First Citizens Bancshares Inc: Form 10-Q for the period ended Sep 30, 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 financial measures that are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in its analysis of the financial condition and results of operations of BancShares. Refer to 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 also owns a fleet of railcars and locomotives that are leased to railroads and shippers.

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 advisers, FCIS and FCAM provide investment management services and advice. FCCS is a broker-dealer that also provides underwriting and private placement services. We also have other wholly owned subsidiaries, including SVB Wealth LLC, SVB Asset Management, and First Citizens Institutional Asset Management, LLC, which are active investment advisers.

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

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.

Recent Events

Share Repurchase Program

On July 25, 2024, BancShares announced that its Board of Directors (the “Board”) authorized a share repurchase program, which allows BancShares to repurchase shares of its Class A common stock in an aggregate amount up to $3.5 billion through 2025. During the third quarter of 2024, we repurchased approximately $700 million of our Class A common stock. Refer to Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information regarding repurchase activity during the current quarter and through October 31, 2024.

Under the authorized share repurchase program, shares of BancShares’ Class A common stock may be purchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan, but the Board’s action does not obligate BancShares to repurchase any minimum or particular number of shares, and repurchases may be suspended or discontinued at any time (subject to the terms of any Rule 10b5-1 plan in effect) without prior notice.

Hurricanes Helene and Milton

On September 26, 2024, Hurricane Helene (“Helene”) made landfall in the Big Bend area of the Florida Gulf Coast as a Category 4 hurricane. Helene's most significant impacts were across the southern Appalachians, where widespread and severe flooding occurred. On October 9, 2024, Hurricane Milton made landfall in the central west coast of Florida and caused extensive damage and flooding across the Florida peninsula. The operations of our branches and offices were not significantly affected. At September 30, 2024, we estimated a $20 million loan loss reserve related to Helene, which will continue to be assessed as further information becomes available.

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 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 and 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.

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.

Recent Economic, Industry and Regulatory Developments

During its September 2024 meeting, the FRB’s Federal Open Market Committee (“FOMC”) reduced the benchmark federal funds rate to a range between 4.75% - 5.00%. In its statement, the FOMC said it gained greater confidence that inflation is moving sustainably toward 2 percent, and therefore lowered the target range for the federal funds rate by 0.50%. The FOMC followed this with a further 0.25% reduction at its November 2024 meeting to reduce the benchmark federal funds rate to a range between 4.50% - 4.75%.

During 2023, the FDIC finalized a notice of proposed rulemaking (“NPR”) covering an industry-wide 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 is payable in eight quarterly installments beginning in 2024. In 2024, the FDIC revised its loss estimate, indicating higher losses than originally estimated to the deposit insurance fund. As a result, we accrued an additional FDIC insurance special assessment charge of approximately $11 million in 2024. The additional FDIC insurance special assessment charge will be paid in two quarterly installments beginning in 2026. The projected number of additional quarters and the estimated rate applicable to those quarters are subject to change depending on any adjustments to estimated losses or amendments to uninsured deposits.

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. If the NPRs are finalized, we expect we would need to raise additional long-term debt to satisfy the requirements.

On June 20, 2024, the FDIC adopted a final rule to amend its Covered Insured Depository Institution rule (“CIDI Rule”). The CIDI Rule requires depository institutions insured by the FDIC with $50 billion or more in total consolidated assets to periodically submit resolution plans that will enable the FDIC as receiver to resolve the bank in the event of its insolvency under the Federal Deposit Insurance Act. As a covered insured depository institution in group A under the CIDI Rule, we will be required to, among other things, submit to the FDIC full resolution plans every three years and interim targeted information between full resolution plan submissions. In addition, the final rule introduces a new credibility standard that will be used to evaluate full resolution plan submissions, which would be subject to potential FDIC enforcement action. While the final rule became effective beginning October 1, 2024, our first submission under the new regulatory reporting requirements will not be due until 2025.

Financial Performance Summary

The following tables in this MD&A include financial data for the three months ended September 30, 2024 (the “current quarter”), the three months ended June 30, 2024 (the “linked quarter”), the three months ended September 30, 2023 (the “prior year quarter”), the nine months ended September 30, 2024 (“current YTD”), and the nine months ended September 30, 2023 (“prior YTD”). The operations acquired in the SVBB Acquisition (the “acquired SVBB operations”) were included in our results of operations for the current YTD, but only from the SVBB Acquisition Date through September 30, 2023 (the “partial prior YTD”). Many year-to-date comparisons in this MD&A highlight the impact of including the acquired SVBB operations for the current YTD and the partial prior YTD.

In accordance with Item 303(c) of Regulation S-K, we focus on changes compared to the linked quarter and year-to-date periods 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 primarily focus the discussion of our financial position by comparing balances as of September 30, 2024 to December 31, 2023, but the tables also provide the linked quarter balances.

The following table summarizes BancShares’ results:

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.

(3) Net interest margin (“NIM”), excluding purchase accounting accretion or amortization (“PAA”), is a non-GAAP financial measure. Refer to the “NIM, Excluding PAA” item in the“Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the most comparable GAAP measure to the non-GAAP measure.

Financial highlights are summarized below. Further details are discussed in the “Results of Operations” section of this MD&A.

Third Quarter Income Statement Highlights

• Net income for the current quarter was $639 million, a decrease of $68 million or 10% from $707 million for the linked quarter. Net income available to common stockholders for the current quarter was $624 million, a decrease of $67 million or 10% from $691 million for the linked quarter. Earnings per diluted common share for the current quarter was $43.42, a decrease from $47.54 for the linked quarter.
• As further discussed below, the decreases were mainly due to higher noninterest expense. Other changes in net income included lower net interest income (“NII”) and higher provision for credit losses, which were partially offset by higher noninterest income.
• Select items in the current quarter and linked quarter included acquisition-related expenses of $46 million and $44 million, respectively.
• Return on average assets for the current quarter was 1.15% compared to 1.30% for the linked quarter.
• NII for the current quarter was $1.80 billion, a decrease of $25 million compared to the linked quarter as the $33 million increase in interest expense was partially offset by an $8 million increase in interest income. The $33 million increase in interest expense was mostly related to growth in the average balance of interest-bearing deposits. The $8 million increase in interest income was mainly due to the higher average loan balance, partially offset by lower loan accretion income. NII excluding PAA for the current quarter was $1.70 billion, an increase from $1.68 billion for the linked quarter. Refer to the “NIM, Excluding PAA” item in the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the most comparable GAAP measure to the non-GAAP measure.
• NIM for the current quarter was 3.53%, a decrease of 11 basis points (“bps”) from 3.64% for the linked quarter, primarily related to lower PAA and the items discussed above for NII. NIM, excluding PAA, was 3.33% compared to 3.36% in the linked quarter. Refer to the “NIM, Excluding PAA” item in the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the most comparable GAAP measure to the non-GAAP measure.
• Provision for credit losses was $117 million in the current quarter compared to $95 million in the linked quarter. The increase of $22 million was the result of a $28 million increase in the provision for loan and lease losses, partially offset by a $6 million increase in the benefit for off-balance sheet credit exposure. The higher provision for loan and lease losses is mainly attributable to an estimate of $20 million related to Helene, as well as increases in net charge-offs and specific reserves, partially offset by changes in credit quality and lower loan balances.
• Noninterest income for the current quarter was $650 million, an increase of $11 million or 2% from $639 million for the linked quarter. The increase in noninterest income included an $11 million improvement from the linked quarter for fair value adjustments on marketable equity securities, a $4 million increase in fees income and other service charges, mainly due to higher capital market fees, and a realized $4 million gain on sale of marketable equity securities. The remaining change included an $18 million decline in other noninterest income, mainly attributable to fair value changes in customer derivative positions and other nonmarketable investments, and an increase of $10 million spread among the remaining noninterest income items.
• Noninterest expense for the current quarter was $1.46 billion, an increase of $70 million or 5% from $1.39 billion for the linked quarter, primarily attributable to increases of $43 million in salaries and benefits and $18 million in professional fees. The remaining increases were spread among various noninterest expense line items.

Year-to-Date Income Statement Highlights

• Net income for the current YTD was $2.08 billion, a decrease of $8.88 billion or 81% from $10.95 billion for the prior YTD. Net income available to common stockholders for the current YTD was $2.03 billion, a decrease of $8.88 billion from $10.91 billion for the prior YTD. Earnings per diluted common share for the current YTD was $140.26, a decrease from $750.19 for the prior YTD.
• The decreases were mostly related to the SVBB Acquisition. Noninterest income was lower for the current YTD as the prior YTD included the $9.89 billion gain on acquisition. This was partially offset by a lower provision for credit losses for the current YTD as the prior YTD included the provision for non-purchased credit deteriorated (“Non-PCD”) loans and leases and the unfunded commitments acquired in the SVBB Acquisition (collectively, the “Day 2 Provision for Credit Losses”).
• As further discussed below, other changes in net income included higher NII, which was partially offset by higher noninterest expenses. Additionally, the acquired SVBB operations were reflected in earnings for the current YTD and the partial prior YTD.
• The current YTD included the following select items:
• Acquisition-related expenses of $148 million, and
• Additional FDIC insurance special assessment of $11 million.
• The prior YTD included the following select items:
• Gain on acquisition of $9.89 billion for the SVBB Acquisition,
• Day 2 Provision for Credit Losses of $716 million for the SVBB Acquisition,
• Loss of $12 million, primarily on the sale of municipal bonds acquired in the SVBB Acquisition, and
• Acquisition-related expenses of $354 million.
• Return on average assets for the current YTD was 1.27% compared to 7.81% for the prior YTD.
• NII for the current YTD was $5.43 billion, an increase of $633 million or 13% from $4.80 billion for the prior YTD. The increase was primarily due to the acquired SVBB operations being included for the current YTD and the partial prior YTD. Additionally, interest income increased in the current YTD due to higher interest income on loans and investment securities, which was partially offset by higher interest expense on interest-bearing deposits and borrowings and lower loan accretion income.
• NIM for the current YTD was 3.62%, a decrease of 33 bps from 3.95% for the prior YTD. The decrease in NIM from higher average balances of interest-bearing deposits and the Purchase Money Note, higher rates paid on deposits, and lower PAA income were partially offset by the NIM impact of higher average balances and yields on loans and investment securities. NIM, excluding PAA, was 3.35% for the current YTD compared to 3.50% for the prior YTD. Refer to the “NIM, Excluding PAA” item in the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the most comparable GAAP measure to the non-GAAP measure.
• Provision for credit losses for the current YTD was $276 million, a decrease of $850 million from $1.13 billion for the prior YTD. The decrease was primarily related to the Day 2 Provision for Credit Losses of $716 million in the prior YTD and changes in the macroeconomic forecast, partially offset by the estimated loan loss provision related to Helene.
• Noninterest income for the current YTD was $1.92 billion, a decrease of $9.62 billion from $11.53 billion for the prior YTD. The decrease was mostly due to the gain on acquisition of $9.89 billion in the prior YTD, partially offset by increases in various components of noninterest income, mostly because the acquired SVBB operations were reflected in earnings for the current YTD and the partial prior YTD.
• Noninterest expense for the current YTD was $4.22 billion, an increase of $375 million or 10% from $3.84 billion. The increase was mostly due to the acquired SVBB operations being included for the current YTD and the partial prior YTD, including higher salaries and benefits, partially offset by lower acquisition-related expenses.

Balance Sheet Highlights

• Loans and leases at September 30, 2024 were $138.70 billion, an increase of $5.39 billion or 4% from $133.30 billion at December 31, 2023 and a decrease of $646 million or 1% from $139.34 billion at June 30, 2024. Compared to December 31, 2023, there was loan growth in each of our business segments. Loan growth in the General Bank segment was primarily related to business and commercial loans in our Branch Network. Loan growth in the Commercial Bank segment was mainly due to the technology media and telecommunications (“TMT”) and the Healthcare industry verticals. Loan growth in the SVB Commercial segment was concentrated in global fund banking loans.
• Compared to June 30, 2024, the decrease in the SVB Commercial segment of $2.12 billion was primarily due to declines in global fund banking as repayment levels outpaced draw activity on new lines of credit. The decline in the SVB Commercial segment loans was partially offset by loan growth in the General Bank and Commercial Bank segment loan portfolios discussed above.
• Investment securities at September 30, 2024 were $38.66 billion, an increase of $8.66 billion or 29% from $30.00 billion at December 31, 2023 and an increase of $997 million or 3% from $37.67 billion at June 30, 2024. Compared to December 31, 2023 and June 30, 2024, the increases were primarily due to purchases of short-duration U.S. agency mortgage-backed and U.S. Treasury investment securities.
• Deposits at September 30, 2024 were $151.57 billion, an increase of $5.72 billion or 4% from $145.85 billion at December 31, 2023 and an increase of $495 million or 0.3% from $151.08 billion at June 30, 2024. The increase from December 31, 2023 reflected deposit growth in our Branch Network in the General Bank segment, the Direct Bank in Corporate, and in the SVB Commercial segment. The increase from June 30, 2024 reflected deposit growth in our Branch Network and SVB Commercial segment, partially offset by declines in the Commercial Bank segment and Direct Bank.
• Borrowings at September 30, 2024 were $37.16 billion, a decrease of $493 million from $37.65 billion at December 31, 2023 and a decrease of $297 million from $37.46 billion at June 30, 2024. The decrease from December 31, 2023 was mostly due to the current quarter redemption of our 2.969% senior unsecured borrowings, along with declines in securities sold under customer purchase agreements and the Purchase Money Note. The decrease from June 30, 2024 reflected the unsecured senior borrowings redemption, partially offset by higher securities sold under customer purchase agreements.
• At September 30, 2024, BancShares remained well capitalized with a total risk-based capital ratio of 15.36%, a Tier 1 risk-based capital ratio of 13.78%, a common equity Tier 1 ratio of 13.24% and a Tier 1 leverage ratio of 10.17%.

Funding, Liquidity and Capital Overview

Deposit Composition and Trends

We fund our business primarily through deposits. Deposits represented approximately 80% of total funding at September 30, 2024. The following table summarizes the composition, average size and uninsured percentages of our deposits:

Table 2

Select Deposit Data

(1) The average size is reflective of the Direct Bank deposits and excludes brokered deposits and rail.

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 mainly included $39.50 billion in our Direct Bank, with the remaining primarily comprised of brokered deposits.

As displayed in the table above, the average size of deposits varies across our business segments. The uninsured percentage is the percentage of uninsured deposits to total deposits at period end for the respective segments and Corporate. At September 30, 2024, total uninsured deposits were approximately $58.59 billion or 39% of total deposits. Uninsured deposits were $54.15 billion or 37% of total deposits at December 31, 2023.

Table 3

Deposit Trends

dollars in millions

Aggregate deposits for our General Bank segment and Corporate increased from December 31, 2023, primarily from deposit growth in our Branch Network and Direct Bank, respectively. SVB Commercial segment deposits increased from $34.73 billion at December 31, 2023 to $35.95 billion at September 30, 2024, mainly due to slight improvement in the macroeconomic environment and increases in client acquisitions. Deposit growth in the current quarter was mostly from our Branch Network. Refer to “Deposit Concentrations” in the Deposits section later in this MD&A for additional information on SVB Commercial segment deposits.

Liquidity Position

We strive to maintain a strong liquidity position, and our risk appetite for liquidity is low. At September 30, 2024, we had $58.36 billion in high-quality liquid assets consisting of $24.71 billion in cash and interest-earning deposits at banks (primarily held at the FRB) and $33.65 billion in high-quality liquid securities (“HQLS”). Additionally, we have unused borrowing capacity with the Federal Home Loan Bank (“FHLB”) and FRB of $15.80 billion and $5.62 billion, respectively.

In connection with the SVBB Acquisition, FCB and the FDIC, as lender and as collateral agent, entered into the Advance Facility Agreement, dated as of March 27, 2023, and effective as of November 20, 2023 (the “Advance Facility Agreement”), 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. The immediate available capacity of the Advance Facility Agreement was $8.13 billion at September 30, 2024. Refer to the “Liquidity Risk” section of this MD&A for further discussion.

Investment Securities Duration

At September 30, 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 September 30, 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 4.5 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

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. Interest income and expense and the respective yields and rates includes amortization of premiums, accretion of discounts, and impacts from hedging activities.

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 volume and yields or rates. Changes in NII due to changes in (i) volume (average balances of interest-earning assets and interest-bearing liabilities) and (ii) yields or rates are based on the following:

• 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 Yields/Rates

dollars in millions

(1) Loans and leases include 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 $1.80 billion, a decrease of $25 million from the linked quarter. This decrease was due to a $33 million increase in interest expense, partially offset by an $8 million increase in interest income.
• Interest income earned on loans and leases for the current quarter was $2.43 billion, an increase of $8 million from $2.42 billion for the linked quarter. Higher average balances led to an increase of $46 million in loan interest income. This was partially offset by a decrease of $38 million in loan accretion income. Loan accretion income was $107 million in the current quarter compared to $145 million in the linked quarter and is expected to continue trending lower as the acquired loans approach maturity.
• Interest income earned on investment securities for the current quarter was $358 million, an increase of $28 million or 8% from $330 million for the linked quarter. The increase reflected continued purchases of short duration agency mortgage-backed and U.S. Treasury investment securities available for sale, and to a lesser extent, higher yields on the more recently purchased investment securities.
• Interest income on interest-earning deposits at banks for the current quarter was $350 million, a decrease of $28 million or 7% from $378 million for the linked quarter. The decrease was mostly due to a lower average balance of interest-earning deposits at banks resulting from the purchases of investment securities described above.
• Interest expense on interest-bearing deposits for the current quarter was $1.00 billion, an increase of $29 million or 3% from $975 million for the linked quarter. The increase was primarily related to growth in money market deposits in the Branch Network and savings accounts in the Direct Bank, partially offset by a decrease in the average balance of time deposits.
• NIM for the current quarter was 3.53%, a decrease of 11 bps from 3.64% for the linked quarter, primarily related to lower PAA and the items discussed above for NII. NIM, excluding PAA, was 3.33% compared to 3.36% in the linked quarter. Refer to the “NIM, Excluding PAA” item in the “Non-GAAP Financial Measures” section of this MD&A. The impact of the 0.50% reduction in the benchmark federal funds rate by the FOMC during its September meeting was not significant to the current quarter NIM.
• Average interest-earning assets for the current quarter were $202.20 billion, an increase of $1.49 billion or 1% from $200.71 billion for the linked quarter. The increase mainly reflected higher average balances for loans, as the higher average investment securities balance was offset by the decline in average interest-earning deposits at banks. The yield on average interest-earning assets was 6.18%, a decrease of 8 bps from the linked quarter, primarily due to decreases in loan accretion and yield on interest-earning deposits at banks, partially offset by a higher yield on investment securities.
• Average interest-bearing liabilities for the current quarter were $149.89 billion, an increase of $1.51 billion or 1% from $148.38 billion in the linked quarter. The increase reflected higher average interest-bearing deposit balances. The rate paid on average interest-bearing liabilities increased by 3 bps from the linked quarter, primarily due to a higher average rate paid on money market deposits, while average rates paid on other deposit types were down. Although the rate paid on average money market deposits increased compared to the linked quarter, it declined late in the current quarter.

Table 6

Average Balances and Yields/Rates

dollars in millions

(1) Loans and leases include 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.

Table 7

Average Balances and Yields/Rates

dollars in millions

(1) Loans and leases include 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 YTD compared to Prior YTD

• NII for the current YTD was $5.43 billion, an increase of $633 million or 13% from $4.80 billion for the prior YTD. The increase reflected the acquired SVBB operations being included for the current YTD and the partial prior YTD. Additionally, interest income increased in the current YTD due to higher interest income on loans and investment securities, which was partially offset by higher interest expense on deposits and borrowings and lower loan accretion income.
• Interest income on loans and leases for the current YTD was $7.21 billion, an increase of $1.41 billion or 24% from $5.80 billion for the prior YTD. The increase largely resulted from earning interest income on the acquired SVBB loans for the current YTD and the partial prior YTD, as well as the benefit from organic loan growth at higher yields and the impact from floating-rate loan resets. Loan accretion income was $415 million in the current YTD and $535 million in the prior YTD, a decrease of $120 million.
• Interest income on investment securities for the current YTD was $970 million, an increase of $563 million or 138% from $407 million for the prior YTD. The increase was 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 on the more recently purchased investment securities.
• Interest income on interest-earning deposits at banks for the current YTD was $1.18 billion, an increase of $105 million or 10% from $1.07 billion for the prior YTD. The increase was a result of higher yields, as well as a higher average YTD balance as amounts related to the SVBB Acquisition were included for the current YTD and the partial prior YTD. The higher current YTD average balance was partially offset by outflows that funded the purchases of investment securities discussed above.
• Interest expense on interest-bearing deposits for the current YTD was $2.91 billion, an increase of $1.28 billion or 78% from $1.63 billion for the prior YTD. The increase is largely due to a higher average YTD balance as the interest-bearing deposits related to the SVBB Acquisition were included for the current YTD and the partial prior YTD. Organic interest-bearing deposit growth in our General Bank and SVB Commercial segments, as well as the Direct Bank, and higher rates paid on average interest-bearing deposits also contributed to the increase.
• Interest expense on borrowings for the current YTD was $1.01 billion, an increase of $170 million or 20% from $841 million for the prior YTD. The increase was mainly the result of interest expense on the Purchase Money Note for the current YTD and the partial prior YTD.
• NIM for the current YTD was 3.62%, a decrease of 33 bps from 3.95% for the prior YTD. The decrease in NIM from higher average balances of interest-bearing deposits and the Purchase Money Note, higher rates paid on deposits, and lower loan accretion income were partially offset by higher average balances and total yields on loans and investment securities. NIM, excluding PAA, was 3.35% for the current YTD compared to 3.50% for the prior YTD. Refer to the “NIM, Excluding PAA” item in the “Non-GAAP Financial Measures” section of this MD&A.
• Average interest-earning assets for the current YTD were $200.50 billion, an increase of $38.32 billion or 24% from $162.18 billion for the prior YTD. The increase was largely due to including the acquired SVBB loans in average interest-earning assets for the current YTD and the partial prior YTD. Organic loan growth and the previously discussed purchases of investment securities also contributed to the increase in average interest-earning assets. The yield on average interest-earning assets was 6.22% in the current YTD, an increase of 23 bps from the prior YTD, primarily due to the higher interest rate environment as yields increased across all interest-earning asset classes.
• Average interest-bearing liabilities for the current YTD were $147.98 billion, an increase of $31.83 billion or 27% from $116.15 billion in the prior YTD. The increase was largely due to including the acquired SVBB interest-bearing deposits and the Purchase Money Note in average interest-bearing liabilities for the current YTD and the partial prior YTD. The rate paid on average interest-bearing liabilities was 3.53%, an increase of 69 bps from the prior YTD, primarily due to a higher rate paid on average interest-bearing deposits, partially offset by the impact of repaying FHLB borrowings in the prior year.

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

Table 8

Average Interest-earning Asset Mix

78

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

Table 9

Average Interest-bearing Liability Mix

Provision for Credit Losses

The provision for credit losses for the current quarter was $117 million, an increase of $22 million or 24% from $95 million for the linked quarter. The increase of $22 million was the result of a $28 million increase in the provision for loan and lease losses, partially offset by a $6 million increase in the benefit for off-balance sheet credit exposure. The higher provision for loan and lease losses is mainly attributable to an estimate of $20 million related to Helene, as well as increases in net charge-offs and specific reserves, partially offset by changes in credit quality and lower loan balances.

The provision for credit losses for the current YTD was $276 million, a decrease of $850 million or 76% from $1.13 billion for the prior YTD. The decrease was primarily related to the Day 2 Provision for Credit Losses of $716 million in the prior YTD and changes in the macroeconomic forecast, partially offset by the estimated loan loss provision related to Helene.

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.

Table 10

Provision for Credit Losses

dollars in millions

79

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 11

Noninterest Income

dollars in millions

Rental Income on Operating Lease Equipment

Rental income on operating lease equipment was $262 million for the current quarter, an increase of $3 million or 1% from $259 million for the linked quarter. Rental income on operating lease equipment was $776 million for the current YTD, an increase of $57 million or 8% from $719 million for the prior YTD. Both current quarter and current YTD periods benefited from growth in operating lease equipment, as well as strong re-pricing and utilization rates 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 $388 million, an increase of $8 million from $380 million for the linked quarter. The changes compared to the linked quarter mostly reflect small increases and decreases among the various noninterest income categories, with the main items described below:

• $11 million favorable fair value adjustment on marketable equity securities relative to the linked quarter.
• During the current quarter, we sold marketable equity securities and realized a $4 million gain.
• Fee income and other service charges, consisting of items such as capital market-related fees, fees for lines and letters of credit, and servicing fees, increased by $4 million, mainly due to higher capital market fees.
• Other noninterest income declined $18 million, mainly attributable to fair value changes in customer derivative positions and other nonmarketable investments.

Other noninterest income for the current YTD was $1.14 billion, a decrease of $9.67 billion from $10.81 billion for the prior YTD. The decrease was mostly due to the gain on acquisition of $9.89 billion in the prior YTD, partially offset by increases in various components of noninterest income, mostly because the acquired SVBB operations were reflected in earnings for the current YTD and the partial prior YTD. The prior YTD also included a loss on sale of investment securities available for sale of $26 million.

Noninterest Expense

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

Table 12

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. The increases in depreciation expense for the current quarter and current YTD compared to the linked quarter and prior YTD are primarily due to the higher operating lease equipment balance. Operating lease activity is in the Rail and Commercial Bank segments. The useful life 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 leases 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 $59 million, a decrease of $1 million, or 2%, from $60 million for the linked quarter. Maintenance and other operating lease expenses for the current YTD were $164 million, an increase of $1 million or 1% from $163 million for the prior YTD. 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 $1.30 billion, an increase of $70 million or 6% compared to $1.23 billion in the linked quarter. The main components of the increase in operating expenses for the current quarter compared to the linked quarter are summarized below:

• The $43 million increase in salaries and benefits was mainly attributable to an additional working day in the current quarter, net staff additions, increases in incentive accruals and temporary labor costs associated with technology projects.
• The $18 million increase in professional fees was mostly due to continued enhancements to our large financial institution regulatory compliance capabilities.
• The $4 million increase in net occupancy expense was largely due to higher utility expenses and increased bank building rent costs.
• Other noninterest expense increased $4 million, mainly due to a $3 million loss estimate for physical property damage to branches in western North Carolina impacted by Helene. Refer to the “Recent Events” section of the Executive Overview in this MD&A for further comments on Helene.

Operating expenses for the current YTD were $3.76 billion, an increase of $356 million or 10% compared to $3.41 billion in the prior YTD. The increase was primarily due to the inclusion of the acquired SVBB operations for the current YTD and the partial prior YTD, which included a $355 million increase in salaries and benefits and a $60 million increase in equipment expense, partially offset by lower acquisition-related and marketing expenses. Professional fees are higher due to enhancements related to our large financial institution regulatory compliance capabilities. The increase in FDIC insurance expense was primarily due to the inclusion of the acquired SVBB deposits for the current YTD and the partial prior YTD, as well as organic deposit growth and a special assessment of approximately $11 million recognized in 2024. The $26 million decrease in marketing costs mostly reflected higher advertising costs to support deposit growth in the Direct Bank in the prior YTD.

The following table presents the major components of acquisition-related expenses:

Table 13

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.

Income Taxes

Table 14

Income Tax Data

dollars in millions

The effective tax rate (“ETR”) was 26.8% for the current quarter compared to 27.8% in the linked quarter. The decrease in the ETR for the current quarter compared to the linked quarter was primarily due to state tax law changes enacted in the second quarter of 2024 that impacted the valuation of gross temporary differences. The ETR was 27.3% for the current YTD compared to 3.6% for the prior YTD. The increase for the current YTD ETR compared to the prior YTD was primarily due to the non-taxable nature of the gain on the SVBB Acquisition in the prior YTD.

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 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 descriptions of segment products and services.

General Bank

Table 15

General Bank: Financial Data

dollars in millions

General Bank segment net income for the current quarter increased $18 million from the linked quarter. Segment NII increased $30 million compared to the linked quarter, benefiting from higher interest income related to loan growth. The lower provision for credit losses in the current quarter was primarily due to the linked quarter reserve build for certain loan portfolios, such as private banking loans. Noninterest income was down modestly. Noninterest expense increased $20 million mainly due to higher salaries and benefits. Noninterest income and expense are discussed in their respective sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A.

General Bank segment net income for the current YTD increased $52 million compared to the prior YTD. The acquired SVBB operations, including SVB Private, which is in the General Bank segment, were reflected in earnings for the current YTD and the partial prior YTD. The higher provision for credit losses in the current YTD was mainly due to loan growth.

The $897 million increase in loans and leases compared to the linked quarter was mainly due to growth in commercial and business loans in our Branch Network. Consumer mortgage loans were up modestly as we continue to originate and sell rather than hold for investment.

Deposits in the General Bank segment primarily include deposits from the Branch Network, as well as Wealth and Community Association Banking channels. The $690 million increase in deposits compared to the linked quarter was primarily in money market deposits in the Branch Network.

Commercial Bank

Table 16

Commercial Bank: Financial Data

dollars in millions

Commercial Bank segment net income for the current quarter decreased $13 million from the linked quarter. Segment NII decreased $5 million compared to the linked quarter, primarily due to higher interest expense on interest-bearing deposits. The $7 million increase in provision for credit losses compared to the linked quarter was primarily due to an increase in net charge-offs, mostly in Commercial Real Estate (“CRE”) and Equipment Finance portfolios. Noninterest income increased $2 million, benefiting from higher capital market fees. Noninterest expense increased $6 million, mostly attributable to higher salaries and benefits. Noninterest income and noninterest expense are discussed in the sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A.

Commercial Bank segment net income for the current YTD increased $214 million compared to the prior YTD, mainly due to the $288 million decrease in provision for credit losses. The higher provision for credit losses in the prior YTD was mainly due to loan growth and a reserve build as a result of then higher charge-offs and unfavorable trends in certain macroeconomic variables. The $20 million decline in noninterest income was mostly due to lower fair value changes in customer derivative positions and factoring commissions, partially offset by higher capital market fees. The $61 million increase in noninterest expense was mainly due to higher salaries and benefits costs.

The $573 million increase in loans and leases compared to the linked quarter reflects loan growth in a number of industry verticals, primarily TMT and Healthcare.

Deposits in the Commercial Bank segment decreased by $204 million from the linked quarter as declines in noninterest-bearing and interest-bearing checking were partially offset by growth in money market deposits.

SVB Commercial

Table 17

SVB Commercial: Financial Data

dollars in millions

84

SVB Commercial segment net income for the current quarter decreased $22 million from the linked quarter. NII increased $6 million due to higher interest income on a higher average loan balance, partially offset by higher interest expense on deposits due to a shift to interest-bearing deposits from noninterest-bearing deposits. The provision for credit losses increased $32 million, primarily the result of higher specific reserves in the investor dependent portfolios. Noninterest income was consistent with the linked quarter. Noninterest expense increased over the linked quarter by $6 million. Refer to sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A for further discussion.

SVB Commercial segment net income for the current YTD increased $262 million compared to the prior YTD, mainly because the acquired SVBB operations were reflected in earnings for the current YTD and the partial prior YTD.

The decrease of $2.12 billion in loans and leases compared to the linked quarter was mainly attributable to a decline in global fund banking loans as repayment levels outpaced new originations and draw activity on lines of credit. The average loan balance in the current quarter was higher compared to the linked quarter.

Deposits totaled $35.95 billion at September 30, 2024, an increase from $35.89 billion at June 30, 2024, mainly due to growth in money market deposits, partially offset by declines in noninterest-bearing and interest-bearing checking.

Rail

Table 18

Rail: Financial Data

dollars in millions

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

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. Railcar depreciation is recognized on a straight-line basis over the estimated useful life of the asset. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the portfolio and tend to be variable due to timing and number of railcars coming on or off lease and the asset condition. 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 lease equipment for the current quarter were $21 million, $205 million, and $94 million, respectively. The increase from the linked quarter in rental income on operating leases and adjusted rental income on operating lease equipment was due to the higher operating lease equipment balance.

Segment net income for the current YTD compared to the prior YTD increased $7 million, mostly due to higher rental income on operating leases. Adjusted rental income on operating leases for the current YTD compared to the prior YTD increased $48 million, largely attributable to growth of our railcar fleet, along with strong re-pricing. Noninterest income primarily reflects net gains on sale of leasing equipment. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the most comparable GAAP measure to the non-GAAP measure.

Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 130% of the average prior or expiring lease rate during the third quarter of 2024. Our fleet is effectively fully utilized. Railcar utilization, including commitments to lease, was 98.1% at September 30, 2024 and 98.7% at December 31, 2023.

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 September 30, 2024 consisted of approximately 125,600 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 19

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

Table 20

Rail Operating Lease Equipment by Obligor Industry

dollars in millions

86

Corporate

Table 21

Corporate: Financial Data

dollars in millions

Current quarter net income and income before income taxes for Corporate decreased $51 million and $82 million, respectively, from the linked quarter.

NII decreased $53 million from the linked quarter, mainly due to a decline in loan accretion income and higher interest costs for the Direct Bank. NII also included a $28 million increase in interest income on investments, which was offset by a $28 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.

Corporate noninterest income increased $8 million from the linked quarter, primarily related to higher fair value adjustments on marketable equity securities and realized gains on investment securities.

Corporate noninterest expense increased $37 million from the linked quarter, mainly from higher personnel costs and increased professional fees, mostly due to continued enhancements to our large financial institution regulatory compliance capabilities. Acquisition-related expenses were $46 million in the current quarter compared to $44 million in the linked quarter. Noninterest income and noninterest expense are discussed in the sections entitled “Noninterest Income” and “Noninterest Expense” of this MD&A.

Corporate net income for the current YTD decreased $9.41 billion compared to the prior YTD, which included the gain on acquisition of $9.89 billion, Day 2 Provision for Credit Losses of $716 million, and higher acquisition-related expenses. The prior YTD also included a loss on sale of investment securities available for sale of $26 million.

The income tax rates for the prior year periods were impacted by the gain on acquisition. Refer to the “Income Taxes” section of this MD&A for further discussion.

Corporate deposits primarily consist of deposits in our Direct Bank and brokered deposits. The $49 million decrease from the linked quarter was primarily due to lower time deposits, partially offset by growth in savings deposits.

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 September 30, 2024 totaled $25.64 billion, a decrease of $7.97 billion or 24% from $33.61 billion at December 31, 2023 and an increase of $279 million or 1% from $25.36 billion at June 30, 2024. 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 September 30, 2024 totaled $455 million, a decrease of $18 million from $473 million at December 31, 2023 and an increase of $63 million from $392 million at June 30, 2024.

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 September 30, 2024 totaled $38.66 billion, an increase of $8.66 billion or 29% from $30.00 billion at December 31, 2023 and an increase of $997 million or 3% from $37.67 billion at June 30, 2024. The increase from December 31, 2023 reflected purchases that totaled $14.14 billion, which were primarily U.S agency residential mortgage-backed and short-duration U.S. Treasury investment securities, partially offset by maturities, sales, and paydowns of $6.15 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 September 30, 2024, investment securities available for sale had a net pretax unrealized loss of $312 million, compared to a net pretax unrealized loss of $752 million as of December 31, 2023, primarily reflecting the impacts of lower 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 increases when interest rates decrease or when credit spreads tighten. 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 September 30, 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 September 30, 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 September 30, 2024.

The following table presents the investment securities portfolio, segregated by major category:

Table 22

Investment Securities

dollars in millions

89

The following table presents the weighted average yields for investment securities available for sale and held to maturity at September 30, 2024, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio was calculated using security-level annualized yields based on book yield to maturity and takes into account amortization of premiums and accretion of discounts, but does not include the effects of hedging. The total weighted average yields for investment securities available for sale and held to maturity are based on the underlying weighted average amortized cost.

Table 23

Weighted Average Yield on Investment Securities

(1) Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity at September 30, 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 market 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 September 30, 2024 were $68 million, a decrease of $8 million or 10% from $76 million at December 31, 2023 and a decrease of $24 million or 25% from $92 million at June 30, 2024.

Table 24

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 September 30, 2024 were $138.70 billion, an increase of $5.39 billion or 4% from $133.30 billion at December 31, 2023 and a decrease of $646 million or 1% from $139.34 billion at June 30, 2024. The increase from December 31, 2023 mostly reflects growth in commercial loans and consumer loans, while SVB loans were modestly higher. The increase of $4.03 billion in commercial loans was spread across various classes due to strong loan originations. The consumer loan growth of $1.02 billion was mostly in residential mortgages. Within the SVB loan classes, the $341 million growth was attributed to the global fund banking portfolio, partially offset by declines in investor dependent loans.

Refer to the Note 4—Loans and Leases for further information.

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

Table 25

Loans and Leases

dollars in millions

The unamortized discount related to acquired loans was $1.69 billion at September 30, 2024, a decrease of $348 million from $2.04 billion at December 31, 2023 and $93 million from $1.78 billion at June 30, 2024. The decrease from December 31, 2023 reflects accretion of $415 million, including $71 million for unfunded commitments, for the nine months ended September 30, 2024. The decrease from June 30, 2024 reflects accretion of $107 million, including $16 million for unfunded commitments, for the quarter ended September 30, 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 portfolio in Rail.

Table 26

Operating Lease Equipment

dollars in millions

(1) Includes off-lease rail equipment of $248 million at September 30, 2024, $164 million at June 30, 2024 and $253 million at December 31, 2023.

Interest-Bearing Liabilities

Interest-bearing liabilities include interest-bearing deposits, securities sold under agreements to repurchase, and borrowings. Interest-bearing liabilities at September 30, 2024 totaled $149.34 billion, an increase of $5.63 billion or 4% from $143.71 billion at December 31, 2023 and an increase of $818 million or less than 1% from $148.52 billion at June 30, 2024. The increase from December 31, 2023 was due to deposit growth as further discussed below.

Deposits

Total deposits at September 30, 2024 were $151.57 billion, an increase of $5.72 billion or 4% from $145.85 billion at December 31, 2023 and an increase of $495 million from $151.08 billion at June 30, 2024. The increase from December 31, 2023 was mainly attributable to:

• growth in money market and time deposit accounts in the Branch Network,
• higher savings deposits, partially offset by lower time deposits in the Direct Bank, and
• an increase in money market deposits in the SVB Commercial segment.

The increase in deposits from June 30, 2024 reflected higher money market and savings deposits, partially offset by lower time and noninterest-bearing deposits.

The following table summarizes the types of deposits:

Table 27

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 branches and offices, 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 September 30, 2024 in North Carolina and South Carolina represented approximately 25.5% and 7.8%, respectively, of total deposits.

The Direct Bank had $39.50 billion or 26.1% of our total deposits as of September 30, 2024. The Direct Bank deposits mainly consist of savings deposit accounts.

SVB Commercial segment deposits as of September 30, 2024 were $35.95 billion or 23.7% of total deposits and are primarily concentrated in online banking. Deposits in the SVB Commercial segment include large dollar accounts with private equity and venture capital clients, primarily in the technology, life science and healthcare industries. Deposit accounts in the SVB Commercial segment with balances in excess of $50 million totaled approximately $5.75 billion as of September 30, 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 the FDIC and FRB. We estimate total uninsured deposits were $58.59 billion, which represented approximately 38.7% of total deposits at September 30, 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 September 30, 2024:

Table 28

Maturities of Time Deposits In Excess of $250,000

dollars in millions

Borrowings

Total borrowings at September 30, 2024 were $37.16 billion, a decrease of $493 million from $37.65 billion at December 31, 2023 and a decrease of $297 million from $37.46 billion at June 30, 2024. The decrease from December 31, 2023 related to the redemption of our 2.969% senior unsecured borrowings in the current quarter and Capital Trust debentures in the first quarter, along with declines in securities sold under agreements to repurchase and the Purchase Money Note payable to the FDIC. We redeemed the senior unsecured notes in September 2024 prior to incurring a higher cost upon conversion to a floating rate instrument.

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

Table 29

Borrowings

dollars in millions

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

(2) Included a callable feature one year prior to maturity and the debt was redeemed in September 2024.

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 reflect a decline in CRE property values 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 obligor 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 to assess the borrower’s ability to repay the loan, and secondary sources of repayment, such as collateral value.

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 September 30, 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 September 30, 2024 was $1.68 billion, representing a decrease of $69 million from $1.75 billion at December 31, 2023. The ALLL as a percentage of total loans and leases at September 30, 2024 was 1.21%, compared to 1.31% at December 31, 2023. The decreases in the ALLL were primarily the result of changes in the macroeconomic forecast and in credit quality, YTD net charge-offs, and lower specific reserves for individually evaluated loans at September 30, 2024 compared to December 31, 2023. The decreases were partially offset by increases related to loan growth and the $20 million loan loss reserve related to Helene. Refer to the “Recent Events” section of the Executive Overview in this MD&A for further comments on Helene.

While management utilizes its best judgment and information available, the ultimate adequacy of our ALLL is dependent upon a variety of factors beyond our control which are inherently difficult to predict, the most significant being the macroeconomic scenario forecasts that determine the economic variables utilized in the ALLL models. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations. At September 30, 2024, ALLL estimates in these scenarios ranged from approximately $1.38 billion, when weighing the upside scenario 100%, to approximately $2.14 billion when weighting the downside scenario 100%. BancShares management determined that an ALLL of $1.68 billion was appropriate as of September 30, 2024.

Table 30

ALLL for Loans and Leases

dollars in millions

Table 31

ALLL for Loans and Leases

dollars in millions

96

Net charge-offs during the current quarter were $145 million, an increase of $13 million from $132 million during the linked quarter. The net charge-off ratio was 0.42% and 0.38% for the current and linked quarters, respectively. The increase in net charge-offs compared to the linked quarter reflects higher commercial loan charge-offs, mostly due to increases in the CRE and Equipment Finance portfolios. Net charge-offs were down from the prior quarter in the SVB loans, primarily in early-stage investor dependent loans. Net charge-offs in our consumer loans were consistent with the prior quarter.

Net charge-offs for the current YTD were $380 million, a slight decrease of $3 million from $383 million in the prior YTD. Lower net charge-offs in SVB Commercial offset the increases in commercial and consumer loans. The higher net charge-offs within the commercial loans was primarily related to CRE and Equipment Finance portfolios in commercial loans.

The following table provides trends in the ALLL ratios:

Table 32

ALLL Ratios

dollars in millions

A reserve for off-balance sheet credit exposure is established for unfunded commitments and is included in other liabilities, presented in Note 13—Other Liabilities. 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 exposure was $281 million at September 30, 2024, a decrease of $35 million compared to $316 million at December 31, 2023. The decrease from December 31, 2023 primarily reflects declines in the volumes of SVB Commercial segment unfunded commitments. 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 33

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 34

Non-Performing Assets

dollars in millions

Nonaccrual loans and leases at September 30, 2024 were $1.24 billion, an increase of $275 million from $969 million at December 31, 2023 and an increase of $103 million from $1.14 billion at June 30, 2024. The increase from December 31, 2023 was primarily due to non-owner occupied commercial mortgage and commercial and industrial loan classes in commercial loans and innovation C&I and cash flow dependent loans in SVB loans. 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.

OREO and repossessed assets at September 30, 2024 and December 31, 2023 were $62 million, compared to $64 million at June 30, 2024. Nonperforming assets as a percentage of total loans, leases, OREO and repossessed assets at September 30, 2024 was 0.94% compared to 0.77% at December 31, 2023 and 0.86% at June 30, 2024.

Past Due Accounts

The percentage of loans 30 days or more past due at September 30, 2024 was 0.89% of total loans, compared to 1.16% at December 31, 2023 and 1.01% at June 30, 2024. 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 35

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 shift to more hybrid work arrangements) may result in changes for general office demand moving forward. Select metrics specific to our general office loan portfolio are as follows:

Table 36

Select General Office Loan Metrics

dollars in millions

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 37

Commercial Loans and Leases - Geography

dollars in millions

Industry Concentrations

The following table represents loans by industry of obligor:

Table 38

Commercial Loans and Leases - Industry

dollars in millions

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 39

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 includes global fund banking and innovation banking loans.

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 68% of SVB loans and 20% of total loans at September 30, 2024, compared to 65% and 19% at December 31, 2023 and 69% and 21% at June 30, 2024. 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.

Innovation Banking

Innovation banking primarily includes loans to technology, life science and healthcare industry clients in the various stages of their life cycles. The loans are classified as Investor Dependent - Early Stage, Investor Dependent - Growth Stage, and Innovation Commercial and Industrial (“Innovation 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 September 30, 2024, compared to 4% and 1% at December 31, 2023 and 3% and 1% at June 30, 2024. 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 6% of SVB loans and 2% of total loans at September 30, 2024, compared to 7% and 2% at December 31, 2023 and 6% and 2% at June 30, 2024. 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 September 30, 2024, compared to 24% and 7% at December 31, 2023 and 22% and 7% at June 30, 2024. 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, life science and 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 September 30, 2024:

Table 40

SVB Loans by Size and Class

dollars in millions

101

SVB Loans - State Concentrations

The following table summarizes state concentrations greater than 5.0% within the SVB loans portfolio at September 30, 2024, based on borrower location:

Table 41

SVB Loans - Geography

dollars in millions

Counterparty Risk

We enter into interest rate and foreign exchange derivatives 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.

Derivative agreements for BancShares’ risk management purposes and for the hedging of client transactions are primarily executed with investment grade financial institutions, with others cleared through certain central party clearing houses. 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. A component of our interest rate risk management strategy is the use of derivative instruments to manage fluctuations in earnings caused by changes in market interest rates. Interest rate swaps are the primary type of derivative instrument that we use as part of our interest rate risk management strategy. These derivatives hedge interest income variability of floating rate loans indexed to Secured Overnight Financing Rate (“SOFR”), as well as fair value changes of fixed rate time deposits and long-term debt indexed to SOFR. Refer to Note 12—Derivative Financial Instruments for further information on our derivative portfolio.

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, and also incorporate additional assumptions, including prepayment estimates, pricing estimates, deposit behaviors, and the use of internal models. The below simulations assume an immediate 100 and 200 bps parallel increase and decrease from current interest rates.

Table 42

Net Interest Income Sensitivity Simulation Analysis

103

NII Sensitivity metrics at September 30, 2024, compared to December 31, 2023, were primarily affected by cash deployment into investment securities, and execution of interest rate hedges, as well as other balance compositional changes.

As of September 30, 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 SOFR. Deposit betas are currently modeled to have a portfolio average of approximately 30%-40% over the twelve-month forecast horizon, including 45%-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, including utilizing a dynamic rate level dependent modeling approach for our deposit attrition assumption. In addition to interest rate changes, other key assumptions used in our EVE Sensitivity simulations include asset prepayment speeds, discount spreads, interest-bearing deposit betas and deposit levels.

The below simulations assume an immediate 100 and 200 bps parallel increase and decrease from current interest rates and the estimated impact on our EVE profile:

Table 43

Economic Value of Equity Modeling Analysis

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.

Loan Maturity and Loan Interest Rate Sensitivity

The following table provides loan maturity distribution information:

Table 44

Loan Maturity Distribution

dollars in millions

As noted above, approximately 60%-65% of our total loans have floating contractual reference rates, indexed primarily to the Prime Lending Rate and SOFR. The following table provides information regarding the sensitivity to changes in interest rates of loans and leases maturing one year or after, as of September 30, 2024:

Table 45

Loan Interest Rate Sensitivity

dollars in millions

105

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 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 September 30, 2024 we had $58.36 billion of high-quality liquid assets (26.5% of total assets) and $29.64 billion of contingent liquidity sources available.

Table 46

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 September 30, 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 September 30, 2024 were $151.57 billion, an increase of $5.72 billion or 4% from $145.85 billion at December 31, 2023 and an increase of $495 million or less than 1% from $151.08 billion at June 30, 2024.

We use borrowings to diversify the funding of our business operations. Total borrowings at September 30, 2024 were $37.16 billion, a decrease of $493 million from $37.65 billion at December 31, 2023 and a decrease of $297 million from $37.46 billion at June 30, 2024. 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 47

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 $5.62 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 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 $8.13 billion and was not utilized as of September 30, 2024. Refer to Note 2—Business Combinations for further discussion.

Contractual Obligations and Commitments

The following table includes significant contractual obligations and commitments as of September 30, 2024, representing required and potential cash outflows, including impacts from purchase accounting adjustments and deferred fees. Refer to 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 48

Contractual Obligations and Commitments

dollars in millions

(1) Time deposits and long-term borrowings are presented net of purchase accounting adjustments of $3 million and $134 million, respectively. On-balance sheet commitments for affordable housing partnerships are included in other liabilities and presented net of a purchase accounting adjustment of $40 million.

(2) Bracketed balances represent the estimated amortization of the purchase accounting adjustment and deferred costs in excess of any principal balance.

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 announced in 2023 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 three quarters of 2024, we paid quarterly dividends of $1.64 on the Class A common stock and Class B common stock. In October 2024, our Board declared and increased the quarterly dividend on the Class A common stock and Class B common stock to $1.95 per common share. The dividends are payable on December 16, 2024 to stockholders of record as of November 29, 2024.

During the first three quarters 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. In October 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 December 16, 2024.

Capital Composition and Ratios

As discussed earlier in this MD&A, the Board authorized a Class A common share repurchase program in July 2024. During the current quarter we purchased 353,058 shares. Refer to the “Recent Events” section above for more information and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information related to our monthly repurchase activity during the current quarter and through October 31, 2024.

The following table details the change in outstanding Class A common stock through September 30, 2024:

Table 49

Changes in Shares of Class A Common Stock Outstanding

We also had 1,005,185 Class B common stock outstanding at September 30, 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 50

Analysis of Capital Adequacy

dollars in millions

As of September 30, 2024, BancShares and FCB had risk-based capital ratio conservation buffers of 7.36% and 6.64%, 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 September 30, 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 September 30, 2024 is discussed in Note 5—Allowance for Loan and Lease Losses and in the “Credit Risk” section above.

RECENT ACCOUNTING PRONOUNCEMENTS

The following Accounting Standards Updates (“ASUs”) were issued by the Financial Accounting Standards Board but are not yet effective for BancShares:

109

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 51

Rail Segment

dollars in millions

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NIM, Excluding PAA

NIM, excluding PAA, is a meaningful metric as it allows us to analyze NIM trends more directly related to the rates of the underlying interest earning-assets and interest-bearing liabilities. Loan PAA income is primarily related to the loan discount in the SVBB Acquisition. Other PAA is primarily related to the discount on the Purchase Money Note payable to the FDIC for the SVBB Acquisition and the premium on deposits assumed in the acquisition of CIT Group Inc.

The following table includes a reconciliation from NIM to NIM, excluding PAA:

Table 52

NIM, Excluding PAA

dollars in millions

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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 (including the recent U.S. election), 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 the recent interest rate cuts 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 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.

BancShares’ share repurchase program allows BancShares to repurchase shares of its Class A common stock through 2025. BancShares is not obligated under the share repurchase program to repurchase any minimum or particular number of shares, and repurchases may be suspended or discontinued at any time (subject to the terms of any Rule 10b5-1 plan in effect) without prior notice. The authorization to repurchase Class A common stock will be utilized at management’s discretion. The actual timing and amount of Class A common stock that may be repurchased will depend on a number of factors, including the terms of any Rule 10-b5-1 plan then in effect, price, general business and market conditions, regulatory requirements, and alternative investment opportunities or capital needs.

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 the 2023 Form 10-K 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 September 30, 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 September 30, 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.