First Citizens Bancshares Inc: Form 10-Q for the period ended Mar 31, 2024

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 (this “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, 2023 (“2023 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 prior years have been reclassified to conform with financial statement presentations for 2024, the reclassifications had no effect on stockholders’ equity or net income as previously reported. Refer to 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. The Parent Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”) 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, small 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. BancShares also provides deposit, cash management and lending to homeowner associations and property management companies.

BancShares delivers banking products and services to its customers through an extensive branch network and additionally operates a nationwide digital banking platform that delivers deposit products to consumers (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.

In addition to our banking operations, we provide various investment products and services through FCB’s wholly owned subsidiaries, including First Citizens Investor Services, Inc. (“FCIS”) and First Citizens Asset Management, Inc. (“FCAM”), and a non-bank subsidiary First Citizens Capital Securities, LLC (“FCCS”). As a registered broker-dealer, FCIS provides a full range of investment products, including annuities, brokerage services and third-party mutual funds. As registered investment advisors, FCIS and FCAM provide investment management services and advice. FCCS is a broker-dealer that also provides underwriting and private placement services.

The SVBB Acquisition 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/healthcare industries, and wealth clients.

In addition, BancShares owns a fleet of railcars and locomotives that are leased to railroads and shippers.

Refer to Note 20—Business Segment Information for further information regarding the products and services we provide.

Refer to the 2023 Form 10-K for a discussion of our strategy.

Significant Events

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 by and among FCB, the FDIC, and the FDIC, as receiver of SVBB (the “SVBB Acquisition”).

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

Segment Updates

We made changes to our segment reporting during the first quarter of 2024 as further discussed in Note 1—Significant Accounting Policies and Basis of Presentation. Segment disclosures for 2023 periods included in this Form 10-Q were recast to reflect the segment reporting changes.

BancShares’ segments at March 31, 2024 include General Bank, Commercial Bank, SVB Commercial, and Rail. All other financial information not allocated to the segments is included in the “Corporate” section of the segment disclosures. Refer to Note 20—Business Segment Information for the segment descriptions, which reflect the segment reporting changes made during the first quarter of 2024.

Segment results are discussed in the section entitled “Results by Business Segment” in this MD&A.

Updates to Loan Classes

We updated our loan classes during the first quarter of 2024 as further discussed in Note 1—Significant Accounting Policies and Basis of Presentation. Loan and lease and allowance for loan and lease losses (“ALLL”) disclosures for 2023 periods included in this Form 10-Q were recast to reflect the changes in loan classes.

Recent Economic, Industry and Regulatory Developments

The Federal Reserve’s Federal Open Market Committee (“FOMC”) maintained benchmark federal funds rate at a range between 5.25% - 5.50% at its most recent meeting in May 2024. Although future rate hikes are possible, the FOMC’s interest rate could be at or near its peak for this tightening cycle, and the FRB has signaled it may cut rates during 2024, depending on future economic conditions.

Although the U.S. economy continued to grow during the first quarter of 2024, economic uncertainty remains. The FOMC reported that it will continue to 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 progress combating inflation, efforts to control inflation have raised concerns over the possibility of a recession. In addition, concerns over domestic and global policy issues, trade policy in the U.S. and geopolitical events, including the ongoing conflicts in Ukraine and the Middle East, add to the global uncertainty and are likely to maintain upward pressure on inflation and weigh on economic activity. Mortgage rates have steadily increased over recent years, and mortgage demand from homebuyers has softened. In addition, there remains concern in the banking industry about the exposure to certain sectors of commercial real estate (“CRE”), and credit trends in these exposures may deteriorate. The timing and impact of inflation, volatility in the stock market, interest rate movements, and a possible recession will depend on future developments, which are highly uncertain and difficult to predict.

The federal banking agencies issued several notices of proposed rulemaking (“NPR”) in 2023 that if and/or when finalized, may impact BancShares and FCB. The FDIC finalized an NPR covering a special assessment to recover losses associated with protecting uninsured depositors following the closures of Silicon Valley Bank, Signature Bank, and First Republic Bank. We accrued a FDIC insurance special assessment charge of $64 million in 2023 that will be paid in eight quarterly installments beginning in 2024. In February 2024, the FDIC indicated that it expects a larger loss to the deposit insurance fund than originally estimated. As a result, we accrued an additional FDIC insurance special assessment charge of $9 million in the first quarter of 2024.

Also in 2023, the federal banking agencies issued NPRs related to enhanced capital and long-term debt requirements for banking organizations with $100 billion or more in total assets. These NPRs were discussed in Item 1. Business of our 2023 Form 10-K, in the section entitled “Regulatory Considerations.” We are in the process of evaluating the proposals and the potential impacts, but we expect we would need to raise additional long-term debt to satisfy the requirements if the NPR is finalized.

Financial Performance Summary

The following tables in this MD&A include financial data for the three months ended March 31, 2024 (the “current quarter”), December 31, 2023 (the “linked quarter”), and March 31, 2023 (the “prior year quarter”). Our results of operations include acquired operations from the SVBB Acquisition, which was consummated on March 27, 2023, and therefore, many comparisons in the tables below will highlight the impact of including acquired operations for the entire current quarter compared to five days in the prior year quarter.

In accordance with Item 303(c) of Regulation S-K, we focus on changes compared to the linked quarter 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 the discussion of our financial position by comparing balances as of March 31, 2024 to December 31, 2023.

The following table summarizes BancShares’ results in accordance with GAAP.

Table 1

Selected Financial Data

dollars in millions, except share data

(1) Calculated net of average credit balances and deposits of factoring clients.

(2) Average loan balances include loans held for sale and nonaccrual loans.

First Quarter Income Statement Highlights

• Net income for the current quarter was $731 million, an increase of $217 million or 42% from $514 million for the linked quarter. Net income available to common stockholders for the current quarter was $716 million, an increase of $217 million or 44% from $499 million for the linked quarter. The increases, as detailed below, were related to lower provision for credit losses and noninterest expenses, along with higher noninterest income, partially offset by lower net interest income (“NII”). Earnings per diluted common share for the current quarter was $49.26, an increase from $34.33 for the linked quarter.
• The current quarter included the following select items:
• Acquisition-related expenses of $58 million, and
• Additional FDIC insurance special assessment of $9 million.
• The linked quarter included the following select items:
• Acquisition-related expenses of $116 million,
• Decrease in the gain on acquisition of $83 million, and
• FDIC insurance special assessment of $64 million.
• Return on average assets for the current quarter was 1.36% compared to 0.95% for the linked quarter.
• NII for the current quarter was $1.82 billion, a decrease of $94 million or 5% from $1.91 billion for the linked quarter. The decrease was primarily due to higher interest expense on deposits and lower loan discount accretion on loans acquired in the SVBB Acquisition.
• *Net interest margin (“*NIM”) for the current quarter was 3.67%, a decrease of 19 basis points (“bps”) from 3.86% for the linked quarter, primarily related to the items discussed above for NII.
• Provision for credit losses for the current quarter was $64 million, a decrease of $185 million or 75% from $249 million for the linked quarter.
• The provision for loan and lease losses decreased $158 million, primarily related to changes in the macroeconomic forecast, a decline in specific reserves on individually evaluated loans, and lower net charge-offs.
• The benefit from off-balance sheet credit exposure increased $27 million, primarily due to a continued decline in unfunded commitments during the current quarter.
• Noninterest income for the current quarter was $627 million, an increase of $84 million or 16% from $543 million for the linked quarter. The increase was primarily due to an adjustment to the gain on acquisition of $83 million in the linked quarter as we further refined income tax estimates related to the SVBB Acquisition.
• Noninterest expense for the current quarter was $1.38 billion, a decrease of $116 million or 8% from $1.49 billion for the linked quarter. The decrease was largely due to lower acquisition-related expense in the current quarter and a higher FDIC insurance special assessment in the linked quarter, partially offset by higher salaries and benefits in the current quarter.

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

Balance Sheet Highlights

• Total loans and leases at March 31, 2024 were $135.37 billion, an increase of $2.07 billion or 2% from $133.30 billion at December 31, 2023. There was loan growth in each of our segments. The increase of $900 million in the General Bank segment was primarily related to business and commercial loan growth, while growth of $794 million in the Commercial Bank segment was across various industry verticals. In addition, global fund banking loans in the SVB Commercial segment increased, partially offset by decreases in the technology and life science/healthcare portfolios.
• Total investment securities at March 31, 2024 were $35.04 billion, an increase of $5.05 billion or 17% from $30.00 billion at December 31, 2023. The increase was primarily due to purchases of short-duration U.S. agency mortgage-backed and U.S. Treasury investment securities available for sale.
• Total deposits at March 31, 2024 were $149.61 billion, an increase of $3.76 billion or 3% from $145.85 billion at December 31, 2023. The increase from December 31, 2023 mainly reflected deposit growth in our branch network and in the Direct Bank.
• Total borrowings at March 31, 2024 were $37.54 billion, a decrease of $114 million from $37.65 billion at December 31, 2023. The decrease was due to repayments of subordinated debt and a decline in securities sold under customer purchase agreements.
• At March 31, 2024, BancShares remained well capitalized with a total risk-based capital ratio of 15.66%, a Tier 1 risk-based capital ratio of 14.00%, a common equity Tier 1 ratio of 13.44% and a Tier 1 leverage ratio of 10.11%.

Funding, Liquidity and Capital Overview

Deposit Composition

We fund our business primarily through deposits. Deposits represented approximately 80.0% of total funding at March 31, 2024. The following table summarizes the composition, average size and uninsured percentages of our deposits:

Table 2

Select Deposit Data

The General Bank segment includes deposits from our branch network, which deploys a relationship-based approach to deposit gathering. The Commercial Bank segment includes deposits of commercial customers, and the SVB Commercial segment includes deposits related to its commercial customer base. Deposits in Corporate primarily were comprised of $39.81 billion in our Direct Bank. There were also $14 million of deposits in 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 such deposits in the respective segments and Corporate. At March 31, 2024, total uninsured deposits were approximately $54.85 billion or 37% of total deposits. Uninsured deposits were $54.15 billion or 37% of total deposits at December 31, 2023.

Deposit Trends

Table 3

Deposit Trends

(dollars in millions)

SVB Commercial segment deposits declined from $34.73 billion at December 31, 2023 to $34.01 billion at March 31, 2024. The table above also indicates that aggregate deposits for the General Bank, Commercial Bank and Rail segments and Corporate increased during the current quarter, primarily from deposit growth in the Direct Bank, which is included in Corporate, and in the branch network in the General Bank segment.

Liquidity Position

We strive to maintain a strong liquidity position, and our risk appetite for liquidity is low. At March 31, 2024, liquidity metrics remained solid as we had $59.33 billion in liquid assets consisting of $30.03 billion in cash and interest-earning deposits at banks (primarily held at the FRB) and $29.30 billion in high-quality liquid securities. We have unused borrowing capacity with the FHLB and FRB of $14.43 billion and $5.51 billion, respectively.

FCB and the FDIC, as lender and as collateral agent, also entered into the Advance Facility Agreement, dated as of March 27, 2023, and effective as of November 20, 2023, providing total advances available through March 27, 2025 of up to $70 billion, subject to limits subsequently described in this MD&A as referenced below, solely to provide liquidity to offset deposit withdrawal or runoff of former SVBB deposit accounts and to fund the unfunded commercial lending commitments acquired in the SVBB Acquisition. The immediate available capacity of the Advance Facility Agreement was $12.85 billion at March 31, 2024. Refer to the “Liquidity Risk” section of this MD&A for further discussion.

Investment Securities Duration

At March 31, 2024, our investment securities portfolio primarily consisted of debt securities available for sale and held to maturity as summarized below. The duration of our investment securities was approximately 2.8 years at March 31, 2024. The investment securities available for sale portfolio had an average duration of 2.2 years and the held to maturity portfolio had an average duration of 4.6 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 well capitalized thresholds and Basel III requirements as further discussed in the “Capital” section of this MD&A.

RESULTS OF OPERATIONS

NET INTEREST INCOME AND NET INTEREST MARGIN

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 changes in both volume and yield or rate (i.e., portfolio mix) is calculated as the change in rate multiplied by the change in volume. This component is allocated between the changes due to volume and yield or rate based on the ratio each component bears to the absolute dollar amounts of their total.
• Tax equivalent NII 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 Purchase Credit Deteriorated (“PCD”) loans, nonaccrual loans, and loans 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 average credit balances and deposits of factoring clients.

NII and NIM - Current quarter compared to linked quarter

• NII for the current quarter was $1.82 billion, a decrease of $94 million or 5% from $1.91 billion for the linked quarter. This decrease was due to a $61 million increase in interest expense and a $33 million decrease in interest income.
• Interest income earned on loans and leases for the current quarter was $2.35 billion, a decrease of $37 million or 2% from $2.39 billion for the linked quarter. The decrease was primarily due to a decline of $35 million in loan discount accretion, which was $163 million in the current quarter and $198 million in the linked quarter.
• Interest income earned on investment securities for the current quarter was $279 million, an increase of $40 million or 17% from $239 million for the linked quarter. The increase reflected a higher average balance due to purchases of short duration agency mortgage-backed and U.S. Treasury investment securities available for sale, and to a lesser extent, a higher yield.
• Interest income earned on interest-earning deposits at banks for the current quarter was $448 million, a decrease of $37 million or 8% from $485 million for the linked quarter. The decrease reflected a lower average balance, mostly due to purchases of investment securities noted above.
• Interest expense on interest-bearing deposits for the current quarter was $928 million, an increase of $63 million or 7% from $865 million for the linked quarter. The increase was due to higher average balances of deposits in our Direct Bank and higher deposit rates as we remain competitive and optimize our funding strategy through deposit growth.
• Interest expense on borrowings for the current quarter was $339 million, down $2 million or 1% from $341 million for the linked quarter. The decrease was mainly due to repayments of subordinated debt.
• NIM for the current quarter was 3.67%, a decrease of 19 bps from 3.86% for the linked quarter due to the reasons noted above for NII.
• Average interest-earning assets for the current quarter were $198.59 billion, an increase of $2.33 billion or 1% from $196.25 billion for the linked quarter. The increase mainly reflected higher average balances for investment securities. The yield on average interest-earning assets was 6.23%, a decrease of 7 bps from the linked quarter, primarily due to lower loan accretion.
• Average interest-bearing liabilities for the current quarter were $145.64 billion, an increase of $3.21 billion or 2% from $142.43 billion in the linked quarter. The increase mostly reflected higher average deposit balances. The rate paid on average interest-bearing liabilities increased by 12 bps, primarily due to a higher rate paid on average interest-bearing deposits.

Table 6

Average Balances and Rates

dollars in millions

(1) Loans and leases include Non-PCD and PCD loans, nonaccrual loans, and loans 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 average credit balances and deposits of factoring clients.

The following table includes the average interest-earning assets by category:

Table 7

Average Interest-earning Asset Mix

The following table shows our average interest-bearing liability mix:

Table 8

Average Interest-bearing Liability Mix

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the current quarter was $64 million, a decrease of $185 million or 75% from $249 million for the linked quarter.

The provision for loan and lease losses decreased $158 million, primarily related to changes in the macroeconomic forecasts, a decline in specific reserves on individually evaluated loans, and lower net charge-offs. The ALLL and net charge-offs are further discussed in the “Risk Management—Credit Risk—Allowance for Loan and Lease Losses” and “Credit Metrics” in this MD&A and in Note 5—Allowance for Loan and Lease Losses.

The benefit from off-balance sheet credit exposure was $29 million in the current quarter compared to $2 million in the linked quarter. The change was primarily due to a continued decline in unfunded commitments.

Table 9

Provision for Credit Losses

dollars in millions

71

NONINTEREST INCOME

Noninterest income is an essential part 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, international fees, service charges generated from deposit accounts, factoring commissions, cardholder and merchant services, and insurance commissions.

Table 10

Noninterest Income

dollars in millions

Rental Income on Operating Lease Equipment

Rental income on operating lease equipment was $255 million for the current quarter, an increase of $3 million or 1% from $252 million for the linked quarter. The increase reflects a higher operating lease equipment balance, along with improved utilization and re-pricing in the rail portfolio. Rental income is generated primarily in the Rail segment and, to a lesser extent, in the Commercial Bank 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 segment 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 $372 million, an increase of $81 million from $291 million for the linked quarter. The increase was primarily due to the previously discussed adjustment to the gain on acquisition in the linked quarter. The remaining changes compared to the linked quarter reflect increases and decreases among the various noninterest income categories, with the main items described as follows:

• 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, decreased by $5 million, mainly due to lower capital markets fees.
• The $5 million decrease in factoring commissions was mostly due to lower volume in the current quarter following the seasonal holiday retail activity in the linked quarter.
• Fair value adjustments on marketable equity securities reflect changes in market prices of underlying portfolio investments.
• Other noninterest income consisted of items such as derivative gains and losses, income from non-marketable securities, and BOLI income. The $10 million increase in other noninterest income was primarily due to higher derivative income.

NONINTEREST EXPENSE

Noninterest expense includes depreciation on operating lease equipment, maintenance and other operating lease expenses, and operating expenses.

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 Bank 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 segment discussion in the section entitled “Results by Business Segment” of this MD&A for further details.

Maintenance and Other Operating Lease Expenses

The Rail segment provides railcars, primarily pursuant to full-service lease contracts under which we, as lessor, are responsible for railcar maintenance and repair. Maintenance and other operating lease expenses for the current quarter were $45 million, a decrease of $14 million, or 25%, from $59 million for the linked quarter. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the railcar 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 segment 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, net occupancy expense, and equipment expenses. Operating expenses for the current quarter were $1.24 billion, a decrease of $102 million or 8% compared to $1.34 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.

• The $30 million increase in salaries and benefits reflected seasonal adjustments associated with the employee 401(k) plan, payroll taxes, and annual merit adjustments.
• The $41 million decrease in total FDIC insurance expense was mainly the result of the FDIC insurance special assessment, which decreased from $64 million in the linked quarter to $9 million in the current quarter. The decrease was partially offset by increases related to higher assessment rates charged to financial institutions and growth in our deposits.
• The $10 million decrease in marketing costs reflected lower spending on digital marketing associated with the Direct Bank.
• Acquisition-related expenses decreased $58 million as shown in the table below.

Table 12

Acquisition-related expenses

dollars in millions

Salaries and benefits primarily includes severance and retention costs for employees associated with business combinations. These amounts are recognized over the requisite service period, if any.

Professional fees mainly include consulting, legal and accounting costs associated with business combinations and the related integration, optimization, and business process reengineering. These amounts are expensed as incurred.

Asset impairment includes the following: (i) impairment of right of use assets for operating leases assumed in business combinations for the leased office space we subsequently vacated; and (ii) impairment of information technology systems and software acquired in business combinations that we subsequently determined would not be utilized.

INCOME TAXES

Table 13

Income Tax Data

dollars in millions

The effective tax rate (“ETR”) was 27.2% for the current quarter compared to 27.9% in the linked quarter. The decrease in the ETR for the current quarter compared to the linked quarter was primarily due to the impact of the return to provision adjustments recorded.

The ETR 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 current quarter 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 18—Income Taxes for additional information.

RESULTS BY BUSINESS SEGMENT

We made changes to our segment reporting during the first quarter of 2024 as further discussed in Note 1—Significant Accounting Policies and Basis of Presentation. Segment disclosures for 2023 periods included in this Form 10-Q were recast to reflect the segment reporting changes.

BancShares’ segments at March 31, 2024 include General Bank, Commercial Bank, SVB Commercial, and Rail. All other financial information not allocated to the segments is included in the “Corporate” section of the segment disclosures. Refer to Note 20—Business Segment Information for the segment descriptions, which reflect the segment reporting changes made during the first quarter of 2024.

General Bank

Table 14

General Bank: Financial Data

dollars in millions

General Bank segment net income for the current quarter increased from the linked quarter, as lower taxes, along with lower provision for credit losses and higher noninterest income, were mostly offset by higher noninterest expenses. Segment NII was relatively flat compared to the linked quarter as higher interest expense for deposits offset higher interest income from loan growth. The decline in the provision for credit losses was primarily due to a release in the ALLL in the current quarter, as further discussed in the sections entitled “Provision for Credit Losses” and “Risk Management—Credit Risk—Allowance for Loan and Lease Losses” in this MD&A. The improvement in noninterest income was in asset management and servicing fees. The increase in noninterest expense was primarily due to increases in salaries and benefits and FDIC insurance expense. Noninterest income and expense are discussed in their respective sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A.

The increase in loans and leases during the current quarter reflected continued demand in our branch network. Growth was primarily concentrated in commercial and business loans, as well as from the small business lending and wealth channels. Our consumer mortgage loans were relatively unchanged, as we increased the amount originated and sold.

Deposits primarily include deposits from the branch network, as well as wealth and community association banking channels. The increase in deposits during the current quarter was primarily in the branch network, largely in time deposit and money market products. Refer to consolidated discussions in the sections entitled “Net Interest Income and Net Interest Margin” and “Interest-Bearing Liabilities—Deposits” of this MD&A for additional information.

Commercial Bank

Table 15

Commercial Bank: Financial Data

dollars in millions

75

Commercial Bank segment net income for the current quarter increased from the linked quarter, primarily due to a lower provision for credit losses, partially offset by higher noninterest expenses and lower noninterest income. Segment NII was relatively flat compared to the linked quarter as higher interest expense for deposits offset higher interest income from loan growth. The decline in the provision for credit losses was primarily due to a release in the ALLL in the current quarter as further discussed in the sections entitled “Provision for Credit Losses” and “Risk Management—Credit Risk—Allowance for Loan and Lease Losses” in this MD&A. Noninterest income decreased, mostly due to lower capital market fees and factoring commissions. Noninterest expenses increased, mainly due to increases in salaries and benefits and FDIC insurance expense. Noninterest income and noninterest expense are discussed in the sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A.

The increase in loans and leases during the current quarter reflected growth in a number of industry verticals, including healthcare, technology, media and telecommunications and energy.

SVB Commercial

Table 16

SVB Commercial: Financial Data

dollars in millions

SVB Commercial segment net income for the current quarter increased from the linked quarter reflecting higher NII and lower provision for credit losses. NII increased, due to increases in loan balances and decreases in deposit balances, partially offset by higher deposit costs as customers shifted deposits to higher cost products. The provision for credit losses decreased mainly due to lower net charge-offs and an increase in the benefit from off-balance sheet credit exposure as further discussed in the sections entitled “Provision for Credit Losses” and “Risk Management—Credit Risk—Allowance for Loan and Lease Losses” in this MD&A.

Loans totaled $39.85 billion at March 31, 2024, up from $39.51 billion at December 31, 2023. The increase was due to increases in global fund banking loans, partially offset by declines in technology and life science/healthcare loans as paydowns exceeded new originations.

Deposits totaled $34.01 billion at March 31, 2024, a decline from $34.73 billion at December 31, 2023, as cash usage by clients offset new funding activity. For additional information on deposit trends, refer to the “Funding, Liquidity and Capital Overview” discussion in the “Executive Overview” section of this MD&A.

Rail

Table 17

Rail: Financial Data

dollars in millions

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

Rail segment 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 is calculated as 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 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.

Rail segment net income, rental income on operating leases, and adjusted rental income on operating leases for the current quarter were $33 million, $198 million, and $103 million, respectively. Rail segment net income for the current quarter increased from the linked quarter, mostly reflecting lower maintenance and other operating lease expenses, along with higher rental income on operating lease equipment. Rental income on operating leases increased, largely as a result of higher utilization, strong re-pricing and a higher number of rail cars owned and leased. Railcar depreciation is recognized on a straight-line basis over the estimated useful life of the asset. Maintenance and other operating lease expenses were lower due to lower repairs and freight charges. Maintenance and other operating lease expenses tend to be variable due to timing and number of railcars coming on or off lease and the asset condition. Noninterest income primarily reflects net gains on equipment sales.

Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 125.0% of the average prior or expiring lease rate during the first quarter of 2024. Our railcar utilization, including commitments to lease, improved from 98.7% at December 31, 2023 to 99.2% at March 31, 2024.

Portfolio

Rail segment 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 March 31, 2024 consisted of approximately 122,900 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 18

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

Table 19

Rail Operating Lease Equipment by Obligor Industry

dollars in millions

Corporate

Table 20

Corporate: Financial Data

dollars in millions

Current quarter net income for Corporate increased from the linked quarter, as the linked quarter included the previously discussed $83 million adjustment to the gain on acquisition and FDIC insurance special assessment of $64 million.

Current quarter NII decreased from the linked quarter, mainly from lower loan discount accretion income related to the SVBB Acquisition and higher interest expense on Direct Bank interest-bearing deposits. The $40 million increase in interest income on investment securities was mostly offset by the $37 million decrease in interest income on interest-earning deposits at banks. Refer to the “Net Interest Income and Net Interest Margin” section of this MD&A for further discussion.

Noninterest expenses were down from the linked quarter, mainly from decreases in acquisition-related expenses and the FDIC insurance special assessment. Acquisition-related expenses were $58 million in the current quarter compared to $116 million in the linked quarter. FDIC insurance special assessment expense accruals were $9 million in the current quarter and $64 million in the linked quarter. Refer to the “Noninterest Expense” section of this MD&A for further discussion.

The prior year quarter included the gain on acquisition of $9.82 billion and the day 2 provisions for credit losses of $716 million related to the SVBB Acquisition. The prior year quarter also included a $4 million provision for investment securities available for sale credit losses.

The income tax rates for the linked and prior year quarters were impacted by the gain on acquisition. 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, loans 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 are primarily comprised of interest-bearing deposits with the FRB. Interest-earning deposits at banks as of March 31, 2024 totaled $30.79 billion, a decrease of $2.82 billion from $33.61 billion at December 31, 2023. The decrease from December 31, 2023 is related to continued liquidity and funding management as we grew deposits and purchased investment securities.

Securities Purchased Under Agreement to Resell

Securities purchased under agreement to resell at March 31, 2024 totaled $394 million, a decrease of $79 million from $473 million at December 31, 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 our 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” in the “Executive Overview” section of this MD&A for additional disclosures regarding investment securities.

The carrying value of investment securities at March 31, 2024 totaled $35.04 billion, an increase of $5.05 billion or 17% from $30.00 billion at December 31, 2023. The increase from December 31, 2023 primarily reflected purchases that totaled $6.47 billion, which were U.S agency residential mortgage-backed and short-duration U.S. Treasury investment securities, partially offset by maturities and paydowns of $1.58 billion. The change also included non-cash items, such as amortization, accretion, and fair value changes for investment securities available for sale and marketable equity securities.

Our portfolio of investment securities available for sale consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury securities, 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 accumulated other comprehensive income, net of deferred taxes. As of March 31, 2024, investment securities available for sale had a net pretax unrealized loss of $876 million, compared to a net pretax unrealized loss of $752 million as of December 31, 2023, reflecting the impacts of market interest rates. 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, no allowance for credit loss was required as of March 31, 2024. For corporate 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. We determined no allowance for credit loss was required as of March 31, 2024.

Our portfolio of investment securities held to maturity consists of similar mortgage-backed securities, U.S. Treasury securities and government agency securities described above, as well as securities issued by the Supranational Entities & Multilateral Development Banks and FDIC guaranteed certificates of deposit with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury and the Supranational Entities & Multilateral Development Banks, and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined that no allowance for credit loss was required for investment securities held to maturity at March 31, 2024.

The following table presents the investment securities portfolio at March 31, 2024 and December 31, 2023, segregated by major category:

Table 21

Investment Securities

dollars in millions

80

The following table presents the weighted average yields for investment securities available for sale and held to maturity at March 31, 2024, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio was calculated using security-level annualized yields.

Table 22

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 March 31, 2024. 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 the lower of cost or fair value (“LOCOM”). When we decide to sell operating lease equipment, it is transferred to assets held for sale at LOCOM.

Assets held for sale at March 31, 2024 were $86 million, an increase of $10 million or 14% from $76 million at December 31, 2023.

Table 23

Assets Held for Sale

dollars in millions

Loans and Leases

We updated our loan classes during the first quarter of 2024 as further discussed in Note 1—Significant Accounting Policies and Basis of Presentation. Loan and lease and ALLL disclosures for 2023 periods included in this Form 10-Q were recast to reflect the changes in loan classes.

Loans and leases held for investment at March 31, 2024 were $135.37 billion, an increase of $2.07 billion or 2% from $133.30 billion at December 31, 2023. The increase from December 31, 2023 mostly reflects growth in commercial loans, while consumer loans and SVB loans were modestly higher. The General Bank segment growth was primarily related to commercial and business loans in the branch network. The Commercial Bank segment generated growth in many of our industry verticals. Within the SVB loan classes, growth in the global fund banking portfolio was partially offset by declines in the technology and life science/healthcare portfolio.

Refer to the “Results by Business Segments” section of this MD&A for further information.

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

Table 24

Loans and Leases

dollars in millions

The unamortized discount related to acquired loans was $1.90 billion at March 31, 2024, a decrease of $132 million from $2.04 billion at December 31, 2023. The decrease from December 31, 2023 reflects accretion of $163 million, including $35 million for unfunded commitments, for the quarter ended March 31, 2024.

OPERATING LEASE EQUIPMENT, NET

As detailed in the following table, our operating lease portfolio mostly relates to the Rail segment, with the remainder included in the Commercial Bank segment. Refer to the “Results by Business Segment” section of this MD&A for further details on the operating lease equipment portfolios in the Rail and Commercial Bank segments.

Table 25

Operating Lease Equipment

dollars in millions

(1) Includes off-lease rail equipment of $150 million at March 31, 2024, and $253 million at December 31, 2023.

INTEREST-BEARING LIABILITIES

Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, and borrowings. Interest-bearing liabilities at March 31, 2024 totaled $147.87 billion, an increase of $4.16 billion or 3% from $143.71 billion at December 31, 2023. The increase from December 31, 2023 was due to deposit growth.

Deposits

Total deposits at March 31, 2024 were $149.61 billion, an increase of $3.76 billion or 3% from $145.85 billion at December 31, 2023. The increase from December 31, 2023 is mainly attributable to savings deposit growth in our Direct Bank.

The following table summarizes the types of deposits at March 31, 2024 and December 31, 2023.

Table 26

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.

Deposit Concentrations

BancShares operates a network of more than 600 branches and offices in 30 states as of March 31, 2024, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States, providing a broad range of financial services to individuals, businesses and professionals. Based on branch location, deposits as of March 31, 2024 in North Carolina and South Carolina represented approximately 25.8% and 8.0%, respectively, of total deposits.

The Direct Bank had $39.81 billion or 27% of our total deposits as of March 31, 2024. The Direct Bank deposits mainly consist of savings deposit accounts.

SVB Commercial segment deposits as of March 31, 2024 were $34.01 billion or 23% of total deposits and are primarily concentrated in online banking. Deposits in the SVB Commercial segment included large dollar accounts with private equity and venture capital clients, primarily in the healthcare and technology industries. Deposit accounts in the SVB Commercial segment with balances in excess of $50 million totaled approximately $4.05 billion as of March 31, 2024.

Uninsured Deposits

Where information is not readily available to determine the amount of deposits not insured by the FDIC, 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 $54.85 billion, which represented approximately 36.7% of total deposits at March 31, 2024, compared to $54.15 billion or 37.1% of total deposits at December 31, 2023.

Refer to the “Funding, Liquidity and Capital Overview” and “Results by Business Segment” sections of this MD&A for further discussion of deposit composition, uninsured deposits, and recent deposit trends.

The following table provides the expected maturity of time deposits with balances in excess of $250,000 as of March 31, 2024:

Table 27

Maturities of Time Deposits In Excess of $250,000

dollars in millions

Borrowings

Total borrowings at March 31, 2024 were $37.54 billion, a decrease of $114 million from $37.65 billion at December 31, 2023. The decrease from December 31, 2023 primarily related to declines in short-term borrowings and redemptions of Capital Trust debentures as shown in the following table.

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

Table 28

Borrowings

dollars in millions

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

Refer to the “Liquidity Risk” section of this MD&A and Note 11—Borrowings for further information regarding liquidity and borrowings.

Refer to the “Regulatory Considerations” section in Item 1. Business of our 2023 Form 10-K for additional information on an NPR issued by the federal banking agencies discussing, among other items, the proposed requirement to maintain a certain level of long-term debt that would be available to absorb losses in the event of failure. We are in the process of evaluating the proposal and assessing its potential impact, but we expect that we would need to raise additional long-term debt to satisfy these requirements if the NPR is finalized.

RISK MANAGEMENT

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 our 2023 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 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 CRE properties due to current interest rate levels that impacted the ALLL forecasts. Key indicators will continue to be monitored and impacts assessed as part of our ongoing risk management framework.

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.

Commercial Lending and Leasing

BancShares employs a credit ratings system where each commercial loan is assigned a probability of default (“PD”), loss given default (“LGD”), and/or overall credit 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, as well as other borrower and loan characteristics, to assign a 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.

Our ALLL estimate as of March 31, 2024 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.

Our ALLL methodology was discussed further in our 2023 Form 10-K, in the section entitled “Critical Accounting Estimates” of the MD&A and Note 1—Significant Accounting Policies and Basis of Presentation.

Allowance for Loan and Lease Losses

We updated our loan classes during the first quarter of 2024 as further discussed in Note 1—Significant Accounting Policies and Basis of Presentation. Loan and lease and ALLL disclosures for 2023 periods included in this Form 10-Q were recast to reflect the changes in loan classes.

The ALLL at March 31, 2024 was $1.74 billion, representing a decrease of $10 million from $1.75 billion at December 31, 2023. The ALLL as a percentage of total loans and leases at March 31, 2024 was 1.28%, compared to 1.31% at December 31, 2023.

The $10 million decrease in the ALLL compared to December 31, 2023 was primarily the result of changes in the macroeconomic forecasts and a decline in specific reserves on individually evaluated loans. As presented in Table 31, the decrease in the ALLL from December 31, 2023 included an increase of $7 million related to the SVB portfolio and decreases of $6 million and $11 million related to the Commercial and Consumer portfolios, respectively.

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 March 31, 2024, ALLL estimates in these scenarios ranged from approximately $1.42 billion, when weighing the upside scenario 100%, to approximately $2.19 billion when weighting the downside scenario 100%. BancShares management determined that an ALLL of $1.74 billion was appropriate as of March 31, 2024.

Table 29

ALLL for Loans and Leases

dollars in millions

Net charge-offs during the current quarter were $103 million, a decrease of $74 million from $177 million during the linked quarter. The net charge-off ratio was 0.31% and 0.53% for the current and linked quarters, respectively. The decrease in net charge-offs compared to the linked quarter primarily reflects lower charge-offs related to Commercial and SVB portfolios. The declines in Commercial portfolio net charge-offs in the current quarter were mostly in energy and equipment finance loans. Within the SVB portfolio, the declines in net charge-offs were primarily in early-stage investor dependent loans.

The following table provides trends in the ALLL ratios:

Table 30

ALLL Ratios

dollars in millions

A reserve for off-balance sheet credit exposures is established for unfunded commitments and is included in other liabilities, presented in Note 13—Other Liabilities. 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 PD and LGD models to those expected funding amounts to estimate the reserve.

The reserve for off-balance sheet credit exposures was $287 million at March 31, 2024, a decrease of $29 million compared to $316 million at December 31, 2023. The decrease from December 31, 2023 primarily reflects declines in the SVB unfunded commitments, mainly in the Innovation C&I portfolios. Refer to Note 21—Commitments and Contingencies for information relating to off-balance sheet commitments.

The following table presents the ALLL by loan class:

Table 31

ALLL by Loan Class

dollars in millions:

Credit Metrics

Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases, other real estate owned (“OREO”) and repossessed assets. Accounting policies related to nonperforming assets were discussed further in our 2023 Form 10-K, in the section entitled “Credit Metrics” of the MD&A and Note 1—Significant Accounting Policies and Basis of Presentation.

The following table presents total nonperforming assets:

Table 32

Non-Performing Assets

dollars in millions

89

Nonaccrual loans and leases at March 31, 2024 were $1.07 billion, an increase of $105 million from $969 million at December 31, 2023. The increase from December 31, 2023 was primarily due to higher commercial nonaccrual loans, partially offset by lower nonaccrual loans in the consumer portfolio. The increase related to commercial was mostly in the commercial and industrial loan class, mainly in the business capital loans, and in the non-owner occupied commercial mortgage loan class. Refer to the “CRE Portfolio” discussion below for further information and Note 4—Loans and Leases for tabular presentation of nonaccrual loans by loan class. Nonaccrual loans in the SVB loans are mostly in the investor dependent portfolios.

OREO and repossessed assets at March 31, 2024 was $58 million, compared to $62 million at December 31, 2023. Nonperforming assets as a percentage of total loans, leases, OREO and repossessed assets at March 31, 2024 was 0.84% compared to 0.77% at December 31, 2023.

Past Due Accounts

The percentage of loans 30 days or more past due at March 31, 2024 was 1.12% of total loans, compared to 1.16% at December 31, 2023. Delinquency status by loan class is presented in Note 4—Loans and Leases.

CRE Portfolio

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

Table 33

Commercial Real Estate Portfolio (1)

dollars in millions

(1) The definition of CRE in these tables is aligned with FRB and FDIC guidance on CRE and includes the following: construction loans, loans where the primary repayment is from third party rental income, and loans not secured by real estate but for the purpose of real estate. These tables exclude the owner occupied commercial mortgage loan class.

Evolving macroeconomic and social conditions (including the increase in remote working in connection with the COVID-19 pandemic) may result in changes for general office demand moving forward. Select metrics specific to our general office loan portfolio are as follows:

Table 34

Select General Office Loan Metrics (1)

dollars in millions

90

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 portfolio loans are concentrated in loans with large balances and loans in certain industries and customer groups, including private equity and venture capital.

Loan concentration data regarding our Commercial, Consumer, and SVB loan portfolios is summarized below.

Commercial Loan Concentrations

Geographic Concentrations

The following table summarizes state concentrations of 5.0% or greater of our loans. Data is based on obligor location.

Table 35

Commercial Loans and Leases - Geography

dollars in millions

Industry Concentrations

The following table represents loans by industry of obligor:

Table 36

Commercial Loans and Leases - Industry

dollars in millions

91

Consumer Loan 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 customer address:

Table 37

Consumer Loans - Geography

dollars in millions

SVB 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 SVB portfolio is focused on two primary markets, Global Fund Banking and Technology and Life Science/Healthcare.

Global Fund Banking

The Global Fund Banking loan portfolio includes loans to clients in the private equity and venture capital community. Global Fund Banking represented 67% of SVB loans and 20% of total loans at March 31, 2024, compared to 65% and 19% at December 31, 2023. 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 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 portfolio includes 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 Commercial and Industrial (“C&I”) and Cash Flow Dependent for reporting purposes.

Investor Dependent - Early Stage loans represented 3% of SVB loans and 1% of total loans at March 31, 2024, compared to 4% and 1% at December 31, 2023. 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.

Investor Dependent - Growth Stage loans represented 7% of SVB loans and 2% of total loans at March 31, 2024, unchanged from 7% and 2% at December 31, 2023. 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 23% of SVB loans and 7% of total loans at March 31, 2024, compared to 24% and 7% at December 31, 2023. 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.

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 March 31, 2024:

Table 38

SVB Loans by Size and Class

dollars in millions

SVB Loans - State Concentrations

The following table summarizes state concentrations greater than 5.0% within the SVB loans portfolio at March 31, 2024, based on borrower location:

Table 39

SVB Loans - Geography

dollars in millions

COUNTERPARTY RISK

We enter into interest rate derivatives and foreign exchange forward contracts as part of our overall risk management practices and also on behalf of our clients. We establish risk metrics and evaluate and manage the counterparty risk associated with these derivative instruments in accordance with the comprehensive Risk Management Framework and Risk Appetite Framework and Statement.

Counterparty credit exposure or counterparty risk is a primary risk of derivative instruments, relating to the ability of a counterparty to perform its financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures, which are integrated with our cash and issuer related credit processes.

The applicable Chief Credit Officer, or delegate, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements for BancShares’ risk management purposes and for the hedging of client transactions are executed with major financial institutions and are settled through the major clearing exchanges, which are rated investment grade by nationally recognized statistical rating agencies. Credit exposure is mitigated via the exchange of collateral between the counterparties covering mark-to-market valuations. Client related derivative transactions, which are primarily related to lending activities, are incorporated into our loan underwriting and reporting processes.

ASSET RISK

Asset risk is a form of price risk that is a primary risk of our leasing businesses. This relates to the risk of earning capital arising from changes in the value of owned leasing equipment. Asset risk in our leasing business is evaluated and managed in the divisions and overseen by risk management processes. In our asset-based lending business, we also use residual value guarantees to mitigate or partially mitigate exposure to end of lease residual value exposure on certain of our finance leases. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic periodic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and product, are reviewed as part of the quarterly financial and asset quality review. Reviews for impairment are performed at least annually.

In combination with other risk management and monitoring practices, asset risk is monitored through reviews of the equipment markets, including utilization rates and traffic flows; the evaluation of supply and demand dynamics; the impact of new technologies; and changes in regulatory requirements on different types of equipment. At a high level, demand for equipment is correlated with Gross Domestic Product growth trends for the markets the equipment serves, as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in trade flows due to specific events represent risks to the earnings that can be realized by these businesses. For instance, in the Rail segment, BancShares seeks to mitigate these risks by maintaining a relatively young fleet of assets, which can bolster attractive lease and utilization rates.

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 (“EVE”) 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.

Our funding sources consist primarily of deposits and we also support our funding needs through wholesale funding sources (including unsecured and secured borrowings).

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 incorporate additional assumptions, including prepayment estimates, pricing estimates, deposit behaviors, and using internal models. The below simulations assume an immediate 100 and 200 bps parallel increase and decrease from the market-based forward curve for March 31, 2024 and December 31, 2023.

Table 40

Net Interest Income Sensitivity Simulation Analysis

NII Sensitivity metrics at March 31, 2024, compared to December 31, 2023, were primarily affected by cash deployment into investment securities, as well as higher market rates.

As of March 31, 2024, 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 60%-65% of our loans have floating contractual reference rates, indexed primarily to the Prime Lending Rate and Secured Overnight Financing Rate (“SOFR”). Deposit betas are currently modeled to have a portfolio average of approximately 30%-35% over the twelve-month forecast horizon; including 40%-50% for interest-bearing non-maturity deposits. Deposit beta is the portion of a change in the federal 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 EVE 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 March 31, 2024 and December 31, 2023:

Table 41

Economic Value of Equity Modeling Analysis

The EVE metrics at March 31, 2024 compared to December 31, 2023 were primarily affected by the balance sheet and market rate changes.

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 balance sheet composition 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 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

The following table provides information regarding the sensitivity to changes in interest rates of loans and leases maturing one year or after, as of March 31, 2024:

Table 43

Loan Interest Rate Sensitivity

dollars in millions

96

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 committed credit facilities, repurchase agreements, brokered certificates of deposit issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties.

We utilize 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 March 31, 2024 we had $59.33 billion of total liquid assets (27.2% of total assets) and $32.90 billion of contingent liquidity sources available.

Table 44

Liquidity

dollars in millions

(1) Consists 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 U.S. Agency investment securities held outright or via reverse repurchase agreements.

(2) Current capacity is based on the amount of collateral pledged and available for use at March 31, 2024.

(3) Advance Facility Agreement with the FDIC obtained in connection with SVBB Acquisition and has a maximum capacity of $70 billion, subject to additional collateral pledge requirements. See below for additional details and limits on use.

(4) 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 March 31, 2024 were $149.61 billion, an increase of $3.76 billion from $145.85 billion at December 31, 2023. The increase in deposits from December 31, 2023 primarily reflected growth in the Direct Bank. We use borrowings to diversify the funding of our business operations. Total borrowings at March 31, 2024 were $37.54 billion, a decrease of $114 million from $37.65 billion at December 31, 2023. The decrease in borrowings from December 31, 2023 primarily reflected lower short term borrowings and redemptions of the remaining Capital Trust debentures. 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” subsections in the “Interest-Bearing Liabilities” section of this MD&A 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 $5.51 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at March 31, 2024 and December 31, 2023.

FDIC Credit Facility

FCB and the FDIC entered into the Advance Facility Agreement, dated as of March 27, 2023, and effective as of November 20, 2023, providing total advances available through March 27, 2025 of up to $70 billion (subject to the limits described below) solely to provide liquidity to offset deposit withdrawal or runoff of former SVBB deposit accounts and to fund the unfunded commercial lending commitments acquired in the SVBB Acquisition. Borrowings outstanding under the Advance Facility Agreement are limited to an amount equal to the value of loans and other collateral obtained from SVBB plus the value of any other unencumbered collateral agreed by the parties to serve as additional collateral, reduced by the amount of principal and accrued interest outstanding under the Purchase Money Note and the accrued interest on the Advance Facility Agreement. Interest on any outstanding principal amount accrues at a variable rate equal to the three-month weighted average of the Daily Simple SOFR plus 25 bps (but in no event less than 0.00%). The facility had a current capacity of $12.85 billion and was not utilized as of March 31, 2024. See Note 2—Business Combinations for further discussion.

Contractual Obligations and Commitments

The following table includes significant contractual obligations and commitments as of March 31, 2024, representing required and potential cash outflows, including impacts from purchase accounting adjustments and deferred fees. See Note 21—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 $8 million and $151 million, respectively. On-balance sheet commitments for affordable housing partnerships are included in other liabilities and presented net of a purchase accounting adjustment of $53 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 were discussed in “Regulatory Considerations” section in Item 1. Business of our 2023 Form 10-K, including a discussion of an NPR issued by the federal banking agencies regarding enhanced capital requirements.

BancShares’ total consolidated assets are 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. However, the proposed interagency rulemaking recently announced by the FDIC, the FRB and the Office of the Comptroller of the Currency could alter the capital framework for banks with total assets of $100 billion or more. We are continuing to monitor these proposed rules. For further discussion, refer to the section entitled “Regulatory Considerations” in Item 1. Business of our 2023 Form 10-K.

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 quarter of 2024, we paid a quarterly dividend of $1.64 on the Class A common stock and Class B common stock. On April 24, 2024, our Board declared a quarterly dividend on the Class A common stock and Class B common stock of $1.64 per common share. The dividends are payable on June 17, 2024 to stockholders of record as of May 31, 2024.

During the first quarter of 2024, we paid quarterly dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock as disclosed in Note 15—Stockholders' Equity. On April 24, 2024, our Board declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in accordance with their terms. The dividends are payable on June 17, 2024.

Capital Composition and Ratios

The following table details activities that caused the change in outstanding Class A common stock during 2024:

Table 47

Changes in Shares of Class A Common Stock Outstanding

We also had 1,005,185 Class B common stock outstanding at March 31, 2024 and December 31, 2023.

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 March 31, 2024, BancShares and FCB had risk-based capital ratio conservation buffers of 7.66% and 7.37%, respectively, which are in excess of the Basel III conservation buffer of 2.50%. As of December 31, 2023, BancShares and FCB risk-based capital ratio conservation buffers were 7.75% and 7.56%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratios as of March 31, 2024 and December 31, 2023 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

The ALLL is considered a critical accounting estimate. The ALLL as of March 31, 2024 is discussed in Note 5—Allowance for Loan and Lease Losses and in the “Credit Risk” section above.

RECENT ACCOUNTING PRONOUNCEMENTS

The following ASUs were issued by the FASB but are not yet effective for BancShares:

100

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’ management 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 rental income on operating leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.

The following table details a reconciliation of rental income on operating leases to adjusted rental income on operating lease equipment:

Table 50

Rail Segment

dollars in millions

101

Forward-Looking Statements

Statements in this 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, 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 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 and the Middle East) and market conditions, including changes in competitive pressures among financial institutions and the impacts related to or resulting from recent bank failures, the risks and impacts of future bank failures and other volatility in the banking industry, public perceptions of our business practices, including our deposit pricing and acquisition activity, 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 recent interest rate hikes and any changes by the FRB, 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 FRB on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions, including significant turbulence in the capital or financial markets, the impact of any sustained or elevated inflationary environment, the impact of any cyberattack, information or security breach, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, including potential increased regulatory requirements, limitations, and costs, such as FDIC special assessments, increases to FDIC deposit insurance premiums and the recently proposed interagency 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 risks associated with BancShares’ previous acquisition transactions, including the SVBB Acquisition and the previously completed transaction with CIT Group Inc., or any future transactions.

Except to the extent required by applicable laws or regulations, BancShares disclaims any obligation to update forward-looking statements 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 BancShares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and its other filings with the SEC.

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. 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.

The information required by this Item 3. Quantitative and Qualitative Disclosures about Market Risk is set forth in the “Risk Management” section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this Form 10-Q.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision of and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as of March 31, 2024. Based on such evaluation, our Chief Executive Officer and Chief 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. 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 during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.

There have been no material changes in the risk factors during 2024 from those reported in our 2023 Form 10-K. For a discussion of the risks and uncertainties that management believes are material to an investment in us, refer to Part I, Item 1A. Risk Factors, of our 2023 Form 10-K, and Forward-Looking Statements of this Form 10-Q.