First Citizens Bancshares Inc: Form 10-Q for the period ended Sep 30, 2023

Management’s discussion and analysis (“MD&A”) of earnings and related financial data is presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” or “BancShares”) and its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”). Unless otherwise noted, the terms “we,” “us,” “our,” and “BancShares” in this section refer to the consolidated financial position and consolidated results of operations for BancShares.

This MD&A is expected to provide our investors with a view of our financial condition and results of operations from our management’s perspective. This MD&A should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q, along with our consolidated financial statements and related MD&A of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Throughout this MD&A, references to a specific “Note” refer to Notes to the Unaudited Consolidated Financial Statements.

Intercompany accounts and transactions have been eliminated. Although certain amounts for the prior year have been reclassified to conform to statement presentations for 2023, the reclassifications had no effect on stockholders’ equity or net income as previously reported. Refer to further detail in Note 1—Significant Accounting Policies and Basis of Presentation.

Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of BancShares. See the "Non-GAAP Financial Measurements" section of this MD&A for a reconciliation of these financial measures to the most directly comparable financial measures in accordance with GAAP.

EXECUTIVE OVERVIEW

The Parent Company is a bank holding company ("BHC") and Financial Holding Company (“FHC”). The Parent Company is regulated by the Board of Governors of the Federal Reserve System under the U.S. Bank Holding Company Act of 1956, as amended. The Parent Company is also registered under the BHC laws of North Carolina and is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks (the “NCCOB”). BancShares conducts its banking operations through its wholly owned subsidiary, FCB, a state-chartered bank organized under the laws of the state of North Carolina. FCB is regulated by the NCCOB. In addition, FCB, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation (the “FDIC”).

BancShares provides financial services for a wide range of consumer and commercial clients. This includes retail and mortgage banking, wealth management, commercial and middle market banking, factoring, and leasing. BancShares provides commercial factoring, receivables management and secured financing services to businesses (generally manufacturers or importers of goods) that operate in various industries, including apparel, textile, furniture, home furnishings, and consumer electronics.

In addition, BancShares owns a fleet of railcars and locomotives that are leased to railroads and shippers. We also provide various investment products and services through FCB’s wholly owned subsidiaries, First Citizens Investor Services, Inc. (“FCIS”) and First Citizens Asset Management, Inc. (“FCAM”). As a registered broker-dealer, FCIS provides a full range of investment products, including annuities, discount brokerage services and third-party mutual funds. As registered investment advisors, FCIS and FCAM provide investment management services and advice. BancShares delivers products and services to its customers through an extensive branch network and additionally operates a nationwide direct bank (the “Direct Bank”). Services offered at most branches include accepting deposits, cashing checks and providing for consumer and commercial cash needs. Consumer and business customers may also conduct banking transactions through various digital channels.

The SVBB Acquisition (as defined and described below) expanded our client base to serve private equity and venture capital clients and also complimented our existing wealth management business by adding enhanced digital capabilities. The SVBB Acquisition further diversified our loan portfolio and business mix, particularly across technology and life sciences and healthcare industries, and wealth clients.

Refer to the 2022 Form 10-K for a discussion of our strategy.

Significant Events in 2023

SVBB Acquisition

On March 27, 2023 (the “SVBB Acquisition Date”), FCB acquired substantially all loans and certain other assets and assumed all customer deposits and certain other liabilities, of Silicon Valley Bridge Bank, N.A. (“SVBB”) from the FDIC pursuant to the terms of a purchase and assumption agreement (the “SVBB Purchase Agreement”) by and among FCB, the FDIC, and the FDIC, as receiver of SVBB (the “SVBB Acquisition”).

Significant items related to the SVBB Acquisition are summarized below.

• The fair value of total assets acquired was $107.54 billion, which mainly consisted of approximately $68.47 billion of loans and $35.31 billion of cash and interest-earning deposits at banks.
• The fair value of deposits assumed was $56.01 billion.
• The core deposit intangible was $230 million.
• The preliminary after tax gain on acquisition was $9.89 billion for the nine months ended September 30, 2023, representing the excess of the net assets acquired over the purchase price. This includes increases of $12 million (net of tax) in the current quarter and $55 million (net of tax) during the second quarter. These reflect refined fair value estimates for acquired affordable housing tax credit investments, loans, and assets and liabilities of acquired SVBB subsidiaries. Until management finalizes its fair value estimates for the acquired assets and assumed liabilities, the preliminary gain on acquisition can be updated for a period not to exceed one year following the SVBB Acquisition Date (the “Measurement Period”).
• The purchase price consideration included a Purchase Money Note (as defined and described below) from the FDIC with an estimated fair value of $35.81 billion.

The SVBB Acquisition is further discussed in Note 2—Business Combinations.

Segment Updates

As of December 31, 2022, BancShares managed its business and reported its financial results in General Banking, Commercial Banking, Rail, and Corporate segments. In conjunction with the SVBB Acquisition, BancShares added a new business segment, Silicon Valley Banking (“SVB”). Prior periods were not impacted by this update. Information about our segments is included in Note 21—Business Segment Information and in the section entitled “Results by Business Segment” in this MD&A.

Recent Economic and Industry Developments

During 2023, the Federal Reserve’s Federal Open Market Committee (“FOMC”) continued to raise its target for the federal funds rate in an effort to combat inflation. The FOMC raised interest rates at its January, March, May and July meetings by 25 basis points each, but did not raise the interest rate during its June and September meetings. The FOMC benchmark federal funds rate was maintained at a range between 5.25% - 5.50%.

The FOMC stands ready in its efforts to control inflation and said it will monitor economic and financial-market developments and the effects of their earlier rate increases in determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time. Although the FOMC has made some progress combating inflation, efforts to control inflation have raised concerns over the possibility of a recession within the next twelve months. In addition, geopolitical events, including the ongoing conflicts in Ukraine, Israel and the Gaza Strip, are likely to maintain upward pressure on inflation and weigh on economic activity. Also, mortgage rates continued to rise in 2023 and mortgage demand from homebuyers softened. The timing and impact of inflation, volatility in the stock market, rising interest rates, and possible recession will depend on future developments, which are highly uncertain and difficult to predict.

Earlier this year, the banking industry experienced increased volatility due to the failure of multiple high-profile banking institutions. These failures have increased industry concerns related to capital and liquidity, deposit outflows, uninsured deposit concentrations, and unrealized losses on securities. Due to the noted uncertainties and related bank failures, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (the “OCC”) (collectively, the “Federal Banking Agencies”) have issued several notices of proposed rulemaking (“NPR”), that if and/or when finalized, may impact BancShares and FCB.

FDIC Special Assessment

On May 22, 2023 the FDIC issued an NPR. The NPR included an annual special assessment rate of approximately 12.5 basis points (“bps”) to an assessment base that would equal an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, with the first $5 billion in estimated uninsured deposits excluded from the assessment base. The assessment would be accrued at the time of adoption, then paid in eight quarterly installments, potentially beginning in the first quarter of 2024. The exact timing and assessment calculation is still to be determined and will be published by the FDIC upon final adoption. We are in the process of evaluating this NPR and assessing its potential impact, but based on preliminary estimates, we anticipate a one-time FDIC assessment fee of approximately $30 million. Refer to the “Funding, Liquidity and Capital Overview” discussion below in the “Financial Performance Summary” section of this MD&A.

Enhanced Capital Requirements

On July 27, 2023, the Federal Banking Agencies released an NPR to implement the final components of the Basel III agreement, also known as the Basel III endgame. The proposal would also modify capital requirements for large banks with total assets of $100 billion or more, including BancShares.

The NPR would replace internal-models-based capital requirements for credit and operational risk currently included in Category I or II capital standards with new, risk-sensitive standardized requirements (the “expanded risk-based approach”) that would apply to all banking organizations with $100 billion or more in total assets (banking organizations subject to Category I, II, III, or IV capital standards). The proposal would maintain the capital rule’s dual-requirement structure and require large banking organizations to calculate risk-weighted asset amounts under the current standardized approach and the expanded risk-based approach and use the higher of the two risk-weighted asset amounts to satisfy minimum capital requirements. The NPR also requires all banking organizations with $100 billion or more in total assets to calculate regulatory capital in a consistent manner, including by reflecting unrealized gains and losses on available-for-sale securities in regulatory capital to better reflect actual loss-absorbing capacity. Additionally, the proposal would require all banking organizations with $100 billion or more in total assets to meet the supplementary leverage ratio requirement and apply the countercyclical capital buffer, if activated.

The NPR included a July 1, 2025 effective date, with certain aspects subject to a three-year phase-in period. However, on October 20, 2023, the Federal Banking Agencies extended the comment period for this NPR from November 30, 2023 to January 16, 2024. We are in the process of evaluating this NPR and assessing its potential impact.

Long-term Debt Requirement

On August 29, 2023, the Federal Banking Agencies released an NPR that requires large banks with total assets of $100 billion or more to maintain a minimum amount of long-term debt that can be used, in the instance of a bank’s failure, to absorb losses and increase options to resolve the failed bank.

Large banks would be required to maintain a minimum amount of eligible long-term debt equal to the greater of 6 percent of risk weighted assets, 3.5 percent of average total consolidated assets, and for banks subject to the supplementary leverage ratio, 2.5 percent of total leverage exposure under the supplementary leverage ratio. Additionally, the proposal would prohibit large banks from engaging in certain activities that could complicate their resolution and discourage banks from holding long-term debt issued by other banks to reduce interconnectedness.

The proposal includes transition provisions to give banks sufficient time to adapt to the changes while minimizing any potential adverse impact. Covered institutions would have to comply with the new requirements through a phased-in approach over a three-year period, during which they would need to meet 25% of their long-term requirements by one year after effectiveness of the rule, 50% after two years, and 100% after three years. It would also allow banks to count, as part of the required amounts, certain existing long-term debt. We are in the process of evaluating this NPR and assessing its potential impact, but we expect we will need to raise additional long-term debt to satisfy these requirements.

Financial Performance Summary

The following tables in this MD&A compare financial data for the three months ended September 30, 2023 (the “current quarter”) to financial data for the three months ended June 30, 2023 (the “linked quarter”) and September 30, 2022 (the “prior year quarter”), and for the nine months ended September 30, 2023 (“current YTD”) to the nine months ended September 30, 2022 (“prior YTD”). In accordance with Item 303(c) of Regulation S-K, we focus on the linked quarter and prior YTD for the narrative discussion and analysis of our results of operations as we believe this provides investors and other users of our data with the most relevant information. We focus our discussion on our financial position by primarily comparing balances as of September 30, 2023 to December 31, 2022, while the tables also provide balances as of June 30, 2023.

Our results of operations include SVB beginning on the SVBB Acquisition Date, and therefore, comparisons to the prior year quarter and prior YTD will highlight the impact of including SVB. Financial position balances as of September 30, 2023 and June 30, 2023 include the assets acquired and liabilities assumed in the SVBB Acquisition.

The following table summarizes BancShares’ results in accordance with GAAP, unless otherwise noted. Refer to the section entitled “Non-GAAP Financial Measurements” at the end of this MD&A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Table 1

Selected Quarterly Data

dollars in millions, except share data

(1) The rate presented is calculated net of credit balances of factoring clients.

(2) Average loan balances include held for sale and non-accrual loans.

Third Quarter Income Statement Highlights

• Net income for the current quarter was $752 million, an increase of $70 million or 10% from $682 million for the linked quarter. Net income available to common stockholders for the current quarter was $737 million, an increase of $70 million or 11% from $667 million for the linked quarter. The increases were primarily related to lower noninterest expenses, which offset higher provision for credit losses. Net interest income improved and included purchase accounting accretion for loans of $275 million compared to $243 million in the linked quarter. Net income per diluted common share for the current quarter was $50.67, an increase from $45.87 for the linked quarter.
• The current quarter included the following select items:
• an increase of $12 million (net of tax) in the preliminary gain on acquisition for Measurement Period adjustments,
• a pre-tax loss of $12 million, primarily on the sale of municipal bonds acquired in the SVBB Acquisition, and
• acquisition-related expenses of $121 million.
• The linked quarter included the following select items:
• an increase of $55 million (net of tax) in the preliminary gain on acquisition for Measurement Period adjustments, and
• acquisition-related expenses of $205 million.
• Return on average assets for the current quarter was 1.41% compared to 1.31% for the linked quarter.
• *Net interest income (“*NII”) for the current quarter was $1.99 billion, an increase of $29 million or 2% from $1.96 billion for the linked quarter. This increase included higher interest income on loans, including a $32 million increase in purchase accounting accretion, higher yield and loan growth in General Banking and Commercial Banking, and an increase in interest on investment securities, which were partially offset by higher costs for deposits.
• *Net interest margin (“*NIM”) for the current quarter was 4.07%, a decrease of 3 bp from 4.10% for the linked quarter.
• Provision for credit losses for the current quarter was $192 million, an increase of $41 million or 27% from $151 million for the linked quarter. The increase reflected deterioration in macroeconomic factors and higher net charge-offs in the current quarter, as further discussed in the “Allowance for Loan and Lease Losses (“ALLL”) section of this MD&A.
• Noninterest income for the current quarter was $615 million, a decrease of $43 million or 7% from $658 million for the linked quarter. The decrease reflects the lower adjustment to the preliminary gain on acquisition of $12 million compared to $55 million in the linked quarter. The $12 million realized loss from the sale of the municipal bond portfolio acquired in the SVBB Acquisition was offset by increases of $10 million in rental income on operating lease equipment and $2 million in fee income and other service charges.
• Noninterest expense for the current quarter was $1.42 billion, a decrease of $156 million or 10% from $1.57 billion for the linked quarter. The decrease was largely related to lower acquisition-related costs, salaries and benefits, and equipment costs, partially offset by higher FDIC insurance expense.

Year to Date Income Statement Highlights

• Net income for the current YTD was $10.95 billion, an increase of $10.11 billion from $841 million for the prior YTD. Net income available to common stockholders for the current YTD was $10.91 billion, an increase of $10.10 billion from $805 million for the prior YTD. The increases were primarily related to the preliminary gain on the SVBB Acquisition, which was $9.46 billion higher than the gain on our merger with CIT Group Inc. (“CIT Merger”), and higher NII. The increases were partially offset by the provision for non-purchased credit deteriorated (“Non-PCD”) loans and leases and off-balance sheet credit exposures acquired in the SVBB Acquisition (collectively, the “day 2 provision for credit losses”), which were $203 million higher in the SVBB Acquisition compared to the CIT Merger, and higher noninterest expenses and income tax expense. Net income per diluted common share for the current YTD was $750.19, an increase from $50.70 for the prior YTD.
• The current YTD included the following select items:
• a preliminary after tax gain on acquisition of $9.89 billion for the SVBB Acquisition,
• a pre-tax loss of $12 million, primarily on the sale of municipal bonds acquired in the SVBB Acquisition,
• day 2 provision for credit losses of $716 million for the SVBB Acquisition, and
• acquisition-related expenses of $354 million.
• The prior YTD included the following select items:
• a gain on acquisition of $431 million for the CIT Merger,
• day 2 provision for credit losses of $513 million for the CIT Merger,
• acquisition-related expenses of $202 million, and
• a reduction in other noninterest expense of $27 million for the termination of certain legacy CIT retiree benefits, reflecting amounts previously accrued.
• Return on average assets for the current YTD was 7.81% compared to 1.04% for the prior YTD. The increase was related to the increases in net income described above, partially offset by the increases in average assets, primarily from the SVBB Acquisition.
• NII for the current YTD was $4.80 billion, an increase of $2.66 billion or 124% from $2.14 billion for the prior YTD. This increase was primarily related to the loans and interest-earning deposits at banks acquired in the SVBB Acquisition, higher purchase accounting accretion, higher interest income from organic loan growth, and higher yields from multiple interest rate increases since September 30, 2022. The increases in interest income were partially offset by interest expense for the Purchase Money Note, higher rates on deposits and debt, inclusion of SVB deposits, and deposit growth in the Direct Bank.
• NIM for the current YTD was 3.94%, an increase of 86 bps compared to 3.08% for the prior YTD. The increase in NIM was related to the increases in NII discussed above.
• Provision for credit losses for the current YTD was $1.13 billion, an increase of $560 million or 99% from $566 million for the prior YTD. The increase was primarily related to the day 2 provision for credit losses, which were $203 million higher in the SVBB Acquisition compared to the CIT Merger, higher loan and lease balances, and increases to the provision for loans and leases as a result of higher current YTD net charge-offs, as further discussed in the ALLL section of this MD&A.
• Noninterest income for the current YTD was $11.53 billion, an increase of $9.83 billion from $1.71 billion for the prior YTD. The increase was primarily related to the higher preliminary gain on acquisition as previously discussed. Increases in client investment fees, international fees, and fee income and other service charges were primarily a result of the SVBB Acquisition. Service charges on deposit accounts also increased, mainly from continued deposit growth.
• Noninterest expense for the current YTD was $3.84 billion, an increase of $1.53 billion or 66% from $2.32 billion for the prior YTD. The increase was primarily related to higher salary and benefit costs, acquisition-related costs and equipment costs resulting from the SVBB Acquisition.

Refer to the “Results of Operations” section of this MD&A for further discussion.

Balance Sheet Highlights

• Total loans and leases at September 30, 2023 were $133.20 billion, an increase of $62.42 billion or 88% from $70.78 billion at December 31, 2022 and an increase of $187 million from $133.02 billion at June 30, 2023. The increase from December 31, 2022 was primarily related to SVB loans of $56.86 billion as of September 30, 2023 and organic loan growth in the General and Commercial Banking segments. SVB loans declined by $1.94 billion from June 30, 2023, mostly concentrated in the Global Fund Banking portfolio, offset by growth of $1.10 billion in the General Banking segment in business and commercial loans and broad-based growth of $1.05 billion in the Commercial Bank in various industry verticals.
• Total investment securities at September 30, 2023 were $26.82 billion, an increase of $7.45 billion or 39% from $19.37 billion at December 31, 2022 and an increase of $4.65 billion from $22.17 billion at June 30, 2023. The increases were primarily due to purchases of short-duration U.S. Treasuries and U.S. agency mortgage-backed investment securities available for sale.
• Total deposits at September 30, 2023 were $146.23 billion, an increase of $56.83 billion or 64% from $89.41 billion at December 31, 2022 and $5.07 billion or 4% from $141.16 billion at June 30, 2023. The increase from December 31, 2022 included $39.97 billion of SVB deposits as of September 30, 2023 and solid deposit growth in our Direct Bank. The $5.07 billion increase from June 30, 2023 was mostly due to an increase of $5.70 billion in the General Banking segment, which includes the Direct Bank. Deposits in the Silicon Valley Banking segment totaled $39.97 billion at September 30, 2023 compared to $40.86 billion at June 30, 2023. See discussion below regarding deposits.
• Total borrowings at September 30, 2023 were $37.71 billion, an increase of $31.07 billion from $6.65 billion at December 31, 2022 and a decrease of $2.43 billion or 6.0% from $40.14 billion at June 30, 2023. The increase from December 31, 2022 was primarily due to the Purchase Money Note of $35.83 billion as of September 30, 2023 payable to the FDIC related to the SVBB Acquisition as further discussed in Note 2—Business Combinations. The decrease from June 30, 2023 reflected repayments of FHLB borrowings.
• At September 30, 2023, BancShares remained well capitalized with a total risk-based capital ratio of 15.64%, a Tier 1 risk-based capital ratio of 13.83%, a common equity Tier 1 ratio of 13.24% and a Tier 1 leverage ratio of 9.73%.

Funding, Liquidity and Capital Overview

Deposit Composition

We fund our business primarily through deposits. Deposits represent approximately 80% of total funding at September 30, 2023. The following table summarizes the composition, average size and uninsured percentages of our deposits.

Table 2

Select Deposit Data

The General Banking segment includes deposits from our branch network, which deploys a relationship-based approach to deposit gathering. The remaining deposits in the General Banking segment are primarily related to the Direct Bank, which enables us to increase deposits to meet the needs of our business, albeit at a higher incremental cost compared to the branch network. The Commercial Banking segment includes deposits of commercial customers, and the SVB segment includes deposits related to the SVBB Acquisition. Other business segments primarily include brokered deposits of $1.86 billion in the Corporate segment, and the remaining $12 million relates to the Rail segment.

As displayed in the table above, the average size of deposits varies across our business segments. The uninsured data represents the percentage of deposits in the respective business segments. At September 30, 2023, total uninsured deposits were approximately $55.77 billion or 38% of total deposits. The increase in uninsured deposits from $29.13 billion or 33% of total deposits at December 31, 2022 was due to deposits in the SVB segment, which have higher average customer balances.

Deposit Trends

Table 3

Deposit Trends

(dollars in millions)

SVB deposits declined from $56.01 billion at the SVBB Acquisition Date to $49.26 billion at March 31, 2023, primarily due to uncertainty in the banking industry. SVB deposits further declined to $39.97 billion at September 30, 2023. As shown in the table above, SVB deposits began to stabilize early during the second quarter. The table above also indicates that aggregate deposits for the General Banking, Commercial Banking, Rail and Corporate segments increased during 2023, primarily from deposit growth in the Direct Bank, which is included in the General Banking segment.

Liquidity Position

We strive to maintain a strong liquidity position, and our risk appetite for liquidity is low. At September 30, 2023, liquidity metrics remained strong as we had $57.02 billion in liquid assets consisting of $35.90 billion in cash and interest-earning deposits at banks (primarily held at the Federal Reserve Bank) and $21.12 billion in high-quality liquid securities. We have unused borrowing capacity with the FHLB and Federal Reserve Bank of $13.53 billion and $4.99 billion, respectively. Further, in conjunction with the SVBB Acquisition, we entered into binding terms and conditions for a five year, up to $70.00 billion line of credit with the FDIC. Refer to the “Liquidity Risk” section of this MD&A for further discussion.

Investment Securities Duration

At September 30, 2023, our investment securities portfolio primarily consisted of debt securities available for sale and debt securities held to maturity as summarized below. The duration of our investment securities is approximately 3.1 years. The investment securities available for sale portfolio has an average duration of 2.3 years and the held to maturity portfolio has an average duration of 4.8 years. Refer to the “Interest-earning Assets - Investment securities” section of this MD&A and Note 3—Investment Securities for further information.

Table 4

Investment Securities

dollars in millions

Capital Position

Our capital position remains strong, and all regulatory capital ratios for BancShares and FCB significantly exceed the Prompt Corrective Action (“PCA”) well-capitalized thresholds and Basel III Requirements as further discussed in the “Capital” section of this MD&A and Note 17—Regulatory Capital.

RESULTS OF OPERATIONS

NET INTEREST INCOME AND NET INTEREST MARGIN

NII is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. NII is affected by changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The following tables present the average balances, yields on interest-earning assets, rates on interest-bearing liabilities, and changes in NII due to changes in: (i) volume (average balances of interest-earning assets and interest-bearing liabilities) and (ii) yields or rates.

• The change in NII due to volume is calculated as the change in average balance multiplied by the yield or rate from the prior period.
• The change in NII due to yield or rate is calculated as the change in yield or rate multiplied by the average balance from the prior period.
• The change in NII due to rate/volume change (i.e., portfolio mix) is calculated as the change in rate multiplied by the change in volume. This component is allocated between the changes in NII due to volume and yield or rate based on the ratio each component bears to the absolute value of their total.
• Tax equivalent net interest income was not materially different from NII, therefore we present NII in our analysis.

Table 5

Average Balances and Rates

dollars in millions

(1) Loans and leases include non-PCD and PCD loans, nonaccrual loans and held for sale. Interest income on loans and leases includes accretion income and loan fees.

(2) The balance and rate presented is calculated net of credit balances of factoring clients.

Current quarter compared to linked quarter

• NII for the current quarter was $1.99 billion, an increase of $29 million or 2% from $1.96 billion for the linked quarter. This increase included higher average investment securities, higher yields on loans and investment securities, and higher purchase accounting accretion for loans, all of which resulted in higher interest income on our interest-earning assets. The increase in interest income was partially offset by higher costs for deposits.
• Interest income earned on loans and leases for the current quarter was $2.43 billion, an increase of $73 million or 3% from $2.35 billion for the linked quarter. The increase was primarily due a $32 million increase in purchase accounting accretion for loans, reflecting acceleration due to loan repayments in the SVB portfolio and higher yields on loans. The decline in average loans reflected the noted repayments in the SVB portfolio, partially offset by loan growth in the General Bank and Commercial Bank portfolios. At September 30, 2023, period end loans and leases were up slightly compared to June 30, 2023.
• Interest income earned on investment securities for the current quarter was $177 million, an increase of $60 million or 52% from $117 million for the linked quarter. The increase was a result of a higher average balance due to purchases of short duration U.S. Treasuries and agency mortgage-backed securities and a higher yield.
• Interest income earned on securities purchased under agreements to resell was $3 million, essentially unchanged from the linked quarter.
• Interest income earned on interest-earning deposits at banks for the current quarter was $504 million, an increase of $24 million or 5% from $480 million for the linked quarter, reflecting higher yields, which offset a lower average balance.
• Interest expense on interest-bearing deposits for the current quarter was $769 million, an increase of $194 million or 34% from $575 million for the linked quarter, primarily reflecting higher deposit rates as we remain competitively priced, and higher average balances of deposits in our Direct Bank.
• Interest expense on borrowings for the current quarter was $351 million, a decrease of $66 million or 16% from $417 million for the linked quarter, primarily due to lower average FHLB borrowings as these were repaid during the quarter. Refer to the “Interest-Bearing Liabilities – Borrowings” section in this MD&A for further discussion of FHLB borrowings.
• NIM for the current quarter was 4.07%, a decrease of 3 bp from 4.10% for the linked quarter. The modest decline in NIM during the quarter was due to higher deposit balances as well as a higher rate paid and lower average loans, partially offset by higher yields on investments and loans and the repayment of FHLB borrowings.
• Average interest-earning assets for the current quarter were $193.99 billion, an increase of $2.58 billion or 1% from $191.42 billion for the linked quarter, reflecting higher average investment securities.
• Average interest-bearing liabilities for the current quarter were $139.11 billion, an increase of $5.81 billion or 4% from $133.30 billion for the linked quarter, reflecting higher average balances for deposits. The average rate on interest-bearing liabilities for the current quarter was 3.19%, an increase of 20 bps from 2.99% for the linked quarter, reflecting the higher interest rate environment.

Table 6

Average Balances and Rates

dollars in millions

(1), (2) See footnotes to Table 5 – Average Balances and Rates.

dollars in millions

(1), (2) See footnotes to Table 5 – Average Balances and Rates.

Year to Date 2023 compared to 2022

• NII for the current YTD was $4.80 billion, an increase of $2.66 billion or 124% from $2.14 billion for the prior YTD. As discussed below, this increase was primarily due to the SVBB Acquisition as well as the higher rate environment.
• Interest income earned on loans and leases for the current YTD was $5.80 billion, an increase of $3.74 billion or 181% from $2.06 billion for the prior YTD. The increase was balanced between the impact of the average loan balance increase and the rising interest rate environment. The average loan balance increase reflected the SVBB Acquisition and loan growth in the General and Commercial Banking segments. The higher yield was due to multiple interest rate increases since last year. In addition, purchase accounting accretion was higher in the current YTD.
• Interest income earned on investment securities for the current YTD was $401 million, an increase of $139 million or 53% from $262 million for the prior YTD. The increase was primarily due to higher reinvestment rates.
• Interest income earned on securities purchased under agreements to resell was $6 million.
• Interest income earned on interest-earning deposits at banks for the current YTD was $1.07 billion, an increase of $1.02 billion from $50 million for the prior YTD. Even though the average balance was up substantially, the increase primarily reflected a higher Fed Funds rate. The higher average balance reflected the impact of the SVBB Acquisition.
• Interest expense on interest-bearing deposits for the current YTD was $1.63 billion, an increase of $1.47 billion from $159 million for the prior YTD, reflecting higher deposit rates across all our product lines as we maintained competitive rates offered to customers, and higher average balances from the SVBB Acquisition and organic growth, mainly in higher-cost savings and time deposits.
• Interest expense on borrowings for the current YTD was $841 million, an increase of $771 million from $70 million for the prior YTD, primarily due to the impact of the Purchase Money Note related to the SVBB Acquisition and higher average FHLB borrowings. In March we increased FHLB borrowings to improve liquidity in light of market conditions that led to bank failures. We repaid all outstanding advances in the second and third quarters as we continuously rebalanced our funding profile to match our funding needs. Refer to the “Interest-Bearing Liabilities – Borrowings” section in this MD&A for further discussion of FHLB borrowings.
• NIM for the current YTD was 3.94%, an increase of 86 bps from 3.08% for the prior YTD. The benefit of the rising interest rate environment on our interest-earning assets exceeded the impacts of higher rates paid on interest-bearing deposits and borrowings.
• Average interest-earning assets for the current YTD were $162.34 billion, an increase of $69.43 billion or 75% from $92.92 billion for the prior YTD, primarily reflecting increases in average loans and leases and interest-earning deposits at banks of $47.78 billion and $19.55 billion, respectively.
• Average interest-bearing liabilities for the current YTD were $116.15 billion, an increase of $47.60 billion or 69% from $68.55 billion for the prior YTD, reflecting higher average balances for both deposits and borrowings. The average rate paid on interest-bearing liabilities for the current YTD was 2.85%, an increase of 240 bps from 0.45% for the prior YTD, reflecting the higher interest rate environment and the weighting of the Purchase Money Note.

The following table details the average interest earning assets by category:

Table 7

Average Interest-earning Asset Mix

The following table shows our average funding mix:

Table 8

Average Funding Mix

The above average mix tables include SVB average balances for the entire current and linked quarters and since the acquisition on March 27, 2023 for the current YTD.

PROVISION FOR CREDIT LOSSES

As presented in the following table, the provision for credit losses for the current quarter was $192 million, an increase of $41 million or 27% from $151 million for the linked quarter. The $41 million increase was primarily due to an increase in the ALLL driven by deterioration in macroeconomic factors, credit quality, and higher net charge-offs. Both the current quarter and linked quarter provision for credit losses include a benefit for losses for off-balance sheet credit exposure of $17 million.

The provision for credit losses for the current YTD was $1.13 billion, an increase of $560 million or 99% from $566 million for the prior YTD. The provision for credit losses includes the day 2 provision for credit losses of $716 million related to the SVBB Acquisition, which included $462 million for acquired loans and leases (the “day 2 provision for loans and leases”) and $254 million for acquired off-balance sheet credit exposures (the “day 2 provision for off-balance sheet credit exposure”). The day 2 provision for credit losses were higher for the SVBB Acquisition in the current YTD than for the CIT Merger in the prior YTD. The remaining increases are due to the reasons discussed above.

The ALLL is further discussed in the “Critical Accounting Estimates” and “Credit Risk Management – Credit Risk – Allowance for Loan and Lease Losses” sections of this MD&A and in Note 5—Allowance for Loan and Lease Losses.

Table 9

Provision for Credit Losses

dollars in millions

NONINTEREST INCOME

Noninterest Income

Noninterest income is an essential component of our total revenue. The primary sources of noninterest income consist of rental income on operating lease equipment, fee income and other service charges, client investment fees, wealth management services, service charges generated from deposit accounts, cardholder and merchant services, international fees, factoring commissions, and mortgage lending and servicing.

The 2023 periods include noninterest income related to the SVBB Acquisition, which was completed on March 27, 2023. We added client investment and international fees as new categories of noninterest income as a result of the SVBB Acquisition. Client investment fees are earned from discretionary investment management services for managing clients’ portfolios based on their investment policies, strategies and objectives. International fees primarily include foreign exchange fees that represent the income differential between purchases and sales of foreign currency on behalf of our clients, primarily from spot contracts. The remaining noninterest income from SVB was aligned into pre-existing categories and primarily included items such as fee income and other service charges, wealth management services, service charges on deposit accounts, and other noninterest income.

Table 10

Noninterest Income

dollars in millions

Rental Income on Operating Lease Equipment

Rental income from equipment we lease was $248 million for the current quarter, an increase of $10 million or 4% from $238 million for the linked quarter. Rental income from equipment we lease was $719 million for the current YTD, an increase of $79 million or 12% from $640 million for the prior YTD. Both current year periods benefited from growth in assets as well as higher re-pricing and strong utilization rates. Rental income is generated primarily in the Rail segment and, to a lesser extent, in the Commercial Banking segment. Revenue is generally dictated by the size of the portfolio, utilization of the railcars, re-pricing of equipment renewed upon lease maturities and pricing on new leases. Re-pricing refers to the rental rate in the renewed equipment contract compared to the prior contract. Refer to the Rail discussion in the “Results by Business Segment” section of this MD&A for further details.

Other Noninterest Income

Other noninterest income for the current quarter was $367 million, a decrease of $53 million or 13% from $420 million for the linked quarter. The decrease mostly reflects a lower preliminary gain on acquisition. The remaining changes in other noninterest income compared to the linked quarter reflect increases and decreases among various noninterest income accounts, with the main items described as follows:

• The realized loss on sale of investment securities available for sale was primarily associated with our strategic decision to sell the municipal bonds acquired in the SVBB Acquisition.
• The current and linked quarters include additional preliminary gains on acquisition of $12 million and $55 million, respectively, due to Measurement Period adjustments as discussed in the “Executive Overview – Significant Events in 2023” section of this MD&A.
• Other noninterest income consisted of items such as derivative gains and losses, gains or losses on sales of other assets including OREO, fixed assets and loans. The decrease in other noninterest income reflected lower derivative income.

Other noninterest income for the current YTD was $10.81 billion, an increase of $9.74 billion from $1.07 billion for the prior YTD. The increase was primarily due to the preliminary gain on the SVBB Acquisition. The remaining changes compared to the prior YTD reflect increases and decreases among various noninterest income accounts and generally trend as described above, with the following additional comments:

• Fee income and other service charges, consisting of items such as capital market-related fees, fees for lines and letters of credit, and servicing fees, increased by $73 million, primarily reflecting higher fees for lines and letters of credit due to the additional SVBB Acquisition activity and higher capital markets fees.
• Client investment fees, a revenue stream added with the SVBB Acquisition, consist of fees that are earned for managing off-balance sheet client funds. Refer to the description above and in Note 1—Significant Accounting Policies and Basis of Presentation.
• Wealth management services increased by $33 million due to additional client and services acquired in the SVBB Acquisition activity and higher assets under management.
• International fees, a revenue stream added with the SVBB Acquisition, relate to commissions on customer foreign currency transactions. Refer to the description above and in Note 1—Significant Accounting Policies and Basis of Presentation.
• Service charges on deposit accounts increased by $36 million, primarily reflecting additional income from the SVBB Acquisition.
• Factoring commissions decreased $18 million, reflecting lower factoring volumes and surcharges.
• Cardholder services increased by $27 million, primarily reflecting additional income from the SVBB Acquisition.
• Fair value adjustments on marketable equity securities reflect changes in market prices of underlying portfolio investments.
• The realized loss on sale of investment securities available for sale was due to the noted sale in the current quarter of municipal bonds along with the sale of a single corporate bond of a distressed entity in the first half of the year.
• BOLI income was down, reflecting our decision in 2022 to terminate a significant portion of the contracts.
• Other noninterest income consisted of items such as derivative gains and losses, gain on sales of other assets including OREO, fixed assets and loans, and non-marketable securities. Other noninterest income increased by $10 million, primarily due to higher derivative income.

NONINTEREST EXPENSE

The 2023 periods include noninterest expenses related to the SVBB Acquisition, which was completed on March 27, 2023. Noninterest expenses from SVB were aligned into pre-existing operating expense categories with salaries and benefits and acquisition-related expenses impacted the most.

Table 11

Noninterest Expense

dollars in millions

Depreciation on Operating Lease Equipment

Depreciation expense on operating lease equipment is primarily related to rail equipment and small and large ticket equipment we own and lease to others. Operating lease activity is in the Rail and Commercial Banking segments. The useful lives of rail equipment is generally longer in duration, 40-50 years, whereas small and large ticket equipment is generally 3-10 years. Refer to the Rail discussion in the section entitled “Results by Business Segment” of this MD&A for further details.

Maintenance and Other Operating Lease Expenses

Rail provides railcars primarily pursuant to full-service lease contracts under which Rail, as lessor, is responsible for railcar maintenance and repair. Maintenance and other operating lease expenses for the current quarter were $51 million, down from $56 million in the linked quarter. Maintenance and other operating lease expenses for the current YTD were $163 million, an increase of $21 million or 15% from $142 million for the prior YTD. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable due to timing and number of railcars coming on or off lease and the asset condition. Refer to the Rail discussion in the section entitled “Results by Business Segment” of this MD&A for further details.

Operating Expenses

The primary components of operating expenses are salaries and benefits and occupancy and equipment expenses. Operating expenses for the current quarter were $1.27 billion, a decrease of $155 million or 11% from $1.43 billion in the linked quarter.

The main components of the decrease in operating expenses for the current quarter compared to the linked quarter are summarized below:

• Salaries and benefits decreased by $48 million, reflecting lower headcount and lower benefit costs as certain payroll taxes reach the maximum limits.
• Equipment expense decreased $16 million as we continue to progress our cost savings initiatives associated with the SVBB Acquisition.
• Professional fees decreased $9 million, mostly reflecting lower costs associated with the SVBB Acquisition.
• FDIC insurance increased $14 million due to a higher assessment rate charged to financial institutions and higher deposit balances.
• Marketing costs decreased by $16 million, primarily reflecting the timing of our advertising related to marketing efforts for the Direct Bank to support deposit growth in the linked quarter.
• Acquisition-related expenses decreased $84 million, primarily due to lower severance and personnel costs related to the SVBB Acquisition.
• Other expenses consisted of other insurance and taxes (other than income tax), foreclosure, collection and other OREO-related expenses, consulting, telecommunications, and other miscellaneous expenses including travel, postage, supplies, and appraisal expense. Changes in these individual items were not material.

Operating expenses for the current YTD were $3.41 billion, an increase of $1.49 billion or 78% compared to $1.92 billion in the prior YTD. Operating expenses for the current YTD compared to the prior YTD increased primarily due to the SVBB Acquisition. In addition, refer to the “Executive Overview – Recent Economic and Industry Developments” section of this MD&A for a discussion regarding a potential special assessment proposed by the FDIC.

INCOME TAXES

Table 12

Income Tax Data

dollars in millions

The effective tax rate (“ETR”) was 24.6% for the current quarter, an increase from 23.9% for the linked quarter. The increase in the ETR was primarily related to the effects of the non-taxable nature of the preliminary gain on acquisition for the SVBB Acquisition in the linked quarter. The ETR was 3.6% for the current YTD compared to 13.3% in the prior YTD. The decrease in the ETR for the current YTD was primarily driven by the effects of the non-taxable nature of the preliminary gain on acquisition for the SVBB Acquisition.

The ETR each quarter is impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to valuation allowances, and discrete items. The ETR in future periods may vary from the actual 2023 ETR due to changes in these factors.

BancShares monitors and evaluates the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors. Refer to Note 19—Income Taxes for additional information.

RESULTS BY BUSINESS SEGMENT

Refer to Note 21—Business Segment Information for related disclosures on the segments and details on segment products and services. During the first quarter of 2023, we updated our segment disclosures to include SVB.

Results in our business segments reflect our funds transfer policy and allocation of expenses. Unallocated balances and, when applicable, certain select items are reflected in Corporate.

General Banking

The General Banking segment delivers products and services to consumers and businesses through our extensive network of branches and various digital channels, including the Direct Bank. We offer a full suite of deposit products, loans, cash management, wealth, and payments and various other fee-based services.

Table 13

General Banking: Financial Data and Metrics

dollars in millions

The increase in net income for the current quarter compared to the linked quarter was due to higher NII and lower provision for credit losses, partially offset by higher noninterest expense. NII increased, reflecting growth in the loan portfolio, which offset higher deposit costs. The provision for credit losses reflects a smaller ALLL build, partially offset by loan growth and deterioration in macroeconomic factors. Noninterest expense for the current quarter increased compared to the linked quarter and is discussed in the section entitled “Noninterest Expense” of this MD&A. Segment net income for the current YTD increased from the prior YTD, reflecting higher NII due to higher yields resulting from the increased rate environment and portfolio growth that outpaced rising deposit costs.

The increase in loans and leases during 2023 reflected continued demand through our branch network. Growth in the current quarter was primarily concentrated in commercial and business loans. Our consumer mortgage loans also increased, reflecting lower prepayments and originating loans that were held on-balance sheet, which offset lower origination activity due to the high rate environment.

Deposits include deposits from the branch network, Direct Bank and community association bank (“CAB”) channels. The increase in deposits during 2023 was primarily in our Direct Bank in products such as time and savings accounts, which partially offset decreases in checking and money market accounts. Refer to consolidated discussions in the sections entitled “Net Interest Income and Net Interest Margin” and “Balance Sheet Analysis—Deposits” of this MD&A for additional information.

Commercial Banking

The Commercial Banking segment provides a range of lending, leasing, capital markets, asset management, and other financial and advisory services, primarily to small and middle market companies in a wide range of industries.

Table 14

Commercial Banking: Financial Data and Metrics

dollars in millions

The increase in net income for the current quarter compared to the linked quarter was due to lower provision for credit losses, partially offset by lower NII. The provision for credit losses decrease was mainly due to a smaller ALLL build, partially offset by higher net charge-offs, loan growth and deterioration in macroeconomic factors. The reserve build remained focused in real estate finance and concentrated in the general office portfolio. NII decreased, primarily due to higher deposit costs that offset portfolio growth. Noninterest income and noninterest expense for the current quarter were essentially unchanged from the linked quarter and are discussed in the sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A. Noninterest expenses for this segment also include depreciation on operating lease equipment, which totaled $46 million for the current quarter and $44 million for the linked quarter. Current YTD depreciation totaled $133 million, an increase of $8 million from $125 million in the prior YTD. Segment net income for the current YTD decreased from the prior YTD, primarily reflecting the higher provision for credit losses due to loan growth and a reserve build as a result of higher charge-offs and unfavorable trends in certain macroeconomic variables, including the CRE Price Index. The reserve build was focused in real estate finance, concentrated in the general office portfolio, and commercial finance. The increase in provision for credit losses was partially offset by an increase in NII, reflecting portfolio growth, higher yields that offset higher interest costs, and higher noninterest income due to higher rental income on operating lease equipment, capital markets income and interest rate derivative income.

The increase in loans and leases during the current quarter reflected growth in a number of industry verticals, such as energy and healthcare along with the technology, media and telecommunication verticals, and a seasonal increase in factoring.

Silicon Valley Banking

The SVB segment products and services are provided to clients primarily in the healthcare and technology industries as well as private equity and venture capital firms. Financial solutions are provided to commercial clients through credit, treasury management, foreign exchange, trade finance, and other financial products and services.

Table 15

Silicon Valley Banking: Financial Data and Metrics

dollars in millions

84

Results of operations include activity of the SVBB Acquisition since March 27, 2023. The results exclude the preliminary gain on acquisition, day 2 provision for credit losses, purchase discount accretion, and acquisition-related expenses, all of which are included in the Corporate segment.

NII for the current quarter was unchanged from the linked quarter. The increase in the provision for credit losses for the current quarter was mostly due to the impact of charge-offs and deterioration in macroeconomic factors, partially offset by the decline in the acquired loan portfolio and lower unfunded commitments. Noninterest income includes various commercial banking products, primarily client investment fees and international fees. Noninterest expenses were mostly salary and benefits related costs.

Loans totaled $56.86 billion at September 30, 2023, $58.80 billion at June 30, 2023, and $68.47 billion at the SVBB Acquisition Date. The acquired balance reflected customers who had drawn on their lines of credit during the uncertainty in the banking industry in March. Most of the subsequent declines have been in Global Fund Banking loans. The declines include the run-off of certain foreign operations, lower new fundings due to impacts of the slowdown in the private equity and venture capital environment, and the impacts of prepayments.

Deposits declined from $56.01 billion at the SVBB Acquisition Date to $49.26 billion at March 31, 2023, primarily due to uncertainty in the banking industry. SVB deposits further declined to $39.97 billion at September 30, 2023, but began to stabilize early in the second quarter. For additional information on deposit trends refer to the “Funding, Liquidity and Capital Overview” discussion in the “Financial Performance Summary” section of this MD&A.

Rail

Our Rail segment offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts; and center beams and flat cars for lumber. Revenues are primarily generated from rental income on operating leases.

Table 16

Rail: Financial Data and Metrics

dollars in millions

(1) Adjusted rental income on operating lease equipment is a non-GAAP measure. See the “Non-GAAP Financial Measures” section for a reconciliation from the GAAP measure (rental income on operating leases) to the non-GAAP measure (adjusted rental income on operating lease equipment).

Net income, rental income on operating leases, and adjusted rental income on operating lease equipment are utilized to measure the profitability of our Rail segment. Adjusted rental income on operating lease equipment reflects rental income on operating lease equipment reduced by depreciation, maintenance and other operating lease expenses. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this segment. NII is not used because it includes the impact of debt costs funding our operating lease assets but excludes the associated net rental income.

Net income, rental income on operating leases and adjusted rental income on operating leases for the current quarter were $28 million, $190 million, and $90 million, respectively, each increased from the linked quarter. Rental income on operating leases increased $10 million and adjusted rental income on operating leases for the current quarter increased $13 million compared to the linked quarter, largely as a result of higher rental income from the increased number of rail cars owned and leased, higher utilization and strong re-pricing. Railcar depreciation is recognized on a straight-line basis over the estimated useful life of the asset. Maintenance and other operating lease expenses reflect costs for railcars put back on lease. The increase in noninterest income reflects a net gain on sale of equipment. Segment net income for the current YTD decreased from the prior YTD, as the higher interest expense offset the higher adjusted rental income, which benefited from improved utilization, higher re-lease rates, and portfolio growth.

Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 138.0% of the average prior or expiring lease rate during the quarter. Our railcar utilization, including commitments to lease, was 98.7% at September 30, 2023.

Portfolio

Rail customers include all of the U.S. and Canadian Class I railroads (i.e., railroads with annual revenues of approximately $500 million and greater) and other railroads, as well as manufacturers and commodity shippers. Our total operating lease fleet at September 30, 2023 consisted of approximately 122,500 railcars and locomotives. The following tables reflect the proportion of railcars by type based on units and net investment, and rail operating lease equipment by obligor industry:

Table 17

Operating lease Railcar Portfolio by Type (units and net investment)

Table 18

Rail Operating Lease Equipment by Obligor Industry

dollars in millions

86

Corporate

Certain items that are not allocated to operating segments are included in the Corporate segment. For descriptions of items not allocated, see Note 21—Business Segment Information.

Table 19

Corporate: Financial Data and Metrics

dollars in millions

Net income for Corporate for the current quarter was up from the linked quarter due to lower noninterest expense and higher accretion on acquired loans. NII in the current and linked quarter benefited from accretion of $266 million and $233 million, respectively, for the loan purchase accounting adjustment related to the SVBB Acquisition. The benefit for credit losses reflects the reversal of the provision for credit losses for investment securities available for sale previously recorded in the first quarter of 2023. The adjustment to the preliminary gain on acquisition in noninterest income was $12 million in the current quarter and $55 million in the linked quarter. The current quarter also included a decrease in noninterest expense, reflecting acquisition-related expenses of $121 million compared to $205 million in the linked quarter.

Segment net income for the current YTD increased from the prior YTD, reflecting the more significant impacts from the SVBB Acquisition including an initial preliminary gain on acquisition of $9.89 billion and noted loan accretion, partially offset by the day 2 provision for credit losses of $716 million, compared to the impacts of the CIT Merger. The income tax rate for the each of the years was impacted of the preliminary gain on acquisition, resulting in the respective benefits. Refer to the “Income Taxes” section of this MD&A for further discussion.

BALANCE SHEET ANALYSIS

INTEREST-EARNING ASSETS

Interest-earning assets include interest-earning deposits at banks, securities purchased under agreement to resell, investment securities, assets held for sale, and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher-risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets while keeping non-earning assets at a minimum.

Interest-earning Deposits at Banks

Interest-earning deposits at banks at September 30, 2023 totaled $36.70 billion, an increase of $31.68 billion from $5.03 billion at December 31, 2022 and a decrease of $1.14 billion from $37.85 billion at June 30, 2023. The increase from December 31, 2022 primarily related to $34.00 billion acquired in the SVBB Acquisition, plus holding additional liquidity. Subsequent to the SVBB Acquisition Date, interest-earning deposits at banks decreased due to the decline in SVB deposits. The trend in deposits is further addressed in the “Funding, Liquidity and Capital Overview” section of this MD&A.

Securities Purchased Under Agreement to Resell

Securities Purchased Under Agreement to Resell at September 30, 2023 totaled $549 million, an increase of $251 million from $298 million at June 30, 2023.

Investment Securities

The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into interest-earning deposits at banks. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow interest-earning deposits at banks to decline and use proceeds from maturing securities and prepayments to fund loan growth. Refer to Note 3—Investment Securities and the “Funding, Liquidity and Capital Overview” section of this MD&A for additional disclosures regarding investment securities.

The carrying value of investment securities at September 30, 2023 totaled $26.82 billion, an increase of $7.45 billion or 39% from $19.37 billion at December 31, 2022, and $4.65 billion or 21% from $22.17 billion at June 30, 2023. The increases from December 31, 2022 and June 30, 2023 primarily reflected investment security purchases. During the nine months ended September 30, 2023, securities purchases totaled $8.63 billion, including $5.32 billion during the quarter ended September 30, 2023, most of which were U.S. Treasuries with an average duration of less than one year, and acquired investment securities of $385 million in the SVBB Acquisition. The increase was partially offset by maturities, paydowns and cash sales of $1.45 billion, including $659 million during the quarter ended September 30, 2023. Other items that impact the change are non-cash in nature, such as fair value changes, amortization and non-settled transactions. The acquired investments in the SVBB Acquisition were municipal bonds, which were sold during the current quarter, and mortgage-backed securities.

BancShares’ portfolio of investment securities available for sale consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, corporate bonds, and municipal bonds. Investment securities available for sale are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. As of September 30, 2023, investment securities available for sale had a net pre-tax unrealized loss of $1.18 billion, compared to a net pre-tax unrealized loss of $972 million as of December 31, 2022. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the investment securities portfolio generally decreases when interest rates increase or when credit spreads widen. Given the consistently strong credit rating of the U.S. Treasury, and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, as of September 30, 2023, no ALLL was required. For corporate bonds and municipal bonds we analyzed the changes in interest rates relative to when the investment securities were purchased or acquired and considered other factors, including changes in credit ratings, delinquencies, and other macroeconomic factors. As a result of this analysis, we determined that one corporate bond carries credit-related losses of an insignificant amount as of September 30, 2023.

BancShares’ portfolio of investment securities held to maturity consists of similar mortgage-backed securities, U.S. Treasury Notes and government agency securities described above, as well as securities issued by the Supranational Entities and Multilateral Development Banks and FDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury and the Supranational Entities and Multilateral Development Banks, and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, BancShares’ management determined that no ALLL was needed for investment securities held to maturity at September 30, 2023 and December 31, 2022.

The following table presents the investment securities portfolio at September 30, 2023, June 30, 2023 and December 31, 2022, segregated by major category:

Table 20

Investment Securities

dollars in millions

89

The following table presents the weighted average yields for investment securities available for sale and held to maturity at September 30, 2023, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio was calculated using security-level annualized yields.

Table 21

Weighted Average Yield on Investment Securities

(1) Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity at September 30, 2023. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.

Assets Held for Sale

Certain residential mortgage loans and commercial loans are originated with the intent to be sold to investors or lenders, respectively, and are recorded in assets held for sale at fair value. In addition, BancShares may change its strategy for certain loans initially held for investment and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.

Assets held for sale at September 30, 2023 were $58 million, a decrease of $2 million or 3% from $60 million at December 31, 2022 and a decrease of $59 million or 51% from $117 million at June 30, 2023.

Table 22

Assets Held for Sale

dollars in millions

Loans and Leases

Loans and leases held for investment at September 30, 2023 were $133.20 billion, an increase of $62.42 billion or 88% from $70.78 billion at December 31, 2022 and an increase of $187 million from $133.02 billion at June 30, 2023. The increase from December 31, 2022 reflects approximately $56.86 billion of SVB loans as of September 30, 2023 and growth in commercial and consumer loans. The increase from June 30, 2023 reflected growth in the commercial and consumer loans, mostly offset by a decline in the SVB loans. As shown in the table below, commercial loans continued to grow during the current quarter in a number of industry verticals such as energy and healthcare, along with technology, media and telecommunication verticals, and seasonal increases in factoring, and growth in our branch network. Most of the decline in the SVB portfolio was in Global Fund Banking loans, reflecting run-off of certain foreign operations, lower new fundings due to impacts of the slowdown in the private equity and venture capital environment, and the impacts of prepayments.

The following table presents loans and leases by loan segment and loan class, and the respective proportion to total loans:

Table 23

Loans and Leases

dollars in millions

The unamortized discount related to acquired loans was $2.20 billion at September 30, 2023, an increase of $2.08 billion from $118 million at December 31, 2022 and a decrease of $281 million from $2.48 billion at June 30, 2023. The increase from December 31, 2022 reflects the discount on loans acquired in the SVBB Acquisition while the decline from June 30, 2023 was due to accretion recognized during the quarter.

OPERATING LEASE EQUIPMENT, NET

As detailed in the following table, our operating lease portfolio was mostly comprised of rail assets. Refer to the Rail segment discussion in the section entitled “Results by Business Segment” of this MD&A for further details on the rail portfolio.

Table 24

Operating Lease Equipment

dollars in millions

(1) Includes off-lease Rail equipment of $257 million at September 30, 2023, $338 million at June 30, 2023 and $457 million at December 31, 2022.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, senior and subordinated debt, and other borrowings. Interest-bearing liabilities at September 30, 2023 totaled $140.80 billion, an increase of $69.67 billion or 98% from $71.13 billion at December 31, 2022 and an increase of $4.05 billion or 3% from $136.76 billion at June 30, 2023. The increase from December 31, 2022 was primarily due to deposits assumed in the SVBB Acquisition and the Purchase Money Note, as well as deposit growth in the General Banking Segment, which includes the Direct Bank and CAB, partially offset by a net decrease in FHLB borrowings. The increase from June 30, 2023 reflected growth in interest-bearing deposits, which offset repayments of FHLB borrowings.

Deposits

Refer to the “Funding, Liquidity and Capital Overview” section of this MD&A for discussion of deposit composition and recent deposit trends.

Total deposits at September 30, 2023 were $146.23 billion, an increase of $56.83 billion or 64% from $89.41 billion at December 31, 2022 and $5.07 billion or 4% from $141.16 billion at June 30, 2023. The increase from December 31, 2022 primarily reflects $39.97 billion of SVB deposits as of September 30, 2023. The remaining increase from December 31, 2022 and the increase from June 30, 2023 reflect solid deposit growth in our Direct Bank, partially offset by the decline in SVB deposits.

As summarized from the following table, interest-bearing deposits totaled $103.09 billion, $96.62 billion and $64.49 billion at September 30, 2023, June 30, 2023 and December 31, 2022, respectively. Noninterest-bearing deposits totaled $43.14 billion, $44.55 billion and $24.92 billion at September 30, 2023, June 30, 2023 and December 31, 2022, respectively.

Table 25

Deposits

dollars in millions

We strive to maintain a strong liquidity position, and therefore, a focus on deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers. As economic conditions change, we recognize that our liquidity position could be adversely affected if bank deposits are withdrawn. Our ability to fund future loan growth is significantly dependent on our success in retaining existing deposits and generating new deposits at a reasonable cost.

Deposits (based on branch location) as of September 30, 2023 in North Carolina and South Carolina represented approximately 25.6% and 7.8%, respectively, of total deposits. The Direct Bank includes $35.65 billion or 24.4% of total deposits as of September 30, 2023. SVB deposits as of September 30, 2023 were $39.97 billion or 27.3% of total deposits and are primarily concentrated in online banking and California.

Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to our regulators. We estimate total uninsured deposits were $55.77 billion, which represents approximately 38.1% of total deposits at September 30, 2023, compared to $29.13 billion or 32.6% of total deposits at December 31, 2022. The increase in the amount of uninsured deposits from December 31, 2022 reflects the inclusion of SVB deposits.

The following table provides the expected maturity of time deposits in excess of $250,000, the FDIC insurance limit, as of September 30, 2023:

Table 26

Maturities of Time Deposits In Excess of $250,000

dollars in millions

Borrowings

Total borrowings at September 30, 2023 were $37.71 billion, an increase of $31.07 billion from $6.65 billion at December 31, 2022 and a decrease of $2.43 billion from $40.14 billion at June 30, 2023. The increase from December 31, 2022 to September 30, 2023 primarily related to the Purchase Money Note of approximately $35.83 billion payable to the FDIC, as discussed in Note 2—Business Combinations, partially offset by repayments of FHLB borrowings, as discussed below, and a $500 million senior unsecured note.

There were no FHLB borrowings outstanding at September 30, 2023, a decrease of $4.25 billion compared to December 31, 2022 and $2.43 billion compared to June 30, 2023. The decline from December 31, 2022 reflected $7.00 billion of advances taken in March 2023 to enhance available liquidity and $3.48 billion of advances in the linked quarter, all of which were repaid by the end of July 2023. Refer to the “Liquidity Risk” section below for more information on FHLB borrowings.

The following table presents borrowings, net of the respective unamortized purchase accounting adjustments and issuance costs:

Table 27

Borrowings

dollars in millions

(1) Purchase Money Note issued in connection with the SVBB Acquisition.

Refer to Note 11—Borrowings for further information on the various components. Also see the “Liquidity Risk” section in this MD&A.

As we balance our liquidity requirements and simplify our debt structure, we may periodically repay borrowings prior to their respective maturity dates.

RISK MANAGEMENT

BancShares provided detailed risk management information in our 2022 Form 10-K. There were no significant changes to those disclosures. The following is a summary of those disclosures.

Risk is inherent in any business. BancShares has defined a moderate risk appetite and a balanced approach to risk taking with a philosophy that does not preclude higher risk business activities commensurate with acceptable returns while meeting regulatory objectives. Through the comprehensive Risk Management Framework and Risk Appetite Framework and Statement, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares may be exposed, with effective challenge and oversight by management committees. Our Board strives to ensure that risk management is a part of our business culture and that our policies and procedures for identifying, assessing, monitoring, and managing risk are part of the decision-making process. The Board’s role in risk oversight is an integral part of our overall Risk Management Framework and Risk Appetite Framework. The Board administers its risk oversight function primarily through its Risk Committee.

The Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Risk Committee is directed to monitor and advise the full Board regarding risk exposures, including Credit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic, and Reputational risks; review, approve and monitor adherence to the Risk Appetite Statement and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework and Statement. The Risk Committee also reviews reports of examination by and communications from regulatory agencies, the results of internal and third party testing and qualitative and quantitative assessments related to risk management, and any other matters within the scope of the Risk Committee’s oversight responsibilities. The Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, compensation risk management and other areas of joint responsibility.

In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.

BancShares monitors and stress tests its capital and liquidity consistent with the safety and soundness expectations of the federal regulators. Refer to the “Regulatory Considerations” section of Item 1. Business included in the 2022 Form 10-K for further discussion.

BancShares has been assessing the emerging impacts of the international tensions that could impact the economy and exacerbate headwinds of rising inflation, elevated market volatility, global supply chain disruptions, and recessionary pressures as well as operational risks such as those associated with potential cyberattacks for FCB and third parties upon whom it relies. Assessments have not identified material impacts to date, but those assessments will remain ongoing as the conditions continue to exist. BancShares is also assessing the potential risk of an economic slowdown or recession that could create increased credit and market risk having downstream impacts on earnings, capital, and/or liquidity. While economic data continues to be mixed, baseline economic forecasts currently reflect a more marked decline in commercial real estate properties due to rising interest rates that impacted the allowance for loan and lease loss forecasts. Key indicators will continue to be monitored and impacts assessed as part of our ongoing risk management framework. BancShares continues to integrate SVB into its existing risk management processes and procedures.

CREDIT RISK

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or Non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type, and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an appropriate ALLL that accounts for expected losses over the life of the loan and lease portfolios.

Our ALLL estimate as of September 30, 2023 included extensive reviews of the changes in credit risk associated with the uncertainties around macroeconomic forecasts. These loss estimates consider industry risk and the actual net losses incurred during prior periods of economic stress as well as recent credit trends.

A reserve for off-balance sheet credit exposures is established for unfunded commitments. These unfunded commitments are assessed to determine both the probability of funding as well as the expectation of future losses. BancShares estimates the expected funding amounts and applies its probability of default (“PD”) and loss given default (“LGD”) models to those expected funding amounts to estimate the reserve.

Our ALLL and reserve for off-balance sheet credit exposures methodologies was discussed in Note 1—Significant Accounting Policies and Basis of Presentation of our 2022 Form 10-K.

Commercial Lending and Leasing

BancShares employs a dual ratings system where each commercial loan is assigned a PD and LGD rating using scorecards developed to rate each type of transaction incorporating assessments of both quantitative and qualitative factors. When commercial loans and leases are graded during underwriting, or when updated periodically thereafter, a model is run to generate a preliminary risk rating. These models incorporate both internal and external historical default and loss data to develop loss rates for each risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts and circumstances, that in management’s judgment, warrant a modification of the modeled risk rating to arrive at the final approved risk ratings.

Consumer Lending

Consumer lending begins with an evaluation of a consumer borrower’s credit profile against published standards. Credit decisions are made after analyzing quantitative and qualitative factors, including borrower’s ability to repay the loan, collateral values, and considering the transaction from a judgmental perspective.

Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Credit standards follow industry standard documentation requirements. Performance is largely evaluated based on an acceptable pay history along with a quarterly assessment which incorporates current market conditions. Loans may also be monitored during quarterly reviews of the borrower’s refreshed credit score. When warranted, an additional review of the loan-to-value of the underlying collateral may be conducted.

Silicon Valley Banking Loans

During integration related to the SVBB Acquisition, ratings and ALLL forecasting models will be re-considered and/or re-developed in order to align loans with common risk characteristics to common rating and loss forecasting methodologies. While FCB assesses ratings processes and ALLL models during integration, Silicon Valley Bank’s existing ratings and ALLL models will be maintained. The methodology for estimating the ALLL is the sum of two main components: (i) modeled ALLL assessed on a collective basis for pools of loans that share similar risk characteristics that includes a quantitative adjustment to account for portfolio risk not captured in the models and may include a qualitative adjustment based on management’s assessment of the risks and (ii) ALLL assessed for individual loans that do not share similar risk characteristics with other loans.

For loans that share similar risk characteristics, the process derives an estimated ALLL assumption from a non-discounted cash flow approach based on portfolio classes. This approach incorporates a calculation of three predictive metrics: PD, LGD and Exposure at Default (“EAD”), over the estimated life of the exposure. Similar to the FCB process for other segments, PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgment. Renewals and extensions within our control are not considered in the estimated contractual term of a loan. BancShares moved SVB from a three year Reasonable and Supportable (“R&S”) period utilized by Silicon Valley Bank to a life of loan R&S period to ensure consistency with the existing Bancshares assumptions. Silicon Valley Bank and FCB were using similar scenario weighting processes, but BancShares moved SVB to the FCB scenario weights for the ALLL estimate as of March 31, 2023. A qualitative adjustment may be applied to account for risk not captured by the models or emerging risks that may not yet be captured.

For loans that do not share similar risk characteristics, the ALLL is measured based on the net realizable value, which is the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ALLL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.

Allowance for Loan and Lease Losses

The ALLL at September 30, 2023 was $1.67 billion, representing an increase of $751 million from $922 million at December 31, 2022 and an increase of $36 million from $1.64 billion at June 30, 2023. The ALLL as a percentage of total loans and leases at September 30, 2023 was 1.26%, compared to 1.30% at December 31, 2022 and 1.23% at June 30, 2023.

The $751 million increase in the ALLL compared to December 31, 2022 was primarily due to the impact of the SVBB Acquisition, including the initial ALLL for PCD loans and leases (the “Initial PCD ALLL”) of $220 million and the day 2 provision for loans and leases of $462 million. The $36 million increase compared to June 30, 2023 was a result of deteriorating macroeconomic forecasts, specifically related to declining corporate profits and deterioration in the commercial real estate portfolio, which includes general office. These increases were partially offset by lower specific reserves and lower loan balances in the SVB segment. In the current quarter, the ALLL on commercial loans increased $76 million, partially offset by an ALLL decrease of $14 million for consumer loans and $26 million for SVB loans.

While management utilizes its best judgment and information available, the ultimate adequacy of our ALLL is dependent upon a variety of factors beyond our control which are inherently difficult to predict, the most significant being the macroeconomic scenario forecasts that determine the economic variables utilized in the ALLL models. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations. At September 30, 2023, ALLL estimates in these scenarios ranged from approximately $1.31 billion, when weighting the upside scenario 100%, to approximately $2.15 billion when weighting the downside scenario 100%. BancShares management determined that an ALLL of $1.67 billion was appropriate as of September 30, 2023.

Table 28

ALLL for Loans and Leases

dollars in millions

dollars in millions

97

Net charge-offs during the current quarter were $176 million, an increase of $19 million from $157 million during the linked quarter. On an annualized basis, the net charge-off ratio was 0.53% and 0.47% for the current and linked quarters, respectively. The increase in net charge-offs compared to the linked quarter primarily reflects charge-offs related to commercial loans and SVB loans. Net charge-offs in the current quarter in the commercial portfolio were primarily in the large office real estate and small ticket equipment leasing portfolios. Within the SVB segment, net charge-offs for the current quarter were concentrated in investor dependent loans with charge-offs totaling $88 million compared to $49 million in the linked quarter.

Net charge-offs for the current YTD of $383 million increased from $55 million during the prior YTD, reflecting the net charge-offs in the SVB portfolio, and higher commercial loan charge-offs, in certain portfolios within the equipment finance and real estate finance businesses. On an annualized basis, the net charge-off ratio was 0.45% and 0.11% for the current YTD and prior YTD, respectively.

The following table provides trends in the ALLL ratios.

Table 29

ALLL Ratios

dollars in millions

The reserve for off-balance sheet credit exposures was $318 million at September 30, 2023, an increase of $212 million compared to $106 million at December 31, 2022 and a decrease of $17 million compared to $335 million at June 30, 2023. The increase from December 31, 2022 primarily reflects the $254 million day 2 provision for off-balance sheet credit exposures related to the SVBB Acquisition, partially offset by subsequent declines in the SVB portfolio. Refer to Note 22—Commitments and Contingencies for information relating to off-balance sheet commitments.

The following table presents the ALLL by loan class:

Table 30

ALLL by Loan Class

dollars in millions:

Credit Metrics

Non-performing Assets

Non-performing assets include non-accrual loans and leases, OREO and repossessed assets.

The following table presents total nonperforming assets:

Table 31

Non-Performing Assets

dollars in millions

99

Non-accrual loans and leases at September 30, 2023 were $899 million, an increase of $272 million from $627 million at December 31, 2022 and a decrease of $30 million from $929 million at June 30, 2023. The increase from December 31, 2022 was primarily due to the SVBB Acquisition, resulting in the addition of $163 million non-accrual loans. These are mostly in the investor dependent and real estate classes. The modest decline from June 30, 2023 was due to lower non-accrual loans in the SVB portfolios, as net charge-offs outpaced loan migration to non-accrual status. Refer to Note 4—Loans and Leases for tabular presentation of non-accrual loans by loan class.

OREO and repossessed assets at September 30, 2023 was $62 million, compared to $47 million at December 31, 2022 and $64 million at June 30, 2023. Non-performing assets as a percentage of total loans, leases, OREO and repossessed assets at September 30, 2023 was 0.72% compared to 0.95% at December 31, 2022 and 0.75% at June 30, 2023.

Past Due Accounts

The percentage of loans 30 days or more past due at September 30, 2023 was 0.88% of total loans, compared to 1.22% at December 31, 2022 and 0.84% at June 30, 2023. Delinquency status of loans is presented in Note 4—Loans and Leases.

Commercial Real Estate Portfolio

Our commercial real estate portfolio is diversified across various property types. The following table provides an overview of the property type exposures within our commercial real estate portfolio.

Table 32

Commercial Real Estate Portfolio

dollars in millions

Evolving macroeconomic and social conditions (including the increase in remote working in connection with the COVID pandemic) may result in changes for general office demand moving forward. Select metrics specific to our general office loan portfolio are as follows:

Table 33

Select General Office Loan Metrics

dollars in millions

100

Concentration Risk

We strive to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to risk, such as our concentrations of real estate secured loans, revolving mortgage loans and healthcare-related loans. Additionally, SVB loans are concentrated in loans with large balances and loans in certain industries and customer groups, including private equity and venture capital. The following discussions present concentration data along our portfolio classes, Commercial, Consumer, and SVB.

Commercial Loans Concentrations

Geographic Concentrations

The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location.

Table 34

Commercial Loans and Leases - Geography

dollars in millions

Industry Concentrations

The following table represents loans by industry of obligor:

Table 35

Commercial Loans and Leases - Industry

dollars in millions

101

Consumer Loans Concentrations

Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or other conditions. The following table summarizes state concentrations greater than 5.0% based on property address:

Table 36

Consumer Loans - Geography

dollars in millions

Silicon Valley Banking Loans

SVB loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions.

The table below details SVB loans that are secured by real estate, at amortized cost:

Table 37

Silicon Valley Banking Loans Secured by Real Estate

dollars in millions

The SVB loan portfolio is focused on three primary markets: (i) Global Fund Banking, (ii) Technology and Life Science/Healthcare and (iii) Private Banking. The remainder of the portfolio is made up of CRE and Other loans.

Global Fund Banking

The Global Fund Banking loan portfolio includes loans to clients in the private equity/venture capital community. Global Fund Banking represented 48% and 21% of SVB loans and total loans at September 30, 2023, respectively. The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds’ remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are typically secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.

Technology and Life Science/Healthcare

The Technology and Life Science/Healthcare loan portfolios include loans to clients at the various stages of their life cycles. The classes of financing receivables for our technology and life science/healthcare market segments are classified as Investor Dependent - Early Stage, Investor Dependent - Growth Stage, and Innovation C&I and Cash Flow Dependent for reporting purposes.

Investor Dependent - Early Stage loans represented 3% and 1% of SVB loans and total loans at September 30, 2023, respectively. These include loans to pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or other investors, or in some cases, a successful sale to a third party or an initial public offering (“IPO”).

Investor Dependent - Growth Stage loans represented 7% and 3% of SVB loans and total loans at September 30, 2023, respectively. These include loans to growth-stage enterprises. Companies with revenues between $5 million and $15 million, or pre-revenue clinical-stage biotechnology companies, are considered to be mid stage, and companies with revenues in excess of $15 million are considered to be later stage.

Innovation C&I and Cash Flow Dependent loans represented 15% and 7% of SVB loans and total loans at September 30, 2023, respectively. This portfolio is comprised of two types of loans, Innovation C&I and Cash Flow Dependent. Innovation C&I includes loans in innovation sectors such as technology and life science/healthcare industries. These loans are dependent on either the borrower’s cash flows or balance sheet for repayment. Cash Flow Dependent loans are typically used to assist a select group of private equity sponsors with the acquisition of businesses, and repayment is generally dependent upon the cash flows of the combined entities.

Private Banking

Private Banking clients consist of executive leaders and senior investment professionals in the innovation economy, as well as high net worth clients. Lending to Private Banking clients represented 17% and 7% of SVB loans and total loans at September 30, 2023, respectively. Many Private Banking products are secured by real estate. These products include mortgage loans, owner-occupied commercial mortgage loans, home equity lines of credit, and other secured lending products. The remaining balance of the Private Banking portfolio consists of personal capital call lines of credit, restricted and private stock loans and other secured and unsecured lending products.

CRE

The CRE class represented 5% and 2% of SVB loans and total loans at September 30, 2023, respectively. This class consists generally of acquisition financing loans for commercial properties such as office buildings, retail properties, apartment buildings and industrial/warehouse space. All CRE products are secured by real estate collateral.

Other

The Other class includes Premium Wine, Other C&I and Other portfolios, which represented 5% and 2% of SVB loans and total loans at September 30, 2023. Premium wine loans are to wine producers, vineyards and wine industry or hospitality businesses across the Western United States. A large portion of premium wine loans are secured by real estate collateral. Other C&I loans include tax-exempt commercial loans to not-for-profit private schools, colleges, public charter schools and other not-for-profit organizations as well as commercial loans to clients that are not in technology and life sciences/healthcare industries. Our Other class of loans is primarily comprised of construction and land loans for financing new developments or financing improvements to existing buildings, as well as loans made as part of our responsibilities under the Community Reinvestment Act of 1977.

The following table provides a summary of SVB loans by size and class. The breakout below is based on total client balances (individually or in the aggregate) as of September 30, 2023:

Table 38

Silicon Valley Banking Loans by Size and Class

dollars in millions

(1) Included in total loans at amortized cost is approximately $11 million in PPP loans. The PPP loans consist of loans across all of our classes of financing receivables.

SVB Loans - State Concentrations

The following table summarizes state concentrations greater than 5.0% within the SVB loans portfolio at September 30, 2023 and June 30, 2023, based on borrower location:

Table 39

Silicon Valley Banking Loans - Geography

dollars in millions

104

MARKET RISK

Interest rate risk management

BancShares is exposed to the risk that changes in market conditions may affect interest rates and negatively impact earnings. The risk arises from the nature of BancShares’ business activities, the composition of BancShares’ balance sheet, and changes in the level or shape of the yield curve. BancShares manages this inherent risk strategically based on prescribed guidelines and approved limits.

Interest rate risk can arise from many of BancShares’ business activities, such as lending, leasing, investing, deposit taking, derivatives, and funding activities. We evaluate and monitor interest rate risk primarily through two metrics.

• *Net Interest Income Sensitivity (“*NII Sensitivity”) measures the net impact of hypothetical changes in interest rates on forecasted NII; and
• *Economic Value of Equity Sensitivity (“*EVE Sensitivity”) measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.

BancShares uses a holistic process to measure and monitor both short term and long term risks, which includes, but is not limited to, gradual and immediate parallel rate shocks, changes in the shape of the yield curve, and changes in the relationship of various yield curves. NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the longer-term risk of the existing balance sheet.

Our exposure to NII Sensitivity is guided by the Risk Appetite Framework and Statement and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest rate risk exposures, including through business line actions and actions within the investment, funding and derivative portfolios.

The composition of our interest rate sensitive assets and liabilities generally results in a net asset-sensitive position for NII Sensitivity, whereby our assets will reprice faster than our liabilities, which is generally concentrated at the short end of the yield curve.

Our funding sources consist primarily of deposits and we also support our funding needs through wholesale funding sources (including unsecured and secured borrowings). The SVBB Acquisition significantly increased our balance sheet and changed our rate sensitivity. At the time of the SVBB Acquisition, we assumed $56.01 billion of deposits, entered into a $36.07 billion fixed-rate Purchase Money Note payable to the FDIC, acquired $68.47 billion of loans, most of which have variable rates, and $35.31 billion of cash and interest-bearing deposits at banks.

The deposit rates we offer are influenced by market conditions and competitive factors. Market rates are the key drivers of deposit costs and we continue to optimize deposit costs by improving our deposit mix. Changes in interest rates, expected funding needs, as well as actions by competitors, can affect our deposit taking activities and deposit pricing. We believe our targeted non-maturity deposit customer retention is strong and we remain focused on optimizing our mix of deposits. We regularly assess the effect of deposit rate changes on our balances and seek to achieve optimal alignment between assets and liabilities.

The following table summarizes the results of 12-month NII Sensitivity simulations produced by our asset/liability management system. These simulations assume static balance sheet replacement with like products and implied forward market rates, but also incorporates additional assumptions, such as, but not limited to prepayment estimates, pricing estimates and deposit behaviors. The below simulations assume an immediate 25, 100 and 200 bps parallel increase and 25 and 100 bps decrease from the market-based forward curve for September 30, 2023, June 30, 2023, and December 2022.

Table 40

Net Interest Income Sensitivity Simulation Analysis

105

NII Sensitivity metrics at September 30, 2023, compared to June 30, 2023, were primarily affected by compositional changes in deposits, funding and investments. NII Sensitivity metrics at September 30, 2023, compared to December 31, 2022, were primarily affected by the addition of the acquired loans and assumed deposits as part of the SVBB Acquisition, as well as the Purchase Money Note and the higher cash balance to manage liquidity risk from the acquired portfolios.

As of September 30, 2023, BancShares continues to have an asset sensitive interest rate risk profile and the potential exposure to forecasted earnings was largely driven by the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as estimates of modest future deposit betas. Approximately 65%-70% of our loans have floating contractual reference rates, indexed primarily to Prime, Secured Overnight Financing Rate (“SOFR”) and LIBOR. Deposit betas are modeled to have a portfolio average of approximately 35%-40% over the forecast horizon. Deposit beta is the portion of a change in the fed funds rate that is passed on to the deposit rate. Actual deposit betas may be different than modeled, depending on various factors, including liquidity requirements, deposit mix and competitive pressures. Impacts to NII Sensitivity may change due to actual results differing from modeled expectations.

As noted above, EVE Sensitivity supplements NII simulations as it estimates risk exposures beyond a twelve-month horizon. EVE Sensitivity measures the change in the economic value of equity driven by changes in assets, liabilities, and off-balance sheet instruments in response to a change in interest rates. EVE Sensitivity was calculated by estimating the change in the net present value of assets, liabilities, and off-balance sheet items under various rate movements.

The following table presents the EVE profile as of September 30, 2023, June 30, 2023, and December 31, 2022:

Table 41

Economic Value of Equity Modeling Analysis

The economic value of equity metrics at September 30, 2023 compared to June 30, 2023 were primarily affected by compositional changes in deposits, funding and investments. The economic value of equity metrics at September 30, 2023 compared to December 31, 2022 were primarily affected by the balance sheet changes noted earlier due to the SVBB Acquisition.

In addition to the above reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that impact management volumes, specific risk events, or the sensitivity to key assumptions are also evaluated.

We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off-balance sheet derivatives to mitigate earnings volatility.

The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations.

The following table provides loan maturity distribution information:

Table 42

Loan Maturity Distribution

dollars in millions

107

The following table provides information regarding the sensitivity of loans and leases to changes in interest rates:

Table 43

Loan Interest Rate Sensitivity

dollars in millions

Reference Rate Reform

U.S. Dollar LIBOR officially ceased reporting at close of business June 30, 2023. The U.K. Financial Conduct Authority at such time announced that U.S. Dollar LIBOR is “Not Representative” going forward.

In April 2018, the FRB of New York commenced publication of SOFR, which has been recommended as an alternative to U.S. Dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest Act (“LIBOR Act”), which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. The final rule was approved by the FRB on December 16, 2022 and became effective February 27, 2023. The Consumer Financial Protection Bureau issued an interim final rule, effective May 15, 2023. This further addresses the planned cessation of most U.S. Dollar LIBOR tenors after June 30, 2023, by incorporating the Board selected benchmark replacement for consumer loans into Regulation Z open-end and closed-end credit provisions. The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR contracts subject to the LIBOR Act. BancShares has adopted Board-selected benchmark replacements to take advantage of the safe harbors, where applicable, that are afforded in the rule.

BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares’ LIBOR exposure is primarily to tenors other than one week and two-month USD LIBOR.

All consumer and commercial clients with contracts providing FCB with unilateral lender discretion were notified in April 2023 of LIBOR’s cessation and FCB’s selected replacement index. During the second quarter of 2023, IT/Operations added replacement indices to all impacted systems. The remaining servicing task for both General Banking and Commercial Banking is to link transactions to the new index as the index becomes effective (next reset date). In the months leading up to the cessation of LIBOR, Commercial Banking engaged in a proactive exercise to amend existing contracts where it would provide a positive client experience. As of September 30, 2023, all amendments had been completed. Synthetic LIBOR for 1, 3 and 6 month tenors will be reported through the end of September 2024 and is calculated based on CME Term SOFR plus the relevant ISDA fixed spread adjustments.

BancShares is utilizing SOFR as our preferred replacement index for LIBOR. As loans mature and new originations occur a larger percentage of BancShares’ variable-rate loans are expected to reference SOFR in response to the discontinuation of LIBOR. However, we are positioned to accommodate other alternative reference rates (e.g., credit sensitive rates) in response to how the market evolves. Further, BancShares has moved to Term SOFR plus the Alternative Reference Rate Committee recommended credit spread adjustment for its Series B Preferred Stock since the dividends were previously based on a floating rate tied to three-month LIBOR. The last dividend payment based on a LIBOR accrual occurred on September 15, 2023.

Some acquired assets, such as loans and derivatives as well as derivative liabilities, from the SVBB Acquisition have LIBOR settings. Processes and procedures are in place to have these LIBOR exposures reference alternative rates, such as Term SOFR and Daily SOFR, in advance of LIBOR’s unavailability.

For a further discussion of risks BancShares faces in connection with the replacement of LIBOR on its operations, see “Risk Factors—Market Risks—We may be adversely impacted by the transition from LIBOR as a reference rate.” in Item 1A. Risk Factors of our 2022 Form 10-K.

LIQUIDITY RISK

Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain sufficient amounts of Available Cash and High Quality Liquid Securities (“HQLS”). Additional sources of liquidity include FHLB borrowing capacity, committed credit facilities, repurchase agreements, brokered CD issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties.

We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business strategy, risk appetite, levels of liquid assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in identifying potential liquidity risk and stress events.

BancShares maintains a framework to establish liquidity risk tolerances, monitoring, and breach escalation protocol to alert management of potential funding and liquidity risks and to initiate mitigating actions as appropriate. Further, BancShares maintains a contingent funding plan, which details protocols and potential actions to be taken under liquidity stress conditions.

Liquidity includes Available Cash and HQLS. At September 30, 2023 we had $57.02 billion of total Liquid Assets (26.7% of total assets) and $88.61 billion of contingent liquidity sources available.

Table 44

Liquidity

dollars in millions

(1) Consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.

(2) Credit facility obtained in connection with SVBB Acquisition. See below for additional details and limits on use.

(3) See following table for additional details.

We fund our operations through deposits and borrowings. Our primary source of liquidity is derived from our various deposit channels, including our branch network and Direct Bank. Total deposits at September 30, 2023 were $146.23 billion, an increase of $56.83 billion from $89.41 billion at December 31, 2022 and an increase of $5.07 billion from $141.16 billion at June 30, 2023. The increase in deposits from December 31, 2022 primarily reflected additional deposits from the SVBB Acquisition, and growth in the Direct Bank. We use borrowings to diversify the funding of our business operations. Total borrowings at September 30, 2023 were $37.71 billion, an increase of $31.07 billion from $6.65 billion at December 31, 2022 and a decrease of $2.43 billion from $40.14 billion at June 30, 2023. The increase in borrowings from December 31, 2022 primarily reflected the Purchase Money Note (see Note 2—Business Combinations), partially offset by FHLB repayments. In addition to the Purchase Money Note and FHLB advances, borrowings also include senior unsecured notes, securities sold under customer repurchase agreements, and subordinated notes. Refer to the respective “Deposits” and “Borrowings” sections for further details.

FHLB Capacity

A source of available funds is advances from the FHLB of Atlanta. We may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted.

Table 45

FHLB Balances

dollars in millions

(1) Letters of credit were established with the FHLB to collateralize public funds.

FRB Capacity

Under borrowing arrangements with the FRB of Richmond, FCB has access to $4.99 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 2023 and December 31, 2022.

In March 2023, following the failures of Silicon Valley Bank and Signature Bank, the FRB created a new Bank Term Funding Program as an additional source of liquidity against high-quality securities in order to make additional funding available to eligible depository institutions. This program offers loans of up to one year in length to eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, provided that such collateral was owned by the borrower as of March 12, 2023. These pledged assets will be valued at par under the Program. Eligible institutions can request advances under the Program at least through March 11, 2024. As of September 30, 2023, we did not have any securities pledged or amounts advanced related to this program.

FDIC Credit Facility

FCB and the FDIC entered into binding terms and conditions for a five-year, up to $70 billion line of credit to FCB (the “Credit Facility”) provided by the FDIC. During the two-year period following the SVBB Acquisition, FCB may draw on the Credit Facility to support liquidity, including for deposit withdrawal or runoff and to fund the unfunded commercial lending commitments acquired pursuant to the SVBB Acquisition. Interest on outstanding principal will accrue at a variable rate equal to the SOFR plus 25 basis points (but in no event less than 0.00%).

The Credit Facility will be primarily secured by all loans acquired in the SVBB Acquisition and related commitments that are subsequently drawn and outstanding as of September 30, 2023.

Contractual Obligations and Commitments

The following table includes significant contractual obligations and commitments as of September 30, 2023, representing required and potential cash outflows, including impacts from purchase accounting adjustments and deferred fees. See Note 22—Commitments and Contingencies for additional information regarding commitments. Financing commitments, letters of credit and deferred purchase commitments are presented at contractual amounts and do not necessarily reflect future cash outflows, as many are expected to expire unused or partially used.

Table 46

Contractual Obligations and Commitments

dollars in millions

(1) Time deposits and long-term borrowings are presented net of purchase accounting adjustments of $16 million and $169 million, respectively. On-balance sheet commitments are included in other liabilities and presented net of a purchase accounting adjustment of $62 million .

(2) Less than 1 year balance represents the estimated amortization of the purchase accounting adjustment and deferred costs in excess of scheduled repayments.

CAPITAL

Capital requirements applicable to BancShares are discussed in the “Regulatory Considerations” section in Item 1. Business — Regulation of our 2022 Form 10-K. The SVBB Acquisition was the primary cause of increase in BancShares’ total assets, from $109.30 billion at December 31, 2022 to $213.77 billion at September 30, 2023. BancShares’ total consolidated assets remains between $100 billion and $250 billion, and, as such, BancShares is required to comply with certain enhanced prudential standards applicable to Category IV banking organizations, subject to the applicable transition periods, as detailed in our 2022 Form 10-K. However, the proposed interagency rulemaking recently announced by the FDIC, the Federal Reserve and the OCC could alter the capital framework for banks with total assets of $100 billion. We are continuing to monitor these proposed rules. See further discussion in the section entitled “Executive Overview – Recent Economic and Industry Developments” above.

BancShares maintains a comprehensive capital adequacy process. BancShares establishes internal capital risk limits and warning thresholds, which utilize Risk-Based and Leverage-Based Capital calculations, internal and external early warning indicators, its capital planning process, and stress testing to evaluate BancShares' capital adequacy for multiple types of risk in both normal and stressed environments. The capital management framework requires contingency plans be defined and may be employed at management’s discretion.

Common and Preferred Stock Dividends

During the first, second and third quarters of 2023, we paid a quarterly dividend of $0.75 on the Class A Common Stock and Class B Common Stock. On October 24, 2023, our Board of Directors declared a quarterly dividend on the Class A Common Stock and Class B Common Stock of $1.64 per common share, an increase of 219% from the prior quarter distribution. The dividends are payable on December 15, 2023 to stockholders of record as of November 30, 2023.

On October 24, 2023, our Board of Directors also declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The dividends are payable on December 15, 2023 to stockholders of record as of November 30, 2023. Dividend payment information on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is disclosed in Note 15—Stockholders' Equity.

Capital Composition and Ratios

The table below shows activities that caused the change in outstanding Class A Common Stock during 2023:

Table 47

Changes in Shares of Class A Common Stock Outstanding

We also had 1,005,185 Class B Common Stock outstanding at September 30, 2023 and December 31, 2022.

On April 25, 2023 the Parent Company’s stockholders approved amendments to the Restated Certificate of Incorporation to increase the number of authorized shares of the Class A Common Stock from 16,000,000 shares to 32,000,000 shares and to increase the number of authorized shares of the Preferred Stock from 10,000,000 shares to 20,000,000.

We are committed to effectively managing our capital to protect our depositors, creditors and stockholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.

In accordance with GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within stockholders’ equity. These amounts are excluded from the calculation of our regulatory capital ratios under current regulatory guidelines.

Table 48

Analysis of Capital Adequacy

dollars in millions

As of September 30, 2023, BancShares and FCB had risk-based capital ratio conservation buffers of 7.64% and 7.36%, respectively, which are in excess of the Basel III conservation buffer of 2.50%. At December 31, 2022, BancShares and FCB risk-based capital ratio conservation buffers were 5.06% and 4.99%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratios as of September 30, 2023 and December 31, 2022 over the Basel III minimum for the ratio that is the binding constraint. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ALLL and qualifying subordinated debt.

CRITICAL ACCOUNTING ESTIMATES

As further described in our 2022 Form 10-K, the ALLL and fair values of loans acquired in and the core deposit intangibles associated with a business combination are considered critical accounting estimates. The ALLL as of September 30, 2023 is discussed in Note 5—Allowance for Loan and Lease Losses and in the “Credit Risk” section above.

Fair values of loans acquired in and the core deposit intangibles associated with the SVBB Acquisition are considered critical accounting estimates. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition and other future events that are highly subjective in nature and may require adjustments. The fair values for these items are further discussed in Note 2—Business Combinations.

RECENT ACCOUNTING PRONOUNCEMENTS

The following accounting pronouncements were issued by the FASB but are not yet effective for BancShares.

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NON-GAAP FINANCIAL MEASUREMENTS

BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares’ consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions.

Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation between the GAAP financial measure and the non-GAAP financial measure. We describe each of these measures below and explain why we believe the measure to be useful.

Adjusted Rental Income on Operating Lease Equipment for Rail Segment

Adjusted rental income on operating lease equipment within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.

The table below presents a reconciliation of rental income on operating leases to adjusted rental income on operating lease equipment.

Table 49

Rail Segment

dollars in millions

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Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans, asset quality, and future performance and other strategic goals of BancShares. Words such as “anticipates,” “believes,” “estimates,” “expects,” “predicts,” “forecasts,” “intends,” “plans,” “projects,” “targets,” “designed,” “could,” “may,” “should,” “will,” “potential,” “continue,” “aims” or other similar words and expressions are intended to identify these forward-looking statements. These forward-looking statements are based on BancShares’ current expectations and assumptions regarding BancShares’ business, the economy, and other future conditions.

Because forward-looking statements relate to future results and occurrences, they are subject to inherent risks, uncertainties, changes in circumstances and other factors that are difficult to predict. Many possible events or factors could affect BancShares’ future financial results and performance and could cause the actual results, performance or achievements of BancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including conflicts in Ukraine, Israel and the Gaza Strip) and market conditions, including changes in competitive pressures among financial institutions and the impacts related to or resulting from recent bank failures and other volatility, the financial success or changing conditions or strategies of BancShares’ vendors or customers, including changes in demand for deposits, loans and other financial services, fluctuations in interest rates, changes in the quality or composition of BancShares’ loan or investment portfolio, actions of government regulators, including the recent and projected interest rate hikes by the Board of Governors of the Federal Reserve Board (the “Federal Reserve”), changes to estimates of future costs and benefits of actions taken by BancShares, BancShares’ ability to maintain adequate sources of funding and liquidity, the potential impact of decisions by the Federal Reserve on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions, including the significant turbulence in the capital or financial markets, the impact of the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, including the interagency proposed rule on regulatory capital, along with the risk that such laws, regulations and regulatory interpretations may change, the availability of capital and personnel, and the failure to realize the anticipated benefits of BancShares’ previous acquisition transactions, including the SVBB Acquisition and the previously completed transaction with CIT, which acquisition risks include (1) disruption from the transactions with customer, supplier or employee relationships, (2) the possibility that the amount of the costs, fees, expenses and charges related to the transactions may be greater than anticipated, including as a result of unexpected or unknown factors, events or liabilities, (3) reputational risk and the reaction of the parties’ customers to the transactions, (4) the risk that the cost savings and any revenue synergies from the transactions may not be realized or take longer than anticipated to be realized, (5) difficulties experienced in completing the integration of the businesses, (6) the ability to retain customers following the transactions and (7) adjustments to BancShares’ estimated purchase accounting impacts of the SVBB Acquisition.

Except to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional factors which could affect the forward-looking statements can be found in the 2022 Form 10-K, its Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, and its other filings with the Securities and Exchange Commission.

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced NII in future periods. As of September 30, 2023, BancShares’ market risk profile has changed since December 31, 2022, primarily due to the SVBB Acquisition. See Market Risk within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of changes. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision of and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2023. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports we file under the Exchange Act.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We review our internal controls over financial reporting on an ongoing basis and make changes intended to ensure the quality of our financial reporting. During the first quarter of 2023, as the result of the SVBB Acquisition, we commenced the evaluation of the acquired entities controls, and designed and implemented new controls as needed. The evaluation of the changes to processes, information technology systems and other components of internal control over financial reporting related to the SVBB Acquisition is ongoing. Otherwise, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.

Except for the new and updated risk factors related to the SVBB Acquisition that were disclosed in our Form 10-Q for the quarter ended March 31, 2023, there have been no material changes in the risk factors during 2023 from those reported in our 2022 Form 10-K. For a discussion of the risks and uncertainties that management believes are material to an investment in us in addition to those listed below, refer to Part I, Item 1A. Risk Factors, of our 2022 Form 10-K, and Forward-Looking Statements of this Quarterly Report on Form 10-Q. Additional risks and uncertainties that are not currently known to management or that management does not currently deem material could also have a material adverse impact on our financial condition, the results of our operations or our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, we could be adversely affected, and the market price of our securities could significantly decline.