FIRST CITIZENS BANCSHARES INC /DE/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (“BancShares”). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our 2019 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2020, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares. EXECUTIVE OVERVIEW BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (“FCB”), a state-chartered bank organized under the laws of the state of North Carolina. BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue. We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people. Refer to our 2019 Annual Report on Form 10-K for further discussion of our strategy. 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 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. The FOMC expects to maintain this target range until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; 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. 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 United States (“U.S.”) Treasury to the public. 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. Further legislation is expected as the government continues to mitigate the economic impact on the crisis. 40 Table of Contents 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. Table 1 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 On January 1, 2020 BancShares adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new credit loss methodology for the estimation of credit losses.The amendments in this ASU require loss estimates be determined over an asset’s lifetime and broaden the information that an entity must consider in developing its expected credit losses. BancShares adopted this ASU using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30 and debt securities available for sale. Refer to Note A - Accounting Policies and Basis of Presentation for additional information. 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 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. 41 Table of Contents FINANCIAL PERFORMANCE SUMMARY 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%. 42 Table of Contents 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. 43 Table of Contents Table 2 SELECTED QUARTERLY 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 Interest income $ 363,257 $ 369,559 $ 354,048 $ 362,318 $ 350,721 $ 732,816 $ 687,645 Interest expense 25,863 31,159 26,924 25,893 23,373 57,022 39,825 Net interest income 337,394 338,400 327,124 336,425 327,348 675,794 647,820 Provision for credit losses 20,552 28,355 7,727 6,766 5,198 48,907 16,948 Net interest income after provision for credit losses 316,842 310,045 319,397 329,659 322,150 626,887 630,872 Noninterest income 165,402 64,011 104,393 100,930 106,875 229,413 210,538 Noninterest expense 291,679 299,971 292,262 270,425 273,397 591,650 541,054 Income before income taxes 190,565 74,085 131,528 160,164 155,628 264,650 300,356 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 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 Book value at period-end 367.57 351.90 337.38 327.86 319.74 367.57 319.74 SELECTED QUARTERLY AVERAGE BALANCES Total assets $ 45,553,502 $ 40,648,806 $ 38,326,641 $ 37,618,836 $ 37,049,030 $ 43,101,154 $ 36,338,839 Investment securities 8,928,467 7,453,159 7,120,023 6,956,981 6,803,570 8,190,813 6,797,656 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 Securities sold under customer repurchase agreements 659,244 474,231 495,804 533,371 556,374 566,737 547,318 Other short-term borrowings 45,549 157,759 28,284 23,236 40,513 101,654 20,369 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 Common shares outstanding 10,105,520 10,473,119 10,708,084 11,060,462 11,286,520 10,289,320 11,402,112 SELECTED QUARTER-END BALANCES 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 Shareholders’ equity $ 3,991,444 $ 3,957,520 $ 3,586,184 $ 3,568,482 $ 3,574,613 $ 3,991,444 $ 3,574,613 Common shares outstanding 9,934,105 10,280,105 10,629,495 10,884,005 11,179,905 9,934,105 11,179,905 SELECTED RATIOS AND OTHER DATA Return on average assets (annualized) 1.36 % 0.57 % 1.05 % 1.32 % 1.29 % 0.98 % 1.28 % 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 Net charge-offs (annualized) to average loans and leases 0.09 0.10 0.14 0.10 0.11 0.10 0.11 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 Common equity Tier 1 ratio 10.32 10.36 10.86 11.80 12.03 10.32 12.03 Total risk-based capital ratio 13.63 13.65 12.12 13.09 13.34 13.63 13.34 Tier 1 leverage capital ratio 8.07 8.98 8.81 9.18 9.35 8.07 9.35 Dividend payout ratio 2.71 7.33 4.19 3.55 3.79 3.99 3.95 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 (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. This increased the amount of nonaccrual loans 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. Of these nonaccrual loans, $35.9 million were outstanding as of June 30, 2020. 44 Table of Contents BUSINESS COMBINATIONS 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. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. The merger contributed $222.1 million in consolidated assets, which included $686 thousand of goodwill, $134.0 million in loans, and $209.3 million in deposits. See Note B - Business Combinations for additional disclosures. Entegra Financial Corp. 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 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. 45 Table of Contents Table 3 CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS Three months ended June 30 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Loans and leases $ 31,635,958 $ 326,618 4.10 % $ 26,597,242 $ 303,803 4.54 % Investment securities: U.S. 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 Mortgage-backed securities 7,555,947 28,532 1.51 4,979,160 28,130 2.26 Corporate bonds 299,250 3,782 5.06 147,669 1,931 5.23 Other investments 209,290 2,236 4.30 143,040 626 1.76 Total investment securities 8,928,467 36,657 1.64 6,803,570 40,491 2.38 Overnight investments 2,231,356 553 0.10 1,274,030 7,280 2.29 Total interest-earning assets 42,795,781 363,828 3.38 34,674,842 351,574 4.04 Cash and due from banks 404,517 295,052 Premises and equipment 1,260,566 1,214,144 Allowance for credit losses (209,973) (229,067) Other real estate owned 55,554 4,646 Other assets 1,247,057 1,047,813 Total assets $ 45,553,502 $ 37,007,430 Liabilities 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 Time deposits 3,398,979 9,775 1.16 3,371,402 11,561 1.38 Total interest-bearing deposits 22,426,564 17,916 0.32 19,428,715 19,157 0.40 Securities sold under customer repurchase agreements 659,244 399 0.24 556,374 515 0.37 Other short-term borrowings 45,549 248 2.16 40,513 278 2.72 Long-term borrowings 1,275,928 7,300 2.26 371,843 3,423 3.64 Total interest-bearing liabilities 24,407,285 25,863 0.42 20,397,445 23,373 0.46 Noninterest-bearing deposits 16,719,851 12,671,495 Other liabilities 438,141 434,049 Shareholders’ equity 3,988,225 3,546,041 Total liabilities and shareholders’ equity $ 45,553,502 $ 37,049,030 Interest rate spread 2.96 % 3.58 % Net interest income and net yield on interest-earning assets $ 337,965 3.14 % $ 328,201 3.77 % 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 June 30, 2020 and 2019. The taxable-equivalent adjustment was $571 thousand and $853 thousand for the three months ended June 30, 2020 and 2019, respectively. 46 Table of Contents Table 4 CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS Six months ended June 30 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Loans and leases $ 30,367,030 $ 652,774 4.27 % $ 26,059,602 $ 595,372 4.56 % Investment securities: U.S. 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 Liabilities 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. 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 six months ended June 30, 2020 and June 30, 2019. 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. 47 Table of Contents Table 4 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME Three months ended June 30, 2020 Six months ended June 30, 2020 Change from prior year period due to: Change from prior year period due to: (Dollars in thousands) Volume (1) Yield/Rate (1) Total Change Volume (1) Yield/Rate (1) Total Change Assets Loans and leases $ 60,243 $ (37,428) $ 22,815 $ 96,223 $ (38,821) $ 57,402 Investment securities: U.S. Treasury (5,558) (533) (6,091) (10,423) (488) (10,911) Government agency 2,164 (3,770) (1,606) 5,639 (5,434) 205 Mortgage-backed securities 15,546 (15,144) 402 21,611 (19,336) 2,275 Corporate bonds 1,981 (130) 1,851 2,799 (408) 2,391 Other investments 291 1,319 1,610 245 1,754 1,999 Total investment securities 14,424 (18,258) (3,834) 19,871 (23,912) (4,041) Overnight investments 5,435 (12,162) (6,727) 7,352 (15,950) (8,598) Total interest-earning assets $ 80,102 $ (67,848) $ 12,254 $ 123,446 $ (78,683) $ 44,763 Liabilities Interest-bearing deposits: 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 Time deposits 63 (1,849) (1,786) 2,777 1,333 4,110 Total interest-bearing deposits 1,887 (3,128) (1,241) 5,442 4,584 10,026 Securities sold under customer repurchase agreements 33 (149) (116) (56) (77) (133) Other short-term borrowings 34 (64) (30) 545 229 774 Long-term borrowings 8,205 (4,328) 3,877 6,746 (216) 6,530 Total interest-bearing liabilities 10,159 (7,669) 2,490 12,677 4,520 17,197 Change in net interest income $ 69,943 $ (60,179) $ 9,764 $ 110,769 $ (83,203) $ 27,566 (1) The rate/volume variance is allocated proportionally between the changes in volume and rate. RESULTS OF OPERATIONS Net Interest Income and Margin (Taxable-Equivalent Basis) 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. The yield on overnight investments and investment securities decreased by 219 basis points and 74 basis points, respectively. 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 $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. 48 Table of Contents 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 $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 Table 6 NONINTEREST INCOME Three months ended June 30 Six months ended June 30 (Dollars in thousands) 2020 2019 2020 2019 Service charges on deposit accounts $ 17,522 $ 25,790 $ 43,935 $ 50,855 Wealth management services 22,371 24,573 48,783 49,574 Cardholder services, net 17,587 18,479 35,747 35,112 Other service charges and fees 7,145 8,164 14,937 15,586 Merchant services, net 5,363 6,455 11,251 12,290 Mortgage income 9,811 5,038 15,035 8,696 Insurance commissions 3,189 2,854 6,877 6,145 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 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. 49 Table of Contents 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: • 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 Table 7 NONINTEREST EXPENSE Three months ended June 30 Six months ended June 30 (Dollars in thousands) 2020 2019 2020 2019 Salaries and wages $ 146,633 $ 136,526 $ 291,888 $ 268,947 Employee benefits 30,364 30,197 68,875 62,732 Occupancy expense 29,556 26,886 57,036 54,647 Equipment expense 28,774 28,489 56,624 55,229 Processing fees paid to third parties 10,186 6,641 20,558 13,730 FDIC insurance expense 3,731 2,757 7,197 5,417 Collection and foreclosure-related expenses 3,949 3,659 8,003 6,681 Merger-related expenses 4,369 4,084 8,601 5,803 Telecommunications expense 2,815 2,393 5,788 4,434 Consultant expense 3,027 3,639 6,287 6,520 Advertising expense 1,980 2,942 4,649 5,494 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 50 Table of Contents The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense. 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 $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 Taxes 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. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors. INTEREST-EARNING ASSETS Interest-earning assets include investment securities, loans and leases, and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to higher levels of market risk. 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 $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. 51 Table of Contents Investment Securities The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities with minimal liquidity and credit risk, and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio and into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C - Investments for additional disclosures. 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. 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 June 30, 2020. 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. As part of the adoption of ASC 326, BancShares evaluated its portfolios of held to maturity and available for sale debt securities to determine the need to record a related allowance for credit losses. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption. As of January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities Table 8 INVESTMENT SECURITIES June 30, 2020 December 31, 2019 (Dollars in thousands) Composition (1) Cost Fair value Composition (1) Cost Fair value Investment securities available for sale U.S. 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 Residential mortgage-backed securities 60.8 5,671,151 5,790,392 73.4 5,269,060 5,267,090 Commercial mortgage-backed securities 11.4 1,047,601 1,079,822 5.3 373,105 380,020 Corporate bonds 4.7 449,623 448,773 2.8 198,278 201,566 State, county and municipal — — — 1.7 118,227 118,227 Total investment securities available for sale 90.5 8,472,398 8,619,282 98.4 7,052,152 7,059,674 Investment in marketable equity securities 1.2 116,322 114,316 1.2 59,262 82,333 Investment securities held to maturity 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 Total investment securities 100.0 % $ 9,363,598 $ 9,524,923 100.0 % $ 7,142,410 $ 7,173,003 (1) Calculated as a percent of the total fair value of investment securities. 52 Table of Contents Loans and Leases 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 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 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. 53 Table of Contents Table 9 LOANS AND LEASES (Dollars in thousands) June 30, 2020 Commercial: Construction and land development $ 1,012,365 Owner occupied commercial mortgage 10,352,793 Non-owner occupied commercial mortgage 3,056,328 Commercial and industrial and leases 4,650,839 SBA-PPP 3,084,549 Total commercial loans 22,156,874 Consumer: Residential mortgage 5,404,682 Revolving mortgage 2,233,977 Construction and land development 353,382 Consumer auto 1,195,771 Consumer other 543,088 Total consumer loans 9,730,900 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 (222,450) Net loans and leases $ 32,195,975 (Dollars in thousands) December 31, 2019 Commercial: Construction and land development $ 1,013,454 Commercial mortgage 12,282,635 Other commercial real estate 542,028 Commercial and industrial and leases 4,403,792 Other 310,093 Total commercial loans 18,552,002 Noncommercial: Residential mortgage 5,293,917 Revolving mortgage 2,339,072 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 Less allowance for loan and lease losses (225,141) Net loans and leases $ 28,656,355 54 Table of Contents ALLOWANCE FOR CREDIT LOSSES 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. This decrease was partially offset by an increase in the consumer segments due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL. 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 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. 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 June 30, 2020. 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. 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 $7.4 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. 55 Table of Contents Table 10 ALLOWANCE FOR CREDIT LOSSES Three months ended June 30, 2020 (Dollars in thousands) Construction and land development - 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 and land development - commercial Commercial mortgage Other commercial 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 and land development - 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 Adoption of ASC 326 (31,061) (19,316) 460 (37,637) 17,118 3,665 (1,291) 1,100 10,037 19,001 (37,924) Balance at January 1 $ 2,152 $ 17,128 $ 11,562 $ 23,973 $ 35,350 $ 23,367 $ 1,418 $ 5,392 $ 40,338 $ 26,537 $ 187,217 Provision (credits) 4,756 5,386 10,498 7,525 8,502 3,515 263 5,000 5,808 (2,346) 48,907 Initial allowance on PCD loans — — — — — — — — — 1,193 1,193 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 and land development - commercial Commercial mortgage Other commercial real estate Commercial and industrial and leases Other Residential mortgage Revolving mortgage Construction and land development - 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 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. 56 Table of Contents Table 11 ALLOWANCE FOR CREDIT LOSSES RATIOS 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%. 57 Table of Contents NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”). 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 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. Table 12 NONPERFORMING ASSETS 2020 2019 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 Total nonperforming assets $ 251,641 $ 230,278 $ 168,280 $ 155,898 $ 151,211 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 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. 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. 58 Table of Contents Table 13 TROUBLED DEBT RESTRUCTURINGS (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 All TDRs: 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 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. Deposits Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers but, as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost. 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. Table 14 DEPOSITS (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 59 Table of Contents Borrowings 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. Table 15 BORROWINGS (Dollars in thousands) June 30, 2020 December 31, 2019 Securities sold under customer repurchase agreements $ 740,276 $ 442,956 Federal Home Loan Bank borrowings 657,682 572,185 Subordinated debt SCB Capital Trust I 9,759 9,739 FCB/SC Capital Trust II 17,597 17,532 FCB/NC Capital Trust III 88,145 88,145 Capital Trust debentures assumed in acquisitions 14,433 14,433 Other subordinated debt 374,312 33,563 Total subordinated debt 504,246 163,412 Other borrowings 96,791 148,318 Total borrowings $ 1,998,995 $ 1,326,871 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 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. SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY On March 4, 2020, BancShares completed its public offering of $350 million aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series A Preferred Stock) for a total of $345 million. The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in FCB as regulatory capital, and redeeming or repurchasing our common stock. The table below shows Class A common stock repurchase activity for the three and six months ended June 30, 2020 and 2019. All Class A common stock repurchases completed in 2020 and 2019 were consummated under previously approved authorizations. Table 16 CLASS A COMMON STOCK REPURCHASE ACTIVITY Three months ended June 30 Six months ended June 30 ($ 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. 60 Table of Contents The table below shows activities that caused the change in outstanding Class A common stock over the past five quarters. Table 16 CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING 2020 2019 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 We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders’ equity. These amounts are excluded from shareholders’ equity in the calculation of our capital ratios under current regulatory guidelines. Table 18 ANALYSIS OF CAPITAL ADEQUACY Requirements to be well-capitalized June 30, 2020 December 31, 2019 (Dollars in thousands) Amount Ratio Amount Ratio BancShares Risk-based capital ratios Tier 1 risk-based capital 8.00 % $ 3,634,050 11.38 % $ 3,344,305 10.86 % Common equity Tier 1 6.50 3,294,113 10.32 3,344,305 10.86 Total risk-based capital 10.00 4,351,169 13.63 3,731,501 12.12 Tier 1 leverage ratio (1) 5.00 3,634,050 8.07 3,344,305 8.81 FCB Risk-based capital ratios Tier 1 risk-based capital 8.00 % $ 4,015,721 12.58 % $ 3,554,974 11.54 % Common equity Tier 1 6.50 4,015,721 12.58 3,554,974 11.54 Total risk-based capital 10.00 4,278,340 13.40 3,837,670 12.46 Tier 1 leverage ratio (2) 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 5.38% and 5.40%, respectively, at June 30, 2020, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions. 61 Table of Contents RISK MANAGEMENT Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee. The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility. In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods. In response to COVID-19, BancShares assembled a cross-functional leadership team to identify and manage newly identified risks and provide effective risk oversight through this pandemic. New or elevated risks have been identified in multiple areas, including but not limited to, operational risk, credit risk, market risk, liquidity risk, capital adequacy risk, compliance risk, and financial reporting risk. As such, we have incorporated changes to Item 1A. Risk Factors within this Quarterly Report on Form 10-Q to capture these changes. These new or increased areas of risk are being actively managed by senior leadership, and have been incorporated into reporting for key management committees and regular updates are being provided to the Board of Directors. Credit risk management Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ACL that accounts for losses inherent in the loan and lease portfolio. We are actively monitoring our loan portfolio for areas of increased risk as a result 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. 62 Table of Contents 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 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 Interest rate risk (“IRR”) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes. We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. Market interest rates declined significantly from year-end driven by economic uncertainty brought on by COVID-19. Net interest income deterioration in down rate shocks will remain muted due to the low absolute value of market interest rates. 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 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. Table 19 NET INTEREST INCOME SENSITIVITY ANALYSIS Estimated percentage increase (decrease) in net interest income 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. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Table 20 table presents the EVE profile as of June 30, 2020 and December 31, 2019. Table 20 ECONOMIC VALUE OF EQUITY MODELING ANALYSIS Estimated percentage increase (decrease) in EVE 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. 63 Table of Contents Liquidity risk management Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile. We utilize various limit-based measures to monitor, measure and control three different categories of liquidity risk: • Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks; • Structural - Measures the amount by which illiquid assets are supported by long-term funding; and • Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner. We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $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 $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 Except as described below, there have been no significant changes in our Critical Accounting Estimates as described in our 2019 Annual Report on Form 10-K. Allowance for credit losses - The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered. The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast with reversion to historical assumptions. Loan losses are estimated using the fair value of collateral for collateral-dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL. PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID-19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience. 64 Table of Contents FORWARD-LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events. Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the impacts of COVID-19 on our business and the economy, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the acquisitions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.