FIRST CITIZENS BANCSHARES INC /DE/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (“BancShares”). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our 2019 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2020, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares. EXECUTIVE OVERVIEW BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (“FCB”), a state-chartered bank organized under the laws of the state of North Carolina. BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue. We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people. Refer to our 2019 Annual Report on Form 10-K for further discussion of our strategy. RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date. In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability. This uncertainty has led to volatility in the financial markets. This impact was coupled with spikes in unemployment as a result of business shutdowns that 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 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 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. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program (“SBA-PPP”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and United States (“U.S.”) Treasury to the public. This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020 and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria. In addition, there were other regulatory actions taken that may impact our business including changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts. Further legislation is expected as the government continues to mitigate the economic impact on the crisis. 40 Table of Contents BANCSHARES’ COVID-19 CONTINUED MONITORING AND RESPONSE BancShares 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. 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 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. Table 1 SBA-PPP LOANS BY LOAN SIZE (Dollars in thousands) Loan Size $ of Loans % of Loans $ Less than $150,000 $ 862,026 27.7 % $150,000 to $2,000,000 1,766,649 56.8 Greater than $2,000,000 484,001 15.5 Total $ 3,112,676 100.0 % Strong Liquidity and Capital Position We maintain a strong level of liquidity. 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 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 On January 1, 2020 BancShares adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new credit loss methodology for the estimation of credit losses.The amendments in this ASU require loss estimates be determined over an asset’s lifetime and broaden the information that an entity must consider in developing its expected credit losses. BancShares adopted this ASU using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30 and debt securities available for sale. Refer to Note A - Accounting Policies and Basis of Presentation for additional information. Upon adoption, BancShares recorded a net decrease of $37.9 million in the Allowance for Credit Losses (“ACL”) which included a decrease of $56.9 million in the ACL on non-purchased credit deteriorated (“non-PCD”) loans, offset by an increase of $19.0 million in the ACL on purchased credit deteriorated (“PCD”) loans. The $56.9 million change in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in a net increase in retained earnings of $36.9 million. The $19.0 million increase in the ACL on PCD loans was a reclassification of the PCD credit discount and resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes. 41 Table of Contents 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 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 $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%. 42 Table of Contents Year to Date Highlights • 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 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. 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. 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. 43 Table of Contents Table 2 SELECTED QUARTERLY DATA 2020 2019 (1) Nine months ended September 30 Third Second First Fourth Third (Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter 2020 2019 SUMMARY OF OPERATIONS Interest income $ 374,334 $ 363,257 $ 369,559 $ 354,048 $ 362,318 $ 1,107,150 $ 1,049,963 Interest expense 20,675 25,863 31,159 26,924 25,893 77,697 65,718 Net interest income 353,659 337,394 338,400 327,124 336,425 1,029,453 984,245 Provision for credit losses 4,042 20,552 28,355 7,727 6,766 52,949 23,714 Net interest income after provision for credit losses 349,617 316,842 310,045 319,397 329,659 976,504 960,531 Noninterest income 120,572 165,402 64,011 104,393 100,930 349,985 311,468 Noninterest expense 291,662 291,679 299,971 292,262 270,425 883,312 811,479 Income before income taxes 178,527 190,565 74,085 131,528 160,164 443,177 460,520 Income taxes 35,843 36,779 16,916 29,654 35,385 89,538 105,023 Net income 142,684 153,786 57,169 101,874 124,779 353,639 355,497 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 Net income $ 14.03 $ 14.74 $ 5.46 $ 9.55 $ 11.27 $ 33.96 $ 31.50 Cash dividends on common shares 0.40 0.40 0.40 0.40 0.40 1.20 1.20 Market price at period end (Class A) 318.78 405.02 332.87 532.21 471.55 318.78 471.55 Book value at period-end 380.43 367.57 351.90 337.38 327.86 380.43 327.86 SELECTED QUARTERLY AVERAGE BALANCES Total assets $ 48,262,155 $ 45,553,502 $ 40,648,806 $ 38,326,641 $ 37,618,836 $ 44,834,045 $ 36,770,191 Investment securities 9,930,197 8,928,467 7,453,159 7,120,023 6,956,981 8,774,840 6,851,348 Loans and leases (2) 32,694,996 31,635,958 29,098,101 27,508,062 26,977,476 31,148,683 26,368,922 Interest-earning assets 45,617,376 42,795,781 38,004,341 36,032,680 35,293,979 42,151,861 34,473,814 Deposits 41,905,844 39,146,415 34,750,061 33,295,141 32,647,264 38,612,836 31,856,771 Interest-bearing liabilities 25,591,707 24,407,285 23,153,777 20,958,943 20,551,393 24,388,339 20,204,705 Securities sold under customer repurchase agreements 710,237 659,244 474,231 495,804 533,371 614,920 542,618 Other short-term borrowings — 45,549 157,759 28,284 23,236 67,522 21,335 Long-term borrowings 1,256,331 1,275,928 961,132 467,223 384,047 1,164,475 366,850 Common shareholders' equity 3,679,138 3,648,284 3,625,975 3,570,872 3,580,235 3,651,132 3,545,418 Shareholders’ equity $ 4,019,075 $ 3,988,225 $ 3,682,634 $ 3,570,872 $ 3,580,235 $ 3,896,645 $ 3,545,418 Common shares outstanding 9,836,629 10,105,520 10,473,119 10,708,084 11,060,462 10,137,321 11,286,984 SELECTED QUARTER-END BALANCES Total assets (1) $ 48,666,873 $ 47,866,194 $ 41,594,453 $ 39,824,496 $ 37,748,324 $ 48,666,873 $ 37,748,324 Investment securities 9,860,594 9,508,476 8,845,197 7,173,003 7,167,680 9,860,594 7,167,680 Loans and leases 32,845,144 32,418,425 29,240,959 28,881,496 27,196,511 32,845,144 27,196,511 Deposits 42,250,606 41,479,245 35,346,711 34,431,236 32,743,277 42,250,606 32,743,277 Securities sold under customer repurchase agreements 693,889 740,276 540,362 442,956 522,195 693,889 522,195 Other short-term borrowings — — 105,000 295,277 — — — Long-term borrowings 1,252,016 1,258,719 1,297,132 588,638 453,876 1,252,016 453,876 Shareholders’ equity $ 4,074,414 $ 3,991,444 $ 3,957,520 $ 3,586,184 $ 3,568,482 $ 4,074,414 $ 3,568,482 Common shares outstanding 9,816,405 9,934,105 10,280,105 10,629,495 10,884,005 9,816,405 10,884,005 SELECTED RATIOS AND OTHER DATA Return on average assets (annualized) 1.18 % 1.36 % 0.57 % 1.05 % 1.32 % 1.05 % 1.29 % Return on average common shareholders’ equity (annualized) 14.93 16.43 6.34 11.32 13.83 12.59 13.41 Net yield on interest-earning assets (taxable equivalent) 3.06 3.14 3.55 3.59 3.77 3.23 3.80 Net charge-offs (annualized) to average loans and leases 0.03 0.09 0.10 0.14 0.10 0.07 0.10 Allowance for credit losses to total loans and leases (3) : PCD 5.07 5.07 4.80 1.35 1.34 5.07 1.34 Non-PCD 0.61 0.61 0.64 0.77 0.82 0.61 0.82 Total 0.68 0.69 0.72 0.78 0.83 0.68 0.83 Ratio of total nonperforming assets to total loans, leases and other real estate owned (4) 0.73 0.77 0.79 0.58 0.57 0.73 0.57 Tier 1 risk-based capital ratio 11.48 11.38 11.43 10.86 11.80 11.48 11.80 Common equity Tier 1 ratio 10.43 10.32 10.36 10.86 11.80 10.43 11.80 Total risk-based capital ratio 13.70 13.63 13.65 12.12 13.09 13.70 13.09 Tier 1 leverage capital ratio 7.80 8.07 8.98 8.81 9.18 7.80 9.18 Dividend payout ratio 2.85 2.71 7.33 4.19 3.55 3.53 3.81 Average loans and leases to average deposits 78.02 80.81 83.74 82.62 82.63 80.67 82.77 (1) We adopted ASC Topic 326 (“CECL”) utilizing the modified retrospective approach. We did not restate selected financial data for the quarters prior to 2020 presented above. (2) Average loan and lease balances include PCD loans, non-PCD loans and leases, loans held for sale and nonaccrual loans and leases. (3) Loans originated in relation to the SBA-PPP ($3.11 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. This increased the amount of nonaccrual loans as those nonaccrual loans within performing PCI pools were previously excluded from reporting. As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools. Of these nonaccrual loans, $27.5 million were outstanding as of September 30, 2020. 44 Table of Contents 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. On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Company, Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank, into FCB. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. The merger contributed $222.1 million in consolidated assets, which included $686 thousand of goodwill, $134.0 million in loans, and $209.3 million in deposits. See Note B - Business Combinations for additional disclosures. Entegra Financial Corp. On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. In order to obtain regulatory approval, FCB entered into an agreement for Select Bank to purchase three of our North Carolina branches, located in Highlands, Sylva and Franklin. On April 17, 2020, FCB completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with a fair value of $110.1 million, $2.1 million and $184.8 million, respectively. The Select Bank purchase price for the divested branches included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank. Federal Deposit Insurance Corporation Assisted Transactions BancShares completed fourteen Federal Deposit Insurance Corporation (“FDIC”) assisted transactions between 2009 and 2017. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. As of 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 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. 45 Table of Contents Table 3 CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS Three months ended September 30 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Loans and leases $ 32,694,996 $ 336,934 4.06 % $ 26,977,476 $ 315,621 4.61 % Investment securities: U.S. Treasury 695,419 497 0.28 834,577 5,262 2.50 Government agency 587,377 1,335 0.91 628,322 4,742 3.02 Mortgage-backed securities 8,047,247 28,236 1.40 5,195,711 27,891 2.15 Corporate bonds 489,602 6,433 5.26 149,888 1,912 5.10 Other investments 110,552 739 2.66 148,483 636 1.70 Total investment securities 9,930,197 37,240 1.50 6,956,981 40,443 2.32 Overnight investments 2,992,183 757 0.10 1,359,522 7,151 2.09 Total interest-earning assets 45,617,376 374,931 3.24 35,293,979 363,215 4.06 Cash and due from banks 349,079 256,379 Premises and equipment 1,261,864 1,224,118 Allowance for credit losses (222,793) (227,707) Other real estate owned 52,716 46,131 Other assets 1,203,913 1,025,936 Total assets $ 48,262,155 $ 37,618,836 Liabilities Interest-bearing deposits: Checking with interest $ 9,239,838 $ 1,369 0.06 % $ 7,361,758 $ 1,509 0.08 % Savings 3,070,619 314 0.04 2,636,583 528 0.08 Money market accounts 8,108,832 3,634 0.18 6,088,740 6,610 0.43 Time deposits 3,205,850 8,151 1.01 3,523,658 13,090 1.47 Total interest-bearing deposits 23,625,139 13,468 0.23 19,610,739 21,737 0.44 Securities sold under customer repurchase agreements 710,237 395 0.22 533,371 542 0.40 Other short-term borrowings — — — 23,236 203 3.50 Long-term borrowings 1,256,331 6,812 2.15 384,047 3,411 3.51 Total interest-bearing liabilities 25,591,707 20,675 0.32 20,551,393 25,893 0.50 Noninterest-bearing deposits 18,280,705 13,036,525 Other liabilities 370,668 450,683 Shareholders’ equity 4,019,075 3,580,235 Total liabilities and shareholders’ equity $ 48,262,155 $ 37,618,836 Interest rate spread 2.92 % 3.56 % Net interest income and net yield on interest-earning assets $ 354,256 3.06 % $ 337,322 3.77 % Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the three months ended September 30, 2020 and 2019. The taxable-equivalent adjustment was $597 thousand and $897 thousand for the three months ended September 30, 2020 and 2019, respectively. 46 Table of Contents Table 4 CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS Nine months ended September 30 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Loans and leases $ 31,148,683 $ 989,708 4.20 % $ 26,368,922 $ 910,993 4.58 % Investment securities: U.S. Treasury 401,666 2,853 0.95 1,062,901 18,529 2.33 Government agency 655,097 6,883 1.40 434,097 10,084 3.10 Mortgage-backed securities 7,224,224 87,475 1.61 5,075,959 84,855 2.23 Corporate bonds 332,029 12,692 5.10 147,579 5,780 5.22 Other investments 161,824 3,653 3.02 130,812 1,552 1.59 Total investment securities 8,774,840 113,556 1.73 6,851,348 120,800 2.35 Overnight investments 2,228,338 5,828 0.35 1,253,544 20,820 2.22 Total interest-earning assets 42,151,861 1,109,092 3.48 34,473,814 1,052,613 4.05 Cash and due from banks 351,334 277,736 Premises and equipment 1,258,147 1,214,960 Allowance for credit losses (206,737) (227,081) Other real estate owned 53,871 46,488 Other assets 1,225,569 984,274 Total assets $ 44,834,045 $ 36,770,191 Liabilities Interest-bearing deposits: Checking with interest $ 8,665,758 $ 4,380 0.07 % $ 7,467,762 $ 4,457 0.08 % Savings 2,837,867 911 0.04 2,606,781 1,260 0.06 Money market accounts 7,583,359 19,262 0.34 5,950,591 16,249 0.37 Time deposits 3,454,438 31,025 1.20 3,248,768 31,854 1.31 Total interest-bearing deposits 22,541,422 55,578 0.33 19,273,902 53,820 0.37 Securities sold under customer repurchase agreements 614,920 1,236 0.27 542,618 1,516 0.37 Other short-term borrowings 67,522 1,052 2.05 21,335 481 2.99 Long-term borrowings 1,164,475 19,831 2.24 366,850 9,900 3.56 Total interest-bearing liabilities 24,388,339 77,697 0.42 20,204,705 65,717 0.43 Noninterest-bearing deposits 16,071,414 12,582,869 Other liabilities 477,647 437,199 Shareholders’ equity 3,896,645 3,545,418 Total liabilities and shareholders’ equity $ 44,834,045 $ 36,770,191 Interest rate spread 3.06 % 3.62 % Net interest income and net yield on interest-earning assets $ 1,031,395 3.23 % $ 986,896 3.80 % 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 nine months ended September 30, 2020 and September 30, 2019. 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. 47 Table of Contents Table 4 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME Three months ended September 30, 2020 Nine months ended September 30, 2020 Change from prior year period due to: Change from prior year period due to: (Dollars in thousands) Volume (1) Yield/Rate (1) Total Change Volume (1) Yield/Rate (1) Total Change Assets Loans and leases $ 70,257 $ (48,944) $ 21,313 $ 166,172 $ (87,457) $ 78,715 Investment securities: U.S. Treasury (889) (3,876) (4,765) (11,531) (4,145) (15,676) Government agency (309) (3,098) (3,407) 5,134 (8,335) (3,201) Mortgage-backed securities 16,028 (15,683) 345 38,131 (35,511) 2,620 Corporate bonds 4,334 187 4,521 7,224 (312) 6,912 Other investments (164) 267 103 362 1,739 2,101 Total investment securities 19,000 (22,203) (3,203) 39,320 (46,564) (7,244) Overnight investments 8,544 (14,938) (6,394) 16,203 (31,195) (14,992) Total interest-earning assets $ 97,801 $ (86,085) $ 11,716 $ 221,695 $ (165,216) $ 56,479 Liabilities Interest-bearing deposits: Checking with interest $ 380 $ (520) $ (140) $ 704 $ (781) $ (77) Savings 85 (299) (214) 110 (459) (349) Money market accounts 2,169 (5,145) (2,976) 4,407 (1,394) 3,013 Time deposits (1,213) (3,726) (4,939) 1,934 (2,763) (829) Total interest-bearing deposits 1,421 (9,690) (8,269) 7,155 (5,397) 1,758 Securities sold under customer repurchase agreements 178 (325) (147) 199 (479) (280) Other short-term borrowings (203) — (203) 681 (110) 571 Long-term borrowings 7,717 (4,316) 3,401 14,003 (4,072) 9,931 Total interest-bearing liabilities 9,113 (14,331) (5,218) 22,038 (10,058) 11,980 Change in net interest income $ 88,688 $ (71,754) $ 16,934 $ 199,657 $ (155,158) $ 44,499 (1) The rate/volume variance is allocated proportionally between the changes in volume and rate. RESULTS OF OPERATIONS Net Interest Income and Margin (Taxable-Equivalent Basis) 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 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. 48 Table of Contents 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. 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 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 $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 Table 6 NONINTEREST INCOME Three months ended September 30 Nine months ended September 30 (Dollars in thousands) 2020 2019 2020 2019 Service charges on deposit accounts $ 20,841 $ 27,112 $ 64,776 $ 77,967 Wealth management services 26,369 25,212 75,152 74,786 Cardholder services, net 19,756 15,957 55,503 51,069 Other service charges and fees 7,892 8,237 22,829 23,823 Merchant services, net 6,763 6,034 18,014 18,324 Mortgage income 13,106 7,438 28,141 16,134 Insurance commissions 3,576 2,960 10,453 9,105 ATM income 1,537 1,635 4,354 4,771 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 Other 2,008 6,176 5,330 15,129 Total noninterest income $ 120,572 $ 100,930 $ 349,985 $ 311,468 49 Table of Contents Noninterest income is an essential component of our total revenue and is critical to our profitability level. The primary sources of noninterest income consist of fees and service charges generated from deposit accounts, cardholder and merchant services, wealth management services, and mortgage lending and servicing. Noninterest income for the 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: • 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 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. • 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. Noninterest Expense Table 7 NONINTEREST EXPENSE Three months ended September 30 Nine months ended September 30 (Dollars in thousands) 2020 2019 2020 2019 Salaries and wages $ 147,297 $ 137,841 $ 439,185 $ 406,788 Employee benefits 31,788 28,358 100,663 91,090 Occupancy expense 27,990 28,163 85,026 82,810 Equipment expense 29,430 28,770 86,054 83,999 Processing fees paid to third parties 11,927 7,250 32,485 20,980 FDIC insurance expense 2,167 2,440 9,364 7,857 Collection and foreclosure-related expenses 2,168 3,044 10,171 9,725 Merger-related expenses 3,507 3,892 12,108 9,695 Telecommunications expense 3,197 2,391 8,985 6,825 Consultant expense 2,936 2,764 9,223 9,284 Advertising expense 2,396 2,937 7,045 8,431 Core deposit intangible amortization 3,468 4,049 10,999 12,529 Other 23,391 18,526 72,004 61,466 Total noninterest expense $ 291,662 $ 270,425 $ 883,312 $ 811,479 50 Table of Contents The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense. Noninterest expense was $291.7 million during the 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 $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. 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 $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 $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. • 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 Taxes 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. We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors. INTEREST-EARNING ASSETS Interest-earning assets include investment securities, loans and leases, and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to higher levels of market risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum. Interest-earning assets totaled $45.96 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. 51 Table of Contents Investment Securities The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities with minimal liquidity and credit risk, and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio and into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C - Investments for additional disclosures. The carrying value of investment securities totaled $9.86 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. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption. As of January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities. 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. 52 Table of Contents Table 8 INVESTMENT SECURITIES September 30, 2020 December 31, 2019 (Dollars in thousands) Composition (1) Cost Fair value Composition (1) Cost Fair value Investment securities available for sale U.S. Treasury 6.6 % $ 654,588 $ 654,762 5.7 % $ 409,397 $ 409,999 Government agency 6.6 659,260 654,941 9.5 684,085 682,772 Residential mortgage-backed securities 61.4 5,968,192 6,069,668 73.4 5,269,060 5,267,090 Commercial mortgage-backed securities 11.1 1,058,640 1,090,210 5.3 373,105 380,020 Corporate bonds 5.6 543,868 550,207 2.8 198,278 201,566 State, county and municipal — — — 1.7 118,227 118,227 Total investment securities available for sale 91.3 8,884,548 9,019,788 98.4 7,052,152 7,059,674 Investment in marketable equity securities 0.9 100,408 93,074 1.2 59,262 82,333 Investment securities held to maturity Residential mortgage-backed securities 6.4 614,489 627,394 — — — Commercial mortgage-backed securities 1.3 130,987 131,602 — — — Other 0.1 2,256 2,256 0.4 30,996 30,996 Total investment securities held to maturity 7.8 747,732 761,252 0.4 30,996 30,996 Total investment securities 100.0 % $ 9,732,688 $ 9,874,114 100.0 % $ 7,142,410 $ 7,173,003 (1) Calculated as a percent of the total fair value of investment securities. Loans and Leases 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 $32.85 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 $3.11 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 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 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. 53 Table of Contents Table 9 LOANS AND LEASES (Dollars in thousands) September 30, 2020 Commercial: Construction and land development $ 1,054,186 Owner occupied commercial mortgage 10,683,822 Non-owner occupied commercial mortgage 2,965,904 Commercial and industrial and leases 4,797,344 SBA-PPP 3,112,676 Total commercial loans 22,613,932 Consumer: Residential mortgage 5,463,646 Revolving mortgage 2,145,506 Construction and land development 347,850 Consumer auto 1,234,196 Consumer other 544,136 Total consumer loans 9,735,334 Total non-PCD loans and leases 32,349,266 PCD loans 495,878 Total loans and leases 32,845,144 Less allowance for credit losses (223,936) Net loans and leases $ 32,621,208 (Dollars in thousands) December 31, 2019 Commercial: Construction and land development $ 1,013,454 Commercial mortgage 12,282,635 Other commercial real estate 542,028 Commercial and industrial and leases 4,403,792 Other 310,093 Total commercial loans 18,552,002 Noncommercial: Residential mortgage 5,293,917 Revolving mortgage 2,339,072 Construction and land development 357,385 Consumer 1,780,404 Total noncommercial loans 9,770,778 Total non-PCI loans and leases 28,322,780 PCI loans 558,716 Total loans and leases 28,881,496 Less allowance for loan and lease losses (225,141) Net loans and leases $ 28,656,355 54 Table of Contents ALLOWANCE FOR CREDIT LOSSES (“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. The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. This decrease was partially offset by an increase in the consumer segments due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period ended 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. Assumptions revert to long term historic averages over a one year period. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Our model results 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 $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. 55 Table of Contents Table 10 ALLOWANCE FOR CREDIT LOSSES Three months ended September 30, 2020 (Dollars in thousands) Construction and land development - commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial and industrial and leases Residential mortgage Revolving mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total Allowance for credit losses: Balance at 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 Charge-offs — (87) — (3,241) (253) (359) — (824) (3,673) (495) (8,932) Recoveries 264 65 10 1,999 275 336 23 401 1,684 1,319 6,376 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 and land development - commercial Commercial mortgage Other commercial real estate Commercial and industrial and leases Other Residential mortgage Revolving mortgage Construction and land development - consumer Consumer 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 Charge-offs (116) (1) — (3,047) (42) (313) (534) — (5,594) — (9,647) Recoveries 52 226 — 611 20 68 201 — 1,945 — 3,123 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 and land development - commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial and industrial and leases Residential mortgage Revolving mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total Balance at December 31 $ 33,213 $ 36,444 $ 11,102 $ 61,610 $ 18,232 $ 19,702 $ 2,709 $ 4,292 $ 30,301 $ 7,536 $ 225,141 Adoption of ASC 326 (31,061) (19,316) 460 (37,637) 17,118 3,665 (1,291) 1,100 10,037 19,001 (37,924) Balance at January 1 $ 2,152 $ 17,128 $ 11,562 $ 23,973 $ 35,350 $ 23,367 $ 1,418 $ 5,392 $ 40,338 $ 26,537 $ 187,217 Provision (credits) 4,876 6,011 11,165 10,802 9,339 2,557 209 5,708 7,253 (4,971) 52,949 Initial allowance on PCD loans — — — — — — — — — 1,193 1,193 Charge-offs (138) (407) (8) (12,159) (1,513) (1,439) (70) (3,023) (13,490) (3,010) (35,257) Recoveries 400 360 107 4,156 555 1,174 52 1,106 4,546 5,378 17,834 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 and land development - commercial Commercial mortgage Other commercial real estate Commercial and industrial and leases Other Residential mortgage Revolving mortgage Construction and land development - non - commercial Consumer PCI Total Balance at January 1 $ 35,270 $ 43,451 $ 2,481 $ 55,620 $ 2,221 $ 15,472 $ 21,862 $ 2,350 $ 35,841 $ 9,144 $ 223,712 Provision (credits) (3,217) 4,748 (230) 10,138 (618) 2,903 (272) 548 11,991 (2,277) 23,714 Charge-offs (188) (851) — (8,327) (73) (957) (1,990) — (18,017) — (30,403) Recoveries 223 502 1 1,748 685 293 1,035 — 5,315 — 9,802 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. 56 Table of Contents Table 11 ALLOWANCE FOR CREDIT LOSSES RATIOS Three months ended September 30 Nine months ended September 30 (Dollars in thousands) 2020 2019 2020 2019 Average loans and leases: PCD $ 512,559 $ 530,390 $ 529,819 $ 551,065 Non-PCD 32,065,084 26,379,156 30,525,411 25,762,098 Loans and leases at period-end: PCD 495,878 513,589 495,878 513,589 Non-PCD 32,349,266 26,682,922 32,349,266 26,682,922 Allowance for credit losses allocated to: PCD 25,127 6,867 25,127 6,867 Non-PCD 198,809 219,958 198,809 219,958 Total $ 223,936 $ 226,825 $ 223,936 $ 226,825 Net charge-offs (recoveries) to average loans and leases: PCD (0.64) % — % (0.60) % — % Non-PCD 0.04 0.10 0.09 0.11 Total 0.03 0.10 0.07 0.10 Allowance for credit losses to total loans and leases (1) : PCD 5.07 1.34 5.07 1.34 Non-PCD 0.61 0.82 0.61 0.82 Total 0.68 0.83 0.68 0.83 (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%. 57 Table of Contents NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”). 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 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. Table 12 NONPERFORMING ASSETS 2020 2019 Third Second First Fourth Third (Dollars in thousands) Quarter Quarter Quarter Quarter Quarter Nonaccrual loans and leases: Non-PCD $ 130,927 $ 135,280 $ 121,337 $ 114,946 $ 108,816 PCD 55,527 62,511 53,234 6,743 829 Other real estate owned 52,789 53,850 55,707 46,591 46,253 Total nonperforming assets $ 239,243 $ 251,641 $ 230,278 $ 168,280 $ 155,898 Accruing loans and leases 90 days or more past due Non-PCD $ 3,587 $ 3,644 $ 2,933 $ 3,291 $ 4,247 PCD — 152 37 24,257 23,287 Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.73 % 0.77 % 0.79 % 0.58 % 0.57 % TROUBLED DEBT RESTRUCTURINGS We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Troubled debt restructurings (“TDRs”) not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans. The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify 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. 58 Table of Contents Table 13 TROUBLED DEBT RESTRUCTURINGS (Dollars in thousands) September 30, 2020 December 31, 2019 Accruing TDRs: Non-PCD $ 141,978 $ 111,676 PCD 16,801 17,074 Total accruing TDRs 158,779 128,750 Nonaccruing TDRs: Non-PCD 41,577 42,331 PCD 6,774 111 Total nonaccruing TDRs 48,351 42,442 All TDRs: Non-PCD 183,555 154,007 PCD 23,575 17,185 Total TDRs $ 207,130 $ 171,192 INTEREST-BEARING LIABILITIES Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities totaled $25.96 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. Deposits Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers but, as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost. At 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. Table 14 DEPOSITS (Dollars in thousands) September 30, 2020 December 31, 2019 Demand $ 18,234,561 $ 12,926,796 Checking with interest 9,355,731 8,284,302 Money market 8,371,891 6,817,752 Savings 3,148,114 2,564,777 Time 3,140,309 3,837,609 Total deposits $ 42,250,606 $ 34,431,236 Borrowings 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. 59 Table of Contents Table 15 BORROWINGS (Dollars in thousands) September 30, 2020 December 31, 2019 Securities sold under customer repurchase agreements $ 693,889 $ 442,956 Federal Home Loan Bank borrowings 655,179 572,185 Subordinated debt SCB Capital Trust I 9,769 9,739 FCB/SC Capital Trust II 17,631 17,532 FCB/NC Capital Trust III 88,145 88,145 Capital Trust debentures assumed in acquisitions 14,433 14,433 Other subordinated debt 374,403 33,563 Total subordinated debt 504,381 163,412 Other borrowings 92,456 148,318 Total borrowings $ 1,945,905 $ 1,326,871 BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon Capital Trust I (the “Trusts”), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY On March 4, 2020, BancShares completed its public offering of $350 million aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series A Preferred Stock) for a total of $345 million. The capital raise provided liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in FCB as regulatory capital, and redeeming or repurchasing our common stock. The table below shows Class A common stock repurchase activity for the three and nine months ended September 30, 2020 and 2019. All Class A common stock repurchases completed in 2020 and 2019 were consummated under previously approved authorizations. There were no repurchases of Class B common stock or the preferred stock during the three and nine months ended September 30, 2020. Table 16 CLASS A COMMON STOCK REPURCHASE ACTIVITY Three months ended September 30 Nine months ended September 30 ($ in thousands, expect per share data) 2020 2019 2020 2019 Number of shares repurchased 117,700 295,900 813,090 744,400 Total cost $ 47,060 $ 135,373 $ 333,756 $ 325,882 Average price per share $ 399.82 $ 457.50 $ 410.48 $ 437.84 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. Table 17 CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING 2020 2019 Third Second First Fourth Third (in thousands) Quarter Quarter Quarter Quarter Quarter Class A shares outstanding at beginning of period 8,929 9,275 9,624 9,879 10,175 Share repurchases (118) (346) (349) (255) (296) Class A shares outstanding at end of period 8,811 8,929 9,275 9,624 9,879 60 Table of Contents We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders’ equity. These amounts are excluded from shareholders’ equity in the calculation of our capital ratios under current regulatory guidelines. Table 18 ANALYSIS OF CAPITAL ADEQUACY Requirements to be well-capitalized September 30, 2020 December 31, 2019 (Dollars in thousands) Amount Ratio Amount Ratio BancShares Risk-based capital ratios Tier 1 risk-based capital 8.00 % $ 3,724,199 11.48 % $ 3,344,305 10.86 % Common equity Tier 1 6.50 3,384,262 10.43 3,344,305 10.86 Total risk-based capital 10.00 4,445,806 13.70 3,731,501 12.12 Tier 1 leverage ratio (1) 5.00 3,384,262 7.80 3,344,305 8.81 FCB Risk-based capital ratios Tier 1 risk-based capital 8.00 % $ 4,165,911 12.83 % $ 3,554,974 11.54 % Common equity Tier 1 6.50 4,165,911 12.83 3,554,974 11.54 Total risk-based capital 10.00 4,433,018 13.66 3,837,670 12.46 Tier 1 leverage ratio (2) 5.00 4,165,911 8.73 3,554,974 9.38 (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 5.48% and 5.66%, respectively, at September 30, 2020, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions. RISK MANAGEMENT Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee. 61 Table of Contents The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility. In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods. In response to COVID-19, BancShares assembled a cross-functional leadership team to identify and manage newly identified risks and provide effective risk oversight through this pandemic. New or elevated risks have been identified in multiple areas, including but not limited to, operational risk, credit risk, market risk, liquidity risk, capital adequacy risk, compliance risk, and financial reporting risk. As such, we have incorporated changes to Item 1A. Risk Factors within this Quarterly Report on Form 10-Q to capture these changes. These new or increased areas of risk are being actively managed by senior leadership, and have been incorporated into reporting for key management committees and regular updates are being provided to the Board of Directors. Credit risk management Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ACL that accounts for losses inherent in the loan and lease portfolio. We are actively monitoring our loan portfolio for areas of increased risk as a result of COVID-19. As of 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 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. 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 significant deterioration from COVID-19 as of September 30, 2020. Interest rate risk management Interest rate risk (“IRR”) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes. 62 Table of Contents We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. Market interest rates declined significantly from year-end driven by economic uncertainty brought on by COVID-19. Net interest income deterioration in down rate shocks will remain muted due to the low absolute value of market interest rates. Assumptions that incorporate customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise have been adjusted based on actual deposit behavior over the last 3 years during a rising rate cycle. Table 19 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of September 30, 2020 and December 31, 2019. Table 19 NET INTEREST INCOME SENSITIVITY ANALYSIS 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) % +100 8.37 1.30 +200 13.19 0.01 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. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Table 20 table presents the EVE profile as of September 30, 2020 and December 31, 2019. Table 20 ECONOMIC VALUE OF EQUITY MODELING ANALYSIS Estimated percentage (decrease) increase in EVE Change in interest rate (basis points) September 30, 2020 December 31, 2019 -100 (23.93) % (8.25) % +100 12.97 (0.03) +200 16.73 (4.80) 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. Liquidity risk management Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile. We utilize various limit-based measures to monitor, measure and control three different categories of liquidity risk: • Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks; 63 Table of Contents • Structural - Measures the amount by which illiquid assets are supported by long-term funding; and • Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner. We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our 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 $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 Except as described below, there have been no significant changes in our Critical Accounting Estimates as described in our 2019 Annual Report on Form 10-K. Allowance for credit losses - The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered. The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast with reversion to historical assumptions. Loan losses are estimated using the fair value of collateral for collateral-dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL. PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID-19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience. FORWARD-LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events. 64 Table of Contents 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. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.