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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 309 added, 206 removed, 479 unchanged (52% of the section changed)

1 unchanged sentence

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.

and its subsidiaries (“BancShares”).

Intercompany accounts and transactions have been eliminated.

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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.

Refer to our 2020 Annual Report 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.

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.

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.

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.

In recent months, COVID-19 vaccines have been approved and are now generally available for use in the United States and certain other countries, however, we cannot predict how widely utilized they will be or whether they will be effective in preventing the spread of COVID-19 (including its variants).

Although we cannot predict when or if normal economic activity and business operations will resume, we did observe general declines in the level of economic uncertainty and stabilization of macroeconomic forecasts during the first half of 2021.

In recent weeks, we have seen an uptick in the number of new cases, although the absolute level of these new cases is significantly below the levels witnessed at the height of the pandemic.

We are unable to predict whether these trends will continue and how this will affect the overall economy at the current time.

However, we remain vigilant in our review and monitoring efforts around the duration and severity of the COVID-19 pandemic (including any of its variants) and its effects on the overall economy and our financial results.

During the second 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 acknowledged the economy’s accelerating recovery from COVID-19, but maintained that the recovery is incomplete and economic risks remain.

The FOMC expects to maintain this target range, but could see rate hikes in 2023 and possibly earlier.

In response to the COVID-19 pandemic, the Small Business Administration Paycheck Protection Program (“SBA-PPP”) was established through the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act 2021 to direct aid via loans to small businesses impacted by the COVID-19 pandemic.

We completed the first round of SBA-PPP funding in the second half 2020.

During the second quarter of 2021, we completed the second round of funding, which resulted in the origination of approximately 12,000 SBA-PPP loans totaling $1.2 billion.

We recorded $27.2 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.

As of June 30, 2021, remaining net deferred fees on SBA-PPP loans were $54.9 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 20,000 forgiveness decisions from the SBA to date, representing over $2.6 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

(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.

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

SBA-PPP LOAN FORGIVENESS STATUS

(Dollars in thousands)

Forgiveness Status $ of Loans % of Round 1 Total

Round One Forgiveness Status at June 30, 2021 $ of Loans % of Round One Total

Received by FCB $ 2,933,046 91.3 %

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Funds Received 2,642,638 82.3

Through June 30, 2021, over 99% 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.

SIGNIFICANT EVENTS IN 2021

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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.

The Transaction has been approved by the shareholders of both companies and has received regulatory approval from the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporation (“FDIC”).

Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System and closing is expected in the third quarter, subject to such approval and the satisfaction or waiver of other 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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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%.

Second Quarter Highlights

• Net income for the second quarter of 2021 was $152.8 million, a decrease of $1.0 million, or 0.6% compared to the same quarter in 2020.

Net income available to common shareholders totaled $148.2 million for the second quarter of 2021.

Net income per common share increased $0.35, or 2.4%, to $15.09 in the second quarter of 2021, from $14.74 per share during the comparable quarter in 2020.

• Return on average assets for the second quarter of 2021 was 1.13%, down from 1.36% in the second quarter of 2020.

Return on average equity for the second quarter of 2021 was 14.64%, down from 16.43% during the comparable quarter of 2020.

• Net interest income was $346.4 million for the second quarter of 2021, an increase of $9.0 million, or 2.7% compared to the same quarter in 2020.

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

SBA-PPP loans contributed $27.2 million in interest and fee income for the second quarter of 2021 compared to $19.0 million in the same quarter of 2020.

The taxable-equivalent net interest margin (“NIM”) was 2.68% for the second quarter of 2021, a decrease of 46 basis points from 3.14% for the second quarter in 2020.

• Provision for credit losses was a benefit of $19.6 million for the second quarter of 2021 compared to $20.6 million in expense for the same quarter in 2020.

The net charge-off ratio was 0.02% for the second quarter of 2021, down from 0.03% for the first quarter of 2021 and 0.09% for the second quarter of 2020.

• Noninterest income was $134.2 million for the second quarter of 2021, a decrease of $31.3 million, or 18.9%, compared to $165.4 million for the same quarter of 2020.

• Noninterest expense was $301.6 million for the second quarter of 2021, an increase of $9.9 million or by 3.4% compared to the same quarter of 2020.

• The allowance for credit losses was $189.1 million at June 30, 2021, compared to $210.7 million at March 31, 2021.

The $21.6 million change was due primarily to a reserve release for the three months ended June 30, 2021 driven by continued improvement in macroeconomic factors, strong credit performance, and low net charge-offs.

• Total loans were $32.7 billion as of June 30, 2021, a decrease of $491.2 million, or by 5.9% on an annualized basis, since March 31, 2021.

Excluding loans originated under the SBA-PPP, total loans increased $605.6 million, or by 8.0% on an annualized basis, since March 31, 2020.

• Total deposits grew to $48.4 billion, an increase of $1.1 billion, or by 9.1% on an annualized basis, since March 31, 2021.

• At June 30, 2021, BancShares remained “well capitalized” as defined by regulatory standards with a total risk-based capital ratio of 14.2%, a Tier 1 risk-based capital of 12.1%, a common equity Tier 1 ratio of 11.1% and a leverage ratio of 7.7%.

Year to Date Highlights

• Net income for the six months ended June 30, 2021 totaled $300.1 million, an increase of $89.1 million, or 42.3% compared to the same period in 2020.

Net income available to common shareholders totaled $290.8 million.

Earnings per share increased $9.59, or 47.9%, to $29.63 for the six months ended June 30, 2021, from $20.04 during the comparable period in 2020.

• Return on average assets for the six months ended June 30, 2021 was 1.14%, up 16 basis points compared to the same period in 2020.

Return on average equity for the six months ended June 30, 2021 was 14.67%, up 328 basis points compared to the same period in 2020.

• Net interest income for the six months ended June 30, 2021, was $686.0 million, an increase of $10.3 million, or 1.5% compared to the same period of 2020.

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

SBA-PPP loans contributed $58.1 million in interest and fee income for the six months ended June 30, 2021 compared to $19.0 million in the comparable period in 2020.

The taxable-equivalent NIM was 2.74% for the six months ended June 30, 2021, a decrease of 59 basis points from 3.33% during the comparable period of 2020.

• Provision for credit losses was a benefit of $30.6 million for the six months ended June 30, 2021, compared to $48.9 million in expense for the same period in 2020.

The net charge-off ratio was 0.03% for the six months ended June 30, 2021, a 7 basis point decrease compared to the same period of 2020.

• Noninterest income was $270.8 million for the six months ended June 30, 2021, an increase of $41.4 million, or 18.0%, compared to $229.4 million for the same quarter of 2020.

• Noninterest expense was $597.5 million for the six months ended June 30 2021, an increase of $5.9 million or by 1.0% compared to the same quarter of 2020.

• The allowance for credit losses was $189.1 million at June 30, 2021, compared to $224.3 million at December 31, 2020.

The $35.2 million change was due primarily to a reserve release for the six months ended June 30, 2021 driven by continued improvement in macroeconomic factors, strong credit performance, and low net charge-offs.

• Total loans grew to $32.7 billion, a decrease of $102.3 million since December 31, 2020.

Excluding SBA-PPP loans, total loans increased $604.7 million, or by 3.7% on an annualized basis, since December 31, 2020.

• Total deposits grew to $48.4 billion, an increase of $5.0 billion since December 31, 2020 or by 23.1% on an annualized basis driven by organic growth and the effects of government stimulus.

SELECTED QUARTERLY DATA

First Fourth Third Second First

2021 2020 Six months ended June 30

Second First Fourth Third Second

(Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter 2021 2020

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Market price at period end (Class A) 832.74 835.77 574.27 318.78 405.02 832.74 405.02

Book value at period-end 405.59 396.21 380.43 367.57 351.90

Book value per share at period-end 421.39 405.59 396.21 380.43 367.57 421.39 367.57

SELECTED QUARTERLY AVERAGE BALANCES

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Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.71 0.73 0.74 0.73 0.77 0.71 0.77

Total risk-based capital ratio 14.15 14.14 13.81 13.70 13.63 14.15 13.63

Tier 1 risk-based capital ratio 12.13 12.02 11.63 11.48 11.38 12.13 11.38

Common equity Tier 1 ratio 11.14 11.00 10.61 10.43 10.32 11.14 10.32

Total risk-based capital ratio 11.00 10.61 10.43 10.32 10.36

Tier 1 leverage capital ratio 7.67 7.84 7.86 7.80 8.07 7.67 8.07

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(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%.

(2) Loans originated in relation to the SBA-PPP ($1.7 billion as of June 30, 2021) do not have a recorded ACL.

As of June 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.56%, while the ratio of ACL to total loans excluding SBA-PPP loans is 0.61%.

BUSINESS COMBINATIONS

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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.

The transaction has been approved by the shareholders of both companies and has received regulatory approval from the North Carolina Commissioner of Banks and the FDIC.

Federal Deposit Insurance Corporation Assisted Transactions

BancShares completed fourteen Federal Deposit Insurance Corporation (“FDIC”) assisted transactions between 2009 and 2017.

BancShares completed fourteen 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.

As of June 30, 2021, these agreements have been satisfied following a $16.1 million payment made to the FDIC for the final active agreement during the first quarter of 2021.

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

Three months ended June 30

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(Dollars in thousands) Balance Expense Rate Balance Expense Rate

Loans and leases $ 33,166,049 $ 324,891 3.89 % $ 31,635,958 $ 326,618 4.10 %

Investment securities:

Treasury — — — 206,575 679 1.32

Government agency 839,614 1,966 0.94 657,405 1,428 0.87

Mortgage-backed securities 8,968,779 25,273 1.13 7,555,947 28,532 1.51

Corporate bonds 612,516 7,806 5.10 299,250 3,782 5.06

Other investments 113,439 426 1.51 209,290 2,236 4.30

Total investment securities 10,534,348 35,471 1.35 8,928,467 36,657 1.64

Overnight investments 7,819,287 2,105 0.11 2,231,356 553 0.10

Total interest-earning assets 51,519,684 362,467 2.80 42,795,781 363,828 3.38

Cash and due from banks 364,303 404,517

Premises and equipment 1,242,700 1,260,566

Allowance for credit losses (211,913) (209,973)

Other real estate owned 46,074 55,554

Other assets 1,438,483 1,247,057

Total assets $ 54,399,331 $ 45,553,502

Interest-bearing deposits:

Checking with interest $ 10,952,753 $ 1,504 0.06 % $ 8,562,145 $ 1,310 0.06 %

Savings 3,796,686 326 0.03 2,846,557 312 0.04

Money market accounts 9,581,775 2,634 0.11 7,618,883 6,519 0.34

Time deposits 2,672,900 4,078 0.61 3,398,979 9,775 1.16

Total interest-bearing deposits 27,004,114 8,542 0.13 22,426,564 17,916 0.32

Securities sold under customer repurchase agreements 677,451 356 0.21 659,244 399 0.24

Other short-term borrowings — — — 45,549 248 2.16

Long-term borrowings 1,227,755 6,534 2.12 1,275,928 7,300 2.26

Total interest-bearing liabilities 28,909,320 15,432 0.21 24,407,285 25,863 0.42

Noninterest-bearing deposits 20,746,989 16,719,851

Other liabilities 344,849 438,141

Shareholders’ equity 4,398,173 3,988,225

Total liabilities and shareholders’ equity $ 54,399,331 $ 45,553,502

Interest rate spread 2.59 % 2.96 %

Net interest income and net yield on interest-earning assets $ 347,035 2.68 % $ 337,965 3.14 %

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 a 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 June 30, 2021 and 2020, respectively.

The taxable-equivalent adjustment was $642 thousand and $571 thousand for the three months ended June 30, 2021 and 2020, respectively.

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

Three months ended March 31

Six months ended June 30

Interest Interest

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

Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as 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.

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 a 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 six months ended June 30, 2021 and 2020, respectively.

The taxable-equivalent adjustment was $1.3 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively.

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

Three months ended March 31, 2021

Three months ended June 30, 2021 Six months ended June 30, 2021

Change from prior year period due to:

(Dollars in thousands) Volume (1)

Yield/Rate (1)

Total Change Volume (1)

Yield/Rate (1)

Loans and leases $ 14,265 $ (15,992) $ (1,727) $ 49,996 $ (54,277) $ (4,281)

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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.

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.

Second Quarter 2021 compared to Second Quarter 2020

Taxable-equivalent net interest income was $347.0 million for the second quarter of 2021, an increase of $9.1 million, or 2.7%, compared to the second quarter of 2020.

SBA-PPP loans contributed $27.2 million in interest and fee income during the second quarter of 2021 compared to $19.0 million in the second quarter of 2020.

The taxable-equivalent NIM was 2.68% in the second quarter of 2021, a decrease of 46 basis points from the comparable quarter in the prior year.

The margin decline was primarily due to changes in earning asset mix as excess liquidity drove an increase in overnight investments as a percentage of total assets.

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

Average interest-earning assets increased by $8.7 billion to $51.5 billion, compared to the second quarter of 2020.

The primary drivers for this change were the excess liquidity build up which led to higher average overnight investments of $5.6 billion, a $1.5 billion increase in average loan balances due to SBA-PPP loans as well as organic loan growth and higher average investment securities of $1.6 billion.

The yield on interest-earning assets decreased by 58 basis points to 2.80% when compared to the second quarter of 2020.

The yield on loans and leases decreased to 3.89%, or by 21 basis points, as a result of downward rate resets on variable rate loans and lower rates on new fixed rate loans.

The yield on overnight investments increased one basis point, but the large increase in average balances resulted in a change in earning asset mix, which contributed to an overall decline in the yield.

The yield on investment securities decreased by 29 basis points primarily due to increased premium amortization on mortgage-backed securities as a result of higher than expected prepayments.

Average interest-bearing liabilities increased by $4.5 billion to $28.9 billion, compared to the second quarter of 2020.

This increase was driven by an increase in average interest-bearing deposit balances of $4.6 billion driven by strong deposit growth.

This was partially offset by a decrease in average long-term borrowings of $48.2 million.

Rates on interest-bearing liabilities decreased by 21 basis points to 0.21%, primarily due to decreased rates paid on interest-bearing deposits as a result of maturing time deposits and a reduction in rates paid on money market accounts.

This is coupled with lower rates paid on borrowings.

Six Months of 2021 compared to Six Months of 2020

The taxable-equivalent net interest income for the six months ended June 30, 2021 was $687.3 million, an increase of $10.2 million, or 1.5%, compared to the same period in 2020.

The increase in net interest income was primarily due to a decrease in total interest expense of $25.9 million, driven largely by declining rates on interest-bearing deposits.

This was partially offset by a decrease in interest on investment securities of $10.0 million and a decrease of $4.3 million in interest earned on loans, driven by a decrease in yields, partially offset by the impact of SBA-PPP loans.

The taxable-equivalent NIM was 2.74% for the six months ended June 30, 2021, a decrease of 59 basis points from the comparable period of 2020.

Th e margin decline was primarily due to changes in earning asset mix and a decline in the yield on interest-earning assets, partially offset by lower rates paid on interest-bearing deposits and the impact of SBA-PPP loans on loan yields.

Average year-to-date interest-earning assets for the six months ended June 30, 2021, increased by $9.7 billion to $50.1 billion, compared to the same period in 2020.

This increase was driven by an increase in average overnight investments of $5.0 billion, coupled with a $2.8 billion increase in average loans outstanding and increases in average investment securities of $2.0 billion.

The yield on interest-earning assets decreased by 76 basis points to 2.86% for the six months ended June 30, 2021, compared to the same period in 2020.

The yield on loans and leases decreased by 36 basis points as a result of decreases in yields on commercial and residential loans.

The yield on overnight investments and the investment securities portfolio decreased by 45 basis points and 55 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 and reinvestment at lower yields were the primary drivers of the yield decline on investment securities.

Average year-to-date interest-bearing liabilities for the six months ended June 30, 2021 increased by $4.6 billion to $28.4 billion, compared to the same period in 2020.

This increase was primarily due to a $4.5 billion increase in average interest-bearing deposit balances driven by deposit growth.

The rate paid on interest-bearing deposits decreased by 26 basis points driven by decreased rates on time deposits and money market accounts.

The rate paid on interest-bearing liabilities decreased by 26 basis points to 0.22% for the six months ended June 30, 2021 compared to the same period in 2020 driven by maturing time deposits and declines in the rate paid on money market accounts.

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.

Provision for credit losses was a benefit of $19.6 million for the second quarter of 2021, compared to $20.6 million in expense for the comparable quarter in 2020.

For the six months ended June 30, 2021, provision for credit losses was a benefit of $30.6 million compared to $48.9 million in expense for the first six months of 2020.

The change was driven primarily by reserve release attributable to improvements in macroeconomic factors during 2021, continued low net charge-offs and strong credit performance.

Provision expense for the three and six month periods ended June 30, 2020 included reserve builds related to COVID-19 of $14.6 million and $36.1 million, respectively.

Noninterest Income

NONINTEREST INCOME

Three months ended March 31

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2021 2020 2021 2020

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ATM income 1,571 1,395 3,053 2,817

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

Marketable equity securities gains, net 11,654 64,570 27,665 13,162

Realized gains on investment securities available for sale, net 15,830 13,752 25,037 33,547

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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%.

Noninterest income for the second quarter of 2021 was $134.2 million, compared to $165.4 million for the same period of 2020, a decrease of $31.3 million, or 18.9%.

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.

• A $52.9 million decline in the amount of favorable fair market value adjustments on marketable equity securities.

Fair market value adjustments on marketable equity securities were heightened in the second quarter of 2020 as we built up our equity portfolio when the market contracted.

As the market started to improve in the second quarter of 2020, we sold a large portion of it to realize the gains.

The $64.6 million of gains recognized in the second quarter of 2020 consisted of realized gains of $37.0 million and unrealized gains of $27.6 million.

• Mortgage income decreased by $3.9 million primarily due to a decline in gain on sale driven by interest rate movements.

• Wealth management services increased by $9.4 million driven by increases in annuity fees, assets under management, and advisory and transaction fees.

• Cardholder services income, net increased by $4.9 million, service charges on deposit accounts increased by $4.4 million and merchant services income increased by $3.2 million.

These increases were driven by increased transaction activity.

Noninterest income was $270.8 million for the first six months of 2021, compared to $229.4 million for the same period of 2020, an increase of $41.4 million, or 18.0%.

The most significant components of the change were as follows:

• Wealth management services increased by $15.2 million, due to increased annuity fees, assets under management, and advisory and transaction fees.

• Gains on the market value of equity securities, net increased by $14.5 million.

• Cardholder services income, net increased $6.7 million primarily due to an increase in transaction volume.

• Mortgage income increased $3.9 million primarily due to a mortgage servicing rights impairment reversal in the first quarter of 2021.

• Realized gains on investment securities available for sale, net decreased by $8.5 million primarily due to a higher volume of sales of debt securities in the first quarter of 2020.

Noninterest Expense

NONINTEREST EXPENSE

Three months ended March 31

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2021 2020 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 $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.

Noninterest expense was $301.6 million during the second quarter of 2021, an increase of $9.9 million, or 3.4%, 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 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.

• Personnel expense increased $11.9 million driven by an increase in payroll incentives and higher health insurance claims.

• Processing fees paid to third parties increased $4.2 million as we continue to make investments in our digital and technological capabilities.

• Collection and foreclosure-related expenses decreased $3.8 million and other noninterest expense decreased by $2.2 million.

Noninterest expense was $597.5 million for the first six months of 2021, compared to $591.7 million for the same period in 2020, an increase of $5.9 million, or 1.0%.

The most significant components of the change were as follows:

• Personnel expense increased by $11.7 million primarily due to an increase in payroll incentives coupled with the impact of merit increases.

• Processing fees paid to third parties increased $7.5 million as we continue to make investments in our digital and technological capabilities.

• Merger-related expenses increased $4.0 million in anticipation of the upcoming merger with CIT.

• Other expenses decreased $11.3 million primarily due to a decrease in pension expense as a result of higher expected returns on plan assets coupled with improvements in the reserve for unfunded commitments.

Income tax expense was $45.8 million and $36.8 million for the second quarter of 2021 and 2020, respectively, representing effective tax rates of 23.1% and 19.3% during the periods.

Income tax expense totaled $89.8 million and $53.7 million for the first six months of 2021 and 2020, respectively, representing effective tax rates of 23.0% and 20.3% for the respective six month periods.

The effective tax rates in 2020 were favorably impacted by the utilization of an allowable alternative for computing our federal income tax liability.

The allowable alternative enabled us to use the federal income tax rate for certain deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax.

Without this alternative, the effective tax rate for the second quarter and first six months of 2020 would have been approximately 23%.

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

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We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.

Interest-earning assets totaled $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.

Interest-earning assets totaled $51.6 billion and $47.2 billion at June 30, 2021 and December 31, 2020, respectively.

The $4.4 billion increase was primarily composed of a $3.5 billion increase in overnight investments and a $971.3 million increase in investment securities, partially offset by a $102.3 million decrease in loans.

Investment Securities

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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.

The carrying value of investment securities totaled $10.9 billion at June 30, 2021, an increase of $971.3 million compared to December 31, 2020.

The increase in the portfolio was primarily attributable to a strong liquidity position, resulting in investment securities purchases of $4.1 billion, partially offset by sales of $1.1 billion and maturities and paydowns of $2.0 billion.

Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes.

As of June 30, 2021, investment securities available for sale had a net pre-tax unrealized gain of $45.3 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 March 31, 2021 and December 31, 2020.

INVESTMENT SECURITIES

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(Dollars in thousands) Composition (1)

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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.

Table 9 presents the weighted average taxable-equivalent yields for investment securities held to maturity at June 30, 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

June 30, 2021

One Year One to Five

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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.

Loans held for sale were $107.8 million at June 30, 2021, a net decrease of $17.1 million since December 31, 2020.

At June 30, 2021, loans totaled $32.69 billion, a decrease of $102.3 million, or by 0.6% on an annualized basis since December 31, 2020.

Excluding SBA-PPP loans, total loans increased $604.7 million, or by 3.7% on an annualized basis since December 31, 2020.

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.

Non-PCD loans and leases were $32.3 billion at both June 30, 2021 and December 31, 2020, representing 98.8% and 98.6% of total loans, respectively.

PCD loans at June 30, 2021 were $396.5 million, compared to $462.9 million at December 31, 2020, representing 1.2% and 1.4% of total loans, respectively.

The discount related to acquired non-PCD loans and leases was $14.5 million and $19.5 million at June 30, 2021 and December 31, 2020, respectively.

The discount related to PCD loans was $35.8 million and $45.3 million at June 30, 2021 and December 31, 2020, respectively.

During the three months ended June 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $2.5 million while interest and accretion income on PCD loans was $12.8 million and $14.4 million, respectively.

During the six months ended June 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $5.0 million while interest and accretion income on PCD loans was $23.7 million and $33.0 million, respectively

LOANS AND LEASES

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

(Dollars in thousands) June 30, 2021 December 31, 2020

Construction and land development $ 1,183,929 $ 985,424

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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 allowance for credit losses (“ACL”) was $189.1 million at June 30, 2021, representing a decrease of $35.2 million since December 31, 2020.

The ACL as a percentage of total loans and leases was 0.58% at June 30, 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 0.61% at June 30, 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.

For the period ended June 30, 2021, the ACL change since December 31, 2020 was driven by improvement in macroeconomic factors, continued strong credit performance and low net charge-offs.

Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years.

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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.

Our ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario, but the June 30, 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%.

These loss estimates were also influenced by our strong credit quality and low net charge-offs.

As of June 30, 2021, the consensus baseline forecast utilized the following significant inputs over the two-year reasonable and supportable forecast period:

Unemployment - Rates are expected to improve with a peak of over 5% in the third quarter of 2021 declining to around 4% in early 2023.

GDP Growth - Peak growth of approximately 7% in the third quarter of 2021, decreasing to around 2% in 2022 and thereafter.

Home Pricing Index - Growth rates to fluctuate between 3.5% and 5% throughout the forecast period.

Commercial Real Estate Index - Forecasted downturn with a maximum 8% drop by the end of 2021, and then improving towards positive year over year growth.

At June 30, 2021, the ACL allocated to non-PCD loans and leases was $170.4 million, or 0.53% of non-PCD loans and leases, compared to $200.3 million, or 0.62%, at December 31, 2020.

The decrease of 9 basis points since December 31, 2020 was primarily due to improvement in the macroeconomic factors, continued strong credit quality and low net charge-offs.

a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.56% at June 30, 2021 compared to 0.67% at December 31, 2020.

At June 30, 2021, the ACL for PCD loans totaled $18.7 million compared to $24.0 million at December 31, 2020.

The decrease was due to paydowns and the decline in the portfolio coupled with the impact of improved macroeconomic factors.

In the period ended June 30, 2021, the ACL on our commercial portfolio decreased $4.8 million, with the largest share of the decrease within commercial real estate.

The ACL on the consumer portfolio decreased $25.2 million, with the largest decrease within residential mortgages.

These portfolios were most impacted by the improvement in macroeconomic factors which was the primary driver of the decline.

Net charge-offs for loans and leases were $2.0 million during the second quarter of 2021, compared to $7.4 million during the second quarter of 2020.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.02% and 0.09% for the second quarter of 2021 and 2020, respectively.

Excluding the impact of SBA-PPP loans on average loan balances, net charge-offs as a percentage of total average loans and leases was 0.03% and 0.10% for the second quarter of 2021 and 2020, respectively.

Net charge-offs for loans and leases were $4.6 million during the six months ended June 30, 2021, compared to $14.9 million during the same period 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 six months ended June 30, 2021 and 2020, respectively.

Average SBA-PPP loans did not have an impact on net charge-offs as a percentage of total average loans for the six months ended June 30, 2021 and 2020.

ALLOWANCE FOR CREDIT LOSSES

Three months ended March 31, 2021

Three months ended June 30, 2021

(Dollars in thousands) Commercial Consumer PCD Total

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

Allowance for credit losses:

Balance at April 1 $ 74,864 $ 112,852 $ 22,935 $ 210,651

Provision (credit) 3,279 (17,481) (5,401) (19,603)

1 unchanged sentence

Recoveries 983 2,929 1,662 5,574

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

Balance at June 30 $ 76,082 $ 94,272 $ 18,740 $ 189,094

Percent of loans in each category to total loans 68.8 % 30.0 % 1.2 % 100.0 %

Annualized net charge-off ratio 0.04 % 0.05 % (0.59) % 0.02 %

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Average loans 22,883,898 9,744,211 414,183 33,042,292

Three months ended June 30, 2020

(Dollars in thousands) Commercial Consumer PCD Total

Balance at April 1 $ 72,410 $ 109,933 $ 26,916 $ 209,259

Provision (credit) 6,628 13,682 242 20,552

Charge-offs (4,015) (6,657) (1,392) (12,064)

Recoveries 1,154 2,387 1,162 4,703

Balance at June 30 $ 76,177 $ 119,345 $ 26,928 $ 222,450

Percent of loans in each category to total loans 68.4 % 30.0 % 1.6 % 100.0 %

Three months ended March 31, 2020

Annualized net charge-off ratio 0.05 % 0.18 % 0.08 % 0.09 %

Net charge-offs $ 2,861 $ 4,270 $ 230 $ 7,361

Average loans 21,372,905 9,619,096 547,000 31,539,001

Six months ended June 30, 2021

(Dollars in thousands) Commercial Consumer PCD Total

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

Provision (credit) (643) (22,985) (6,949) (30,577)

Initial allowance on PCD loans — — — —

Charge-offs (6,375) (8,497) (1,219) (16,091)

Recoveries 2,258 6,269 2,921 11,448

Balance at June 30 $ 76,082 $ 94,272 $ 18,740 $ 189,094

Percent of loans in each category to total loans 68.8 % 30.0 % 1.2 % 100.0 %

Annualized net charge-off ratio 0.04 % 0.05 % (0.79) % 0.03 %

Net charge-offs $ 4,117 $ 2,228 $ (1,702) $ 4,643

Average loans 22,857,758 9,714,503 434,241 33,006,502

Six months ended June 30, 2020

(Dollars in thousands) Commercial Consumer PCD Total

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

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Recoveries 2,581 4,818 4,059 11,458

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

Balance at June 30 $ 76,177 $ 119,345 $ 26,928 $ 222,450

Percent of loans in each category to total loans 68.4 % 30.0 % 1.6 % 100.0 %

Annualized net charge-off ratio 0.07 % 0.20 % (0.58) % 0.10 %

1 unchanged sentence

Average loans 19,917,631 9,829,485 538,543 30,285,659

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.

The reserve for unfunded loan commitments was $11.1 million and $12.8 million at June 30, 2021 and December 31, 2020, respectively.

ALLOWANCE FOR CREDIT LOSSES RATIOS

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

(Dollars in thousands) June 30, 2021 December 31, 2020

Allowance for credit losses to total loans and leases (1) :

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Total PCD loans 396,506 462,882

(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%.

(1) Loans originated in relation to the SBA-PPP ($1.7 billion as of June 30, 2021 and $2.4 billion as of December 31, 2020) do not have a recorded ACL.

As of June 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.56% while the ratio of ACL to total loans excluding SBA-PPP loans was 0.61%.

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%.

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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.

At June 30, 2021, BancShares’ nonperforming assets totaled $231.1 million, a decrease of $11.2 million since December 31, 2020.

Nonaccrual loans and leases at June 30, 2021 were $187.5 million, reflecting a decrease of $4.0 million since December 31, 2020.

Nonaccrual loans and leases as a percentage of total loans and leases was 0.57% and 0.58% at June 30, 2021 and December 31, 2020, respectively.

At June 30, 2021, OREO totaled $43.7 million, representing a decrease of $7.2 million since December 31, 2020.

Nonperforming assets as a percentage of total loans, leases and OREO was 0.71% as of June 30, 2021 compared to 0.74% as of December 31, 2020.

NONPERFORMING ASSETS

First Fourth Third Second First

Second First Fourth Third Second

(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter

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TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty.

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

TROUBLED DEBT RESTRUCTURINGS

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

(Dollars in thousands) June 30, 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 $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.

Interest-bearing liabilities totaled $29.4 billion at June 30, 2021, compared to $27.3 billion at December 31, 2020.

The increase was mostly due to an increase of $2.0 billion in interest-bearing deposits.

Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective.

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

At 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

At June 30, 2021, total deposits were $48.4 billion, an increase of $5.0 billion, representing annualized growth of 23.1% since December 31, 2020, driven by organic growth and the effects of government stimulus.

(Dollars in thousands) June 30, 2021 December 31, 2020

Demand $ 20,974,111 $ 18,014,029

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Total deposits $ 48,410,596 $ 43,431,609

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

Total borrowings were relatively unchanged, totaling $1.9 billion at June 30, 2021 and December 31, 2020.

(Dollars in thousands) June 30, 2021 December 31, 2020

Securities sold under customer repurchase agreements $ 692,604 $ 641,487

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Total borrowings $ 1,917,092 $ 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.

BancShares owns four special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III 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.

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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.

The table below shows Class A common stock repurchase activity for the three and six months ended June 30, 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.

There were no repurchases of Class B common stock or the preferred stock during the three and six months ended June 30, 2021 or 2020.

CLASS A COMMON STOCK REPURCHASE ACTIVITY

Three months ended March 31

Three months ended June 30 Six months ended June 30

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

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ANALYSIS OF CAPITAL ADEQUACY

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

Requirements to be well-capitalized June 30, 2021 December 31, 2020

(Dollars in thousands) Amount Ratio Amount Ratio

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Tier 1 leverage ratio 5.00 4,468,560 8.29 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.

As of June 30, 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.

BancShares and FCB had capital conservation buffers of 6.13% and 5.79%, respectively, at June 30, 2021, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

RISK MANAGEMENT

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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.

Through June 30, 2021, over 99% of all COVID-19 related loan extensions have begun repayment.

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.

We continue to assess both the credit and operational risks this program presents and at June 30, 2021, BancShares had $1.7 billion in SBA-PPP loans outstanding.

Interest rate risk management

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Assumptions that incorporate customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise have been adjusted based on actual deposit behavior over the last 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 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of June 30, 2021 and December 31, 2020.

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

Change in interest rate (basis points) June 30, 2021 December 31, 2020

-100 (5.93) % (6.24) %

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+200 14.48 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.

The decreased asset sensitivity in net interest income sensitivity metrics as of June 30, 2021 compared to December 31, 2020 resulted from a deployment of excess liquidity out of low-yielding overnight cash predominantly into investment securities.

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

Table 20 presents the EVE profile as of June 30, 2021 and December 31, 2020.

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS

Estimated percentage (decrease) increase in EVE

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

Change in interest rate (basis points) June 30, 2021 December 31, 2020

-100 (16.40) % (21.20) %

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+200 9.02 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.

The economic value of equity metrics at June 30, 2021 compared to December 31, 2020 were primarily affected by redeployment of excess funds during the second quarter of 2021 coupled with lower 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 $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.

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 $13.2 billion at June 30, 2021 compared to $9.6 billion at December 31, 2020.

Another source of available funds was advances from the FHLB of Atlanta.

Outstanding FHLB advances were $646.7 million as of June 30, 2021, and we had sufficient collateral pledged to secure $8.3 billion of additional borrowings from the FHLB of Atlanta.

Also, at June 30, 2021, $4.4 billion in non-PCD loans with a lendable collateral value of $3.5 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 June 30, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

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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.

For more information on these commitments, see 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.

There have been no significant changes in our Critical Accounting Estimates as described in our 2020 Annual Report.

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.

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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 2020 Annual Report 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.

Risk Factors of our 2020 Annual Report 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.

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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