What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 256 added, 240 removed, 548 unchanged (48% of the section changed)

20 unchanged sentences

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.

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.

Although vaccines for COVID-19 have been made available to the general public in the United States and many places around the world, vaccination rates vary and effectiveness may decrease over time.

We cannot predict how widely utilized the vaccines and boosters will be or whether and for how long 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 observed general declines in the level of economic uncertainty and stabilization of macroeconomic forecasts during the first three quarters of 2021.

The US experienced an uptick in the number of new cases during the third quarter of 2021.

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.

During the third 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 the COVID-19 pandemic, but maintained that the recovery is incomplete and economic risks remain.

The FOMC expects to maintain this target range, but rate hikes are expected in late 2022 or early 2023.

Further, the committee suggested that they will begin tapering asset purchases, potentially as early as the fourth quarter of 2021 if economic progress continues as expected.

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 June 30, 2021, remaining net deferred fees on SBA-PPP loans were $54.9 million.

We completed the first round of SBA-PPP funding in the second half 2020 and the second round of funding during the second quarter of 2021.

As of September 30, 2021, there were $1.1 billion SBA-PPP loans outstanding with remaining net deferred fees of $39.4 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.

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

As of September 30, 2021, we have received approximately 98% of forgiveness decisions from the SBA to date, representing over $3.1 billion in forgiveness payments.

With respect to the second round of SBA-PPP, we began accepting and processing applications for forgiveness during the third quarter of 2021.

As of September 30, 2021, we have received approximately 14% of forgiveness decisions from the SBA, representing over $175 million in forgiveness payments.

SBA-PPP LOAN FORGIVENESS STATUS

(Dollars in thousands)

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

Received by FCB $ 2,933,046 91.3 %

Submitted to SBA 2,842,312 88.5

Approved by SBA 2,767,706 86.2

Funds Received 2,642,638 82.3

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

Round 1 Round 2

Status $ of Loans % of Round Total $ of Loans % of Round Total

Total Funded $ 3,199,897 100.0 % $ 1,223,797 100.0 %

Payments Received 3,121,746 97.6 175,660 14.4

Total Remaining $ 78,151 2.4 % $ 1,048,137 85.6 %

Through September 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.

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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.

On September 30, 2021, the parties entered into an amendment to the merger agreement pursuant to which the parties mutually agreed to extend until March 1, 2022 the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed.

Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System and both parties are committed to continuing to seek such approval.

The parties have responded to all questions issued by the Staff of the Federal Reserve Board, and the Staff has informed us that they do not have further questions at this time.

The parties have been informed that the application is presently at the Governor level, but the Board of Governors has not provided a time frame for its decision on the application.

Closing is expected to occur as soon as practicable following receipt of 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

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%.

Third Quarter Highlights

• Net income for the third quarter of 2021 was $124.1 million, a decrease of $18.6 million, or 13.0% compared to the same quarter in 2020.

Net income available to common shareholders totaled $119.4 million for the third quarter of 2021.

Net income per common share decreased $1.86, or 13.3%, to $12.17 in the third quarter of 2021, from $14.03 per share during the comparable quarter in 2020.

• Return on average assets for the third quarter of 2021 was 0.88%, down from 1.18% in the third quarter of 2020.

Return on average equity for the third quarter of 2021 was 11.29%, down from 14.93% during the comparable quarter of 2020.

• Net interest income was $346.9 million for the third quarter of 2021, a decrease of $6.8 million, or 1.9% compared to the same quarter in 2020, but was relatively stable compared to the second quarter of 2021.

The taxable-equivalent net interest margin (“NIM”) was 2.61% for the third quarter of 2021, a decrease of 45 basis points from 3.06% for the third quarter in 2020 and a decrease of 7 basis points from 2.68% from the second quarter of 2021.

• Provision for credit losses was a benefit of $1.1 million for the third quarter of 2021 compared to an expense of $4.0 million for the same quarter in 2020.

The net charge-off ratio was 0.06% for the third quarter of 2021, up from 0.02% for the second quarter of 2021 and 0.03% for the third quarter of 2020.

• Noninterest income was $122.9 million for the third quarter of 2021, an increase of $2.4 million, or 2.0%, compared to $120.6 million for the same quarter of 2020.

• Noninterest expense was $312.8 million for the third quarter of 2021, an increase of $21.2 million, or by 7.3% compared to the same quarter of 2020.

• The allowance for credit losses was $183.2 million at September 30, 2021, compared to $189.1 million at June 30, 2021.

The $5.9 million change was due primarily to a reserve release for the three months ended September 30, 2021 driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors.

• Total loans were $32.5 billion as of September 30, 2021, a decrease of $173.5 million, or by 2.1% on an annualized basis, since June 30, 2021.

Excluding loans originated under the SBA-PPP, total loans increased $437.4 million, or by 5.6% on an annualized basis, since June 30, 2021.

• Total deposits grew to $50.1 billion, an increase of $1.7 billion, or by 13.6% on an annualized basis, since June 30, 2021.

• At September 30, 2021, BancShares remained “well-capitalized” as defined by regulatory standards with a total risk-based capital ratio of 14.3%, a Tier 1 risk-based capital of 12.3%, a common equity Tier 1 ratio of 11.3% 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 for the nine months ended September 30, 2021 totaled $424.2 million, an increase of $70.5 million, or 19.9% compared to the same period in 2020.

Net income available to common shareholders totaled $410.3 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.

Earnings per share increased $7.83, or 23.1%, to $41.79 for the nine months ended September 30, 2021, from $33.96 during the comparable period in 2020.

• Return on average assets for the nine months ended September 30, 2021 was 1.05%, consistent with the same period in 2020.

Return on average equity for the nine months ended September 30, 2021 was 13.50%, up 91 basis points compared to the same period in 2020.

• Net interest income for the nine months ended September 30, 2021, was $1.0 billion, an increase of $3.5 million, or 0.3% compared to the same period of 2020.

The taxable-equivalent NIM was 2.69% for the nine months ended September 30, 2021, a decrease of 54 basis points from 3.23% during the comparable period of 2020.

• Provision for credit losses was a benefit of $31.7 million for the nine months ended September 30, 2021, compared to $52.9 million in expense for the same period in 2020.

The net charge-off ratio was 0.04% for the nine months ended September 30, 2021, a 3 basis point decrease compared to the same period of 2020.

• Noninterest income was $393.7 million for the nine months ended September 30, 2021, an increase of $43.8 million, or 12.5%, compared to $350.0 million for the same quarter of 2020.

• Noninterest expense was $910.3 million for the nine months ended September 30 2021, an increase of $27.0 million or by 3.1% compared to the same quarter of 2020.

• The allowance for credit losses was $183.2 million at September 30, 2021, compared to $224.3 million at December 31, 2020.

The $41.1 million change was due primarily to a reserve release for the nine months ended September 30, 2021 driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors.

• Total loans were $32.5 billion, a decrease of $275.8 million since December 31, 2020.

Excluding SBA-PPP loans, total loans increased $1.0 billion, or by 4.6% on an annualized basis, since December 31, 2020.

• Total deposits grew to $50.1 billion, an increase of $6.6 billion since December 31, 2020 or by 20.4% on an annualized basis.

SELECTED QUARTERLY DATA

2021 2020 Six months ended June 30

Second First Fourth Third Second

2021 2020 Nine months ended September 30

Third Second First Fourth Third

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

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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 ($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%.

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

As of September 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.53%, while the ratio of ACL to total loans excluding SBA-PPP loans is 0.58%.

BUSINESS COMBINATIONS

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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.

Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System and both parties are committed to continuing to seek such approval.

The parties have responded to all questions issued by the Staff of the Federal Reserve Board, and the Staff has informed us that they do not have further questions at this time.

The parties have been informed that the application is presently at the Governor level, but the Board of Governors has not provided a time frame for its decision on the application.

Closing is expected to occur as soon as practicable following receipt of such approval and the satisfaction or waiver of other customary closing conditions.

Federal Deposit Insurance Corporation Assisted Transactions

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 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.

As of September 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

Three months ended September 30

Interest Interest

34 unchanged sentences

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.

The taxable-equivalent adjustment was $564 thousand and $597 thousand for the three months ended September 30, 2021 and 2020, respectively.

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

Six months ended June 30

Nine months ended September 30

Interest Interest

34 unchanged sentences

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 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.

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 nine months ended September 30, 2021 and 2020, respectively.

The taxable-equivalent adjustment was $1.8 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively.

CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME

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

Three months ended September 30, 2021 Nine months ended September 30, 2021

Change from prior year period due to:

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Net Interest Income and Margin (Taxable-Equivalent Basis)

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.

Third Quarter 2021 compared to Third Quarter 2020

Taxable-equivalent net interest income totaled $347.5 million for the third quarter of 2021, a decrease of $6.8 million, or 1.9%, compared to the third quarter of 2020.

The decline in net interest income was driven primarily by a decline in the yield on interest-earning assets due to the sustained low rate environment and a reduction in interest and fee income on SBA-PPP loans.

These declines were partially offset by organic loan growth, higher average investment balances as we have deployed some of the excess liquidity on our balance sheet, and a decline in the rate paid on interest bearing deposits.

SBA-PPP loans contributed $20.0 million in interest and fee income for the third quarter of 2021 compared to $28.9 million for the same quarter in 2020.

While SBA-PPP loans continue to support overall net interest income, the contribution from these loans continues to decline as forgiveness activity continues.

Net interest income increased $0.5 million compared to the linked quarter despite a decline in SBA-PPP income and continued low interest rates.

Higher investment and overnight yields and balances, organic loan growth and slightly lower deposit costs more than offset rate pressure on loans and a decline in SBA-PPP income.

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

The taxable-equivalent NIM was 2.61% in the third quarter of 2021, a decrease of 45 basis points from the comparable quarter of 2020.

The margin decline was primarily due to changes in earning asset mix driven by excess liquidity and higher balances in overnight investments as well as declines in loan yields.

These declines were partially offset by lower rates paid on interest-bearing deposits and increased yield on SBA-PPP loans.

As with prior quarters, we continue to operate with liquidity above normal operating ranges which puts downward pressure on net interest margin.

The level of organic loan growth has helped to somewhat protect taxable equivalent NIM from the impacts of the low interest rate environment.

We have also opportunistically deployed incremental liquidity of $1 billion into the investment portfolio since the third quarter of 2020.

The taxable-equivalent NIM declined 7 basis points from 2.68% for the linked quarter primarily due to changes in earning asset mix as our overnight investments continued to grow, partially offset by higher investment yields.

Nine Months of 2021 compared to Nine Months of 2020

The taxable-equivalent net interest income for the nine months ended September 30, 2021 was $1.0 billion, an increase of $3.4 million, or 0.3%, compared to the same period in 2020.

This increase was primarily due to organic loan growth, an increase in interest and fee income on SBA-PPP loans, and lower rates paid on interest-bearing deposits.

These increases were largely offset by a decline in the yield on interest-earning assets.

SBA-PPP loans contributed $78.1 million in interest and fee income for the nine months ended September 30, 2021, compared to $47.9 million for the same period in 2020.

The taxable-equivalent NIM was 2.69% for the nine months ended September 30, 2021, a decrease of 54 basis points from the comparable period of 2020.

The 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 increased income on SBA-PPP loans.

Provision for Credit Losses

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.

Provision for credit losses was a benefit of $1.1 million for the third quarter of 2021, compared to an expense of $4.0 million for the comparable quarter in 2020.

The third quarter of 2021 was favorably impacted by a $5.9 million reserve release driven primarily by continued strong credit performance, low net charge-offs and improvement in macroeconomic factors.

The comparable quarter in 2020 included a $1.5 million reserve build due to continued uncertainties surrounding the COVID-19 pandemic and net loan growth.

Total net charge-offs for the third quarter of 2021 were $4.8 million, an increase from $2.6 million for the comparable quarter in 2020 due to a higher volume of charge-offs and lower recoveries.

The net charge-off ratio was 0.06% for the third quarter of 2021 compared to 0.03% for the same quarter in 2020.

The impact of SBA-PPP loans on average loan balances did not affect the net charge-off ratio in either three-month period.

For the nine months ended September 30, 2021, provision for credit losses was a benefit of $31.7 million compared to $52.9 million in expense for the first nine months of 2020.

Provision for credit losses for the nine months ended September 30, 2021 was favorably impacted by a $41.1 million reserve release driven primarily by continued strong credit performance, low net charge-offs and improvement in macroeconomic factors.

The comparable period in 2020 included $36.1 million reserve build related to uncertainties surrounding the COVID-19 pandemic.

Net charge-offs for the nine months ended September 30, 2021 were $9.4 million, a decrease from $17.4 million for the comparable period in 2020 due to a lower volume of charge-offs and stable recoveries.

The net charge-off ratio was 0.04% for the nine months ended September 30, 2021 compared to 0.07% for the same period in 2020.

The impact of SBA-PPP loans on average loan balances did not have an impact on the net charge-off ratio for the nine months ended September 30, 2021.

Excluding the impact of SBA-PPP loans on average loan balances, the net charge-off ratio was 0.08% for the nine months ended September 30, 2020.

Noninterest Income

NONINTEREST INCOME

Three months ended June 30 Six months ended June 30

Three months ended September 30 Nine months ended September 30

(Dollars in thousands) 2021 2020 2021 2020

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Cardholder services, net 22,879 19,756 65,310 55,503

Mortgage income 5,929 9,811 18,920 15,035

Merchant services, net 8,532 5,363 17,449 11,251

Other service charges and fees 9,205 7,892 26,653 22,829

Merchant services, net 8,409 6,763 25,858 18,014

Mortgage income 6,106 13,106 25,026 28,141

Insurance commissions 4,000 3,576 11,702 10,453

ATM income 1,481 1,537 4,534 4,354

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

Realized gains on investment securities available for sale, net 8,082 21,425 33,119 54,972

Marketable equity securities gains (losses), net 3,350 (2,701) 31,015 10,461

Other 2,639 2,008 6,363 5,330

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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 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%.

Noninterest income for the third quarter of 2021 was $122.9 million, compared to $120.6 million for the same period of 2020, an increase of $2.4 million, or 2.0%.

The most significant components of the change were as follows:

• 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%.

• A $6.1 million favorable change in the fair market value adjustments on marketable equity securities.

• Wealth management services increased by $5.6 million, primarily due to growth in assets under management driving higher advisory and transaction fees.

• Service charges on deposit accounts increased by $4.0 million due to volume.

• Cardholder services income, net increased by $3.1 million and merchant services, net increased by $1.6 million, primarily due to an increase in transaction volume.

• Realized gains on investment securities available for sale, net declined by $13.3 million.

• Mortgage income decreased by $7.0 million, driven by reductions in gain on sale margins and lower production volume in 2021 due to higher mortgage rates and increased competition.

Noninterest income was $393.7 million for the first nine months of 2021, compared to $350.0 million for the same period of 2020, an increase of $43.8 million, or 12.5%.

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.

• Wealth management services increased by $20.7 million, primarily due to growth in assets under management driving higher advisory and transaction fees.

• A $20.6 million favorable change in the fair market value adjustments on marketable equity securities.

• Cardholder services income, net increased by $9.8 million and merchant services, net increased by $7.8 million, primarily due to an increase in transaction volume.

• Realized gains on investment securities available for sale declined by $21.9 million.

Noninterest Expense

NONINTEREST EXPENSE

Three months ended June 30 Six months ended June 30

Three months ended September 30 Nine months ended September 30

(Dollars in thousands) 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 $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.

Noninterest expense was $312.8 million during the third quarter of 2021, an increase of $21.2 million, or 7.3%, compared to the same quarter in 2020.

The most significant components of the change were as follows:

• 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%.

• Salaries and wages increased $13.7 million driven primarily by annual merit increases, increases in revenue-driven incentives, and an increase in temporary personnel costs.

• Processing fees paid to third parties increased $3.7 million driven by our continued investments in digital and technology to support revenue-generating businesses and improve internal processes.

• Merger-related expenses increased $3.5 million in anticipation of the upcoming merger with CIT.

Noninterest expense was $910.3 million for the first nine months of 2021, compared to $883.3 million for the same period in 2020, an increase of $27.0 million, or 3.1%.

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.

• Salaries and wages increased $23.2 million driven primarily by annual merit increases, increases in revenue-driven incentives, and an increase in temporary personnel costs.

• Processing fees paid to third parties increased $11.2 million by our continued investments in digital and technology to support revenue-generating businesses and improve internal processes.

• Merger-related expenses increased $7.5 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%.

• Other expenses decreased $16.5 million primarily due to a decrease in pension expense as a result of higher returns on plan assets, coupled with a reduction in the reserve for unfunded commitments.

• Collection and foreclosure-related expenses declined $7.0 million.

Income tax expense was $34.1 million and $35.8 million for the third quarter of 2021 and 2020, respectively, representing effective tax rates of 21.5% and 20.1% during the respective periods.

Income tax expense totaled $123.9 million and $89.5 million for the first nine months of 2021 and 2020, respectively, representing effective tax rates of 22.6% and 20.2% for the respective nine month periods.

The effective tax rates during 2020 were favorably impacted by BancShares’ decision to utilize an allowable alternative for computing its federal income tax liability.

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

Without this alternative, the effective tax rate is materially unchanged for the third quarter and first nine months of 2021 and the effective tax rate for the third quarter and first nine months of 2020 would have been approximately 22.0% and 22.6% respectively.

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 $51.6 billion and $47.2 billion at June 30, 2021 and December 31, 2020, respectively.

Interest-earning assets totaled $53.4 billion and $47.2 billion at September 30, 2021 and December 31, 2020, respectively.

The $6.2 billion increase was primarily composed of a $5.5 billion increase in overnight investments and a $952.4 million increase in investment securities, partially offset by a $275.8 million decrease in loans.

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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 $10.9 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.

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 recorded at June 30, 2021 or December 31, 2020.

See Note C - Investments to our consolidated financial statements for additional disclosures.

The carrying value of investment securities totaled $10.9 billion at September 30, 2021, an increase of $952.4 million compared to December 31, 2020 attributable to our continued growth in deposits.

During the period we had $5.0 billion in investment security purchases, partially offset by sales of $1.4 billion and maturities and paydowns of $2.6 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, net of deferred taxes.

As of September 30, 2021, investment securities available for sale had a net pre-tax unrealized gain of $26.0 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 June 30, 2021 and December 31, 2020.

INVESTMENT SECURITIES

June 30, 2021 December 31, 2020

September 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 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.

Table 9 presents the weighted average taxable-equivalent yields for investment securities available for sale and held to maturity at September 30, 2021 segregated by major category with ranges of contractual maturities.

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

WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES

June 30, 2021

September 30, 2021

One Year One to Five

1 unchanged sentence

Years After 10 Years Total

Investment securities available for sale

Government agency — % 2.15 % 1.08 % 1.07 % 1.07 %

Residential mortgage-backed securities (1)

— — 1.80 1.26 1.27

Commercial mortgage-backed securities (1)

— — 3.19 2.04 2.09

Corporate bonds 4.05 5.87 5.21 4.76 5.24

Total investment securities available for sale 4.05 % 5.70 % 3.71 % 1.38 % 1.71 %

Investment securities held to maturity

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Loans and Leases

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.

Loans held for sale were $98.5 million at September 30, 2021, a net decrease of $26.4 million since December 31, 2020.

At September 30, 2021, loans totaled $32.5 billion, a decrease of $275.8 million, or by 1.1% on an annualized basis since December 31, 2020.

Excluding SBA-PPP loans, total loans increased $1.0 billion, or by 4.6% 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 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

Non-PCD loans and leases were $32.1 billion at September 30, 2021 and $32.3 billion at December 31, 2020, representing 98.9% and 98.6% of total loans, respectively.

PCD loans at September 30, 2021 were $373.3 million, compared to $462.9 million at December 31, 2020, representing 1.1% and 1.4% of total loans, respectively.

The discount related to acquired non-PCD loans and leases was $13.4 million and $19.5 million at September 30, 2021 and December 31, 2020, respectively.

The discount related to PCD loans was $32.6 million and $45.3 million at September 30, 2021 and December 31, 2020, respectively.

During the three months ended September 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $1.2 million and $2.8 million, respectively, while interest and accretion income on PCD loans was $10.8 million and $15.0 million, respectively.

During the nine months ended September 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $6.1 million and $7.8 million, respectively, while interest and accretion income on PCD loans was $34.5 million and $48.0 million, respectively

LOANS AND LEASES

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

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

Construction and land development $ 1,247,680 $ 985,424

16 unchanged sentences

ALLOWANCE FOR CREDIT LOSSES

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 allowance for credit losses (“ACL”) was $183.2 million at September 30, 2021, representing a decrease of $41.1 million since December 31, 2020.

The ACL as a percentage of total loans and leases was 0.56% at September 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 0.58% at September 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 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.

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

2 unchanged sentences

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 June 30, 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 September 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 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.

As of September 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 to below 4% through the end of 2022 and stabilizing into early 2023.

GDP Growth - Peak growth of just under 7% in the fourth quarter of 2021, decreasing to below 3% in 2022 and thereafter.

Home Pricing Index - Growth rates of over 7% declining to below 4% over the forecast period.

Commercial Real Estate Index - Small forecasted downturn through the first half of 2022 and then improving to over 6% into 2023.

At September 30, 2021, the ACL allocated to non-PCD loans and leases was $164.8 million, or 0.51% of non-PCD loans and leases, compared to $200.3 million, or 0.62%, at December 31, 2020.

The decrease of 11 basis points since December 31, 2020 was primarily due to continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors.

The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.53% at September 30, 2021 compared to 0.67% at December 31, 2020.

At September 30, 2021, the ACL for PCD loans totaled $18.4 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.

In the period ended September 30, 2021, the ACL on our commercial portfolio decreased $8.2 million, with the largest share of the decrease within commercial real estate.

The ACL on the consumer portfolio decreased $27.4 million, with decreases across all portfolios with the largest change in residential mortgages.

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

Net charge-offs for loans and leases were $4.8 million during the third quarter of 2021, compared to $2.6 million during the third quarter of 2020.

On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.06% and 0.03% for the third quarter of 2021 and 2020, respectively.

The impact of SBA-PPP loans on average loans balances did not affect the net charge-off ratio in either period.

Net charge-offs for loans and leases were $9.4 million during the nine months ended September 30, 2021, compared to $17.4 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 0.04% and 0.07% for the nine months ended September 30, 2021 and 2020, respectively.

The impact of SBA-PPP loans on average loan balances did not have an impact on the net charge-off ratio for the nine months ended September 30, 2021.

Excluding the impact of SBA-PPP loans on average loan balances, the net charge-off ratio was 0.08% for the nine months ended September 30, 2020.

ALLOWANCE FOR CREDIT LOSSES

Three months ended June 30, 2021

Three months ended September 30, 2021

(Dollars in thousands) Commercial Consumer PCD Total

Allowance for credit losses:

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

Balance at July 1 $ 76,082 $ 94,272 $ 18,740 $ 189,094

Provision (credit) 975 (223) (1,872) (1,120)

1 unchanged sentence

Recoveries 1,594 2,330 2,369 6,293

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

Balance at September 30 $ 72,684 $ 92,072 $ 18,438 $ 183,194

Percent of loans in each category to total loans 68.4 % 30.5 % 1.2 % 100.0 %

2 unchanged sentences

Average loans 22,331,889 9,891,071 384,673 32,607,633

Three months ended June 30, 2020

Three months ended September 30, 2020

(Dollars in thousands) Commercial Consumer PCD Total

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

Balance at July 1 $ 76,177 $ 119,345 $ 26,928 $ 222,450

Provision (credit) 4,793 1,874 (2,625) 4,042

1 unchanged sentence

Recoveries 2,338 2,719 1,319 6,376

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

Balance at September 30 $ 79,980 $ 118,829 $ 25,127 $ 223,936

Percent of loans in each category to total loans 68.9 % 29.6 % 1.5 % 100.0 %

2 unchanged sentences

Average loans 22,361,650 9,703,434 512,559 32,577,643

Six months ended June 30, 2021

Nine months ended September 30, 2021

(Dollars in thousands) Commercial Consumer PCD Total

4 unchanged sentences

Recoveries 3,852 8,599 5,290 17,741

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

Balance at September 30 $ 72,684 $ 92,072 $ 18,438 $ 183,194

Percent of loans in each category to total loans 68.4 % 30.5 % 1.2 % 100.0 %

2 unchanged sentences

Average loans 22,680,602 9,773,946 417,536 32,872,084

Six months ended June 30, 2020

Nine months ended September 30, 2020

(Dollars in thousands) Commercial Consumer PCD Total

6 unchanged sentences

Recoveries 5,023 7,433 5,378 17,834

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

Balance at September 30 $ 79,980 $ 118,829 $ 25,127 $ 223,936

Percent of loans in each category to total loans 68.9 % 29.6 % 1.5 % 100.0 %

2 unchanged sentences

Average loans 20,687,348 9,838,064 529,819 31,055,231

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

The reserve for unfunded loan commitments was $11.5 million and $12.8 million at September 30, 2021 and December 31, 2020, respectively.

ALLOWANCE FOR CREDIT LOSSES RATIOS

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

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

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

10 unchanged sentences

Total PCD loans 373,255 462,882

(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%.

(1) Loans originated in relation to the SBA-PPP ($1.1 billion as of September 30, 2021 and $2.4 billion as of December 31, 2020) do not have a recorded ACL.

As of September 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.53% while the ratio of ACL to total loans excluding SBA-PPP loans was 0.58%.

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 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.

At September 30, 2021, BancShares’ nonperforming assets totaled $204.4 million, a decrease of $37.9 million since December 31, 2020.

Nonaccrual loans and leases at September 30, 2021 were $163.8 million, reflecting a decrease of $27.7 million since December 31, 2020.

Nonaccrual loans and leases as a percentage of total loans and leases was 0.50% and 0.58% at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, OREO totaled $40.6 million, representing a decrease of $10.2 million since December 31, 2020.

Nonperforming assets as a percentage of total loans, leases and OREO was 0.63% as of September 30, 2021 compared to 0.74% as of December 31, 2020.

NONPERFORMING ASSETS

Second First Fourth Third Second

Third Second First Fourth Third

(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter

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TROUBLED DEBT RESTRUCTURINGS

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

(Dollars in thousands) September 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 $29.4 billion at June 30, 2021, compared to $27.3 billion at December 31, 2020.

Interest-bearing liabilities totaled $30.4 billion at September 30, 2021, compared to $27.3 billion at December 31, 2020.

The increase was mostly due to an increase of $3.1 billion in interest-bearing deposits.

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

We strive to maintain a strong liquidity position, and therefore a focus on 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 18 months.

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

At June 30, 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

At September 30, 2021, total deposits were $50.1 billion, an increase of $6.6 billion, representing annualized growth of 20.4% since December 31, 2020, driven by organic growth.

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

Demand $ 21,514,407 $ 18,014,029

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Total deposits $ 50,065,762 $ 43,431,609

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

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

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

Securities sold under customer repurchase agreements $ 663,575 $ 641,487

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FCB/NC Capital Trust III 88,145 88,145

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

Macon Capital Trust I 14,433 14,433

3.375 % Fixed-to-Floating Rate Subordinated Notes due 2030 347,163 346,541

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SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

The table below shows Class A common stock repurchase activity for the three and six months ended June 30, 2021 and 2020.

The table below shows Class A common stock repurchase activity for the three and nine months ended September 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 and six months ended June 30, 2021 or 2020.

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

CLASS A COMMON STOCK REPURCHASE ACTIVITY

Three months ended June 30 Six months ended June 30

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

Three months ended September 30 Nine months ended September 30

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

Number of shares repurchased — 117,700 — 813,090

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ANALYSIS OF CAPITAL ADEQUACY

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

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

(Dollars in thousands) Amount Ratio Amount Ratio

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Tier 1 leverage ratio 5.00 4,581,621 8.27 4,276,870 8.72

As of June 30, 2021, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines.

As of September 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 6.13% and 5.79%, respectively, at June 30, 2021, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.

BancShares and FCB had capital conservation buffers of 6.30% and 5.93%, respectively, at September 30, 2021, and resulted in no limit on distributions.

RISK MANAGEMENT

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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.

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

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

Through September 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 June 30, 2021, BancShares had $1.7 billion in SBA-PPP loans outstanding.

At September 30, 2021, BancShares had $1.1 billion in SBA-PPP loans outstanding.

Interest rate risk management

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IRR scenarios modeled include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates.

Market interest rates 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 June 30, 2021 and December 31, 2020.

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

Table 19 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of September 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) June 30, 2021 December 31, 2020

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

-100 (6.94) % (6.24) %

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+200 15.41 14.57

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.

Net interest income sensitivity metrics as of September 30, 2021 remain largely unchanged when compared to December 31, 2020.

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

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

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

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

ECONOMIC VALUE OF EQUITY MODELING ANALYSIS

Estimated percentage (decrease) increase in EVE

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

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

-100 (15.09) % (21.20) %

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+200 8.77 15.71

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.

The economic value of equity metrics at September 30, 2021 compared to December 31, 2020 were primarily affected by ongoing growth in non-maturity deposits during 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.

LIBOR Transition

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”).

Subsequent announcements have delayed the potential date for certain LIBOR tenors until June 30, 2023.

We continue to transition away from LIBOR in order to cease issuance of loans indexed to LIBOR by December 31, 2021.

Conforming and nonconforming adjustable rate mortgage originations transitioned to alternative rates in 2020.

The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative to LIBOR.

We have introduced SOFR as an alternative rate for other business lines in mid-2021.

We do not expect a material financial impact to BancShares or our customers from this transition.

Liquidity risk management

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We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature.

Our primary source of liquidity is our 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 $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.

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

Sources of liquidity include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $15.1 billion at September 30, 2021 compared to $9.6 billion at December 31, 2020.

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

Outstanding FHLB advances were $645.7 million as of September 30, 2021, and we had sufficient collateral pledged to secure $8.5 billion of additional borrowings from the FHLB of Atlanta.

Also, at September 30, 2021, $4.6 billion in non-PCD loans with a lendable collateral value of $3.8 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 $556.0 million of available capacity at September 30, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

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

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, risks, uncertainties and other factors relating to our announced merger with CIT through a series of merger transactions, including the ability to obtain regulatory approvals and meet other closing conditions to the Transaction, 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 I, Item 1A.

Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, risks, uncertainties and other factors relating to our announced merger with CIT through a series of merger transactions, including the ability to obtain the remaining 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 I, Item 1A.

Risk Factors of our 2020 Annual Report and other developments or changes in our business that we do not expect.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis