FIRST CITIZENS BANCSHARES INC /DE/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (“BancShares”). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our 2020 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2021, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares. EXECUTIVE OVERVIEW BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (“FCB”), a state-chartered bank organized under the laws of the state of North Carolina. BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue. We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people. Refer to our 2020 Annual Report on Form 10-K for further discussion of our strategy. RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date. In response to the outbreak, governments 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. 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. The FOMC expects to maintain this target range until labor market conditions have reached levels consistent with the FOMC’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program (“SBA-PPP”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and United States (“U.S.”) Treasury to the public. This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020, and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria. In addition, there were other regulatory actions taken that may impact our business including changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts. 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. 31 Table of Contents BANCSHARES’ COVID-19 CONTINUED MONITORING AND RESPONSE 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. Table 1 SBA-PPP LOANS BY LOAN SIZE (Dollars in thousands) Loan Size $ of Loans % of Loans $ Less than $150,000 $ 793,559 28.7 % $150,000 to $2,000,000 1,465,863 52.9 Greater than $2,000,000 510,484 18.4 Total $ 2,769,906 100.0 % 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. Table 2 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 October 15, 2020, BancShares and CIT Group Inc., a Delaware corporation (“CIT”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB (“Merger Sub”), and CIT, the parent company of CIT Bank, N.A., a national banking association (“CIT Bank”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the “First-Step Merger”), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the “Mergers”). The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the “Transaction”). 32 Table of Contents 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 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. Holders of CIT Common Stock will receive cash in lieu of fractional shares. In addition, at the Effective Time, each share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, of CIT and 5.625% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, of CIT issued and outstanding will automatically be converted into the right to receive one share of a newly created series of preferred stock, Series B, of BancShares and one share of a newly created series of preferred stock, Series C, of BancShares, respectively. The Merger Agreement requires that, effective as of the Effective Time, the Boards of Directors of the combined company and the combined bank will consist of 14 directors, (i) 11 of whom will be members of the current Board of Directors of BancShares, and (ii) three of whom will be selected from among the current Board of Directors of CIT and will include as one of those three Ellen R. Alemany, Chairwoman and Chief Executive Officer of CIT. 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 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%. 33 Table of Contents Table 3 SELECTED QUARTERLY DATA 2021 2020 First Fourth Third Second First (Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter SUMMARY OF OPERATIONS Interest income $ 355,323 $ 376,876 $ 374,334 $ 363,257 $ 369,559 Interest expense 15,671 18,160 20,675 25,863 31,159 Net interest income 339,652 358,716 353,659 337,394 338,400 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 Noninterest income 136,649 126,765 120,572 165,402 64,011 Noninterest expense 295,926 305,373 291,662 291,679 299,971 Income before income taxes 191,349 174,705 178,527 190,565 74,085 Income taxes 44,033 36,621 35,843 36,779 16,916 Net income 147,316 138,084 142,684 153,786 57,169 Net income available to common shareholders $ 142,680 $ 133,448 $ 138,048 $ 148,996 $ 57,169 Net interest income, taxable equivalent $ 340,271 $ 359,370 $ 354,256 $ 337,965 $ 339,174 PER COMMON SHARE DATA Net income $ 14.53 $ 13.59 $ 14.03 $ 14.74 $ 5.46 Cash dividends on common shares 0.47 0.47 0.40 0.40 0.40 Market price at period end (Class A) 835.77 574.27 318.78 405.02 332.87 Book value at period-end 405.59 396.21 380.43 367.57 351.90 SELECTED QUARTERLY AVERAGE BALANCES Total assets $ 51,409,634 $ 49,557,803 $ 48,262,155 $ 45,553,502 $ 40,648,806 Investment securities 9,757,650 9,889,124 9,930,197 8,928,467 7,453,159 Loans and leases (1) 33,086,656 32,964,390 32,694,996 31,635,958 29,098,101 Interest-earning assets 48,715,279 46,922,823 45,617,376 42,795,781 38,004,341 Deposits 44,858,198 43,123,312 41,905,844 39,146,415 34,750,061 Interest-bearing liabilities 27,898,525 26,401,222 25,591,707 24,407,285 23,153,777 Securities sold under customer repurchase agreements 641,236 684,311 710,237 659,244 474,231 Other short-term borrowings — — — 45,549 157,759 Long-term borrowings 1,235,576 1,250,682 1,256,331 1,275,928 961,132 Common shareholders' equity 3,935,267 3,786,158 3,679,138 3,648,284 3,625,975 Shareholders’ equity $ 4,275,204 $ 4,126,095 $ 4,019,075 $ 3,988,225 $ 3,682,634 Common shares outstanding 9,816,405 9,816,405 9,836,629 10,105,520 10,473,119 SELECTED QUARTER-END BALANCES Total assets $ 53,908,606 $ 49,957,680 $ 48,666,873 $ 47,866,194 $ 41,594,453 Investment securities 10,222,107 9,922,905 9,860,594 9,508,476 8,845,197 Loans and leases 33,180,851 32,791,975 32,845,144 32,418,425 29,240,959 Deposits 47,330,997 43,431,609 42,250,606 41,479,245 35,346,711 Securities sold under customer repurchase agreements 680,705 641,487 693,889 740,276 540,362 Other short-term borrowings — — — — 105,000 Long-term borrowings 1,230,326 1,248,163 1,252,016 1,258,719 1,297,132 Shareholders’ equity $ 4,321,400 $ 4,229,268 $ 4,074,414 $ 3,991,444 $ 3,957,520 Common shares outstanding 9,816,405 9,816,405 9,816,405 9,934,105 10,280,105 SELECTED RATIOS AND OTHER DATA Return on average assets (annualized) 1.16 % 1.11 % 1.18 % 1.36 % 0.57 % Return on average common shareholders’ equity (annualized) 14.70 14.02 14.93 16.43 6.34 Net yield on interest-earning assets (taxable equivalent) 2.80 3.02 3.06 3.14 3.55 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) : PCD 5.30 5.18 5.07 5.07 4.80 Non-PCD 0.57 0.62 0.61 0.61 0.64 Total 0.63 0.68 0.68 0.69 0.72 Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.73 0.74 0.73 0.77 0.79 Tier 1 risk-based capital ratio 14.14 13.81 13.70 13.63 13.65 Common equity Tier 1 ratio 12.02 11.63 11.48 11.38 11.43 Total risk-based capital ratio 11.00 10.61 10.43 10.32 10.36 Tier 1 leverage capital ratio 7.84 7.86 7.80 8.07 8.98 Dividend payout ratio 3.23 3.46 2.85 2.71 7.33 Average loans and leases to average deposits 73.76 76.44 78.02 80.81 83.74 (1) Average loan and lease balances include PCD loans, non-PCD loans and leases, loans held for sale and nonaccrual loans and leases. (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%. 34 Table of Contents BUSINESS COMBINATIONS CIT Group Inc. On October 15, 2020, BancShares and CIT, entered into the Merger Agreement by and among BancShares, FCB, the Merger Sub, and CIT, the parent company of CIT Bank. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub and CIT will ultimately merge with and into FCB, with FCB as the surviving entity. The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank. 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, 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. 35 Table of Contents Table 4 CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS Three months ended March 31 2021 2020 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Loans and leases $ 33,086,656 $ 323,602 3.92 % $ 29,098,101 $ 326,155 4.46 % Investment securities: U.S. Treasury 383,300 171 0.18 299,777 1,677 2.25 Government agency 791,293 1,900 0.96 721,254 4,121 2.29 Mortgage-backed securities 7,882,679 20,607 1.05 6,060,434 30,707 2.03 Corporate bonds 602,883 7,742 5.14 205,504 2,477 4.82 Other investments 97,495 472 1.96 166,190 678 1.64 Total investment securities 9,757,650 30,892 1.27 7,453,159 39,660 2.13 Overnight investments 5,870,973 1,448 0.10 1,453,081 4,518 1.25 Total interest-earning assets 48,715,279 355,942 2.93 38,004,341 370,333 3.88 Cash and due from banks 333,069 300,433 Premises and equipment 1,251,542 1,251,970 Allowance for credit losses (224,009) (187,269) Other real estate owned 48,590 53,356 Other assets 1,285,163 1,225,975 Total assets $ 51,409,634 $ 40,648,806 Liabilities Interest-bearing deposits: Checking with interest $ 10,746,225 $ 1,409 0.05 % $ 8,188,983 $ 1,701 0.08 % Savings 3,461,780 299 0.04 2,593,869 285 0.04 Money market accounts 9,008,391 2,508 0.11 7,016,587 9,109 0.52 Time deposits 2,805,317 4,577 0.66 3,761,216 13,099 1.40 Total interest-bearing deposits 26,021,713 8,793 0.14 21,560,655 24,194 0.45 Securities sold under customer repurchase agreements 641,236 338 0.21 474,231 442 0.38 Other short-term borrowings — — — 157,759 804 2.02 Long-term borrowings 1,235,576 6,540 2.12 961,132 5,719 2.35 Total interest-bearing liabilities 27,898,525 15,671 0.23 23,153,777 31,159 0.54 Noninterest-bearing deposits 18,836,485 13,189,406 Other liabilities 399,420 622,989 Shareholders’ equity 4,275,204 3,682,634 Total liabilities and shareholders’ equity $ 51,409,634 $ 40,648,806 Interest rate spread 2.70 % 3.34 % Net interest income and net yield on interest-earning assets $ 340,271 2.80 % $ 339,174 3.55 % 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 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. 36 Table of Contents Table 5 CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME Three months ended March 31, 2021 Change from prior year period due to: (Dollars in thousands) Volume (1) Yield/Rate (1) Total Change Assets Loans and leases $ 47,241 $ (49,794) $ (2,553) Investment securities: U.S. Treasury 451 (1,957) (1,506) Government agency 400 (2,621) (2,221) Mortgage-backed securities 9,353 (19,453) (10,100) Corporate bonds 4,789 476 5,265 Other investments (278) 72 (206) Total investment securities 14,715 (23,483) (8,768) Overnight investments 13,602 (16,672) (3,070) Total interest-earning assets $ 75,558 $ (89,949) $ (14,391) Liabilities Interest-bearing deposits: Checking with interest $ 529 $ (821) $ (292) Savings 95 (81) 14 Money market accounts 2,517 (9,118) (6,601) Time deposits (3,359) (5,163) (8,522) Total interest-bearing deposits (218) (15,183) (15,401) Securities sold under customer repurchase agreements 155 (259) (104) Other short-term borrowings (804) — (804) Long-term borrowings 1,608 (787) 821 Total interest-bearing liabilities 741 (16,229) (15,488) Change in net interest income $ 74,817 $ (73,720) $ 1,097 (1) The rate/volume variance is allocated proportionally between the changes in volume and rate. RESULTS OF OPERATIONS Net Interest Income and Margin (Taxable-Equivalent Basis) 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 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. 37 Table of Contents 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 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 Table 6 NONINTEREST INCOME Three months ended March 31 (Dollars in thousands) 2021 2020 Wealth management services $ 32,198 $ 26,412 Service charges on deposit accounts 21,536 26,413 Cardholder services, net 19,960 18,160 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 gains (losses), net 16,011 (51,408) Realized gains on investment securities available for sale, net 9,207 19,795 Other 1,860 625 Total noninterest income $ 136,649 $ 64,011 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 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: • 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. 38 Table of Contents Noninterest Expense Table 7 NONINTEREST EXPENSE Three months ended March 31 (Dollars in thousands) 2021 2020 Salaries and wages $ 147,830 $ 145,255 Employee benefits 35,725 38,511 Occupancy expense 29,743 27,480 Equipment expense 29,803 27,850 Processing fees paid to third parties 13,673 10,372 FDIC insurance expense 3,218 3,466 Collection and foreclosure-related expenses 2,198 4,054 Merger-related expenses 6,819 4,232 Telecommunications expense 3,033 2,973 Consultant expense 2,065 3,260 Advertising expense 1,885 2,669 Core deposit intangible amortization 3,044 3,859 Other 16,890 25,990 Total noninterest expense $ 295,926 $ 299,971 The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense. 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: • 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 Taxes 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. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors. INTEREST-EARNING ASSETS Interest-earning assets include 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 $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. 39 Table of Contents Investment Securities The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities with minimal liquidity and credit risk, and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio and into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C - Investments for additional disclosures. The carrying value of investment securities totaled $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 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. 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 March 31, 2021. 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 March 31, 2021 and December 31, 2020. Table 8 INVESTMENT SECURITIES March 31, 2021 December 31, 2020 (Dollars in thousands) Composition (1) Amortized cost Fair value Composition (1) Amortized cost Fair value Investment securities available for sale U.S. Treasury — % $ — $ — 5.0 % $ 499,832 $ 499,933 Government agency 8.4 852,305 846,686 7.0 706,241 701,391 Residential mortgage-backed securities 46.6 4,736,893 4,758,589 44.5 4,369,130 4,438,103 Commercial mortgage-backed securities 10.8 1,096,259 1,098,987 7.9 745,892 771,537 Corporate bonds 5.9 585,095 602,860 6.1 590,870 603,279 Total investment securities available for sale 71.7 7,270,552 7,307,122 70.5 6,911,965 7,014,243 Investment in marketable equity securities 1.1 84,297 106,886 0.9 84,837 91,680 Investment securities held to maturity Residential mortgage-backed securities 16.9 1,740,314 1,724,995 19.1 1,877,692 1,895,381 Commercial mortgage-backed securities 10.2 1,065,778 1,047,980 9.4 937,034 940,862 Other 0.1 2,007 2,007 0.1 2,256 2,256 Total investment securities held to maturity 27.2 2,808,099 2,774,982 28.6 2,816,982 2,838,499 Total investment securities 100.0 % $ 10,162,948 $ 10,188,990 100.0 % $ 9,813,784 $ 9,944,422 (1) Calculated as a percent of the total fair value of investment securities. 40 Table of Contents 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. Table 9 WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES March 31, 2021 Within 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 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 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. 41 Table of Contents Table 10 LOANS AND LEASES (Dollars in thousands) March 31, 2021 December 31, 2020 Commercial: Construction and land development $ 1,022,087 $ 985,424 Owner occupied commercial mortgage 11,340,966 11,165,012 Non-owner occupied commercial mortgage 3,017,898 2,987,689 Commercial and industrial and leases 4,946,445 5,013,644 SBA-PPP 2,769,906 2,406,291 Total commercial loans 23,097,302 22,558,060 Consumer: Residential mortgage 5,566,026 5,561,686 Revolving mortgage 1,938,422 2,052,854 Construction and land development 336,065 348,123 Consumer auto 1,271,586 1,255,402 Consumer other 538,677 552,968 Total consumer loans 9,650,776 9,771,033 Total non-PCD loans and leases 32,748,078 32,329,093 PCD loans 432,773 462,882 Total loans and leases 33,180,851 32,791,975 Less allowance for credit losses (210,651) (224,314) Net loans and leases $ 32,970,200 $ 32,567,661 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 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. 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 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 42 Table of Contents 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%. Table 11 ALLOWANCE FOR CREDIT LOSSES 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 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 Adoption of ASC 326 (87,554) 30,629 19,001 (37,924) Balance at January 1 54,815 105,865 26,537 187,217 Provision (credit) 21,537 9,406 (2,588) 28,355 Initial allowance on PCD loans — — 1,193 1,193 Charge-offs (5,369) (7,769) (1,123) (14,261) Recoveries 1,427 2,431 2,897 6,755 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. Table 12 ALLOWANCE FOR CREDIT LOSSES RATIOS (Dollars in thousands) March 31, 2021 December 31, 2020 Allowance for credit losses to total loans and leases (1) : 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%. 43 Table of Contents NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”). 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. Table 13 NONPERFORMING ASSETS 2021 2020 First Fourth Third Second First (Dollars in thousands) Quarter Quarter Quarter Quarter Quarter Nonaccrual loans and leases: Non-PCD $ 141,369 $ 136,544 $ 130,927 $ 135,280 $ 121,337 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 Total nonperforming assets $ 243,046 $ 242,373 $ 239,243 $ 251,641 $ 230,278 Accruing loans and leases 90 days or more past due Non-PCD $ 5,945 $ 5,507 $ 3,587 $ 3,644 $ 2,933 PCD 1,432 355 — 152 37 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 We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Troubled debt restructurings (“TDRs”) not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans. The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty. BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in most cases, is not recording these as TDRs. 44 Table of Contents Table 14 TROUBLED DEBT RESTRUCTURINGS (Dollars in thousands) March 31, 2021 December 31, 2020 Accruing TDRs: Non-PCD $ 139,631 $ 139,747 PCD 20,920 17,617 Total accruing TDRs 160,551 157,364 Nonaccruing TDRs: Non-PCD 46,886 43,470 PCD 9,509 7,346 Total nonaccruing TDRs 56,395 50,816 All TDRs: Non-PCD 186,517 183,217 PCD 30,429 24,963 Total TDRs $ 216,946 $ 208,180 INTEREST-BEARING LIABILITIES Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities totaled $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. Deposits Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers, 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 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. Table 15 DEPOSITS (Dollars in thousands) March 31, 2021 December 31, 2020 Demand $ 20,515,142 $ 18,014,029 Checking with interest 10,819,900 10,591,687 Money market 9,590,372 8,632,713 Savings 3,676,138 3,304,167 Time 2,729,445 2,889,013 Total deposits $ 47,330,997 $ 43,431,609 45 Table of Contents Borrowings Total borrowings were relatively unchanged, totaling $1.9 billion at March 31, 2021 and December 31, 2020. Table 16 BORROWINGS (Dollars in thousands) March 31, 2021 December 31, 2020 Securities sold under customer repurchase agreements $ 680,705 $ 641,487 Federal Home Loan Bank borrowings 648,671 655,175 Subordinated debt SCB Capital Trust I 9,788 9,779 FCB/SC Capital Trust II 17,697 17,664 FCB/NC Capital Trust III 88,145 88,145 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 Total subordinated debt 497,153 504,518 Other borrowings 84,502 88,470 Total borrowings $ 1,911,031 $ 1,889,650 BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon Capital Trust I (the “Trusts”), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY 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. Table 17 CLASS A COMMON STOCK REPURCHASE ACTIVITY Three months ended March 31 ($ in thousands, expect per share data) 2021 2020 Number of shares repurchased — 349,390 Total cost $ — $ 159,705 Average price per share $ — $ 457.10 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. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders’ equity. These amounts are excluded from shareholders’ equity in the calculation of our capital ratios under current regulatory guidelines. 46 Table of Contents Table 18 ANALYSIS OF CAPITAL ADEQUACY Requirements to be well-capitalized March 31, 2021 December 31, 2020 (Dollars in thousands) Amount Ratio Amount Ratio BancShares 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 Tier 1 leverage ratio 5.00 3,997,179 7.84 3,856,086 7.86 FCB 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 Tier 1 leverage ratio 5.00 4,396,983 8.64 4,276,870 8.72 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 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 Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee. The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility. In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods. 47 Table of Contents Credit risk management Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ACL that accounts for 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. 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 Interest rate risk (“IRR”) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes. We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. Market interest rates 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 three 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 March 31, 2021 and December 31, 2020. Table 19 NET INTEREST INCOME SENSITIVITY ANALYSIS Estimated percentage (decrease) increase in net interest income Change in interest rate (basis points) March 31, 2021 December 31, 2020 -100 (7.62) % (6.24) % +100 9.06 8.09 +200 16.83 14.57 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. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. 48 Table of Contents Table 20 presents the EVE profile as of March 31, 2021 and December 31, 2020. Table 20 ECONOMIC VALUE OF EQUITY MODELING ANALYSIS Estimated percentage (decrease) increase in EVE Change in interest rate (basis points) March 31, 2021 December 31, 2020 -100 (15.18) % (21.20) % +100 8.47 12.18 +200 9.21 15.71 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. Liquidity risk management Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile. We utilize various limit-based measures to monitor, measure and control three different categories of liquidity risk: • Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks; • Structural - Measures the amount by which illiquid assets are supported by long-term funding; and • Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner. We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our 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 $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 $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 There have been no significant changes in our Critical Accounting Estimates as described in our 2020 Annual Report on Form 10-K. 49 Table of Contents FORWARD-LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events. Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, 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. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.