What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-05 · 451 added, 260 removed, 424 unchanged (63% of the section changed)

18 unchanged sentences

RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS

During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies.

In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains and overall economic instability.

This uncertainty has led to volatility in the financial markets, including significant declines in the United States (“US”) equity markets.

This impact was coupled with spikes in unemployment as a result of business shutdowns that may indicate future labor disruptions or a potential recession.

During the first quarter of 2020, the Federal Reserve’s Federal Open Market Committee (“FOMC”) lowered the federal funds rate by 150 basis points to a target range of 0.00% to 0.25%.

During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date.

In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability.

This uncertainty has led to volatility in the financial markets.

This impact was coupled with spikes in unemployment as a result of business shutdowns that may continue to impact financial institutions operationally and financially.

For a discussion of the risks we face with respect to the COVID-19 pandemic, the associated economic uncertainty, the steps taken to mitigate the pandemic and the resulting economic contraction, see "Item 1A — Risk Factors" in Part II of this quarterly report on Form 10-Q, which should be read in conjunction with the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019.

During the second quarter of 2020, the Federal Reserve’s Federal Open Market Committee (“FOMC”) maintained the federal funds rate at a target range of 0.00% to 0.25%.

The FOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook.

4 unchanged sentences

for individuals, economic impact payments and enhanced unemployment benefits;

for small businesses, access to loans and support through the Small Business Administration (“SBA”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned.

While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and US Treasury to the public.

for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program (“SBA-PPP”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned.

This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020 and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria.

In addition, there were other regulatory actions taken that may impact our business including troubled debt restructuring recognition relief, changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts.

BANCSHARES’ COVID-19 CRISIS PREPAREDNESS AND RESPONSE

BancShares’ strong capital and liquidity positions, along with a history of sound risk management, provide flexibility and stability to navigate this crisis.

At the onset, BancShares assembled a cross-functional leadership team to ensure business continuity, protect the safety of our associates, and support our customers and communities.

Our continued investment in technology allowed our team to respond to customers without interruption.

Digital account openings and virtual logins increased approximately 25% from pre-COVID-19 levels and we have successfully deployed a remote work strategy for numerous associates.

Our leadership team, with the help of all our dedicated associates, has been working diligently to ensure our high standards of customer service continue while also protecting the safety and soundness of our organization and the health and welfare of our stakeholders.

Supporting Our Associates

More than 90% of associates at our corporate locations are working remotely.

Branches transitioned to drive-thru and lobby by appointment only service to limit exposure to our associates and our customers.

Increased access to employee assistance programs, including emotional support and assistance with childcare and eldercare services.

Offering paid leave and medical treatment for associates with COVID-19-related illnesses.

Established an internal COVID-19 platform to provide daily communication across the company.

Supporting Our Customers

Ensuring the majority of our branches remain operational for our customers with appropriate safety protocols.

Waiving early withdrawal penalties on certificates of deposit when customers need the funds for relief.

Offering 90-day payment deferrals for qualified borrowers with no late fees.

Increasing access to funds through our traditional lending products and offering special unsecured loans for up to 24 months with a low fixed interest rate and no payments for 90 days.

Participating in the Small Business Administration Paycheck Protection Program (“SBA-PPP”) .

Diversified Loan Portfolio and Ongoing Monitoring of Credit Risk

While we understand that helping our customers through this trying time may defer a full understanding of the impact of COVID-19, we are actively monitoring our loan portfolio for areas of increased risk.

As of May 4, 2020, we have approved or processed loan payment extensions on approximately $6.5 billion in loans (approximately $200 million in deferred payments) for customers in good standing who have been affected by COVID-19.

BancShares has a well-diversified loan portfolio by geography and industry, however, extensions have been concentrated in industries impacted the most by the pandemic which includes our dental and medical portfolios, as well as the hospitality industry.

The risk profile is somewhat mitigated as our typical customer’s dental or medical practice is well established and actively managed.

Social distancing requirements had an immediate impact on both of these industries;

however, they should also see immediate demand for services once those restrictions are lessened.

Through April 24, 2020, we have not seen significant shifts in credit line utilization or overall declines in credit quality.

BancShares continues to have solid credit performance that has matched or exceeded its peer group net charge-off ratios over time.

We are actively participating in the SBA-PPP program, which will provide much needed funds to our small business customers.

In March, we put together a detailed and comprehensive framework to enable us to accept applications from our customers to help them in this time of need.

We processed approximately 5,000 SBA-PPP loan applications, securing funding for our customers of approximately $1.8 billion, during the initial round of funding for this program.

As of May 4, 2020, we have processed approximately 18,000 additional loan applications for the second phase of this program, representing additional funding of approximately $1.6 billion.

Strong Liquidity Position and Low Cost Funding Sources

We maintain a strong level of liquidity, which positions us well to adapt to stresses posed by this environment.

As of March 31, 2020, we had liquid assets (available cash and unencumbered high quality liquid assets at market value) totaling approximately $5.5 billion.

This represented 13.2% of consolidated assets as of March 31, 2020.

In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.3 billion in the form of Federal Home Loan Bank borrowing capacity, Federal Reserve Discount Window availability, fed funds lines and a committed line of credit.

Our funding base is composed of 94.8% deposits, of which 38.7% are demand deposit accounts.

Of our total deposits, 97.7% are core deposits.

As of March 31, 2020, our loan to deposit ratio was 83.7% and our cost of total deposits was 0.28%.

Strong Capital Position

In accordance with our capital plan, we operate with a level of capital above regulatory established well-capitalized limits.

This plan considers an assessment of internal and external risk factors and is further informed by combined idiosyncratic and market-stressed scenarios.

At March 31, 2020, BancShares’ regulatory capital ratios were well in excess of Basel III capital requirements to withstand these market-stressed scenarios with a total risk-based capital ratio of 13.7%, a Tier 1 risk-based capital ratio of 11.4%, a common equity Tier 1 ratio of 10.4%, a Tier 1 leverage ratio of 9.0%, and a capital conservation buffer of 5.4%, over twice the required level of 2.5%.

Further legislation is expected as the government continues to mitigate the economic impact on the crisis.

BANCSHARES’ COVID-19 CONTINUED MONITORING AND RESPONSE

BancShares ended second quarter in a very strong capital and liquidity position providing stability in navigating this crisis.

Our leadership team continues to ensure appropriate measures are in place to protect the welfare of our employees and soundness of the organization, while continuing to support our customers.

Approximately 95% of our branches have re-opened with enhanced safety protocols and our corporate locations remain at limited occupancy due to current virus trends.

At June 30, 2020 COVID-19 related loan extensions totaled approximately $5.6 billion in outstanding loan balances, representing approximately $166 million in payment deferrals.

The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter.

As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances, representing approximately $43 million in payment deferrals.

Of the accounts moving to active status, 91% have made their first scheduled payment and the majority of the remaining accounts are within 15 days of their payment date.

To date, we have not seen significant shifts in credit line utilization or declines in overall credit quality.

BancShares originated approximately 23,000 SBA-PPP loan requests with an outstanding balance of $3.08 billion at June 30, 2020.

We have collected all $116.9 million in SBA-PPP related loan fees per the program terms.

These fees and related costs are deferred and are being recognized in interest income over the life of the loans.

Once the forgiveness requirements and procedures are finalized by the regulatory bodies, we anticipate accelerated recognition of the fee income as borrower requests are processed and loans are forgiven.

SBA-PPP LOANS BY LOAN SIZE

(Dollars in thousands)

Loan Size $ of Loans % of Loans $

Less than $150,000 $ 853,103 27.7 %

$150,000 to $2,000,000 1,758,252 57.0

Greater than $2,000,000 473,194 15.3

Total $ 3,084,549 100.0 %

Strong Liquidity and Capital Position

We maintain a strong level of liquidity.

As of June 30, 2020, liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately $8.04 billion representing 16.8% of consolidated assets as of June 30, 2020.

In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.68 billion in the form of Federal Home Loan Bank (“FHLB”) borrowing capacity, Federal Reserve Discount Window availability, federal funds lines and a committed line of credit.

At June 30, 2020, BancShares’ regulatory capital ratios were well in excess of Basel III capital requirements with a total risk-based capital ratio of 13.6%, a Tier 1 risk-based capital ratio of 11.4%, a common equity Tier 1 ratio of 10.3%, a Tier 1 leverage ratio of 8.1% and a capital conservation buffer of 5.4%, over twice the required level of 2.5%.

SIGNIFICANT EVENTS IN 2020

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Upon adoption, BancShares recorded a net decrease of $37.9 million in the Allowance for Credit Losses (“ACL”) which included a decrease of $56.9 million in the ACL on non-purchased credit deteriorated (“non-PCD”) loans, offset by an increase of $19.0 million in the ACL on purchased credit deteriorated (“PCD”) loans.

The $56.9 million change in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in an increase in retained earnings of $36.9 million .

The $19.0 million increase in the ACL on PCD loans resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings.

The $56.9 million change in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in a net increase in retained earnings of $36.9 million.

The $19.0 million increase in the ACL on PCD loans was a reclassification of the PCD credit discount and resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings.

Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co.

and its bank subsidiary, Gwinnett Community Bank, into FCB.

On April 17, 2020, FCB completed the sale of three branches to Select Bank & Trust Company (“Select Bank”), which were originally acquired from Entegra Bank on December 31, 2019.

FINANCIAL PERFORMANCE SUMMARY

First Quarter Highlights

Net income for the first quarter of 2020 totaled $57.2 million , a decrease of $54.2 million , or 48.7% compared to the same quarter in 2019 .

Net income per share common shares decreased $4.21 , or 43.6% , to $5.46 in the first quarter of 2020 , from $9.67 per share during the same period in 2019 .

First quarter 2020 earnings were impacted by a $51.4 million ($39.7 million net of tax) decline in fair value in the equity securities portfolio, as well as a $21.5 million ($16.6 million net of tax) additional provision expense for the potential impact of COVID-19.

Return on average assets for the first quarter of 2020 was 0.57% , down from 1.27% in the first quarter of 2019 .

Return on average equity for the first quarter of 2020 was 6.24% , down from 12.86% in the the first quarter of 2019 .

The impact of the adjustments to net income described above reduced the first quarter ROA and ROE by 0.56% and 6.14%, respectively.

Net interest income totaled $338.4 million for the first quarter of 2020 , an increase of $17.9 million , or 5.6% compared to the same quarter in 2019 .

The taxable-equivalent net interest margin (“NIM”) was 3.55% for the first quarter of 2020 , down from 3.86% for the first quarter in 2019 .

The allowance for credit losses was $209.3 million at March 31, 2020, compared to $225.1 million at December 31, 2019.

The $15.8 million change was due primarily to the $37.9 million reduction in the allowance as a result of adopting ASC 326, partially offset by a $21.5 million increase as a result of COVID-19.

Noninterest income for the first quarter of 2020 totaled $64.0 million , a decrease of $39.7 million , or 38.3% compared to the same quarter of 2019 .

Noninterest expense was $300.0 million for the first quarter of 2020, compared to $267.7 million during the same quarter of 2019, an increase of $32.3 million or 12.1%.

Total loans grew to $29.24 billion , an increase of $359.5 million , or 5.0% on an annualized basis, since December 31, 2019 .

The net charge-off ratio was 0.10% for the first quarter of 2020 , down from 0.11% for the same quarter in 2019 .

Total deposits grew to $35.35 billion , an increase of $915.5 million , or 10.7% on an annualized basis, since December 31, 2019 .

Excluding acquired deposits, total deposits increased $697.5 million since December 31, 2019, or by 8.1% on an annualized basis.

Second Quarter Highlights

• Net income for the second quarter of 2020 totaled $153.8 million, an increase of $34.4 million, or 28.8% compared to the same quarter in 2019.

Net income available to common shareholders totaled $149.0 million.

Net income per common share increased $4.18, or 39.6%, to $14.74 in the second quarter of 2020, from $10.56 per share during the same period in 2019.

Second quarter 2020 earnings were impacted by positive changes in the fair value of the equity securities portfolio totaling $64.6 million, interest and fee income related to SBA-PPP loans of $19.0 million and realized gains on the sale of available for sale securities of $13.8 million, partially offset by an increase in provision expense of $15.4 million, primarily related to the potential impacts of COVID-19, and a decrease in net interest income, excluding the impact of SBA-PPP loans, of $9.0 million.

• Return on average assets for the second quarter of 2020 was 1.36%, up from 1.29% in the second quarter of 2019.

Return on average equity for the second quarter of 2020 was 16.43%, up from 13.50% in the the second quarter of 2019.

• Net interest income totaled $337.4 million for the second quarter of 2020, an increase of $10.0 million, or 3.1% compared to the same quarter in 2019.

The taxable-equivalent net interest margin (“NIM”) was 3.14% for the second quarter of 2020, down 63 basis points from 3.77% for the second quarter in 2019.

• Noninterest income for the second quarter of 2020 totaled $165.4 million, an increase of $58.5 million, or 54.8% compared to the same quarter of 2019 predominantly due to positive changes on the fair value of the equity securities portfolio.

• Noninterest expense was $291.7 million for the second quarter of 2020, compared to $273.4 million during the same quarter of 2019, an increase of $18.3 million or 6.7%.

• Total loans grew to $32.42 billion, an increase of $3.18 billion, or by 43.7% on an annualized basis, since March 31, 2020, primarily due to SBA-PPP loan originations of $3.08 billion.

Excluding SBA-PPP loans and loans divested in the quarter, total loans and leases grew $203.0 million, or by 2.8% on an annualized basis.

The net charge-off ratio was 0.09% for the second quarter of 2020, down from 0.11% for the same quarter in 2019.

• Total deposits grew to $41.48 billion, an increase of $6.13 billion, or by 69.8% on an annualized basis, since March 31, 2020, including $3.51 billion of estimated combined deposits related to SBA-PPP loans and consumer stimulus checks.

Excluding SBA-PPP and consumer related stimulus deposits and deposits divested in the quarter, total deposits grew $2.80 billion, or by 31.9% on an annualized basis.

• BancShares repurchased 346,000 shares of its Class A common stock during the second quarter of 2020 totaling $127.0 million.

At June 30, 2020, BancShares remained well capitalized with a total risk-based capital ratio of 13.6%, a Tier 1 risk-based capital of 11.4%, a common equity Tier 1 ratio of 10.3%, and a leverage ratio of 8.1%.

Year to Date Highlights

• Net income for the six months ended June 30, 2020 totaled $211.0 million, a decrease of $19.8 million, or 8.6% compared to the same period of 2019.

Net income available to common shareholders totaled $206.2 million.

Earnings per share decreased $0.19, or 0.9%, to $20.04 for the six months ended June 30, 2020, from $20.23 per share during the same period in 2019.

• Return on average assets for the six months ended June 30, 2020 was 0.98%, down 30 basis points compared to the same period in 2019.

Return on average equity for the six months ended June 30, 2020 was 11.40%, down 179 basis points compared to the same period in 2019.

• Net interest income for the six months ended June 30, 2020, was $675.8 million, an increase of $28.0 million, or 4.3% compared to the same period of 2019.

The taxable-equivalent NIM was 3.33% for the six months ended June 30, 2020, down 48 basis points from 3.81% during the same period of 2019.

• The allowance for credit losses was $222.5 million at June 30, 2020, compared to $225.1 million at December 31, 2019.

The $2.7 million change was due primarily to the $37.9 million reduction in the allowance as a result of adopting ASC 326, partially offset by a $36.1 million reserve build relating to potential COVID-19 impact.

• Total loans grew to $32.42 billion, an increase of $3.54 billion since December 31, 2019.

The net growth from recent acquisitions and divestitures totaled $12.3 million and growth of $3.08 billion was related to loans originated through the SBA-PPP.

Excluding acquired and SBA-PPP loans, total loans increased $440.1 million, or by 3.1% on an annualized basis.

The net charge-off ratio was 0.10% for the six months ended June 30, 2020, a 1 basis point decrease compared to the same period of 2019.

• Total deposits grew to $41.48 billion, an increase of $7.05 billion since December 31, 2019.

This growth includes $2.99 billion of reciprocal deposits from SBA-PPP (estimated at the time of funding) and $526.0 million from government stimulus deposits (estimated at time of issuance) as well as $43.0 million of net deposits related to acquisition and divestiture.

Excluding the cumulative impact of these deposits total deposits grew $3.49 billion, or by 20.4% on an annualized basis.

• BancShares repurchased 695,390 shares of its Class A common stock during the six months ended June 30, 2020 totaling $286.7 million.

• During the first quarter of 2020, BancShares successfully completed a $695 million capital raise which consisted of $350 million of subordinated notes and $345 million of Series A preferred stock.

BancShares repurchased 349,390 shares of its Class A common stock during the first quarter of 2020 totaling $159.7 million .

At March 31, 2020 , BancShares remained well capitalized with a total risk-based capital ratio of 13.7% , a Tier 1 risk-based capital of 11.4% , a common equity Tier 1 ratio of 10.4% , and a leverage ratio of 9.0% .

SELECTED QUARTERLY DATA

(Dollars in thousands, except share data)

2020 2019 (1)

Six months ended June 30

Second First Fourth Third Second

(Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter 2020 2019

SUMMARY OF OPERATIONS

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Income before income taxes 190,565 74,085 131,528 160,164 155,628 264,650 300,356

Net interest income, taxable equivalent

Income taxes 36,779 16,916 29,654 35,385 36,269 53,695 69,638

Net income 153,786 57,169 101,874 124,779 119,359 210,955 230,718

Net income available to common shareholders $ 148,996 $ 57,169 $ 101,874 $ 124,779 $ 119,359 $ 206,165 $ 230,718

PER COMMON SHARE DATA

Cash dividends

Net income $ 14.74 $ 5.46 $ 9.55 $ 11.27 $ 10.56 $ 20.04 $ 20.23

Cash dividends on common shares 0.40 0.40 0.40 0.40 0.40 0.80 0.80

Market price at period end (Class A) 405.02 332.87 532.21 471.55 450.27 405.02 450.27

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Loans and leases (2)

31,635,958 29,098,101 27,508,062 26,977,476 26,597,242 30,367,030 26,059,602

Interest-earning assets 42,795,781 38,004,341 36,032,680 35,293,979 34,674,842 40,400,061 34,056,935

Deposits 39,146,415 34,750,061 33,295,141 32,647,264 32,100,210 36,948,238 31,454,973

Interest-bearing liabilities 24,407,285 23,153,777 20,958,943 20,551,393 20,397,445 23,780,042 20,028,489

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Long-term borrowings 1,275,928 961,132 467,223 384,047 371,843 1,118,042 358,110

Common shareholders' equity 3,648,284 3,625,975 3,570,872 3,580,235 3,546,041 3,637,129 3,528,549

Shareholders’ equity $ 3,988,225 $ 3,682,634 $ 3,570,872 $ 3,580,235 $ 3,546,041 $ 3,835,430 $ 3,528,549

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Total assets (1)

$ 47,866,194 $ 41,594,453 $ 39,824,496 $ 37,748,324 $ 37,655,094 $ 47,866,194 $ 37,655,094

Investment securities 9,508,476 8,845,197 7,173,003 7,167,680 6,695,578 9,508,476 6,695,578

Loans and leases 32,418,425 29,240,959 28,881,496 27,196,511 26,728,237 32,418,425 26,728,237

Deposits 41,479,245 35,346,711 34,431,236 32,743,277 32,719,671 41,479,245 32,719,671

Securities sold under customer repurchase agreements 740,276 540,362 442,956 522,195 544,527 740,276 544,527

Other short-term borrowings — 105,000 295,277 — — — —

Long-term borrowings 1,258,719 1,297,132 588,638 453,876 369,854 1,258,719 369,854

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Return on average assets (annualized) 1.36 % 0.57 % 1.05 % 1.32 % 1.29 % 0.98 % 1.28 %

Return on average shareholders’ equity (annualized)

Return on average common shareholders’ equity (annualized) 16.43 6.34 11.32 13.83 13.50 11.40 13.19

Net yield on interest-earning assets (taxable equivalent) 3.14 3.55 3.59 3.77 3.77 3.33 3.81

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Allowance for credit losses to total loans and leases (3) :

PCD 5.07 4.80 1.35 1.34 1.51 5.07 1.51

Non-PCD 0.61 0.64 0.77 0.82 0.83 0.61 0.83

Total 0.69 0.72 0.78 0.83 0.85 0.69 0.85

Ratio of total nonperforming assets to total loans, leases and other real estate owned (4)

0.77 0.79 0.58 0.57 0.56 0.77 0.56

Tier 1 risk-based capital ratio 11.38 11.43 10.86 11.80 12.03 11.38 12.03

4 unchanged sentences

Average loans and leases to average deposits 80.81 83.74 82.62 82.63 82.86 82.19 82.85

(1) We adopted ASC Topic 326 utilizing the modified retrospective approach.

(1) We adopted ASC Topic 326 (CECL) utilizing the modified retrospective approach.

We did not restate selected financial data for the quarters prior to 2020 presented above.

(2) Average loan and lease balances include PCD loans, non-PCD loans and leases, loans held for sale and nonaccrual loans and leases.

(3) Loans originated in relation to the SBA-PPP ($3.08 billion as of June 30, 2020) do not have a recorded ACL.

As of June 30, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.68% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.76%.

(4) Upon adoption of ASC 326, we dissolved pooling of PCI loans allowed under ASC 310-30.

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As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools.

Of these nonaccrual loans, $35.9 million were outstanding as of June 30, 2020.

BUSINESS COMBINATIONS

Community Financial Holding Co.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co.

Community Financial Holding Company, Inc.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Company, Inc.

(“Community Financial”) and its bank subsidiary, Gwinnett Community Bank, into FCB.

4 unchanged sentences

Entegra Financial Corp.

On April 17, 2020, FCB and Select Bank completed the sale of three North Carolina branches located in Highlands, Sylva and Franklin.

FCB was required to divest these branches, other assets and liabilities in order to obtain regulatory approval for the merger of Franklin, North Carolina-based Entegra Entegra and its bank subsidiary, Entegra Bank, completed in the fourth quarter of 2019.

The assets and liabilities of the branches divested are recorded on the Consolidated Balance Sheets and in the related Unaudited Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $108.8 million, $1.9 million, and $185.3 million, respectively as of March 31, 2020.

The Select Bank purchase price, of the divested branches, included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank.

FCB completed the transaction with Select Bank on April 17, 2020.

FDIC-Assisted Transactions

BancShares completed fourteen FDIC-assisted transactions between 2009 and 2017.

On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp.

(“Entegra”) and its bank subsidiary, Entegra Bank.

In order to obtain regulatory approval, FCB entered into an agreement for Select Bank to purchase three of our North Carolina branches, located in Highlands, Sylva and Franklin.

On April 17, 2020, FCB completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with a fair value of $110.1 million, $2.1 million and $184.8 million, respectively.

The Select Bank purchase price for the divested branches included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank.

Federal Deposit Insurance Corporation Assisted Transactions

BancShares completed fourteen Federal Deposit Insurance Corporation (“FDIC”) assisted transactions between 2009 and 2017.

Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.

As of March 31, 2020 , shared-loss protection remains for single family residential loans acquired in the amount of $42.4 million .

The shared-loss agreement for two of the FDIC-assisted transactions include a provision related to a payment that may be owed to the FDIC at the termination of the agreement (the “clawback liability”) .

As of March 31, 2020 and December 31, 2019 , the estimated clawback liability was $14.7 million and $112.4 million , respectively.

BancShares issued a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions.

As of June 30, 2020, shared-loss protection remains for single family residential loans acquired in the amount of $38.0 million.

The shared-loss agreement for two of the FDIC-assisted transactions included a provision related to a payment owed to the FDIC at the termination of the agreement (the “clawback liability”) .

As of June 30, 2020 and December 31, 2019, the estimated clawback liability was $15.0 million and $112.4 million, respectively, as a result of a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions.

The remaining clawback liability payment date is March 2021.

CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS

Three months ended

March 31, 2020

March 31, 2019

(Dollars in thousands)

Three months ended June 30

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(Dollars in thousands) Balance Expense Rate Balance Expense Rate

Loans and leases $ 31,635,958 $ 326,618 4.10 % $ 26,597,242 $ 303,803 4.54 %

Investment securities:

Treasury 206,575 679 1.32 1,150,001 6,770 2.36

Government agency 657,405 1,428 0.87 383,700 3,034 3.16

9 unchanged sentences

Other real estate owned 55,554 4,646

Other assets 1,247,057 1,047,813

Total assets $ 45,553,502 $ 37,007,430

Interest-bearing deposits:

Checking with interest $ 8,562,145 $ 1,310 0.06 % $ 7,485,693 $ 1,571 0.08 %

Savings 2,846,557 312 0.04 2,658,974 527 0.08

Money market accounts 7,618,883 6,519 0.34 5,912,646 5,498 0.37

12 unchanged sentences

Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale.

Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the three months ended March 31, 2020 and 2019 .

The taxable-equivalent adjustment was $774 and $900 for the three months ended March 31, 2020 and 2019 , respectively.

The taxable-equivalent adjustment was $571 thousand and $853 thousand for the three months ended June 30, 2020 and 2019, respectively.

CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS

Six months ended June 30

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(Dollars in thousands) Balance Expense Rate Balance Expense Rate

Loans and leases $ 30,367,030 $ 652,774 4.27 % $ 26,059,602 $ 595,372 4.56 %

Investment securities:

Treasury 253,176 2,356 1.87 1,178,955 13,267 2.27

Government agency 689,330 5,548 1.61 335,375 5,343 3.19

Mortgage-backed securities 6,808,190 59,239 1.74 5,015,089 56,964 2.27

Corporate bonds 252,377 6,259 4.96 146,405 3,868 5.28

Other investments 187,740 2,914 3.12 121,832 915 1.51

Total investment securities 8,190,813 76,316 1.86 6,797,656 80,357 2.37

Overnight investments 1,842,218 5,071 0.55 1,199,677 13,669 2.30

Total interest-earning assets 40,400,061 734,161 3.62 34,056,935 689,398 4.05

Cash and due from banks 352,475 288,592

Premises and equipment 1,256,268 1,210,306

Allowance for credit losses (198,621) (226,763)

Other real estate owned 54,455 46,669

Other assets 1,236,516 963,097

Total assets $ 43,101,154 $ 36,338,836

Interest-bearing deposits:

Checking with interest $ 8,375,564 $ 3,011 0.07 % $ 7,521,642 $ 2,948 0.08 %

Savings 2,720,213 597 0.04 2,591,633 733 0.06

Money market accounts 7,317,735 15,628 0.43 5,880,372 9,639 0.33

Time deposits 3,580,097 22,874 1.28 3,109,045 18,764 1.22

Total interest-bearing deposits 21,993,609 42,110 0.39 19,102,692 32,084 0.34

Securities sold under customer repurchase agreements 566,737 841 0.30 547,318 974 0.36

Other short-term borrowings 101,654 1,052 2.05 20,369 278 2.72

Long-term borrowings 1,118,042 13,019 2.30 358,110 6,489 3.60

Total interest-bearing liabilities 23,780,042 57,022 0.48 20,028,489 39,825 0.40

Noninterest-bearing deposits 14,954,629 12,352,281

Other liabilities 531,053 429,517

Shareholders’ equity 3,835,430 3,528,549

Total liabilities and shareholders’ equity $ 43,101,154 $ 36,338,836

Interest rate spread 3.14 % 3.65 %

Net interest income and net yield on interest-earning assets $ 677,139 3.33 % $ 649,573 3.81 %

Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale.

The taxable-equivalent adjustment was $1.3 million and $1.8 million for the six months ended June 30, 2020 and June 30, 2019, respectively.

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

Three months ended March 31, 2020

Three months ended June 30, 2020 Six months ended June 30, 2020

Change from prior year period due to:

(Dollars in thousands)

Change from prior year period due to:

(Dollars in thousands) Volume (1)

Yield/Rate (1)

Total Change Volume (1)

Yield/Rate (1)

Loans and leases $ 60,243 $ (37,428) $ 22,815 $ 96,223 $ (38,821) $ 57,402

Investment securities:

Treasury (5,558) (533) (6,091) (10,423) (488) (10,911)

Government agency 2,164 (3,770) (1,606) 5,639 (5,434) 205

7 unchanged sentences

Checking with interest $ 221 $ (482) $ (261) $ 327 $ (264) $ 63

Savings 36 (251) (215) 35 (171) (136)

Money market accounts 1,567 (546) 1,021 2,303 3,686 5,989

9 unchanged sentences

Net Interest Income and Margin (Taxable-Equivalent Basis)

First Quarter 2020 compared to First Quarter 2019

Net interest income for the first quarter of 2020 totaled $338.4 million , an increase of $17.9 million , or 5.6% , compared to the first quarter of 2019 .

The taxable-equivalent NIM was 3.55% in the first quarter of 2020 , a decrease of 31 basis points from the same quarter in the prior year.

The increase in net interest income was primarily due to an increase of $34.6 million in interest earned on loans from loan growth, partially offset by increases in interest expense on deposits of $11.3 million and borrowings of $3.4 million.

The primary drivers of the margin decline were an increase in the rates paid on interest-bearing deposits, largely in time deposits and money market accounts, and a decline in the yield on interest earning assets.

Average interest-earning assets increased by $4.57 billion to $38.00 billion , compared to the first quarter of 2019 .

The primary drivers for this change were higher average loan balances which increased $3.58 billion , due to contributions from both recent acquisitions and organic loan growth, particularly within the commercial and residential mortgage portfolios, higher average investment securities of $662.5 million and higher average overnight investments of $327.6 million .

The yield on interest-earning assets decreased by 18 basis points to 3.88 % when compared to the first quarter of 2019 .

Second Quarter 2020 compared to Second Quarter 2019

Net interest income for the second quarter of 2020 totaled $337.4 million, an increase of $10.0 million, or 3.1%, compared to the second quarter of 2019.

The taxable-equivalent NIM was 3.14% in the second quarter of 2020, a decrease of 63 basis points from the same quarter in the prior year.

The increase in net interest income was primarily due to an increase of $22.8 million in interest earned on loans due to loan growth, partially offset by an increase in interest expense on borrowings of $3.7 million.

Interest and fee income related to SBA-PPP loans totaled $19.0 million in the second quarter of 2020.

The primary drivers of the margin decline were lower yields on interest-earning assets, partially offset by a decrease in the rates paid on borrowings and interest-bearing deposits, largely in time deposits and money market accounts.

Average interest-earning assets increased by $8.12 billion to $42.80 billion, compared to the second quarter of 2019.

The primary drivers for this change were higher average loan balances which increased $5.04 billion, due to contributions from both recent acquisitions and loans originated under the SBA-PPP, as well as organic loan growth, higher average investment securities of $2.12 billion and higher average overnight investments of $957.3 million.

The yield on interest-earning assets decreased by 66 basis points to 3.38% when compared to the second quarter of 2019.

The yield on loans and leases decreased to 4.10%, or by 44 basis points, primarily due to lower yields on commercial and home equity loans mostly due to downward rate resets on variable rate loans and lower rates on originations.

1 unchanged sentence

The yield decrease on overnight investments was primarily due to a lower federal funds rate, while lower yields on government agency and mortgage-backed securities were the primary reasons for the investment securities yield decline.

Average interest-bearing liabilities increased by $3.50 billion to $23.15 billion , compared to the first quarter of 2019 .

This increase was primarily due to an increase in average interest-bearing deposit balances of $2.79 billion driven by contributions from recent acquisitions and organic deposit growth, as well as an increase in average long-term borrowings of $616.9 million due to due to sub debt issuance and higher other borrowings in the quarter.

Rates on interest-bearing liabilities increased by 20 basis points to 0.54 %, primarily due to increased rates paid on time deposits and money market accounts.

Average interest-bearing liabilities increased by $4.01 billion to $24.41 billion, compared to the second quarter of 2019.

This increase was primarily due to an increase in average interest-bearing deposit balances of $3.00 billion driven by contributions from organic deposit growth and recent acquisitions, including reciprocal deposits from SBA-PPP loans, as well as an increase in average long-term borrowings of $904.1 million.

Rates on interest-bearing liabilities decreased by 4 basis points to 0.42%, primarily due to decreased rates paid on borrowings and time deposits, checking with interest deposits, and money market accounts.

Six Months of 2020 compared to Six Months of 2019

Net interest income for the six months ended June 30, 2020, was $675.8 million, an increase of $28.0 million, or 4.3%, compared to the same period of 2019.

The taxable-equivalent NIM was 3.33% for the six months ended June 30, 2020, a decrease of 48 basis points from the same period of 2019.

Average year-to-date interest-earning assets for the six months ended June 30, 2020, increased by $6.34 billion to $40.40 billion, compared to the same period in 2019.

This increase was primarily due to a $4.31 billion increase in average outstanding loans due the impact of recent acquisitions and organic loan growth, including growth from loans originated under the SBA-PPP.

This increase was coupled with increases in average investment securities of $1.39 billion and average overnight investments of $642.5 million.

The yield on interest-earning assets decreased by 43 basis points to 3.62% for the six months ended June 30, 2020, compared to the same period in 2019.

The yield on loans and leases decreased by 29 basis points primarily due to decreases in yields on commercial and residential loans.

The yield on overnight investments and the investment securities portfolio decreased by 175 basis points and 51 basis points, respectively.

The lower federal funds rate was the primary driver for the yield decrease on overnight investments, while the lower yields on mortgage-backed securities, government agency securities, and U.S.

Treasury securities were the primary drivers of the investment securities yield decline.

Average year-to-date interest-bearing liabilities for the six months ended June 30, 2020 increased by $3.75 billion to $23.78 billion, compared to the same period in 2019.

This increase was primarily due to a $2.89 billion increase in average interest-bearing deposit balances driven by recent acquisitions and organic growth, including reciprocal deposits related to SBA-PPP loans.

The rate paid on interest-bearing liabilities increased by 8 basis points to 0.48% for the six months ended June 30, 2020 compared to same period in 2019.

The rate paid on interest-bearing deposits increased by 5 basis points due primarily to increased rates on time deposits, checking with interest deposits and money market accounts.

Provision for Credit Losses

BancShares recorded net provision expense of $28.4 million for the three months ended March 31, 2020 as compared to $11.8 million , for the same period in 2019.

The increase in the current period was primarily due to conditions related to COVID-19 and the potential impact on BancShares’ portfolio loan losses.

Loss estimates consider the potential impact of slower economic activity and increasing unemployment, as well as potential mitigating effects from the government stimulus and loan modification programs.

The increase in provision was mostly related to commercial and industrial loans and commercial real estate.

BancShares recorded net provision expense of $20.6 million for the three months ended June 30, 2020 compared to $5.2 million for the same period in 2019.

BancShares recorded a net provision expense for credit losses of $48.9 million for the six months ended June 30, 2020, compared to $16.9 million for the six months ended June 30, 2019.

The increase for both the three and six month periods was primarily COVID-19 related as loss estimates consider the impact of slower economic activity and elevated unemployment, as well as potential mitigants due to unprecedented government stimulus and loan accommodations.

The quarter and year-to-date provision expense includes $14.6 million and $36.1 million, respectively, in additions to the ACL specifically related to COVID-19.

Noninterest Income

NONINTEREST INCOME

Three months ended

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

March 31, 2020

March 31, 2019

Service charges on deposit accounts $ 17,522 $ 25,790 $ 43,935 $ 50,855

5 unchanged sentences

Insurance commissions 3,189 2,854 6,877 6,145

Marketable equity securities (losses) gains, net

ATM income 1,395 1,625 2,817 3,136

Marketable equity securities gains, net 64,570 3,144 13,162 14,472

Realized gains on investment securities available for sale, net 13,752 5,719 33,547 5,719

Other 2,697 5,034 3,322 8,953

Total noninterest income $ 165,402 $ 106,875 $ 229,413 $ 210,538

Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels.

Noninterest income is an essential component of our total revenue and is critical to our profitability level.

The primary sources of noninterest income consist of fees and service charges generated from deposit accounts, cardholder and merchant services, wealth management services, and mortgage lending and servicing.

Noninterest income for the first quarter of 2020 was $64.0 million , compared to $103.7 million for the same period of 2019 , a decrease of $39.7 million , or 38.3% .

Noninterest income for the second quarter of 2020 was $165.4 million, compared to $106.9 million for the same period of 2019, an increase of $58.5 million, or 54.8%.

The most significant components of the change were as follows:

A decline in the market value of our equity securities portfolio resulted in a $62.7 million reduction in noninterest income.

Realized gains on investment securities available for sale were $19.8 million for the first quarter of 2020, while no gains were recognized in the first quarter of 2019.

Mortgage income increased by $1.6 million primarily due to favorable interest rate movements and increased origination volume.

Noninterest income related to increased production was partially offset by a mortgage servicing rights impairment of $3.0 million recorded due to declining mortgage rates and an expected increase in prepayment activity.

Cardholder services increased by $1.5 million primarily due to volume increases and higher fee income.

Wealth management services increased by $1.4 million primarily due to an increase in average managed assets.

• Marketable equity securities gains increased by $61.4 million.

The gains of $64.6 million consisted of realized gains of $37.0 million and unrealized gains of $27.6 million.

• Gains on sales of investment securities increased by $8.0 million.

• Mortgage income increased by $4.8 million primarily due to increased origination volume brought about by lower mortgage rates.

The production-related income was partially offset by mortgage servicing rights impairment of $1.1 million due to declining mortgage rates.

• Service charges on deposit accounts declined by $8.3 million primarily due to decreased customer activity and efforts to aid our customers during the COVID-19 pandemic.

• Wealth management services decreased by $2.2 million primarily due to decreased sales volume driven by branch closures in response to local government mandates and low interest rates.

Noninterest income was $229.4 million for the first six months of 2020, compared to $210.5 million for the same period of 2019, an increase of $18.9 million, or 9.0%.

The most significant components of the change were as follows:

• Gains on sales investment securities increased by $27.8 million.

• Mortgage income increased by $6.3 million primarily due to increased origination volume brought about by lower mortgage rates.

The production-related income was partially offset by mortgage servicing rights impairment of $4.0 million recorded due to declining mortgage rates.

• Service charges on deposit accounts declined by $6.9 million primarily due to decreased customer activity and efforts to aid our customers during the COVID-19 pandemic.

• Other noninterest income decreased $5.6 million primarily due to acquired recoveries on PCD loans, formerly reported in noninterest income, now being recorded as a component of the allowance for credit losses .

Noninterest Expense

NONINTEREST EXPENSE

Three months ended

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

March 31, 2020

March 31, 2019

Salaries and wages $ 146,633 $ 136,526 $ 291,888 $ 268,947

10 unchanged sentences

Core deposit intangible amortization 3,672 4,233 7,531 8,480

Other 22,623 20,951 48,613 42,940

Total noninterest expense $ 291,679 $ 273,397 $ 591,650 $ 541,054

The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense.

Noninterest expense was $300.0 million during the first quarter of 2020 , compared to $267.7 million for the same period in 2019 , an increase of $32.3 million , or 12.1% .

Noninterest expense was $291.7 million during the second quarter of 2020, compared to $273.4 million for the same period in 2019, an increase of $18.3 million, or 6.7%.

The most significant components of the change were as follows:

Personnel expense increased $18.8 million primarily due to an increase in salaries and wages as a result of net staff additions, including personnel from acquisitions (impact of $5.8 million), and merit increases.

Other noninterest expense increased by $4.0 million primarily due to an increase in pension costs.

Processing fees paid to third parties increased $3.3 million primarily due to the expansion of digital banking offerings.

Merger-related expenses increased by $2.5 million due to an increase in acquisition activity, particularly related to the acquisitions of Entegra and Community Financial.

Equipment expense increased by $1.1 million primarily due to higher depreciation on hardware and software additions.

Income tax expense was $16.9 million and $33.4 million for the first quarter of 2020 and first quarter of 2019 , respectively, representing effective tax rates of 22.8% and 23.1% during the periods.

• Personnel expense increased $10.3 million primarily due to an increase in salaries and wages as a result of merit increases and net staff additions, including personnel from acquisitions.

• Processing fees paid to third parties increased $3.5 million primarily due to the expansion of digital banking offerings as well as processing fees related to recent acquisitions.

• Occupancy expense increased $2.7 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19 as well as increased building repairs.

• Other noninterest expense increased by $1.7 million primarily due to higher provision related to unfunded loan commitments as a result of potential economic impacts of COVID-19 and increased pension costs due to a lower discount rate.

Noninterest expense was $591.7 million for the first six months of 2020, compared to $541.1 million for the same period in 2019, an increase of $50.6 million, or 9.4%.

The most significant components of the change were as follows:

• Personnel expense increased by $29.1 million primarily due to an increase in salaries and wages as a result of merit increases and increased headcount from recent acquisitions.

• Processing fees paid to third parties increased $6.8 million primarily due to the expansion of digital banking offerings as well as processing fees related to recent acquisitions.

• Other noninterest expense increased $5.7 million primarily due to higher provision related to unfunded loan commitments as a result of potential economic impacts of COVID-19 and increased pension costs due to a lower discount rate.

• Merger-related expenses increased $2.8 million primarily due to costs related to Entegra.

• Occupancy expense increased $2.4 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19.

Income tax expense was $36.8 million and $36.3 million for the second quarter of 2020 and 2019, respectively, representing effective tax rates of 19.3% and 23.3% during the periods.

Income tax expense was $53.7 million and $69.6 million for the six months ended June 30, 2020 and 2019, respectively, representing effective tax rates of 20.3% and 23.2% during the periods.

The effective tax rate for the second quarter 2020 was favorably impacted by $6.9 million due to BancShares’ decision to utilize an allowable alternative for computing its 2020 federal income tax liability.

Without this alternative, the effective tax rate would have been approximately 23%.

The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax.

As a result of this favorable federal tax rate benefit, the effective tax rate for the remainder of 2020 is estimated to be approximately 21%.

The actual 2020 effective tax rate will depend upon the nature and amount of future income and expenses as well as transactions with discrete tax effects.

We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities.

4 unchanged sentences

We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning assets totaled $38.85 billion and $37.23 billion at March 31, 2020 and December 31, 2019 , respectively.

The $1.62 billion increase was primarily composed of a $1.67 billion increase in investment securities and a $359.5 million increase in loans and leases, partially offset by a $419.3 million decrease in overnight investments.

Interest-earning assets totaled $45.14 billion and $37.23 billion at June 30, 2020 and December 31, 2019, respectively.

The $7.91 billion increase was primarily composed of a $3.54 billion increase in loans and leases, a $2.34 billion increase in investment securities and a $2.00 billion increase in overnight investments.

Investment Securities

6 unchanged sentences

See Note C - Investments for additional disclosures.

The fair value of investment securities totaled $8.85 billion at March 31, 2020 , an increase of $1.67 billion compared to December 31, 2019 .

The increase in the portfolio was primarily attributable to investment securities purchases of $5.32 billion , partially offset by sales of $3.16 billion and maturities/paydowns of $587.1 million .

As of March 31, 2020 , investment securities available for sale had a net pre-tax unrealized gain of $132.6 million , compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019 .

After evaluating the available for sale securities with unrealized losses, management concluded that the unrealized losses relate to changes in interest rates relative to when the securities were purchased, and therefore, no allowance for credit losses was needed at March 31, 2020 .

The carrying value of investment securities totaled $9.51 billion at June 30, 2020, an increase of $2.34 billion compared to December 31, 2019.

The increase in the portfolio was primarily attributable to investment securities purchases of $6.79 billion, partially offset by sales of $3.44 billion and maturities and paydowns of $1.20 billion.

As of June 30, 2020, investment securities available for sale had a net pre-tax unrealized gain of $146.9 million, compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019.

Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income (“AOCI”), net of deferred taxes.

1 unchanged sentence

See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption.

As of March 31, 2020 and January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities

As of January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities

INVESTMENT SECURITIES

March 31, 2020

December 31, 2019

(Dollars in thousands)

Composition (1)

June 30, 2020 December 31, 2019

(Dollars in thousands) Composition (1)

value Composition (1)

Investment securities available for sale

Treasury 7.9 % $ 754,350 $ 754,586 5.7 % $ 409,397 $ 409,999

Government agency 5.7 549,673 545,709 9.5 684,085 682,772

7 unchanged sentences

Residential mortgage-backed securities 7.5 693,143 709,339 — — —

Commercial mortgage-backed securities 0.8 78,729 78,980 — — —

Other — 3,006 3,006 0.4 30,996 30,996

Total investment securities held to maturity 8.3 774,878 791,325 0.4 30,996 30,996

2 unchanged sentences

Loans and Leases

Loans and leases were $29.24 billion at March 31, 2020 , a net increase of $359.5 million , representing annualized growth of 5.0% since December 31, 2019 .

This increase was driven by a $357.8 million net increase in the non-PCD portfolio as well as a $1.6 million net increase in the PCD loan portfolio.

The net increase in the non-PCD portfolio was due to organic growth primarily in our commercial segments as well as $111.1 million in loans acquired from Community Financial.

The net increase in PCD loans was primarily due to $24.2 million in loans from Community Financial as well as the adoption of ASC 326 resulting in a $19.0 million increase, partially offset by a $22.5 million decrease in loans from prior acquisitions.

Excluding 2020 acquired loans, total loans grew by 3.1% on an annualized basis.

Loans for held for sale were $107.9 million at June 30, 2020, a net increase of $40.0 million since December 31, 2019.

The increase is primarily due to originations of $503.2 million driven by low interest rates, partially offset by sales of $474.2 million.

Loans and leases held for investment were $32.42 billion at June 30, 2020, a net increase of $3.54 billion, representing annualized growth of 24.6% since December 31, 2019.

This increase was driven by a $3.56 billion net increase in the non-PCD portfolio offset by a $28.1 million net decrease in the PCD loan portfolio.

The net increase in the non-PCD portfolio was due to $3.08 billion related to SBA-PPP originations as well as organic growth primarily in our commercial segments.

The net decrease in PCD loans was primarily due to a $69.2 million decline in loans from prior acquisitions, partially offset by $22.1 million in acquired PCD loans during 2020 along with a 19.0 million increase from the adoption of ASC 326.

Excluding 2020 loans related to acquisitions and divestitures and SBA-PPP loans, total loans grew by 3.1% on an annualized basis.

BancShares reports non-PCD and PCD loan portfolios separately, and the non-PCD portfolio is further divided into commercial and consumer segments.

Non-PCD loans and leases at March 31, 2020 were $28.68 billion compared to non-PCI loans of $28.32 billion at December 31, 2019 , representing 98.1% of total loans at both period ends.

PCD loans at March 31, 2020 were $560.4 million , compared to $558.7 million of PCI loans at December 31, 2019 , representing 1.9% of loans at both period ends.

The discount related to acquired non-PCD loans and leases at March 31, 2020 and PCI loans and leases at December 31, 2019 was $28.3 million and $30.9 million , respectively.

The discount related to PCD loans at March 31, 2020 and PCI loans and leases at December 31, 2019 was $61.6 million and $88.2 million , respectively.

Non-PCD loans and leases at June 30, 2020 were $31.89 billion compared to non-PCI loans of $28.32 billion at December 31, 2019, representing 98.4% and 98.1% of total loans, respectively.

PCD loans at June 30, 2020 were $530.7 million, compared to $558.7 million of PCI loans at December 31, 2019, representing 1.6% and 1.9% of loans, respectively.

The discount related to acquired non-PCD loans and leases at June 30, 2020 and non-PCI loans and leases at December 31, 2019 was $25.8 million and $30.9 million, respectively.

The discount related to PCD loans at June 30, 2020 and PCI loans at December 31, 2019 was $54.7 million and $88.2 million, respectively.

The primary driver of the decrease in PCD discount is the adoption of ASC 326, which resulted in a reclassification of the credit portion of the loan discount to the ACL of $19.0 million.

During the three months ended March 31, 2020 and 2019 , accretion income on purchased non-PCD loans and leases was $2.5 million and $3.2 million , respectively.

During the three months ended March 31, 2020 and 2019 , interest and accretion income on purchased PCD loans and leases was $18.5 million and $17.8 million, respectively.

During the three months ended June 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $2.5 million and $3.4 million, respectively.

During the three months ended June 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $14.4 million and $11.9 million, respectively.

During the six months ended June 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $5.0 million and $6.7 million, respectively.

During the six months ended June 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $33.0 million and $29.9 million, respectively.

LOANS AND LEASES

(Dollars in thousands)

March 31, 2020

(Dollars in thousands) June 30, 2020

Construction and land development $ 1,012,365

2 unchanged sentences

Commercial and industrial and leases 4,650,839

SBA-PPP 3,084,549

Total commercial loans 22,156,874

6 unchanged sentences

Total non-PCD loans and leases 31,887,774

PCD loans 530,651

Total loans and leases 32,418,425

Less allowance for credit losses on loans and leases

Less allowance for credit losses (222,450)

Net loans and leases $ 32,195,975

(Dollars in thousands)

December 31, 2019

(Dollars in thousands) December 31, 2019

Construction and land development $ 1,013,454

2 unchanged sentences

Commercial and industrial and leases 4,403,792

Other 310,093

Total commercial loans 18,552,002

3 unchanged sentences

Construction and land development 357,385

Consumer 1,780,404

Total noncommercial loans 9,770,778

Total non-PCI loans and leases 28,322,780

PCI loans 558,716

Total loans and leases 28,881,496

2 unchanged sentences

ALLOWANCE FOR CREDIT LOSSES

The ACL was $209.3 million at March 31, 2020 , representing a decrease of $19.5 million since December 31, 2019 .

The ACL as a percentage of total loans and leases was 0.72% at March 31, 2020 , compared to 0.85% December 31, 2019 .

Upon adoption of ASC 326, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, partially offset by an increase of $19.0 million in the ACL on PCD loans.

The ACL was $222.5 million at June 30, 2020, representing a decrease of $2.7 million since December 31, 2019.

The ACL as a percentage of total loans and leases was 0.69% at June 30, 2020, compared to 0.78% December 31, 2019.

The ACL as a percentage of loans and leases excluding SBA-PPP loans, which have no recorded ACL, was 0.76% at June 30, 2020.

Upon adoption of ASC 326 on January 1, 2020, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, partially offset by an increase of $19.0 million in the ACL on PCD loans.

The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives.

2 unchanged sentences

The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality.

For the quarter ended March 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $21.5 million increase due to the potential economic impact of COVID-19 and its estimated impact on credit losses during the quarter.

Within our forecast period of 24 months , forecasts varied widely for key macroeconomic variables (unemployment, gross domestic product, home price index, and commercial real estate index) used in the ACL models.

Expected loss estimates considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs.

These loss estimates were also influenced by BancShares strong credit quality, historically low net charge-offs and recent credit trends, which remained stable through the quarter ended March 31, 2020.

At March 31, 2020 , the ACL allocated to non-PCD loans and leases was $182.3 million , or 0.64% of non-PCD loans and leases, compared to $217.6 million , or 0.77% , at December 31, 2019 .

For the period ended June 30, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $36.1 million reserve build due to the potential economic impact of COVID-19 and its estimated impact on credit losses.

Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years.

Assumptions revert to long term historic averages over a one year period.

Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index.

Our model results included baseline, adverse and upside scenarios, as well as management’s expectation of borrower performance based upon COVID-19 residual risk by industry and geography.

Expected loss estimates considered the potential impact of slower economic activity and elevated unemployment, as well as mitigating impacts from the government stimulus and loan modification programs.

At June 30, 2020, the ACL allocated to non-PCD loans and leases was $195.5 million, or 0.61% of non-PCD loans and leases, compared to $217.6 million, or 0.77%, at December 31, 2019.

The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.68% at June 30, 2020.

The decrease of 16 basis points since December 31, 2019 was primarily due to the adoption of ASC 326, partially offset by the forecasted potential economic impacts of the COVID-19 pandemic on expected credit losses.

At March 31, 2020 , the ACL for PCD loans totaled $26.9 million compared to $7.5 million at December 31, 2019 .

The adoption of ASC 326 resulted in a decrease of 18 basis points, while the COVID-19 impacts resulted in an increase of 11 basis points.

At June 30, 2020, the ACL for PCD loans totaled $26.9 million compared to $7.5 million at December 31, 2019.

The increase was primarily due the adoption of ASC 326.

Net charge-offs for loans and leases were $7.5 million during the first quarter of 2020 , compared to $6.7 million during the first quarter of 2019 .

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.10% and 0.11% for the first quarter of 2020 and 2019 , respectively.

Net charge-offs for loans and leases were $7.4 million during the second quarter of 2020, compared to $7.4 million during the second quarter of 2019.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.09% and 0.11% for the second quarter of 2020 and 2019, respectively.

The net charge-off ratio was 0.10% and 0.11% for the six months ended June 30, 2020 and 2019, respectively.

The ACL as of June 30, 2020, excluding SBA-PPP loans, covered approximately 7.5 times annualized year to date net charge-offs compared to 6.5 times at January 1, 2020 CECL adoption.

As part of ASC 326 adoption, BancShares made a policy not to measure an ACL for accrued interest receivable as our accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner.

Management reviewed this policy election during the second quarter of 2020 in light of the increase in accrued interest receivable and concluded the policy election remained appropriate due to trends in payments and extension activity.

Accrued interest receivable at June 30, 2020 was $175.5 million compared to $123.2 million at December 31, 2019 of which $139.8 million and $88.0 million related to outstanding accrued interest on the loan portfolio at June 30, 2020 and December 31, 2019, respectively.

The $51.8 million increase in accrued receivable on loans was due in part to the increases in loan balances, as well the volume of loans in deferred payment status.

At June 30, 2020 there were approximately $5.6 billion in active COVID-19 related loan extensions with an accrued interest receivable balance of approximately $63 million.

The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter.

As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances with an accrued interest receivable balance of approximately $15 million as a significant portion of the original payment extensions moved to active status.

ALLOWANCE FOR CREDIT LOSSES

Three months ended March 31, 2020

(Dollars in thousands)

Owner occupied commercial mortgage

Non-owner occupied commercial mortgage

and industrial and leases

development - consumer

Consumer auto

Consumer other

Three months ended June 30, 2020

(Dollars in thousands) Construction

- commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial

and industrial and leases Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total

Allowance for credit losses:

Balance at April 1 $ 2,290 $ 22,970 $ 16,531 $ 30,619 $ 38,366 $ 24,557 $ 1,140 $ 5,769 $ 40,101 $ 26,916 $ 209,259

Provision (credits) 4,705 (721) 5,542 (2,898) 4,909 2,211 486 4,042 2,034 242 20,552

Charge-offs (138) — (8) (3,869) (460) (495) — (1,255) (4,447) (1,392) (12,064)

Recoveries 49 240 84 781 57 367 14 342 1,607 1,162 4,703

Balance at June 30 $ 6,906 $ 22,489 $ 22,149 $ 24,633 $ 42,872 $ 26,640 $ 1,640 $ 8,898 $ 39,295 $ 26,928 $ 222,450

Three months ended June 30, 2019

(Dollars in thousands) Construction

- commercial Commercial

mortgage Other

real estate Commercial

and industrial and leases Other Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer PCD Total

Balance at April 1 $ 37,476 $ 45,281 $ 2,399 $ 57,025 $ 2,167 $ 16,987 $ 21,495 $ 2,473 $ 34,492 $ 8,980 $ 228,775

Provision (credits) (5,544) 3,714 (57) 2,699 (174) 371 (328) 277 4,877 (637) 5,198

Charge-offs (28) (89) — (3,422) (31) (478) (493) — (6,061) — (10,602)

Recoveries 40 56 — 599 221 52 447 — 1,797 — 3,212

Balance at June 30 $ 31,944 $ 48,962 $ 2,342 $ 56,901 $ 2,183 $ 16,932 $ 21,121 $ 2,750 $ 35,105 $ 8,343 $ 226,583

Six months ended June 30, 2020

(Dollars in thousands) Construction

- commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial

and industrial and leases Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total

Balance at December 31 $ 33,213 $ 36,444 $ 11,102 $ 61,610 $ 18,232 $ 19,702 $ 2,709 $ 4,292 $ 30,301 $ 7,536 $ 225,141

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Initial allowance on PCD loans — — — — — — — — — 1,193 1,193

Balance at March 31

Three months ended March 31, 2019

(Dollars in thousands)

and industrial and leases

- non - commercial

Charge-offs (138) (320) (8) (8,918) (1,260) (1,080) (70) (2,199) (9,817) (2,515) (26,325)

Recoveries 136 295 97 2,053 280 838 29 705 2,966 4,059 11,458

Balance at June 30 $ 6,906 $ 22,489 $ 22,149 $ 24,633 $ 42,872 $ 26,640 $ 1,640 $ 8,898 $ 39,295 $ 26,928 $ 222,450

Six months ended June 30, 2019

(Dollars in thousands) Construction

- commercial Commercial

mortgage Other

real estate Commercial

and industrial and leases Other Residential

mortgage Revolving

mortgage Construction

- non - commercial Consumer PCI Total

Balance at January 1 $ 35,270 $ 43,451 $ 2,481 $ 55,620 $ 2,221 $ 15,472 $ 21,862 $ 2,350 $ 35,841 $ 9,144 $ 223,712

Provision (credits) (3,425) 6,085 (140) 5,424 (672) 1,879 (119) 400 8,317 (801) 16,948

Balance at March 31

The reserve for unfunded loan commitments was $10.5 million and $1.1 million at March 31, 2020 and December 31, 2019 , respectively.

The increase in the reserve was primarily due to increases in the scope of off-balance sheet exposures considered in this estimate due to the provisions of ASC 326.

Charge-offs (72) (850) — (5,280) (31) (644) (1,456) — (12,423) — (20,756)

Recoveries 171 276 1 1,137 665 225 834 — 3,370 — 6,679

Balance at June 30 $ 31,944 $ 48,962 $ 2,342 $ 56,901 $ 2,183 $ 16,932 $ 21,121 $ 2,750 $ 35,105 $ 8,343 $ 226,583

The reserve for unfunded loan commitments was $13.7 million and $1.1 million at June 30, 2020 and December 31, 2019, respectively.

The increase was primarily due to increases in the scope of off-balance sheet exposures considered due to the provisions of ASC 326.

ALLOWANCE FOR CREDIT LOSSES RATIOS

Three months ended March 31

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

Average loans and leases:

PCD $ 546,998 $ 544,250 $ 538,543 $ 561,574

Non-PCD 30,992,001 25,995,212 29,747,116 25,448,455

Loans and leases at period-end:

PCD 530,651 551,447 530,651 551,447

Non-PCD 31,887,774 26,176,790 31,887,774 26,176,790

Allowance for credit losses allocated to:

PCD 26,928 8,343 26,928 8,343

Non-PCD 195,522 218,240 195,522 218,240

Total $ 222,450 $ 226,583 $ 222,450 $ 226,583

Net charge-offs (recoveries) to average loans and leases:

PCD 0.17 % — % (0.58) % — %

Non-PCD 0.09 0.11 0.11 0.11

Total 0.09 0.11 0.10 0.11

Allowance for credit losses to total loans and leases (1) :

PCD 5.07 1.51 5.07 1.51

Non-PCD 0.61 0.83 0.61 0.83

Total 0.69 0.85 0.69 0.85

(1) Loans originated in relation to the SBA-PPP ($3,08 billion as of June 30, 2020) do not have a recorded ACL.

As of June 30, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.68% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.76%.

NONPERFORMING ASSETS

Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”).

At March 31, 2020 , BancShares’ nonperforming assets totaled $230.3 million , an increase of $79.1 million since December 31, 2019 .

Nonaccrual loans and leases at March 31, 2020 were $174.6 million , reflecting an increase of $52.9 million since December 31, 2019 .

At June 30, 2020, BancShares’ nonperforming assets totaled $251.6 million, an increase of $83.4 million since December 31, 2019.

Nonaccrual loans and leases at June 30, 2020 were $197.8 million, reflecting an increase of $76.1 million since December 31, 2019.

Nonaccrual loans and leases as a percentage of total loans and leases was 0.61% and 0.42% at June 30, 2020 and December 31, 2019, respectively.

The increase was primarily due to the dissolution of PCI loan pools under the adoption of ASC 326 as those nonaccrual loans within performing PCI pools were previously excluded from reporting.

As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools, including $24.2 million of loans that were greater than 90 days past due.

The credit quality of the portfolio remains in line with our risk tolerances and management has not identified material increases in portfolio risk.

At March 31, 2020 , OREO totaled $55.7 million , representing an increase of $9.1 million since December 31, 2019 primarily due to additions from Community Financial of $9.8 million .

The additional PCI nonaccrual loans and acquired OREO resulted in an increase of 18 basis points to the nonperforming assets ratio at March 31, 2020 .

As of June 30, 2020, there were $35.9 million of nonaccrual loans that had been released from performing PCI pools.

The remaining increase in nonaccrual loans was primarily due to increases within our acquired loan portfolios.

The credit quality of the portfolio remains in line with our risk tolerances and management is actively monitoring any potential increases in portfolio risk due to COVID-19.

At June 30, 2020, OREO totaled $53.9 million, representing an increase of $7.3 million since December 31, 2019 primarily due to additions from Community Financial of $9.8 million.

Nonperforming assets as a percentage of total loans was 0.77% as of June 30, 2020 compared to 0.58% as of December 31, 2019.

The additional PCI nonaccrual loans and acquired OREO resulted in an increase of 14 basis points to the nonperforming assets ratio at June 30, 2020.

NONPERFORMING ASSETS

(Dollars in thousands)

Second First Fourth Third Second

(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter

Nonaccrual loans and leases:

Non-PCD $ 135,280 $ 121,337 $ 114,946 $ 108,816 $ 100,701

PCD 62,511 53,234 6,743 829 4,274

Other real estate owned 53,850 55,707 46,591 46,253 46,236

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Accruing loans and leases 90 days or more past due

Non-PCD $ 3,644 $ 2,933 $ 3,291 $ 4,247 $ 3,468

PCD 152 37 24,257 23,287 29,319

Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.77 % 0.79 % 0.58 % 0.57 % 0.56 %

TROUBLED DEBT RESTRUCTURINGS (“TDR”)

TROUBLED DEBT RESTRUCTURINGS

We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations.

Typical modifications include short-term deferral of interest or modification of payment terms.

TDRs not accruing interest at the time of restructure are included as nonperforming loans.

Troubled debt restructurings (“TDRs”) not accruing interest at the time of restructure are included as nonperforming loans.

TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty.

BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs.

TROUBLED DEBT RESTRUCTURINGS

(Dollars in thousands)

March 31, 2020

December 31, 2019

(Dollars in thousands) June 30, 2020 December 31, 2019

Accruing TDRs:

Non-PCD $ 136,174 $ 111,676

PCD 18,639 17,074

Total accruing TDRs 154,813 128,750

Nonaccruing TDRs:

Non-PCD 40,668 42,331

PCD 6,024 111

Total nonaccruing TDRs 46,692 42,442

Recent legislation and regulatory requirements have allowed for relief on determination of TDRs for new loan modifications and forbearances for borrowers experiencing COVID-19-related financial difficulty on loans that were current as of December 31, 2019.

BancShares has elected to adopt this guidance and did not identify new TDRs as a result of COVID-19-related modifications beginning in March 31, 2020 for borrowers that were current at the time of requested modification.

Non-PCD 176,842 154,007

PCD 24,663 17,185

Total TDRs $ 201,505 $ 171,192

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debentures, and other borrowings.

Interest-bearing liabilities totaled $23.60 billion at March 31, 2020 , compared to $22.83 billion at December 31, 2019 .

The $769.2 million increase was due to an increase in total borrowings of $615.6 million and an increase in interest-bearing deposits of $153.5 million.

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings.

Interest-bearing liabilities totaled $25.33 billion at June 30, 2020, compared to $22.83 billion at December 31, 2019.

The $2.50 billion increase was due to an increase in interest-bearing deposits of $1.83 billion and an increase in total borrowings of $672.1 million.

Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective.

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Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost.

At March 31, 2020 , total deposits were $35.35 billion , an increase of $915.5 million , representing annualized growth of 10.7% since December 31, 2019 .

Excluding acquired deposits totaling $218.0 million , deposits increased $697.5 million , or by 8.1% annualized, over the same time period.

At June 30, 2020, total deposits were $41.48 billion, an increase of $7.05 billion, representing annualized growth of 41.2% since December 31, 2019.

Excluding SBA-PPP reciprocal deposits of $2.99 billion, consumer stimulus deposits of $526.0 million and acquired deposits totaling $43.0 million, deposits increased $3.49 billion, or by 20.4% annualized, over the same time period.

This organic growth was primarily the result of increases in demand and money market accounts partially offset by a decline in time deposits.

(Dollars in thousands)

March 31, 2020

December 31, 2019

(Dollars in thousands) June 30, 2020 December 31, 2019

Demand $ 18,149,466 $ 12,926,796

Checking with interest 9,056,063 8,284,302

Money market 8,013,942 6,817,752

Savings 2,983,138 2,564,777

Time 3,276,636 3,837,609

Total deposits $ 41,479,245 $ 34,431,236

At March 31, 2020 , total borrowings were $1.94 billion compared to $1.33 billion at December 31, 2019 .

The $615.6 million increase was primarily due to a subordinated debt issuance of $340.7 million in the first quarter of 2020, an increase in FHLB borrowings of $220.5 million and an increase in securities sold under customer repurchase agreements of $97.4 million , partially offset by a decrease in other borrowings of $43.0 million .

(Dollars in thousands)

March 31, 2020

December 31, 2019

At June 30, 2020, total borrowings were $2.00 billion compared to $1.33 billion at December 31, 2019.

The $672.1 million increase was primarily due to an increase in subordinated debt of $340.8 million due to new debt issuance in 2020, an increase in securities sold under customer repurchase agreements of $297.3 million as a result of increased customer deposit balances, and an increase in FHLB borrowings of $85.5 million, partially offset by a decrease in other borrowings of $51.5 million.

(Dollars in thousands) June 30, 2020 December 31, 2019

Securities sold under customer repurchase agreements $ 740,276 $ 442,956

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BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon Capital Trust I (the “Trusts”), which mature in 2036, 2034, 2034, 2036, and 2034, respectively.

Subordinated debentures included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time.

Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time.

BancShares has guaranteed all obligations of the Trusts.

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The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in FCB as regulatory capital, and redeeming or repurchasing our common stock.

During the first quarter of 2020, BancShares repurchased 349,390 shares of Class A common stock for $159.7 million at an average cost per share of $457.05 .

During the three months ended March 31, 2019 , BancShares repurchased a total of 243,000 shares of Class A common stock for $100.7 million at an average cost per share of $414.58 .

The table below shows Class A common stock repurchase activity for the three and six months ended June 30, 2020 and 2019.

All Class A common stock repurchases completed in 2020 and 2019 were consummated under previously approved authorizations.

Subsequent to quarter-end through April 30, 2020 , BancShares repurchased an additional 111,700 shares of Class A common stock for $37.3 million at an average cost per share of $333.71 .

On April 28, 2020, the Board authorized share repurchases of up to 500,000 of BancShares’ Class A common stock for the period May 1, 2020 through July 31, 2020.

This authority will supersede all previously approved authorities.

CLASS A COMMON STOCK REPURCHASE ACTIVITY

Three months ended June 30 Six months ended June 30

($ in thousands, expect per share data) June 30 June 30 June 30 June 30

Number of shares repurchased 346,000 205,500 695,390 448,500

Total cost $ 126,974 $ 89,765 $ 286,664 $ 190,508

Average price per share $ 366.98 $ 436.81 $ 412.23 $ 424.77

Subsequent to quarter-end through July 31, 2020, BancShares repurchased an additional 117,700 shares of Class A common stock for $47.1 million at an average cost per share of $399.77.

Upon completion of the current authorization on July 31, 2020, share repurchase activity has been suspended and will be reevaluated in subsequent periods.

The table below shows activities that caused the change in outstanding Class A common stock over the past five quarters.

CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING

(in thousands)

Second First Fourth Third Second

(in thousands) Quarter Quarter Quarter Quarter Quarter

Class A shares outstanding at beginning of period 9,275 9,624 9,879 10,175 10,380

Share repurchases (346) (349) (255) (296) (205)

Class A shares outstanding at end of period 8,929 9,275 9,624 9,879 10,175

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ANALYSIS OF CAPITAL ADEQUACY

Requirements to be well-capitalized

March 31, 2020

December 31, 2019

(Dollars in thousands)

Requirements to be well-capitalized June 30, 2020 December 31, 2019

(Dollars in thousands) Amount Ratio Amount Ratio

Risk-based capital ratios

3 unchanged sentences

Tier 1 leverage ratio (1)

5.00 3,634,050 8.07 3,344,305 8.81

Risk-based capital ratios

3 unchanged sentences

Tier 1 leverage ratio (2)

As of March 31, 2020 , BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines.

5.00 4,015,721 8.93 3,554,974 9.38

(1) The SBA PPP program, with $3.1 billion in outstanding balances, has decreased BancShares’ Tier 1 leverage ratio by 48 bps;

BancShares’ Tier 1 leverage ratio would be estimated at 8.55% at June 30, 2020 without the impact the SBA PPP program.

(2) The SBA PPP program, with $3.1 billion in outstanding balances, has decreased FCB’s Tier 1 leverage ratio by 53 bps;

FCB’s Tier 1 leverage ratio would be estimated at 9.46% at June 30, 2020 without the impact the SBA PPP program.

As of June 30, 2020, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines.

Trust preferred capital securities continue to be a component of total risk-based capital.

BancShares and FCB had capital conservation buffers of 5.65% and 5.20% , respectively, at March 31, 2020 , which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

BancShares and FCB had capital conservation buffers of 5.38% and 5.40%, respectively, at June 30, 2020, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

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We are actively monitoring our loan portfolio for areas of increased risk as a result of COVID-19.

BancShares has a well-diversified loan portfolio, by geography and industry, however, extensions have been concentrated in industries impacted the most by the pandemic, which include our dental and medical portfolios, as well as the hospitality industry.

The risk profile is somewhat mitigated as our typical customer’s dental or medical practice is well established and actively managed.

Social distancing requirements had an immediate impact on both of these industries;

however, they should also see immediate demand for services once those restrictions are lessened.

Through May 4, 2020, we have not seen significant shifts in credit line utilization or overall declines in credit quality.

BancShares continues to have solid credit performance that has matched or exceeded its peer group.

Additionally, we are participating in the SBA-PPP program, which will provide much needed funds to our existing small business customers and continue to assess both the credit and operational risks this program presents.

We processed approximately 5,000 SBA-PPP loan applications, securing funding for our customers of approximately $1.8 billion, during the initial round of funding for this program.

As of May 4, 2020, we have processed approximately 18,000 additional loan applications for the second phase of this program, representing additional funding of approximately $1.6 billion.

Our ACL estimate for the quarter ended March 31, 2020 included extensive reviews of the changes in credit risk associated with the loan portfolio and uncertainties around economic forecasts and the overall economic impact of COVID-19.

As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances, representing approximately $43 million in payment deferrals.

The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter.

A significant portion of the original payment extensions, approximately $5.5 billion, have moved to active status as of July 31, 2020.

To date, we have not seen significant shifts in credit line utilization or declines in overall credit quality.

Additionally, we are participating in the SBA-PPP program, which provided much needed funds to our existing small business customers, and we continue to assess both the credit and operational risks this program presents.

BancShares originated approximately 23,000 SBA-PPP loan requests with an outstanding balance of $3.08 billion at June 30, 2020.

Our ACL estimate for the quarter ended June 30, 2020 included extensive reviews of the changes in credit risk associated with the loan portfolio and uncertainties around economic forecasts and the overall economic impact of COVID-19.

Expected loss estimates within each portfolio considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs.

These loss estimates additionally considered BancShares historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen deterioration from COVID-19 as of March 31, 2020.

These loss estimates additionally considered BancShares industry and geography risk, historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen deterioration from COVID-19 as of June 30, 2020.

Interest rate risk management

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Assumptions that incorporate customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise have been adjusted based on actual deposit behavior over the last 3 years during a rising rate cycle.

Table 16 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of March 31, 2020 and December 31, 2019 .

Table 19 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of June 30, 2020 and December 31, 2019.

NET INTEREST INCOME SENSITIVITY ANALYSIS

Estimated percentage increase (decrease) in net interest income

Change in interest rate (basis points)

March 31, 2020

December 31, 2019

Net interest income sensitivity metrics at March 31, 2020 compared to December 31, 2019 were primarily affected by a reduction in both the number of offerings and promotional rates paid on time deposits.

Additionally, as market interest rates have fallen in 2020, prepayment speeds have increased leading to an increase in loan interest income under positive rate shocks.

Change in interest rate (basis points) June 30, 2020 December 31, 2019

-100 (3.12) % (8.00) %

+100 4.91 1.30

+200 6.68 0.01

The increased asset sensitivity in net interest income sensitivity metrics as of June 30, 2020 compared to December 31, 2019 were primarily affected by a significant influx of non-maturity deposits during the second quarter of 2020 related to participation in the SBA-PPP as well as consumer stimulus payments generating large overnight cash balances.

Long-term interest rate risk exposure is measured using the economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital.

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The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet.

Table 17 table presents the EVE profile as of March 31, 2020 and December 31, 2019 .

Table 20 table presents the EVE profile as of June 30, 2020 and December 31, 2019.

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS

Estimated percentage increase (decrease) in EVE

Change in interest rate (basis points)

March 31, 2020

December 31, 2019

The economic value of equity metrics at March 31, 2020 compared to December 31, 2019 were primarily affected by strong growth in non-interest demand deposits coupled with adjustments to assumptions related to customer migration.

Change in interest rate (basis points) June 30, 2020 December 31, 2019

-100 (22.56) % (8.25) %

+100 8.10 (0.03)

+200 9.21 (4.80)

The economic value of equity metrics at June 30, 2020 compared to December 31, 2019 were primarily affected by substantial growth in demand deposits of nearly $6.5 billion during the second quarter of 2020.

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

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Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers.

Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $5.45 billion at March 31, 2020 compared to $3.57 billion at December 31, 2019 .

Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $8.04 billion at June 30, 2020 compared to $3.57 billion at December 31, 2019.

Another source of available funds was advances from the FHLB of Atlanta and Chicago.

Outstanding FHLB advances were $792.7 million as of March 31, 2020 , and we had sufficient collateral pledged to secure $7.43 billion of additional borrowings from the FHLB of Atlanta.

Also, at March 31, 2020 , $3.88 billion in non-PCD loans with a lendable collateral value of $3.15 billion were used to create additional borrowing capacity at the Federal Reserve Bank.

We also maintain Federal Funds lines and other credit lines, which had $623.0 million of available capacity at March 31, 2020 .

Outstanding FHLB advances were $657.7 million as of June 30, 2020, and we had sufficient collateral pledged to secure $7.86 billion of additional borrowings from the FHLB of Atlanta.

Also, at June 30, 2020, $3.93 billion in non-PCD loans with a lendable collateral value of $3.14 billion were used to create additional borrowing capacity at the Federal Reserve Bank.

We also maintain Federal Funds lines and other credit lines, which had $623.0 million of available capacity at June 30, 2020.

CRITICAL ACCOUNTING ESTIMATES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis