ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/ (ZION) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key Corporate Objectives

We conduct our operations primarily through seven separately managed and geographically defined affiliates, each with its own local branding and management team. Our affiliate banks are supported by an enterprise operating segment (referred to as the “Other” segment) that provides governance and risk management, allocates capital, establishes strategic objectives, and includes centralized technology, back-office functions, and certain lines of business not operated through our affiliate banks.

We focus our efforts and resources to achieve our strategic growth and profitability objectives. This includes providing high-quality products and services and deepening relationships with our small business, commercial, and consumer customers. Serving as a trusted advisor for our business customers and supporting their operational needs generally affords us a major source of relatively stable deposits.

We strive to achieve balanced growth of customers, pre-provision net revenue (“PPNR”), profitability, and shareholder returns. We focus on five strategic growth areas: small business, commercial, affluent, capital markets, and consumer.

To facilitate the achievement of our growth and profitability objectives, we invest in the following five key areas, referred to as “strategic enablers”:

•People and Empowerment — we invest in training our employees and providing them the tools and resources to build their capabilities;

•Technology — we invest in innovative technologies that will make us more efficient and enable us to remain competitive;

•Operational Excellence — we invest in and support ongoing improvements in how we safely and securely deliver value to our customers;

•Risk Management — we engage in risk management practices to ensure prudent risk-taking and appropriate oversight; and

•Data and Analytics — we invest in relevant enterprise data and analytic tools to support local execution and prudent decision making.

RESULTS OF OPERATIONS

During 2023, the banking industry experienced significant changes in market conditions, including a higher interest rate environment, significant fluctuations in deposit levels, and broad weakness in bank valuations due in large part to several regional banks being closed and placed into receivership with the FDIC. We employed the following strategic actions during the year as a complement to our existing, well-established risk management practices:

•Generated customer deposit growth through a combination of competitive interest rates, customer outreach, and expanded utilization of reciprocal deposit programs in order to increase the availability of FDIC insurance;

•Actively managed the balance sheet through an earning-asset mix change toward higher-yielding loans, while reducing the size of our lower-yielding securities and money market positions;

•Increased total available liquidity sources, which far exceeded our level of uninsured deposits, and included the expanded use of existing collateralized funding lines;

•Actively managed our interest rate and market risk exposures through a rebalancing of our hedges for both available-for-sale (“AFS”) securities and commercial loans;

•Remained committed to controlling expenses, including active personnel management, while continuing to invest in technology;

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•Maintained strong credit performance, including low net charge-offs; and

•Further strengthened our regulatory capital position through increased retained earnings and suspended share repurchase programs (beginning the second quarter of 2023 through the end of the year).

Our Financial Performance

This section and other sections provide information about our recent financial performance. For more information about our results of operations for 2022 compared with 2021, see the respective sections in MD&A included in our 2022 Form 10-K.

Our financial performance for 2023 relative to the prior year reflected an increase in deposits, lower net interest income, stabilization of the net interest margin (“NIM”), loan growth, and strong credit quality, as well as higher noninterest expense and provision for credit losses.

•Net interest income decreased $82 million, or 3%, as higher earning asset yields were offset by rising funding costs. The NIM decreased slightly to 3.02%, compared with 3.06%. Net interest income was also impacted by a reduction in interest-earning assets and an increase in interest-bearing liabilities.

◦Average interest-earning assets decreased $1.7 billion, or 2%, driven by declines in average securities and average money market investments, partially offset by an increase in average loans and leases.

◦Total loans and leases increased $2.1 billion, or 4%, primarily due to growth in the consumer 1-4 family residential mortgage, commercial real estate term, and commercial and industrial loan portfolios.

◦Average interest-bearing liabilities increased $9.7 billion, or 23%, primarily due to increases in average interest-bearing deposits and average borrowed funds. These increases were offset by a decrease of $10.2 billion, or 26%, in average noninterest-bearing deposits, as customers migrated to interest-bearing products in response to the higher interest rate environment.

◦Total deposits increased $3.3 billion, or 5%, primarily due to a $12.8 billion increase in interest-bearing deposits, partially offset by a $9.5 billion decrease in noninterest-bearing demand deposits. Customer deposits (excluding brokered deposits) remained relatively stable at $70.5 billion and included approximately $6.8 billion of reciprocal deposit products. The loan-to-deposit ratio remained flat at 77%.

•The provision for credit losses was $132 million in 2023, compared with $122 million in 2022.

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•Customer-related noninterest income increased $6 million, or 1%, primarily due to increases in commercial account fees and wealth management fees, partially offset by a decrease in retail and business banking fees resulting from a change in our overdraft and non-sufficient funds practices effected during the third quarter of 2022. Increases in noncustomer-related noninterest income were due largely to an increase in dividends on FHLB stock, as well as the gain on sale of a bank-owned property in the second quarter of 2023.

•Noninterest expense increased $219 million, or 12%, primarily due to an increase in deposit insurance and regulatory expense, driven largely by a $90 million accrual associated with the FDIC special assessment in the fourth quarter of 2023. Noninterest expense was also impacted by higher salaries and benefits (including severance) and technology, telecom, and information processing expenses.

•Credit quality remained strong, as net loan and lease charge-offs were $36 million, or 0.06% of average loans in 2023, compared with net charge-offs of $39 million, or 0.07% of average loans, in 2022. Classified loans decreased $104 million, or 11%. Nonperforming assets increased $79 million, or 53%, primarily due to one commercial and industrial loan totaling $31 million, and two suburban office commercial real estate loans totaling $46 million.

The following schedule presents additional selected financial highlights:

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Schedule 4

SELECTED FINANCIAL HIGHLIGHTS

1 See “Non-GAAP Financial Measures” on page 77 for more information.

2 The common dividend payout ratio is equal to common dividends paid divided by net earnings applicable to common shareholders.

3 This ratio is the common dividends paid plus share repurchases for the year, divided by net earnings applicable to common shareholders.

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Net Interest Income and Net Interest Margin

Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, and represented 78% and 80% of our net revenue (net interest income plus noninterest income) during 2023 and 2022, respectively. The NIM is calculated as net interest income as a percent of average interest-earning assets.

Schedule 5

NET INTEREST INCOME AND NET INTEREST MARGIN

1 Taxable-equivalent rates used where applicable.

Net interest income decreased $82 million, or 3%, in 2023, relative to the prior year, as higher earning asset yields were offset by higher funding costs. The NIM was 3.02%, compared with 3.06%.

The yield on average interest-earning assets was 4.86% in 2023, an increase of 158 basis points, reflecting higher interest rates and a favorable mix change to higher yielding assets. The yield on average loans and leases increased 163 basis points to 5.69% in 2023, compared with 4.06% in 2022, reflecting the higher interest rate environment. The yield on average securities increased 58 basis points to 2.64% in 2023.

The rate paid on average interest-bearing liabilities was 2.91% in 2023, compared with 0.44% in the prior year, and the cost of total deposits was 1.46%, compared with 0.09% in the prior year, also reflecting the higher interest rate environment, and the impact of the change in deposit composition away from noninterest-bearing deposits. The rate paid on total borrowed funds was 5.11%, compared with 3.27%, for the same time periods.

Net interest income was also impacted by a reduction in interest-earning assets and an increase in interest-bearing liabilities. Average interest-earning assets decreased $1.7 billion, or 2%, from the prior year, driven by declines in average securities and average money market investments. The decrease in average securities was primarily due to principal reductions. These decreases were partially offset by an increase of $4.1 billion in average loans and leases.

Average interest-bearing liabilities increased $9.7 billion, or 23%, primarily due to increases in average interest-bearing deposits and average borrowed funds. These increases were offset by a decline of $10.2 billion, or 26%, in average noninterest-bearing deposits, as customers migrated to interest-bearing products in response to the higher interest rate environment.

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

Average loans and leases increased $4.1 billion, or 8%, to $56.7 billion, primarily due to growth in average consumer and commercial loans. Average securities decreased $3.8 billion, or 15%, to $21.7 billion, primarily due to principal reductions. During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the held-to-maturity (“HTM”) category.

Average deposits decreased $5.6 billion, or 7%, to $72.9 billion, driven largely by the reduction in noninterest-bearing deposits. Average noninterest-bearing deposits as a percentage of total deposits decreased to 41% in 2023, compared with 51% during 2022. Our loan-to-deposit ratio was 77%, compared with 78% in the prior year.

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Average borrowed funds, consisting primarily of secured borrowings, increased $5.2 billion, or 149%, to $8.7 billion, due largely to a shift in wholesale funding needs as a result of fluctuations in deposit levels during 2023.

For more information on our investment securities portfolio and borrowed funds and how we manage liquidity risk, refer to the “Investment Securities Portfolio” section on page 46 and the “Liquidity Risk Management” section on page 67. For further discussion of the effects of market rates on net interest income and how we manage interest rate risk, refer to the “Interest Rate and Market Risk Management” section on page 63.

The following schedule summarizes the average balances, the amount of interest earned or paid, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities:

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Schedule 6

AVERAGE BALANCE SHEETS, YIELDS, AND RATES

1 Taxable-equivalent rates used where applicable.

2 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs. Loans include nonaccrual and restructured loans.

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The following schedule presents year-over-year changes in net interest income on a fully taxable-equivalent basis for the years indicated. For purposes of calculating the yields in this schedule, the average loan balances also include the principal amounts of nonaccrual and restructured loans. Interest payments received on nonaccrual loans are not recognized into interest income, but are applied as a reduction to the principal outstanding. In addition, interest on modified loans is generally accrued at the modified rates.

In the analysis of changes in taxable-equivalent net interest income attributed to volume and rate, changes are allocated to volume with the following exceptions: when volume and rate both increase, the variance is allocated proportionately to both volume and rate; when the rate increases and volume decreases, the variance is allocated to rate.

Schedule 7

ANALYSIS OF CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME

1 Taxable-equivalent rates used where applicable.

2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and modified loans.

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Provision for Credit Losses

The allowance for credit losses (“ACL”) is the combination of both the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”). The ALLL represents the estimated current expected credit losses related to the loan and lease portfolio as of the balance sheet date. The RULC represents the estimated reserve for current expected credit losses associated with off-balance sheet commitments. Changes in the ALLL and RULC, net of charge-offs and recoveries, are recorded as the provision for loan and lease losses and the provision for unfunded lending commitments, respectively, on the consolidated statement of income. The ACL for debt securities is estimated separately from loans and is included in “Investment securities” on the consolidated balance sheet.

The provision for credit losses, which is the combination of both the provision for loan and lease losses and the provision for unfunded lending commitments, was $132 million in 2023, compared with $122 million in 2022.

The ACL was $729 million at December 31, 2023, compared with $636 million at December 31, 2022. The increase in the ACL reflects incremental reserves associated with portfolio-specific risks including commercial real estate, as well as deterioration in economic forecasts. The ratio of ACL to total loans and leases was 1.26% at December 31, 2023, compared with 1.14% at December 31, 2022. The provision for securities losses was less than $1 million during 2023 and 2022.

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The bar chart above illustrates the broad categories of change in the ACL from the prior year period. The second bar represents changes in economic forecasts and current economic conditions, which increased the ACL by $33 million from the prior year period.

The third bar represents changes in credit quality factors and includes risk-grade migration, portfolio-specific risks, and specific reserves against loans, which, when combined, increased the ACL by $84 million, driven largely by an increased focus on certain portfolio-specific risks, including commercial real estate.

The fourth bar represents loan portfolio changes, driven primarily by changes in loan balances and composition, the aging of the portfolio, and other qualitative risk factors; all of which resulted in a $24 million decrease in the ACL.

See “Credit Risk Management” on page 54 and Note 6 of the Notes to Consolidated Financial Statements for more information on how we determine the appropriate level of the ALLL and the RULC.

Noninterest Income

Noninterest income represents revenue we earn from products and services that generally have no associated interest rate or yield and is classified as either customer-related or noncustomer-related. Customer-related noninterest income excludes items such as securities gains and losses, dividends, insurance-related income, and mark-to-market adjustments on certain derivatives.

Total noninterest income increased $45 million, or 7%, in 2023, relative to the prior year. Noninterest income accounted for 22% and 20% of net revenue during 2023 and 2022, respectively. The following schedule presents a comparison of the major components of noninterest income:

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Schedule 8

NONINTEREST INCOME

Customer-related Noninterest Income

Consistent with our key corporate objectives, we continue to deepen existing relationships with our commercial, small business, capital markets, affluent, and retail customers by providing high-quality treasury management products, capital market solutions, wealth management advisory services, and depository account services.

Total customer-related noninterest income increased $6 million, or 1%, in 2023, relative to the prior year. Key drivers impacting customer-related revenue included:

•Commercial account fees increased $15 million or 9%, driven by increases in treasury management sweep income, account analysis fees, and bankcard merchant fees.

•Wealth management fee income increased $3 million, or 5%, reflecting growth in assets and increased wealth and advisory services. Our assets under management were $13.3 billion at December 31, 2023.

•Retail and business banking fees decreased $7 million, or 10%, primarily due to changes in our overdraft and non-sufficient funds practices, which were effected in the third quarter of 2022.

•Card fees decreased $3 million, or 3%, due to declines in commercial and business bankcard interchange fees.

•Capital markets fees decreased $2 million, or 2%, primarily due to reduced customer swap and loan syndication fees.

Noncustomer-related Noninterest Income

Total noncustomer-related noninterest income increased $39 million in 2023. Dividends and other income increased $40 million, primarily due to higher dividends on FHLB stock resulting from increased average FHLB activity stock and an increase in the associated dividend rate, when compared with the prior year, as well as a gain on sale of a bank-owned property in the second quarter of 2023. Net securities gains increased $19 million, due largely to higher losses recorded during the prior year in our Small Business Investment Company (“SBIC”) investment portfolio. Fair value and nonhedge derivative income decreased $20 million, primarily due to larger gains during the prior year related to credit valuation adjustments (“CVA”) on client-related interest rate swaps.

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Noninterest Expense

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

Schedule 9

NONINTEREST EXPENSE

Noninterest expense increased $219 million, or 12%, in 2023, relative to the prior year, primarily due to a $119 million increase in deposit insurance and regulatory expense, driven largely by a $90 million accrual associated with the FDIC special assessment during the fourth quarter of 2023, as well as an increased FDIC insurance base rate beginning in 2023.

In November 2023, the FDIC issued a final rule to implement a special assessment pursuant to a systemic risk determination to recover the costs associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank in early 2023. Using an assessment base equal to the estimated amount of uninsured deposits above $5 billion at December 31, 2022, the FDIC is expected to collect a tax-deductible special assessment from banks at an annual rate of approximately 13.4 bps for an anticipated eight quarterly assessment periods, beginning with the first quarter of 2024.

Salaries and benefits expense represented approximately 61% and 66% of total noninterest expense during 2023 and 2022, respectively. The following schedule presents the major components of salaries and employee benefits expense:

Schedule 10

SALARIES AND EMPLOYEE BENEFITS

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Total salaries and benefits expense increased $40 million, or 3%, primarily due to the ongoing impact of inflationary and competitive labor market pressures on wages and benefits, a decline in deferred salaries related to fewer loan originations and reduced software development activities, and an increase in severance expense. These increases were partially offset by a decrease in incentive compensation accruals. We had 9,679 full-time equivalent employees at December 31, 2023, a decrease of approximately 3% relative to the prior year.

Technology, telecom, and information processing expense increased $31 million, or 15%, primarily due to increases in software amortization expenses associated with the replacement of our core loan and deposit banking system, as well as other related application software, license, and maintenance expenses, reflecting our ongoing investments in strategic technology initiatives designed to improve our products and services and to simplify how we do business. For further discussion on the replacement of our core loan and deposit banking system, see “Premises, Equipment, and Software” on page 52.

The efficiency ratio was 62.9%, compared with 58.8%, primarily due to a decline in adjusted taxable-equivalent revenue. For information on non-GAAP financial measures, see page 77.

Technology Spend

Consistent with our strategic objectives, we invest in technologies that will make us more efficient and enable us to remain competitive. We generally consider these investments as technology spend, which represents expenditures associated with technology-related investments, operations, systems, and infrastructure, and includes current period expenses presented on the consolidated statement of income, as well as capitalized investments, net of related amortization and depreciation, presented on the consolidated balance sheet. Technology spend is reported as a combination of the following:

•Technology, telecom, and information processing expense — includes expenses related to application software licensing and maintenance, related amortization, telecommunications, and data processing;

•Other technology-related expense — includes related noncapitalized salaries and employee benefits, occupancy and equipment, and professional and legal services; and

•Technology investments — includes capitalized technology infrastructure equipment, hardware, and purchased or internally developed software, less related amortization or depreciation.

The following schedule presents the composition of our technology spend:

Schedule 11

TECHNOLOGY SPEND

Total technology spend increased $32 million, or 7%, relative to the prior year, driven largely by the aforementioned increases in technology, telecom, and information processing expense, as well as higher technology-related compensation and investments in resiliency.

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Income Taxes

The following schedule summarizes the income tax expense and effective tax rates for the periods presented:

Schedule 12

INCOME TAXES

The effective tax rates for the periods presented above were decreased by nontaxable municipal interest income and nontaxable income from certain bank-owned life insurance (“BOLI”), and were increased by the nondeductibility of certain FDIC premiums, certain executive compensation, and other fringe benefits. The increase in the effective tax rate for 2023 was primarily due to higher FDIC premium expense (regular FDIC insurance premiums are non-deductible) and interest expense related to tax-exempt income. Additionally, investments in technology initiatives, low-income housing, and municipal securities during 2023, 2022, and 2021, generated tax credits and nontaxable income that benefited the effective tax rate for each respective year.

We had a net DTA of $1.0 billion and $1.1 billion at December 31, 2023 and 2022, respectively. The decrease in the net DTA was driven largely by a decrease in unrealized losses in AOCI associated with investment securities and derivative instruments and a reduction of certain capitalized expenses for tax purposes. These decreases were partially offset by an increase in the provision for credit losses during 2023.

We had no valuation allowance at December 31, 2023 and December 31, 2022. See Note 20 of the Notes to Consolidated Financial Statements for more information about the factors that impacted our effective tax rate, significant components of our DTAs and DTLs, and unrecognized tax benefits for uncertain tax positions.

Preferred Stock Dividends

Preferred stock dividends totaled $32 million in 2023, and $29 million in both 2022 and 2021. See further details in Note 14 of the Notes to Consolidated Financial Statements.

Business Segment Results

We manage our operations through seven affiliate banks located in different geographic markets, each with its own local branding and management team. These affiliate banks comprise our primary business segments and include: Zions Bank, California Bank & Trust (“CB&T”), Amegy Bank (“Amegy”), National Bank of Arizona (“NBAZ”), Nevada State Bank (“NSB”), Vectra Bank Colorado (“Vectra”), and The Commerce Bank of Washington (“TCBW”). We emphasize local authority, responsibility, pricing, and customization of certain products that are designed to maximize customer satisfaction, strengthen community relations, and improve profitability and shareholder returns. Our affiliate banks are supported by an enterprise operating segment (referred to as the “Other” segment) that provides governance and risk management, allocates capital, establishes strategic objectives, and includes centralized technology, back-office functions, and certain lines of business not operated through our affiliate banks.

We allocate the cost of centrally provided services to the business segments based upon estimated or actual usage of those services. We also allocate capital based on the risk-weighted assets held at each business segment. We use an internal funds transfer pricing (“FTP”) allocation process to report results of operations for business segments. This process is subject to change and refinement over time. For more performance information related to our business segments, including the Other segment, see Note 22 of the Notes to Consolidated Financial Statements.

The following schedule summarizes selected financial information of our business segments. Ratios are calculated based on amounts in thousands.

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Schedule 13

SELECTED SEGMENT INFORMATION

All references below to domestic deposits by state are based on FDIC deposit market share data for full-service institutions with at least three branches at June 30, 2023.

Zions Bank

Zions Bank is headquartered in Salt Lake City, Utah, and conducts operations in Utah, Idaho, and Wyoming. As measured by domestic deposits in these states, Zions Bank was the largest full-service commercial bank in Utah and the fifth largest in Idaho.

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Zions Bank’s income before income taxes decreased $76 million, or 20%, during 2023. The decrease was due to a $45 million decrease in net interest income and a $62 million increase in noninterest expense, partially offset by a $23 million decrease in the provision for credit losses and an $8 million increase in noninterest income. The loan portfolio increased $852 million during 2023, including increases of $557 million and $424 million in consumer and commercial loans, respectively, and a decrease of $129 million in CRE loans. The ratio of ACL to net loans and leases decreased to 1.10% at December 31, 2023, compared with 1.17%. Nonperforming assets decreased $10 million, or 28%, from the prior year. Total deposits decreased 3% in 2023.

California Bank & Trust

California Bank & Trust is headquartered in San Diego, California. As measured by domestic deposits in the state, CB&T was the 17th largest full-service commercial bank in California.

CB&T’s income before income taxes decreased $32 million, or 10%, during 2023. The decrease was due to a $48 million increase in noninterest expense, partially offset by an $8 million increase in noninterest income, a $5 million decrease in the provision for credit losses, and a $3 million increase in net interest income. The loan portfolio increased $291 million during 2023, including increases of $243 million and $164 million in consumer and CRE loans, respectively, and a decrease of $116 million in commercial loans. The ratio of ACL to net loans and leases increased to 1.15% at December 31, 2023, compared with 0.93%. Nonperforming assets increased $57 million from the prior year, driven largely by two suburban office commercial real estate loans totaling $46 million. Total deposits increased 2% in 2023.

Amegy Bank

Amegy Bank is headquartered in Houston, Texas. As measured by domestic deposits in the state, Amegy was the 9th largest full-service commercial bank in Texas.

Amegy’s income before income taxes decreased $93 million, or 30%, during 2023. The decrease was due to a $60 million decrease in net interest income, a $49 million increase in noninterest expense, and a $10 million increase in the provision for credit losses, partially offset by a $26 million increase in noninterest income. The loan portfolio increased $237 million during 2023, including increases of $171 million and $156 million in CRE and consumer loans, respectively, and a decrease of $90 million in commercial loans. The ratio of ACL to net loans and leases increased to 1.08% at December 31, 2023, compared with 1.01%. Nonperforming assets decreased $24 million, or 41%, from the prior year. Total deposits increased 9% in 2023.

National Bank of Arizona

National Bank of Arizona is headquartered in Phoenix, Arizona. As measured by domestic deposits in the state, NBAZ was the fifth largest full-service commercial bank in Arizona.

NBAZ’s income before income taxes decreased $4 million, or 4%, during 2023. The decrease was due to a $22 million increase in noninterest expense and an $8 million decrease in noninterest income, partially offset by a $19 million increase in net interest income and a $7 million decrease in the provision for credit losses. The loan portfolio increased $509 million during 2023, including increases of $259 million, $177 million, and $73 million in CRE, consumer, and commercial loans, respectively. The ratio of ACL to net loans and leases increased to 1.02% at December 31, 2023, compared with 0.81%. Nonperforming assets increased $6 million from the prior year. Total deposits decreased 6% in 2023.

Nevada State Bank

Nevada State Bank is headquartered in Las Vegas, Nevada. As measured by domestic deposits in the state, NSB was the fifth largest full-service commercial bank in Nevada.

NSB’s income before income taxes decreased $53 million, or 70%, during 2023. The decrease was due to a $38 million increase in the provision for credit losses, a $20 million increase in noninterest expense, and a $3 million decrease in noninterest income, partially offset by an $8 million increase in net interest income. The loan

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portfolio increased $158 million during 2023, including increases of $104 million and $56 million in consumer and CRE loans, respectively, and a decrease of $2 million in commercial loans. The ratio of ACL to net loans and leases increased to 1.95% at December 31, 2023, compared with 0.90%. Nonperforming assets increased $37 million from the prior year. Total deposits increased 1% in 2023.

In July 2022, NSB purchased three Northern Nevada City National Bank branches and their associated deposit, credit card, and loan accounts. In addition to the three branches, the purchase included approximately $430 million in deposits and $95 million in commercial and consumer loans.

Vectra Bank Colorado

Vectra Bank Colorado is headquartered in Denver, Colorado. As measured by domestic deposits in the state, Vectra was the 14th largest full-service commercial bank in Colorado.

Vectra’s income before income taxes decreased $21 million, or 38%, during 2023. The decrease was due to a $17 million increase in noninterest expense, a $3 million decrease in noninterest income, and a $3 million decrease in net interest income, partially offset by a $2 million decrease in the provision for credit losses. The loan portfolio increased $114 million during 2023, including increases of $160 million and $43 million in consumer and CRE loans, respectively, and a decrease of $89 million in commercial loans. The ratio of ACL to net loans and leases increased to 1.12% at December 31, 2023, compared with 0.99%. Nonperforming assets increased $2 million, or 14%, from the prior year. Total deposits decreased 9% in 2023.

The Commerce Bank of Washington

The Commerce Bank of Washington is headquartered in Seattle, Washington, and operates in Washington under The Commerce Bank of Washington name and in Portland, Oregon, under The Commerce Bank of Oregon name. The FDIC deposit market share data at June 30, 2023 for TCBW in Washington and Oregon was not meaningful.

TCBW’s income before income taxes decreased $7 million, or 16%, during 2023. The decrease was due to a $3 million increase in noninterest expense, a $3 million decrease in net interest income, and a $1 million increase in the provision for credit losses. The loan portfolio decreased $14 million during 2023, including a decrease of $83 million in commercial loans, partially offset by increases of $68 million and $1 million in CRE and consumer loans, respectively. The ratio of ACL to net loans and leases increased to 0.65% at December 31, 2023, compared with 0.55%. Nonperforming assets increased $8 million from the prior year. Total deposits decreased 23% in 2023.

BALANCE SHEET ANALYSIS

Interest-earning Assets

Interest-earning assets have associated interest rates or yields, and generally consist of loans and leases, securities, and money market investments. We strive to maintain a high level of interest-earning assets relative to total assets. For more information regarding the average balances, associated revenue generated, and the respective yields of our interest-earning assets, see Schedule 6 on page 35.

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AVERAGE NET LOANS, SECURITIES, AND MONEY MARKET INVESTMENTS

(at December 31)

Investment Securities Portfolio

We invest in securities to actively manage liquidity and interest rate risk and to generate interest income. We primarily own securities that can readily provide us cash and liquidity through secured borrowing agreements without the need to sell the securities. We also manage the duration of our investment securities portfolio to help balance the inherent interest rate mismatch between loans and deposits, and to protect the economic value of shareholders’ equity. At December 31, 2023, the estimated duration of our securities portfolio decreased to 3.6 percent, compared with 4.1 percent at December 31, 2022, primarily due to the addition of fair value hedges of fixed-rate securities during the second quarter of 2023.

For information about our borrowing capacity associated with the investment securities portfolio and how we manage our liquidity risk, refer to the “Liquidity Risk Management” section on page 67. See also Note 3 and Note 5 of the Notes to Consolidated Financial Statements for more information on fair value measurements and the accounting for our investment securities portfolio.

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Schedule 14

INVESTMENT SECURITIES PORTFOLIO

1 During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the HTM category. The transfer of these securities from AFS to HTM at fair value resulted in a discount to the amortized cost basis of the HTM securities equivalent to the $2.4 billion ($1.8 billion after tax) of unrealized losses in AOCI attributable to these securities. The amortization of the unrealized losses will offset the effect of the accretion of the discount created by the transfer. At December 31, 2023, the unamortized discount on the HTM securities totaled approximately $2.1 billion ($1.5 billion after tax).

The amortized cost of total HTM and AFS investment securities decreased $2.5 billion, or 10%, during 2023, primarily due to principal reductions. Approximately 7.0% and 8.0% of the total HTM and AFS investment securities were floating-rate instruments at December 31, 2023 and 2022, respectively. Additionally, at December 31, 2023, we had a total of $3.6 billion of pay-fixed swaps held as fair value hedges against fixed-rate AFS securities that effectively convert the fixed interest income to a floating rate on the hedged portion of the securities.

At December 31, 2023, the AFS investment securities portfolio included approximately $216 million of net premium that was distributed across the various security categories. Total taxable-equivalent premium amortization for these investment securities was $75 million in 2023, compared with $103 million in 2022.

In addition to HTM and AFS securities, we also have a trading securities portfolio, comprised of municipal securities, which totaled $48 million at December 31, 2023. The trading securities portfolio at December 31, 2022 was $465 million and included $71 million of municipal securities and $394 million of money market mutual funds available for customer sweeps. Beginning in the first quarter of 2023, sweep-related balances were included in “Money market investments” on the consolidated balance sheet.

Refer to the “Interest Rate Risk Management” section on page 63, the “Capital Management” section on page 72, and Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio, swaps, and related unrealized gains and losses.

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Municipal Investments and Extensions of Credit

We support our communities by providing products and services to state and local governments (“municipalities”), including deposit services, loans, and investment banking services. We also invest in securities issued by municipalities. Our municipal lending products generally include loans in which the debt service is repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

The following schedule summarizes our total investments and extensions of credit to municipalities:

Schedule 15

MUNICIPAL INVESTMENTS AND EXTENSIONS OF CREDIT

Our municipal loans and securities are primarily associated with municipalities located within our geographic footprint. The municipal loan and lease portfolio is primarily secured by general obligations of municipal entities. Other types of collateral also include real estate, revenue pledges, or equipment. At December 31, 2023, we had no municipal loans on nonaccrual.

Municipal securities are internally graded, similar to loans, using risk-grading systems which vary based on the size and type of credit risk exposure. The internal risk grades assigned to our municipal securities follow our definitions of Pass, Special Mention, and Substandard, which are consistent with published definitions of regulatory risk classifications. At December 31, 2023, all municipal securities were graded as Pass. See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans and securities.

Loan and Lease Portfolio

We provide a wide range of lending products to commercial customers, generally small- and medium-sized businesses. We also provide various retail lending products and services to consumers and small businesses. The following schedule presents the composition of our loan and lease portfolio:

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Schedule 16

LOAN AND LEASE PORTFOLIO

1 Commercial and industrial loan balances include Paycheck Protection Program (“PPP”) loans of $77 million and $197 million for the respective periods presented.

At December 31, 2023 and December 31, 2022, the ratio of loans and leases to total assets was 66% and 62%, respectively. The largest loan category was commercial and industrial loans, which constituted 29% and 30% of our total loan portfolio for the same respective periods.

During 2023, the loan and lease portfolio increased $2.1 billion, or 4%, to $57.8 billion. Consumer loans increased $1.4 billion, primarily in the 1-4 family residential and consumer construction loan portfolios, and commercial real estate loans increased $0.6 billion, primarily in the multi-family and industrial term loan portfolios. Funding of construction lending commitments and a slower pace of loan payoffs contributed to growth in both the consumer and CRE portfolios.

The following schedule presents the contractual maturity distribution of our loan and lease portfolio:

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Schedule 17

LOAN AND LEASE PORTFOLIO BY CONTRACTUAL MATURITY

Our loans and leases have predetermined (fixed) or variable interest rates. The following schedule presents the interest rate composition of our loan and lease portfolio with a contractual maturity date over one year, and does not include the effect of any interest rate swaps associated with the loan portfolio. For more information on our interest rate risk management, see “Interest Rate Risk” on page 63.

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Schedule 18

LOAN AND LEASE PORTFOLIO WITH CONTRACTUAL MATURITIES OVER ONE YEAR BY INTEREST RATE TYPE

Other Noninterest-bearing Investments

Other noninterest-bearing investments are equity investments that are held primarily for capital appreciation, dividends, or for certain regulatory requirements. The following schedule summarizes our related investments.

Schedule 19

OTHER NONINTEREST-BEARING INVESTMENTS

Total other noninterest-bearing investments decreased $180 million, or 16%, during 2023, primarily due to a $215 million decrease in FHLB stock. We are required to invest approximately 4% of our FHLB borrowings in FHLB activity stock to maintain our borrowing capacity. The decrease in period-end FHLB activity stock was primarily due to a shift in wholesale funding needs as a result of the increase in interest-bearing deposits and the decrease in interest-earning assets.

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Visa Class B Shares

In 2007, we received 460,153 non-transferable Class B shares of Visa, Inc. in connection with a restructuring and public offering by Visa U.S.A. As a member of Visa U.S.A., we received the Class B shares based on our interest in Visa U.S.A. and did not pay anything to acquire the shares. On September 13, 2023, Visa, Inc. announced its intent to engage with common stockholders on a potential proposal that would result in the release of certain transfer restrictions on a portion of Visa Class B common stock. On January 23, 2024, the proposal was approved by a majority of Class A, B, and C common stockholders, which would provide us the option to convert up to 50% of our Class B shares to freely transferable Visa Class A common shares upon terms and conditions more fully described in the public filings of Visa, Inc. The closing price of a Visa Class A common share was $260.35 at December 31, 2023. In light of uncertainties associated with certain ongoing litigation matters involving Visa and the details of the aforementioned proposal, the ultimate timing and impact of us exercising this option, including any gain contingency, is unknown.

Premises, Equipment, and Software

We are in the final phase of a three-phase project to replace our core loan and deposit banking systems. This final phase includes the replacement of our deposit banking systems through multiple affiliate bank conversions, the first of which was successfully completed in the second quarter of 2023. Our experience with the initial conversion led to enhanced processes, trainings, and product offerings, which resulted in a delay of subsequent planned conversions. We expect to complete the remaining conversions in 2024.

The following schedule summarizes the capitalized costs associated with our core system replacement project, which are depreciated using a useful life of ten years:

Schedule 20

CAPITALIZED COSTS ASSOCIATED WITH THE CORE SYSTEM REPLACEMENT PROJECT

Deposits

Deposits are our primary funding source. In recent years, we experienced a significant influx of deposits, which was impacted by considerable fiscal and monetary policy decisions. During 2022, with the withdrawal of stimulus by the federal government, our deposits began to decline. This trend accelerated with prominent bank closures during the first quarter of 2023 and abated during the second quarter of 2023. As shown below, total deposits increased 5% during 2023. The following schedule presents the composition of our deposit portfolio:

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Schedule 21

DEPOSIT PORTFOLIO

1 Includes both insured and uninsured deposits.

Total deposits increased $3.3 billion, or 5%, in 2023. Interest-bearing deposits increased $12.8 billion, or 36%, and were partially offset by a decrease of $9.5 billion, or 27%, in noninterest-bearing demand deposits, as customers migrated to interest-bearing products in response to the higher interest rate environment. Our noninterest-bearing deposits are generally more valuable in a rising interest rate environment, creating meaningful economic value that is not fully reflected on our balance sheet since core deposits and related intangible assets are not recorded at fair value for accounting purposes.

At December 31, 2023, customer deposits (excluding brokered deposits) totaled $70.5 billion and included approximately $6.8 billion of reciprocal deposit products, where we distributed our customers’ deposits in a placement network to increase their FDIC insurance, and in return, we received a matching amount of deposits from other network banks.

At December 31, 2023, the total estimated amount of uninsured deposits was $33.2 billion, or 44%, of total deposits, compared with $38.1 billion, or 53%, of total deposits at December 31, 2022, respectively. Our loan-to-deposit ratio was 77%, compared with 78% for the same respective time periods.

See “Liquidity Risk Management” on page 67 for additional information on liquidity, including the ratio of available liquidity to uninsured deposits.

RISK MANAGEMENT

We engage in risk management practices to ensure prudent risk-taking and appropriate oversight. Risk management is an integral part of our operations and an essential determinant of our overall performance as one of our key strategic objectives.

We utilize the three lines of defense approach to risk management with responsibilities for each line of defense defined in our Risk Management Framework. The first line of defense represents units and functions throughout the Bank engaged in activities related to revenue generation, expense reduction, operational support, and technology services. These units and functions are accountable for owning and managing the risks associated with these activities. The second line of defense represents functions responsible for independently assessing and overseeing risk management activities. The third line of defense is our internal audit function that provides independent assessment of the effectiveness of the first and second lines of defense.

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In support of management’s efforts, the Board has established certain committees to oversee our risk management processes. The Audit Committee oversees financial reporting risk, and the ROC oversees the other risk management processes. The ROC meets on a regular basis to monitor and review ERM activities. As required by its charter, the ROC provides oversight for various ERM activities and approves ERM policies and activities as detailed in the ROC charter.

We employ various strategies to reduce the risks to which our operations are exposed, including credit risk, market and interest rate risk, liquidity risk, strategic and business risk, operational risk, technology risk, cybersecurity risk, capital/financial reporting risk, legal/compliance risk (including regulatory risk), and reputational risk. These risks are overseen by various management committees of which the Enterprise Risk Management Committee is the focal point.

Credit Risk Management

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. The Board, through the ROC, is responsible for approving key credit policies. The ROC also oversees and monitors adherence to these policies and the credit risk appetite as defined in the Risk Management Framework. The Board has delegated responsibility for managing credit risk and approving changes to credit policies to the Chief Credit Officer, who chairs the Credit Risk Committee.

Credit policies, credit risk management, and credit examination functions inform and support the oversight of credit risk. Our credit policies emphasize strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses. These formal credit policies and procedures provide us with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level. Policies include standards for sensitivity and scenario analyses that assess the resilience of the borrower, including the borrower’s ability to service the loan in a rising interest rate environment.

Our credit policies and practices are also designed to help manage potential risks, including those arising from environmental issues. Environmental risk related to our lending practices is primarily covered in our environmental credit policy and by our environmental subject matter experts and management. The extent of environmental due diligence performed by our environmental risk team is based on the risks identified at each property and the loan amount. The extension of credit to certain borrowers, or those connected with certain activities, may be restricted or require escalated approval, by policy, because of various environmental risks.

Our credit risk management function is separate from the lending function and strengthens control over, and the independent evaluation of, credit activities. In addition, we have a well-defined set of standards for evaluating our loan portfolio, and we utilize a comprehensive loan risk-grading system to determine the risk potential in the portfolio.

The internal credit examination department, which is independent of the lending function, periodically conducts examinations of our lending departments and credit activities. These examinations are designed to review credit quality, adequacy of documentation, appropriate loan risk-grading administration, and compliance with credit policies. Credit examinations related to the ACL are reported to both the Audit Committee and the ROC.

Our business activity is conducted primarily within the geographic footprint of our banking affiliates. We strive to avoid the risk of undue concentrations of credit in any particular industry, collateral type, location, or with any individual customer or counterparty. We have adopted and adhere to concentration limits on certain commercial industries, including leveraged lending, municipal lending, oil and gas-related lending, and various types of CRE lending, particularly construction and land development and office lending. Concentration limits are regularly monitored and revised as necessary.

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U.S. Government Agency Guaranteed Loans

We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the U.S. Small Business Administration (“SBA”), Federal Housing Authority, U.S. Department of Veterans Affairs, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. At December 31, 2023, $554 million of related loans were guaranteed, primarily by the SBA, and included $77 million of Paycheck Protection Program (“PPP”) loans. The following schedule presents the composition of U.S. government agency guaranteed loans:

Schedule 22

U.S. GOVERNMENT AGENCY GUARANTEED LOANS

Commercial Lending

The following schedule provides information regarding lending exposures to certain industries in our commercial lending portfolio:

Schedule 23

COMMERCIAL LENDING BY INDUSTRY GROUP 1

1 Industry groups are determined by North American Industry Classification System (“NAICS”) codes.

2 Includes primarily utilities, power, and renewable energy.

3 At December 31, 2023, no other industry group individually exceeded 3.3%.

Commercial Real Estate Loans

At December 31, 2023 and 2022, our CRE loan portfolio totaled $13.4 billion and $12.7 billion, respectively, representing 23% of the total loan portfolio for both periods. The majority of our CRE loans are secured by real estate primarily located within our geographic footprint.

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The following schedule presents the geographic distribution of our CRE loan portfolio based on the location of the primary collateral:

Schedule 24

COMMERCIAL REAL ESTATE LENDING BY COLLATERAL LOCATION

Term CRE loans generally mature within a three- to seven-year period and consist of full, partial, and non-recourse guarantee structures. Typical term CRE loan structures include annually tested operating covenants that require loan rebalancing based on minimum debt service coverage, debt yield, or loan-to-value tests. Construction and land development loans generally mature in 18 to 36 months and contain full or partial recourse guarantee structures with one- to five-year extension options or roll-to-perm options that often result in term loans. At December 31, 2023, approximately 83% of our CRE loan portfolio was variable-rate, and approximately 22% of these variable-rate loans were swapped to a fixed rate.

The following schedule provides information regarding lending exposures to certain collateral types in our commercial real estate lending portfolio:

Schedule 25

COMMERCIAL REAL ESTATE LENDING BY COLLATERAL TYPE