What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-03 · 253 added, 453 removed, 432 unchanged (62% of the section changed)

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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.

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

This uncertainty 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%.

Vaccine distribution and other factors have improved the economic outlook, but uncertainty remains.

During the first quarter of 2021, 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.

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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.

The Consolidated Apportions Act 2021 was signed into law during the fourth quarter of 2020 and contained provisions for a second round of funding of SBA-PPP loans.

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.

BancShares remains dedicated to serving our customers and communities through the COVID-19 crisis.

Our branches have re-opened with enhanced safety protocols and our corporate locations remain at limited occupancy as we navigate the challenges of COVID-19.

During the first quarter of 2021 in the second round of SBA-PPP, BancShares originated approximately 9,600 SBA-PPP loans totaling $1.1 billion.

We recorded $30.9 million of interest and fee income related to SBA-PPP loans for the quarter.

As of March 31, 2021, remaining net deferred fees on SBA-PPP loans were $66.7 million.

With respect to the first round of SBA-PPP, we began accepting and processing applications for forgiveness during the third quarter of 2020.

We have received approximately 12,000 forgiveness decisions from the SBA to date, representing over $1.4 billion in forgiveness payments.

BancShares originated approximately 23,000 loans during round one totaling $3.2 billion.

Through March 31, 2021, approximately 98% 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, and we have not seen significant declines in overall credit quality.

During 2020, we recorded a $36.1 million reserve build due to uncertainty surrounding COVID-19 and its potential impact on our credit portfolio.

Improved macroeconomic factors used as inputs into our ACL models and continued low net charge-offs during the first quarter of 2021 resulted in a provision credit of $11.0 million driven primarily by a $13.7 million reserve release during the quarter.

Table 1 provides a breakdown of the $2.8 billion of SBA-PPP loans outstanding by loan size as of March 31, 2021.

SBA-PPP LOANS BY LOAN SIZE

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Total $ 2,769,906 100.0 %

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%.

We began accepting and processing applications for forgiveness during the third quarter of 2020.

Table 2 represents the forgiveness status of SBA-PPP loans as of March 31, 2021.

SBA-PPP LOAN FORGIVENESS STATUS

(Dollars in thousands)

Forgiveness Status $ of Loans % of Round 1 Total

Received by FCB $ 2,222,139 69.2 %

Submitted to SBA 2,099,988 65.4

Approved by SBA 1,458,983 45.4

Funds Received 1,410,441 43.9

SIGNIFICANT EVENTS IN 2021

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.

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”).

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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.

The Transaction was approved by the North Carolina Commissioner of Banks on February 5, 2021, as well as the shareholders of both companies on February 9, 2021.

We are continuing to work with other regulators on remaining approvals and anticipate closing in mid-2021 subject to the satisfaction of customary closing conditions.

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 0.06200 shares of BancShares Class A common stock, par value $1.00 per share.

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Alemany, Chairwoman and Chief Executive Officer of CIT.

We intend to appoint Michael A.

Carpenter and Vice Admiral John R.

Ryan, USN (Ret.), as the two other members from CIT’s current Board of Directors who will join the Boards of Directors of the combined company and the combined bank.

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%.

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.

First Quarter Highlights

• Net income for the first quarter of 2021 was $147.3 million, an increase of $90.1 million, or 157.7% compared to the same quarter in 2020.

Net income available to common shareholders totaled $142.7 million for the first quarter of 2021.

Net income per common share increased $9.07, or 166.1%, to $14.53 in the first quarter of 2021, from $5.46 per share during the same quarter in 2020.

• Return on average assets for the first quarter of 2021 was 1.16%, up from 0.57% in the first quarter of 2020.

Return on average equity for the first quarter of 2021 was 14.70%, up from 6.34% during the same quarter of 2020.

• Net interest income was $339.7 million for the first quarter of 2021, an increase of $1.3 million, or 0.4% compared to the same quarter in 2020.

This was primarily due to interest and fee income on SBA-PPP loans, organic loan growth and lower rates paid on interest-bearing deposits, partially offset by a decline in the yield on interest-earning assets.

SBA-PPP loans contributed $30.9 million in interest and fee income during the quarter.

The taxable-equivalent net interest margin (“NIM”) was 2.80% for the first quarter of 2021, a decrease of 75 basis points from 3.55% for the first quarter in 2020.

• Noninterest income was $136.6 million for the first quarter of 2021 , an increase of $72.6 million, or 113.5%, compared to $64.0 million for the same quarter of 2020.

• Noninterest expense was $295.9 million for the first quarter of 2021, a decrease of $4.0 million or by 1.3% compared to the same quarter of 2020,

• Total loans grew to $33.2 billion, an increase of $388.9 million, or by 4.8% on an annualized basis, since December 31, 2020.

Excluding loans originated under the SBA-PPP, total loans increased $25.3 million, or by 0.3% on an annualized basis, since December 31, 2020.

The net charge-off ratio was 0.03% for the first quarter of 2021, down from 0.06% for the fourth quarter of 2020 and 0.10% for the first quarter of 2020.

• Total deposits grew to $47.3 billion, an increase of $3.9 billion, or by 36.4% on an annualized basis, since December 31, 2020.

• At March 31, 2021, BancShares remained well capitalized with a total risk-based capital ratio of 14.1%, a Tier 1 risk-based capital of 12.0%, a common equity Tier 1 ratio of 11.0% and a leverage ratio of 7.8%.

SELECTED QUARTERLY DATA

2020 2019 (1)

Nine months ended September 30

Third Second First Fourth Third

First Fourth Third Second First

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

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Net interest income 339,652 358,716 353,659 337,394 338,400

Provision for credit losses 4,042 20,552 28,355 7,727 6,766 52,949 23,714

Provision (credit) for credit losses (10,974) 5,403 4,042 20,552 28,355

Net interest income after provision for credit losses 350,626 353,313 349,617 316,842 310,045

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Total assets $ 53,908,606 $ 49,957,680 $ 48,666,873 $ 47,866,194 $ 41,594,453

$ 48,666,873 $ 47,866,194 $ 41,594,453 $ 39,824,496 $ 37,748,324 $ 48,666,873 $ 37,748,324

Investment securities 10,222,107 9,922,905 9,860,594 9,508,476 8,845,197

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Net yield on interest-earning assets (taxable equivalent) 2.80 3.02 3.06 3.14 3.55

Net charge-offs (annualized) to average loans and leases 0.03 0.09 0.10 0.14 0.10 0.07 0.10

Net charge-offs to average loans and leases (annualized) 0.03 0.06 0.03 0.09 0.10

Allowance for credit losses to total loans and leases (2) :

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Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.73 0.74 0.73 0.77 0.79

0.73 0.77 0.79 0.58 0.57 0.73 0.57

Tier 1 risk-based capital ratio 14.14 13.81 13.70 13.63 13.65

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Average loans and leases to average deposits 73.76 76.44 78.02 80.81 83.74

(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.

(1) 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.

(2) Loans originated in relation to the SBA-PPP ($2.8 billion as of March 3, 2021) do not have a recorded ACL.

As of March 31, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.63%, while the ratio of ACL to total loans excluding SBA-PPP loans is 0.69%.

BUSINESS COMBINATIONS

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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.

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

The Transaction was approved by the North Carolina Commissioner of Banks on February 5, 2021, as well as the shareholders of both companies on February 9, 2021.

We are continuing to work with other regulators on remaining approvals and anticipate closing in mid-2021 subject to regulatory approval and the satisfaction of customary closing conditions.

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.

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

Three months ended September 30

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(Dollars in thousands) Balance Expense Rate Balance Expense Rate

Loans and leases $ 32,694,996 $ 336,934 4.06 % $ 26,977,476 $ 315,621 4.61 %

Investment securities:

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

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.

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

For certain FDIC-assisted transactions, the shared-loss agreement included a provision related to a payment owed to the FDIC at the termination of the agreement.

As of March 31, 2021, these agreements have been satisfied following a $16.1 million payment made to the FDIC for the final active agreement.

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

Nine months ended September 30

Three months ended March 31

Interest Interest

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

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

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 a blended state income tax rate of 3.3% and 3.4%, for the three months ended March 31, 2021 and March 31, 2020, respectively.

The taxable-equivalent adjustment was $619 thousand and $774 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively.

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:

Three months ended March 31, 2021

Change from prior year period due to:

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Yield/Rate (1)

Total Change Volume (1)

Yield/Rate (1)

Loans and leases $ 47,241 $ (49,794) $ (2,553)

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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.

First Quarter 2021 compared to First Quarter 2020

Taxable-equivalent net interest income was $340.3 million for the first quarter of 2021, an increase of $1.1 million, or 0.3%, compared to the first quarter of 2020.

The increase in net interest income was primarily due to interest and fee income on SBA-PPP loans, organic loan growth and lower rates paid on interest-bearing deposits, partially offset by a decline in yield on interest-earning assets.

SBA-PPP loans contributed $30.9 million in interest and fee income during the first quarter of 2021.

The taxable-equivalent NIM was 2.80% in the first quarter of 2021, a decrease of 75 basis points from the same quarter in the prior year.

The margin decline was primarily due to changes in earning asset mix, driven by a build up of excess liquidity held in lower yielding overnight investments.

This was coupled with a decrease in the yield on interest-earning assets, partially offset by lower rates paid on interest-bearing deposits and the yield on SBA-PPP loans.

Average interest-earning assets increased by $10.7 billion to $48.7 billion, compared to the first quarter of 2020.

The primary drivers for this change were the excess liquidity build up leading to higher average overnight investments of $4.4 billion, higher average loan balances, which increased $4.0 billion, due to contributions from loans originated under the SBA-PPP as well as organic loan growth and higher average investment securities of $2.3 billion.

The yield on interest-earning assets decreased by 95 basis points to 2.93% when compared to the first quarter of 2020.

The yield on loans and leases decreased to 3.92%, or by 54 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 115 basis points and 86 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.

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.

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

Average interest-bearing liabilities increased by $4.7 billion to $27.9 billion, compared to the first quarter of 2020.

This increase was primarily due to an increase in average interest-bearing deposit balances of $4.5 billion driven by organic deposit growth, SBA-PPP fundings and stimulus checks, as well as an increase in average long-term borrowings of $274.4 million.

Rates on interest-bearing liabilities decreased by 31 basis points to 0.23%, primarily due to decreased rates paid on interest-bearing deposits and borrowings.

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.

Provision for credit losses was an $11.0 million credit for the first quarter of 2021, compared to $28.4 million in provision expense for the same quarter in 2020.

The change was driven primarily by a $13.7 million reserve release attributable to continued low net charge-offs, strong credit performance and improvements in macroeconomic factors.

This compares to a $21.5 million reserve build related to COVID-19 recorded in the first quarter of 2020.

Noninterest Income

NONINTEREST INCOME

Three months ended September 30 Nine months ended September 30

Three months ended March 31

(Dollars in thousands) 2021 2020

Service charges on deposit accounts $ 20,841 $ 27,112 $ 64,776 $ 77,967

Wealth management services $ 32,198 $ 26,412

Service charges on deposit accounts 21,536 26,413

Cardholder services, net 19,960 18,160

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 12,991 5,224

Merchant services, net 8,917 5,888

Other service charges and fees 8,489 7,792

Insurance commissions 3,998 3,688

ATM income 1,482 1,422

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

Marketable equity securities gains (losses), net 16,011 (51,408)

Realized gains on investment securities available for sale, net 9,207 19,795

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

Noninterest income for the first quarter of 2021 was $136.6 million, compared to $64.0 million for the same period of 2020, an increase of $72.6 million, or 113.5%.

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.

• Favorable change in the fair market value adjustments on the marketable equity securities portfolio of $67.4 million.

• Mortgage income increased by $7.8 million primarily due to the partial recapture of mortgage servicing rights impairment recorded in the first quarter of 2020 totaling $3.1 million as mortgage interest rates increased.

The remaining increase was due to higher production and sales volume.

• Wealth management services increased by $5.8 million primarily due to increases in advisory and transactions fees, assets under management and annuity fees.

• Realized gains on sales of investment securities decreased by $10.6 million.

• Service charges on deposit accounts decreased by $4.9 million primarily due to elevated customer deposit balances.

Noninterest Expense

NONINTEREST EXPENSE

Three months ended September 30 Nine months ended September 30

Three months ended March 31

(Dollars in thousands) 2021 2020

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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%.

Noninterest expense was $295.9 million during the first quarter of 2021, a decrease of $4.0 million, or 1.3%, compared to the same quarter in 2020.

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 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.

• Other noninterest expense decreased $9.1 million primarily due to lower pension expense, a decrease in the reserve for unfunded loan commitments and declining travel expenses due to COVID-19.

• Processing fees paid to third parties increased $3.3 million as a result of continued investment in digital and technological capabilities.

• Merger-related expenses increased $2.6 million driven by legal and consulting expenses related to the pending merger with CIT.

Income tax expense was $44.0 million and $16.9 million for the first quarter of 2021 and 2020, respectively, representing effective tax rates of 23.0% and 22.8% during the periods.

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

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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.

Interest-earning assets include overnight investments, investment securities and loans and leases, 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.

Interest-earning assets totaled $51.1 billion and $47.2 billion at March 31, 2021 and December 31, 2020, respectively.

The $3.9 billion increase was primarily composed of a $3.2 billion increase in overnight investments, a $388.9 million increase in loans and leases and a $299.2 million increase in investment securities.

Investment Securities

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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.

The carrying value of investment securities totaled $10.2 billion at March 31, 2021, an increase of $299.2 million compared to December 31, 2020.

The increase in the portfolio was primarily attributable to deposit growth outpacing loan growth for the period, resulting in investment securities purchases of $2.0 billion, partially offset by sales of $356.1 million and maturities and paydowns of $1.3 billion.

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.

As of March 31, 2021, investment securities available for sale had a net pre-tax unrealized gain of $36.6 million, compared to a net pre-tax unrealized gain of $102.3 million as of December 31, 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.

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 March 31, 2021 and December 31, 2020.

INVESTMENT SECURITIES

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(Dollars in thousands) Composition (1)

Amortized cost Fair

value Composition (1)

Amortized cost Fair

Investment securities available for sale

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Corporate bonds 5.9 585,095 602,860 6.1 590,870 603,279

State, county and municipal — — — 1.7 118,227 118,227

Total investment securities available for sale 71.7 7,270,552 7,307,122 70.5 6,911,965 7,014,243

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(1) Calculated as a percent of the total fair value of investment securities.

Table 9 presents the weighted average taxable-equivalent yields for investment securities held to maturity at March 31, 2021 segregated by major category with ranges of contractual maturities.

The weighted average yield on the portfolio is calculated using security-level annualized yields.

WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES

March 31, 2021

One Year One to Five

Years Five to 10

Years After 10 Years Total

Investment securities held to maturity

Residential mortgage-backed securities (1)

— % — % — % 1.01 % 1.01 %

Commercial mortgage-backed securities (1)

— — — 1.32 1.32

Other investments 1.09 1.25 — — 1.17

Total investment securities held to maturity 1.09 % 1.25 % — % 1.13 % 1.13 %

(1) Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity.

The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.

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.

Loans held for sale were $129.3 million at March 31, 2021, a net increase of $4.5 million since December 31, 2020.

Loans and leases held for investment were $33.2 billion at March 31, 2021, a net increase of $388.9 million, representing annualized growth of 4.8% since December 31, 2020.

This increase was driven by a $419.0 million net increase in the non-PCD portfolio offset by a $30.1 million net decrease in the PCD loan portfolio.

The net increase in the non-PCD portfolio was due to a net increase of $363.6 million related to SBA-PPP loans, as well as organic growth primarily in commercial and business loans.

The net decrease in PCD loans was primarily due to pay downs and pay-offs.

Excluding SBA-PPP loans, total loans grew by 0.3% 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.

Non-PCD loans and leases at March 31, 2021 were $32.7 billion compared to $32.3 billion at December 31, 2020, representing 98.7% and 98.6% of total loans, respectively.

PCD loans at March 31, 2021 were $432.8 million, compared to $462.9 million at December 31, 2020, representing 1.3% and 1.4% of total loans, respectively.

The discount related to acquired non-PCD loans and leases was $17.0 million and $19.5 million at March 31, 2021 and December 31, 2020, respectively.

The discount related to PCD loans was $41.1 million and $45.3 million at March 31, 2021 and December 31, 2020, respectively.

During the three months ended March 31, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $2.5 million.

During the three months ended March 31, 2021 and 2020, interest and accretion income on purchased PCD loans was $10.9 million and $18.5 million, respectively.

LOANS AND LEASES

(Dollars in thousands) September 30, 2020

(Dollars in thousands) March 31, 2021 December 31, 2020

Construction and land development $ 1,022,087 $ 985,424

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Net loans and leases $ 32,970,200 $ 32,567,661

(Dollars in thousands) December 31, 2019

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

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.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses (“ACL”) was $210.7 million at March 31, 2021, representing a decrease of $13.7 million since December 31, 2020.

The ACL as a percentage of total loans and leases was 0.63% at March 31, 2021, compared to 0.68% at December 31, 2020.

The ACL as a percentage of loans and leases excluding SBA-PPP loans, which have no recorded ACL, was 0.69% at March 31, 2021, compared to 0.74% at December 31, 2020.

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.

For the three months ended March 31, 2021, the primary reason for the ACL change was a reserve credit due to improvements in macroeconomic factors.

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.

For most pools, we use a 12-month straight-line reversion period to historical averages for model inputs;

however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized.

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.

ALLOWANCE FOR CREDIT LOSSES

Three months ended September 30, 2020

(Dollars in thousands) Construction

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

and industrial and leases Residential

mortgage Revolving

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

Our ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario, but the March 31, 2021 ACL forecast was calculated using the consensus baseline scenario.

This scenario showed improvements in the most significant economic factors compared to what was used to generate the December 31, 2020 ACL.

These loss estimates were also influenced by our strong credit quality, low net charge-offs and recent credit trends, which remained stable through the quarter ended March 31, 2021, despite potential impacts of COVID-19.

As of March 31, 2021, the consensus baseline forecast utilized the following significant inputs over the two-year reasonable and supportable forecast period:

Unemployment - Rates are projected to remain elevated, and will generally improve to below 5% by the end of 2022.

GDP Growth - Peak growth of approximately 6% in the second and third quarters of 2021, decreasing to under 3% in late 2022.

Home Pricing Index - Growth rates over 4% in 2021 which then fluctuate between 2% and 3% thereafter.

Commercial Real Estate Index - Forecasted downturn with a maximum 10% drop by the end of 2021, and then slowly improving towards positive year over year growth.

At March 31, 2021, the ACL allocated to non-PCD loans and leases was $187.7 million, or 0.57% of non-PCD loans and leases, compared to $200.3 million, or 0.62%, at December 31, 2020.

The decrease of 5 basis points since December 31, 2020 was primarily due to improvement in the macroeconomic factors.

The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.63% at March 31, 2021 compared to 0.67% at December 31, 2020

At March 31, 2021, the ACL for PCD loans totaled $22.9 million compared to $24.0 million at December 31, 2020.

The decrease was due to run off of the portfolio.

In the three months ended March 31, 2021, the ACL on commercial portfolios decreased $6.0 million, with the largest share of the decrease within commercial real estate.

The ACL on consumer portfolios decreased $6.6 million, with the largest decrease within revolving mortgages.

These portfolios were most impacted by the improvement in macroeconomic factors.

Net charge-offs for loans and leases were $2.7 million during the first quarter of 2021, compared to $7.5 million during the first quarter of 2020.

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 first quarter of 2021 and 2020, respectively.

As of March 31, 2021, excluding SBA-PPP loans, net charge-offs as a percentage of average loans and leases was 0.04%.

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

- commercial Commercial

mortgage Other

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

Three months ended March 31, 2021

(Dollars in thousands) Commercial Consumer PCD Total

Balance at January 1 $ 80,842 $ 119,485 $ 23,987 $ 224,314

Provision (credit) (3,922) (5,504) (1,548) (10,974)

Charge-offs (3,331) (4,469) (763) (8,563)

Recoveries 1,275 3,340 1,259 5,874

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

- 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 March 31 $ 74,864 $ 112,852 $ 22,935 $ 210,651

Annualized net charge-off ratio 0.04 % 0.05 % (0.44) % 0.03 %

Net charge-offs 2,056 1,129 (496) 2,689

Average loans 22,831,292 9,684,501 454,521 32,970,314

Percent of loans in each category to total loans 69.61 % 29.09 % 1.30 % 100.00 %

Three months ended March 31, 2020

(Dollars in thousands) Commercial Consumer PCD Total

Balance at December 31 $ 142,369 $ 75,236 $ 7,536 $ 225,141

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Balance at January 1 54,815 105,865 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

Provision (credit) 21,537 9,406 (2,588) 28,355

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

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Recoveries 1,427 2,431 2,897 6,755

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

- commercial Commercial

mortgage Other

real estate Commercial

and industrial and leases Other Residential

mortgage Revolving

mortgage Construction

- non - commercial Consumer PCI Total

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

Provision (credits) (3,217) 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.

Balance at March 31 $ 72,410 $ 109,933 $ 26,916 $ 209,259

Annualized net charge-off ratio 0.09 % 0.22 % (1.36) % 0.10 %

Net charge-offs 3,942 5,338 (1,774) 7,506

Average loans 18,731,471 9,770,760 530,087 29,032,318

Percent of loans in each category to total loans 64.59 % 33.49 % 1.92 % 100.00 %

The reserve for unfunded loan commitments was $11.6 million and $12.8 million at March 31, 2021 and December 31, 2020, respectively.

The decrease was primarily due to improvements in macroeconomic factors.

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

(Dollars in thousands) March 31, 2021 December 31, 2020

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%.

0.63 % 0.68 %

Allowance for credit losses $ 210,651 $ 224,314

Total loans and leases 33,180,851 32,791,975

Allowance for credit losses to non-PCD loans and leases (1) :

0.57 % 0.62 %

Allowance for credit losses on non-PCD loans and leases $ 187,716 $ 200,327

Total non-PCD loans and leases 32,748,078 32,329,093

Allowance for credit losses to PCD loans:

5.30 % 5.18 %

Allowance for credit losses on PCD loans $ 22,935 $ 23,987

Total PCD loans 432,773 462,882

(1) Loans originated in relation to the SBA-PPP ($2.8 billion as of March 31,2021) do not have a recorded ACL.

As of March 31, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.63% while the ratio of ACL to total loans excluding SBA-PPP loans was 0.69%.

As of December 31, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.67% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.74%.

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.

At March 31, 2021, BancShares’ nonperforming assets totaled $243.0 million, an increase of $0.7 million since December 31, 2020.

Nonaccrual loans and leases at March 31, 2021 were $194.5 million, reflecting an increase of $3.1 million since December 31, 2020.

Nonaccrual loans and leases as a percentage of total loans and leases was 0.59% and 0.58% at March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021, OREO totaled $48.5 million, representing a decrease of $2.4 million since December 31, 2020.

Nonperforming assets as a percentage of total loans, leases and OREO was 0.73% as of March 31, 2021 compared to 0.74% as of December 31, 2020.

NONPERFORMING ASSETS

Third Second First Fourth Third

First Fourth Third Second First

(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter

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PCD 53,165 54,939 55,527 62,511 53,234

Total nonaccrual loans and leases 194,534 191,483 186,454 197,791 174,571

Other real estate owned 48,512 50,890 52,789 53,850 55,707

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Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.73 % 0.74 % 0.73 % 0.77 % 0.79 %

Ratio of nonaccrual loans and leases to total loans and leases 0.59 0.58 0.57 0.61 0.60

Ratio of allowance for credit losses to nonaccrual loans and leases 108.3 117.1 120.1 112.5 119.9

TROUBLED DEBT RESTRUCTURINGS

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TROUBLED DEBT RESTRUCTURINGS

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

(Dollars in thousands) March 31, 2021 December 31, 2020

Accruing TDRs:

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

Interest-bearing liabilities totaled $25.96 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.

Interest-bearing liabilities totaled $28.7 billion at March 31, 2021, compared to $27.3 billion at December 31, 2020.

The increase was mostly due to an increase in interest-bearing deposits of $1.4 billion.

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.

We believe traditional bank deposit products remain an attractive option for many customers, as evidenced by the significant deposit growth the industry has experienced over the past 12 months.

As economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn.

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.

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

At March 31, 2021, total deposits were $47.3 billion, an increase of $3.9 billion, representing annualized growth of 36.4% since December 31, 2020, driven by organic growth, SBA-PPP loan fundings and stimulus checks.

(Dollars in thousands) March 31, 2021 December 31, 2020

Demand $ 20,515,142 $ 18,014,029

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Total deposits $ 47,330,997 $ 43,431,609

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

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

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

Total borrowings were relatively unchanged, totaling $1.9 billion at March 31, 2021 and December 31, 2020.

(Dollars in thousands) March 31, 2021 December 31, 2020

Securities sold under customer repurchase agreements $ 680,705 $ 641,487

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Capital Trust debentures assumed in acquisitions 14,433 14,433

3.375 % Fixed-to-Floating Rate Subordinated Notes due 2030 346,748 346,541

Other subordinated debt 20,342 27,956

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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.

The table below shows Class A common stock repurchase activity for the three months ended March 31, 2021 and 2020.

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

There were no repurchases of Class B common stock or the preferred stock during the three months ended March 31, 2021 or 2020.

CLASS A COMMON STOCK REPURCHASE ACTIVITY

Three months ended September 30 Nine months ended September 30

Three months ended March 31

($ in thousands, expect per share data) 2021 2020

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Average price per share $ — $ 457.10

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

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

CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING

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

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

We are committed to effectively managing our capital to protect our depositors, creditors and shareholders.

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ANALYSIS OF CAPITAL ADEQUACY

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

Requirements to be well-capitalized March 31, 2021 December 31, 2020

(Dollars in thousands) Amount Ratio Amount Ratio

Risk-based capital ratios

Total risk-based capital 10.00 % $ 4,701,118 14.14 % $ 4,577,212 13.81 %

Tier 1 risk-based capital 8.00 3,997,179 12.02 3,856,086 11.63

Common equity Tier 1 6.50 3,657,242 11.00 3,516,149 10.61

Total risk-based capital 10.00 4,445,806 13.70 3,731,501 12.12

Tier 1 leverage ratio 5.00 3,997,179 7.84 3,856,086 7.86

5.00 3,384,262 7.80 3,344,305 8.81

Risk-based capital ratios

Total risk-based capital 10.00 % $ 4,646,422 13.99 % $ 4,543,496 13.72 %

Tier 1 risk-based capital 8.00 4,396,983 13.24 4,276,870 12.92

Common equity Tier 1 6.50 4,396,983 13.24 4,276,870 12.92

Total risk-based capital 10.00 4,433,018 13.66 3,837,670 12.46

Tier 1 leverage ratio 5.00 4,396,983 8.64 4,276,870 8.72

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.

As of March 31, 2021, 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.

BancShares and FCB had capital conservation buffers of 6.02% and 5.99%, respectively, at March 31, 2021, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

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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

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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.

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 expected credit losses in the loan and lease portfolio.

We continue to actively monitor our loan portfolio for areas of increased risk as a result of COVID-19 and to date have not seen any significant declines in credit quality.

As of March 31, 2021, COVID-19 related loan extensions decreased to approximately $132.5 million in outstanding loan balances, representing approximately $4.2 million in payment deferrals.

Through March 31, 2021, approximately 98% 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.

Additionally, we participated in both rounds of funding in the SBA-PPP program, which provided much needed funds to our existing small business customers.

We continue to assess both the credit and operational risks this program presents and at March 31, 2021, BancShares had $2.8 billion in SBA-PPP loans outstanding.

Interest rate risk management

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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.

Market interest rates have increased from year-end driven by improving economic conditions.

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 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of March 31, 2021 and December 31, 2020.

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

Change in interest rate (basis points) March 31, 2021 December 31, 2020

-100 (7.62) % (6.24) %

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+200 16.83 14.57

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.

The increased asset sensitivity in net interest income sensitivity metrics as of March 31, 2021 compared to December 31, 2020 continues to be affected by the substantial influx of non-maturity deposits that began in the second quarter of 2020 and continued through the first quarter of 2021.

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

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

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

Table 20 presents the EVE profile as of March 31, 2021 and December 31, 2020.

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS

Estimated percentage (decrease) increase in EVE

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

Change in interest rate (basis points) March 31, 2021 December 31, 2020

-100 (15.18) % (21.20) %

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+200 9.21 15.71

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.

The economic value of equity metrics at March 31, 2021 compared to December 31, 2020 were primarily affected by continued growth in non-maturity deposits of nearly $4.0 billion during the first quarter of 2021 coupled with higher market interest rates.

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

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Our primary source of liquidity is our 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.

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 $12.8 billion at March 31, 2021 compared to $9.6 billion at December 31, 2020.

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.

Outstanding FHLB advances were $648.7 million as of March 31, 2021, and we had sufficient collateral pledged to secure $8.2 billion of additional borrowings from the FHLB of Atlanta.

Also, at March 31, 2021, $4.2 billion in non-PCD loans with a lendable collateral value of $3.4 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 $606.0 million of available capacity at March 31, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, we are a party to certain financial instruments with off-balance sheet risk, which we enter into in order to meet the financing needs of our customers.

These off-balance sheet instruments include commitments to extend credit and standby letters of credit.

For more information on these commitments Note N - Commitments and Contingencies to our consolidated financial statements.

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.

There have been no significant changes in our Critical Accounting Estimates as described in our 2020 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

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Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, 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.

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, and delay in closing the Transaction, as well as risks, uncertainties and other factors relating to the impact of COVID-19 on our business and the economy, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of our prior acquisitions, the risks discussed in Part II, Item 1A.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis