862

 
0.61
%
 
6,342,031

 
8,227

 
0.52
%
Short-term borrowings and FHLB advances
 
480,830

 
1,457

 
1.20
%
 
568,575

 
1,433

 
1.01
%
Long-term borrowings
 
118,423

 
2,476

 
8.30
%
 
117,576

 
2,384

 
8.13
%
Total interest bearing liabilities
 
7,049,108

 
$
13,795

 
0.78
%
 
7,028,182

 
$
12,044

 
0.69
%
Non-interest bearing demand
 
1,636,625

 
 
 
 
 
1,655,233

 
 
 
 
Other liabilities
 
70,245

 
 
 
 
 
64,318

 
 
 
 
Shareholders’ equity
 
1,344,378

 
 
 
 
 
1,322,932

 
 
 
 
Total liabilities and shareholders’ equity
 
$
10,100,356

 
 
 
 
 
$
10,070,665

 
 
 
 
Net interest income and spread(1)
 
 
 
$
86,538

 
3.53
%
 
 
 
$
85,847

 
3.59
%
Net interest margin(1)
 
 
 
 
 
3.71
%
 
 
 
 
 
3.75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (FTE)(1)
 
 
 
$
86,538

 
 
 
 
 
$
85,847

 
 
Tax equivalent adjustment
 
 
 
(622
)
 
 
 
 
 
(605
)
 
 
Net interest income
 
 
 
$
85,916

 
 
 
 
 
$
85,242

 
 
(1)Presented on a fully tax equivalent basis.
(2)Includes Federal Home Loan Bank stocks.


49

Rate/Volume Analysis
(Dollars in thousands)
 
Three Months Ended September 30, 2017
Compared to Three Months Ended June 30, 2017 Due to changes in:
 
 
Average
Volume
 
Average
Yield / Rate
 
Net Increase
(Decrease)
Interest income
 
 
 
 
 
 
Loans (1)
 
$
486

 
$
3,173

 
$
3,659

Investment securities (1)
 
(49
)
 
(1,252
)
 
(1,301
)
Interest bearing deposits in other banks
 
70

 
35

 
105

Other earning assets (2)
 
(48
)
 
27

 
(21
)
Total interest income
 
459

 
1,983

 
2,442

Interest expense
 
 
 
 
 
 
Time deposits
 
283

 
824

 
1,107

Money market
 
81

 
407

 
488

Interest bearing demand
 
(50
)
 
91

 
41

Savings
 
(5
)
 
4

 
(1
)
Short-term borrowings and FHLB advances
 
(241
)
 
265

 
24

Long-term borrowings
 
17

 
75

 
92

Total interest expense
 
85

 
1,666

 
1,751

Change in net interest income
 
$
374

 
$
317

 
$
691

(1) 
Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis.
(2) 
Includes Federal Home Loan Bank stocks.
Three months ended September 30, 2017 compared to three months ended September 30, 2016:
Net interest income for the three months ended September 30, 2017 increased by $23.3 million, or 37.2%, to $85.9 million from $62.6 million. The increase was due to the acquisition of CommunityOne and organic loan growth.The net interest margin increased thirteen basis points to 3.71% from 3.58% and the net interest spread increased ten basis points to 3.53% from 3.43%. Loan yields increased thirty three basis points to 4.73% from 4.40%. During the quarter, we originated loans of $485.4 million with an average yield of 4.29%, compared to $471.5 million with an average yield of 3.84%, during the three months ended September 30, 2016. Investment securities yields declined one basis point to 2.42% . The cost of core deposits increased five basis points to 0.24%. The cost of total deposits increased seven basis points to 0.48%. Total funding cost increased twelve basis points to 0.63% .





50

(Dollars in thousands)
 
Three Months Ended 
September 30, 2017
 
Three Months Ended 
September 30, 2016
 
 
Average
Balances
 
Interest
 
Yield / Rate
 
Average
Balances
 
Interest
 
Yield / Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
7,557,263

 
$
90,064

 
4.73
%
 
$
5,786,171

 
$
64,055

 
4.40
%
Investment securities (1)
 
1,589,185

 
9,704

 
2.42
%
 
1,133,031

 
6,924

 
2.43
%
Interest bearing deposits in other banks
 
68,435

 
198

 
1.15
%
 
60,373

 
69

 
0.45
%
Other earning assets (2)
 
28,249

 
367

 
5.15
%
 
29,788

 
337

 
4.50
%
Total interest earning assets(1)
 
9,243,132

 
100,333

 
4.31
%
 
7,009,363

 
71,385

 
4.05
%
Non-interest earning assets
 
857,224

 
 
 
 
 
583,413

 
 
 
 
Total assets
 
$
10,100,356

 
 
 
 
 
$
7,592,776

 
 
 
 
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
2,274,258

 
$
5,896

 
1.03
%
 
$
1,613,502

 
$
3,992

 
0.98
%
Money market
 
1,858,223

 
2,451

 
0.52
%
 
1,225,743

 
1,132

 
0.37
%
Interest bearing demand
 
1,839,844

 
1,296

 
0.28
%
 
1,444,305

 
752

 
0.21
%
Savings
 
477,530

 
219

 
0.18
%
 
404,187

 
205

 
0.20
%
Total interest bearing deposits
 
6,449,855

 
9,862

 
0.61
%
 
4,687,737

 
6,081

 
0.52
%
Short-term borrowings and FHLB advances
 
480,830

 
1,457

 
1.20
%
 
558,313

 
635

 
0.45
%
Long-term borrowings
 
118,423

 
2,476

 
8.30
%
 
87,095

 
1,586

 
7.24
%
Total interest bearing liabilities
 
7,049,108

 
13,795

 
0.78
%
 
5,333,145

 
8,302

 
0.62
%
Non-interest bearing demand
 
1,636,625

 
 
 
 
 
1,188,771

 
 
 
 
Other liabilities
 
70,245

 
 
 
 
 
48,997

 
 
 
 
Shareholders’ equity
 
1,344,378

 
 
 
 
 
1,021,863

 
 
 
 
Total liabilities and shareholders’ equity
 
$
10,100,356

 
 
 
 
 
$
7,592,776

 
 
 
 
Net interest income and spread(1)
 
 
 
$
86,538

 
3.53
%
 
 
 
$
63,083

 
3.43
%
Net interest margin(1)
 
 
 
 
 
3.71
%
 
 
 
 
 
3.58
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (FTE)(1)
 
 
 
$
86,538

 
 
 
 
 
$
63,083

 
 
Tax equivalent adjustment
 
 
 
(622
)
 
 
 
 
 
(456
)
 
 
Net interest income
 
 
 
$
85,916

 
 
 
 
 
$
62,627

 
 
(1)Presented on a fully tax equivalent basis.
(2)Includes Federal Home Loan Bank stocks.


51

Rate/Volume Analysis
(Dollars in thousands)
 
Three Months Ended September 30, 2017
Compared to Three Months Ended September 30, 2016 Due to changes in:
 
 
Average
Volume
 
Average
Yield / Rate
 
Net Increase
(Decrease)
Interest income
 
 
 
 
 
 
Loans (1)
 
$
20,807

 
$
5,202

 
$
26,009

Investment securities (1)
 
2,785

 
(5
)
 
2,780

Interest bearing deposits in other banks
 
10

 
119

 
129

Other earning assets (2)
 
(18
)
 
48

 
30

Total interest income
 
23,584

 
5,364

 
28,948

Interest expense
 
 
 
 
 
 
Time deposits
 
1,705

 
199

 
1,904

Money market
 
721

 
598

 
1,319

Interest bearing demand
 
238

 
306

 
544

Savings
 
35

 
(21
)
 
14

Short-term borrowings and FHLB advances
 
(99
)
 
921

 
822

Long-term borrowings
 
630

 
260

 
890

Total interest expense
 
3,230

 
2,263

 
5,493

Change in net interest income
 
$
20,354

 
$
3,101

 
$
23,455

(1) 
Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis.
(2) 
Includes Federal Home Loan Bank stocks.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016:
Net interest income for the nine months ended September 30, 2017 increased by $67.8 million, or 36.5%, to $253.3 million from $185.5 million. The increase was due to the acquisition of CommunityOne and higher organic loan growth . The net interest margin increased twelve basis points to 3.73% from 3.61% and the net interest spread increased to 3.57% from 3.47%. Loan yields increased to 4.64% from 4.47% due to higher average yield on loan originations. During the nine months ended September 30, 2017, we originated loans of $1,472.0 million with an average yield of 4.33%, compared to $1,241.2 million with an average yield of 3.73% during the nine months ended September 30, 2016. The cost of core deposits increased four basis points to 0.22%. The cost of total deposits decreased two basis points to 0.43%. Total funding cost increased six basis points to 0.57%.


52

 
 
Nine Months Ended 
September 30, 2017
 
Nine Months Ended 
September 30, 2016
 
 
Average
Balances
 
Interest
 
Yield/Rate
 
Average
Balances
 
Interest
 
Yield/Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
7,494,448

 
$
260,222

 
4.64
%
 
$
5,684,143

 
$
190,063

 
4.47
%
Investment securities (1)
 
1,562,781

 
30,022

 
2.57
%
 
1,129,129

 
20,020

 
2.37
%
Interest bearing deposits in other banks
 
56,319

 
388

 
0.92
%
 
66,100

 
227

 
0.46
%
Other earning assets (2)
 
29,789

 
1,113

 
4.99
%
 
27,216

 
981

 
4.81
%
Total interest earning assets(1)
 
9,143,337

 
291,745

 
4.27
%
 
6,906,588

 
$
211,291

 
4.09
%
Non-interest earning assets
 
883,562

 
 
 
 
 
602,904

 
 
 
 
Total assets
 
$
10,026,899

 
 
 
 
 
$
7,509,492

 
 
 
 
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
2,189,869

 
$
15,224

 
0.93
%
 
$
1,640,959

 
$
12,130

 
0.99
%
Money market
 
1,807,885

 
6,171

 
0.46
%
 
1,219,227

 
3,227

 
0.35
%
Interest bearing demand
 
1,892,081

 
3,689

 
0.26
%
 
1,422,389

 
2,149

 
0.20
%
Savings
 
486,668

 
659

 
0.18
%
 
411,729

 
640

 
0.21
%
Total interest bearing deposits
 
6,376,503

 
25,743

 
0.54
%
 
4,694,304

 
18,146

 
0.52
%
Short-term borrowings and FHLB advances
 
514,303

 
3,777

 
0.98
%
 
501,892

 
1,680

 
0.45
%
Long-term borrowings
 
117,587

 
7,140

 
8.12
%
 
86,860

 
4,644

 
7.14
%
Total interest bearing liabilities
 
7,008,393

 
36,660

 
0.70
%
 
5,283,056

 
24,470

 
0.62
%
Non-interest bearing demand
 
1,629,334

 
 
 
 
 
1,171,599

 
 
 
 
Other liabilities
 
66,787

 
 
 
 
 
44,594

 
 
 
 
Shareholders’ equity
 
1,322,385

 
 
 
 
 
1,010,244

 
 
 
 
Total liabilities and shareholders’ equity
 
$
10,026,899

 
 
 
 
 
$
7,509,493

 
 
 
 
Net interest income and spread(1)
 
 
 
$
255,085

 
3.57
%
 
 
 
$
186,821

 
3.47
%
Net interest margin(1)
 
 
 
 
 
3.73
%
 
 
 
 
 
3.61
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (FTE)(1)
 
 
 
$
255,085

 
 
 
 
 
$
186,821

 
 
Tax equivalent adjustment
 
 
 
(1,811
)
 
 
 
 
 
(1,312
)
 
 
Net interest income
 
 
 
$
253,274

 
 
 
 
 
$
185,509

 
 
(1)Presented on a fully tax equivalent basis.
(2)Includes Federal Home Loan Bank stocks.


53

(Dollars in thousands)
 
Nine Months Ended September 30, 2017
Compared to Nine Months Ended September 30, 2016 Due to changes in:
 
 
Average
Volume
 
Average
Yield / Rate
 
Net Increase
(Decrease)
Interest income
 
 
 
 
 
 
Loans (1)
 
$
62,607

 
$
7,552

 
$
70,159

Investment securities (1)
 
8,216

 
1,786

 
10,002

Interest bearing deposits in other banks
 
(38
)
 
199

 
161

Other earning assets (2)
 
95

 
36

 
131

Total interest income
 
70,880

 
9,573

 
80,453

Interest expense
 
 
 
 
 
 
Time deposits
 
3,852

 
(759
)
 
3,093

Money market
 
1,840

 
1,104

 
2,944

Interest bearing demand
 
819

 
721

 
1,540

Savings
 
108

 
(89
)
 
19

Short-term borrowings and FHLB advances
 
43

 
2,054

 
2,097

Long-term borrowings
 
1,804

 
692

 
2,496

Total interest expense
 
8,466

 
3,723

 
12,189

Change in net interest income
 
$
62,414

 
$
5,850

 
$
68,264

(1) 
Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax-exempt interest on tax-exempt investment securities and loans to a fully taxable basis.
(2) 
Includes Federal Home Loan Bank stocks.
Provision for Loan and Lease Losses
The following table presents the provision for loan and lease losses for PCI and non-PCI Loans for the three and nine months ended September 30, 2017 and 2016:
(Dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Provision (reversal) for loan and lease losses on PCI Loans
$
167

 
$
(48
)
 
$
1,171

 
$
(835
)
Provision for loan and lease losses on non-PCI Loans
2,875

 
634

 
7,566

 
3,968

Provision for Loan and Lease Losses
$
3,042

 
$
586

 
$
8,737

 
$
3,133

Three months ended September 30, 2017 compared to three months ended September 30, 2016:
The provision for loan and lease losses for the three months ended September 30, 2017 was $3.0 million compared to $0.6 million for the three months ended September 30, 2016. The change is primarily due to an increase in the provision on non-PCI loans to $2.9 million for the three months ended September 30, 2017, as compared to $0.6 million for the three months ended September 30, 2016. The increase in the provision on non-PCI loans is due to a combination of stronger new loan production and higher charge-offs for the three months ended September 30, 2017, as compared to 2016. In addition, the provision expense was lower for the three months ended September 30, 2016 due to a decline in reserve levels during the quarter driven by lower historical peer bank losses.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016:
The provision for loan and lease losses for the nine months ended September 30, 2017 was $8.7 million compared to a provision of $3.1 million for the nine months ended September 30, 2016. The provision on non-PCI loans increased to $7.6 million for the nine months ended September 30, 2017, from $4.0 million for the nine months ended September 30, 2016. The increase in provision on non-PCI loans is due to a combination of stronger new loan production and higher charge-offs for the nine months ended September 30, 2017, as compared to 2016. The provision on PCI loans increased to $1.2 million for the nine months ended September 30, 2017, as compared to a reversal of $0.8 million for the nine months ended September 30, 2016. The increase in provision on PCI loans for the nine months ended September 30, 2017 as compared to 2016, is due primarily to impairment in a new pool of loans established upon the acquisition of CommunityOne.

54

The table below illustrates the impact of our third quarter of 2017 estimates of expected cash flows on PCI Loans on impairment and prospective yield:
(Dollars in thousands)
 
 
Weighted Average Prospective Yields
 
 
 
 
 
 
 
Cumulative
Impairment
 
Based on Original
Estimates of
Expected Cash Flows
 
Based on Most
Recent Estimates of
Expected Cash Flows
 
Loan Balance
 
Weighted
Average
Note
Rate
 
Weighted
Average
Life
(Years)
PCI loans
$
24,186

 
5.73%
 
8.07%
 
$
755,194

 
4.93%
 
2.48
Non-interest Income
Three months ended September 30, 2017 compared to three months ended September 30, 2016:
Non-interest income increased $2.4 million, to $14.8 million for the three months ended September 30, 2017 from $12.4 million for the three months ended September 30, 2016. The increase was mainly due to the acquisition of CommunityOne and includes a $1.4 million increase in debit card income, a $0.5 million increase in service charges, and a $0.4 million increase in other income (includes credit card and merchant service income).
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016:
Non-interest income increased $19.8 million, or 73.6%, to $46.6 million for the nine months ended September 30, 2017 from $26.9 million for the nine months ended September 30, 2016. The increase was mainly driven by the absence of $9.2 million related to the termination of the loss share agreements, and higher debit card income of $4.9 million and service charge income of $1.8 million related to the acquisition of CommunityOne.
The following table sets forth the components of non-interest income for the periods indicated:
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Service charges on deposit accounts
 
$
5,311

 
$
4,777

 
$
15,923

 
$
14,074

Debit card income
 
4,822

 
3,389

 
14,638

 
9,710

Fees on mortgage loans originated and sold
 
931

 
1,334

 
3,329

 
3,445

Investment advisory and trust fees
 
537

 
290

 
1,774

 
1,242

Termination of loss share agreements
 
—

 
—

 
—

 
(9,178
)
Investment securities gains, net
 
98

 
71

 
235

 
228

OREO revenues
 
85

 
72

 
461

 
264

Earnings on bank owned life insurance policies
 
615

 
342

 
2,034

 
1,125

Participated loan fees
 
687

 
626

 
2,180

 
1,898

Wire transfer fees
 
230

 
204

 
713

 
620

Fee income interest rate swaps
 
—

 
243

 
247

 
525

Other income
 
1,457

 
1,022

 
5,091

 
2,905

Total non-interest income
 
$
14,773

 
$
12,370

 
$
46,625

 
$
26,858

Non-interest Expense
Three months ended September 30, 2017 compared to three months ended September 30, 2016:
Non-interest expense increased $9.5 million, or 19.9%, to $57.0 million for the three months ended September 30, 2017 from $47.5 million for the three months ended September 30, 2016. The increase was mainly due to $5.8 million in additional employee compensation, $0.7 million in restructuring charges and $1.6 million in occupancy and equipment expense, which were mostly related to the acquisition of CommunityOne.
Our efficiency ratios for the three months ended September 30, 2017 and 2016 were 56.59% and 63.38%, respectively. Our core efficiency ratios for the three months ended September 30, 2017 and 2016 were 55.44% and 61.06%, respectively.

55

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016:
Non-interest expense increased $41.7 million, or 30.0%, to $180.7 million for the nine months ended September 30, 2017 from $139.0 million for the nine months ended September 30, 2016. The increase was mainly driven by an increase of $20.3 million in salaries and employee benefits, $5.5 million in restructuring charges and $4.3 million in occupancy and equipment expenses, which were mostly related to the acquisition of CommunityOne.
Our efficiency ratios for the nine months ended September 30, 2017 and 2016 were 60.24% and 65.45%, respectively. Our core efficiency ratios for the nine months ended September 30, 2017 and 2016 were 56.90% and 60.58%, respectively.
The following table sets forth the components of non-interest expense for the periods indicated:
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Salaries and employee benefits
 
$
26,708

 
$
20,935

 
$
83,536

 
$
63,236

Stock-based compensation expense
 
1,441

 
790

 
3,305

 
1,574

Net occupancy and equipment expense
 
8,894

 
7,340

 
26,712

 
22,398

Computer services
 
3,794

 
3,153

 
11,947

 
10,002

Software expense
 
2,524

 
1,948

 
7,759

 
5,984

Telecommunication expense
 
1,968

 
1,790

 
6,331

 
4,880

OREO valuation expense
 
249

 
742

 
758

 
2,328

Net losses (gains) on sales of OREO
 
1

 
(159
)
 
(511
)
 
(1,251
)
Foreclosed asset related expense
 
487

 
397

 
1,227

 
1,081

Loan workout expense
 
281

 
206

 
763

 
521

Conversion and merger related expense, net
 
591

 
394

 
4,609

 
3,317

Professional fees
 
2,071

 
1,642

 
5,967

 
4,607

Restructuring charges, net
 
595

 
(113
)
 
5,485

 
34

Legal settlement expense
 
—

 
1,500

 
45

 
1,500

Regulatory assessments
 
1,020

 
841

 
2,884

 
3,375

Amortization of intangibles
 
1,662

 
923

 
4,992

 
2,774

Other expense
 
4,698

 
5,201

 
14,863

 
12,644

Total non-interest expense
 
$
56,984

 
$
47,530

 
$
180,672

 
$
139,004


The core efficiency ratio, which equals core non-interest expense divided by core net revenues (net interest income plus core non-interest income), for the three and nine months ended September 30, 2017 and 2016 is as follows:

56

(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net interest income
 
$
85,916

 
$
62,627

 
$
253,274

 
$
185,509

 
 
 
 
 
 
 
 
 
Reported non-interest income
 
$
14,773

 
$
12,370

 
$
46,625

 
$
26,858

Less: Termination of loss share agreements
 
—

 
—

 
—

 
(9,178
)
Securities gains
 
98

 
71

 
235

 
228

Core non-interest income
 
$
14,675

 
$
12,299

 
$
46,390

 
$
35,808

 
 
 
 
 
 
 
 
 
Reported non-interest expense
 
$
56,984

 
$
47,530

 
$
180,672

 
$
139,004

Less: Restructuring charges, net
 
595

 
(113
)
 
5,485

 
34

Conversion costs and merger tax deductible, net
 
589

 
331

 
3,389

 
2,319

Conversion costs and merger non-tax deductible
 
2

 
61

 
1,220

 
996

Severance expense
 
33

 
—

 
33

 
75

Legal settlement
 
—

 
1,500

 
45

 
1,500

Core non-interest expense
 
$
55,765

 
$
45,751

 
$
170,500

 
$
134,080

 
 
 
 
 
 
 
 
 
Efficiency ratio(1)
 
56.59
%
 
63.38
%
 
60.24
%
 
65.45
%
Core efficiency ratio(2)
 
55.44
%
 
61.06
%
 
56.90
%
 
60.58
%
(1) 
Efficiency Ratio: Non-interest expense / (Non-interest income + Net interest income)
(2) 
Core Efficiency Ratio: Core non-interest expense / (Core non-interest income + Net interest income)

The core efficiency ratio is a non-GAAP measure which we believe provides analysts and investors with information useful in understanding our business and evaluating our operating efficiency. We monitor the core efficiency ratio to evaluate and control operating costs. The core efficiency ratio is also a measure utilized by our Board of Directors in measuring management’s performance in controlling operating costs in comparison to peers. This non-GAAP measure has inherent limitations and is not required to be uniformly applied. It should not be considered in isolation or as a substitute for analysis of results reported under GAAP. This non-GAAP measure may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for non-interest expense.
Income Taxes
The provision for income taxes was $14.9 million and $40.0 million for the three and nine months ended September 30, 2017, respectively. The effective income tax rate was 37% and 36% for these periods, respectively.
At September 30, 2017 and December 31, 2016, the Company had no material amounts recorded for uncertain tax positions and no material unrecognized tax benefits. We do not expect to identify any material unrecognized tax benefits during the next 12 months.
Refer to Note 12. Income Taxes to our Consolidated Financial Statements for further information on our provision for income taxes.
Financial Condition
Our assets totaled $10.1 billion at September 30, 2017 and $9.9 billion at December 31, 2016. Total loans increased $206.4 million to $7.6 billion at September 30, 2017 compared to $7.4 billion at December 31, 2016. The increase in loans was due to loan originations of $1,472.0 million, partially offset by $96.3 million in resolutions of problem loans and $1,169.3 million in net principal repayments. Investment and trading securities increased by $192.2 million mainly due to $359.2 million of investment purchases and $9.7 million change in market valuation on available for sale investment securities, partially offset by $176.9 million of principal reductions and amortization. Total deposits increased by $241.0 million or 3.1% to $8.1 billion at September 30, 2017 compared to $7.9 billion at December 31, 2016. Core deposits, which include all checking, savings and money market accounts, excluding brokered, increased by $16.2 million. Non-interest bearing checking accounts increased $41.4 million, interest bearing demand deposits decreased by $84.0 million, money market balances increased $84.1 million and savings deposits decreased by $25.2 million. Core deposits represent 70.0% and 72.0% of total deposits at September 30, 2017 and December 31, 2016, respectively. Brokered deposits and time deposits increased by $224.8 million. Borrowed funds, consisting of FHLB advances, short-term borrowings, notes payable and subordinated debentures, totaled $594.3 million and $681.3 million at

57

September 30, 2017 and December 31, 2016, respectively. FHLB advances decreased by $105.2 million to $440.5 million at September 30, 2017 compared to $545.7 million at December 31, 2016.
Shareholders’ equity was $1.4 billion at September 30, 2017 and $1.3 billion at December 31, 2016. The Company’s Board of Directors has authorized a stock repurchase plan of up to $400.0 million. Stock repurchases may be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase program does not obligate the Company to repurchase any particular amount of shares, and the programs may be extended, modified, suspended, or discontinued at any time.
As of September 30, 2017, the Company has repurchased a total of $312.4 million, or 12,739,763 common shares at an average price of $24.52 per share, and had $87.6 million remaining under the current board authorized stock repurchase program.
Core return-on-assets (“core ROA”) is a non-GAAP measure which we believe provides management and investors with useful information to understand the effects of certain non-interest items and provides an alternative view of the Company’s performance over time and in comparison to the Company’s competitors. This non-GAAP measure has inherent limitations and is not required to be uniformly applied. It should not be considered in isolation or as a substitute for analysis of results reported under GAAP. This non-GAAP measure may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for results determined in accordance to GAAP. A reconciliation to the most directly comparable GAAP financial measure is shown in the table below:

(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net Income
 
$
25,758

 
$
18,511

 
$
70,447

 
45,812

Adjustments
 
 
 
 
 
 

 
 
Non-interest income
 
 
 
 
 
 

 
 
Termination of loss share agreements
 
—

 
—

 
—

 
9,178

Less: Securities gains, net(1)
 
(98
)
 
(71
)
 
235

 
(228
)
Non-interest expense
 
 
 
 
 
 
 
 
Legal settlement(1)
 
—

 
1,500

 
45

 
1,500

Tax adjustment
 
 
 
(1,067
)
 
 
 
(1,067
)
Severance expense(1)
 
33

 
—

 
33

 
75

Conversion costs and merger tax deductible(1)
 
589

 
331

 
3,389

 
2,319

Conversion costs and merger non-tax deductible
 
2

 
61

 
1,220

 
996

Restructuring charges, net(1)
 
595

 
(113
)
 
5,485

 
34

Tax effect of adjustments(1)
 
(428
)
 
(629
)
 
(3,801
)
 
(4,922
)
Core Net Income
 
$
26,451

 
$
18,523

 
$
77,053

 
$
53,697

 
 
 
 
 
 
 
 
 
Diluted shares
 
53,226

 
44,118

 
53,204

 
44,068

Core Net Income per share
 
$
0.50

 
$
0.42

 
$
1.45

 
$
1.22

Average Assets
 
$
10,100,356

 
$
7,592,776

 
$
10,026,899

 
$
7,509,492

ROA(2)
 
1.02
%
 
0.98
%
 
0.94
%
 
0.81
%
Core ROA(3)
 
1.05
%
 
0.98
%
 
1.02
%
 
0.95
%

(1) 
Tax effected at a blended income tax rate of 38%.
(2) 
ROA: Annualized net income / Average assets.
(3) 
Core ROA: Annualized core net income / Average assets.


58

Loans
Our loan portfolio is our largest earning asset. Our strategy is to increase the loan portfolio by originating commercial and consumer loans that we believe to be of high quality, that comply with our conservative credit policies and that produce revenues consistent with our financial objectives.

The following table sets forth the carrying amounts of our loan portfolio:

(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
 
Year to Date Change
 
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Non-owner occupied commercial real estate
 
$
1,293,647

 
17.0
%
 
$
1,130,883

 
15.3
%
 
$
162,764

 
14.4
 %
Other commercial construction and land
 
402,250

 
5.3
%
 
327,622

 
4.4
%
 
74,628

 
22.8
 %
Multifamily commercial real estate
 
148,192

 
1.9
%
 
117,515

 
1.6
%
 
30,677

 
26.1
 %
1-4 family residential construction and land
 
143,807

 
1.9
%
 
140,030

 
1.9
%
 
3,777

 
2.7
 %
Total commercial real estate
 
1,987,896

 
26.1
%
 
1,716,050

 
23.2
%
 
271,846

 
15.8
 %
Owner occupied commercial real estate
 
1,226,211

 
16.1
%
 
1,321,405

 
17.8
%
 
(95,194
)
 
(7.2
)%
Commercial and industrial
 
1,502,939

 
19.7
%
 
1,468,874

 
19.8
%
 
34,065

 
2.3
 %
Total commercial
 
2,729,150

 
35.8
%
 
2,790,279

 
37.6
%
 
(61,129
)
 
(2.2
)%
1-4 family residential
 
1,787,690

 
23.5
%
 
1,714,702

 
23.1
%
 
72,988

 
4.3
 %
Home equity loans
 
481,696

 
6.3
%
 
507,759

 
6.9
%
 
(26,063
)
 
(5.1
)%
Other consumer loans
 
384,728

 
5.1
%
 
448,972

 
6.1
%
 
(64,244
)
 
(14.3
)%
Total consumer
 
2,654,114

 
34.9
%
 
2,671,433

 
36.1
%
 
(17,319
)
 
(0.6
)%
Other
 
241,440

 
3.2
%
 
228,430

 
3.1
%
 
13,010

 
5.7
 %
Total loans
 
$
7,612,600

 
100.0
%
 
$
7,406,192

 
100.0
%
 
$
206,408

 
2.8
 %

The following tables set forth the carrying amounts of our non-PCI and PCI loan portfolio by category:

(Dollars in thousands)
 
September 30, 2017
 
 
Non-PCI Loans
 
 
 
 
 
 
Originated
 
Acquired
 
PCI Loans
 
Total
Non-owner occupied commercial real estate
 
$
891,125

 
$
199,244

 
$
203,278

 
$
1,293,647

Other commercial construction and land
 
280,126

 
77,414

 
44,710

 
402,250

Multifamily commercial real estate
 
118,128

 
14,138

 
15,926

 
148,192

1-4 family residential construction and land
 
132,701

 
10,812

 
294

 
143,807

Total commercial real estate
 
1,422,080

 
301,608

 
264,208

 
1,987,896

Owner occupied commercial real estate
 
908,549

 
168,521

 
149,141

 
1,226,211

Commercial and industrial
 
1,367,979

 
75,988

 
58,972

 
1,502,939

Total commercial
 
2,276,528

 
244,509

 
208,113

 
2,729,150

1-4 family residential
 
1,129,241

 
478,755

 
179,694

 
1,787,690

Home equity loans
 
186,606

 
239,910

 
55,180

 
481,696

Other consumer loans
 
295,719

 
67,492

 
21,517

 
384,728

Total consumer
 
1,611,566

 
786,157

 
256,391

 
2,654,114

Other
 
207,672

 
7,286

 
26,482

 
241,440

Total loans
 
$
5,517,846

 
$
1,339,560

 
$
755,194

 
$
7,612,600


59

(Dollars in thousands)
 
December 31, 2016
 
 
Non PCI Loans
 
 
 
 
 
 
Originated
 
Acquired
 
PCI Loans
 
Total
Non-owner occupied commercial real estate
 
$
680,044

 
$
221,304

 
$
229,535

 
$
1,130,883

Other commercial construction and land
 
182,486

 
73,248

 
71,888

 
327,622

Multifamily commercial real estate
 
77,694

 
19,108

 
20,713

 
117,515

1-4 family residential construction and land
 
105,816

 
33,831

 
383

 
140,030

Total commercial real estate
 
1,046,040

 
347,491

 
322,519

 
1,716,050

Owner occupied commercial real estate
 
901,957

 
239,982

 
179,466

 
1,321,405

Commercial and industrial
 
1,283,012

 
96,494

 
89,368

 
1,468,874

Total commercial
 
2,184,969

 
336,476

 
268,834

 
2,790,279

1-4 family residential
 
994,323

 
505,420

 
214,959

 
1,714,702

Home equity loans
 
172,883

 
268,093

 
66,783

 
507,759

Other consumer loans
 
330,423

 
88,134

 
30,415

 
448,972

Total consumer
 
1,497,629

 
861,647

 
312,157

 
2,671,433

Other
 
185,839

 
9,776

 
32,815

 
228,430

Total loans
 
$
4,914,477

 
$
1,555,390

 
$
936,325

 
$
7,406,192

During the nine months ended September 30, 2017, our loan portfolio increased by $206.4 million, as $1,472.0 million of loan fundings were partially offset by $96.3 million in resolutions of problem loans and $1,169.3 million in net principal repayments. Non-PCI loans represent 90.1% of our total loan portfolio as compared to 87.4% at December 31, 2016.
The composition of loan originations is indicative of our business strategy of emphasizing commercial and industrial and consumer loans. As illustrated in the table below, commercial loans and consumer and other loans represented approximately 33.0% and 27.6%, respectively, of loan originations for the nine months ended September 30, 2017. We expect that this production will be more balanced going forward, as we expect commercial real estate to comprise a larger proportion of the loan production.
The following table sets forth our loan originations (excluding renewals of existing loans) segmented by loan type:

(Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
 
Amount
 
Percent
 
Amount
 
Percent
Non-owner occupied commercial real estate
 
$
255,815

 
17.4
%
 
$
148,055

 
11.8
%
Other commercial construction and land
 
219,933

 
14.9
%
 
127,228

 
10.3
%
Multifamily commercial real estate
 
34,193

 
2.3
%
 
8,585

 
0.7
%
1-4 family residential construction and land
 
70,659

 
4.8
%
 
61,674

 
5.0
%
Total commercial real estate
 
580,600

 
39.4
%
 
345,542

 
27.8
%
Owner occupied commercial real estate
 
97,537

 
6.6
%
 
85,349

 
6.9
%
Commercial and industrial
 
388,157

 
26.4
%
 
413,446

 
33.3
%
Total commercial
 
485,694

 
33.0
%
 
498,795

 
40.2
%
1-4 family residential
 
264,486

 
18.0
%
 
278,699

 
22.5
%
Home equity loans
 
41,888

 
2.9
%
 
38,735

 
3.1
%
Other consumer loans
 
73,789

 
5.0
%
 
38,465

 
3.1
%
Total consumer
 
380,163

 
25.9
%
 
355,899

 
28.7
%
Other
 
25,559

 
1.7
%
 
40,956

 
3.3
%
Total loans
 
$
1,472,016

 
100.0
%
 
$
1,241,192

 
100.0
%
We underwrite commercial real estate loans based on the value of the collateral, the ratio of debt service to property income and the creditworthiness of tenants. Due to the inherent risk of commercial real estate lending, we underwrite loans selectively. Accordingly, we have reduced the concentration in our portfolio over time, which had characterized our acquired loan portfolios.

60

Florida, North Carolina, South Carolina, Georgia and Tennessee accounted for 27.6%, 38.4%, 10.4%, 0.3% and 23.3% of our originated loan portfolio, respectively, for the nine months ended September 30, 2017. Florida, North Carolina, South Carolina, and Tennessee accounted for 34.5%, 27.6%, 9.6% and 28.3% of our originated loan portfolio, respectively, for the nine months ended September 30, 2016.
Asset Quality
Consistent with our strategy of operating with a sound risk profile, we focus on originating loans we believe to be of high quality, and disposing of non-performing assets rapidly and at reasonable valuations. To achieve these objectives, we underwrite loans and manage existing loans in accordance with our underwriting standards under the direction of our Chief Credit Officer. Additionally, we have assigned senior credit officers to oversee the Florida, Tennessee and Carolinas markets, and we have established a special assets division to dispose of legacy problem loans and OREO.    
As of September 30, 2017, total loans were $7.6 billion, of which 0.3% were past due 30-89 days, 0.6% were nonperforming PCI (of which 0.1% were >90 days past due and still accreting) and 0.2% were nonaccrual. As of December 31, 2016, total loans were $7.4 billion, of which 0.3% were past due 30-89 days, 0.9% were nonperforming PCI (of which 0.2% were >90 days past due and still accreting) and 0.2% were nonaccrual.
At September 30, 2017, 9.9% of loans were acquired impaired loans. We applied acquisition accounting adjustments to the acquired loans to reflect estimates at the time of acquisition of the expected lifetime losses of such loans.
Loan Credit Quality Summary
The table below summarizes key loan credit quality indicators as of the dates indicated:
 
(Dollars in thousands)
September 30, 2017
 
December 31, 2016
 

Balance
 
% 30-89
Days Past
Due
 
% Nonperforming PCI Loans
 
% Non-
accrual
 

Balance
 
% 30-89
Days Past
Due
 
% Nonperforming PCI Loans
 
% Non-
accrual
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
$
1,293,647

 
—
%
 
0.2
%
 
0.2
%
 
$
1,130,883

 
—
%
 
0.4
%
 
0.2
%
Other commercial construction and land
402,250

 
0.1
%
 
0.9
%
 
—
%
 
327,622

 
0.2
%
 
3.4
%
 
0.1
%
Multifamily commercial real estate
148,192

 
—
%
 
0.1
%
 
—
%
 
117,515

 
—
%
 
0.6
%
 
—
%
1-4 family residential construction and land
143,807

 
—
%
 
—
%
 
—
%
 
140,030

 
0.1
%
 
—
%
 
—
%
Total commercial real estate
1,987,896

 
—
%
 
0.3
%
 
0.1
%
 
1,716,050

 
—
%
 
1.0
%
 
0.2
%
Owner occupied commercial real estate
1,226,211

 
0.2
%
 
0.6
%
 
0.4
%
 
1,321,405

 
0.2
%
 
0.7
%
 
0.2
%
Commercial and industrial loans
1,502,939

 
—
%
 
1.1
%
 
0.2
%
 
1,468,874

 
—
%
 
1.1
%
 
—
%
Total commercial
2,729,150

 
0.1
%
 
0.9
%
 
0.3
%
 
2,790,279

 
0.1
%
 
0.9
%
 
0.1
%
1-4 family residential
1,787,690

 
0.1
%
 
0.6
%
 
0.1
%
 
1,714,702

 
0.2
%
 
0.8
%
 
0.1
%
Home equity loans
481,696

 
0.7
%
 
0.6
%
 
0.6
%
 
507,759

 
0.4
%
 
0.7
%
 
0.3
%
Other consumer loans
384,728

 
2.9
%
 
0.5
%
 
0.9
%
 
448,972

 
2.3
%
 
0.4
%
 
0.5
%
Total consumer
2,654,114

 
0.6
%
 
0.6
%
 
0.3
%
 
2,671,433

 
0.6
%
 
0.7
%
 
0.2
%
Other
241,440

 
0.1
%
 
0.1
%
 
—
%
 
228,430

 
—
%
 
0.5
%
 
—
%
Total loans
$
7,612,600

 
0.3
%
 
0.6
%
 
0.2
%
 
$
7,406,192

 
0.3
%
 
0.9
%
 
0.2
%
Total non-performing loans as of September 30, 2017 declined by $11.3 million, or 15.1%, to $63.8 million as compared to $75.1 million at December 31, 2016. The change in non-performing loans during the nine months ended September 30, 2017 was attributable to $20.7 million in resolutions and $6.3 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures. Partially offsetting these decreases were $15.7 million of loans that became non-performing.
During the nine months ended September 30, 2017, of the loans we foreclosed, or received deeds in lieu of foreclosure, approximately $3.5 million consisted of residential loans and $2.1 million consisted of commercial real estate loans.

61

The customer-owed principal balances and carrying amounts as of September 30, 2017 and December 31, 2016 are set forth in the tables below:
(Dollars in thousands)
 
September 30, 2017
 
 
Gross
Customer
Balance Owed
 
Carrying
Amount (1)
 
Carrying
Amount as a
Percentage of
Customer
Balance
 
Carrying
Amount of
Noncurrent
Loans (2)
 
Carrying
Amount of
Noncurrent
Loans as a
Percentage of
Carrying
Amount
Non-owner occupied commercial real estate
 
$
1,415,430

 
$
1,293,647

 
91.4
%
 
$
4,591

 
0.4
%
Other commercial construction and land
 
787,084

 
402,250

 
51.1
%
 
3,807

 
0.9
%
Multifamily commercial real estate
 
164,008

 
148,192

 
90.4
%
 
139

 
0.1
%
1-4 family residential construction and land
 
203,986

 
143,807

 
70.5
%
 
—

 
—
%
Total commercial real estate
 
2,570,508

 
1,987,896

 
77.3
%
 
8,537

 
0.4
%
Owner occupied commercial real estate
 
1,328,670

 
1,226,211

 
92.3
%
 
11,765

 
1.0
%
Commercial and industrial loans
 
1,636,564

 
1,502,939

 
91.8
%
 
18,922

 
1.3
%
Total commercial
 
2,965,234

 
2,729,150

 
92.0
%
 
30,687

 
1.1
%
1-4 family residential
 
1,907,033

 
1,787,690

 
93.7
%
 
12,952

 
0.7
%
Home equity loans
 
549,330

 
481,696

 
87.7
%
 
5,968

 
1.2
%
Other consumer loans
 
417,577

 
384,728

 
92.1
%
 
5,483

 
1.4
%
Total consumer
 
2,873,940

 
2,654,114

 
92.4
%
 
24,403

 
0.9
%
Other
 
260,185

 
241,440

 
92.8
%
 
174

 
0.1
%
Total Loans
 
$
8,669,867

 
$
7,612,600

 
87.8
%
 
$
63,801

 
0.8
%
 
(1) 
The carrying amount represents a discount from the total gross customer balance of $1,057.3 million or 12.2%.
(2) 
Includes loans greater than 90 days past due, and nonperforming loans less than 90 days past due.

(Dollars in thousands)
 
December 31, 2016
 
 
Gross
Customer
Balance Owed
 
Carrying
Amount (1)
 
Carrying
Amount as a
Percentage of
Customer
Balance
 
Carrying
Amount of
Noncurrent
Loans (2)
 
Carrying
Amount of
Noncurrent
Loans as a
Percentage of
Carrying
Amount
Non-owner occupied commercial real estate
 
$
1,257,156

 
$
1,130,883

 
90.0
%
 
$
7,170

 
0.6
%
Other commercial construction and land
 
735,457

 
327,622

 
44.5
%
 
11,482

 
3.5
%
Multifamily commercial real estate
 
133,578

 
117,515

 
88.0
%
 
721

 
0.6
%
1-4 family residential construction and land
 
199,232

 
140,030

 
70.3
%
 
—

 
—
%
Total commercial real estate
 
2,325,423

 
1,716,050

 
73.8
%
 
19,373

 
1.1
%
Owner occupied commercial real estate
 
1,437,417

 
1,321,405

 
91.9
%
 
12,740

 
1.0
%
Commercial and industrial loans
 
1,658,413

 
1,468,874

 
88.6
%
 
17,099

 
1.2
%
Total commercial
 
3,095,830

 
2,790,279

 
90.1
%
 
29,839

 
1.1
%
1-4 family residential
 
1,831,407

 
1,714,702

 
93.6
%
 
15,367

 
0.9
%
Home equity loans
 
583,204

 
507,759

 
87.1
%
 
5,243

 
1.0
%
Other consumer loans
 
508,326

 
448,972

 
88.3
%
 
4,120

 
0.9
%
Total consumer
 
2,922,937

 
2,671,433

 
91.4
%
 
24,730

 
0.9
%
Other
 
247,782

 
228,430

 
92.2
%
 
1,174

 
0.5
%
Total Loans
 
$
8,591,972

 
$
7,406,192

 
86.2
%
 
$
75,116

 
1.0
%
 
(1) 
The carrying amount represents a discount from the total gross customer balance of $1,185.8 million, or 13.8%.
(2) 
Includes loans greater than 90 days past due, and nonperforming loans less than 90 days past due.

62

Allowance and Provision for Loan and Lease Losses
At September 30, 2017, the allowance for loan and lease losses was $45.4 million, of which $24.2 million was associated with PCI loans and $21.2 million related to non-PCI loans. At September 30, 2017, the allowance for loan and lease losses represents 0.60% of our total $7.6 billion loan portfolio. At December 31, 2016, the allowance for loan and lease losses was $43.1 million, of which $23.0 million was associated with PCI loans and $20.1 million related to non-PCI loans. At December 31, 2016, the allowance for loan and lease losses represented 0.58% of our total $7.4 billion loan portfolio.
For non-PCI loans, the allowance for loan and lease losses reflects an allowance for probable incurred credit losses in the loan portfolio. Our formalized process for assessing the adequacy of the allowance for loan and lease losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analysis and loan pool analysis. Individual loan analysis are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and are performed primarily on commercial real estate and other commercial loans. The result is that commercial real estate loans and commercial loans are divided into the following risk categories: Pass, Special Mention, Substandard and Doubtful. The allowance consists of specific and general components. When appropriate, a specific reserve will be established for individual loans based upon the risk classifications and the estimated potential for loss. The specific component relates to loans that are individually classified as impaired.
Home equity loans, indirect auto loans, residential loans and consumer loans generally are not analyzed individually or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above. However, should such loans exceeding certain size thresholds exhibit signs of impairment, they may be individually evaluated for impairment.
For PCI loans, the allowance for loan and lease losses is a measure of impairment based upon our most recent estimates of expected cash flows. Our estimation of expected cash flows, which is used to determine the need for provisions to or reversals of the allowance every reporting period, is determined by assigning probability of default (“PD”) and loss given default (“LGD”) assumptions, amongst other assumptions such as prepayment speeds and recovery or liquidation timing. For commercial real estate and other commercial loans, we generally assign PD assumptions through the mapping of the following loan level risk ratings: Pass, Watch, Sub-Performing and Non-Performing. For home equity loans, residential loans, and consumer loans, PD is determined by mapping payment performance and delinquency status to market based default assumptions. Estimated loan to value ratios, determined using appraisals and/or real estate indices, are used to derive loss given default assumptions for real estate collateralized loans.
Senior management and our Board of Directors review this calculation and the underlying assumptions on a routine basis, not less frequently than quarterly.
The provision for loan and lease losses is a charge to income in the current period to establish or replenish the allowance and maintain it at a level that management has determined to be adequate to absorb estimated incurred losses in the loan portfolio for non-PCI loans. A provision for loan and lease losses is also required for any unfavorable changes in expected cash flows related to pools of purchased impaired loans. The provision for loan and lease losses and expectations of cash flows may be impacted by many factors, including changes in the value of real estate collateralizing loans, net charge-offs and credit losses incurred, changes in loans outstanding, changes in impaired loans, historical loss rates and the mix of loan types.
The provision for loan and lease losses in future periods for acquired loans will be most significantly influenced in the short term by the differences between the actual credit losses resulting from the resolution of problem loans and the estimated credit losses used in determining the estimated fair values of purchased impaired loans as of their acquisition dates. For non-PCI loans, the provision for loan and lease losses will be affected by the loss potential of impaired loans and trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted. Refer to Provision for loan and lease losses section for further discussion.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan and lease losses at an appropriate level.
The following table presents the roll-forward of the allowance for loan and lease losses for PCI and non-PCI loans for the three and nine months ended September 30, 2017 and 2016 by the class of loans against which the allowance is allocated:


63

 
Three Months Ended
(Dollars in thousands)
September 30, 2017
 
September 30, 2016
 
Non-PCI
 
PCI
 
Total
 
Non-PCI
 
PCI
 
Total
Allowance for loan and lease losses at the beginning of the period
$
20,619

 
$
24,019

 
$
44,638

 
$
21,182

 
$
23,701

 
$
44,883

Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(22
)
 
—

 
(22
)
 
—

 
—

 
—

Other commercial construction and land
1

 
—

 
1

 
—

 
—

 
—

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
(21
)
 
—

 
(21
)
 
—

 
—

 
—

Owner occupied commercial real estate
1

 
—

 
1

 
—

 
—

 
—

Commercial and industrial loans
(133
)
 
—

 
(133
)
 
(6
)
 
—

 
(6
)
Total commercial
(132
)
 
—

 
(132
)
 
(6
)
 
—

 
(6
)
1-4 family residential
(1
)
 
—

 
(1
)
 
(47
)
 
—

 
(47
)
Home equity loans
(209
)
 
—

 
(209
)
 
(50
)
 
—

 
(50
)
Other consumer loans
(2,145
)
 
—

 
(2,145
)
 
(1,293
)
 
—

 
(1,293
)
Total consumer
(2,355
)
 
—

 
(2,355
)
 
(1,390
)
 
—

 
(1,390
)
Other
(426
)
 
—

 
(426
)
 
(558
)
 
—

 
(558
)
Total charge-offs
(2,934
)
 
—

 
(2,934
)
 
(1,954
)
 
—

 
(1,954
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
2

 
—

 
2

 
2

 
—

 
2

Other commercial construction and land
—

 
—

 
—

 
37

 
—

 
37

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
1

 
—

 
1

 
2

 
—

 
2

Total commercial real estate
3

 
—

 
3

 
41

 
—

 
41

Owner occupied commercial real estate
12

 
—

 
12

 
—

 
—

 
—

Commercial and industrial loans
268

 
—

 
268

 
22

 
—

 
22

Total commercial
280

 
—

 
280

 
22

 
—

 
22

1-4 family residential
15

 
—

 
15

 
26

 
—

 
26

Home equity loans
126

 
—

 
126

 
66

 
—

 
66

Other consumer loans
122

 
—

 
122

 
164

 
—

 
164

Total consumer
263

 
—

 
263

 
256

 
—

 
256

Other
136

 
—

 
136

 
150

 
—

 
150

Total recoveries
682

 
—

 
682

 
469

 
—

 
469

Net charge-offs
(2,252
)
 
—

 
(2,252
)
 
(1,485
)
 
—

 
(1,485
)
Provision (reversal) for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(88
)
 
351

 
263

 
(96
)
 
69

 
(27
)
Other commercial construction and land
(142
)
 
(1,527
)
 
(1,669
)
 
(102
)
 
447

 
345

Multifamily commercial real estate
(21
)
 
30

 
9

 
(9
)
 
12

 
3

1-4 family residential construction and land
(139
)
 
—

 
(139
)
 
(31
)
 
(111
)
 
(142
)
Total commercial real estate
(390
)
 
(1,146
)
 
(1,536
)
 
(238
)
 
417

 
179

Owner occupied commercial real estate
(119
)
 
(226
)
 
(345
)
 
(183
)
 
4

 
(179
)
Commercial and industrial loans
155

 
163

 
318

 
(695
)
 
122

 
(573
)
Total commercial
36

 
(63
)
 
(27
)
 
(878
)
 
126

 
(752
)
1-4 family residential
(272
)
 
235

 
(37
)
 
(148
)
 
(431
)
 
(579
)
Home equity loans
20

 
(107
)
 
(87
)
 
15

 
(136
)
 
(121
)
Other consumer loans
3,178

 
1,239

 
4,417

 
1,461

 
(29
)
 
1,432

Total consumer
2,926

 
1,367

 
4,293

 
1,328

 
(596
)
 
732

Other
303

 
9

 
312

 
422

 
5

 
427

Total provision (reversal) for loan and lease losses
2,875

 
167

 
3,042

 
634

 
(48
)
 
586

Allowance for loan and lease losses at the end of the period
$
21,242

 
$
24,186

 
$
45,428

 
$
20,331

 
$
23,653

 
$
43,984



64

 
Nine Months Ended
(Dollars in thousands)
September 30, 2017
 
September 30, 2016
 
Non-PCI
 
PCI
 
Total
 
Non-PCI
 
PCI
 
Total
Allowance for loan and lease losses at the beginning of the period
$
20,050

 
$
23,015

 
$
43,065

 
$
20,546

 
$
24,488

 
$
45,034

Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(22
)
 
—

 
(22
)
 
(2
)
 
—

 
(2
)
Other commercial construction and land
(6
)
 
—

 
(6
)
 
—

 
—

 
—

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
(28
)
 
—

 
(28
)
 
(2
)
 
—

 
(2
)
Owner occupied commercial real estate
(5
)
 
—

 
(5
)
 
(80
)
 
—

 
(80
)
Commercial and industrial loans
(385
)
 
—

 
(385
)
 
(510
)
 
—

 
(510
)
Total commercial
(390
)
 
—

 
(390
)
 
(590
)
 
—

 
(590
)
1-4 family residential
(3
)
 
—

 
(3
)
 
(47
)
 
—

 
(47
)
Home equity loans
(365
)
 
—

 
(365
)
 
(224
)
 
—

 
(224
)
Other consumer loans
(6,340
)
 
—

 
(6,340
)
 
(3,633
)
 
—

 
(3,633
)
Total consumer
(6,708
)
 
—

 
(6,708
)
 
(3,904
)
 
—

 
(3,904
)
Other
(1,493
)
 
—

 
(1,493
)
 
(1,598
)
 
—

 
(1,598
)
Total charge-offs
(8,619
)
 
—

 
(8,619
)
 
(6,094
)
 
—

 
(6,094
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
6

 
—

 
6

 
13

 
—

 
13

Other commercial construction and land
116

 
—

 
116

 
46

 
—

 
46

Multifamily commercial real estate
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential construction and land
5

 
—

 
5

 
5

 
—

 
5

Total commercial real estate
127

 
—

 
127

 
64

 
—

 
64

Owner occupied commercial real estate
55

 
—

 
55

 
—

 
—

 
—

Commercial and industrial loans
338

 
—

 
338

 
81

 
—

 
81

Total commercial
393

 
—

 
393

 
81

 
—

 
81

1-4 family residential
65

 
—

 
65

 
206

 
—

 
206

Home equity loans
285

 
—

 
285

 
341

 
—

 
341

Other consumer loans
821

 
—

 
821

 
589

 
—

 
589

Total consumer
1,171

 
—

 
1,171

 
1,136

 
—

 
1,136

Other
554

 
—

 
554

 
630

 
—

 
630

Total recoveries
2,245

 
—

 
2,245

 
1,911

 
—

 
1,911

Net charge-offs
(6,374
)
 
—

 
(6,374
)
 
(4,183
)
 
—

 
(4,183
)
Provision (reversal) for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
(154
)
 
(324
)
 
(478
)
 
(323
)
 
728

 
405

Other commercial construction and land
(344
)
 
(2,611
)
 
(2,955
)
 
(19
)
 
193

 
174

Multifamily commercial real estate
18

 
13

 
31

 
(31
)
 
1

 
(30
)
1-4 family residential construction and land
(218
)
 
—

 
(218
)
 
55

 
(517
)
 
(462
)
Total commercial real estate
(698
)
 
(2,922
)
 
(3,620
)
 
(318
)
 
405

 
87

Owner occupied commercial real estate
(200
)
 
(255
)
 
(455
)
 
(145
)
 
100

 
(45
)
Commercial and industrial loans
(367
)
 
928

 
561

 
291

 
754

 
1,045

Total commercial
(567
)
 
673

 
106

 
146

 
854

 
1,000

1-4 family residential
(527
)
 
670

 
143

 
(433
)
 
(1,419
)
 
(1,852
)
Home equity loans
5

 
(112
)
 
(107
)
 
(69
)
 
(645
)
 
(714
)
Other consumer loans
8,415

 
2,830

 
11,245

 
3,628

 
(44
)
 
3,584

Total consumer
7,893

 
3,388

 
11,281

 
3,126

 
(2,108
)
 
1,018

Other
938

 
32

 
970

 
1,014

 
14

 
1,028

Total provision (reversal) for loan and lease losses
7,566

 
1,171

 
8,737

 
3,968

 
(835
)
 
3,133

Allowance for loan and lease losses at the end of the period
$
21,242

 
$
24,186

 
$
45,428

 
$
20,331

 
$
23,653

 
$
43,984



65

No portion of the allowance allocated to non-PCI loans is in any way restricted to any individual loan or group of non-PCI loans, and the entirety of such allowance is available to absorb probable incurred credit losses from any and all such loans. The following table represents management’s best estimate of the allocation of the allowance for loan and lease losses for non-PCI loans to the various segments of the loan portfolio based on information available as of September 30, 2017 and December 31, 2016:
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
 
 
Non-PCI
Loan Balance
 
Allowance for
Loan and Lease Losses
 
Percent of
Non-PCI
Loans
 
Non-PCI
Loan Balance
 
Allowance for
Loan and Lease Losses
 
Percent of
Non-PCI
Loans
Non-owner occupied commercial real estate
 
$
1,090,369

 
$
789

 
0.1
%
 
$
901,348

 
$
959

 
0.1
%
Other commercial construction and land
 
357,540

 
1,464

 
0.4
%
 
255,734

 
1,698

 
0.7
%
Multifamily commercial real estate
 
132,266

 
67

 
0.1
%
 
96,802

 
49

 
0.1
%
1-4 family residential construction and land
 
143,513

 
453

 
0.3
%
 
139,647

 
666

 
0.5
%
Total commercial real estate
 
1,723,688

 
2,773

 
0.2
%
 
1,393,531

 
3,372

 
0.2
%
Owner occupied commercial real estate
 
1,077,070

 
992

 
0.1
%
 
1,141,939

 
1,142

 
0.1
%
Commercial and industrial
 
1,443,967

 
6,116

 
0.4
%
 
1,379,506

 
6,530

 
0.5
%
Total commercial
 
2,521,037

 
7,108

 
0.3
%
 
2,521,445

 
7,672

 
0.3
%
1-4 family residential
 
1,604,936

 
1,792

 
0.1
%
 
1,486,869

 
2,257

 
0.2
%
Home equity loans
 
426,516

 
561

 
0.1
%
 
440,976

 
636

 
0.1
%
Other consumer loans
 
363,211

 
8,706

 
2.4
%
 
418,557

 
5,810

 
1.4
%
Total consumer
 
2,394,663

 
11,059

 
0.5
%
 
2,346,402

 
8,703

 
0.4
%
Other
 
214,958

 
302

 
0.1
%
 
195,615

 
303

 
0.2
%
Total loans
 
$
6,854,346

 
$
21,242

 
0.3
%
 
$
6,456,993

 
$
20,050

 
0.3
%

Criticized and Classified Loans
Loans with the following attributes are categorized as criticized and classified loans: (1) a potential weakness that deserves management’s close attention; (2) inadequate protection by the current net worth and paying capacity of the obligor or of the collateral pledged; or (3) weaknesses which make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

66

The following table summarizes criticized and classified loans at September 30, 2017 and December 31, 2016:

(Dollars in thousands)
 
September 30, 2017 (1)
 
December 31, 2016 (1)
Non-owner occupied commercial real estate
 
$
24,896

 
$
37,194

Other commercial construction and land
 
21,582

 
41,441

Multifamily commercial real estate
 
1,330

 
2,191

1-4 family residential construction and land
 
—

 
—

Total commercial real estate
 
47,808

 
80,826

Owner occupied commercial real estate
 
50,365

 
50,469

Commercial and industrial
 
32,441

 
54,473

Total commercial
 
82,806

 
104,942

1-4 family residential
 
24,281

 
31,069

Home equity loans
 
7,824

 
9,008

Other consumer loans
 
5,716

 
4,180

Total consumer
 
37,821

 
44,257

Other
 
1,368

 
2,152

Total loans
 
$
169,803

 
$
232,177

(1) 
PCI and non-PCI loans are included in the balances presented.
Total criticized and classified loans declined $62.4 million, or 35.8% annualized, during the nine months ended September 30, 2017 as a result of $13.4 million in transfers to other real estate owned and $93.4 million of pay downs, charge offs and upgrades. Loan downgrades of $44.5 million partially offset the decline.
Impaired Loans
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgages, commercial and commercial real estate loans exceeding certain size thresholds established by management are individually evaluated for impairment. Non-accrual loans and restructured loans where loan term concessions benefiting the borrowers have been made are generally designated as impaired.
Within the context of the accounting for impaired loans described in the preceding paragraph, other than the PCI loans described above, as of September 30, 2017, there were 168 loans individually evaluated for impairment and 90 deemed impaired with a related allowance for loan and lease losses of $0.9 million. At December 31, 2016, there were 137 loans individually evaluated for impairment and 83 deemed impaired with a related allowance for loan and lease losses of $0.3 million.
Due to the pool method of accounting for purchased credit impaired loans, non-performing PCI loans may be reported as 90 days past due and still accruing/accreting. Going forward, additional acquired loans not classified as purchased credit impaired and loans originated by us may become impaired and will be classified as such. Impaired loans also include loans which were not classified as non-accrual, but otherwise meet the criteria for classification as an impaired loan (i.e., loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). In our evaluation of the adequacy of the allowance for loan and lease losses, we consider (1) purchased credit impaired loans and loans classified as impaired, (2) our historical portfolio loss experience and trends as well as that of peers and (3) certain other quantitative and qualitative factors.


67

Non-Performing Assets
Non-performing assets include accruing/accreting loans delinquent 90 days or more, accreting PCI loans less than 90 days past due with expected cash flows less than contractual terms, non-accrual loans, repossessed personal property and other real estate. Non-PCI loans are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when such assets are 90 days past due. Non-performing assets were as follows:
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
 
 
Total
 
Total
Total non-accrual loans
 
$
18,126

 
$
11,449

Accruing/accreting loans delinquent 90 days or more
 
10,522

 
15,906

Accreting PCI loans <90 days with expected cash flows less than contractual
 
35,153

 
47,761

Total non-performing loans
 
63,801

 
75,116

Repossessed personal property
 
332

 
163

Other real estate owned
 
44,416

 
53,482

Total non-performing assets
 
$
108,549

 
$
128,761

Allowance for loan and lease losses
 
$
45,428

 
$
43,065

Non-performing assets as a percent of total assets
 
1.07
%
 
1.30
%
Non-performing loans as a percent of total loans
 
0.84
%
 
1.01
%
Allowance for loan and lease losses as a percent of non-performing loans
 
71.20
%
 
57.33
%
Non-PCI allowance for loan and lease losses as a percent of non-PCI loans
 
0.31
%
 
0.32
%
At September 30, 2017 and December 31, 2016, loans classified as delinquent 90 days or more and accruing/accreting are entirely comprised of components of PCI loan pools. There were no non-PCI loans included in this category at the end of each period presented. In addition to the discussion in the previous section, please refer to Note 5. Loans in our Consolidated Financial Statements for a description of the accounting for pooled PCI loans.
Total non-performing assets at September 30, 2017 declined by $20.2 million to $108.5 million compared to $128.8 million at December 31, 2016, which represents an annualized decline of 20.9%. The change in non-performing assets was attributable to the net decline in non-performing loans and other real estate owned of $11.3 million and $9.1 million, respectively. The net decline in non-performing loans was due to $20.7 million in resolutions and $6.3 million in transfers to other real estate owned through foreclosures or receipt of deeds in lieu of foreclosures, offset by $15.7 million of loans that became non-performing. The decline in other real estate owned was mainly due to sales of $21.7 million.
Investment Securities
Investment securities represent a significant portion of our assets. We invest in a variety of securities including obligations of U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, obligations of states or political subdivisions, privately issued mortgage-backed securities, bank eligible corporate obligations, mutual funds and limited types of equity securities.
Our investment activities are governed internally by a written, Board-approved policy. The investment policy is carried out by our Treasury department. Investment strategies are reviewed by the Risk Committee of the Board based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and our overall interest rate sensitivity. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (1) to provide a margin of liquid assets sufficient to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (2) to provide eligible securities to secure public funds and other borrowings; and (3) to manage interest rate risk and earn the maximum return on funds invested that is commensurate with meeting our first two goals.
Trading securities related to our non-qualified deferred compensation program and CRA investment fund totaled $4.5 million and $3.8 million at September 30, 2017 and December 31, 2016, respectively.
Our investment securities consisted primarily of U.S. agency mortgage-backed securities, which expose us to a low degree of credit and liquidity risk. The following tables set forth our investment securities as of September 30, 2017 and December 31, 2016:

68

(Dollars in thousands)
 
September 30, 2017
Security Type
 
Amortized
Cost
 
Estimated
Fair Value
 
Percent of Total Portfolio
 
Yield
 
Modified Duration in Years
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
60,161

 
$
64,008

 
5.5
%
 
3.46%
 
8.76
State and political subdivisions—tax exempt
 
11,859

 
11,492

 
1.0
%
 
1.88%
 
10.80
Mortgage-backed securities—residential issued by government sponsored entities
 
1,085,935

 
1,077,052

 
93.2
%
 
2.27%
 
4.59
Industrial revenue bonds
 
3,069

 
3,142

 
0.3
%
 
2.61%
 
3.52
Total
 
$
1,161,024

 
$
1,155,694

 
100.0
%
 
2.33%
 
4.90
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
9,738

 
$
9,899

 
2.4
%
 
2.80%
 
4.89
Corporate bonds
 
94,004

 
95,636

 
23.0
%
 
5.05%
 
2.85
State and political subdivisions—tax exempt
 
8,252

 
8,868

 
2.2
%
 
3.60%
 
3.93
State and political subdivisions—taxable
 
513

 
524

 
0.1
%
 
3.98%
 
1.50
Mortgage-backed securities—residential issued by government sponsored entities
 
299,544

 
300,311

 
72.3
%
 
2.37%
 
3.62
Total
 
$
412,051

 
$
415,238

 
100.0
%
 
3.02%
 
3.48


(Dollars in thousands)
 
December 31, 2016
Security Type
 
Amortized
Cost
 
Estimated
Fair Value
 
Percent of Total Portfolio
 
Yield
 
Modified Duration in Years
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
28,354

 
$
28,953

 
3.2
%
 
3.20%
 
9.56
State and political subdivisions - tax exempt
 
11,871

 
11,077

 
1.2
%
 
1.88%
 
11.35
Mortgage-backed securities—residential issued by government sponsored entities
 
883,802

 
868,922

 
95.2
%
 
2.19%
 
4.95
Industrial revenue bonds
 
3,239

 
3,298

 
0.4
%
 
2.15%
 
4.12
Total
 
$
927,266

 
$
912,250

 
100.0
%
 
2.22%
 
5.20
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
11,234

 
$
11,311

 
2.5
%
 
2.81%
 
5.02
Corporate bonds
 
94,010

 
91,988

 
20.0
%
 
5.05%
 
3.80
State and political subdivisions—tax exempt
 
8,069

 
8,458

 
1.8
%
 
3.58%
 
4.66
State and political subdivisions—taxable
 
520

 
533

 
0.1
%
 
3.96%
 
2.20
Mortgage-backed securities—residential issued by government sponsored entities
 
350,126

 
348,621

 
75.6
%
 
2.33%
 
3.64
Total
 
$
463,959

 
$
460,911

 
100.0
%
 
2.92%
 
3.73


69

Contractual maturities of investment securities at September 30, 2017 and December 31, 2016 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Other securities include mortgage-backed securities which are not due at a single maturity date. The following table segments our investment portfolio by maturity date:
(Dollars in thousands)
Within One Year
 
After One Year
Within Five Years
 
After Five Years
Within Ten Years
 
After Ten Years
 
Other Securities
 
Total
September 30, 2017
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
—
%
 
$
—

 
—
%
 
$
48,258

 
3.48
%
 
$
15,750

 
3.40
%
 
$
—

 
—
%
 
$
64,008

 
3.46
%
State and political subdivisions—tax exempt
—

 
—
%
 
—

 
—
%
 
1,495

 
1.60
%
 
9,997

 
1.92
%
 
—

 
—
%
 
11,492

 
1.88
%
Mortgage-backed securities—residential issued by government sponsored entities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
1,077,052

 
2.27
%
 
1,077,052

 
2.27
%
Industrial revenue bonds
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
3,142

 
2.61
%
 
—

 
—
%
 
3,142

 
2.61
%
Total
$
—

 
—
%
 
$
—

 
—
%
 
$
49,753

 
3.42
%
 
$
28,889

 
2.77
%
 
$
1,077,052

 
2.27
%
 
$
1,155,694

 
2.33
%
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
9,738

 
2.80
%
 
$
—

 
—
%
 
$
9,738

 
2.80
%
Corporate bonds
—

 
—
%
 
55,029

 
5.03
%
 
38,975

 
5.08
%
 
—

 
—
%
 
—

 
—
%
 
94,004

 
5.05
%
State and political subdivisions—tax exempt
696

 
1.72
%
 
4,774

 
3.34
%
 
2,782

 
4.50
%
 
—

 
—
%
 
—

 
—
%
 
8,252

 
3.60
%
State and political subdivisions—taxable
—

 
—
%
 
—

 
—
%
 
513

 
3.98
%
 
—

 
—
%
 
—

 
—
%
 
513

 
3.98
%
Mortgage-backed securities—residential issued by government sponsored entities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
299,544

 
2.37
%
 
299,544

 
2.37
%
Total
$
696

 
1.72
%
 
$
59,803

 
4.90
%
 
$
42,270

 
5.02
%
 
$
9,738

 
2.80
%
 
$
299,544

 
2.37
%
 
$
412,051

 
3.02
%

(Dollars in thousands)
Within One Year
 
After One Year
Within Five Years
 
After Five Years
Within Ten Years
 
After Ten Years
 
Other Securities
 
Total
December 31, 2016
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
28,953

 
3.20
%
 
$
—

 
—
%
 
$
28,953

 
3.20
%
State and political
subdivisions - tax exempt
—

 
—
%
 
—

 
—
%
 
946

 
1.60
%
 
10,131

 
1.91
%
 
—

 
—
%
 
11,077

 
1.88
%
Mortgage-backed securities—residential issued by government sponsored entities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
868,922

 
2.19
%
 
868,922

 
2.19
%
Industrial revenue bonds
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
3,298

 
2.15
%
 
—

 
—
%
 
3,298

 
2.15
%
Total
$
—

 
—
%
 
$
—

 
—
%
 
$
946

 
1.60
%
 
$
42,382

 
2.79
%
 
$
868,922

 
2.19
%
 
$
912,250

 
2.22
%
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
11,234

 
2.81
%
 
$
—

 
—
%
 
$
11,234

 
2.81
%
Corporate bonds
—

 
—
%
 
30,042

 
5.06
%
 
43,968

 
4.95
%
 
20,000

 
5.25
%
 
—

 
—
%
 
94,010

 
5.05
%
State and political subdivisions—tax exempt
—

 
—
%
 
4,878

 
3.18
%
 
3,191

 
4.20
%
 
—

 
—
%
 
—

 
—
%
 
8,069

 
3.58
%
State and political subdivisions—taxable
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
520

 
3.96
%
 
—

 
—
%
 
520

 
3.96
%
Mortgage-backed securities—residential issued by government sponsored entities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
350,126

 
2.33
%
 
350,126

 
2.33
%
Total
$
—

 
—
%
 
$
34,920

 
4.80
%
 
$
47,159

 
4.90
%
 
$
31,754

 
4.37
%
 
$
350,126

 
2.33
%
 
$
463,959

 
2.92
%
We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of securities may result in impairment charges which may be material to our financial condition and results of operations. More specifically, our impairment analysis is based on the following: (1) whether it is “more likely than not” we would have to sell a security prior to recovery of the amortized cost; (2) whether we

70

intend to sell the security; and (3) whether or not we expect to recover our recorded investment on an amortized cost basis based on credit characteristics of the investment. If, based upon our analysis, any of those conditions exist for a given security, we would generally be required to record an impairment charge in the amount of the difference between the carrying amounts and estimated fair value of such security. Based on our analysis there were no investment securities considered to be other-than-temporarily impaired at September 30, 2017 or December 31, 2016.
Deposits
Our strategy is to fund asset growth primarily with low-cost customer deposits in order to maintain a stable liquidity profile and net interest margin.
As of September 30, 2017, our core deposits, which we define as demand deposits, savings and money market accounts, excluding brokered, increased by $16.2 million as compared to December 31, 2016. The increase was mainly the result of the Company's continued focus on growing low-cost core deposits. The average contractual rate on core deposits increased to 0.25% at September 30, 2017, from 0.20% at December 31, 2016.
Time deposit balances increased by $149.5 million during the nine months ended September 30, 2017. At September 30, 2017, our wholesale time deposits increased by $11.3 million, while retail time deposits increased by $138.2 million as compared to December 31, 2016. The average contractual rate on time deposits increased to 1.13% from 0.93% at December 31, 2016. The weighted average contractual rate of deposits increased to 0.51% from 0.41% for the periods ended September 30, 2017 and December 31, 2016, respectively.
The following table sets forth the balances and average contractual rates payable to customers on our deposits, segmented by account type as of September 30, 2017 and December 31, 2016:

(Dollars in thousands)
September 30, 2017
 
December 31, 2016
 
Year to Date Change
 
Amount
 
Percent
of
Total
 
Weighted
Average
Contractual
Rate
 
Amount
 
Percent
of
Total
 
Weighted
Average
Contractual
Rate
 
Amount
 
Percent
Non-interest bearing demand
$
1,631,526

 
20.1
%
 
—
%
 
$
1,590,164

 
20.2
%
 
—
%
 
$
41,362

 
2.6
 %
Interest bearing demand
1,846,172

 
22.7
%
 
0.26
%
 
1,930,143

 
24.5
%
 
0.24
%
 
(83,971
)
 
(4.4
)%
Savings
471,931

 
5.8
%
 
0.18
%
 
497,171

 
6.3
%
 
0.18
%
 
(25,240
)
 
(5.1
)%
Money market
1,735,107

 
21.4
%
 
0.47
%
 
1,651,023

 
21.0
%
 
0.35
%
 
84,084

 
5.1
 %
Total core deposits
5,684,736

 
70.0
%
 
0.25
%
 
5,668,501

 
72.0
%
 
0.20
%
 
16,235

 
0.3
 %
Brokered money market
150,073

 
1.8
%
 
1.36
%
 
74,815

 
0.9
%
 
0.89
%
 
75,258

 
100.6
 %
Customer time deposits
2,015,301

 
24.8
%
 
1.10
%
 
1,877,132

 
23.8
%
 
0.90
%
 
138,169

 
7.4
 %
Wholesale time deposits
271,514

 
3.4
%
 
1.32
%
 
260,180

 
3.3
%
 
1.17
%
 
11,334

 
4.4
 %
Total time deposits
2,286,815

 
28.2
%
 
1.13
%
 
2,137,312

 
27.1
%
 
0.93
%
 
149,503

 
7.0
 %
Total deposits
$
8,121,624

 
100.0
%
 
0.51
%
 
$
7,880,628

 
100.0
%
 
0.41
%
 
$
240,996

 
3.1
 %

71


The following table sets forth our average deposits and the average rates expensed for the periods indicated:

(Dollars in thousands)
 
Three Months Ended
 
 
September 30, 2017
 
December 31, 2016
 
 
Average
Amount
 
Average
Rate
 
Average
Amount
 
Average
Rate
Non-interest bearing demand
 
$
1,636,625

 
—
%
 
$
1,508,496

 
—
%
Interest bearing
 
 
 
 
 
 
 
 
Interest bearing demand
 
1,839,844

 
0.28
%
 
1,748,269

 
0.21
%
Savings
 
477,530

 
0.18
%
 
471,466

 
0.18
%
Money market
 
1,858,223

 
0.52
%
 
1,601,167

 
0.37
%
Time deposits (1)
 
2,274,258

 
1.03
%
 
2,049,066

 
0.88
%
Total deposits
 
$
8,086,480

 
0.48
%
 
$
7,378,464

 
0.39
%
(1) 
The average rates on time deposits include the amortization of premiums on time deposits assumed in connection with the acquisitions and paid to brokers on wholesale deposits. Such premiums were required to be recorded to initially record these deposits at their fair values as of the respective acquisition dates.
The following table sets forth our time deposits segmented by maturity and deposit amount:

(Dollars in thousands)
 
September 30, 2017
Months to maturity:
 
Time Deposits of
$100K and
Greater
 
Time Deposits
of Less than
$100K
 
Total
Three or less
 
$
279,172

 
$
111,133

 
$
390,305

Over three to six
 
135,228

 
97,787

 
233,015

Over six to twelve
 
298,897

 
216,354

 
515,251

Over twelve
 
698,020

 
450,224

 
1,148,244

Total time deposits
 
$
1,411,317

 
$
875,498

 
$
2,286,815


Capital Resources and Liquidity
Capital Resources
In order to maintain a conservative risk profile, we operate with a prudent cushion of capital in relation to regulatory requirements and to the risk of our assets and business model. For planning purposes, we expect to operate with a minimum capital target equal to an 8% leverage ratio (defined as Tier 1 capital equal to 8% of average tangible assets), which would be in excess of regulatory standards for “well-capitalized” banks. We believe the 8% target is appropriate for our business model because of our conservative loan underwriting policies, investment portfolio composition, funding strategy, interest rate risk management limits and liquidity risk profile and because of the experience of our senior management team and Board of Directors.
Non-GAAP measures have inherent limitations and are not required to be uniformly applied. They should not be considered in isolation or as a substitute for analysis of results reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be viewed as a substitute for shareholders’ equity or total assets.
We calculate tangible book value, and tangible book value per share, which are non-GAAP measures because we believe they are useful for both investors and management as these are measures commonly used by financial institutions, regulators and investors to measure the capital adequacy of financial institutions. Tangible book value is equal to book value, or stockholders' equity, less goodwill and other intangible assets tax effected.
The following table sets forth a reconciliation of tangible book value and tangible book value per share to total shareholders’ equity, which is the most directly comparable GAAP measure:

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(Dollars and shares in thousands, except per share amounts)
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Total shareholders’ equity
 
$
1,354,619

 
$
1,292,047

Less: goodwill
 
(231,292
)
 
(235,500
)
Less: intangible assets
 
(27,938
)
 
(33,370
)
Tax effect on intangible assets (1)
 
10,479

 
12,694

Tangible book value
 
$
1,105,868

 
$
1,035,871

Common shares outstanding
 
52,027

 
51,765

Book value per share
 
$
26.04

 
$
24.96

Tangible book value per share
 
$
21.26

 
$
20.01

(1) 
Tax effected at a blended income tax rate of 38%.
The Company operates with a significant level of excess capital above regulatory requirements (see the table below for the historical capital ratios as well as minimum and well capitalized ratio requirements).
As of September 30, 2017, we had a Tier 1 leverage ratio of 12.0%, which provided us with $392.2 million in excess capital relative to our longer-term target of 8%. As of September 30, 2017, Capital Bank Corporation had a 10.9% Tier 1 leverage ratio, a 12.7% Tier 1 common capital ratio, a 12.7% Tier 1 risk-based ratio and a 13.2% Total risk-based capital ratio.
As of December 31, 2016, we had a Tier 1 leverage ratio of 12.2%, which provided us with $380.7 million in excess capital relative our longer-term planning target of 8%. As of December 31, 2016, Capital Bank Corporation had a 11.2% Tier 1 leverage ratio, a 12.4% Tier I common capital ratio, a 12.4% Tier 1 risk-based ratio and an 12.9% total risk-based capital ratio.


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The minimum ratios along with the actual ratios for us and Capital Bank Corporation as of September 30, 2017 and December 31, 2016 are presented in the following tables:
 
 
 
 
 
Actual
September 30, 2017
Well
Capitalized
Requirement
 
Adequately
Capitalized
Requirement
 
September 30, 2017
 
December 31, 2016
Tier 1 Leverage Capital
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
≥ 4.0%
 
12.0%
 
12.2%
Bank
≥ 5.0%
 
≥ 4.0%
 
10.9%
 
11.2%
Tier 1 Common Equity Capital
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
≥ 4.5%
 
12.7%
 
12.4%
Bank
≥ 6.5%
 
≥ 4.5%
 
12.7%
 
12.4%
Tier 1 Risk-based Capital
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
≥ 6.0%
 
14.0%
 
13.5%
Bank
≥ 8.0%
 
≥ 6.0%
 
12.7%
 
12.4%
Total Risk-based Capital
 
 
 
 
 
 
 
(to Risk-weighted Assets)
 
 
 
 
 
 
 
CBF Consolidated
N/A
 
≥ 8.0%
 
14.5%
 
14.0%
Bank
≥ 10.0%
 
≥ 8.0%
 
13.2%
 
12.9%


 
 
Actual
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
CBF Consolidated
 
 
 
 
Tier 1 Leverage Capital
 
$
1,176,655

 
$
1,101,743

Excess Tier 1 Leverage Capital:
 
 
 
 
vs. 8% target
 
392,206

 
380,718

Capital Bank Corporation
 
 
 
 
Tier 1 Leverage Capital
 
1,062,316

 
1,010,409

Excess Tier 1 Leverage Capital:
 
 
 
 
vs. 8% target
 
280,431

 
290,399

In July 2013, the U.S. banking regulators adopted a final rule which implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and certain changes required by the Dodd-Frank Act. The final rule establishes an integrated regulatory capital framework and introduces the “Standardized Approach” for risk weighted assets, which replaces the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015, the date we became subject to the new rules.
The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level

74

falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. As of September 30, 2017, our capital buffer would be 6.5%; well exceeding the 2.5% 2019 requirement.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are now required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).
Dividend Program
On October 19, 2017, the Company's board of directors approved a quarterly common dividend of $0.12 per share payable on November 13, 2017 to shareholders of record as of November 3, 2017.
Liquidity
Liquidity involves our ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other funding needs, to maintain reserve requirements and to otherwise operate on an ongoing basis. To mitigate liquidity risk, our strategy is to fund asset growth primarily with low-cost customer deposits. We also operate under a liquidity policy and contingent liquidity plan that require us to monitor indicators of potential liquidity risk, utilize cash flow projection models to forecast liquidity needs, identify alternative back-up sources of liquidity and maintain a cushion of cash and liquid securities at 15% of total assets.
Our liquidity needs are met primarily by our cash position, growth in core deposits and cash flow from our amortizing investment and loan portfolios (including scheduled payments, prepayments, and maturities from portfolios of loans and investment securities). Our ability to borrow funds from non-deposit sources provides additional flexibility in meeting our liquidity needs. Short-term borrowings include federal funds purchased, securities sold under repurchase agreements and brokered deposits. We also utilize longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost effective options for funding asset growth and satisfying capital needs. Our long-term borrowings include structured repurchase agreements and subordinated notes underlying our trust preferred securities.
As of September 30, 2017 and December 31, 2016, cash and liquid securities totaled 17.3% and 17.0% of assets, respectively, providing ample liquidity to support our existing bank franchise. As of September 30, 2017 and December 31, 2016, the ratio of wholesale to total funding was 13.7%, and 14.3%, respectively, which is below our policy limit of 25%. In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. We hold investments in FHLB stock for the purpose of maintaining credit lines with the FHLB. The credit availability is based on a percentage of the Bank’s total assets as reported in its most recent quarterly financial information submitted to the FHLB and subject to the pledging of sufficient collateral.
At September 30, 2017 and December 31, 2016, there were $440.5 million and $545.7 million, respectively, in FHLB advances outstanding. In addition, we had $15.8 million and $15.4 million in letters of credit outstanding as of September 30, 2017 and December 31, 2016, respectively. Collateral available under our agreements with the FHLB provided for incremental borrowing availability of up to approximately $566.9 million and $415.9 million, respectively.
We believe that we have adequate funding sources through unused borrowing capacity from the FHLB, unpledged investment securities, cash on hand and on deposit in other financial institutions, loan principal repayment and potential asset maturities and sales to meet our foreseeable liquidity requirements and contractual obligations.


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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
The Company pursues a conservative strategy with respect to interest rate risk management, with the goal of minimizing the risk that interest rate volatility will negatively impact our financial results. Due to the current low level of interest rates, we regard rising interest rates as the most likely source of risk and accordingly have sought to maintain an asset-sensitive position.
There are several components to our conservative interest rate strategy. First, we avoid holding loans with long duration. At September 30, 2017, approximately 53% of the loan portfolio was variable rate and of the remaining fixed rate loans, the majority had terms of less than five years. Second, the purpose of our securities portfolio is to provide liquidity and to manage interest rate sensitivity, and as such we limit its duration. At September 30, 2017, securities accounted for 16% of assets, and the effective duration of the portfolio was 3.7 years with limited extension risk to 4.3 years in a plus 300 basis point immediate parallel shift in interest rates. We utilize average life estimates based on prepayment rates obtained from an independent source. Third, we seek to fund the Bank, to the extent possible, with long-duration core deposits, and within core deposits, we emphasize checking account balances as the most stable and least risky source of funds. At September 30, 2017, core deposits accounted for 70% of total deposits, and checking balances accounted for 61% of core deposits.
We continuously monitor the Bank’s interest rate risk profile through our Asset Liability Committee, which consists of our Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, Chief of Strategic Planning, Treasurer, business unit heads and certain other officers. To manage interest rate risk, our Board of Directors has established quantitative and qualitative guidelines with respect to our net interest income exposure and how predefined interest rate shocks affect our financial performance, measured in terms of forecast net interest income and economic value of equity, which is the intrinsic value of assets, less the intrinsic value of liabilities. Under our policy, these predefined rate shocks include minus 300, minus 200, minus 100, plus 100, plus 200 and plus 300 basis point immediate parallel shifts in interest rates.
If a predefined immediate parallel rate shock cannot be modeled due to the low level of interest rates, a proportional rate shock and policy limit applies and all other declining rate shocks will be suspended until such scenarios can be modeled. Because of the current low level of interest rates, the minus 200 and minus 300 rate shocks have been suspended. In addition to monitoring our compliance with these policies, management undertakes additional analysis, considering a wide range of possible interest rate fluctuations, including changes in the shape of the yield curve, and assessing the sensitivity of these results to key assumptions, including the behavior of depositors and loan customers.
Based upon the current interest rate environment, as of September 30, 2017, our sensitivity to interest rate risk was as follows:
(Dollars in thousands)
Interest Rate Change in Basis Points
 
Next 12 Months
Net Interest Income
 
Economic Value of Equity
 
$ Change
 
% Change
 
$ Change
 
% Change
300
 
$
15,415

 
4.7
 %
 
$
94,983

 
6.2
 %
200
 
11,539

 
3.5
 %
 
87,629

 
5.7
 %
100
 
6,491

 
2.0
 %
 
60,736

 
3.9
 %
—
 
—

 
—
 %
 
—

 
—
 %
(100)
 
(13,576
)
 
(4.1
)%
 
(121,051
)
 
(7.9
)%
We used many assumptions to calculate the impact of changes in interest rates on our portfolio, and actual results may not be similar to projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. Actual results may also differ due to our actions, if any, in response to the changing rates. In calculating these exposures, we use an interest rate simulation model which is validated by third-party reviewers on an annual basis.
In the event the model indicates an unacceptable level of risk, we may take a number of actions to reduce this risk, including changing the terms, pricing, and conditions of loans and deposits, the sale of a portion of our available-for-sale investment portfolio or the use of risk management strategies such as interest rate swaps and caps and cash flow hedges. As of September 30, 2017, we were in compliance with all of the limits and policies established by our Board of Directors in predefined plus rate shocks and remained temporarily out of compliance in the minus 100 basis point rate shocks primarily due to the low level of interest rates. We continuously evaluate all balance sheet strategies to optimize the Company’s interest rate risk position and will take prudent actions to maintain an appropriate interest rate risk position based on the level of interest rates and the policies established by our Board of Directors.

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Inflation Risk Management
Inflation has an important impact on the growth of total assets in the banking industry and creates a need to increase equity capital to higher than normal levels in order to maintain an appropriate equity-to-assets ratio. We cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.
ITEM 4: CONTROLS AND PROCEDURES
 
(a)
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and are also designed to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
(b)
Internal Control Over Financial Reporting
Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting during the period ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS
From time to time we are party to various litigation matters incidental to the conduct of our business. On July 14, 2017, a case captioned Garfield v. First Horizon National Corporation, et al., Index No.CH-17-1022 (the “Garfield Action”), was filed on behalf of a putative class of First Horizon shareholders against First Horizon, its directors, and Capital Bank Financial Corp. in the Chancery Court of Shelby County, Tennessee, Thirtieth Judicial District, in connection with the merger. On August 15, 2017, First Horizon National Corporation made certain supplemental disclosures to the Joint Proxy Statement/Prospectus filed on July 28, 2017. On September 6, 2017, the Court approved the Stipulation and Proposed Order dismissing the Action.
In addition, Capital Bank Financial Corp. and the individual members of the Capital Bank Financial Corp. board of directors have been named as defendants in three substantially similar putative class action lawsuits filed by shareholders of Capital Bank Financial Corp. These actions are captioned: (1) Bushansky v. Capital Bank Financial Corp., et al., No. 3:17-cv-00422 (W.D.N.C. filed July 17, 2017); (2) Parshall v. Capital Bank Financial Corp., et al., No. 3:17-cv-00428 (W.D.N.C. filed July 19, 2017); and (3) Catherine McNamara v. Capital Bank Financial Corp., et al., No. 3:17-cv-00439 (W.D. N.C. filed July 25, 2017). The Parshall complaint also names First Horizon and Firestone Sub, Inc. as defendants. On August 11, 2017, the court ordered the consolidation of the three lawsuits into the lead action captioned In Re: Capital Bank Financial Corp. Stockholder Litigation, No. 3:17-cv-00422.
On August 23, 2017, Capital Bank Financial Corp. made certain supplemental disclosures to the Joint Proxy Statement/Prospectus filed on July 28, 2017. On August 28, 2017, the Court ordered that the Stipulation of Dismissal and Proposed Order was deemed to be a Rule 41(a)(2) Motion to Dismiss and granted such motion.

ITEM 1A: RISK FACTORS
There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.
ITEM 2: UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDSERT

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RAPIMAG
The following table provides information regarding repurchases of the Company’s common stock by the Company during the three months ended September 30, 2017:
Period
 
Total Number of
Shares Purchased
 
Average Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Dollar Value
of Shares that May Yet
Be Purchased Under
the Current Board Program
July 1-30
 
—

 
$
—

 
—

 
$
87,616,326

August 1-31
 
—

 
—

 
—

 
87,616,326

September 1-30
 
—

 
—

 
—

 
87,616,326

Total
 
—

 
$
—

 
—

 
$
87,616,326

Through 2016, the Company’s Board of Directors authorized stock repurchases of up to $400.0 million. Stock repurchases may be made from time to time, on the open market or in privately negotiated transactions. The approved stock repurchase program does not obligate the Company to repurchase any particular amount of shares, and the program may be extended, modified, suspended, or discontinued at any time.
During the three months ended September 30, 2017, the Company did not repurchase shares.
As of September 30, 2017, the Company has repurchased a total of $312.4 million or 12,739,763 common shares at an average price of $24.52 per share, and had $87.6 million remaining under the current board authorized stock repurchase program.
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.

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ITEM 6: EXHIBITS
Exhibit
Number
  
Description
2.1
 
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
32.2
  
 
 
 
101.INS
  
XBRL Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document






79

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.
 
 
 
 
CAPITAL BANK FINANCIAL CORP.
 
 
 
 
Date:
November 6, 2017
 
/s/ R. Eugene Taylor
 
 
 
R. Eugene Taylor
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
November 6, 2017
 
/s/ Christopher G. Marshall
 
 
 
Christopher G. Marshall
Chief Financial Officer
 
 
 
(Principal Accounting Officer)




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