Zions Bancorporation, National Association: Form 10-Q for the period ended Sep 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 lease 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, 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. Reasons for changes in the current year-to-date period compared with the same prior year period are generally consistent with the quarter-to-date comparisons unless otherwise specified. Growth rates of 100% or more are considered not meaningful (“NM”) as they generally reflect a low starting point.

Third 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 third quarter of 2024 reflected continued improvement in our net interest margin (“NIM”), low net charge-offs, growth in customer deposits and loans, a record quarter for capital markets fee income, and deterioration in certain credit quality metrics. Diluted earnings per share (“EPS”) was $1.37, compared with $1.13 in the third 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 $35 million, or 6%, relative to the prior year period, as higher earning asset yields were partially offset by higher funding costs. Net interest income was also impacted by growth in average interest-earning assets. The net interest margin was 3.03%, compared with 2.93%.
• Average interest-earning assets increased $2.2 billion, or 3%, as growth in average money market investments and average loans and leases, was partially offset by a decline in average securities.
• Average interest-bearing liabilities increased $4.3 billion, or 8%, driven by increases in average interest-bearing deposits and average borrowed funds.
• Total loans and leases increased $2.0 billion, or 3%, primarily due to growth in the consumer 1-4 family residential mortgage and commercial and industrial loan portfolios.
• Total deposits increased $319 million, as an increase in interest-bearing deposits was partially offset by a decrease in noninterest-bearing demand deposits. Customer deposits (excluding brokered deposits) increased $1.7 billion, or 2%, to $70.5 billion, compared with $68.8 billion.
• The provision for credit losses was $13 million, compared with $41 million in the prior year period.
• Customer-related noninterest income increased $4 million, or 3%, driven largely by increases in capital markets fees and commercial account fees, partially offset by a decline in loan-related fees and income. Decreases in noncustomer-related noninterest income were primarily due to credit valuation adjustments on client-related interest rate swaps, and a decline in dividends on Federal Home Loan Bank (“FHLB”) stock.
• Noninterest expense increased $6 million, or 1%. Salaries and employee benefits expense increased primarily due to a decline in capitalized salaries related to reduced software development activities, and technology, telecom, and information processing expense increased primarily due to higher application software, license, and maintenance expenses. These increases were partially offset by decreases in other expenses, including professional and legal services and occupancy and equipment expenses.
• Net loan and lease charge-offs totaled $3 million, or 0.02%, of average loans and leases, compared with $14 million, or 0.10%, in the prior year quarter. The ratio of allowance for credit losses (“ACL”) to total loans and leases was 1.25%, compared with 1.30%.
• Nonperforming assets totaled $368 million, or 0.62%, of total loans and leases and other real estate owned, compared with $219 million, or 0.38%. The increase was primarily due to a small number of loans in the commercial and industrial and term commercial real estate (“CRE”) portfolios.
• Classified loans totaled $2.1 billion, or 3.55%, of total loans and leases, compared with $769 million, or 1.35%. The increase was primarily in the multifamily CRE loan portfolio, largely due to a change in approach to risk grading that places more emphasis on current cash flow, which is the primary source of repayment, and less emphasis on the adequacy of collateral values and the strength of guarantors and sponsors. The increase in classified loans was also attributable to weaker performance, particularly for 2021 and 2022 construction loan vintages, as borrowers missed projections due to lower-than-anticipated leasing, rent concessions, elevated costs, and higher interest rates.
• Total borrowed funds, consisting primarily of secured borrowings, decreased $1.4 billion, or 29%, from the prior year quarter, primarily due to a decrease in security repurchase agreements.

Net Interest Income and Net Interest Margin

NET INTEREST INCOME AND NET INTEREST MARGIN

(Dollar amounts in millions)

1 Includes interest income recoveries of $1 million for both the three months ended, and $5 million for both the nine months ended September 30, 2024, and 2023, respectively.

2 Taxable-equivalent rates used where applicable.

Net interest income accounted for approximately 78% and 76% of our net revenue (net interest income plus noninterest income) during the third quarter of 2024 and 2023, respectively, and increased $35 million, or 6%, relative to the prior year quarter, as the repricing of interest-earning assets outpaced the increase in funding costs. Net interest income was also impacted by growth in average interest-earning assets. The NIM was 3.03%, compared with 2.93%.

The yield on average interest-earning assets was 5.35% in the third quarter of 2024, an increase of 33 basis points (“bps”), reflecting higher interest rates and a favorable mix change to higher yielding assets, as average securities decreased, and average loans and average money market investments increased. The yield on average loans and leases increased 31 bps to 6.15%, and the yield on average securities increased 13 bps to 2.86% in the third quarter of 2024.

The rate paid on total deposits and interest-bearing liabilities was 2.36%, compared with 2.10% in the prior year quarter, and the cost of total deposits was 2.14%, compared with 1.92%, reflecting the higher interest rate environment and reduced noninterest-bearing deposits.

Average interest-earning assets increased $2.2 billion, or 3% from the prior year quarter, as growth of $2.3 billion in average money market investments and $1.7 billion in average loans and leases, was partially offset by a decline of $1.8 billion in average securities. The decrease in average securities was primarily due to principal reductions.

Average interest-bearing liabilities increased $4.3 billion, or 8%, from the prior year quarter, driven by increases of $2.5 billion in average interest-bearing deposits, primarily due to customer deposit growth, and $1.8 billion in average borrowed funds, primarily due to increased short-term borrowings.

For the nine months ended September 30, 2024, net interest income decreased $52 million, or 3%, relative to the same prior year period, as higher funding costs more than offset higher earning asset yields.

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

Average loans and leases increased $1.7 billion, or 3%, to $58.7 billion, primarily due to growth in average consumer and commercial real estate loans. Average securities decreased $1.8 billion, or 9%, to $19.4 billion, primarily due to principal reductions.

Average deposits decreased $0.7 billion, or 1%, to $75.0 billion at an average cost of 2.14%, from $75.7 billion at an average cost of 1.92% in the third quarter of 2023. Average noninterest-bearing deposits decreased $3.2 billion, or 11%, relative to the prior year quarter, and were relatively flat compared with the ending balance at June 30, 2024, reflecting stabilization during the current quarter. Average noninterest-bearing deposits decreased to 33% of total deposits, compared with 37% during the same prior year period.

Average borrowed funds, consisting primarily of secured borrowings, increased $1.8 billion, or 39%, to $6.3 billion, primarily due to increased short-term borrowings, including advances under the Bank Term Funding Program (“BTFP”).

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 17 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 $736 million at September 30, 2024, and was relatively flat compared with $738 million at September 30, 2023. The slight decrease in the ACL primarily reflects improvements in economic forecasts and declines in unfunded lending commitments related to construction lending, partially offset by increases associated with declines in credit quality, incremental reserves associated with portfolio-specific risks including CRE, average loan growth of $1.7 billion, and changes in our loan portfolio composition. The ratio of ACL to total loans and leases was 1.25% at September 30, 2024, compared with 1.30% at September 30, 2023.

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 $41 million in the third quarter of 2023. The provision for securities losses was less than $1 million during both the third 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 $199 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 $163 million increase in the ACL, driven largely by declines in credit quality and 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 $34 million increase 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.

Noninterest income accounted for approximately 22% and 24% of our net revenue (net interest income plus noninterest income) during the third quarter of 2024 and 2023, respectively, and decreased $8 million, or 4%, relative to the prior year quarter. 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 increased $4 million, or 3%, compared with the prior year period. Capital markets fees increased $10 million, largely due to increased swap fees, loan syndication fees, and expanded real estate capital markets activity, and commercial account fees increased $3 million. These increases were partially offset by a $6 million 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 $12 million from the prior year quarter. Fair value and nonhedge derivative income decreased $10 million, primarily due to credit valuation adjustments on client-related interest rate swaps, and dividends and other income decreased $7 million, primarily due to a decline in dividends on FHLB stock. These decreases were partially offset by an increase of $5 million in net securities gains, largely due to 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 increased $6 million, or 1%, relative to the prior year quarter. Salaries and employee benefits expense increased $6 million, or 2%, primarily due to a decline in capitalized salaries related to reduced software development activities, as well as higher benefits accruals, and an additional business day during the current quarter. Technology, telecom, and information processing expense increased $4 million, or 6%, primarily due to increases in application software, license, and maintenance expenses. These increases were partially offset by decreases in other expenses including professional and legal services associated with reduced technology-related consulting services and occupancy and equipment expenses.

Adjusted noninterest expense increased $6 million, or 1%. The efficiency ratio was 62.5%, compared with 64.4%, due to an increase in adjusted taxable-equivalent revenue. For information on non-GAAP financial measures, see page 38.

For the nine months ended September 30, 2024, noninterest expense increased $21 million, or 1%, relative to the same prior year period. Technology, telecom, and information processing expense increased $19 million, or 11%, primarily due to increases in software amortization expenses associated with the replacement of substantially all of our in-scope core loan and deposit banking systems. Deposit insurance and regulatory expense increased $14 million, or 23%, driven largely by a $13 million accrual associated with an updated special assessment estimate by the Federal Deposit Insurance Corporation (“FDIC”) during the first quarter of 2024. These increases were partially offset by a decrease of $8 million, or 1%, in salaries and employee benefits expense, primarily due to higher severance expense and incentive compensation accruals in the prior year period.

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 $6 million, or 5%, relative to the prior year quarter, as the aforementioned increase in technology, telecom, and information processing expense and an increase in other technology-related expense was more than offset by a decrease in certain technology investments, as the final phase of our multi-year project to replace substantially all of our in-scope 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 22.7% and 23.2% for the three months ended September 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 $10 million and $7 million for the third 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 both September 30, 2024 and December 31, 2023, the estimated duration of our investment securities portfolio, which measures price sensitivity to interest rate changes, was 3.6 percent.

For information about our borrowing capacity associated with our 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 investment securities decreased $1.6 billion, or 7%, from December 31, 2023, largely due to principal reductions. Approximately 7% of the total investment securities were floating-rate instruments at both September 30, 2024 and December 31, 2023. Additionally, at September 30, 2024, we had $3.6 billion of pay-fixed swaps designated as fair value hedges against fixed-rate available-for-sale (“AFS”) securities that effectively convert the fixed interest income to a floating rate on the hedged portion of the securities.

At September 30, 2024, our AFS investment securities portfolio included $181 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 third quarter of 2024, compared with $20 million for the same prior year period.

Refer to the “Interest Rate Risk Management” section on page 31, the “Capital Management” section on page 35, 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 September 30, 2024, we had a small number of municipal loans on nonaccrual totaling $11 million; we had no municipal loans on nonaccrual at December 31, 2023. These loans were to private commercial entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

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 September 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, as well as other products secured by commercial real estate. We also provide various retail banking 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 nine months of 2024, the loan and lease portfolio increased $1.1 billion, or 2%, to $58.9 billion at September 30, 2024. Loan growth was primarily in the consumer 1-4 family residential mortgage portfolio. At September 30, 2024 and December 31, 2023, the ratio of loans and leases to total assets was 68% 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 decreased $4 million during the first nine months of 2024, primarily due to a decrease in FHLB stock, partially offset by higher valuation adjustments in our SBIC investment portfolio. 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 due to a decline in short-term FHLB borrowings.

Premises, Equipment, and Software

We continue to invest 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 allows 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 increased $757 million, or 1%, from December 31, 2023, as a $2.0 billion increase in interest-bearing deposits was partially offset by a $1.3 billion decrease in noninterest-bearing demand deposits. At both September 30, 2024 and December 31, 2023, customer deposits (excluding brokered deposits) totaled $70.5 billion, and included approximately $7.3 billion and $6.8 billion, respectively, of reciprocal deposits.

At September 30, 2024, the estimated total amount of uninsured deposits was $33.1 billion, or 44%, of total deposits, compared with $33.2 billion, or 44%, at December 31, 2023. Our loan-to-deposit ratio was 78%, 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 September 30, 2024, $548 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

September 30, 2024, approximately 70% 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)

1 No other geography exceeds 2.7% for September 30, 2024 and December 31, 2023, respectively.

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 3.5% and 3.3% for September 30, 2024 and December 31, 2023, respectively.

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 (“LTV”) 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 September 30, 2024, approximately 86% 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.

Real estate appraisals are performed in accordance with regulatory guidelines. In some cases, reports from automated valuation services are used or internal evaluations are performed. An appraisal is ordered and reviewed prior to loan closing, and a new appraisal or evaluation is generally ordered when market conditions indicate a potential decline in the value of the collateral, or when the loan is either modified, renewed, or deteriorates to a certain level of credit weakness. CRE LTVs are calculated by dividing the outstanding loan balance by the estimated collateral value from the most current appraisal. At September 30, 2024, the weighted average LTV ratio for our term CRE portfolio was less than 60%.

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)

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 $356 million and $202 million of unsecured loans at September 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 multifamily. We provide additional analysis of our multifamily and office CRE portfolios below in view of increased investor interest in those collateral types in recent periods.

Multifamily CRE

At September 30, 2024 and December 31, 2023, our multifamily 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 multifamily CRE loan portfolio is scheduled to mature in the next 12 months. We believe that most of these borrowers will be able to refinance at maturity through the Bank, or other lenders, as a result of the cash flows from the properties, acceptable LTVs, equity levels, and guarantor support. The following schedule presents the composition of our multifamily CRE loan portfolio and other related credit quality metrics:

MULTIFAMILY CRE LOAN PORTFOLIO

(Dollar amounts in millions)

1 For the first nine months of 2024, multifamily CRE classified loan balances significantly increased. See the “Classified Loans” section below on page 29 for more information about changes in these related balances.

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

MULTIFAMILY CRE LOAN PORTFOLIO BY COLLATERAL LOCATION

(Dollar amounts in millions)

(Dollar amounts in millions)

1 Other included $55 million of multifamily loans with collateral located in New Mexico at both September 30, 2024 and December 31, 2023.

Office CRE

At September 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. We believe that most of these borrowers will be able to refinance at maturity through the Bank, or other lenders, as a result of the cash flows from the properties, acceptable LTVs, equity levels, and guarantor support. 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 Other included $17 million of office CRE loans with collateral located in Georgia at both September 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)

1-4 Family Residential Mortgages

We originate first-lien residential home mortgage loans considered to be of prime quality. At September 30, 2024, our 1-4 family residential mortgage loan portfolio totaled $9.5 billion, or 65%, of our total consumer loan portfolio, compared with $8.4 billion, or 61%, at December 31, 2023. Approximately 91% and 93% of our 1-4 family residential mortgage loan portfolio was variable-rate for the same respective time periods. 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.

Home Equity Credit Lines

We also originate home equity credit lines (“HECLs”). At September 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 were secured by first liens for the same respective time periods.

At September 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 92% of our HECL portfolio is still in the draw period, and about 21% 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 September 30, 2024 and December 31, 2023, was (0.01)% 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)

Credit Quality

We monitor credit quality by analyzing various factors, including (among others) nonperforming status, internal risk grades, and net charge-offs, all of which are used in our overall evaluation of the adequacy of our ACL. See Note 6 of the Notes to Consolidated Financial Statements for more information on these factors and the ACL.

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 totaled $368 million, or 0.62%, of total loans and leases and other real estate owned at September 30, 2024, compared with $228 million, or 0.39%, at December 31, 2023. The increase was primarily due to a small number of loans in the commercial and industrial and term CRE portfolios.

Classified Loans

Classified loans are considered loans with well-defined weaknesses and are assigned using our internal risk grade definitions of substandard and doubtful, which are consistent with regulatory risk classifications. The following schedule presents our classified loans by loan segment:

CLASSIFIED LOANS

(Dollar amounts in millions)

Classified loans totaled $2.1 billion, or 3.55%, of total loans and leases, at September 30, 2024, compared with $825 million, or 1.43%, at December 31, 2023. The increase was primarily in the multifamily CRE loan portfolio, largely due to a change in approach to risk grading that places more emphasis on current cash flow, which is the primary source of repayment, and less emphasis on the adequacy of collateral values and the strength of guarantors and sponsors. The increase in classified loans was also attributable to weaker performance, particularly for 2021 and 2022 construction loan vintages, as borrowers missed projections due to lower-than-anticipated leasing, rent concessions, elevated costs, and higher interest rates. Our CRE loan portfolio continues to benefit from strong underwriting, supported by high borrower equity and guarantor support.

Allowance for Credit Losses

The ACL, which consists of the ALLL and the RULC, 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.

We estimate current expected credit losses, which include considerations of historical credit loss experience, current conditions, and standard economic forecasts, all of which inform the quantitative portion of our ACL. We also consider qualitative and environmental factors that may indicate losses may differ from levels estimated by our quantitative models. The impact of these factors on our ACL may change from quarter to quarter.

During recent quarters, the qualitative portion of the ACL has increased primarily due to (1) economic uncertainty, which caused us to increase the weights on recessionary economic forecasts, and (2) portfolio-specific risks, which caused us to use stressed economic forecasts for certain portfolios, particularly CRE.

The following schedule presents the changes in the ACL and certain credit-related metrics:

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.

See “The Allowance and Provision for Credit Losses” section on page 12 for more discussion on changes in the ACL, and 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 the recent 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. 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. Our models are particularly sensitive to these assumptions about the rate of such behavior.

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 increases as market rates decline due to the inability to reprice as deposits approach their floor.

As noted previously, we utilize derivatives to manage interest rate risk. The following schedule presents derivatives that are designated in qualifying hedging relationships at September 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 September 30, 2024, we had $117 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 instantaneous 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 nine 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 55%.

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 September 30, 2024, lifetime prepayment speeds were estimated to be 15.8% 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.

If interest rates were to follow the rate path implied by the forward curve at September 30, 2024, modeled net interest income would increase in the third quarter of 2025 by an additional 1.4%, when compared to the third quarter of 2024. 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 (0.8)% and 3.1%, respectively.

Our focus on business banking also plays a significant role in determining the nature of our asset-liability management posture. At September 30, 2024, $27.4 billion of our commercial and CRE loans were scheduled to reprice in the next six months. For these variable-rate loans, we have executed $350 million of cash flow hedges by receiving fixed rates on interest rate swaps. At September 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 35. 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. For more information regarding our equity investments, see “Interest Rate and Market Risk Management” in our 2023 Form 10-K.

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 $202 million and $190 million at September 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. For more information on our liquidity risk management practices, see “Liquidity Risk Management” in our 2023 Form 10-K.

We have pledged collateral to the FRB’s primary credit facility (or discount window) and to the BTFP, which provide additional contingent funding sources outside the normal operating hours of the FHLB and the General Collateral Funding (“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.

For the first nine months of 2024, the primary sources of cash came from a decrease in investment securities, an increase in deposits, and net cash provided by operating activities. Uses of cash during the same period primarily included a decrease in short-term borrowings, an increase in loans and leases, and dividends paid on common and preferred stock. Cash payments for interest reflected in operating expenses were $1.4 billion and $913 million for the first nine 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 September 30, 2024, our total investment in FHLB and FRB stock was $56 million and $65 million, respectively, compared with $79 million and $65 million at December 31, 2023.

At September 30, 2024, loans with a carrying value of $23.3 billion and $17.3 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 September 30, 2024 and December 31, 2023, investment securities with a carrying value of $18.6 billion and $20.5 billion, respectively, were pledged as collateral for potential borrowings. For the same time periods, these pledged securities included $8.9 billion and $9.5 billion for available use through the GCF and other repo programs, $5.2 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 Includes $42 million pledged for available use through other repo programs.

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

At September 30, 2024 and December 31, 2023, our total available liquidity was $43.1 billion, compared with $40.6 billion, respectively. At September 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 $694 million, or 12%, to $6.4 billion at September 30, 2024, compared with $5.7 billion at December 31, 2023. The AOCI balance was a loss of $2.3 billion at September 30, 2024, and largely reflects a decline in the fair value of fixed-rate AFS securities as a result of changes in interest rates, and includes $1.9 billion ($1.4 billion after tax) of unrealized losses on the securities previously transferred from AFS to held-to-maturity (“HTM”). When compared to December 31, 2023, AOCI improved $356 million, primarily due to $147 million in unrealized loss amortization associated with the securities transferred from AFS to HTM, and $137 million primarily related to paydowns on AFS securities. AOCI was also impacted by a $72 million decrease in unrealized losses and other adjustments associated with 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 currently 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 October 1, 2024, we had $1.4 billion of retained net profits available for distribution.

During the third 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 November 2024, the Board declared a regular quarterly dividend of $0.43 per common share, payable on November 21, 2024 to shareholders of record on November 14, 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 September 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.

Estimated common equity tier 1 (“CET1”) capital was $7.2 billion, an increase of 6%, compared with $6.8 billion in the prior year period. The estimated CET1 capital ratio was 10.7%, compared with 10.2%. Our tangible common equity ratio increased to 5.7%, compared with 4.4%, primarily due to an increase in retained earnings and reduced unrealized losses in AOCI. For more information on non-GAAP financial measures, see page 38.

Recent Regulatory Developments

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 September 30, 2024, we had $87.0 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 11.4%, 10.9%, and 9.9% 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 ended June 30, 2024 would have been 65.6%.

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