Zions Bancorporation, National Association: Form 10-Q for the period ended Jun 30, 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 bank fees, insurance assessments and capital standards; and other regulatory requirements;
• 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 to help us prevent or mitigate effects upon us and our customers of inadequate performance, systems failures, or cyber and other incidents by or affecting 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 customers’ operations and business and communities, including the increasing difficulty in, and the expense of, obtaining property, auto, business, and other insurance products;
• 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;
• 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.

Factors that could cause our actual results, performance or achievements, industry trends, or regulatory outcomes to differ materially from those expressed or implied in the forward-looking statements are discussed in our 2023 Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”), and are available on our website (www.zionsbancorporation.com (http://www.zionsbancorporation.com)) and from the SEC (www.sec.gov (http://www.sec.gov)).

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.

Second Quarter 2024 Financial Performance

Net Earnings Applicable to Common Shareholders (in millions) Diluted EPS Adjusted PPNR (in millions) 1 Efficiency Ratio 1

1 For information on non-GAAP financial measures, see page 38.

Executive Summary

Our financial results in the second quarter of 2024 reflected continued improvement in our net interest margin (“NIM”), growth in customer deposits and loans, and low net charge-offs. Diluted earnings per share (“EPS”) was $1.28, compared with $1.11 in the second quarter of 2023, as higher net interest income and a lower provision for credit losses were partially offset by lower noninterest income.

• Net interest income increased $6 million, or 1%, relative to the prior year period, as higher earning asset yields were partially offset by higher funding costs. The net interest margin was 2.98%, compared with 2.92%.
• Average interest-earning assets decreased slightly by $0.4 billion, as the decline in average securities exceeded the growth in average loans and leases and average money market investments.
• Total loans and leases increased $1.5 billion, or 3%, primarily due to growth in the consumer 1-4 family residential mortgage and the term commercial real estate (“CRE”) loan portfolios.
• Average interest-bearing liabilities increased $3.4 billion, or 7%, driven by an increase in average interest-bearing deposits, partially offset by a decline in average borrowed funds.
• Total deposits decreased $0.6 billion, or 1%, as a decrease in noninterest-bearing demand deposits was partially offset by an increase in interest-bearing deposits. Customer deposits (excluding brokered deposits) increased $3.6 billion, or 5%, to $69.5 billion, compared with $65.9 billion.
• The provision for credit losses was $5 million, compared with $46 million in the prior year period.
• Customer-related noninterest income decreased $8 million, or 5%, driven largely by declines in capital markets fees, including loan syndications, swaps, and other related fees. Decreases in noncustomer-related noninterest income were due largely to higher gains in the prior year period associated with the sale of bank-owned property and higher dividends on Federal Home Loan Bank (“FHLB”) stock. During the current quarter, dividends and other income benefited from a $9 million gain on the sale of our Enterprise Retirement Solutions business and a $4 million gain on the sale of a bank-owned property.
• Noninterest expense remained relatively stable at $509 million. An increase in technology, telecom, and information processing expense, driven largely by increases in software amortization expenses associated with the replacement of our core loan and deposit banking systems, was partially offset by a decrease in salaries and employee benefits expense, primarily due to higher severance expense in the prior year period.
• Net loan and lease charge-offs totaled $15 million, or 0.10% of average loans, compared with $13 million, or 0.09%, in the prior year quarter. Classified loans totaled $1.3 billion, or 2.16%, compared with $768 million, or 1.35%, of total loans and leases, and nonperforming assets were $265 million, or 0.45%, compared with $164 million, or 0.29%, of total loans and leases. The increases in classified loans and nonperforming assets were 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, increased $146 million, or 2%, from the prior year quarter, primarily due to an increase in short-term borrowings.

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, and $4 million for both the six months ended June 30, 2024, and 2023, respectively.

2 Taxable-equivalent rates used where applicable.

Net interest income accounted for approximately 77% of our net revenue (net interest income plus noninterest income) for the current quarter and increased $6 million, or 1%, relative to the prior year quarter, as higher earning asset yields were partially offset by higher funding costs. The NIM was 2.98%, compared with 2.92%.

The yield on average interest-earning assets was 5.31% in the second quarter of 2024, an increase of 50 basis points (“bps”), reflecting higher interest rates and a favorable mix change to higher yielding assets, as average securities decreased while average loans increased. The yield on average loans and leases increased 46 bps to 6.11%, and the yield on average securities increased 34 bps to 2.90% in the second quarter of 2024.

The rate paid on total deposits and interest-bearing liabilities was 2.36%, compared with 1.88% in the prior year quarter, and the cost of total deposits was 2.11%, compared with 1.27%, reflecting the higher interest rate environment as well as reduced noninterest-bearing deposits.

Average interest-earning assets decreased slightly by $0.4 billion from the prior year quarter, as growth of $1.6 billion in average loans and leases and $0.2 billion in average money market investments, was more than offset by a decline of $2.2 billion in average securities. The decrease in average securities was primarily due to principal reductions.

Average interest-bearing liabilities increased $3.4 billion, or 7%, from the prior year quarter, driven by an increase of $9.2 billion in average interest-bearing deposits, primarily due to customer deposit growth as well as customers moving from noninterest-bearing to interest-bearing products in response to the higher interest rate environment. This increase was partially offset by a decrease of $5.8 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 $1.6 billion, or 3%, to $58.3 billion, primarily due to growth in average consumer and commercial real estate loans. Average securities decreased $2.2 billion, or 10%, to $19.8 billion, primarily due to available-for-sale (“AFS”) securities principal reductions.

Average deposits increased $4.5 billion, or 7%, to $74.2 billion at an average cost of 2.11%, from $69.7 billion at an average cost of 1.27% in the second quarter of 2023. Average noninterest-bearing deposits as a percentage of total deposits decreased to 34%, compared with 43% during the same prior year period. The loan-to-deposit ratio based on end-of-period balances was 79%, compared with 77% in the prior year quarter.

Average borrowed funds, consisting primarily of secured borrowings, decreased $5.8 billion, or 46%, to $6.8 billion, primarily due to a reduction in wholesale funding needs as a result of an increase in interest-bearing deposits.

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 16 and the “Liquidity Risk Management” section on page 34. 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 31.

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

(Dollar amounts in millions)

1 Taxable-equivalent rates used where applicable.

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

The Allowance and 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 ACL was $726 million at June 30, 2024, compared with $711 million at June 30, 2023. The year-over-year increase in the ACL primarily reflects incremental reserves associated with portfolio-specific risks including commercial real estate, declines in credit quality, and average loan growth of $1.6 billion, partially offset by improvements in economic forecasts, changes in our loan portfolio composition, and declines in unfunded lending commitments related to construction lending. The ratio of ACL to total loans and leases was 1.24% and 1.25% at June 30, 2024 and 2023, respectively.

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 $5 million, compared with $46 million in the second quarter of 2023. The provision for securities losses was less than $1 million during both the second 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 during the current quarter. These changes contributed to a $132 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 $222 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 and mix, the aging of the portfolio, and other qualitative risk factors; all of which contributed to a $75 million decrease in the ACL.

See “Credit Risk Management” on page 21 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 $10 million, or 5%, relative to the prior year. Noninterest income accounted for approximately 23% and 24% of our net revenue (net interest income plus noninterest income) during the second 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 decreased $8 million, or 5%, compared with the prior year period. The decrease was driven primarily by declines in capital markets fees, including loan syndications, swaps, and other related fees.

Noncustomer-related Noninterest Income

Noncustomer-related noninterest income decreased $2 million from the prior year quarter. Dividends and other income decreased $4 million, largely due to a $13 million gain in the prior year period associated with the sale of bank-owned property and higher dividends on FHLB stock. During the current quarter, dividends and other income benefited from a $9 million gain on the sale of our Enterprise Retirement Solutions business and a $4 million gain on the sale of a bank-owned property. Fair value and nonhedge derivative income decreased $2 million, primarily due to credit valuation adjustments on client-related interest rate swaps. These decreases were partially offset by an increase of $4 million in net securities gains driven by valuation adjustments in our Small Business Investment Company (“SBIC”) investment portfolio.

Noninterest Expense

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

NONINTEREST EXPENSE

(Dollar amounts in millions)

Total noninterest expense remained relatively stable at $509 million. Technology, telecom, and information processing expense increased $8 million, or 14%, 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 $6 million, or 2%, primarily due to higher severance expense during the prior year period.

Adjusted noninterest expense increased $12 million, or 2%. The efficiency ratio was 64.5%, compared with 62.5% in the prior year period, primarily due to the increase in adjusted noninterest expense and a decrease in adjusted taxable-equivalent revenue, the latter of which was largely driven by a decline in customer-related fees. For information on non-GAAP financial measures, see page 38.

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 $5 million, or 4%, relative to the prior year quarter, as an increase in other technology-related expense and the aforementioned increase in technology, telecom, and information processing expense was more than offset by a decrease in certain technology investments, as the final phase of our three-phase project to replace our core loan and deposit banking systems was completed in July 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 23.3% and 22.6% for the three months ended June 30, 2024 and 2023, respectively. 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 $11 million and $9 million for the second 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 June 30, 2024, the estimated duration of our securities portfolio, which measures price sensitivity to interest rate changes, was 3.7 percent, compared with 3.6 percent at 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 34. 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 $1.0 billion, or 5%, from December 31, 2023. Approximately 7% of the total HTM and AFS investment securities were floating-rate instruments at both June 30, 2024 and December 31, 2023. Additionally, at June 30, 2024, we had $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 June 30, 2024, our AFS investment securities portfolio included $193 million of net premium that was distributed across the various security categories. Total taxable-equivalent premium amortization for our total investment securities portfolio was $17 million for the second quarter of 2024, compared with $22 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 $24 million at June 30, 2024, compared with $48 million at December 31, 2023.

Refer to the “Interest Rate Risk Management” section on page 31, the “Capital Management” section on page 36, 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, real estate, revenue pledges, or equipment. At June 30, 2024, we had $6 million of municipal loans on nonaccrual, and we had no municipal loans on nonaccrual at December 31, 2023.

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 June 30, 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)

During the first six months of 2024, the loan and lease portfolio increased $636 million, or 1%, to $58.4 billion at June 30, 2024. Loan growth was primarily in the consumer 1-4 family residential mortgage and term commercial real estate loan portfolios. At June 30, 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 29% of our total loan portfolio for both time periods.

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 increased $37 million, or 4%, during the first six months of 2024, primarily due to a $25 million increase in FHLB stock, and an $8 million increase in SBIC investments. We are required to invest approximately 4% of our FHLB borrowings in FHLB stock to maintain our borrowing capacity. The increase in period-end FHLB activity stock was due to an increase in short-term FHLB borrowings.

Premises, Equipment, and Software

We have been investing in technology to modernize our financial systems. In July 2024, we successfully completed the final phase of our multi-year project to replace our core loan and deposit banking systems. We have now transitioned substantially all of our commercial, commercial real estate, and consumer loans, as well as our deposit accounts to a modern, integrated core system, which will allow us to deliver improved experiences to our customers and gain incremental operational efficiencies.

The following schedule summarizes the capitalized costs associated with our core system replacement project, which are amortized 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 $1.2 billion, or 2%, to $73.8 billion, from December 31, 2023. At June 30, 2024 and December 31, 2023, customer deposits (excluding brokered deposits) were $69.5 billion and $70.5 billion, and included approximately $7.3 billion and $6.8 billion, respectively, of reciprocal deposits.

At June 30, 2024, the estimated total amount of uninsured deposits was $32.1 billion, or 44%, of total deposits, compared with $33.2 billion, or 44%, at December 31, 2023, respectively. Our loan-to-deposit ratio was 79%, compared with 77% for the same respective time periods. See “Liquidity Risk Management” on page 34 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 June 30, 2024, $555 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)

Commercial Lending

The following schedule presents the composition of our commercial lending portfolio:

COMMERCIAL LENDING PORTFOLIO

(Dollar amounts in millions)

Our commercial loans span various industries and generally mature within a one-to-five-year period with applicable amortization based on the underlying collateral and guarantees. Commercial loans are typically structured as seasonal, term, working capital, or bridge loans in the form of revolving and non-revolving lines of credit, amortizing term loans, guidance facilities, and single-payment loans. These loans include covenants requiring borrowers to provide regular financial reporting to measure leverage, debt service coverage, and liquidity. At June

30, 2024, approximately 69% of our commercial lending portfolio was variable-rate, and approximately 10% of these variable-rate loans were swapped with our customers to a fixed rate.

Underwriting of commercial loans is primarily based on analyses of management, financial performance, industry, sponsorship (if applicable), and transaction structure, with credit enhancements typically provided by collateral and guarantees from the owners or sponsors. Prospective cash flows are subjected to various downside scenario analyses, including revenue decline, margin compression, and interest rate movements.

The following schedule presents the geography distribution of our commercial lending portfolio. For commercial loans, geographies are based on the location of the primary borrower.

COMMERCIAL LENDING BY GEOGRAPHY

(Dollar amounts in millions)

The following schedule presents an industry distribution of our commercial lending portfolio. Industry classification is based on the North American Industry Classification System.

COMMERCIAL LENDING BY INDUSTRY

(Dollar amounts in millions)

1 Includes primarily utilities, power, and renewable energy.

2 No other industry group exceeds 3.4%.

Commercial Real Estate Lending

The following schedule presents the composition of our commercial real estate lending portfolio:

COMMERCIAL REAL ESTATE LENDING PORTFOLIO

(Dollar amounts in millions)

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 June 30, 2024, approximately 85% of our CRE loan portfolio was variable-rate, and approximately 21% of these variable-rate loans were swapped with our customers 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. Remargining 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 the geography distribution of our commercial real estate lending portfolio. Geographies are based on the location of the primary collateral.

COMMERCIAL REAL ESTATE LENDING BY GEOGRAPHY

(Dollar amounts in millions)

23

The following schedule presents our commercial real estate lending portfolio by the type of collateral:

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 $310 million and $202 million of unsecured loans at June 30, 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 discussed, our commercial real estate lending 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 CRE

At June 30, 2024 and December 31, 2023, our multi-family CRE loan portfolio totaled $3.9 billion and $3.7 billion, representing 29% and 28% of the total CRE loan portfolio, respectively. Approximately 33% 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)

24

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 June 30, 2024 and December 31, 2023.

Office CRE

At June 30, 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 39% 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)

25

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 Other included $17 million of office CRE loans with collateral located in Georgia at both June 30, 2024 and December 31, 2023.

Consumer Lending

The following schedule presents the composition of our consumer lending portfolio:

CONSUMER LENDING PORTFOLIO

(Dollar amounts in millions)

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 June 30, 2024 and December 31, 2023, our HECL portfolio totaled $3.5 billion and $3.4 billion, respectively. Approximately 37% and 39% of our HECLs are secured by first liens for the same respective time periods.

At June 30, 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 20% 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 June 30, 2024 and December 31, 2023, was 0.06% and 0.05%, respectively. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of the HECL portfolio.

The following schedule presents the geography distribution of our consumer lending portfolio. Geographies are based on the location of the primary borrower.

CONSUMER LENDING BY GEOGRAPHY

(Dollar amounts in millions)

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 0.45% at June 30, 2024, compared with 0.39% at December 31, 2023. Total nonaccrual loans at June 30, 2024 increased to $261 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 six months of 2024 and 2023, loans that have been modified to accommodate a borrower experiencing financial difficulties totaled $177 million, and $148 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 and certain credit-related ratios:

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 six months of 2024, the total ACL decreased to $726 million from $729 million. The slight decrease in the ACL primarily reflects improvements in economic forecasts, changes in our loan portfolio composition, and declines in unfunded lending commitments related to construction lending, partially offset by declines in credit quality, incremental reserves associated with portfolio-specific risks including commercial real estate, and loan growth. 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.

We generally have granular deposit funding, and much of this funding is in the form of demand deposits with no maturity, which contractually can be withdrawn at any time. Rather than using contractual maturities, our interest rate risk model uses dynamically modeled behavioral assumptions based on historical behavior and future projections. Because many deposits from household and business accounts have proven to be stable over time and less sensitive to rate changes, 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 June 30, 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 consist of a pay-fixed swap hedging rolling FHLB advances. This swap matures in May 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 June 30, 2024, we had $154 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 -200 bps to +200 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 shifts.

The asset sensitivity, as measured by EaR, increased during the first six months of 2024, due to securities redemptions, swap maturities, and assumption changes that reduced the projected runoff of noninterest-bearing deposits. 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 54%.

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 June 30, 2024, lifetime prepayment speeds were estimated to be 13.2% for loans, which reflects an acceleration of prepayments upon rate reset for adjustable rate loans, and 7.1% for mortgage-backed securities.

The EaR analysis focuses on parallel rate shocks across the term structure of benchmark interest rates. In a non-parallel rate scenario, where short-term rates decline 200 bps, but long-term rates are unchanged, the EaR is comparable to the parallel rate scenario of similar rate shock.

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 8.3% in the second quarter of 2025, compared with the second 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 decline consistent with the forward curve at June 30, 2024, we expect emergent sensitivity to reduce net interest income by approximately 2.0% from the latent sensitivity level, for a cumulative 6.3% 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 between 4.6% and 7.7%, respectively.

Our focus on business banking also plays a significant role in determining the nature of our asset-liability management posture. At June 30, 2024, $27.1 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 $550 million of cash flow hedges by receiving fixed rates on interest rate swaps. At June 30, 2024, we also had $4.0 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. For more discussion regarding investment securities and AOCI, see the “Capital Management” section on page 36. 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 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 $198 million and $190 million at June 30, 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 June 30, 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 six months of 2024, the primary sources of cash came from an increase in short-term borrowings, a decrease in investment securities, and net cash provided by operating activities. Uses of cash during the same period primarily included a decrease in deposits, an increase in money market investments, and an increase in loans and leases. Cash payments for interest reflected in operating expenses were $940 million and $546 million for the first six 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 June 30, 2024, our total investment in FHLB and FRB stock was $104 million and $64 million, respectively, compared with $79 million and $65 million at December 31, 2023.

At June 30, 2024, loans with a carrying value of $23.0 billion and $16.3 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 June 30, 2024 and December 31, 2023, investment securities with a carrying value of $18.9 billion and $20.5 billion, respectively, were pledged as collateral for potential borrowings. For the same time periods, these pledged securities included $9.0 billion and $9.5 billion for available use through the GCF repo program, $5.4 billion and $5.5 billion to the FRB and FHLB, and $4.5 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 June 30, 2024 and December 31, 2023, our total available liquidity was $40.3 billion, compared with $40.6 billion, respectively. At June 30, 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 $334 million, or 6%, to $6.0 billion at June 30, 2024, compared with $5.7 billion at December 31, 2023. Common stock and additional paid-in capital decreased $18 million, primarily due to common stock repurchases during the first quarter of 2024.

The AOCI balance was a loss of $2.5 billion at June 30, 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 second quarter of 2024, AOCI improved $60 million, driven largely by $50 million in unrealized loss amortization associated with the securities transferred from AFS to HTM. 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 amounts)

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 July 1, 2024, we had $1.3 billion of retained net profits available for distribution.

During the second quarter of 2024, we paid dividends on preferred stock of $11 million and dividends on common stock of $61 million, or $0.41 per share. In August 2024, the Board declared a regular quarterly dividend of $0.41 per common share, payable on August 22, 2024 to shareholders of record on August 15, 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 June 30, 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 38 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 June 30, 2024, we had $87.6 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 10.9%, 8.4%, and 10.0% 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 shares and per share amounts)

38

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)

1 Excluding both the $9 million gain on sale of our Enterprise Retirement Solutions business and the $4 million gain on sale of a bank-owned property (recorded in dividends and other income), the efficiency ratio for the three months and six months ended June 30, 2024 would have been 65.6% and 66.7%, respectively.

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 June 30, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at June 30, 2024. There were no changes in our internal control over financial reporting during the second 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.