Zions Bancorporation, National Association: Form 10-Q for the period ended Mar 31, 2024

FORWARD-LOOKING INFORMATION

This quarterly report includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and assumptions regarding future events or determinations, all of which are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements, industry trends, and results or regulatory outcomes to differ materially from those expressed or implied. Forward-looking statements include, among others:

• Statements with respect to the beliefs, plans, objectives, goals, targets, commitments, designs, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation, National Association and its subsidiaries (collectively “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” “us”); and
• Statements preceded or followed by, or that include the words “may,” “might,” “can,” “continue,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “forecasts,” “expect,” “intend,” “target,” “commit,” “design,” “plan,” “projects,” “will,” and the negative thereof and similar words and expressions.

Forward-looking statements are not guarantees, nor should they be relied upon as representing management’s views as of any subsequent date. Actual results and outcomes may differ materially from those presented. Although the following list is not comprehensive, important factors that may cause material differences include:

• The quality and composition of our loan and securities portfolios and the quality and composition of our deposits;
• Changes in general industry, political and economic conditions, including elevated inflation, economic slowdown or recession, or other economic challenges; changes in interest and reference rates, which could adversely affect our revenue and expenses, the value of assets and liabilities, and the availability and cost of capital and liquidity; deterioration in economic conditions that may result in increased loan and leases losses;
• The effects of newly enacted and proposed regulations affecting us and the banking industry, as well as changes and uncertainties in applicable laws, and fiscal, monetary, regulatory, trade, and tax policies, and actions taken by governments, agencies, central banks, and similar organizations, including those that result in decreases in revenue; increases in capital standards; and increases in insurance assessments and other bank expenses;
• Competitive pressures and other factors that may affect aspects of our business, such as pricing and demand for our products and services, and our ability to recruit and retain talent;
• The impact of technological advancements, digital commerce, artificial intelligence, and other innovations affecting the banking industry;
• Our ability to complete projects and initiatives and execute on our strategic plans, manage our risks, control compensation and other expenses, and achieve our business objectives;
• Our ability to develop and maintain technology, information security systems and controls designed to guard against fraud, cybersecurity, and privacy risks;
• Our ability to provide adequate oversight of our suppliers or prevent inadequate performance by third parties upon whom we rely for the delivery of various products and services;
• Natural disasters, pandemics, catastrophic events and other emergencies and incidents and their impact on our and our customer’s operations and business and communities, including the increasing difficulty in, and the expense of, obtaining adequate insurance at reasonable prices;
• Governmental and social responses to environmental, social, and governance issues, including those with respect to climate change;
• Securities and capital markets behavior, including volatility and changes in market liquidity and our ability to raise capital;
• The possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and shareholders’ equity, but not on our regulatory capital;
• The impact of bank closures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;
• Adverse news and other expressions of negative public opinion whether directed at us, other banks, the banking industry, or otherwise that may adversely affect our reputation and that of the banking industry generally;
• Protracted congressional negotiations and political stalemates regarding government funding and other issues, including those that increase the possibility of government shutdowns, downgrades in United States (“U.S.”) credit ratings, or other economic disruptions; and
• The effects of wars and geopolitical conflicts, such as the ongoing war between Russia and Ukraine, the war in the Middle East, and other local, national, or international disasters, crises, or conflicts that may occur in the future.

We caution against the undue reliance on forward-looking statements, which reflect our views only as of the date they are made. Except to the extent required by law, we specifically disclaim any obligation to update any factors or to publicly announce the revisions to any forward-looking statements to reflect future events or developments.

RESULTS OF OPERATIONS

Comparisons noted below are calculated for the current quarter compared with the same prior year period unless otherwise specified. Growth rates of 100% or more are considered not meaningful (“NM”) as they generally reflect a low starting point.

First Quarter 2024 Financial Performance

Net Earnings Applicable to Common Shareholders (in millions) Diluted EPS Adjusted PPNR (in millions) Efficiency Ratio

Executive Summary

Our financial results in the first quarter of 2024 reflected low net charge-offs, reduced net interest income, loan growth, and sequential improvement of the net interest margin (“NIM”). Diluted earnings per share (“EPS”) was $0.96, compared with $1.33 in the first quarter of 2023, as lower revenue and slightly higher noninterest expense was partially offset by a lower provision for credit losses.

• Net interest income decreased $93 million, or 14%, relative to the prior year period, as higher funding costs more than offset higher earning asset yields. The net interest margin was 2.94%, compared with 3.33%, and was up from 2.91% in the fourth quarter of 2023. Net interest income was also impacted by reduced interest-earning assets and an increase in interest-bearing liabilities.
• Average interest-earning assets decreased $2.2 billion, or 3%, driven by declines in average securities and average money market investments, partially offset by an increase in average loans and leases.
• Total loans and leases increased $1.8 billion, or 3%, primarily due to growth in the consumer 1-4 family residential mortgage and commercial real estate (“CRE”) multi-family and industrial construction loan portfolios.
• Average interest-bearing liabilities increased $6.0 billion, or 12%, driven by an increase in average interest-bearing deposits, partially offset by a decline in average borrowed funds.
• Total deposits increased $5.0 billion, or 7%, as an increase in interest-bearing deposits was partially offset by a decrease in noninterest-bearing demand deposits. Customer deposits (excluding brokered deposits) totaled $69.9 billion, compared with $63.8 billion at March 31, 2023, and included approximately $7.5 billion of reciprocal deposits at March 31, 2024.
• The provision for credit losses was $13 million, compared with $45 million in the prior year period.
• Customer-related noninterest income remained flat at $151 million, as an increase in capital markets fees was offset by a decrease in loan-related fees and income. Decreases in noncustomer-related noninterest income were due largely to higher mark-to-market valuation adjustments related to servicing rights in the prior year quarter, a decrease in dividends on Federal Home Loan Bank (“FHLB”) stock, and a valuation loss associated with one of our equity investments in the current period.
• Noninterest expense increased $14 million, or 3%, driven largely by an increase in deposit insurance and regulatory expense, which included a $13 million accrual associated with an updated special assessment estimate by the Federal Deposit Insurance Corporation (“FDIC”) during the quarter. This increase was partially offset by a decrease in salaries and employee benefits expense, primarily due to a decline in incentive compensation accruals.
• Net loan and lease charge-offs totaled $6 million, or 0.04% of average loans, compared with zero net charge-offs in the prior year quarter. Classified loans increased $54 million, or 6%. Nonperforming assets increased to $254 million, or 0.44%, compared with $173 million, or 0.31%, of loans and leases, primarily due to a small number of loans in the commercial and industrial and term commercial real estate portfolios.
• Total borrowed funds, consisting primarily of secured borrowings, decreased $7.3 billion, or 57%, from the prior year quarter, due largely to an increase in interest-bearing deposits and a decrease in interest-earning assets.

Net Interest Income and Net Interest Margin

NET INTEREST INCOME AND NET INTEREST MARGIN

(Dollar amounts in millions)

1 Includes interest income recoveries of $2 million for both the three months ended March 31, 2024, and 2023.

2 Taxable-equivalent rates used where applicable.

Net interest income accounted for approximately 79% of our net revenue (net interest income plus noninterest income) for the current quarter and decreased $93 million, or 14%, relative to the prior year quarter, as higher funding costs more than offset higher earning asset yields. The NIM was 2.94%, compared with 3.33%, and was up from 2.91% in the fourth quarter of 2023.

The yield on average interest-earning assets was 5.25% in the first quarter of 2024, an increase of 76 basis points (“bps”), reflecting higher interest rates and a favorable mix change to higher-yielding assets. The yield on average loans and leases increased 76 bps to 6.06%, and the yield on average securities increased 38 bps to 2.84% in the first quarter of 2024.

The rate paid on total deposits and interest-bearing liabilities was 2.34%, compared with 1.17% in the prior year quarter, and the cost of total deposits was 2.06%, compared with 0.47%, also reflecting the higher interest rate environment as well as reduced noninterest-bearing deposits.

Net interest income was also impacted by reduced interest-earning assets and an increase in interest-bearing liabilities. Average interest-earning assets decreased $2.2 billion, or 3%, from the prior year quarter, driven by declines of $2.5 billion and $1.5 billion in average securities and average money market investments, respectively. The decrease in average securities was primarily due to principal reductions. These decreases were partially offset by an increase of $1.8 billion in average loans and leases.

Average interest-bearing liabilities increased $6.0 billion, or 12%, from the prior year quarter, driven by an increase of $12.0 billion in average interest-bearing deposits, as customers moved from noninterest-bearing to interest-bearing products in response to the higher interest rate environment. This increase was partially offset by a decrease of $6.0 billion in average borrowed funds.

The following charts further illustrate the changes in average interest-earning assets and average interest-bearing liabilities:

Average loans and leases increased $1.8 billion, or 3%, to $57.9 billion, primarily due to growth in average consumer and commercial real estate loans. Average securities decreased $2.5 billion, or 11%, to $20.4 billion, primarily due to available-for-sale (“AFS”) securities principal reductions.

Average deposits increased $3.2 billion, or 5%, to $73.4 billion at an average cost of 2.06%, from $70.2 billion at an average cost of 0.47% in the first quarter of 2023. Average noninterest-bearing deposits as a percentage of total deposits decreased to 35%, compared with 49% during the same prior year period. The loan-to-deposit ratio was 78%, compared with 81% in the prior year quarter.

Average borrowed funds, consisting primarily of secured borrowings, decreased $6.0 billion, or 45%, to $7.2 billion, due largely to an increase in interest-bearing deposits and a decrease in interest-earning assets.

For more information on our investment securities portfolio and borrowed funds and how we manage liquidity risk, refer to the “Investment Securities Portfolio” section on page 15 and the “Liquidity Risk Management” section on page 31. For further discussion of the effects of market rates on net interest income and how we manage interest rate risk, refer to the “Interest Rate and Market Risk Management” section on page 28.

The following schedule summarizes the average balances, the amount of interest earned or paid, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities:

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES

(Unaudited)

(Dollar amounts in millions)

1 Taxable-equivalent rates used where applicable.

2 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs.

ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

Provision for Credit Losses

The allowance for credit losses (“ACL”) is the combination of both the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”). The ALLL represents the estimated current expected credit losses related to the loan and lease portfolio as of the balance sheet date. The RULC represents the estimated reserve for current expected credit losses associated with off-balance sheet commitments. Changes in the ALLL and RULC, net of charge-offs and recoveries, are recorded as the provision for loan and lease losses and the provision for unfunded lending commitments, respectively, on the consolidated statement of income. The ACL for debt securities is estimated separately from loans and is included in “Investment securities” on the consolidated balance sheet.

The provision for credit losses, which is the combination of both the provision for loan and lease losses and the provision for unfunded lending commitments, was $13 million, compared with $45 million in the first quarter of 2023.

The ACL was $736 million at March 31, 2024, compared with $678 million at March 31, 2023. The increase in the ACL primarily reflects incremental reserves associated with portfolio-specific risks including commercial real estate and modest deterioration in credit quality, partially offset by improvements in economic forecasts. The ratio of ACL to total loans and leases was 1.27% and 1.20% at March 31, 2024 and 2023, respectively. The provision for securities losses was less than $1 million during both the first quarter of 2024 and 2023.

The bar chart above illustrates the broad categories of change in the ACL from the prior year period. To estimate current expected losses, we use econometric loss models that include multiple economic scenarios that reflect optimistic, baseline, and stressed economic conditions. The results derived using these economic scenarios are weighted to produce the credit loss estimate. Management may adjust the weights to reflect their assessment of current conditions and reasonable and supportable forecasts. The second bar represents changes in these economic forecasts and current economic conditions, including management's judgment of the weighting of the economic forecasts. These changes contributed to a $90 million decrease in the ACL from the prior year quarter.

The third bar represents changes in credit quality factors and includes risk-grade migration, portfolio-specific risks, and specific reserves against loans, which, when combined, contributed to a $193 million increase in the ACL, driven largely by an increased focus on certain portfolio-specific risks, including commercial real estate.

The fourth bar represents changes in our loan portfolio composition, including changes in loan balances, the aging of the portfolio, and other qualitative risk factors; all of which contributed to a $45 million decrease in the ACL.

See “Credit Risk Management” on page 20 and Note 6 in our 2023 Form 10-K for more information on how we determine the appropriate level of the ALLL and the RULC.

Noninterest Income

Noninterest income represents revenue earned from products and services that generally have no associated interest rate or yield and is classified as either customer-related or noncustomer-related. Customer-related noninterest income excludes items such as securities gains and losses, dividends, insurance-related income, and mark-to-market adjustments on certain derivatives.

Total noninterest income decreased $4 million, or 3%, relative to the prior year. Noninterest income accounted for approximately 21% and 19% of our net revenue (net interest income plus noninterest income) during the first quarter of 2024 and 2023, respectively. The following schedule presents a comparison of the major components of noninterest income:

NONINTEREST INCOME

(Dollar amounts in millions)

Customer-related Noninterest Income

Customer-related noninterest income remained flat at $151 million. An increase in capital markets fees, driven largely by improved real estate capital markets and securities underwriting activity, was offset by a decrease in loan-related fees and income, primarily due to higher gains on loan sales in the prior year period and a decline in loan servicing income resulting from the sale of associated mortgage servicing rights in the third quarter of 2023.

Noncustomer-related Noninterest Income

Noncustomer-related noninterest income decreased $4 million from the prior year quarter. Dividends and other income decreased $5 million, primarily due to higher mark-to-market valuation adjustments related to servicing rights in the prior year quarter and a decrease in dividends on FHLB stock. Net securities gains decreased $3 million, due to a $4 million valuation loss associated with one of our equity investments in the current period. These decreases were offset by a $4 million increase in fair value and nonhedge derivative income, primarily due to credit valuation adjustments on client-related interest rate swaps.

Noninterest Expense

The following schedule presents a comparison of the major components of noninterest expense:

NONINTEREST EXPENSE

(Dollar amounts in millions)

13

Total noninterest expense increased $14 million, or 3%, relative to the prior year quarter. Deposit insurance and regulatory expense increased $16 million, driven largely by a $13 million accrual associated with an updated special assessment estimate by the FDIC during the current quarter, which was related to the bank closures in early 2023.

Technology, telecom, and information processing expense increased $7 million, or 13%, primarily due to increases in software amortization expenses associated with the replacement of our core loan and deposit banking systems, as well as other related application software, license, and maintenance expenses. Salaries and employee benefits expense decreased $8 million, or 2%, primarily due to a decline in incentive compensation accruals.

Adjusted noninterest expense remained relatively flat at $511 million. The efficiency ratio was 67.9%, compared with 59.9%, primarily due to a decline in adjusted taxable-equivalent revenue. For information on non-GAAP financial measures, see page 35.

Technology Spend

Consistent with our strategic objectives, we invest in technologies that will make us more efficient and enable us to remain competitive. We generally consider these investments as technology spend, which represents expenditures associated with technology-related investments, operations, systems, and infrastructure, and includes current period expenses presented on the consolidated statement of income, as well as capitalized investments, net of related amortization and depreciation, presented on the consolidated balance sheet. Technology spend is reported as a combination of the following:

• Technology, telecom, and information processing expense — includes expenses related to application software licensing and maintenance, related amortization, telecommunications, and data processing;
• Other technology-related expense — includes related noncapitalized salaries and employee benefits, occupancy and equipment, and professional and legal services; and
• Technology investments — includes capitalized technology infrastructure equipment, hardware, and purchased or internally developed software, less related amortization or depreciation.

The following schedule presents the composition of our technology spend:

TECHNOLOGY SPEND

(Dollar amounts in millions)

Total technology spend decreased $4 million, or 3%, relative to the prior year quarter, as the aforementioned increase in technology, telecom, and information processing expense was offset by a decrease in certain technology investments, as the replacement of our core loan and deposit banking systems nears completion in 2024.

Income Taxes

The following schedule summarizes the income tax expense and effective tax rates for the periods presented:

INCOME TAXES

(Dollar amounts in millions)

The effective tax rate was 24.6% and 27.7% for the three months ended March 31, 2024 and 2023, respectively. The higher effective tax rate in the prior year period was the result of a change in a discrete item that affected the reserve for uncertain tax positions. See Note 12 of the Notes to Consolidated Financial Statements for more information about the factors that impacted the income tax rates, as well as information about deferred income tax assets and liabilities.

Preferred Stock Dividends

Preferred stock dividends totaled $10 million and $6 million for the first quarter of 2024 and 2023, respectively. The increase was primarily due to changes in the timing and rates of dividend payments for certain series of preferred stock.

BALANCE SHEET ANALYSIS

Interest-Earning Assets

Interest-earning assets have associated interest rates or yields, and generally consist of loans and leases, securities, and money market investments. We strive to maintain a high level of interest-earning assets relative to total assets. For more information regarding the average balances, associated revenue generated, and the respective yields of our interest-earning assets, see the Consolidated Average Balance Sheet on page 10.

Investment Securities Portfolio

We invest in securities to actively manage liquidity and interest rate risk and to generate interest income. We primarily own securities that can readily provide us cash and liquidity through secured borrowing agreements without the need to sell the securities. Our fixed-rate securities portfolio helps balance the inherent interest rate mismatch between loans and deposits and protects the economic value of shareholders’ equity. At March 31, 2024, the estimated duration, which measures price sensitivity to interest rate changes, of our securities portfolio was 3.6 percent, unchanged from December 31, 2023.

For information about our borrowing capacity associated with the investment securities portfolio and how we manage our liquidity risk, refer to the “Liquidity Risk Management” section on page 31. See also Note 3 and Note 5 of the Notes to Consolidated Financial Statements for more information on fair value measurements and the accounting for our investment securities portfolio.

The following schedule presents the major components of our investment securities portfolio:

INVESTMENT SECURITIES PORTFOLIO

(In millions)

The amortized cost of total held-to-maturity (“HTM”) and AFS investment securities decreased $480 million, or 2%, from December 31, 2023. Approximately 8% and 7% of the total HTM and AFS investment securities were floating-rate instruments at March 31, 2024 and December 31, 2023, respectively. Additionally, at March 31, 2024, we have $3.6 billion of pay-fixed swaps designated as fair value hedges against fixed-rate AFS securities that effectively convert the fixed interest income to a floating rate on the hedged portion of the securities. At March 31, 2024, total taxable-equivalent premium amortization for our investment securities was $17 million for the first quarter of 2024, compared with $26 million for the same prior year period.

In addition to HTM and AFS securities, we also have a trading securities portfolio, comprised of municipal securities, which totaled $59 million at March 31, 2024, compared with $48 million at December 31, 2023.

Refer to the “Interest Rate Risk Management” section on page 28, the “Capital Management” section on page 33, and Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio, swaps, and related unrealized gains and losses.

Municipal Investments and Extensions of Credit

We support our communities by providing products and services to state and local governments (“municipalities”), including deposit services, loans, and investment banking services. We also invest in securities issued by municipalities. Our municipal lending products generally include loans in which the debt service is repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

The following schedule summarizes our total investments and extensions of credit to municipalities:

MUNICIPAL INVESTMENTS AND EXTENSIONS OF CREDIT

(In millions)

Our municipal loans and securities are primarily associated with municipalities located within our geographic footprint. The municipal loan and lease portfolio is primarily secured by general obligations of municipal entities. Other types of collateral also include real estate, revenue pledges, or equipment. At March 31, 2024, we had no municipal loans on nonaccrual.

Municipal securities are internally graded, similar to loans, using risk-grading systems which vary based on the size and type of credit risk exposure. The internal risk grades assigned to our municipal securities follow our definitions of Pass, Special Mention, and Substandard, which are consistent with published definitions of regulatory risk classifications. At March 31, 2024, all municipal securities were graded as Pass. See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans and securities.

Loan and Lease Portfolio

We provide a wide range of lending products to commercial customers, generally small- and medium-sized businesses. We also provide various retail lending products and services to consumers and small businesses. The following schedule presents the composition of our loan and lease portfolio:

LOAN AND LEASE PORTFOLIO

(Dollar amounts in millions)

At March 31, 2024 and December 31, 2023, the ratio of loans and leases to total assets was 67% and 66%, respectively. The largest loan category was commercial and industrial loans, which constituted 28% and 29% of our total loan portfolio for the same respective periods.

During the first three months of 2024, the loan and lease portfolio increased $330 million, or 1%, to $58.1 billion at March 31, 2024. Loan growth was driven largely by increases in consumer 1-4 family residential mortgage and term commercial real estate loans.

Other Noninterest-Bearing Investments

Other noninterest-bearing investments are equity investments that are held primarily for capital appreciation, dividends, or for certain regulatory requirements. The following schedule summarizes our related investments:

OTHER NONINTEREST-BEARING INVESTMENTS

(Dollar amounts in millions)

Other noninterest-bearing investments decreased $28 million, or 3%, during the first three months of 2024, primarily due to a $34 million decrease in FHLB stock. We are required to invest approximately 4% of our FHLB borrowings in FHLB stock to maintain our borrowing capacity. The decrease in period-end FHLB activity stock was driven largely by an increase in interest-bearing deposits and a decrease in interest-earning assets.

Visa Class B Shares

In 2007, we received 460,153 non-transferable Class B shares of Visa, Inc. in connection with a restructuring and public offering by Visa U.S.A. These shares are carried at no cost on our consolidated balance sheet. In January 2024, Visa’s previously announced exchange offer proposal was approved by common stockholders, which resulted, among other actions, in a redenomination of all Visa Class B common shares to Class B-1 common shares. In April 2024, Visa commenced its exchange offer allowing Class B-1 shareholders the option to exchange up to 50% of their Class B-1 shares for shares that would be convertible into freely transferable Visa Class A common shares following a temporary restriction period. We did not participate in the exchange offer, which expired on May 3, 2024, in view of contingent obligations associated with certain make-whole provisions required as a condition of the exchange.

Premises, Equipment, and Software

We are in the final phase of a three-phase project to replace our core loan and deposit banking systems. This final phase includes the replacement of our deposit banking systems through multiple affiliate bank conversions. The first and second conversions were successfully completed in May 2023 and April 2024, respectively. We anticipate completing the migration of substantially all of the remaining accounts by late summer 2024.

The following schedule summarizes the capitalized costs associated with our core system replacement project, which are depreciated using a useful life of ten years:

CAPITALIZED COSTS ASSOCIATED WITH THE CORE SYSTEM REPLACEMENT PROJECT

(In millions)

Deposits

Deposits are our primary funding source. The following schedule presents the composition of our deposit portfolio:

DEPOSIT PORTFOLIO

(Dollar amounts in millions)

1 Includes both insured and uninsured deposits.

Total deposits decreased $724 million, or 1%, from December 31, 2023. At March 31, 2024 and December 31, 2023, customer deposits (excluding brokered deposits) were $69.9 billion and $70.5 billion, and included approximately $7.5 billion and $6.8 billion, respectively, of reciprocal deposits.

At March 31, 2024, the estimated total amount of uninsured deposits was $32.0 billion, or 43%, of total deposits, compared with $33.2 billion, or 44%, at December 31, 2023, respectively. Our loan-to-deposit ratio was 78%, compared with 77% for the same respective time periods. See “Liquidity Risk Management” on page 31 for additional information on liquidity, including the ratio of available liquidity to uninsured deposits.

RISK MANAGEMENT

Risk management is an integral part of our operations and is a key determinant of our overall performance. We employ various strategies to prudently manage the risks to which our operations are exposed, including credit risk, market and interest rate risk, liquidity risk, strategic and business risk, operational risk, technology risk, cybersecurity risk, capital/financial reporting risk, legal/compliance risk (including regulatory risk), and reputational risk. These risks are overseen by various management committees including the Enterprise Risk Management Committee. For a more comprehensive discussion of these risks, see “Risk Factors” in our 2023 Form 10-K.

Credit Risk Management

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. Credit policies, credit risk management, and credit examination functions inform and support the oversight of credit risk. Our credit policies emphasize strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses. These formal credit policies and procedures provide us with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level.

Our business activity is conducted primarily within the geographic footprint of our banking affiliates. We strive to avoid the risk of undue concentrations of credit in any particular industry, collateral type, location, or with any individual customer or counterparty. For a more comprehensive discussion of our credit risk management, see “Credit Risk Management” in our 2023 Form 10-K.

U.S. Government Agency Guaranteed Loans

We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the Small Business Administration (“SBA”), Federal Housing Authority, U.S. Department of Veterans Affairs, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. At March 31, 2024, $540 million of related loans were guaranteed, primarily by the SBA. The following schedule presents the composition of U.S. government agency guaranteed loans:

U.S. GOVERNMENT AGENCY GUARANTEED LOANS

(Dollar amounts in millions)

20

Commercial Lending

The following schedule provides information regarding lending exposures to certain industries in our commercial lending portfolio:

COMMERCIAL LENDING BY INDUSTRY GROUP 1

(Dollar amounts in millions)

1 Industry groups are determined by North American Industry Classification System (“NAICS”) codes.

2 Includes primarily utilities, power, and renewable energy.

3 No other industry group exceeds 3.3%.

Commercial Real Estate Loans

At March 31, 2024 and December 31, 2023, our CRE loan portfolio totaled $13.6 billion and $13.4 billion, respectively, representing 23% of the total loan portfolio for both periods. The majority of our CRE loans are secured by real estate primarily located within our geographic footprint. The following schedule presents the geographic distribution of our CRE loan portfolio based on the location of the primary collateral:

COMMERCIAL REAL ESTATE LENDING BY COLLATERAL LOCATION

(Dollar amounts in millions)

21

Term CRE loans generally mature within a three- to seven-year period and consist of full, partial, and non-recourse guarantee structures. Typical term CRE loan structures include annually tested operating covenants that require loan rebalancing based on minimum debt service coverage, debt yield, or loan-to-value tests. Construction and land development loans generally mature in 18 to 36 months and contain full or partial recourse guarantee structures with one- to five-year extension options or roll-to-perm options that often result in term loans. At March 31, 2024, approximately 85% of our CRE loan portfolio was variable-rate, and approximately 21% of these variable-rate loans were swapped to a fixed rate.

Underwriting on commercial properties is primarily based on the economic viability of the project with significant consideration given to the creditworthiness and experience of the sponsor. We generally require that the owner’s equity be included prior to any advances. Re-margining requirements (required equity infusions upon a decline in value or cash flow of the collateral) are often included in the loan agreement along with guarantees of the sponsor. For a more comprehensive discussion of CRE loans and our underwriting, see “Commercial Real Estate Loans” in our 2023 Form 10-K.

The following schedule presents our CRE loan portfolio by collateral type:

COMMERCIAL REAL ESTATE LENDING BY COLLATERAL TYPE

(Dollar amounts in millions)

1 Included in the total amount of the “Other” commercial and residential categories was approximately $216 million and $202 million of unsecured loans at March 31, 2024 and December 31, 2023, respectively.

2 Residential property consists primarily of loans provided to commercial homebuilders for land, lot, and single-family housing developments.

As previously described, our CRE portfolio is diversified across geography and collateral type, with the largest concentration in multi-family. We provide additional analysis of our multi-family and office CRE portfolios below in view of increased investor interest in those collateral types in recent periods.

Multi-family

At March 31, 2024 and December 31, 2023, our multi-family loan portfolio totaled $3.9 billion and $3.7 billion, representing 28% of the total CRE loan portfolio for both periods. Approximately 36% of the multi-family CRE loan portfolio is scheduled to mature in the next 12 months. The following schedule presents the composition of our multi-family CRE loan portfolio and other related credit quality metrics:

MULTI-FAMILY CRE LOAN PORTFOLIO

(Dollar amounts in millions)

The following schedules present our multi-family CRE loan portfolio by collateral location for the periods presented:

MULTI-FAMILY CRE LOAN PORTFOLIO BY COLLATERAL LOCATION

(Dollar amounts in millions)

(Dollar amounts in millions)

1 Other included $55 million of multi-family loans with collateral located in New Mexico at both March 31, 2024 and December 31, 2023.

Office CRE loan portfolio

At March 31, 2024 and December 31, 2023, our office CRE loan portfolio totaled $1.9 billion and $2.0 billion, representing 14% and 15% of the total CRE loan portfolio, respectively. Approximately 32% of the office CRE loan portfolio is scheduled to mature in the next 12 months. The following schedule presents the composition of our office CRE loan portfolio and other related credit quality metrics:

OFFICE CRE LOAN PORTFOLIO

(Dollar amounts in millions)

The following schedules present our office CRE loan portfolio by collateral location for the periods presented:

OFFICE CRE LOAN PORTFOLIO BY COLLATERAL LOCATION

(Dollar amounts in millions)

(Dollar amounts in millions)

1 No other geography exceeded $17 million at both March 31, 2024 and December 31, 2023.

Consumer Loans

We originate first-lien residential home mortgages considered to be of prime quality. We generally hold variable-rate loans in our portfolio and sell “conforming” fixed-rate loans to third parties, including Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, for which we make representations and warranties that the loans meet certain underwriting and collateral documentation standards.

We also originate home equity credit lines (“HECLs”). At both March 31, 2024 and December 31, 2023, our HECL portfolio totaled $3.4 billion. Approximately 38% and 39% of our HECLs are secured by first liens for the same respective time periods.

At March 31, 2024, loans representing less than 1% of the outstanding balance in the HECL portfolio were estimated to have combined loan-to-value (“CLTV”) ratios above 100%. An estimated CLTV ratio is the ratio of our loan plus any prior lien amounts divided by the estimated current collateral value. At origination, underwriting standards for the HECL portfolio generally include a maximum 80% CLTV with a Fair Isaac Corporation (“FICO”) credit score greater than 700.

Approximately 91% of our HECL portfolio is still in the draw period, and about 19% of those loans are scheduled to begin amortizing within the next five years. We believe the risk of loss and borrower default in the event of a loan becoming fully amortizing and the effect of significant interest rate changes is low, given the rate shock analysis performed at origination. The ratio of HECL net charge-offs (recoveries) for the trailing twelve months to average balances at both March 31, 2024 and December 31, 2023, was 0.05%. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of the HECL portfolio.

Nonperforming Assets

Nonperforming assets include nonaccrual loans and other real estate owned (“OREO”) or foreclosed properties. The following schedule presents our nonperforming assets:

NONPERFORMING ASSETS

(Dollar amounts in millions)

1 Includes loans held for sale.

2 Does not include banking premises held for sale.

Nonperforming assets as a percentage of loans and leases and OREO increased to 0.44% at March 31, 2024, compared with 0.39% at December 31, 2023. Total nonaccrual loans at March 31, 2024 increased to $248 million from $222 million at December 31, 2023, primarily due to a small number of loans in the commercial and industrial and term commercial real estate portfolios. See Note 6 of the Notes to Consolidated Financial Statements for more information on nonaccrual loans.

Loan Modifications

Loans may be modified in the normal course of business for competitive reasons or to strengthen our collateral position. Loan modifications may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. For the first three months of 2024 and 2023, loans that have been modified to accommodate a borrower experiencing financial difficulties totaled $123 million, and $97 million, respectively.

If a modified loan is on nonaccrual and performs for at least six months according to the modified terms, and an analysis of the customer’s financial condition indicates that we are reasonably assured of repayment of the modified principal and interest, the loan may be returned to accrual status. The borrower’s payment performance prior to and following the modification is taken into account to determine whether a loan should be returned to accrual status.

ACCRUING AND NONACCRUING MODIFIED LOANS TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY

(In millions)

For additional information regarding loan modifications to borrowers experiencing financial difficulty, see Note 6 of the Notes to Consolidated Financial Statements.

Allowance for Credit Losses

The ACL includes the ALLL and the RULC. The ACL represents our estimate of current expected credit losses

related to the loan and lease portfolio and unfunded lending commitments as of the balance sheet date. To determine

the adequacy of the allowance, our loan and lease portfolio is segmented based on loan type.

The RULC is a reserve for potential losses associated with off-balance sheet commitments and is included in “Other

liabilities” on the consolidated balance sheet. Any related increases or decreases in the reserve are included in

“Provision for unfunded lending commitments” on the consolidated statement of income.

The following schedule presents the changes in and allocation of the ACL:

CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES

(Dollar amounts in millions)

1 Ratios are annualized for the periods presented except for the period representing the full twelve months.

During the first three months of 2024, the total ACL increased to $736 million from $729 million. The increase in the ACL primarily reflects incremental reserves associated with portfolio-specific risks including commercial real estate and modest deterioration in credit quality, partially offset by improvements in economic forecasts. See Note 6 of the Notes to Consolidated Financial Statements for additional information related to the ACL and credit trends experienced in each portfolio segment.

Interest Rate and Market Risk Management

Interest rate and market risk is the risk of losses to current or future earnings and capital from changes in interest rates and other market conditions. Because we engage in transactions involving various financial products, we are exposed to interest rate and market risk. For a more comprehensive discussion of our interest rate and market risk management, see “Interest Rate and Market Risk Management” in our 2023 Form 10-K.

We strive to position the Bank for interest rate changes and manage the balance sheet sensitivity to reduce the volatility of both net interest income and economic value of equity (“EVE”). With a higher interest rate environment, customer deposit behavior has deviated from the trends observed during the relatively low interest rate period over the prior 15 years. As a result, customers have been more inclined to (1) move deposits to nonbanking products, such as money market mutual funds, that offer higher interest rates, and (2) reduce their balances in noninterest-bearing accounts. These recently observed changes in deposit behavior have been incorporated into our deposit models used in managing interest rate risk, giving more weight to the recently observed behavior, and increased both the deposit beta for interest-bearing products and the percentage of noninterest-bearing deposits assumed to migrate to interest-bearing products. Changes to models are independently reviewed by our Model Risk Management function. Management believes our deposit models are more likely to reflect future behavior of deposits, and therefore we manage our interest rate risk exposure on that basis.

We generally have granular deposit funding, and much of this funding has an indeterminable life with no maturity, and can be withdrawn at any time. Because most deposits come from household and business accounts, their duration is generally longer than the duration of our loan portfolio. As such, we have historically been “asset-sensitive” — meaning that our assets are expected to reprice faster or more significantly than our liabilities. We regularly use interest rate swaps, investment in fixed-rate securities, and funding strategies to manage our interest rate risk. These strategies collectively have muted the expected sensitivity of net interest income to changes in interest rates. Asset sensitivity measures depend upon the assumptions we use for deposit runoff and repricing behavior. As interest rates rise, we expect some customers to move balances from demand deposits to interest-bearing accounts such as money market, savings, or certificates of deposit. Our models are particularly sensitive to the assumption about the rate of such migration.

We also assume a correlation, referred to as a “deposit beta,” with respect to interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared with changes in average benchmark interest rates. Generally, certificates of deposit are assumed to have a high correlation, while interest-bearing checking accounts are assumed to have a lower correlation.

The following schedule presents deposit duration assumptions discussed previously:

DEPOSIT ASSUMPTIONS

The effective duration of the deposits has shortened considerably due to faster deposit repricing.

As noted previously, we utilize derivatives to manage interest rate risk. The following schedule presents derivatives that are designated in qualifying hedging relationships at March 31, 2024. Included are the average outstanding derivative notional amounts for each period presented and the weighted average fixed-rate paid or received for each category of cash flow and fair value hedge. See Note 7 of the Notes to Consolidated Financial Statements for additional information regarding the impact of these hedging relationships on interest income and expense.

DERIVATIVES DESIGNATED IN QUALIFYING HEDGING RELATIONSHIPS

(Dollar amounts in millions)

1 Cash flow hedges of assets consist of receive-fixed swaps hedging pools of floating-rate loans. The longest dated cash flow hedge matures in February 2027. Amounts for 2027 have not been prorated to reflect this hedge maturing during the period.

2 Cash flow hedges of liabilities consists of a pay-fixed swap hedging rolling FHLB advances. This swap matures in May of 2025.

3 Fair value asset hedges consist of pay-fixed swaps hedging fixed-rate AFS securities and fixed-rate commercial loans, as further discussed in Note 7 of the Notes to Consolidated Financial Statements. Increasing notional amounts in 2025 are due to forward starting swaps.

At March 31, 2024, we had $173 million of net losses deferred in accumulated other comprehensive income (loss) (“AOCI”) related to terminated cash flow hedges. Amounts deferred in AOCI from terminated cash flow hedges will be amortized into interest income on a straight-line basis through the original maturity dates of the hedges as long as the hedged forecasted transactions continue to be expected to occur. For more information on amounts deferred in AOCI related to terminated cash flow hedges, see “Interest Rate and Market Risk Management” in our 2023 Form 10-K.

Earnings at Risk (EaR) and Economic Value of Equity (EVE)

Incorporating our deposit assumptions and the impact of derivatives in qualifying hedging relationships previously discussed, the following schedule presents earnings at risk (“EaR”), or the percentage change in 12-month forward-looking net interest income, and our estimated percentage change in EVE. Both EaR and EVE are based on a static balance sheet size under parallel interest rate changes ranging from -100 bps to +300 bps. These measures highlight the sensitivity to changes in interest rates across various scenarios; the outcomes are not intended to be forecasts of expected net interest income.

INCOME SIMULATION – CHANGE IN NET INTEREST INCOME AND CHANGE IN ECONOMIC VALUE OF EQUITY

1 Assumes rates cannot go below zero in the negative rate shift.

The asset sensitivity, as measured by EaR, increased during the first quarter of 2024, primarily due to an increase in pay-fixed interest rate swap notional, partially offset by deposit migration from low beta products (e.g., checking accounts) to high beta products (e.g., money market accounts) and a shift from short- to long-term fixed-rate borrowings. Under our current deposit assumptions, interest rate risk remains within policy limits. For interest-bearing deposits with indeterminable maturities, the weighted average modeled beta is 53%.

Prepayment assumptions are an important factor in how we manage interest rate risk. Certain assets in our portfolio, such as 1-4 family residential mortgages and mortgage-backed securities, can be prepaid at any time by the borrower, which may significantly affect our expected cash flows. At March 31, 2024, lifetime prepayment speeds on loans and mortgage-backed securities were estimated to be 8.7% and 6.1%, respectively.

The EaR analysis focuses on parallel rate shocks across the term structure of benchmark interest rates. In a non-parallel rate scenario where shorter-term rates increase slightly, but the ten-year rate increases by 200 bps, the increase in EaR would be approximately 50 percent larger than the change associated with the parallel +200 bps rate change.

EaR has inherent limitations in describing expected changes in net interest income in rapidly changing interest rate environments due to a lag in asset and liability repricing behavior. As such, we expect net interest income to change due to “latent” and “emergent” interest rate sensitivity. Unlike EaR, which measures net interest income over 12 months, latent and emergent interest rate sensitivity explains changes in current quarter net interest income, compared with expected net interest income in the same quarter one year forward.

Latent interest rate sensitivity refers to future changes in net interest income based upon past rate movements that have yet to be fully recognized in revenue but will be recognized over the near term. We expect latent sensitivity to increase net interest income by 0.8% in the first quarter of 2025, compared with the first quarter of 2024.

Emergent interest rate sensitivity refers to future changes in net interest income based upon future interest rate movements and is measured from the latent level of net interest income. If interest rates rise consistent with the forward curve at March 31, 2024, we expect emergent sensitivity to increase net interest income by 1.0% from the latent sensitivity level, for a cumulative 1.8% increase in net interest income. For a +100 bps and -100 bps parallel interest rate shock to the implied forward rate path, the cumulative net interest income sensitivity would be 2.8% and -0.5%, respectively.

Our focus on business banking also plays a significant role in determining the nature of our asset-liability management posture. At March 31, 2024, $26.6 billion of our commercial lending and CRE loan balances were scheduled to reprice in the next six months. For these variable-rate loans, we have executed $850 million of cash flow hedges by receiving fixed rates on interest rate swaps. At March 31, 2024, we also had $3.7 billion of variable-rate consumer loans scheduled to reprice in the next six months. The impact on asset sensitivity from commercial or consumer loans with floors has become insignificant as rates have risen. See Notes 3 and 7 of the Notes to Consolidated Financial Statements for additional information regarding derivative instruments.

Fixed Income

We are exposed to market risk through changes in fair value. This includes market risk for trading securities and for interest rate swaps used to hedge interest rate risk. We underwrite municipal and corporate securities. We also trade municipal, agency, and treasury securities. This underwriting and trading activity exposes us to a risk of loss arising from adverse changes in the prices of these fixed-income securities.

Changes in the fair value of AFS securities and in interest rate swaps that qualify as cash flow hedges are included in AOCI for each financial reporting period. During the first quarter of 2024, the $12 million after-tax improvement in AOCI related to investment securities was primarily due to paydowns on the AFS securities. For more discussion regarding investment securities and AOCI, see the “Capital Management” section on page 33. See also Note 5 of the Notes to Consolidated Financial Statements for further information regarding the accounting for investment securities.

Equity Investments

Through our equity investment activities, we own equity securities that are publicly traded. In addition, we own equity securities in governmental entities and companies, e.g., Federal Reserve (“FRB”) and the FHLB, that are not publicly traded. Equity investments may be accounted for at cost less impairment and adjusted for observable price changes, fair value, the equity method, or proportional or full consolidation methods of accounting, depending on our ownership position and degree of influence over the investees’ business. Regardless of the accounting method, the values of our investments are subject to fluctuation. Because the fair value of these securities may fall below the cost at which we acquired them, we are exposed to the possibility of loss. Equity investments in private and public companies are evaluated, monitored, and approved by members of management in our Equity Investments Committee and Securities Valuation Committee.

We hold both direct and indirect investments in predominantly pre-public companies, primarily through various Small Business Investment Company (“SBIC”) venture capital funds as a strategy to provide beneficial financing, growth, and expansion opportunities to diverse businesses generally in communities within our geographic footprint. Our equity exposure to these investments was approximately $196 million and $190 million at March 31, 2024 and December 31, 2023, respectively. On occasion, some of the companies within our SBIC investment may issue an initial public offering (“IPO”). In this case, the fund is generally subject to a lockout period before we can liquidate the investment, which can introduce additional market risk. See Note 3 of the Notes to Consolidated Financial Statements for additional information regarding the valuation of our SBIC investments.

Liquidity Risk Management

Liquidity refers to our ability to meet our cash, contractual, and collateral obligations, and to manage both expected and unexpected cash flows without adversely impacting our operations or financial strength. We manage our liquidity to provide funds for our customers’ credit needs, our anticipated financial and contractual obligations, and other corporate activities. Sources of liquidity primarily include deposits, borrowings, equity, and paydowns of assets, such as loans and investment securities. Our investment securities are primarily held as a source of contingent liquidity. We generally own securities that can readily provide us with cash and liquidity through secured borrowing agreements with securities pledged as collateral.

We maintain and regularly test a contingency funding plan to identify sources and uses of liquidity. Our Board-approved liquidity policy requires us to monitor and maintain adequate liquidity, diversify funding positions, and anticipate future funding needs. In accordance with this policy, we monitor our liquidity positions by conducting various stress tests and evaluating certain liquid asset measurements, such as a 30-day liquidity coverage ratio.

We perform regular liquidity stress tests and assess our portfolio of highly liquid assets (sufficient to cover 30-day funding needs under stress scenarios). These stress tests include projections of funding maturities, uses of funds, and assumptions of deposit runoff. The assumptions consider the size of deposit account, operational nature of deposits, type of depositor, and concentrations of funding sources including large depositors and aggregate levels of uncollateralized deposits exceeding insured levels. Concentrated funding sources are given large runoff factors up to 100% in projecting stressed funding needs. Our liquidity stress testing considers multiple timeframes ranging from overnight to 12 months. Our liquidity policy requires us to maintain sufficient on-balance sheet liquidity in the form of FRB reserve balance and other highly liquid assets to meet stressed outflow assumptions.

We have a dedicated funding desk that monitors real-time inflows and outflows of our FRB account, and we have tools, including ready access to repo markets and FHLB advances, to manage intraday liquidity. FHLB borrowings are “open-term,” allowing us the ability to retain or return funds based on our liquidity needs. We pledge a large portion of our highly liquid investment securities portfolio through the General Collateral Funding (“GCF”) repo program. Through this program, high-quality collateral is pledged, and program participants exchange funds anonymously, which allows for near instant access to funding during market hours.

Additionally, we have pledged collateral to the FRB’s primary credit facility (or discount window) and to the Bank Term Funding Program (“BTFP”), which provide additional contingent funding sources outside the normal operating hours of the FHLB and the GCF program. The BTFP offered loans of up to one year in length to eligible depository institutions pledging U.S. Treasuries, agency debt and government mortgage-backed securities, and other qualifying assets as collateral. The availability of advances under the program ended in mid-March 2024. At March 31, 2024, our outstanding borrowings under the BTFP were $3.0 billion, with $1.5 billion maturing on December 31, 2024, and another $1.5 billion maturing on January 15, 2025. These advances may be prepaid at any time without penalty. For more information on our liquidity risk management practices, see “Liquidity Risk Management” in our 2023 Form 10-K.

For the first three months of 2024, the primary sources of cash came from a decrease in investment securities, an increase in short-term borrowings, and net cash provided by operating activities. Uses of cash during the same period primarily included a decrease in deposits, an increase in loans and leases, and an increase in money market investments. Cash payments for interest reflected in operating expenses were $491 million and $224 million for the first three months of 2024 and 2023, respectively.

The FHLB and FRB have been, and continue to be, a significant source of back-up liquidity and funding. We are a member of the FHLB of Des Moines, which allows member banks to borrow against eligible loans and securities to satisfy liquidity and funding requirements. We are required to invest in FHLB and FRB stock to maintain our borrowing capacity. At March 31, 2024, our total investment in FHLB and FRB stock was $45 million and $65 million, respectively, compared with $79 million and $65 million at December 31, 2023.

At March 31, 2024, loans with a carrying value of $22.9 billion and $15.8 billion, compared with $24.8 billion and $11.5 billion at December 31, 2023, were pledged at the FHLB and FRB, respectively, as collateral for current and potential borrowings.

At March 31, 2024 and December 31, 2023, investment securities with a carrying value of $19.8 billion and $20.5 billion, respectively, were pledged as collateral for potential borrowings. For the same time periods, these pledged securities included $9.2 billion and $9.5 billion for available use through the GCF repo program, $5.4 billion and $5.5 billion to the FRB, and $5.1 billion and $5.5 billion to secure collateralized public and trust deposits, advances, and for other purposes.

A large portion of these pledged assets are unencumbered, but are pledged to provide immediate access to contingency sources of funds. The following schedule presents our total available liquidity including unused collateralized borrowing capacity:

AVAILABLE LIQUIDITY

(Dollar amounts in billions)

1 Represents borrowing capacity and borrowings outstanding at the Federal Reserve Bank discount window.

2 Represents funds deposited by the Bank primarily at the Federal Reserve Bank.

At March 31, 2024 and December 31, 2023, our total available liquidity was $41.6 billion, compared with $40.6 billion, respectively. At March 31, 2024, we had sources of liquidity that exceeded our uninsured deposits without the need to sell any investment securities.

Credit Ratings

General financial market and economic conditions impact our access to, and cost of, external financing. Access to funding markets is also directly affected by the credit ratings we receive from various rating agencies. The ratings not only influence the costs associated with borrowings, but can also influence the sources of the borrowings. All of the credit rating agencies rate our debt at an investment-grade level.

The following schedule presents our credit ratings:

Capital Management

A strong capital position is vital to the achievement of our key corporate objectives, our continued profitability, and to promoting depositor and investor confidence. We seek to (1) maintain sufficient capital to support the current needs and growth of our businesses, consistent with our assessment of their potential to create value for shareholders, and (2) fulfill responsibilities to depositors and bondholders while managing capital distributions to shareholders through dividends and repurchases of common stock.

We utilize stress testing as an important mechanism to inform our decisions on the appropriate level of capital, based upon actual and hypothetically stressed economic conditions, including the FRB’s supervisory severely adverse scenario. The timing and amount of capital actions are subject to various factors, including our financial performance, business needs, prevailing and anticipated economic conditions, and the results of our internal stress testing, as well as Board and Office of the Comptroller of the Currency (“OCC”) approval. Shares may be repurchased occasionally in the open market or through privately negotiated transactions. For a more comprehensive discussion of our capital risk management, see “Capital Management” in our 2023 Form 10-K.

SHAREHOLDERS' EQUITY

(Dollar amounts in millions)

Total shareholders’ equity increased $138 million, or 2%, to $5.8 billion at March 31, 2024, compared with $5.7 billion at December 31, 2023. Common stock and additional paid-in capital decreased $26 million, primarily due to common stock repurchases. In February 2024, the Board approved a plan to repurchase up to $35 million of common shares outstanding during the year 2024. During the first quarter of 2024, we repurchased 0.9 million common shares outstanding for $35 million.

The AOCI balance was a loss of $2.6 billion at March 31, 2024, and primarily reflects the decline in the fair value of fixed-rate investment securities as a result of higher interest rates, and includes $2.0 billion ($1.5 billion after tax) of unrealized losses on the securities previously transferred from AFS to HTM. During the first quarter of 2024, AOCI improved $83 million, driven largely by $46 million in unrealized loss amortization associated with the securities transferred from AFS to HTM, and $12 million primarily related to paydowns on AFS securities. AOCI was also positively impacted by a $25 million change in net deferred losses related to derivative instruments used for risk management purposes. Absent any sales or credit impairment of the AFS securities, the unrealized losses will not be recognized in earnings. We do not intend to sell any securities with unrealized losses. Although changes in AOCI are reflected in shareholders’ equity, they are excluded from regulatory capital, and therefore do not impact our regulatory ratios. For more discussion on our investment securities portfolio and related unrealized gains and losses, see Note 5 of the Notes to Consolidated Financial Statements.

CAPITAL DISTRIBUTIONS

(In millions, except share data)

1 Includes amounts related to the common shares acquired from our publicly announced plans and those acquired in connection with our stock compensation plan. Shares were acquired from employees to pay for their payroll taxes and stock option exercise cost upon the exercise of stock options.

Pursuant to the OCC’s “Earnings Limitation Rule,” our dividend payments are restricted to an amount equal to the sum of the total of (1) our net income for that year, and (2) retained earnings for the preceding two years, unless the OCC approves the declaration and payment of dividends in excess of such amount. As of April 1, 2024, we had $1.1 billion of retained net profits available for distribution.

During the first quarter of 2024, we paid dividends on preferred stock of $10 million and dividends on common stock of $61 million, or $0.41 per share. In April 2024, the Board declared a regular quarterly dividend of $0.41 per common share, payable on May 23, 2024 to shareholders of record on May 16, 2024. See Note 9 of the Notes to Consolidated Financial Statements for additional information about our capital management actions.

Basel III

We are subject to Basel III capital requirements that include certain minimum regulatory capital ratios. At March 31, 2024, we exceeded all capital adequacy requirements under the Basel III capital rules. Based on our internal stress testing and other assessments of capital adequacy, we believe we hold capital sufficiently in excess of internal and regulatory requirements for well-capitalized banks. See “Supervision and Regulation” and Note 15 of our 2023 Form 10-K for more information about our compliance with the Basel III capital requirements. The following schedule presents our capital amounts, capital ratios, and other selected performance ratios:

CAPITAL AMOUNTS AND RATIOS

(Dollar amounts in millions)

1 See “Non-GAAP Financial Measures” on page 35 for more information regarding these ratios.

During the third quarter of 2023, federal bank regulators issued a proposal to implement the Basel Committee on Banking Supervision’s finalization of the post-crisis bank regulatory capital reforms. The proposal, commonly referred to as the “Basel III Endgame,” would significantly revise the capital requirements applicable to large banking organizations, defined as those with total assets of $100 billion or more, and would potentially impact our current and future capital planning, including share repurchase activity. At March 31, 2024, we had $87.1 billion in total assets and do not currently qualify as a large banking organization. We continue to evaluate the potential impact of the proposal, as we expect it is more likely than not we would become subject to this proposal in the future, were it to be finalized in its current form.

Federal bank regulators also issued proposals that would (1) expand a long-term debt requirement to all banks with total assets of $100 billion or more, and (2) revise requirements for resolution planning. For more information about these regulatory proposals and their potential impact, see “Recent Regulatory Developments” in the Supervision and Regulation section of our 2023 Form 10-K.

NON-GAAP FINANCIAL MEASURES

This Form 10-Q presents non-GAAP financial measures, in addition to generally accepted accounting principles (“GAAP”) financial measures. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are presented in the following schedules. We consider these adjustments to be relevant to ongoing operating results and provide a meaningful basis for period-to-period comparisons. We use these non-GAAP financial measures to assess our performance and financial position. We believe that presenting these non-GAAP financial measures allows investors to assess our performance on the same basis as that applied by our management and the financial services industry.

Non-GAAP financial measures have inherent limitations and are not necessarily comparable to similar financial measures that may be presented by other financial services companies. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.

Tangible Common Equity and Related Measures

Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets and their related amortization. We believe these non-GAAP measures provide useful information about our use of shareholders’ equity and provide a basis for evaluating the performance of a business more consistently, whether acquired or developed internally.

RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)

(Dollar amounts in millions)

1 Excluding the effect of AOCI from average tangible common equity would result in associated returns of 8.4%, 6.7%, and 12.3% for the periods presented, respectively.

TANGIBLE EQUITY RATIO, TANGIBLE COMMON EQUITY RATIO, AND TANGIBLE BOOK VALUE PER COMMON SHARE (ALL NON-GAAP MEASURES)

(Dollar amounts in millions, except per share amounts)

36

Efficiency Ratio and Adjusted Pre-Provision Net Revenue

The efficiency ratio is a measure of operating expense relative to revenue. We believe the efficiency ratio provides useful information regarding the cost of generating revenue. We make adjustments to exclude certain items that are not generally expected to recur frequently, as identified in the subsequent schedule, which we believe allows for more consistent comparability across periods. Adjusted noninterest expense provides a measure as to how we are managing our expenses. Adjusted pre-provision net revenue (“PPNR”) enables management and others to assess our ability to generate capital. Taxable-equivalent net interest income allows us to assess the comparability of revenue arising from both taxable and tax-exempt sources.

EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP)

(Dollar amounts in millions)

37

Our most significant risks include interest rate and market risk, which are closely monitored by management as previously discussed. For more information regarding interest rate and market risk, see the “Interest Rate and Market Risk Management” section in this Form 10-Q.

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures at March 31, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at March 31, 2024. There were no changes in our internal control over financial reporting during the first quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A. Risk Factors in our 2023 Form 10-K.