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
 ________________________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11875604&doc=12 
(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