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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-05 · 244 added, 234 removed, 641 unchanged (43% of the section changed)

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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.

This impact was coupled with spikes in unemployment as a result of business shutdowns that 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%.

During the third 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.

The FOMC expects to maintain this target range until labor market conditions have reached levels consistent with the FOMC’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed.

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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.

In addition, there were other regulatory actions taken that may impact our business including 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.

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.

BancShares remains in a very strong capital and liquidity position providing stability in navigating the COVID-19 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.

Our branches have re-opened with enhanced safety protocols, and our corporate locations remain at limited occupancy due to current virus trends.

Through September 30, 2020, over 94% of all COVID-19 related loan extensions have begun repayment.

Delinquency trends among loans entering repayment are in line with the remainder of the portfolio.

We have not seen significant declines in overall credit quality, though the impact of the SBA-PPP and payment extensions could be delaying signs of credit deterioration.

During 2020, BancShares originated over 23,000 SBA-PPP loans with an outstanding balance of $3.11 billion at September 30, 2020.

We have collected all $117.2 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.

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

We have begun accepting and processing applications for forgiveness, and subsequent to the third quarter, we have begun receiving forgiveness payments.

We anticipate acceleration of the fee income as the volume of approved forgiveness applications and payments received from the SBA increase.

SBA-PPP LOANS BY LOAN SIZE

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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.

As of September 30, 2020, liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately $8.51 billion representing 17.5% of consolidated assets as of September 30, 2020.

In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.37 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%.

At September 30, 2020, BancShares’ regulatory capital ratios were well in excess of Basel III capital requirements with a total risk-based capital ratio of 13.7%, a Tier 1 risk-based capital ratio of 11.5%, a common equity Tier 1 ratio of 10.4%, a Tier 1 leverage ratio of 7.8% and a capital conservation buffer of 5.5%, more than twice the required level of 2.5%.

SIGNIFICANT EVENTS IN 2020

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

On October 15, 2020, BancShares and CIT Group Inc., a Delaware corporation (“CIT”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB (“Merger Sub”), and CIT, the parent company of CIT Bank, N.A., a national banking association (“CIT Bank”).

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the “First-Step Merger”), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the “Mergers”).

The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the “Transaction”).

The Merger Agreement was unanimously approved by the Board of Directors of each of BancShares and CIT.

Subject to the fulfillment of customary closing conditions, the parties anticipate that the Transaction will close in the first half of 2021.

Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”), each share of CIT common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (“CIT Common Stock”), except for certain shares of CIT Common Stock owned by CIT or BancShares, will be converted into the right to receive .06200 shares of BancShares Class A common stock, par value $1.00 per share.

Holders of CIT Common Stock will receive cash in lieu of fractional shares.

In addition, at the Effective Time, each share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, of CIT and 5.625% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, of CIT issued and outstanding will automatically be converted into the right to receive one share of a newly created series of preferred stock, Series B, of BancShares and one share of a newly created series of preferred stock, Series C, of BancShares, respectively.

The Merger Agreement requires that, effective as of the Effective Time, the Boards of Directors of the combined company and the combined bank will consist of 14 directors, (i) 11 of whom will be members of the current Board of Directors of BancShares, and (ii) three of whom will be selected from among the current Board of Directors of CIT and will include as one of those three Ellen R.

Alemany, Chairwoman and Chief Executive Officer of CIT.

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.

Third Quarter Highlights

• Net income for the third quarter of 2020 totaled $142.7 million, an increase of $17.9 million, or 14.3% compared to the same quarter in 2019.

Net income available to common shareholders totaled $138.0 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%.

Net income per common share increased $2.76, or 24.5%, to $14.03 in the third quarter of 2020, from $11.27 per share during the same period in 2019.

• Return on average assets for the third quarter of 2020 was 1.18%, down from 1.32% in the third quarter of 2019.

Return on average equity for the third quarter of 2020 was 14.93%, up from 13.83% in the the third quarter of 2019.

• Net interest income totaled $353.7 million for the third quarter of 2020, an increase of $17.2 million, or 5.1% compared to the same quarter in 2019.

The increase was primarily due to an increase of $21.3 million in interest earned on loans due to loan growth and lower interest expense on deposits of $8.3 million, partially offset by a decrease in interest earned on overnight investments of $6.4 million.

Interest and fee income related to SBA-PPP loans totaled $29.8 million in the third quarter of 2020.

The taxable-equivalent net interest margin (“NIM”) was 3.06% for the third quarter of 2020, down 71 basis points from 3.77% for the third quarter in 2019.

• Noninterest income for the third quarter of 2020 totaled $120.6 million, an increase of $19.6 million, or 19.5%, compared to the same quarter of 2019, predominantly due to realized gains on the sale of available for sale securities.

• Noninterest expense was $291.7 million for the third quarter of 2020, compared to $270.4 million during the same quarter of 2019, an increase of $21.3 million or 7.9%.

• Total loans grew to $32.85 billion, an increase of $426.7 million, or by 5.2% on an annualized basis, since June 30, 2020.

The net charge-off ratio was 0.03% for the third quarter of 2020, down from 0.09% for the second quarter of 2020 and 0.10% for the third quarter of 2019.

• Total deposits grew to $42.25 billion, an increase of $771.4 million, or by 7.4% on an annualized basis, since June 30, 2020.

• BancShares repurchased 117,700 shares of its Class A common stock during the third quarter of 2020 totaling $47.1 million.

At September 30, 2020, BancShares remained well capitalized with a total risk-based capital ratio of 13.7%, a Tier 1 risk-based capital of 11.5%, a common equity Tier 1 ratio of 10.4%, and a leverage ratio of 7.8%.

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 for the nine months ended September 30, 2020 totaled $353.6 million, a decrease of $1.9 million, or 0.5% compared to the same period of 2019.

Net income available to common shareholders totaled $344.2 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.

Earnings per share increased $2.46, or 7.8%, to $33.96 for the nine months ended September 30, 2020, from $31.50 per share during the same period in 2019.

• Return on average assets for the nine months ended September 30, 2020 was 1.05%, down 24 basis points compared to the same period in 2019.

Return on average equity for the nine months ended September 30, 2020 was 12.59%, down 82 basis points compared to the same period in 2019.

• Net interest income for the nine months ended September 30, 2020, was $1.03 billion, an increase of $45.2 million, or 4.6% compared to the same period of 2019.

The increase was primarily due to an increase of $78.7 million in interest earned on loans primarily due to loan growth, partially offset by a decrease in interest earned on overnight investments of $15.0 million as well as an increase in total interest expense of $12.0 million.

Interest and fee income related to SBA-PPP loans totaled $47.9 million in the first nine months of 2020.

The taxable-equivalent NIM was 3.23% for the nine months ended September 30, 2020, down 57 basis points from 3.80% during the same period of 2019.

• The allowance for credit losses was $223.9 million at September 30, 2020, compared to $225.1 million at December 31, 2019.

The $1.2 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 related to potential COVID-19 impact.

• Total loans grew to $32.85 billion, an increase of $3.96 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.

Excluding $3.11 billion of loans originated under the SBA-PPP, total loans increased $851.0 million, or by 3.9% on an annualized basis.

The net charge-off ratio was 0.07% for the nine months ended September 30, 2020, a 3 basis point decrease compared to the same period of 2019.

• Total deposits grew to $42.25 billion, an increase of $7.82 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.

Excluding estimated SBA-PPP deposits of $1.30 billion, total deposits grew $6.52 billion, or by 25.3% on an annualized basis.

• BancShares repurchased 813,090 shares of its Class A common stock during the nine months ended September 30, 2020 totaling $333.8 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.

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2020 2019 (1)

Six months ended June 30

Second First Fourth Third Second

Nine months ended September 30

Third Second First Fourth Third

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

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Net income available to common shareholders $ 138,048 $ 148,996 $ 57,169 $ 101,874 $ 124,779 $ 344,213 $ 355,497

Net interest income, taxable equivalent $ 354,256 $ 337,965 $ 339,174 $ 328,045 $ 337,322 $ 1,031,395 $ 986,896

PER COMMON SHARE DATA

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(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%.

(3) Loans originated in relation to the SBA-PPP ($3.11 billion as of September 30, 2020) do not have a recorded ACL.

As of September 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 0.75%.

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

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

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

Of these nonaccrual loans, $27.5 million were outstanding as of September 30, 2020.

BUSINESS COMBINATIONS

CIT Group Inc.

On October 15, 2020, BancShares and CIT, entered into the Merger Agreement by and among BancShares, FCB, the Merger Sub, and CIT, the parent company of CIT Bank.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub and CIT will ultimately merge with and into FCB, with FCB as the surviving entity.

The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank.

Subject to the fulfillment of customary closing conditions, the parties anticipate that the Transaction will close in the first half of 2021.

Community Financial Holding Company, Inc.

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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.

As of September 30, 2020, shared-loss protection remains for single family residential loans acquired in the amount of $36.2 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.

As of September 30, 2020 and December 31, 2019, the estimated clawback liability was $15.3 million and $112.4 million, respectively, as a result of a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions.

The remaining clawback liability payment date is March 2021.

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

Three months ended June 30

Three months ended September 30

Interest Interest

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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.

The taxable-equivalent adjustment was $597 thousand and $897 thousand for the three months ended September 30, 2020 and 2019, respectively.

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

Six months ended June 30

Nine months ended September 30

Interest Interest

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

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

The taxable-equivalent adjustment was $1.9 million and $2.7 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

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

Three months ended September 30, 2020 Nine months ended September 30, 2020

Change from prior year period due to:

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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.

Third Quarter 2020 compared to Third Quarter 2019

The taxable-equivalent net interest income for the third quarter of 2020 totaled $354.3 million, an increase of $16.9 million, or 5.0%, compared to the third quarter of 2019.

The increase in net interest income was primarily due to an increase of $21.3 million in interest earned on loans due to loan growth and lower interest expense on deposits of $8.3 million, partially offset by a decrease in interest earned on overnight investments of $6.4 million.

Interest and fee income related to SBA-PPP loans totaled $29.8 million in the third quarter of 2020.

The taxable-equivalent NIM was 3.06% in the third quarter of 2020, a decrease of 71 basis points from the same quarter in the prior year.

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

Average interest-earning assets increased by $10.32 billion to $45.62 billion, compared to the third quarter of 2019.

The primary drivers for this change were higher average loan balances, which increased $5.72 billion, due to contributions from loans originated under the SBA-PPP as well as recent acquisitions and organic loan growth, higher average investment securities of $2.97 billion and higher average overnight investments of $1.63 billion.

The yield on interest-earning assets decreased by 82 basis points to 3.24% when compared to the third quarter of 2019.

The yield on loans and leases decreased to 4.06%, or by 55 basis points, primarily due to lower yields on commercial and home equity loans as a result of downward rate resets on variable rate loans and lower rates on originations.

The yield on overnight investments and investment securities decreased by 199 basis points and 82 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.

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

Average interest-bearing liabilities increased by $5.04 billion to $25.59 billion, compared to the third quarter of 2019.

This increase was primarily due to an increase in average interest-bearing deposit balances of $4.01 billion driven by contributions from organic deposit growth including SBA-PPP deposits, and recent acquisitions, as well as an increase in average long-term borrowings of $872.3 million.

Rates on interest-bearing liabilities decreased by 18 basis points to 0.32%, 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.

Nine Months of 2020 compared to Nine Months of 2019

The taxable-equivalent net interest income for the nine months ended September 30, 2020, was $1.03 billion, an increase of $44.5 million, or 4.5%, compared to the same period of 2019.

The increase in net interest income was primarily due to an increase of $78.7 million in interest earned on loans primarily due to loan growth, partially offset by a decrease in interest earned on overnight investments of $15.0 million as well as an increase in total interest expense of $12.0 million.

Interest and fee income related to SBA-PPP loans totaled $47.9 million in the first nine months of 2020.

The taxable-equivalent NIM was 3.23% for the nine months ended September 30, 2020, a decrease of 57 basis points from the same period of 2019.

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

Average year-to-date interest-earning assets for the nine months ended September 30, 2020, increased by $7.68 billion to $42.15 billion, compared to the same period in 2019.

This increase was primarily due to a $4.78 billion increase in average outstanding loans due the impact of growth from SBA-PPP loans, as well as recent acquisitions and organic loan growth.

This increase was coupled with increases in average investment securities of $1.92 billion, primarily consisting of mortgage-backed securities, and average overnight investments of $974.8 million.

The yield on interest-earning assets decreased by 57 basis points to 3.48% for the nine months ended September 30, 2020, compared to the same period in 2019.

The yield on loans and leases decreased by 38 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 187 basis points and 62 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.

The lower federal funds rate was the primary driver for the yield decrease on overnight investments, while the accelerated prepayments on mortgage-backed securities with reinvestment at lower yields were the primary drivers of the investment securities yield decline.

Average year-to-date interest-bearing liabilities for the nine months ended September 30, 2020 increased by $4.18 billion to $24.39 billion, compared to the same period in 2019.

This increase was primarily due to a $3.27 billion increase in average interest-bearing deposit balances driven by SBA-PPP related deposits, as well as recent acquisitions and organic growth.

The rate paid on interest-bearing deposits decreased by 4 basis points due primarily to decreased rates on time deposits, checking with interest deposits and money market accounts.

The rate paid on interest-bearing liabilities decreased by 1 basis points to 0.42% for the nine months ended September 30, 2020 compared to same period in 2019.

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.

BancShares recorded net provision expense of $4.0 million for the three months ended September 30, 2020 compared to $6.8 million for the same period in 2019.

This was due to stabilization in the macroeconomic forecasts, limited movement in credit quality metrics and continued low net charge-offs.

For the nine months ended September 30, 2020, BancShares recorded a net provision expense of $52.9 million, compared to $23.7 million for same period in 2019.

This increase was primarily COVID-19 related reserve build of $36.1 million as loss estimates consider the potential impact of slower economic activity and elevated unemployment, as well as potential mitigants due to government stimulus and loan accommodations.

Noninterest Income

NONINTEREST INCOME

Three months ended June 30 Six months ended June 30

Three months ended September 30 Nine months ended September 30

(Dollars in thousands) 2020 2019 2020 2019

7 unchanged sentences

ATM income 1,537 1,635 4,354 4,771

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

Marketable equity securities (losses) gains, net (2,701) (967) 10,461 13,505

Realized gains on investment securities available for sale, net 21,425 1,136 54,972 6,855

3 unchanged sentences

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

Noninterest income for the 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%.

Noninterest income for the third quarter of 2020 was $120.6 million, compared to $100.9 million for the same period of 2019, an increase of $19.6 million, or 19.5%.

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%.

• Gains on sales of investment securities available for sale increased by $20.3 million.

• Mortgage income increased by $5.7 million primarily due to origination volume brought about by lower mortgage rates.

• Cardholder services income increased by $3.8 million primarily due to a decline in credit card reward redemptions driven by COVID-19, as well as an increase in transaction volume particularly by business customers.

• Service charges on deposit accounts declined by $6.3 million primarily due to decreased customer activity and fees waived to aid our customers during the COVID-19 pandemic.

Noninterest income was $350.0 million for the first nine months of 2020, compared to $311.5 million for the same period of 2019, an increase of $38.5 million, or 12.4%.

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.

• Gains on sales of investment securities available for sale increased by $48.1 million.

• Mortgage income increased by $12.0 million primarily due to origination volume brought about by lower mortgage rates.

The production-related income was partially offset by mortgage servicing rights impairment of $4.3 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.

• Cardholder services income increased $4.4 million primarily due to a decline in credit card reward redemptions driven by COVID-19, as well as an increase in transaction volume particularly by business customers.

• Service charges on deposit accounts declined by $13.2 million primarily due to decreased customer activity and fees waived to aid our customers during the COVID-19 pandemic.

• Other noninterest income decreased $9.8 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.

1 unchanged sentence

NONINTEREST EXPENSE

Three months ended June 30 Six months ended June 30

Three months ended September 30 Nine months ended September 30

(Dollars in thousands) 2020 2019 2020 2019

14 unchanged sentences

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%.

Noninterest expense was $291.7 million during the third quarter of 2020, compared to $270.4 million for the same period in 2019, an increase of $21.2 million, or 7.9%.

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.

• Personnel expense increased $12.9 million primarily due to an increase in salaries and wages as a result of merit increases and additional headcount from recent acquisitions.

• Other noninterest expense increased $4.9 million primarily due to higher write-downs on OREO properties and increased pension costs due to a lower discount rate.

• Processing fees paid to third parties increased $4.7 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%.

Noninterest expense was $883.3 million for the first nine months of 2020, compared to $811.5 million for the same period in 2019, an increase of $71.8 million, or 8.9%.

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.

• Personnel expense increased by $42.0 million primarily due to an increase in salaries and wages as a result of merit increases and additional headcount from recent acquisitions.

• Processing fees paid to third parties increased $11.5 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.

• Other noninterest expense increased $10.5 million primarily due to higher provision related to unfunded loan commitments as a result of the potential economic impact of COVID-19 and increased pension costs due to a lower discount rate.

• Merger-related expenses increased $2.4 million primarily due to costs related to Entegra.

• Occupancy expense increased $2.2 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19.

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

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

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

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

• Telecommunications expense increased $2.2 million primarily due to equipment upgrades to increase network capacity to facilitate remote access as corporate employees continue to work from home.

Income tax expense was $35.8 million and $35.4 million for the third quarter of 2020 and 2019, respectively, representing effective tax rates of 20.1% and 22.1% during the periods.

Income tax expense was $89.5 million and $105.0 million for the nine months ended September 30, 2020 and 2019, respectively, representing effective tax rates of 20.2% and 22.8% during the periods.

The effective tax rates for the third quarter and first nine months of 2020 were favorably impacted by $3.5 million and $10.4 million, respectively, due to BancShares’ decision in the second quarter to utilize an allowable alternative for computing its 2020 federal income tax liability.

Without this alternative, the effective tax rate would have been approximately 22.0% and 22.6% for the third quarter and first nine months of 2020, respectively.

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.

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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.

Interest-earning assets totaled $45.96 billion and $37.23 billion at September 30, 2020 and December 31, 2019, respectively.

The $8.73 billion increase was primarily composed of a $3.96 billion increase in loans and leases, a $2.69 billion increase in investment securities and a $2.03 billion increase in overnight investments.

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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.

The carrying value of investment securities totaled $9.86 billion at September 30, 2020, an increase of $2.69 billion compared to December 31, 2019.

The increase in the portfolio was primarily attributable to deposit growth outpacing loan growth for the period, resulting in investment securities purchases of $8.80 billion, partially offset by sales of $4.22 billion and maturities and paydowns of $2.04 billion.

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.

1 unchanged sentence

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

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 of September 30, 2020, investment securities available for sale had a net pre-tax unrealized gain of $135.2 million, compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019.

Management evaluated the available for sale securities in an unrealized loss position and 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 September 30, 2020.

BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities.

Given the consistently strong credit rating of the U.S.

Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no allowance for credit losses was needed at September 30, 2020.

INVESTMENT SECURITIES

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(Dollars in thousands) Composition (1)

17 unchanged sentences

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.

Loans for held for sale were $120.3 million at September 30, 2020, a net increase of $52.4 million since December 31, 2019.

The increase is primarily due to originations of $775.9 million driven by low interest rates, partially offset by sales of $743.5 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.

Loans and leases held for investment were $32.85 billion at September 30, 2020, a net increase of $3.96 billion, representing annualized growth of 18.3% since December 31, 2019.

This increase was driven by a $4.03 billion net increase in the non-PCD portfolio offset by a $62.8 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.

The net increase in the non-PCD portfolio was due to $3.11 billion related to SBA-PPP loans as well as organic growth primarily in our commercial segments.

The net decrease in PCD loans was primarily due to pay downs and pay-offs, partially offset by a $19.0 million increase from the adoption of ASC 326.

Excluding 2020 loans related to SBA-PPP loans, total loans grew by 3.9% 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.

Non-PCD loans and leases at September 30, 2020 were $32.35 billion compared to $28.32 billion at December 31, 2019, representing 98.5% and 98.1% of total loans, respectively.

PCD loans at September 30, 2020 were $495.9 million, compared to $558.7 million of PCI loans at December 31, 2019, representing 1.5% and 1.9% of loans, respectively.

The discount related to acquired non-PCD loans and leases at September 30, 2020 and non-PCI loans and leases at December 31, 2019 was $23.0 million and $30.9 million, respectively.

The discount related to PCD loans at September 30, 2020 and PCI loans at December 31, 2019 was $49.2 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.

During the three months ended September 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $2.8 million and $3.6 million, respectively.

During the three months ended September 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $15.0 million and $16.5 million, respectively.

During the nine months ended September 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $7.8 million and $10.3 million, respectively.

During the nine months ended September 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $48.0 million and $46.1 million, respectively.

LOANS AND LEASES

(Dollars in thousands) June 30, 2020

(Dollars in thousands) September 30, 2020

Construction and land development $ 1,054,186

33 unchanged sentences

Net loans and leases $ 28,656,355

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.

ALLOWANCE FOR CREDIT LOSSES (“ACL”)

The ACL was $223.9 million at September 30, 2020, representing a decrease of $1.2 million since December 31, 2019.

The ACL as a percentage of total loans and leases was 0.68% at September 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 0.75% at September 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.

3 unchanged sentences

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

For the 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.

For the period ended September 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.

1 unchanged sentence

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.

Our model results consider baseline, adverse and upside scenarios.

To calculate the ACL, we utilized the baseline scenario, which includes improvements to the most significant assumptions and impact from government stimulus.

This result was calibrated using management’s expectation of borrower performance based upon COVID-19 residual risk by industry and geography.

These loss estimates were also influenced by BancShares strong credit quality, low net charge-offs and recent credit trends, which remained stable through the quarter ended September 30, 2020.

At September 30, 2020, the ACL allocated to non-PCD loans and leases was $198.8 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 September 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 impact 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 impact resulted in an increase of 11 basis points.

At September 30, 2020, the ACL for PCD loans totaled $25.1 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.

Net charge-offs for loans and leases were $2.6 million during the third quarter of 2020, compared to $6.5 million during the third quarter of 2019.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.03% and 0.10% for the third quarter of 2020 and 2019, respectively.

The net charge-off ratio was 0.07% and 0.10% for the nine months ended September 30, 2020 and 2019, respectively.

The ACL as of September 30, 2020, excluding SBA-PPP loans, covered approximately 9.4 times annualized year to date net charge-offs compared to 6.5 times at January 1, 2020 CECL adoption.

ALLOWANCE FOR CREDIT LOSSES

Three months ended June 30, 2020

Three months ended September 30, 2020

(Dollars in thousands) Construction

4 unchanged sentences

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

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

Provision (credits) 120 625 667 3,381 837 (958) (54) 708 1,341 (2,625) 4,042

1 unchanged sentence

Recoveries 264 65 10 1,999 275 336 23 401 1,684 1,319 6,376

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

Balance at September 30 $ 7,290 $ 23,092 $ 22,826 $ 26,772 $ 43,731 $ 25,659 $ 1,609 $ 9,183 $ 38,647 $ 25,127 $ 223,936

Three months ended September 30, 2019

(Dollars in thousands) Construction

4 unchanged sentences

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

mortgage Construction and land development - consumer Consumer PCI Total

Balance at July 1 $ 31,944 $ 48,962 $ 2,342 $ 56,901 $ 2,183 $ 16,932 $ 21,121 $ 2,750 $ 35,105 $ 8,343 $ 226,583

Provision (credits) 208 (1,337) (90) 4,714 54 1,024 (153) 148 3,674 (1,476) 6,766

1 unchanged sentence

Recoveries 52 226 — 611 20 68 201 — 1,945 — 3,123

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

Balance at September 30 $ 32,088 $ 47,850 $ 2,252 $ 59,179 $ 2,215 $ 17,711 $ 20,635 $ 2,898 $ 35,130 $ 6,867 $ 226,825

Nine months ended September 30, 2020

(Dollars in thousands) Construction

10 unchanged sentences

Recoveries 400 360 107 4,156 555 1,174 52 1,106 4,546 5,378 17,834

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

Balance at September 30 $ 7,290 $ 23,092 $ 22,826 $ 26,772 $ 43,731 $ 25,659 $ 1,609 $ 9,183 $ 38,647 $ 25,127 $ 223,936

Nine months ended September 30, 2019

(Dollars in thousands) Construction

10 unchanged sentences

Recoveries 223 502 1 1,748 685 293 1,035 — 5,315 — 9,802

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.

Balance at September 30 $ 32,088 $ 47,850 $ 2,252 $ 59,179 $ 2,215 $ 17,711 $ 20,635 $ 2,898 $ 35,130 $ 6,867 $ 226,825

The reserve for unfunded loan commitments was $14.0 million and $1.1 million at September 30, 2020 and December 31, 2019, respectively.

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

ALLOWANCE FOR CREDIT LOSSES RATIOS

Three months ended June 30 Six months ended June 30

Three months ended September 30 Nine months ended September 30

(Dollars in thousands) 2020 2019 2020 2019

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Total 0.68 0.83 0.68 0.83

(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%.

(1) Loans originated in relation to the SBA-PPP ($3.11 billion as of September 30, 2020) do not have a recorded ACL.

As of September 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 0.75%.

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.

At September 30, 2020, BancShares’ nonperforming assets totaled $239.2 million, an increase of $71.0 million since December 31, 2019.

Nonaccrual loans and leases at September 30, 2020 were $186.5 million, reflecting an increase of $64.8 million since December 31, 2019.

Nonaccrual loans and leases as a percentage of total loans and leases was 0.57% and 0.42% at September 30, 2020 and December 31, 2019, respectively.

Contributing to this increase was 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 September 30, 2020, there were $27.5 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.

At September 30, 2020, OREO totaled $52.8 million, representing an increase of $6.2 million since December 31, 2019 due primarily to additions of OREO through acquisitions of $9.3 million.

Nonperforming assets as a percentage of total loans was 0.73% as of September 30, 2020 compared to 0.58% as of December 31, 2019.

The additional PCI nonaccrual loans and acquired OREO resulted in an increase of 11 basis points to the nonperforming assets ratio at September 30, 2020.

NONPERFORMING ASSETS

Second First Fourth Third Second

Third Second First Fourth Third

(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter

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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.

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 accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty.

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

TROUBLED DEBT RESTRUCTURINGS

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

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

Accruing TDRs:

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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.

Interest-bearing liabilities totaled $25.96 billion at September 30, 2020, compared to $22.83 billion at December 31, 2019.

The $3.13 billion increase was due to an increase in interest-bearing deposits of $2.51 billion and an increase in total borrowings of $619.0 million.

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

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

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

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

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

At September 30, 2020, total deposits were $42.25 billion, an increase of $7.82 billion, representing annualized growth of 30.3% since December 31, 2019.

Excluding SBA-PPP deposits of $1.30 billion, total deposits increased $6.52 billion, or by 25.3% annualized, over the same time period.

This organic growth primarily occurred in demand and money market accounts, partially offset by a decline in time deposits.

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

Demand $ 18,234,561 $ 12,926,796

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Total deposits $ 42,250,606 $ 34,431,236

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

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

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

At September 30, 2020, total borrowings were $1.95 billion compared to $1.33 billion at December 31, 2019.

The $619.0 million increase was primarily due to a subordinated debt issuance that resulted in $341.0 million outstanding, an increase in securities sold under customer repurchase agreements of $250.9 million, and an increase in FHLB borrowings of $83.0 million, partially offset by a decrease in other borrowings of $55.9 million.

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

Securities sold under customer repurchase agreements $ 693,889 $ 442,956

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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.

The capital raise provided 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 nine months ended September 30, 2020 and 2019.

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

There were no repurchases of Class B common stock or the preferred stock during the three and nine months ended September 30, 2020.

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

Three months ended September 30 Nine months ended September 30

($ in thousands, expect per share data) 2020 2019 2020 2019

Number of shares repurchased 117,700 295,900 813,090 744,400

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Average price per share $ 399.82 $ 457.50 $ 410.48 $ 437.84

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.

Upon expiration of most recent authorization on July 31, 2020, share repurchase activity has ended and will be reevaluated in subsequent periods.

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

CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING

Second First Fourth Third Second

Third Second First Fourth Third

(in thousands) Quarter Quarter Quarter Quarter Quarter

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ANALYSIS OF CAPITAL ADEQUACY

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

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

(Dollars in thousands) Amount Ratio Amount Ratio

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5.00 4,165,911 8.73 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.

(1) The SBA-PPP program added $3.11 billion in outstanding loan balances and consequently decreased BancShares’ Tier 1 leverage ratio by 63 bps;

BancShares’ Tier 1 leverage ratio would be estimated at 8.43% at September 30, 2020 without the impact the SBA PPP program.

(2) The SBA-PPP program added $3.11 billion in outstanding loan balances and consequently decreased FCB’s Tier 1 leverage ratio by 71 bps;

FCB’s Tier 1 leverage ratio would be estimated at 9.44% at September 30, 2020 without the impact the SBA PPP program.

As of September 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.

BancShares and FCB had capital conservation buffers of 5.48% and 5.66%, respectively, at September 30, 2020, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

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

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.

As of September 30, 2020, COVID-19 related loan extensions decreased to approximately $466.6 million in outstanding loan balances, representing approximately $13.4 million in payment deferrals.

Through September 30, 2020, over 94% of all COVID-19 related loan extensions have begun repayment.

Delinquency trends among loans entering repayment are in line with the remainder of the portfolio.

We have not seen significant declines in overall credit quality, though the impact of the SBA-PPP and payment extensions could be delaying signs of credit deterioration.

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

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

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

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

These loss estimates additionally considered BancShares 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.

BancShares originated approximately 23,000 SBA-PPP loans with an outstanding balance of $3.11 billion at September 30, 2020.

Our ACL estimate for the quarter ended September 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 elevated unemployment, as well as potential mitigating impact from the government stimulus and loan modification programs.

Interest rate risk management

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

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

NET INTEREST INCOME SENSITIVITY ANALYSIS

Estimated percentage increase (decrease) in net interest income

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

Estimated percentage (decrease) increase in net interest income

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

-100 (3.44) % (8.00) %

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+200 13.19 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.

The increased asset sensitivity in net interest income sensitivity metrics as of September 30, 2020 compared to December 31, 2019 continues to be affected by the substantial influx of non-maturity deposits that began in the second quarter of 2020 and continued through the third quarter of 2020.

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

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

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

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

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS

Estimated percentage increase (decrease) in EVE

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

Estimated percentage (decrease) increase in EVE

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

-100 (23.93) % (8.25) %

1 unchanged sentence

+200 16.73 (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.

The economic value of equity metrics at September 30, 2020 compared to December 31, 2019 were primarily affected by continued growth in non-maturity deposits of nearly $1.0 billion during the third quarter of 2020 on top of the $6.5 billion increase during the second quarter of 2020.

During the third quarter, we implemented assumption changes as a result of an updated core deposit study.

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

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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.

Our primary source of liquidity is our branch-generated retail deposit portfolio due to the generally stable balances and low cost.

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 $8.51 billion at September 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.

Outstanding FHLB advances were $655.2 million as of September 30, 2020, and we had sufficient collateral pledged to secure $7.54 billion of additional borrowings from the FHLB of Atlanta.

Also, at September 30, 2020, $3.97 billion in non-PCD loans with a lendable collateral value of $3.21 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 $625.0 million of available capacity at September 30, 2020.

CRITICAL ACCOUNTING ESTIMATES

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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.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, risks, uncertainties and other factors relating to our announced merger with CIT through a series of merger transactions, including the ability to obtain regulatory approvals and meet other closing conditions to the Transaction, such as approval by our shareholders of the issuance of the shares of our common stock to be issued in the First-Step Merger and approval of the Merger Agreement by CIT’s shareholders, and delay in closing the Transaction, as well as risks, uncertainties and other factors relating to the impact 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 our prior acquisitions, the risks discussed in Part II, Item 1A.

Risk Factors and other developments or changes in our business that we do not expect.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis