UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 193410-Q
For the quarterly period ended September 30, 2021
or
☐ | | | | | |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2022 |
| or |
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-16715
First Citizens BancShares, Inc.
(Exact name of registrantRegistrant as specified in its charter)
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Delaware | 56-1528994 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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4300 Six Forks Road | Raleigh | North Carolina | 27609 |
(Address of principle executive offices) | (Zip code) |
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| | (919) | 716-7000 |
(Registrant’s telephone number, including area code) |
Securities Registered Pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: |
Title of each class | Trading SymbolSymbol(s) | Name of each exchange on which registered |
Class A Common Stock, Par Value $1 | FCNCA | Nasdaq Global Select Market |
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A | FCNCP | Nasdaq Global Select Market |
5.625% Non-Cumulative Perpetual Preferred Stock, Series C | FCNCO | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: |
Class B Common Stock, Par Value $1 |
Securities Registered Pursuant to Section 12(g) of the Act:
Class B Common Stock, Par Value $1
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company,”company” and “emerging‘emerging growth company”company’ in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Class A Common Stock—8,811,220 13,498,535 shares
Class B Common Stock—1,005,185 shares
(Number of shares outstanding, by class, as of October 31, 2021)2022)
INDEX
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| | Page No.CONTENTS |
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PART I.Part One — Financial Information: |
FINANCIAL INFORMATION | |
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Item 1. | | | | |
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Item 2. | | | | |
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Item 3. | | | | |
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Item 4. | | | | |
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PART II. | OTHER INFORMATION | |
Part Two — Other Information: |
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Item 1. | | | | |
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Item 1A. | | | | |
Item 2. | | | | |
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Item 5. | | | | |
Item 6. | | | | |
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GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following is a list of certain abbreviations and acronyms we use throughout this document. You may find it helpful to refer back to this table. We also include a Glossary of Key Terms in Part 1, Item 2. Management’s Discussion and Analysis.
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Acronym | Definition | Acronym | Definition |
ACL | Allowance for Credit Losses | IRC | Internal Revenue Code |
AOCI | Accumulated Other Comprehensive Income | ISDA | International Swaps and Derivative Association |
ASC | Accounting Standards Codification | LIBOR | London Inter-Bank Offered Rate |
ASU | Accounting Standards Update | LOCOM | Lower of the Cost or Market Value |
BHC | Bank Holding Company | MD&A | Management’s Discussion and Analysis |
BOLI | Bank Owned Life Insurance | MSRs | Mortgage Servicing Rights |
bps | Basis point(s); 1 bp = 0.01% | NCCOB | North Carolina Commissioner of Banks |
CAB | Community Association Banking | NII | Net Interest Income |
CECL | Current Expected Credit Losses | NII Sensitivity | Net Interest Income Sensitivity |
DPA | Deferred Purchase Agreement | NIM | Net Interest Margin |
DTAs | Deferred Tax Assets | NSF | Nonsufficient Funds |
ETR | Effective Tax Rate | OREO | Other Real Estate Owned |
EVE Sensitivity | Economic Value of Equity Sensitivity | PAA | Purchase Accounting Adjustments |
FASB | Financial Accounting Standards Board | PB | Primary Beneficiary |
FCB | First-Citizens Bank & Trust Company | PCA | Prompt corrective action |
FDIC | Federal Deposit Insurance Corporation | PCD | Purchased Credit Deteriorated |
FHA | Federal Housing Administration | PD | Probability of Obligor Default |
FHC | Financial Holding Company | ROU | Right of Use |
FHLB | Federal Home Loan Bank | RSU | Restricted Stock Unit |
FOMC | Federal Open Market Committee | SBA | Small Business Administration |
FRB | Federal Reserve Bank | SBA-PPP | Small Business Administration Paycheck Protection Plan |
GAAP | Accounting Principles Generally Accepted in the U.S. | SOFR | Secured Overnight Financing Rate |
GDP | Gross Domestic Product | TDRs | Troubled Debt Restructuring |
HAMP | Home Affordable Modification Program | UPB | Unpaid Principal Balance |
HOA | Home Owner’s Association | VA | Veteran’s Administration |
HQLS | High Quality Liquid Securities | VIE | Variable Interest Entity |
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Item 6. | | | |
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PART I
Item 1.Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
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(Dollars in thousands, unaudited) | September 30, 2021 | | December 31, 2020 |
Assets | | | |
Cash and due from banks | $ | 337,450 | | | $ | 362,048 | |
Overnight investments | 9,875,063 | | | 4,347,336 | |
Investment in marketable equity securities (cost of $85,554 at September 30, 2021 and $84,837 at December 31, 2020) | 123,147 | | | 91,680 | |
Investment securities available for sale (cost of $7,345,143 at September 30, 2021 and $6,911,965 at December 31, 2020) | 7,371,129 | | | 7,014,243 | |
Investment securities held to maturity (fair value of $3,353,078 at September 30, 2021 and $2,838,499 at December 31, 2020) | 3,381,078 | | | 2,816,982 | |
Loans held for sale | 98,451 | | | 124,837 | |
Loans and leases | 32,516,189 | | | 32,791,975 | |
Allowance for credit losses | (183,194) | | | (224,314) | |
Net loans and leases | 32,332,995 | | | 32,567,661 | |
Premises and equipment | 1,230,572 | | | 1,251,283 | |
Other real estate owned | 40,649 | | | 50,890 | |
Income earned not collected | 132,911 | | | 145,694 | |
Goodwill | 350,298 | | | 350,298 | |
Other intangible assets | 44,142 | | | 50,775 | |
Other assets | 1,584,092 | | | 783,953 | |
Total assets | $ | 56,901,977 | | | $ | 49,957,680 | |
Liabilities | | | |
Deposits: | | | |
Noninterest-bearing | $ | 21,514,407 | | | $ | 18,014,029 | |
Interest-bearing | 28,551,355 | | | 25,417,580 | |
Total deposits | 50,065,762 | | | 43,431,609 | |
Securities sold under customer repurchase agreements | 663,575 | | | 641,487 | |
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Federal Home Loan Bank borrowings | 645,663 | | | 655,175 | |
Subordinated debt | 497,427 | | | 504,518 | |
Other borrowings | 76,139 | | | 88,470 | |
FDIC shared-loss payable | — | | | 15,601 | |
Other liabilities | 372,116 | | | 391,552 | |
Total liabilities | 52,320,682 | | | 45,728,412 | |
Shareholders’ equity | | | |
Common stock: | | | |
Class A - $1 par value (16,000,000 shares authorized; 8,811,220 shares issued and outstanding at September 30, 2021 and December 31, 2020) | 8,811 | | | 8,811 | |
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2021 and December 31, 2020) | 1,005 | | | 1,005 | |
Preferred stock - $0.01 par value (10,000,000 shares authorized; 345,000 shares issued and outstanding at September 30, 2021 and December 31, 2020; $1,000 per share liquidity preference) | 339,937 | | | 339,937 | |
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Retained earnings | 4,263,679 | | | 3,867,252 | |
Accumulated other comprehensive (loss) income | (32,137) | | | 12,263 | |
Total shareholders’ equity | 4,581,295 | | | 4,229,268 | |
Total liabilities and shareholders’ equity | $ | 56,901,977 | | | $ | 49,957,680 | |
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dollars in millions, except share data | September 30, 2022 | | December 31, 2021 |
Assets | | | |
Cash and due from banks | $ | 481 | | | $ | 338 | |
Interest-earning deposits at banks | 6,172 | | | 9,115 | |
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Investments in marketable equity securities (cost of $73 million at September 30, 2022 and December 31, 2021) | 92 | | | 98 | |
Investment securities available for sale (cost of $10,083 million at September 30, 2022 and $9,215 million at December 31, 2021) | 9,088 | | | 9,203 | |
Investment securities held to maturity (fair value of $8,166 million at September 30, 2022 and $3,759 million at December 31, 2021) | 9,661 | | | 3,809 | |
Assets held for sale | 21 | | | 99 | |
Loans and leases | 69,790 | | | 32,372 | |
Allowance for credit losses | (882) | | | (178) | |
Loans and leases, net of allowance for credit losses | 68,908 | | | 32,194 | |
Operating lease equipment, net | 7,984 | | | — | |
Premises and equipment, net | 1,410 | | | 1,233 | |
Bank-owned life insurance | 1,342 | | | 116 | |
Goodwill | 346 | | | 346 | |
Other intangible assets | 145 | | | 19 | |
Other assets | 3,660 | | | 1,739 | |
Total assets | $ | 109,310 | | | $ | 58,309 | |
Liabilities | | | |
Deposits: | | | |
Noninterest-bearing | $ | 26,587 | | | $ | 21,405 | |
Interest-bearing | 60,966 | | | 30,001 | |
Total deposits | 87,553 | | | 51,406 | |
Credit balances of factoring clients | 1,147 | | | — | |
Borrowings: | | | |
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Short-term borrowings | 3,128 | | | 589 | |
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Long-term borrowings | 5,215 | | | 1,195 | |
Total borrowings | 8,343 | | | 1,784 | |
Other liabilities | 2,434 | | | 381 | |
Total liabilities | 99,477 | | | 53,571 | |
Stockholders’ equity | | | |
Preferred stock - $0.01 par value (10,000,000 shares authorized at September 30, 2022 and December 31, 2021) | 881 | | | 340 | |
Common stock: | | | |
Class A - $1 par value (16,000,000 shares authorized; 13,970,944 and 8,811,220 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively) | 14 | | | 9 | |
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at September 30, 2022 and December 31, 2021) | 1 | | | 1 | |
Additional paid in capital | 4,506 | | | — | |
Retained earnings | 5,160 | | | 4,378 | |
Accumulated other comprehensive (loss) income | (729) | | | 10 | |
Total stockholders’ equity | 9,833 | | | 4,738 | |
Total liabilities and stockholders’ equity | $ | 109,310 | | | $ | 58,309 | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
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| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands, except per share data, unaudited) | 2021 | | 2020 | | 2021 | | 2020 |
Interest income | | | | | | | |
Loans and leases | $ | 319,214 | | | $ | 336,382 | | | $ | 966,525 | | | $ | 988,029 | |
Investment securities interest and dividend income | 39,246 | | | 37,195 | | | 105,530 | | | 113,293 | |
Overnight investments | 3,395 | | | 757 | | | 6,948 | | | 5,828 | |
Total interest income | 361,855 | | | 374,334 | | | 1,079,003 | | | 1,107,150 | |
Interest expense | | | | | | | |
Deposits | 8,073 | | | 13,468 | | | 25,408 | | | 55,578 | |
Securities sold under customer repurchase agreements | 358 | | | 395 | | | 1,052 | | | 1,236 | |
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Federal Home Loan Bank borrowings | 2,114 | | | 2,156 | | | 6,300 | | | 7,612 | |
Subordinated debt | 4,174 | | | 4,351 | | | 12,543 | | | 11,783 | |
Other borrowings | 249 | | | 305 | | | 768 | | | 1,488 | |
Total interest expense | 14,968 | | | 20,675 | | | 46,071 | | | 77,697 | |
Net interest income | 346,887 | | | 353,659 | | | 1,032,932 | | | 1,029,453 | |
Provision (credit) for credit losses | (1,120) | | | 4,042 | | | (31,697) | | | 52,949 | |
Net interest income after provision for credit losses | 348,007 | | | 349,617 | | | 1,064,629 | | | 976,504 | |
Noninterest income | | | | | | | |
Wealth management services | 31,935 | | | 26,369 | | | 95,886 | | | 75,152 | |
Service charges on deposit accounts | 24,858 | | | 20,841 | | | 68,277 | | | 64,776 | |
Cardholder services, net | 22,879 | | | 19,756 | | | 65,310 | | | 55,503 | |
Other service charges and fees | 9,205 | | | 7,892 | | | 26,653 | | | 22,829 | |
Merchant services, net | 8,409 | | | 6,763 | | | 25,858 | | | 18,014 | |
Mortgage income | 6,106 | | | 13,106 | | | 25,026 | | | 28,141 | |
Insurance commissions | 4,000 | | | 3,576 | | | 11,702 | | | 10,453 | |
ATM income | 1,481 | | | 1,537 | | | 4,534 | | | 4,354 | |
Realized gains on investment securities available for sale, net | 8,082 | | | 21,425 | | | 33,119 | | | 54,972 | |
Marketable equity securities gains (losses), net | 3,350 | | | (2,701) | | | 31,015 | | | 10,461 | |
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Other | 2,639 | | | 2,008 | | | 6,363 | | | 5,330 | |
Total noninterest income | 122,944 | | | 120,572 | | | 393,743 | | | 349,985 | |
Noninterest expense | | | | | | | |
Salaries and wages | 160,947 | | | 147,297 | | | 462,420 | | | 439,185 | |
Employee benefits | 32,146 | | | 31,788 | | | 103,169 | | | 100,663 | |
Occupancy expense | 29,101 | | | 27,990 | | | 87,283 | | | 85,026 | |
Equipment expense | 30,229 | | | 29,430 | | | 88,934 | | | 86,054 | |
Processing fees paid to third parties | 15,602 | | | 11,927 | | | 43,702 | | | 32,485 | |
FDIC insurance expense | 3,661 | | | 2,167 | | | 10,261 | | | 9,364 | |
Collection and foreclosure-related expenses | 836 | | | 2,168 | | | 3,207 | | | 10,171 | |
Merger-related expenses | 7,013 | | | 3,507 | | | 19,601 | | | 12,108 | |
Other | 33,283 | | | 35,388 | | | 91,745 | | | 108,256 | |
Total noninterest expense | 312,818 | | | 291,662 | | | 910,322 | | | 883,312 | |
Income before income taxes | 158,133 | | | 178,527 | | | 548,050 | | | 443,177 | |
Income taxes | 34,060 | | | 35,843 | | | 123,873 | | | 89,538 | |
Net income | $ | 124,073 | | | $ | 142,684 | | | $ | 424,177 | | | $ | 353,639 | |
Preferred stock dividends | 4,636 | | | 4,636 | | | 13,908 | | | 9,426 | |
Net income available to common shareholders | $ | 119,437 | | | $ | 138,048 | | | $ | 410,269 | | | $ | 344,213 | |
Weighted average common shares outstanding | 9,816,405 | | | 9,836,629 | | | 9,816,405 | | | 10,137,321 | |
Earnings per common share | $ | 12.17 | | | $ | 14.03 | | | $ | 41.79 | | | $ | 33.96 | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
dollars in millions, except share and per share data | 2022 | | 2021 | | 2022 | | 2021 |
Interest income | | | | | | | |
Interest and fees on loans | $ | 785 | | | $ | 320 | | | $ | 2,061 | | | $ | 967 | |
Interest on investment securities | 90 | | 40 | | 262 | | 106 |
Interest on deposits at banks | 31 | | 3 | | 50 | | 7 |
Total interest income | 906 | | | 363 | | | 2,373 | | | 1,080 | |
Interest expense | | | | | | | |
Deposits | 78 | | 8 | | 159 | | 25 |
Borrowings | 33 | | 8 | | 70 | | 22 |
Total interest expense | 111 | | | 16 | | | 229 | | | 47 | |
Net interest income | 795 | | 347 | | 2,144 | | 1,033 |
Provision (benefit) for credit losses | 60 | | (1) | | 566 | | (32) |
Net interest income after provision for credit losses | 735 | | | 348 | | | 1,578 | | | 1,065 | |
Noninterest income | | | | | | | |
Rental income on operating leases | 219 | | — | | 640 | | — |
Fee income and other service charges | 44 | | 10 | | 118 | | 31 |
Wealth management services | 35 | | 32 | | 107 | | 96 |
Service charges on deposit accounts | 21 | | 26 | | 77 | | 69 |
Factoring commissions | 24 | | — | | 78 | | — |
Cardholder services, net | 25 | | 23 | | 76 | | 65 |
Merchant services, net | 8 | | 9 | | 27 | | 26 |
Insurance commissions | 11 | | 4 | | 34 | | 12 |
Realized gain on sale of investment securities available for sale, net | — | | 8 | | — | | 33 |
Fair value adjustment on marketable equity securities, net | (2) | | 3 | | (5) | | 31 |
Bank-owned life insurance | 8 | | 1 | | 25 | | 2 |
Gain on sale of leasing equipment, net | 2 | | — | | 13 | | — |
Gain on acquisition | — | | — | | 431 | | — |
Gain on extinguishment of debt | 1 | | — | | 7 | | — |
Other noninterest income | 37 | | 8 | | 79 | | 29 |
Total noninterest income | 433 | | | 124 | | | 1,707 | | | 394 | |
Noninterest expense | | | | | | | |
Depreciation on operating lease equipment | 87 | | — | | 257 | | — |
Maintenance and other operating lease expenses | 52 | | — | | 142 | | — |
Salaries and benefits | 351 | | 194 | | 1,044 | | 566 |
Net occupancy expense | 47 | | 29 | | 144 | | 87 |
Equipment expense | 55 | | 30 | | 161 | | 89 |
Professional fees | 13 | | 5 | | 44 | | 13 |
Third-party processing fees | 27 | | 16 | | 77 | | 44 |
FDIC insurance expense | 5 | | 3 | | 26 | | 10 |
Marketing | 15 | | 3 | | 32 | | 7 |
Merger-related expenses | 33 | | 7 | | 202 | | 20 |
Intangible asset amortization | 5 | | 3 | | 17 | | 9 |
Other noninterest expense | 70 | | 24 | | 169 | | 66 |
Total noninterest expense | 760 | | | 314 | | | 2,315 | | | 911 | |
Income before income taxes | 408 | | 158 | | 970 | | 548 |
Income tax expense | 93 | | 34 | | 129 | | 124 |
Net income | $ | 315 | | | $ | 124 | | | $ | 841 | | | $ | 424 | |
Preferred stock dividends | 12 | | 5 | | 36 | | 14 |
Net income available to common stockholders | $ | 303 | | | $ | 119 | | | $ | 805 | | | $ | 410 | |
Earnings per common share | | | | | | | |
Basic | $ | 19.27 | | | $ | 12.17 | | | $ | 50.76 | | | $ | 41.79 | |
Diluted | $ | 19.25 | | | $ | 12.17 | | | $ | 50.70 | | | $ | 41.79 | |
Weighted average common shares outstanding | | | | | | | |
Basic | 15,711,976 | | 9,816,405 | | 15,849,219 | | 9,816,405 |
Diluted | 15,727,993 | | 9,816,405 | | 15,867,314 | | 9,816,405 |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
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| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands, unaudited) | 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 124,073 | | | $ | 142,684 | | | $ | 424,177 | | | $ | 353,639 | |
Other comprehensive income | | | | | | | |
Unrealized (losses) gains on securities available for sale: | | | | | | | |
Unrealized (losses) gains on securities available for sale arising during the period | (11,270) | | | 9,781 | | | (43,173) | | | 182,690 | |
Tax effect | 2,593 | | | (2,251) | | | 9,930 | | | (42,019) | |
Reclassification adjustment for realized gains on securities available for sale included in income before income taxes | (8,082) | | | (21,425) | | | (33,119) | | | (54,972) | |
Tax effect | 1,858 | | | 4,928 | | | 7,617 | | | 12,644 | |
Unrealized (losses) gains on securities available for sale arising during the period, net of tax | (14,901) | | | (8,967) | | | (58,745) | | | 98,343 | |
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Unrealized gains on securities available for sale transferred to held to maturity: | | | | | | | |
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Reclassification adjustment for accretion of unrealized gains on securities available for sale transferred to held to maturity | (430) | | | — | | | (1,690) | | | — | |
Tax effect | 99 | | | — | | | 389 | | | — | |
Total change in unrealized gains on securities available for sale transferred to held to maturity, net of tax | (331) | | | — | | | (1,301) | | | — | |
Change in pension obligation: | | | | | | | |
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Amortization of actuarial losses | 6,773 | | | 6,332 | | | 20,320 | | | 18,994 | |
Tax effect | (1,558) | | | (1,457) | | | (4,674) | | | (4,370) | |
Total change in pension obligation, net of tax | 5,215 | | | 4,875 | | | 15,646 | | | 14,624 | |
Other comprehensive (loss) income | (10,017) | | | (4,092) | | | (44,400) | | | 112,967 | |
Total comprehensive income | $ | 114,056 | | | $ | 138,592 | | | $ | 379,777 | | | $ | 466,606 | |
(Unaudited)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
dollars in millions | 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 315 | | | $ | 124 | | | $ | 841 | | | $ | 424 | |
Other comprehensive loss, net of tax | | | | | | | |
Net unrealized loss on securities available for sale | (266) | | | (15) | | | (747) | | | (59) | |
Net change in unrealized loss on securities available for sale transferred to securities held to maturity | — | | | (1) | | | 1 | | | (1) | |
Net change in pension obligations | 2 | | | 6 | | | 7 | | | 16 | |
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Other comprehensive loss, net of tax | $ | (264) | | | $ | (10) | | | $ | (739) | | | $ | (44) | |
Total comprehensive income | $ | 51 | | | $ | 114 | | | $ | 102 | | | $ | 380 | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’Stockholders’ Equity (Unaudited)
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| Three months ended September 30 |
(Dollars in thousands, unaudited) | Class A Common Stock | | Class B Common Stock | | Preferred Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders’ Equity |
Balance at June 30, 2020 | $ | 8,929 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 3,651,237 | | | $ | (9,664) | | | $ | 3,991,444 | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 142,684 | | | — | | | 142,684 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (4,092) | | | (4,092) | |
Issuance of preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchase of 117,700 shares of Class A common stock | (118) | | | — | | | — | | | — | | | (46,942) | | | — | | | (47,060) | |
| | | | | | | | | | | | | |
Cash dividends declared ($0.40 per common share) | | | | | | | | | | | | | |
Class A common stock | — | | | — | | | — | | | — | | | (3,524) | | | — | | | (3,524) | |
Class B common stock | — | | | — | | | — | | | — | | | (402) | | | — | | | (402) | |
Preferred stock dividends declared | — | | | — | | | — | | | — | | | (4,636) | | | — | | | (4,636) | |
Balance at September 30, 2020 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 3,738,417 | | | $ | (13,756) | | | $ | 4,074,414 | |
| | | | | | | | | | | | | |
Balance at June 30, 2021 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 4,148,857 | | | $ | (22,120) | | | $ | 4,476,490 | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 124,073 | | | — | | | 124,073 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (10,017) | | | (10,017) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash dividends declared ($0.47 per common share) | | | | | | | | | | | | | |
Class A common stock | — | | | — | | | — | | | — | | | (4,143) | | | — | | | (4,143) | |
Class B common stock | — | | | — | | | — | | | — | | | (472) | | | — | | | (472) | |
Preferred stock dividends declared | — | | | — | | | — | | | — | | | (4,636) | | | — | | | (4,636) | |
Balance at September 30, 2021 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 4,263,679 | | | $ | (32,137) | | | $ | 4,581,295 | |
| | | | | | | | | | | | | |
| Nine months ended September 30 |
(Dollars in thousands, unaudited) | Class A Common Stock | | Class B Common Stock | | Preferred Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
Balance at December 31, 2019 | $ | 9,624 | | | $ | 1,005 | | | $ | — | | | $ | 44,081 | | | $ | 3,658,197 | | | $ | (126,723) | | | $ | 3,586,184 | |
Cumulative effect of adoption of ASC 326 | — | | | — | | | — | | | — | | | 36,943 | | | — | | | 36,943 | |
Net income | — | | | — | | | — | | | — | | | 353,639 | | | — | | | 353,639 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 112,967 | | | 112,967 | |
Issuance of preferred stock | — | | | — | | | 339,937 | | | — | | | — | | | — | | | 339,937 | |
Repurchase of 813,090 shares of Class A common stock | (813) | | | — | | | — | | | (44,081) | | | (288,861) | | | — | | | (333,755) | |
| | | | | | | | | | | | | |
Cash dividends declared ($1.20 per common share) | | | | | | | | | | | | | |
Class A common stock | — | | | — | | | — | | | — | | | (10,869) | | | — | | | (10,869) | |
Class B common stock | — | | | — | | | — | | | — | | | (1,206) | | | — | | | (1,206) | |
Preferred stock dividends declared | — | | | — | | | — | | | — | | | (9,426) | | | — | | | (9,426) | |
Balance at September 30, 2020 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 3,738,417 | | | $ | (13,756) | | | $ | 4,074,414 | |
| | | | | | | | | | | | | |
Balance at December 31, 2020 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 3,867,252 | | | $ | 12,263 | | | $ | 4,229,268 | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 424,177 | | | — | | | 424,177 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (44,400) | | | (44,400) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash dividends declared ($1.41 per common share) | | | | | | | | | | | | | |
Class A common stock | — | | | — | | | — | | | — | | | (12,426) | | | — | | | (12,426) | |
Class B common stock | — | | | — | | | — | | | — | | | (1,416) | | | — | | | (1,416) | |
Preferred stock dividends declared | — | | | — | | | — | | | — | | | (13,908) | | | — | | | (13,908) | |
Balance at September 30, 2021 | $ | 8,811 | | | $ | 1,005 | | | $ | 339,937 | | | $ | — | | | $ | 4,263,679 | | | $ | (32,137) | | | $ | 4,581,295 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
dollars in millions, except share data | | Preferred Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity |
Balance at June 30, 2022 | | $ | 881 | | | $ | 15 | | | $ | 1 | | | $ | 5,345 | | | $ | 4,865 | | | $ | (465) | | | $ | 10,642 | |
Net income | | — | | | — | | | — | | | — | | | 315 | | | — | | | 315 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (264) | | | (264) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Stock based compensation | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
Repurchased 1,027,414 shares of Class A common stock | | — | | | (1) | | | — | | | (841) | | | — | | | — | | | (842) | |
Cash dividends declared ($0.47 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Class B common stock | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Preferred stock dividends declared: | | | | | | | | | | | | | | |
Series A | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Series B | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Series C | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Balance at September 30, 2022 | | 881 | | | 14 | | | 1 | | | 4,506 | | | 5,160 | | | (729) | | | 9,833 | |
| | | | | | | | | | | | | | |
Balance at June 30, 2021 | | 340 | | | 9 | | | 1 | | | — | | | 4,149 | | | (22) | | | 4,477 | |
Net income | | — | | | — | | | — | | | — | | | 124 | | | — | | | 124 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
Cash dividends declared ($0.47 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
Class B common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Preferred stock dividends declared | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Balance at September 30, 2021 | | $ | 340 | | | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 4,264 | | | $ | (32) | | | $ | 4,582 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
dollars in millions, except share data | | Preferred Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
Balance at December 31, 2021 | | $ | 340 | | | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 4,378 | | | $ | 10 | | | $ | 4,738 | |
Net income | | — | | | — | | | — | | | — | | | 841 | | | — | | | 841 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (739) | | | (739) | |
Issued in CIT Merger: | | | | | | | | | | | | | | |
Common stock | | — | | | 6 | | | — | | | 5,273 | | | — | | | — | | | 5,279 | |
Series B preferred stock | | 334 | | | — | | | — | | | — | | | — | | | — | | | 334 | |
Series C preferred stock | | 207 | | | — | | | — | | | — | | | — | | | — | | | 207 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Stock based compensation | | — | | | — | | | — | | | 74 | | | — | | | — | | | 74 | |
Repurchased 1,027,414 shares of Class A common stock | | — | | | (1) | | | — | | | (841) | | | — | | | — | | | (842) | |
Cash dividends declared ($0.47 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (21) | | | — | | | (21) | |
Class B common stock | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Preferred stock dividends declared: | | | | | | | | | | | | | | |
Series A | | — | | | — | | | — | | | — | | | (14) | | | — | | | (14) | |
Series B | | — | | | — | | | — | | | — | | | (14) | | | — | | | (14) | |
Series C | | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | |
Balance at September 30, 2022 | | 881 | | | 14 | | | 1 | | | 4,506 | | | 5,160 | | | (729) | | | 9,833 | |
| | | | | | | | | | | | | | |
Balance at December 31, 2020 | | 340 | | | 9 | | | 1 | | | — | | | 3,867 | | | 12 | | | 4,229 | |
Net income | | — | | | — | | | — | | | — | | | 424 | | | — | | | 424 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (44) | | | (44) | |
Cash dividends declared ($0.47 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (12) | | | — | | | (12) | |
Class B common stock | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Preferred stock dividends declared | | — | | | — | | | — | | | — | | | (14) | | | — | | | (14) | |
Balance at September 30, 2021 | | $ | 340 | | | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 4,264 | | | $ | (32) | | | $ | 4,582 | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30 |
(Dollars in thousands, unaudited) | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 424,177 | | | $ | 353,639 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | |
Provision (credit) for credit losses | (31,697) | | | 52,949 | |
Deferred tax expense | 9,266 | | | 16,227 | |
Net increase in prepaid and current tax receivable | (774,212) | | | (38,878) | |
Depreciation and amortization | 80,293 | | | 81,169 | |
Net decrease in accrued interest payable | (2,855) | | | (7,620) | |
Net decrease (increase) in income earned not collected | 12,783 | | | (28,025) | |
Contribution to pension plans | — | | | (100,000) | |
Realized gains on investment securities available for sale, net | (33,119) | | | (54,972) | |
Marketable equity securities gains, net | (31,015) | | | (10,461) | |
| | | |
Origination of loans held for sale | (911,995) | | | (775,900) | |
Proceeds from sale of loans held for sale | 808,172 | | | 743,508 | |
Gain on sale of loans | (26,789) | | | (25,728) | |
| | | |
Net (gains) losses on other real estate owned | (2,971) | | | 2,360 | |
| | | |
Net accretion of premiums and discounts | 5,017 | | | 4,599 | |
Amortization of intangible assets | 16,408 | | | 18,589 | |
| | | |
Origination of mortgage servicing rights, net of change in valuation allowance | (9,775) | | | (1,332) | |
Net change in other assets | 14,233 | | | (6,394) | |
Net change in other liabilities | (7,692) | | | (7,472) | |
| | | |
Net cash (used in) provided by operating activities | (461,771) | | | 216,258 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Net (increase) decrease in loans outstanding | 325,209 | | | (3,876,578) | |
Purchases of investment securities available for sale | (3,620,680) | | | (7,608,380) | |
Purchases of investment securities held to maturity | (1,199,419) | | | (856,047) | |
Purchases of marketable equity securities | (1,563) | | | (333,126) | |
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity | 605,664 | | | 134,736 | |
Proceeds from maturities, calls, and principal repayments of investment securities available for sale | 1,968,339 | | | 1,909,462 | |
Proceeds from sales of investment securities available for sale | 1,366,909 | | | 3,889,386 | |
Proceeds from sales of marketable equity securities | 1,111 | | | 332,762 | |
Net increase in overnight investments | (5,527,727) | | | (1,994,972) | |
| | | |
Cash paid to FDIC for settlement of shared-loss agreement | (16,103) | | | (99,468) | |
Proceeds from sales of other real estate owned | 29,666 | | | 19,683 | |
Proceeds from sales of premises and equipment | 1,194 | | | 46 | |
Purchases of premises and equipment | (72,463) | | | (98,490) | |
Business acquisitions, net of cash acquired | — | | | (59,999) | |
Other investing activities | (18,940) | | | — | |
Net cash used in investing activities | (6,158,803) | | | (8,640,985) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Net decrease in time deposits | (314,004) | | | (759,491) | |
Net increase in demand and other interest-bearing deposits | 6,949,598 | | | 8,556,808 | |
Net increase (decrease) in short-term borrowings | 22,088 | | | (44,344) | |
Repayment of long-term obligations | (29,343) | | | (82,747) | |
Origination of long-term obligations | — | | | 745,849 | |
| | | |
Net proceeds from preferred stock issuance | — | | | 339,937 | |
| | | |
Repurchase of common stock | — | | | (333,755) | |
Cash dividends paid | (32,363) | | | (21,830) | |
Net cash provided by financing activities | 6,595,976 | | | 8,400,427 | |
Change in cash and due from banks | (24,598) | | | (24,300) | |
Cash and due from banks at beginning of period | 362,048 | | | 376,719 | |
Cash and due from banks at end of period | $ | 337,450 | | | $ | 352,419 | |
See accompanying Notes to Unaudited Consolidated Financial Statements. |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid (received) during the period for: | | | |
Interest | $ | 48,926 | | | $ | 85,344 | |
Income taxes | 871,327 | | | 117,716 | |
Significant noncash investing and financing activities: | | | |
Transfers of loans to other real estate | 7,861 | | | 10,295 | |
Dividends declared but not paid | — | | | 3,926 | |
Unsettled call of investment securities | 15,000 | | | — | |
Loans held for sale exchanged for investment securities | 177,301 | | | — | |
Reclassification of portfolio loans to loans held for sale | 22,655 | | | (3,464) | |
| | | |
Transfers of premises and equipment to other real estate | 8,593 | | | 8,133 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
dollars in millions | 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 841 | | | $ | 424 | |
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | |
Provision (benefit) for credit losses | 566 | | | (32) | |
Deferred tax expense | 80 | | | 9 | |
Depreciation, amortization, and accretion, net | 399 | | | 102 | |
Stock based compensation expense | 17 | | | — | |
Realized gain on sales of investment securities available for sale, net | — | | | (33) | |
Fair value adjustment on marketable equity securities, net | 5 | | | (31) | |
Gain on sale of loans, net | (16) | | | (27) | |
Gain on sale of operating lease equipment, net | (10) | | | — | |
Loss on sale of premises and equipment, net | 1 | | | — | |
Gain on other real estate owned, net | (13) | | | (3) | |
Gain on acquisition | (431) | | | — | |
| | | |
Gain on extinguishment of debt | (7) | | | — | |
Origination of loans held for sale | (320) | | | (861) | |
Proceeds from sale of loans held for sale | 388 | | | 808 | |
Net change in other assets | 84 | | | (747) | |
Net change in other liabilities | 216 | | | (11) | |
Other operating activities | (29) | | | (9) | |
Net cash provided by (used in) operating activities | 1,771 | | | (411) | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Net decrease (increase) in interest-earning deposits at banks | 5,817 | | | (5,528) | |
Purchases of marketable equity securities | — | | | (2) | |
Proceeds from sales of investments in marketable equity securities | — | | | 1 | |
Purchases of investment securities available for sale | (1,813) | | | (3,621) | |
Proceeds from maturities of investment securities available for sale | 927 | | | 1,968 | |
Proceeds from sales of investment securities available for sale | — | | | 1,367 | |
Purchases of investment securities held to maturity | — | | | (1,199) | |
Proceeds from maturities of investment securities held to maturity | 699 | | | 606 | |
| | | |
Net change in loans | (4,648) | | | 275 | |
Proceeds from sales of loans | 173 | | | — | |
Purchases of operating lease equipment | (464) | | | — | |
Proceeds from sales of operating lease equipment | 58 | | | — | |
Purchases of premises and equipment | (81) | | | (72) | |
Proceeds from sales of premises and equipment | 13 | | | 1 | |
| | | |
Proceeds from sales of other real estate owned | 38 | | | 30 | |
Acquisition, net of cash acquired | 134 | | | — | |
Other investing activities | (67) | | | (35) | |
Net cash provided by (used in) investing activities | 786 | | | (6,209) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Net change in time deposits | (1,741) | | | (314) | |
Net change in demand and other interest-bearing deposits | (1,831) | | | 6,949 | |
Net change in securities sold under customer repurchase agreements | (11) | | | 22 | |
Repayment of short-term borrowings | (450) | | | — | |
Proceeds from issuance of short-term borrowings | 3,000 | | | — | |
Repayment of long-term borrowings | (3,740) | | | (29) | |
Proceeds from issuance of long-term borrowings | 3,253 | | | — | |
| | | |
| | | |
Repurchase of Class A common stock | (792) | | | — | |
Cash dividends paid | (58) | | | (32) | |
Other financing activities | (44) | | | — | |
Net cash (used in) provided by financing activities | (2,414) | | | 6,596 | |
| | | |
Change in cash and due from banks | 143 | | | (24) | |
Cash and due from banks at beginning of period | 338 | | | 362 | |
Cash and due from banks at end of period | $ | 481 | | | $ | 338 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
dollars in millions | 2022 | | 2021 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid (refunded) during the period for: | | | |
Interest | $ | 315 | | | $ | 49 | |
Income taxes | (12) | | | 871 | |
Significant non-cash investing and financing activities: | | | |
Transfers of loans to other real estate | 13 | | | 8 | |
Transfers of premises and equipment to other real estate | 18 | | | 9 | |
| | | |
Dividends declared but not paid | 1 | | | — | |
Transfer of assets from held for investment to held for sale | 98 | | | 73 | |
Transfer of assets from held for sale to held for investment | 19 | | | 2 | |
Loans held for sale exchanged for investment securities | 38 | | | 177 | |
Commitments extended during the period on affordable housing investment credits | 55 | | | 15 | |
Issuance of common stock as consideration for acquisition | 5,279 | | | — | |
Stock based compensation as consideration for acquisition | 81 | | | — | |
Issuance of preferred stock as consideration for acquisition | 541 | | | — | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
NOTE A -1 — ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Nature of Operations
First Citizens BancShares, Inc. (“BancShares”(the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” “BancShares”) is a financial holding company organized under the laws of Delaware andthat conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”FCB,” or the “Bank”), which is headquartered in Raleigh, North Carolina. BancShares and its subsidiaries operate more than 550 branches in 22 states, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States.
General
BASIS OF PRESENTATION
Principles of Consolidation and Basis of Presentation
These consolidated financial statements and notes thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2020.2021 (the “2021 Form 10-K”).
The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, certain partnership interests and variable interest entities (“VIEs”) where BancShares is the primary beneficiary (“PB”), if applicable. Assets held in agency or fiduciary capacity are not included in the consolidated financial statements.
Reclassifications
In certain instances, amounts reported in prior periods’the 2021 consolidated financial statements have been reclassified to conform to the current financial statement presentation.presentation, primarily driven by impacts from the CIT Merger, as defined below. Such reclassifications had no effect on previously reported cash flows, shareholders’stockholders’ equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affectimpacting the amounts reported.reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The estimates BancShares considers significant are the allowance for credit losses (“ACL”), to be a significant estimate.
Business Combinations
BancShares accounts for all business combinations using the acquisition method of accounting. Under this method, acquired assets and assumed liabilities are included with the acquirer’s accounts at their estimated fair value measurements,as of the date of acquisition, with any excess of purchase price over the fair value of the net assets acquired recognized as either finite lived intangibles or capitalized as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a gain on acquisition is recognized. Acquisition-related and income taxes.
Share Repurchasesrestructuring costs are recognized as period expenses as incurred.
On January 3, 2022, BancShares did not repurchase sharescompleted its previously announced merger (the “CIT Merger”) with CIT Group Inc. (“CIT”), pursuant to an Agreement and Plan of Class A common stock during the nine-month period endedMerger, dated as of October 15, 2020, as amended by Amendment No. 1, dated as of September 30, 2021 (as amended, the “Merger Agreement”). DuringResults as of and for the third quarter of 2020, BancShares repurchased a total of 117,700 shares of Class A common stock for $47.1 million at an average cost per share of $399.82. During thethree and nine months ended September 30, 2020,2022 include activity of the combined entity. See Note 2 — Business Combinations for additional information.
ACCOUNTING POLICIES
Significant accounting policies are described in the 2021 Form 10-K. We have further described relevant updates to the significant accounting policies presented below.
Reportable Segments
As of December 31, 2021, BancShares repurchasedmanaged its business and reported its financial results as a totalsingle segment. BancShares began reporting multiple segments during the first quarter of 813,090 shares of Class A common stock for $333.8 million at an average cost per share of $410.48.
During 2020, share repurchases included 45,000 shares of Class A common stock purchased from Ella Ann Holding, as trustee of her revocable trust. Mrs. Holding is2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the widowcomparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ former Executive Vice Chairman, Frank B. Holding,operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the motherCIT Merger. Reportable segments are discussed further in Note 22 — Business Segment Information.
Loans and Leases
Loan Classes
We re-evaluated our loan classes to reflect the characteristics of Frank B. Holding, Jr. and Hope H. Bryant, BancShares’ Chairman and Chief Executive Officer and Vice Chairman, respectively.
Small Business Administration Paycheck Protection Program
portfolio. The changes to the loan classes primarily include: (i) reclassifying Small Business Administration Paycheck Protection Program (“SBA-PPP”) loans into the commercial and industrial class, (ii) identifying a separate loan class for leases, and (iii) purchased credit deteriorated (“PCD”) loans are no longer a separate loan class. The following represent our classes of loans as of September 30, 2022. Prior period disclosures have been conformed to the current presentation.
Commercial Loans and Leases
Commercial Construction - Commercial construction consists of loans to finance land for commercial development of real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.
Owner OccupiedCommercial Mortgage - Owner occupied commercial mortgage consists of loans to purchase or refinance owner occupied nonresidential properties. This includes office buildings, other commercial facilities and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is onepossible the liquidation of collateral will not fully satisfy the obligation.
Non-owner Occupied Commercial Mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the centerpiecesincome-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Commercial and Industrial - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and business credit cards. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the Coronavirus Aid Reliefloan.
Factoring - We provide factoring, receivable management, and Economic Security Act (the “CARES Act”)secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., which was passed on March 27, 2020 in responsesold or assigned to the outbreakfactor). The most prevalent risk in factoring transactions is customer credit risk, which relates to the financial inability of a novel straincustomer to pay undisputed factored trade accounts receivable. Factoring receivables are primarily included in the commercial and industrial loan class.
Leases – Leases consists of coronavirusfinance lease arrangements for technology and office equipment and large and small industrial, medical, and transportation equipment.
Consumer Loans
Residential Mortgage- Consumer mortgage consists of loans to purchase, construct, or refinance the borrower’s primary dwelling, secondary residence or vacation home and are often secured by 1-4 family residential properties or undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. Delays in construction and development projects can cause cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Revolving Mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit or loans secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured.
Consumer Auto - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well as indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral.
ConsumerOther -Other consumer loans consist of loans to finance unsecured home improvements, student loans, and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral.
Assets Held for Sale
Assets held for sale at September 30, 2022 primarily consist of residential mortgage loans held for sale of $7 million carried at fair value and commercial loans held for sale of $11 million carried at the lower of the cost or fair market value less disposal costs (“COVID-19”LOCOM”). The remainder related to operating lease equipment held for sale.
Goodwill
BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at September 30, 2022 and December 31, 2021. The entire balance of goodwill relates to business combinations that BancShares completed prior to the CIT Merger. All of the goodwill relates to the General Banking reporting unit. There was supplementedno goodwill impairment during the three or nine month periods ended September 30, 2022. Goodwill and other intangibles are discussed further in Note 7 — Goodwill and Other Intangibles.
Derivative Financial Instruments
BancShares did not have any significant derivative financial instruments prior to completion of the CIT Merger. However, BancShares acquired various derivative financial instruments in connection with subsequent legislation. Overseenthe CIT Merger as further described in Note 13 — Derivative Financial Instruments. BancShares manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. BancShares also offers derivative products to its customers in order for them to manage their interest rate and currency risks. BancShares does not enter into derivative financial instruments for speculative purposes.
Derivatives utilized by BancShares may include swaps, forward settlement contracts and options contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time.
BancShares documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedges. Upon executing a derivative contract, BancShares designates the derivative as either a qualifying hedge or non-qualifying hedge. The designation may change based upon management’s reassessment of circumstances. BancShares does not have any qualifying fair value, cash flow or net investment hedges as of September 30, 2022.
BancShares provides interest rate derivative contracts to support the business requirements of its customers. The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, BancShares enters into similar offsetting positions with broker-dealers.
BancShares has both bought and sold credit protection in the form of participations in interest rate swaps (risk participations). These risk participations were entered into in the ordinary course of business to facilitate customer credit needs. Swap participations where BancShares has sold credit protection have maturities ranging between 2022 and 2040 and may require BancShares to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction.
BancShares uses foreign currency forward contracts, interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges.
All derivative instruments are recorded at their respective fair value. BancShares reports all derivatives on a gross basis in the Consolidated Balance Sheets and does not offset derivative assets and liabilities and cash collateral under master netting agreements except for swap contracts cleared by the United States (“U.S.”) DepartmentChicago Mercantile Exchange and LCH Clearnet. These swap contracts are accounted as “settled-to-market” and cash variation margin paid or received is characterized as settlement of the Treasury,derivative exposure and variation margin balances are offset against the SBA-PPP offers cash-flow assistancecorresponding derivative asset and liability balances on the balance sheet. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, but with their resulting gains or losses recognized in other noninterest income. For non-qualifying derivatives with periodic interest settlements, BancShares reports such settlements with other changes in fair value in other noninterest income.
Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Valuations of derivative assets and liabilities reflect the value of the instrument including BancShares’ and the counterparty’s credit risk.
BancShares is exposed to nonprofit and small business employers through guaranteed loans for certain expenses. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loanscredit risk to the extent that the proceeds were usedcounterparty fails to cover eligible payroll costs, interest costs, rent,perform under the terms of a derivative agreement. Losses related to credit risk are reflected in other noninterest income. BancShares manages this credit risk by requiring that all derivative transactions entered into as hedges be conducted with counterparties rated investment grade at the initial transaction by nationally recognized rating agencies, and utility costs overby setting limits on the exposure with any individual counterparty. In addition, pursuant to the terms of the Credit Support Annexes between BancShares and its counterparties, BancShares may be required to post collateral or may be entitled to receive collateral in the form of cash or highly liquid securities depending on the valuation of the derivative instruments as measured on a perioddaily basis. Derivatives are discussed further in Note 13 — Derivative Financial Instruments.
Bank-Owned Life Insurance (“BOLI”)
Banks can purchase life insurance policies on the lives of between eightcertain officers and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorizedare the United States Small Business Administration (“SBA”) to temporarily guarantee these loans. The SBA began processing forgiveness payments duringowner and beneficiary of the fourth quarterpolicies. These policies, known as BOLI, offset the cost of 2020.
The Consolidated Appropriations Actproviding employee benefits. BancShares had BOLI of $1.3 billion and $116 million at September 30, 2022 and December 31, 2021, was signed into law duringrespectively. BancShares acquired BOLI of $1.2 billion in the fourth quarter of 2020 and contained provisions for a second round of funding of SBA-PPP loans and during the first nine months of 2021,CIT Merger. BancShares originated approximately 12,000 SBA-PPP loans totaling approximately $1.2 billion.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosedrecords BOLI as a separate loan class. Origination fees received fromline item in the SBA are capitalized intoConsolidated Balance Sheets at each policy’s respective cash surrender value, with changes recorded as noninterest income in the Consolidated Statements of Income.
Impairment of Operating Lease Equipment
BancShares did not have significant amounts of equipment related to operating leases prior to completion of the CIT Merger. At September 30, 2022, BancShares has operating lease equipment of approximately $8.0 billion, primarily related to the Rail segment. A review for impairment of long-lived assets, such as operating lease equipment, is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of long-lived assets is determined by comparing the loans.carrying amount to future undiscounted net cash flows expected to be generated. If a long-lived asset is impaired, the impairment is the amount by which the carrying amount exceeds the fair value of the long-lived asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment and published appraisal data), are considered both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when the projected fair value is below the projected book value at the end of the depreciable life. Assets to be disposed of are included in assets held for sale in the Consolidated Balance Sheets and are reported at LOCOM.
Stock-Based Compensation
BancShares did not have stock-based compensation awards prior to completion of the CIT Merger. Certain CIT employees received grants of restricted stock unit awards (“CIT RSUs”) or performance stock unit awards (“CIT PSUs”). Upon completion of the CIT Merger and pursuant to the terms of the Merger Agreement, (i) the CIT RSUs and PSUs converted into “BancShares RSUs” based on the 0.062 exchange ratio (the “Exchange Ratio”) and (ii) the BancShares RSUs became subject to the same terms and conditions (including vesting terms, payment timing and rights to receive dividend equivalents) applicable to the CIT RSUs and CIT PSUs, except that vesting for the converted CIT PSUs was no longer subject to any performance goals or metrics. Upon completion of the CIT Merger, the fair value of the BancShares RSUs was determined based on the closing share price of the Parent Company’s Class A Common Stock (the “Class A Common Stock”) on January 3, 2022. The deferred fee income, netfair value of origination costs,the BancShares RSUs is (i) included in the purchase price consideration for the portion related to employee services provided prior to completion of the CIT Merger and (ii) recognized in expenses for the portion related to employee services to be provided after completion of the CIT Merger. For “graded vesting” awards, each vesting tranche of the award is amortized separately as if each were a separate award. For “cliff vesting” awards, compensation expense is recognized over the liferequisite service period. BancShares recognizes the effect of forfeitures in compensation expense when they occur. In the event of involuntary termination of employees after the Merger Date, vesting occurs on the employee termination date for BancShares RSUs subject to change in control provisions. Expenses related to stock-based compensation are included in merger-related expenses in the Consolidated Statements of Income. Stock-based compensation is discussed further in Note 21 — Employee Benefit Plans.
Members of the loans as an adjustmentCIT Board of Directors had RSU awards, stock settled annual awards, and deferred stock-settled annual awards (collectively, the “CIT Director Equity Awards”), which vested immediately upon the completion of the CIT Merger. The fair value of the CIT Director Equity Awards was determined based on the Exchange Ratio and the closing share price of the Class A Common Stock on January 3, 2022, and was included in the purchase price consideration disclosed in Note 2 — Business Combinations.
Per Share Data
Earnings per common share is computed by dividing net income available to yieldcommon stockholders by the weighted average number of Class A Common Stock and Class B Common Stock outstanding during each period. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding increased by the weighted-average potential impact of dilutive shares. BancShares’ potential dilutive instruments include unvested RSUs assumed in the CIT Merger. The dilutive effect is computed using the effective interest method. treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the diluted earnings per common share computation as the result would have an anti-dilutive effect. BancShares had no potential dilutive common shares outstanding prior to the CIT Merger and did not report diluted earnings per common share for prior periods.
Defined Benefit Pension Plans and Other Postretirement Benefits
As disclosed in the 2021 Form 10-K, BancShares has both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain employees, each of September 30, 2021, SBA-PPP loans outstanding were $1.1 billion.which is designed in accordance with the practices and regulations in the related countries. In conjunction with the CIT Merger, BancShares assumed the funded and unfunded noncontributory defined benefit pension and postretirement plans of CIT. See Note 21 — Employee Benefit Plans for disclosures related to the plans.
Revenue Recognition and Noninterest Income
Descriptions of significant noninterest revenue-generating activities new to BancShares due to the CIT Merger are as follows:
Rental income on operating leases is recognized on a straight-line basis over the lease term for lease contract fixed payments and is included in noninterest income. Rental income also includes variable lease income which is recognized as earned. The accrual of rental income on operating leases is suspended when the collection of substantially all rental payments is no longer probable and rental income for such leases is recognized when cash payments are received. In the period we conclude that collection of rental payments is no longer probable, accrued but uncollected rental revenue is reversed against rental income.
Factoring commissions, which are earned in the Commercial Banking segment, are driven by factoring volumes, principally in the retail sectors. Factoring commissions are charged as a percentage of the invoice amount of the receivables assigned to BancShares. The volume of factoring activity and the commission rates charged impact factoring commission income earned. Factoring commissions are deferred and recognized as income over time based on the underlying terms of the assigned receivables. See Commercial Loans and Leases section for additional commentary on factoring.
Gains on leasing equipment are recognized upon completion of Contentssale (sale closing) and transfer of title. The gain is determined based on sales price less book carrying value (net of accumulated depreciation).
Recently Issued Accounting Pronouncements
There were no
BOLI income reflects income earned on changes in the cash surrender value of the BOLI.
Other Newly Adopted Accounting Standards
The following pronouncements or Accounting Standards Updates (“ASUs”) were issued during the third quarter of 2021 by the Financial Accounting Standards Board (“FASB”) and adopted by BancShares as of January 1, 2022:
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity - Issued August 2020
The amendments in this ASU reduce the number of models used to account for convertible instruments, amend diluted earnings per share calculations for convertible instruments, amend the requirements for a contract (or embedded derivative) that willis potentially settled in an entity’s own shares to be classified in equity, and expand disclosure requirements for convertible instruments. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements.statements and disclosures as BancShares does not have any convertible instruments within the scope of this ASU.
ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options - Issued May 2021
The amendments in this ASU clarify an issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU requires that such modifications or exchanges be treated as an exchange of the original instrument for a new instrument. An issuer should measure the effect of such modifications or exchanges based on analysis of the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification or exchange. Recognition of a modification or an exchange of a freestanding equity-classified written call option is then based upon the substance of the transaction. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares currently does not have any freestanding equity-classified written call options within the scope of this ASU.
ASU 2021-05, Leases, (Topic 842), Lessors - Certain Leases with Variable Lease Payments - Issued July 2021
The amendments in this ASU improve lessor accounting for certain leases with variable lease payments so that lessors are no longer required to recognize a day-one selling loss upon lease commencement when specified criteria are met. Specifically, this ASU requires a lessor to classify a lease with variable payments that do not depend on a reference index or a rate as an operating lease if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a day-one selling loss at lease commencement. A day-one selling loss is not recognized under operating lease accounting. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares has not originated finance leases which required a day-one selling loss at lease commencement.
NOTE B -2 — BUSINESS COMBINATIONS
Recently Announced Business Combinations
CIT Group Inc.
On October 15, 2020, BancShares andcompleted the CIT Group Inc., a Delaware corporation (“CIT”), entered into an Agreement and Plan of Merger on January 3, 2022 (the “Merger Agreement”) by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB (“Merger Sub”), and CIT, the parent company of CIT Bank, N.A., a national banking association (“CIT Bank”Date”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the “First-Step Merger”), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the “Mergers”). The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the “Transaction”).
The Merger Agreement was unanimously approved by the Board of Directors of each of BancShares and CIT. The transaction was approved by the shareholders of both companies and has received regulatory approval from the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporation (“FDIC”).
On September 30, 2021, the parties entered into an amendment to the merger agreement pursuant to which the parties mutually agreed to extend until March 1, 2022 the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed. Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”), each share of CIT common stock, par value $0.01 per share issued and outstanding immediately prior to the Effective Time (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, will bewas converted into the right to receive 0.062000.062 shares of BancShares Class A common stock,Common Stock, par value $1.00 per share. Holders of CIT Common Stock will receiveshare, plus cash in lieu of fractional shares.shares of Class A Common Stock. The Parent Company issued approximately 6.1 million shares of Class A Common Stock in connection with the consummation of the CIT Merger. The closing share price of Class A Common Stock on the Nasdaq Global Select Market was $859.76 on January 3, 2022. The purchase price consideration related to the issuance of Class A Common Stock was $5.3 billion. There were approximately 8,800 fractional shares for which the Parent Company paid cash of $7 million.
In addition, at
Pursuant to the Effective Time,terms of the Merger Agreement, each issued and outstanding share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Seriesfixed-to-floating rate non-cumulative perpetual preferred stock, series A, par value $0.01 per share, of CIT (“CIT Series A Preferred Stock”) and each issued and outstanding share of 5.625% Non-Cumulative Perpetual Preferred Stock, Seriesnon-cumulative perpetual preferred stock, series B, par value $0.01 per share, of CIT issued(“CIT Series B Preferred Stock” and outstanding will automatically betogether with CIT Series A Preferred Stock, “CIT Preferred Stock”), converted into the right to receive 1one share of a newly created series of preferred stock, series B, of the Parent Company (“BancShares Series B of BancSharesPreferred Stock”) and 1one share of a newly created series of preferred stock, series C, of the Parent Company (“BancShares Series C Preferred Stock” and together with the BancShares Series B Preferred Stock, the “New BancShares Preferred Stock”), respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The non-callable period for the New BancShares Preferred Stock is January 4, 2027, which is five years from the original issuance date of the New BancShares Preferred Stock. There are 325,000 shares of BancShares respectively.Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in a total liquidation preference of $325 million. There are 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $25 per share, resulting in a total liquidation preference of $200 million. The New BancShares Preferred Stock qualifies as Tier 1 capital. The purchase price consideration related to the fair value of the New BancShares Preferred Stock was $541 million.
CIT RSUs and PSUs converted to BancShares RSUs and CIT Director Awards and immediately vested upon completion of the CIT Merger as further described in the “Stock-Based Compensation” discussion in Note 1 — Accounting Policies and Basis of Presentation. The aggregate purchase price consideration related to these compensation awards was $81 million.
The CIT Merger has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values based on initial valuations as of January 3, 2022. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments.
As of September 30, 2022, certain fair value measurements remain preliminary. The purchase price allocation is considered preliminary related to loan and lease portfolios, operating lease equipment, and deposits, as we identify and assess information regarding the nature of these assets and liabilities and review the associated valuation assumptions and methodologies. The amounts recorded for current and deferred tax assets and liabilities are considered provisional as we continue to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of the acquired assets and liabilities assumed.
While BancShares believes that the information available on January 3, 2022 provided a reasonable basis for estimating fair value, as mentioned above, BancShares continues to review information relating to events or circumstances existing at the Merger Date. Purchase accounting could change until management finalizes its analysis of the acquired assets and assumed liabilities, up to one year from the Merger Date.
The following table provides a preliminary purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the Merger Date:
Purchase Price Consideration and Net Assets Acquired | | | | | | | | | | | | | | | | | |
dollars in millions, except shares issued and price per share | | | | | Purchase Price Allocation |
Common share consideration | | | | | |
Shares of Class A Common Stock issued | | | | | 6,140,010 | |
Price per share on January 3, 2022 | | | | | $ | 859.76 | |
Common stock consideration | | | | | $ | 5,279 | |
Preferred stock consideration | | | | | 541 | |
Stock-based compensation consideration | | | | | 81 | |
Cash in lieu of fractional shares and other consideration paid | | | | | 51 | |
Purchase price consideration | | | | | $ | 5,952 | |
Assets | | | | | |
Cash and interest-earning deposits at banks | | | | | $ | 3,060 | |
Investment securities | | | | | 6,561 | |
Assets held for sale | | | | | 59 | |
Loans and leases | | | | | 32,714 | |
Operating lease equipment | | | | | 7,838 | |
Bank-owned life insurance | | | | | 1,202 | |
Intangible assets | | | | | 143 | |
Other assets | | | | | 2,198 | |
Total assets acquired | | | | | $ | 53,775 | |
Liabilities | | | | | |
Deposits | | | | | $ | 39,428 | |
Borrowings | | | | | 4,536 | |
Credit balances of factoring clients | | | | | 1,534 | |
Other liabilities | | | | | 1,894 | |
Total liabilities assumed | | | | | $ | 47,392 | |
Fair value of net assets acquired | | | | | 6,383 | |
Preliminary gain on acquisition | | | | | $ | 431 | |
BancShares recorded a preliminary gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The preliminary gain on acquisition is not taxable.
The following is a description of the methods used to determine the estimated fair values of significant assets acquired and liabilities assumed as presented above.
Cash and interest-bearing deposits
For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value.
Investment securities
Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or discounted cash flows methodologies.
Loans held for sale and portfolio loans
Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, amortization status and current discount rate. Selected larger, impaired loans were specifically reviewed to evaluate credit risk. Loans with similar risk characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and required rates of return for market participants to purchase similar assets, including adjustments for liquidity and credit quality when necessary.
Purchased loans and leases which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD loans and leases. PCD loans and leases are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus BancShares' initial ACL which results in a gross up of the loan balance (the “PCD Gross-Up”). The difference between the unpaid principal balance (“UPB”) and the acquisition date amortized cost resulting from the PCD Gross-Up is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.
Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases consist of loans that do not reflect more than insignificant credit deterioration since origination at acquisition.
The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger. The UPB for PCD loans and leases includes the PCD Gross-Up of $272 million as discussed further in Note 4 — Loans and Leases.
Loans Acquired
| | | | | | | | | | | |
dollars in millions | Loans and Leases |
| UPB | | Fair Value |
| | | |
Non-PCD loans and leases | $ | 29,542 | | | $ | 29,481 | |
PCD loans and leases | 3,550 | | | 3,233 | |
Total loans and leases | $ | 33,092 | | | $ | 32,714 | |
Operating Lease Equipment
Operating lease equipment were comprised of two sub-groups: rail and non-rail equipment. Fair values for both were based on the cost approach where market values were not available. The sales approach was used to value rail assets where market information was available, or when replacement cost less depreciation was lower than the current market value. An intangible liability was recorded for net below market lease contracts rental rates, for which fair value was estimated using the income approach and market lease rates and other key inputs.
A discount was recorded for operating lease equipment, which includes railcars, locomotives and other equipment, to reduce it to fair value. This adjustment will reduce depreciation expense over the remaining useful lives of the equipment on a straight-line basis. The intangible liability (see Note 7 — Goodwill and Other Intangibles) will be amortized, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements on a straight-line basis.
Bank Owned Life Insurance
The fair values of BOLI policies were determined by the policy administrator and calculated based on the net present value of investment cash flows. Expected premium payments, death benefits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysis and management’s review of the analysis, fair value was determined to equate to book value as of the merger date.
Intangible assets
The following table presents the intangible asset recorded in conjunction with the CIT Merger related to the valuation of core deposits:
Intangible Assets
| | | | | | | | | | | | | | | | | |
dollars in millions | Fair Value | | Estimated Useful Life | | Amortization Method |
Core deposit intangibles | $143 | | 10 years | | Straight-line |
Certain core deposits were acquired as part of the CIT Merger, which provide an additional source of funds for BancShares. The core deposit intangibles represent the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. This intangible was valued using the income approach, after-tax cost savings method. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances over their estimated average remaining life. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to Note 7 — Goodwill and Other Intangibles for further discussion.
Other assets
The following table details other assets acquired:
Other Assets | | | | | |
dollars in millions | Fair Value |
Low-income housing tax credits and other investments | $ | 777 |
Right of use assets | 327 |
Premises and equipment | 230 |
Fair value of derivative financial instruments | 209 | |
Counterparty receivables | 133 |
Other | 522 | |
Total other assets | $ | 2,198 |
The fair values of the tax credit investments considered the ongoing equity installments that are regularly allocated to each of the underlying tax credit funds comprising the low-income housing tax credits investments, along with changes to projected tax benefits and the impact this has on future capital contributions, and an appropriately determined discount rate. The fair value of the investments in unconsolidated entities was valued using the income approach.
The right of use asset associated with real estate operating leases were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. The lease liability was measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the acquirer at the acquisition date and using BancShares incremental borrowing rate. The lease term was determined for individual leases based on management’s assessment of the probability of exercising the existing renewal, termination and/or purchase option.
Fair values for property, including leasehold improvements, furniture and fixtures, computer software and other digital equipment were determined using the cost approach. Certain tangible assets that are expected to be sold in the short term were reported at net book. Real estate property, such as land and buildings, was valued using the sales comparison approach, where sales of comparable properties are adjusted for differences to estimate the value of each subject property.
The fair values of the derivative financial instruments, as well as counterparty receivables, were valued using prices of financial instruments with similar characteristics and observable inputs.
Deposits
The fair values for time deposits were estimated using a discounted cash flow analysis whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.
Borrowings
In connection with the CIT Merger, BancShares assumed the outstanding borrowings of CIT. The fair values of borrowing were estimated based on readily observable prices using reliable market sources.
Credit balances of Factoring Clients
Credit balance amounts represent short-term payables that are tied to the factoring receivables. Due to the short-term nature of these payables and given that amounts are settled at book value, it was determined that the carrying value is equivalent to fair value.
Other Liabilities
Other liabilities include items such as accounts payable and accrued liabilities, lease liabilities, current and deferred taxes, commitments to fund tax credit investments and other miscellaneous liabilities. The fair value of lease liabilities was measured using the present value of remaining lease payments, using BancShares’ discount rate at the merger date. The fair value of the remaining liabilities was determined to approximate book value. For all accrued liabilities and accounts payable, it was determined that the carrying value equals book value.
Unaudited Pro Forma Information
The amount of interest income, noninterest income and net income of $1,199 million, $920 million and $461 million, respectively, attributable to the acquisition of CIT were included in BancShares’ Consolidated Statement of Income for the nine months ended September 30, 2022. CIT’s interest income, noninterest income and net income noted above reflect management’s best estimates, based on information available at the reporting date.
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and nine months ended September 30, 2022 and 2021 as if CIT had been acquired on January 1, 2021. The unaudited estimated pro forma information combines the historical results of CIT with the BancShares’ consolidated historical results and includes certain adjustments for the respective periods. The following key adjustments were made to reflect the pro forma results as if the CIT Merger was completed on January 1, 2021: (i) provision for credit losses of $513 million related to the Non-PCD loans and leases and unfunded commitments (increased nine months ended September 30, 2022 to reflect the expense in 2021); (ii) merger and integration costs of $33 million and $202 million for the three and nine months ended September 30, 2022 (increased the 2022 periods to reflect the expense in the 2021 periods), respectively; (iii) estimated purchase accounting adjustment (“PAA”) accretion and amortization related to fair value adjustments and intangibles associated with the CIT Merger (net reduction to 2021); and (iv) $431 million preliminary gain on acquisition (decreased nine months ended September 30, 2022 to reflect the gain in 2021). BancShares expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not reflected in the pro forma amounts that follow. The pro forma information should not be relied upon as being indicative of the historical results of operations that would have occurred had the acquisition taken place on January 1, 2021. Actual results may differ from the unaudited pro forma information presented below and the differences could be significant.
Selected Unaudited Pro Forma Financial Information for Consolidated BancShares
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest income | $ | 906 | | | $ | 714 | | | $ | 2,373 | | | $ | 2,152 | |
Noninterest income | 433 | | | 515 | | | 1,276 | | | 2,014 | |
Net income | 338 | | | 340 | | | 955 | | | 1,112 | |
NOTE C - INVESTMENTS3 — INVESTMENT SECURITIES
The following tables as of September 30, 2022 include the investment security balances acquired in the CIT Merger, which were recorded at fair value on the acquisition date. The amortized cost and fair value of investment securities at September 30, 20212022 and December 31, 2020,2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
(Dollars in thousands) | Amortized cost(1) | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Investment securities available for sale | | | | | | | |
| | | | | | | |
Government agency | $ | 851,860 | | | $ | 5,348 | | | $ | 3,480 | | | $ | 853,728 | |
Residential mortgage-backed securities | 4,800,194 | | | 19,219 | | | 17,767 | | | 4,801,646 | |
Commercial mortgage-backed securities | 1,092,183 | | | 9,875 | | | 11,406 | | | 1,090,652 | |
Corporate bonds | 600,906 | | | 25,295 | | | 1,098 | | | 625,103 | |
| | | | | | | |
Total investment securities available for sale | $ | 7,345,143 | | | $ | 59,737 | | | $ | 33,751 | | | $ | 7,371,129 | |
Investment in marketable equity securities | 85,554 | | | 37,744 | | | 151 | | | 123,147 | |
Investment securities held to maturity | | | | | | | |
Residential mortgage-backed securities | 2,122,299 | | | 5,313 | | | 15,051 | | | 2,112,561 | |
Commercial mortgage-backed securities | 1,256,771 | | | 3 | | | 18,265 | | | 1,238,509 | |
Other | 2,008 | | | — | | | — | | | 2,008 | |
Total investment securities held to maturity | 3,381,078 | | | 5,316 | | | 33,316 | | | 3,353,078 | |
Total investment securities | $ | 10,811,775 | | | $ | 102,797 | | | $ | 67,218 | | | $ | 10,847,354 | |
| | | | | | | |
| December 31, 2020 |
(Dollars in thousands) | Amortized cost(1) | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 499,832 | | | $ | 101 | | | $ | — | | | $ | 499,933 | |
Government agency | 706,241 | | | 723 | | | 5,573 | | | 701,391 | |
Residential mortgage-backed securities | 4,369,130 | | | 70,283 | | | 1,310 | | | 4,438,103 | |
Commercial mortgage-backed securities | 745,892 | | | 25,645 | | | — | | | 771,537 | |
Corporate bonds | 590,870 | | | 14,437 | | | 2,028 | | | 603,279 | |
| | | | | | | |
Total investment securities available for sale | $ | 6,911,965 | | | $ | 111,189 | | | $ | 8,911 | | | $ | 7,014,243 | |
Investment in marketable equity securities | 84,837 | | | 8,654 | | | 1,811 | | | 91,680 | |
Investment securities held to maturity | | | | | | | |
Residential mortgage-backed securities | 1,877,692 | | | 17,689 | | | — | | | 1,895,381 | |
Commercial mortgage-backed securities | 937,034 | | | 3,884 | | | 56 | | | 940,862 | |
Other | 2,256 | | | — | | | — | | | 2,256 | |
Total investment securities held to maturity | 2,816,982 | | | 21,573 | | | 56 | | | 2,838,499 | |
Total investment securities | $ | 9,813,784 | | | $ | 141,416 | | | $ | 10,778 | | | $ | 9,944,422 | |
(1)Amortized cost includes any recorded ACL. | | | | | | | |
On November 1, 2020, mortgage-backed securities with an amortized cost of $1.46 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $1.47 billionAmortized Cost and a weighted average contractual maturity of 18 years. The unrealized gain on these securities at the date of transfer was $5.9 million, or $4.5 million net of tax, and was reported as a component of accumulated other comprehensive income. This unrealized gain is accreted over the remaining expected life of the securities as an adjustment of yield.Fair Value - Debt Securities
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,047 | | | $ | — | | | $ | (147) | | | $ | 1,900 | |
Government agency | 175 | | | — | | | (2) | | | 173 | |
Residential mortgage-backed securities | 5,450 | | | — | | | (666) | | | 4,784 | |
Commercial mortgage-backed securities | 1,828 | | | — | | | (155) | | | 1,673 | |
Corporate bonds | 583 | | | — | | | (25) | | | 558 | |
| | | | | | | |
Total investment securities available for sale | $ | 10,083 | | | $ | — | | | $ | (995) | | | $ | 9,088 | |
Investment in marketable equity securities | $ | 73 | | | $ | 20 | | | $ | (1) | | | $ | 92 | |
Investment securities held to maturity | | | | | | | |
U.S. Treasury | $ | 473 | | | $ | — | | | $ | (54) | | | $ | 419 | |
Government agency | 1,546 | | | — | | | (196) | | | 1,350 | |
Residential mortgage-backed securities | 4,510 | | | — | | | (765) | | | 3,745 | |
Commercial mortgage-backed securities | 2,834 | | | — | | | (437) | | | 2,397 | |
Supranational securities | 295 | | | — | | | (43) | | | 252 | |
Other | 3 | | | — | | | — | | | 3 | |
Total investment securities held to maturity | $ | 9,661 | | | $ | — | | | $ | (1,495) | | | $ | 8,166 | |
Total investment securities | $ | 19,817 | | | $ | 20 | | | $ | (2,491) | | | $ | 17,346 | |
| | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,007 | | | $ | — | | | $ | (2) | | | $ | 2,005 | |
Government agency | 221 | | | 1 | | | (1) | | | 221 | |
Residential mortgage-backed securities | 4,757 | | | 8 | | | (36) | | | 4,729 | |
Commercial mortgage-backed securities | 1,648 | | | 9 | | | (17) | | | 1,640 | |
Corporate bonds | 582 | | | 27 | | | (1) | | | 608 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,215 | | | $ | 45 | | | $ | (57) | | | $ | 9,203 | |
Investment in marketable equity securities | $ | 73 | | | $ | 25 | | | $ | — | | | $ | 98 | |
Investment securities held to maturity | | | | | | | |
Residential mortgage-backed securities | $ | 2,322 | | | $ | 6 | | | $ | (22) | | | $ | 2,306 | |
Commercial mortgage-backed securities | 1,485 | | | — | | | (34) | | | 1,451 | |
Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | $ | 3,809 | | | $ | 6 | | | $ | (56) | | | $ | 3,759 | |
Total investment securities | $ | 13,097 | | | $ | 76 | | | $ | (113) | | | $ | 13,060 | |
Investments in residential and commercial mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. U.S. Treasury investments represents T-bills and Notes issued by the U.S. Treasury. Investments in government agency securities represent securities issued by the SBA.Small Business Association (“SBA”), Federal Home Loan Bank (“FHLB”) and other agencies. Investments in supranational securities represent securities issued by the World Bank. Investments in corporate bonds andrepresent positions in debt securities of other financial institutions. Investments in marketable equity securities represent positions in securitiescommon stock of otherpublicly traded financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions.
BancShares also holds approximately 354,000 shares of Class B common stock of Visa, Inc. (“Visa”). Until the resolution of certain litigation, at which time the Visa Class B common stock will convert to publicly traded Visa Class A common stock, these shares are only transferable to other shareholdersstockholders of Visa Class B common stock. As a result, there is limited transfer activity in private transactions between buyers and sellers. Given this limited trading activity and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for shares of Visa Class B common stock into shares of Visa Class A common stock, these shares are not considered to have a readily determinable fair value and are recorded at $0.have no carrying value. BancShares continues to monitor the trading activity in Visa Class B common stock and the status of the resolution of certain litigation matters at Visa that would trigger the conversion of the Visa Class B common stock into Visa Class A common stock.
BancShares held Federal Housing Loan Bank (“ FHLB”) stock of $40.5 million and $45.4 million and other non-marketable equity securities of $9.6 million and $11.6 millionat September 30, 2021 and December 31, 2020, respectively. These securities are recorded at cost within other assets.
As of September 30, 20212022 and December 31, 2020,2021, no ACL was required for available for sale andor held to maturity debt securities. Accrued interest receivables for available for sale and held to maturity debt securities were excluded from the estimate for credit losses. At September 30, 2022, accrued interest receivables for available for sale and held to maturity debt securities were $29 million and $16 million, respectively. At December 31, 2021, accrued interest receivables for available for sale and held to maturity debt securities were $21.1$22 million and $6.0 million, respectively. At December 31, 2020, accrued interest receivables for available for sale and held to maturity debt securities were $17.6 million and $5.4$7 million, respectively. During the three and nine months ended September 30, 2022 and 2021, and 2020,there was no accrued interest that was deemed uncollectible and written off against interest income.
The following table provides the amortized cost and fair value by contractual maturity for investment securities available for sale and held to maturity. Expected maturities will differ from contractual maturities on certain securities because issuersborrowers and borrowers of underlying collateralissuers may have the right to call or prepay obligations with or without prepayment penalties. Residential and commercial mortgage-backed and government agency securities are stated separately as they are not due at a single maturity date.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Amortized cost(1) | | Fair value | | Amortized cost(1) | | Fair value |
Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 1,204 | | | $ | 1,208 | | | $ | 500,846 | | | $ | 500,954 | |
One through five years | 37,248 | | | 38,540 | | | 72,565 | | | 73,881 | |
Five through 10 years | 545,754 | | | 568,692 | | | 508,320 | | | 519,570 | |
Over 10 years | 16,700 | | | 16,663 | | | 8,971 | | | 8,807 | |
Government agency | 851,860 | | | 853,728 | | | 706,241 | | | 701,391 | |
Residential mortgage-backed securities | 4,800,194 | | | 4,801,646 | | | 4,369,130 | | | 4,438,103 | |
Commercial mortgage-backed securities | 1,092,183 | | | 1,090,652 | | | 745,892 | | | 771,537 | |
Total investment securities available for sale | $ | 7,345,143 | | | $ | 7,371,129 | | | $ | 6,911,965 | | | $ | 7,014,243 | |
Investment securities held to maturity | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | 1,259 | | | 1,259 | | | 1,507 | | | 1,507 | |
One through five years | 749 | | | 749 | | | 749 | | | 749 | |
Residential mortgage-backed securities | 2,122,299 | | | 2,112,561 | | | 1,877,692 | | | 1,895,381 | |
Commercial mortgage-backed securities | 1,256,771 | | | 1,238,509 | | | 937,034 | | | 940,862 | |
Total investment securities held to maturity | $ | 3,381,078 | | | $ | 3,353,078 | | | $ | 2,816,982 | | | $ | 2,838,499 | |
(1)Amortized cost includes any recorded ACL. | | | | | | | |
Maturities - Debt Securities
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
| Cost | | Fair Value | | Cost | | Fair Value |
Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 48 | | | $ | 48 | | | $ | — | | | $ | — | |
After one through five years | 2,063 | | | 1,914 | | | 2,049 | | | 2,048 | |
After five through 10 years | 503 | | | 481 | | | 523 | | | 548 | |
After 10 years | 16 | | | 15 | | | 17 | | | 17 | |
| | | | | | | |
Government agency | 175 | | | 173 | | | 221 | | | 221 | |
Residential mortgage-backed securities | 5,450 | | | 4,784 | | | 4,757 | | | 4,729 | |
Commercial mortgage-backed securities | 1,828 | | | 1,673 | | | 1,648 | | | 1,640 | |
Total investment securities available for sale | $ | 10,083 | | | $ | 9,088 | | | $ | 9,215 | | | $ | 9,203 | |
Investment securities held to maturity | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 53 | | | $ | 51 | | | $ | 2 | | | $ | 2 | |
After one through five years | 1,334 | | | 1,190 | | | — | | | — | |
After five through 10 years | 930 | | | 783 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | 4,510 | | | 3,745 | | | 2,322 | | | 2,306 | |
Commercial mortgage-backed securities | 2,834 | | | 2,397 | | | 1,485 | | | 1,451 | |
| | | | | | | |
| | | | | | | |
Total investment securities held to maturity | $ | 9,661 | | | $ | 8,166 | | | $ | 3,809 | | | $ | 3,759 | |
| | | | | | | |
The following table presents interest and dividend income on investment securities.
Interest and Dividends on Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest income - taxable investment securities | $ | 89 | | | $ | 39 | | | $ | 260 | | | $ | 104 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Dividend income - marketable equity securities | 1 | | | 1 | | | 2 | | | 2 | |
Interest on investment securities | $ | 90 | | | $ | 40 | | | $ | 262 | | | $ | 106 | |
The following table provides the gross realized gains and losses on the sales of investment securities available for sale for the three and nine months ended September 30, 2021 and 2020:sale:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Gross realized gains on sales of investment securities available for sale | $ | 8,082 | | | $ | 21,425 | | | $ | 33,133 | | | $ | 55,651 | |
Gross realized losses on sales of investment securities available for sale | — | | | — | | | (14) | | | (679) | |
Net realized gains on sales of investment securities available for sale | $ | 8,082 | | | $ | 21,425 | | | $ | 33,119 | | | $ | 54,972 | |
Realized Gains on Debt Securities Available For Sale
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Gross realized gains on sales of investment securities available for sale | $ | — | | | $ | 8 | | | $ | — | | | $ | 33 | |
Gross realized losses on sales of investment securities available for sale | — | | | — | | | — | | | — | |
Net realized gains on sales of investment securities available for sale | $ | — | | | $ | 8 | | | $ | — | | | $ | 33 | |
The following table provides the realized and unrealized gains and lossesfair value adjustment on marketable equity securities for the three and nine months ended September 30, 2021 and 2020:securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Marketable equity securities gains (losses), net | $ | 3,350 | | | $ | (2,701) | | | $ | 31,015 | | | $ | 10,461 | |
Less net gains recognized on marketable equity securities sold | — | | | 2,568 | | | 263 | | | 39,884 | |
Unrealized gains (losses) recognized on marketable equity securities held | $ | 3,350 | | | $ | (5,269) | | | $ | 30,752 | | | $ | (29,423) | |
Fair Value Adjustment on Marketable Equity Securities
11 | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
Fair value adjustment on marketable equity securities, net | $ | (2) | | | $ | 3 | | | $ | (5) | | | $ | 31 | |
The following table provides information regarding investment securities available for sale with unrealized losses as of September 30, 2021 and December 31, 2020:for which an ACL has not been recorded:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Less than 12 months | | 12 months or more | | Total |
(Dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Investment securities available for sale | | | | | | | | | | | |
| | | | | | | | | | | |
Government agency | $ | 302,114 | | | $ | 2,857 | | | $ | 119,231 | | | $ | 623 | | | $ | 421,345 | | | $ | 3,480 | |
Residential mortgage-backed securities | 2,137,675 | | | 17,752 | | | 1,762 | | | $ | 15 | | | 2,139,437 | | | 17,767 | |
Commercial mortgage-backed securities | 758,798 | | | 11,406 | | | — | | | $ | — | | | 758,798 | | | 11,406 | |
Corporate bonds | 42,593 | | | 1,042 | | | 10,444 | | | $ | 56 | | | 53,037 | | | 1,098 | |
| | | | | | | | | | | |
Total | $ | 3,241,180 | | | $ | 33,057 | | | $ | 131,437 | | | $ | 694 | | | $ | 3,372,617 | | | $ | 33,751 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2020 |
| Less than 12 months | | 12 months or more | | Total |
(Dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Investment securities available for sale | | | | | | | | | | | |
| | | | | | | | | | | |
Government agency | $ | 268,622 | | | $ | 3,197 | | | $ | 328,777 | | | $ | 2,376 | | | $ | 597,399 | | | $ | 5,573 | |
Residential mortgage-backed securities | 433,816 | | | 1,241 | | | 23,064 | | | 69 | | | 456,880 | | | 1,310 | |
| | | | | | | | | | | |
Corporate bonds | 57,715 | | | 2,028 | | | — | | | — | | | 57,715 | | | 2,028 | |
| | | | | | | | | | | |
Total | $ | 760,153 | | | $ | 6,466 | | | $ | 351,841 | | | $ | 2,445 | | | $ | 1,111,994 | | | $ | 8,911 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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Gross Unrealized Losses on Debt Securities Available For Sale
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 1,900 | | | $ | (147) | | | $ | — | | | $ | — | | | $ | 1,900 | | | $ | (147) | |
Government agency | 70 | | | (1) | | | 65 | | | (1) | | | 135 | | | (2) | |
Residential mortgage-backed securities | 2,178 | | | (231) | | | 2,573 | | | (435) | | | 4,751 | | | (666) | |
Commercial mortgage-backed securities | 938 | | | (64) | | | 688 | | | (91) | | | 1,626 | | | (155) | |
Corporate bonds | 493 | | | (23) | | | 44 | | | (2) | | | 537 | | | (25) | |
Total | $ | 5,579 | | | $ | (466) | | | $ | 3,370 | | | $ | (529) | | | $ | 8,949 | | | $ | (995) | |
| | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 1,811 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | 1,811 | | | $ | (2) | |
Government agency | 17 | | | — | | | 79 | | | (1) | | | 96 | | | (1) | |
Residential mortgage-backed securities | 3,992 | | | (36) | | | 1 | | | — | | | 3,993 | | | (36) | |
Commercial mortgage-backed securities | 852 | | | (15) | | | 111 | | | (2) | | | 963 | | | (17) | |
Corporate bonds | 52 | | | (1) | | | — | | | — | | | 52 | | | (1) | |
Total | $ | 6,724 | | | $ | (54) | | | $ | 191 | | | $ | (3) | | | $ | 6,915 | | | $ | (57) | |
As of September 30, 2021,2022, there were 36124 investment securities available for sale with continuous unrealized losses for more than 12 months, of which 34118 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and 2 werethe remaining six related to corporate bonds.
None of the unrealized losses identified as of September 30, 2021,2022, or December 31, 2020,2021, relate to the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the securities were deemed to require an allowance for credit losses.ACL. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.
Investment securities having an aggregate carrying value of $5.5$3.9 billion at September 30, 2021,2022, and $4.6$5.7 billion at December 31, 2020,2021, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities.entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the World Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no further credit monitoring is performedACL has been recorded on these portfolios. Shouldsecurities. In the event there beare downgrades to the credit rating of the U.S. Treasury or the World Bank or losses reported on securities issued by government agencies and government sponsored entities, BancShares will reevaluate its determination of zero expected credit losses on held to maturity debt securities.
There were no debt securities held to maturity on nonaccrual status as of September 30, 2021.
A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of September 30, 2022 and December 31, 2021.
There were no debt securities held to maturity on non-accrual status as of September 30, 2022 and December 31, 2021.
Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $234 million and $40 million at September 30, 2022 and December 31, 2021, respectively; these securities are recorded at cost. BancShares held $55 million and $1 million of nonmarketable securities without readily determinable fair values measured under the measurement exception at September 30, 2022 and December 31, 2021, respectively. Investments in qualified affordable housing projects that qualify for the proportional amortization method were $558 million and $156 million at September 30, 2022 and December 31, 2021, respectively.
NOTE D -4 — LOANS AND LEASES
BancShares’ accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination, which is determined
The following tables as of September 30, 2022 include loan and lease balances acquired in the acquisition date. Non-purchased credit deteriorated (“PCD”) loans consist of loans originated by BancShares and loans purchased from other institutions, that do not reflect more than insignificant credit deterioration at acquisition. Purchased loansCIT Merger, which reflect more than insignificant credit deterioration are classified as PCD and reported as a single loan segment or class. At the date of acquisition, all acquired loans arewere recorded at fair value.value on the Merger Date. Refer to Note 2 — Business Combinations for further information. Refer to Note 1 — Accounting Policies and Basis of Presentation for updates to our accounting policies related to loans.
Loans and leases outstanding
Unless otherwise noted, loans held for sale are not included in the following at September 30, 2021 and December 31, 2020:tables. Leases in the following tables include finance leases but exclude operating lease equipment.
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Commercial: | | | |
Construction and land development | $ | 1,247,680 | | | $ | 985,424 | |
Owner occupied commercial mortgage | 11,625,554 | | | 11,165,012 | |
Non-owner occupied commercial mortgage | 3,002,928 | | | 2,987,689 | |
Commercial and industrial and leases | 5,266,266 | | | 5,013,644 | |
SBA-PPP | 1,086,917 | | | 2,406,291 | |
Total commercial loans | 22,229,345 | | | 22,558,060 | |
Consumer: | | | |
Residential mortgage | 5,701,346 | | | 5,561,686 | |
Revolving mortgage | 1,834,690 | | | 2,052,854 | |
Construction and land development | 391,768 | | | 348,123 | |
Consumer auto | 1,350,377 | | | 1,255,402 | |
Consumer other | 635,408 | | | 552,968 | |
Total consumer loans | 9,913,589 | | | 9,771,033 | |
| | | |
PCD loans | 373,255 | | | 462,882 | |
Total loans and leases | $ | 32,516,189 | | | $ | 32,791,975 | |
Loans by Class | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Commercial | | | |
Commercial construction | $ | 2,752 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 14,053 | | | 12,099 | |
Non-owner occupied commercial mortgage | 9,683 | | | 3,041 | |
Commercial and industrial | 24,288 | | | 5,937 | |
Leases | 2,184 | | | 271 | |
Total commercial | 52,960 | | | 22,586 | |
Consumer | | | |
Residential mortgage | 12,910 | | | 6,088 | |
Revolving mortgage | 1,923 | | | 1,818 | |
Consumer auto | 1,385 | | | 1,332 | |
Consumer other | 612 | | | 548 | |
Total consumer | 16,830 | | | 9,786 | |
Total loans and leases | $ | 69,790 | | | $ | 32,372 | |
At September 30, 20212022 and December 31, 2020,2021, accrued interest receivable on loans included in other assets was $88.1$171 million and $107.7$87 million, respectively, and was excluded from the estimate of credit losses.
Certain residential real estate loans are originated to be sold to investors. BancShares has elected the fair value option on these loans, which are recorded in loans held for sale. In addition, BancShares may change its strategy for certain portfolio loans 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. Loans held for sale totaled $98.5 million and $124.8 million at September 30, 2021 and December 31, 2020, respectively.
The following table presents selected components of the amortized cost of loans.
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Deferred fees, including unearned fees and unamortized costs on non-PCD loans | | | |
Net deferred fees related to SBA-PPP loans | $ | 39,372 | | | $ | 41,064 | |
Net deferred fees related to other portfolios | 15,162 | | 9,153 |
Total net deferred fees | $ | 54,534 | | | $ | 50,217 | |
| | | |
Net unamortized discount on purchased loans | | | |
Non-PCD | $ | 13,350 | | | $ | 19,473 | |
PCD | 32,623 | | | 45,254 | |
Total | $ | 45,973 | | | $ | 64,727 | |
Components of Amortized Cost
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Deferred fees, including unearned fees and unamortized costs on non-PCD loans | $ | 72 | | $ | 32 |
| | | |
Net unamortized discount on purchased loans | | | |
Non-PCD | $ | 81 | | $ | 11 |
PCD | 50 | | 29 | |
Total net unamortized discount | $ | 131 | | $ | 40 |
The aging of the outstanding loans and leases, by class, at September 30, 20212022 and December 31, 20202021 is provided in the tables below. Loans and leases past due less than 30 days past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loanrespective agreement.
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| September 30, 2021 |
(Dollars in thousands) | 30-59 days past due | | 60-89 days past due | | 90 days or greater | | Total past due | | Current | | Total loans and leases |
Commercial: | | | | | | | | | | | |
Construction and land development | $ | 233 | | | $ | — | | | $ | 1,424 | | | $ | 1,657 | | | $ | 1,246,023 | | | $ | 1,247,680 | |
Owner occupied commercial mortgage | 7,210 | | | 5,553 | | | 8,198 | | | 20,961 | | | 11,604,593 | | | 11,625,554 | |
Non-owner occupied commercial mortgage | 752 | | | 1,245 | | | 6,716 | | | 8,713 | | | 2,994,215 | | | 3,002,928 | |
Commercial and industrial and leases | 10,309 | | | 3,234 | | | 9,690 | | | 23,233 | | | 5,243,033 | | | 5,266,266 | |
SBA-PPP | — | | | — | | | — | | | — | | | 1,086,917 | | | 1,086,917 | |
Total commercial loans | 18,504 | | | 10,032 | | | 26,028 | | | 54,564 | | | 22,174,781 | | | 22,229,345 | |
Consumer: | | | | | | | | | | | |
Residential mortgage | 18,417 | | | 6,607 | | | 20,864 | | | 45,888 | | | 5,655,458 | | | 5,701,346 | |
Revolving mortgage | 5,587 | | | 1,443 | | | 4,513 | | | 11,543 | | | 1,823,147 | | | 1,834,690 | |
Construction and land development | 477 | | | 1,719 | | | 70 | | | 2,266 | | | 389,502 | | | 391,768 | |
Consumer auto | 5,345 | | | 1,173 | | | 1,263 | | | 7,781 | | | 1,342,596 | | | 1,350,377 | |
Consumer other | 2,197 | | | 1,122 | | | 1,295 | | | 4,614 | | | 630,794 | | | 635,408 | |
Total consumer loans | 32,023 | | | 12,064 | | | 28,005 | | | 72,092 | | | 9,841,497 | | | 9,913,589 | |
PCD loans | 11,407 | | | 5,200 | | | 27,111 | | | 43,718 | | | 329,537 | | | 373,255 | |
Total loans and leases | $ | 61,934 | | | $ | 27,296 | | | $ | 81,144 | | | $ | 170,374 | | | $ | 32,345,815 | | | $ | 32,516,189 | |
| | | | | | | | | | | |
| December 31, 2020 |
(Dollars in thousands) | 30-59 days past due | | 60-89 days past due | | 90 days or greater | | Total past due | | Current | | Total loans and leases |
Commercial: | | | | | | | | | | | |
Construction and land development | $ | 956 | | | $ | 527 | | | $ | 1,603 | | | $ | 3,086 | | | $ | 982,338 | | | $ | 985,424 | |
Owner occupied commercial mortgage | 8,757 | | | 2,232 | | | 14,082 | | | 25,071 | | | 11,139,941 | | | 11,165,012 | |
Non-owner occupied commercial mortgage | 12,370 | | | — | | | 5,973 | | | 18,343 | | | 2,969,346 | | | 2,987,689 | |
Commercial and industrial and leases | 14,532 | | | 2,842 | | | 3,243 | | | 20,617 | | | 4,993,027 | | | 5,013,644 | |
SBA-PPP | — | | | — | | | — | | | — | | | 2,406,291 | | | 2,406,291 | |
Total commercial loans | 36,615 | | | 5,601 | | | 24,901 | | | 67,117 | | | 22,490,943 | | | 22,558,060 | |
Consumer: | | | | | | | | | | | |
Residential mortgage | 43,218 | | | 8,364 | | | 31,690 | | | 83,272 | | | 5,478,414 | | | 5,561,686 | |
Revolving mortgage | 11,977 | | | 2,626 | | | 7,415 | | | 22,018 | | | 2,030,836 | | | 2,052,854 | |
Construction and land development | 932 | | | 77 | | | 330 | | | 1,339 | | | 346,784 | | | 348,123 | |
Consumer auto | 6,825 | | | 1,835 | | | 1,076 | | | 9,736 | | | 1,245,666 | | | 1,255,402 | |
Consumer other | 3,610 | | | 1,464 | | | 1,505 | | | 6,579 | | | 546,389 | | | 552,968 | |
Total consumer loans | 66,562 | | | 14,366 | | | 42,016 | | | 122,944 | | | 9,648,089 | | | 9,771,033 | |
PCD loans | 18,322 | | | 6,076 | | | 31,026 | | | 55,424 | | | 407,458 | | | 462,882 | |
Total loans and leases | $ | 121,499 | | | $ | 26,043 | | | $ | 97,943 | | | $ | 245,485 | | | $ | 32,546,490 | | | $ | 32,791,975 | |
Loans and Leases - Delinquency Status
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 5 | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 2,747 | | | $ | 2,752 | |
Owner occupied commercial mortgage | 23 | | | 3 | | | 26 | | | 52 | | | 14,001 | | | 14,053 | |
Non-owner occupied commercial mortgage | 34 | | | — | | | 46 | | | 80 | | | 9,603 | | | 9,683 | |
Commercial and industrial | 80 | | | 20 | | | 21 | | | 121 | | | 24,167 | | | 24,288 | |
Leases | 41 | | | 15 | | | 14 | | | 70 | | | 2,114 | | | 2,184 | |
Total commercial | 183 | | | 38 | | | 107 | | | 328 | | | 52,632 | | | 52,960 | |
Consumer | | | | | | | | | | | |
Residential mortgage | 74 | | | 16 | | | 48 | | | 138 | | | 12,772 | | | 12,910 | |
Revolving mortgage | 9 | | | 2 | | | 8 | | | 19 | | | 1,904 | | | 1,923 | |
Consumer auto | 7 | | | 1 | | | 2 | | | 10 | | | 1,375 | | | 1,385 | |
Consumer other | 4 | | | 2 | | | 4 | | | 10 | | | 602 | | | 612 | |
Total consumer | 94 | | | 21 | | | 62 | | | 177 | | | 16,653 | | | 16,830 | |
Total loans and leases | $ | 277 | | | $ | 59 | | | $ | 169 | | | $ | 505 | | | $ | 69,285 | | | $ | 69,790 | |
| | | | | | | | | | | |
| December 31, 2021 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 3 | | | $ | 1,235 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 21 | | | 1 | | | 9 | | | 31 | | | 12,068 | | | 12,099 | |
Non-owner occupied commercial mortgage | 3 | | | — | | | 2 | | | 5 | | | 3,036 | | | 3,041 | |
Commercial and industrial | 8 | | | 3 | | | 5 | | | 16 | | | 5,921 | | | 5,937 | |
Leases | — | | | 1 | | | 1 | | | 2 | | | 269 | | | 271 | |
Total commercial | 33 | | | 5 | | | 19 | | | 57 | | | 22,529 | | | 22,586 | |
Consumer | | | | | | | | | | | |
Residential mortgage | 24 | | | 6 | | | 23 | | | 53 | | | 6,035 | | | 6,088 | |
Revolving mortgage | 6 | | | 2 | | | 6 | | | 14 | | | 1,804 | | | 1,818 | |
Consumer auto | 6 | | | 1 | | | 1 | | | 8 | | | 1,324 | | | 1,332 | |
Consumer other | 2 | | | 2 | | | 1 | | | 5 | | | 543 | | | 548 | |
Total consumer | 38 | | | 11 | | | 31 | | | 80 | | | 9,706 | | | 9,786 | |
Total loans and leases | $ | 71 | | | $ | 16 | | | $ | 50 | | | $ | 137 | | | $ | 32,235 | | | $ | 32,372 | |
The amortized cost, by class, of loans and leases on nonaccrualnon-accrual status, and loans and leases greater than 90 days past due and still accruing at September 30, 20212022 and December 31, 2020,2021 are presented below.
Loans on Non-Accrual Status (1) (2)
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dollars in millions | September 30, 2022 | | December 31, 2021 |
| Non-Accrual Loans | | Loans > 90 Days and Accruing | | Non-Accrual Loans | | Loans > 90 Days and Accruing |
Commercial | | | | | | | |
Commercial construction | $ | 20 | | | $ | — | | | $ | 4 | | | $ | — | |
Owner occupied commercial mortgage | 41 | | | 3 | | | 18 | | | 5 | |
Non-owner occupied commercial mortgage | 96 | | | 28 | | | 5 | | | — | |
Commercial and industrial | 172 | | | 3 | | | 15 | | | 1 | |
Leases | 27 | | | 5 | | | 3 | | | — | |
Total commercial | 356 | | | 39 | | | 45 | | | 6 | |
Consumer | | | | | | | |
Residential mortgage | 74 | | | 8 | | | 54 | | | — | |
Revolving mortgage | 19 | | | — | | | 18 | | | — | |
Consumer auto | 4 | | | — | | | 3 | | | — | |
Consumer other | 1 | | | 3 | | | 1 | | | 1 | |
Total consumer | 98 | | | 11 | | | 76 | | | 1 | |
Total loans and leases | $ | 454 | | | $ | 50 | | | $ | 121 | | | $ | 7 | |
(1) Accrued interest that was reversed when the loan went to non-accrual status was $2 million for the nine months ended September 30, 2022.
(2) Non-accrual loans for which there was no related ACL totaled $41 million at September 30, 2022 and $15 million at December 31, 2021.
Other real estate owned (“OREO”) and repossessed assets were $54 million as follows:of September 30, 2022 and $40 million as of December 31, 2021.
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| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Nonaccrual loans and leases | | Loans and leases > 90 days and accruing | | Nonaccrual loans and leases | | Loans and leases > 90 days and accruing |
Commercial: | | | | | | | |
Construction and land development | $ | 1,457 | | | $ | — | | | $ | 1,661 | | | $ | — | |
Owner occupied commercial mortgage | 19,886 | | | 601 | | | 23,103 | | | 3,625 | |
Non-owner occupied commercial mortgage | 10,613 | | | — | | | 7,932 | | | 147 | |
Commercial and industrial and leases | 20,689 | | | 1,414 | | | 10,626 | | | 540 | |
Total commercial loans | 52,645 | | | 2,015 | | | 43,322 | | | 4,312 | |
Consumer: | | | | | | | |
Residential mortgage | 44,463 | | | 779 | | | 66,345 | | | — | |
Revolving mortgage | 17,295 | | | — | | | 22,236 | | | — | |
Construction and land development | 571 | | | — | | | 652 | | | — | |
Consumer auto | 3,287 | | | — | | | 3,166 | | | — | |
Consumer other | 476 | | | 1,033 | | | 823 | | | 1,195 | |
Total consumer loans | 66,092 | | | 1,812 | | | 93,222 | | | 1,195 | |
PCD loans | 45,038 | | | 1,787 | | | 54,939 | | | 355 | |
Total loans and leases | $ | 163,775 | | | $ | 5,614 | | | $ | 191,483 | | | $ | 5,862 | |
Credit Qualityquality indicators
Loans and leases are monitored for credit quality on a recurring basis. Commercial loans and leases and consumer loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segmentsclasses being evaluated. The credit quality indicators for Non-PCD commercial loans and leases are borrower risk classifications developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated at least annually,periodically with more frequent evaluations done on criticized loans. Commercial loans are also updated if there is evidence of potential credit deterioration, such as delinquency. Commercial credit cards are included in the Commercial and industrial and leases segment, but are evaluated based primarily upon delinquency status. The risk classificationsindicators as of the date presented are based on the most recent assessment performed and are defined below:
Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention – A special mention asset has potential weaknesses thatwhich deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.
Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at September 30, 2022 and December 31, 2021, relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.
The credit quality indicatorsindicator for consumer and PCD loans areis based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases. An exemption is applied to government guaranteed loans as the principal repayments are insured by the Federal Housing Administration (“FHA”) and U.S. Department of Veterans Affairs and thus remain on accrual status regardless of delinquency status.
The following table summarizes the commercial loans disaggregated by year of origination and by risk rating. The consumer loan delinquency status by year of origination is also presented below. The tables reflect the amortized cost of the loans and include PCD loans.
Commercial Loans - Risk Classifications by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 |
Risk Classification: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | | Total |
Commercial construction | | | | | | | | | | | | | | | | |
Pass | $ | 782 | | | $ | 816 | | | $ | 628 | | | $ | 222 | | | $ | 27 | | | $ | 81 | | | $ | 67 | | | $ | — | | | $ | 2,623 | |
Special Mention | 3 | | | — | | | 17 | | | 18 | | | 29 | | | — | | | — | | | — | | | 67 | |
Substandard | 2 | | | — | | | — | | | 42 | | | 11 | | | 4 | | | — | | | — | | | 59 | |
Doubtful | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | 787 | | | 816 | | | 645 | | | 285 | | | 67 | | | 85 | | | 67 | | | — | | | 2,752 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 2,095 | | | 3,261 | | | 3,043 | | | 1,883 | | | 1,095 | | | 2,031 | | | 174 | | | — | | | 13,582 | |
Special Mention | 31 | | | 23 | | | 38 | | | 33 | | | 17 | | | 49 | | | 1 | | | — | | | 192 | |
Substandard | 7 | | | 29 | | | 40 | | | 43 | | | 40 | | | 114 | | | 5 | | | — | | | 278 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | 2,133 | | | 3,313 | | | 3,121 | | | 1,959 | | | 1,152 | | | 2,195 | | | 180 | | | — | | | 14,053 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 1,918 | | | 1,668 | | | 1,833 | | | 1,575 | | | 774 | | | 1,147 | | | 43 | | | — | | | 8,958 | |
Special Mention | — | | | 1 | | | 32 | | | 83 | | | 3 | | | 10 | | | 1 | | | — | | | 130 | |
Substandard | 4 | | | 12 | | | 66 | | | 293 | | | 60 | | | 148 | | | — | | | — | | | 583 | |
Doubtful | — | | | — | | | — | | | 5 | | | — | | | 7 | | | — | | | — | | | 12 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | 1,922 | | | 1,681 | | | 1,931 | | | 1,956 | | | 837 | | | 1,312 | | | 44 | | | — | | | 9,683 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | 6,784 | | | 4,502 | | | 2,278 | | | 1,745 | | | 997 | | | 1,108 | | | 5,046 | | | 33 | | | 22,493 | |
Special Mention | 84 | | | 126 | | | 86 | | | 73 | | | 60 | | | 31 | | | 31 | | | — | | | 491 | |
Substandard | 70 | | | 109 | | | 184 | | | 150 | | | 173 | | | 192 | | | 289 | | | 1 | | | 1,168 | |
Doubtful | — | | | 1 | | | 1 | | | 3 | | | 13 | | | 18 | | | 5 | | | — | | | 41 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 95 | | | — | | | 95 | |
Total commercial and industrial | 6,938 | | | 4,738 | | | 2,549 | | | 1,971 | | | 1,243 | | | 1,349 | | | 5,466 | | | 34 | | | 24,288 | |
Leases | | | | | | | | | | | | | | | | | |
Pass | 547 | | | 523 | | | 457 | | | 257 | | | 106 | | | 116 | | | — | | | — | | | 2,006 | |
Special Mention | 13 | | | 18 | | | 26 | | | 10 | | | 5 | | | 2 | | | — | | | — | | | 74 | |
Substandard | 21 | | | 32 | | | 19 | | | 16 | | | 8 | | | 1 | | | — | | | — | | | 97 | |
Doubtful | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 7 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | 582 | | | 575 | | | 504 | | | 284 | | | 120 | | | 119 | | | — | | | — | | | 2,184 | |
Total commercial | $ | 12,362 | | | $ | 11,123 | | | $ | 8,750 | | | $ | 6,455 | | | $ | 3,419 | | | $ | 5,060 | | | $ | 5,757 | | | $ | 34 | | | $ | 52,960 | |
The following tables represent current credit quality indicators by origination year as of September 30, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Commercial Loans Amortized Cost Basis by Origination Year | | | | | | |
Classification: | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving | | Revolving converted to term loans | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
Construction and land development | | | | | | | | | | | | | | | | |
Pass | $ | 373,012 | | | $ | 451,926 | | | $ | 256,321 | | | $ | 98,892 | | | $ | 44,343 | | | $ | 12,396 | | | $ | 4,231 | | | $ | — | | | $ | 1,241,121 | |
Special Mention | 19 | | | 157 | | | — | | | 134 | | | 63 | | | — | | | — | | | — | | | 373 | |
Substandard | 300 | | | 38 | | | 326 | | | 1,442 | | | 4,070 | | | 10 | | | — | | | — | | | 6,186 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 373,331 | | | 452,121 | | | 256,647 | | | 100,468 | | | 48,476 | | | 12,406 | | | 4,231 | | | — | | | 1,247,680 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | |
Pass | 2,069,209 | | | 3,078,093 | | | 1,989,052 | | | 1,316,012 | | | 1,036,593 | | | 1,778,334 | | | 122,411 | | | 120 | | | 11,389,824 | |
Special Mention | 2,082 | | | 24,356 | | | 29,358 | | | 28,165 | | | 12,199 | | | 20,469 | | | 4,047 | | | 71 | | | 120,747 | |
Substandard | 9,459 | | | 7,495 | | | 22,482 | | | 10,947 | | | 18,598 | | | 39,695 | | | 6,307 | | | — | | | 114,983 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 2,080,750 | | | 3,109,944 | | | 2,040,892 | | | 1,355,124 | | | 1,067,390 | | | 1,838,498 | | | 132,765 | | | 191 | | | 11,625,554 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | |
Pass | 438,949 | | | 770,507 | | | 587,335 | | | 278,507 | | | 283,867 | | | 507,411 | | | 31,876 | | | — | | | 2,898,452 | |
Special Mention | 495 | | | 487 | | | 263 | | | 10,219 | | | 800 | | | 5,654 | | | 500 | | | — | | | 18,418 | |
Substandard | 2,615 | | | 11,742 | | | 22,600 | | | 10,184 | | | 10,243 | | | 27,352 | | | 1,322 | | | — | | | 86,058 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 442,059 | | | 782,736 | | | 610,198 | | | 298,910 | | | 294,910 | | | 540,417 | | | 33,698 | | | — | | | 3,002,928 | |
Commercial and industrial and leases | | | | | | | | | | | | | | | | |
Pass | 1,238,557 | | | 1,162,246 | | | 714,374 | | | 344,220 | | | 193,857 | | | 350,870 | | | 1,087,462 | | | 5,136 | | | 5,096,722 | |
Special Mention | 2,323 | | | 8,279 | | | 22,100 | | | 3,528 | | | 4,070 | | | 4,324 | | | 4,575 | | | 206 | | | 49,405 | |
Substandard | 7,765 | | | 7,978 | | | 4,770 | | | 4,241 | | | 3,175 | | | 4,221 | | | 17,392 | | | 1,280 | | | 50,822 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 2 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 69,315 | | | — | | | 69,315 | |
Total | 1,248,645 | | | 1,178,503 | | | 741,244 | | | 351,989 | | | 201,102 | | | 359,416 | | | 1,178,745 | | | 6,622 | | | 5,266,266 | |
SBA-PPP | | | | | | | | | | | | | | | | |
Pass | 1,011,370 | | | 75,547 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,086,917 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial | $ | 5,156,155 | | | $ | 5,598,851 | | | $ | 3,648,981 | | | $ | 2,106,491 | | | $ | 1,611,878 | | | $ | 2,750,737 | | | $ | 1,349,439 | | | $ | 6,813 | | | $ | 22,229,345 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer and PCD Loans Amortized Cost Basis by Origination Year | | | | | | |
Days Past Due: | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving | | Revolving converted to term loans | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
Residential mortgage | | | | | | | | | | | | | | | | |
Current | $ | 1,591,381 | | | $ | 1,651,853 | | | $ | 690,779 | | | $ | 410,446 | | | $ | 390,940 | | | $ | 900,129 | | | $ | 19,930 | | | $ | — | | | $ | 5,655,458 | |
30-59 days | 252 | | | 1,506 | | | 4,728 | | | 3,066 | | | 1,486 | | | 7,379 | | | — | | | — | | | 18,417 | |
60-89 days | 788 | | | 295 | | | — | | | 764 | | | 881 | | | 3,879 | | | — | | | — | | | 6,607 | |
90 days or greater | 55 | | | 713 | | | 1,059 | | | 1,511 | | | 3,084 | | | 14,193 | | | 249 | | | — | | | 20,864 | |
Total | 1,592,476 | | | 1,654,367 | | | 696,566 | | | 415,787 | | | 396,391 | | | 925,580 | | | 20,179 | | | — | | | 5,701,346 | |
Revolving mortgage | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,700,947 | | | 122,200 | | | 1,823,147 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 2,939 | | | 2,648 | | | 5,587 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 378 | | | 1,065 | | | 1,443 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 1,901 | | | 2,612 | | | 4,513 | |
Total | — | | | — | | | — | | | — | | | — | | | — | | | 1,706,165 | | | 128,525 | | | 1,834,690 | |
Construction and land development | | | | | | | | | | | | | | | | |
Current | 165,993 | | | 175,007 | | | 26,889 | | | 10,258 | | | 5,745 | | | 3,016 | | | 2,594 | | | — | | | 389,502 | |
30-59 days | 33 | | | 416 | | | — | | | — | | | — | | | 28 | | | — | | | — | | | 477 | |
60-89 days | — | | | 1,650 | | | — | | | — | | | 69 | | | — | | | — | | | — | | | 1,719 | |
90 days or greater | — | | | 29 | | | — | | | — | | | — | | | 41 | | | — | | | — | | | 70 | |
Total | 166,026 | | | 177,102 | | | 26,889 | | | 10,258 | | | 5,814 | | | 3,085 | | | 2,594 | | | — | | | 391,768 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 504,537 | | | 384,849 | | | 229,033 | | | 139,764 | | | 59,487 | | | 24,926 | | | — | | | — | | | 1,342,596 | |
30-59 days | 889 | | | 1,262 | | | 1,450 | | | 877 | | | 586 | | | 281 | | | — | | | — | | | 5,345 | |
60-89 days | 200 | | | 330 | | | 234 | | | 255 | | | 84 | | | 70 | | | — | | | — | | | 1,173 | |
90 days or greater | 140 | | | 347 | | | 420 | | | 228 | | | 83 | | | 45 | | | — | | | — | | | 1,263 | |
Total | 505,766 | | | 386,788 | | | 231,137 | | | 141,124 | | | 60,240 | | | 25,322 | | | — | | | — | | | 1,350,377 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 117,047 | | | 33,700 | | | 16,222 | | | 5,431 | | | 5,011 | | | 29,871 | | | 423,512 | | | — | | | 630,794 | |
30-59 days | 89 | | | 63 | | | 18 | | | 24 | | | — | | | 13 | | | 1,990 | | | — | | | 2,197 | |
60-89 days | 11 | | | 25 | | | 89 | | | 1 | | | — | | | — | | | 996 | | | — | | | 1,122 | |
90 days or greater | 49 | | | 12 | | | 17 | | | 1 | | | — | | | — | | | 1,216 | | | — | | | 1,295 | |
Total | 117,196 | | | 33,800 | | | 16,346 | | | 5,457 | | | 5,011 | | | 29,884 | | | 427,714 | | | — | | | 635,408 | |
Total consumer | $ | 2,381,464 | | | $ | 2,252,057 | | | $ | 970,938 | | | $ | 572,626 | | | $ | 467,456 | | | $ | 983,871 | | | $ | 2,156,652 | | | $ | 128,525 | | | $ | 9,913,589 | |
PCD loans | | | | | | | | | | | | | | | | | |
Current | $ | — | | | $ | 23,091 | | | $ | 23,792 | | | $ | 21,034 | | | $ | 20,864 | | | $ | 213,681 | | | $ | 10,622 | | | $ | 16,453 | | | $ | 329,537 | |
30-59 days | — | | | 846 | | | 61 | | | 785 | | | 1,393 | | | 7,777 | | | 113 | | | 432 | | | 11,407 | |
60-89 days | — | | | 98 | | | 149 | | | 48 | | | — | | | 4,699 | | | 29 | | | 177 | | | 5,200 | |
90 days or greater | — | | | 806 | | | 230 | | | 3,698 | | | 1,070 | | | 20,319 | | | 16 | | | 972 | | | 27,111 | |
Total PCD | $ | — | | | $ | 24,841 | | | $ | 24,232 | | | $ | 25,565 | | | $ | 23,327 | | | $ | 246,476 | | | $ | 10,780 | | | $ | 18,034 | | | $ | 373,255 | |
Total loans and leases | $ | 7,537,619 | | | $ | 7,875,749 | | | $ | 4,644,151 | | | $ | 2,704,682 | | | $ | 2,102,661 | | | $ | 3,981,084 | | | $ | 3,516,871 | | | $ | 153,372 | | | $ | 32,516,189 | |
Consumer Loans - Delinquency Status by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 |
Days Past Due: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | | Total |
Residential mortgage | | | | | | | | | | | | | | | | | |
Current | $ | 2,797 | | | $ | 3,759 | | | $ | 2,156 | | | $ | 842 | | | $ | 432 | | | $ | 2,763 | | | $ | 23 | | | $ | — | | | $ | 12,772 | |
30-59 days | 6 | | | 5 | | | 3 | | | 5 | | | 5 | | | 50 | | | — | | | — | | | 74 | |
60-89 days | — | | | 3 | | | 1 | | | — | | | 1 | | | 11 | | | — | | | — | | | 16 | |
90 days or greater | — | | | 1 | | | 1 | | | 2 | | | 2 | | | 42 | | | — | | | — | | | 48 | |
Total residential mortgage | 2,803 | | | 3,768 | | | 2,161 | | | 849 | | | 440 | | | 2,866 | | | 23 | | | — | | | 12,910 | |
Revolving mortgage | | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,784 | | | 120 | | | 1,904 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 3 | | | 9 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 5 | | | 8 | |
Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,794 | | | 129 | | | 1,923 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 470 | | | 437 | | | 241 | | | 128 | | | 71 | | | 28 | | | — | | | — | | | 1,375 | |
30-59 days | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 7 | |
60-89 days | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
90 days or greater | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 2 | |
Total consumer auto | 471 | | | 441 | | | 243 | | | 129 | | | 72 | | | 29 | | | — | | | — | | | 1,385 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 121 | | | 91 | | | 15 | | | 7 | | | 3 | | | 19 | | | 346 | | | — | | | 602 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | | | — | | | 4 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | 3 | | | 1 | | | — | | | 4 | |
Total consumer other | 121 | | | 91 | | | 15 | | | 7 | | | 3 | | | 25 | | | 350 | | | — | | | 612 | |
Total consumer | $ | 3,395 | | | $ | 4,300 | | | $ | 2,419 | | | $ | 985 | | | $ | 515 | | | $ | 2,920 | | | $ | 2,167 | | | $ | 129 | | | $ | 16,830 | |
The following tables represent current credit quality indicators by origination year as of December 31, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Commercial Loans Amortized Cost Basis by Origination Year | | | | | | |
Classification: | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Revolving converted to term loans | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
Construction and land development | | | | | | | | | | | | | | | | |
Pass | $ | 342,183 | | | $ | 341,233 | | | $ | 190,429 | | | $ | 50,776 | | | $ | 23,969 | | | $ | 11,306 | | | $ | 10,969 | | | $ | — | | | $ | 970,865 | |
Special Mention | 246 | | | — | | | 6,421 | | | 5,342 | | | — | | | — | | | 153 | | | — | | | 12,162 | |
Substandard | 229 | | | 629 | | | 1,450 | | | — | | | 8 | | | 81 | | | — | | | — | | | 2,397 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 342,658 | | | 341,862 | | | 198,300 | | | 56,118 | | | 23,977 | | | 11,387 | | | 11,122 | | | — | | | 985,424 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | |
Pass | 3,183,467 | | | 2,201,165 | | | 1,625,141 | | | 1,301,412 | | | 1,049,858 | | | 1,454,020 | | | 101,556 | | | 133 | | | 10,916,752 | |
Special Mention | 6,274 | | | 20,702 | | | 36,739 | | | 12,387 | | | 17,699 | | | 25,693 | | | 5,115 | | | 72 | | | 124,681 | |
Substandard | 10,280 | | | 19,052 | | | 9,842 | | | 20,928 | | | 13,736 | | | 41,303 | | | 8,438 | | | — | | | 123,579 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 3,200,021 | | | 2,240,919 | | | 1,671,722 | | | 1,334,727 | | | 1,081,293 | | | 1,521,016 | | | 115,109 | | | 205 | | | 11,165,012 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | |
Pass | 865,514 | | | 609,975 | | | 378,136 | | | 331,800 | | | 282,810 | | | 391,517 | | | 32,149 | | | — | | | 2,891,901 | |
Special Mention | 569 | | | 905 | | | 10,794 | | | 1,808 | | | 5,121 | | | 3,279 | | | 483 | | | — | | | 22,959 | |
Substandard | 2,899 | | | 18,546 | | | 12,296 | | | 8,764 | | | 14,087 | | | 15,427 | | | 810 | | | — | | | 72,829 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 868,982 | | | 629,426 | | | 401,226 | | | 342,372 | | | 302,018 | | | 410,223 | | | 33,442 | | | — | | | 2,987,689 | |
Commercial and industrial and leases | | | | | | | | | | | | | | | | |
Pass | 1,620,622 | | | 983,852 | | | 504,463 | | | 310,468 | | | 234,735 | | | 286,996 | | | 899,978 | | | 5,520 | | | 4,846,634 | |
Special Mention | 3,146 | | | 17,065 | | | 7,265 | | | 5,393 | | | 3,307 | | | 4,912 | | | 9,152 | | | 189 | | | 50,429 | |
Substandard | 17,811 | | | 4,095 | | | 4,370 | | | 4,257 | | | 2,548 | | | 3,801 | | | 22,384 | | | 983 | | | 60,249 | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 56,332 | | | — | | | 56,332 | |
Total | 1,641,579 | | | 1,005,012 | | | 516,098 | | | 320,118 | | | 240,590 | | | 295,709 | | | 987,846 | | | 6,692 | | | 5,013,644 | |
SBA-PPP | | | | | | | | | | | | | | | | |
Pass | 2,406,291 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,406,291 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial | $ | 8,459,531 | | | $ | 4,217,219 | | | $ | 2,787,346 | | | $ | 2,053,335 | | | $ | 1,647,878 | | | $ | 2,238,335 | | | $ | 1,147,519 | | | $ | 6,897 | | | $ | 22,558,060 | |
| | | | | | | | | | | | | | | | | |
Commercial Loans - Risk Classifications by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Risk Classification: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | | Total |
Commercial construction | | | | | | | | | | | | | | | | |
Pass | $ | 540 | | | $ | 400 | | | $ | 189 | | | $ | 29 | | | $ | 48 | | | $ | 11 | | | $ | 10 | | | $ | — | | | $ | 1,227 | |
Special Mention | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Substandard | 2 | | | — | | | 1 | | | 2 | | | 4 | | | 1 | | | — | | | — | | | 10 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | 542 | | | 400 | | | 190 | | | 31 | | | 52 | | | 13 | | | 10 | | | — | | | 1,238 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 3,045 | | | 3,022 | | | 1,873 | | | 1,194 | | | 963 | | | 1,572 | | | 125 | | | — | | | 11,794 | |
Special Mention | 3 | | | 35 | | | 37 | | | 22 | | | 13 | | | 33 | | | 5 | | | — | | | 148 | |
Substandard | 31 | | | 16 | | | 18 | | | 12 | | | 18 | | | 56 | | | 6 | | | — | | | 157 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | 3,079 | | | 3,073 | | | 1,928 | | | 1,228 | | | 994 | | | 1,661 | | | 136 | | | — | | | 12,099 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 644 | | | 737 | | | 578 | | | 263 | | | 266 | | | 412 | | | 37 | | | — | | | 2,937 | |
Special Mention | 1 | | | — | | | — | | | 3 | | | 3 | | | 10 | | | — | | | — | | | 17 | |
Substandard | 9 | | | 11 | | | 24 | | | 12 | | | 7 | | | 22 | | | 1 | | | — | | | 86 | |
Doubtful | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | 654 | | | 748 | | | 602 | | | 278 | | | 277 | | | 444 | | | 38 | | | — | | | 3,041 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | 2,107 | | | 1,018 | | | 599 | | | 257 | | | 149 | | | 281 | | | 1,342 | | | 5 | | | 5,758 | |
Special Mention | 9 | | | 7 | | | 20 | | | 2 | | | 4 | | | 5 | | | 5 | | | — | | | 52 | |
Substandard | 20 | | | 7 | | | 3 | | | 4 | | | 2 | | | 2 | | | 16 | | | 1 | | | 55 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 72 | | | — | | | 72 | |
Total commercial and industrial | 2,136 | | | 1,032 | | | 622 | | | 263 | | | 155 | | | 288 | | | 1,435 | | | 6 | | | 5,937 | |
Leases | | | | | | | | | | | | | | | | | |
Pass | 93 | | | 68 | | | 38 | | | 42 | | | 17 | | | 8 | | | — | | | — | | | 266 | |
Special Mention | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Substandard | 2 | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 4 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | 95 | | | 70 | | | 38 | | | 43 | | | 17 | | | 8 | | | — | | | — | | | 271 | |
Total commercial | $ | 6,506 | | | $ | 5,323 | | | $ | 3,380 | | | $ | 1,843 | | | $ | 1,495 | | | $ | 2,414 | | | $ | 1,619 | | | $ | 6 | | | $ | 22,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer and PCD Loans Amortized Cost Basis by Origination Year | | | | | | |
Days Past Due: | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Revolving converted to term loans | | Total |
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
Residential mortgage | | | | | | | | | | | | | | | | |
Current | $ | 1,882,683 | | | $ | 978,298 | | | $ | 655,798 | | | $ | 596,309 | | | $ | 461,719 | | | $ | 878,634 | | | $ | 24,973 | | | $ | — | | | $ | 5,478,414 | |
30-59 days | 2,278 | | | 4,573 | | | 11,463 | | | 3,772 | | | 8,613 | | | 12,299 | | | 220 | | | — | | | 43,218 | |
60-89 days | 30 | | | 100 | | | 1,246 | | | 1,449 | | | 834 | | | 4,705 | | | — | | | — | | | 8,364 | |
90 days or greater | 282 | | | 4,831 | | | 3,150 | | | 4,015 | | | 5,689 | | | 13,723 | | | — | | | — | | | 31,690 | |
Total | 1,885,273 | | | 987,802 | | | 671,657 | | | 605,545 | | | 476,855 | | | 909,361 | | | 25,193 | | | — | | | 5,561,686 | |
Revolving mortgage | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,879,968 | | | 150,868 | | | 2,030,836 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 8,241 | | | 3,736 | | | 11,977 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 527 | | | 2,099 | | | 2,626 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 2,301 | | | 5,114 | | | 7,415 | |
Total | — | | | — | | | — | | | — | | | — | | | — | | | 1,891,037 | | | 161,817 | | | 2,052,854 | |
Construction and land development | | | | | | | | | | | | | | | | |
Current | 215,112 | | | 85,707 | | | 24,860 | | | 10,269 | | | 6,093 | | | 2,218 | | | 2,525 | | | — | | | 346,784 | |
30-59 days | — | | | 420 | | | 121 | | | 370 | | | — | | | 21 | | | — | | | — | | | 932 | |
60-89 days | — | | | — | | | — | | | 9 | | | — | | | 68 | | | — | | | — | | | 77 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | 330 | | | — | | | — | | | 330 | |
Total | 215,112 | | | 86,127 | | | 24,981 | | | 10,648 | | | 6,093 | | | 2,637 | | | 2,525 | | | — | | | 348,123 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 521,719 | | | 340,594 | | | 219,597 | | | 104,280 | | | 49,872 | | | 9,604 | | | — | | | — | | | 1,245,666 | |
30-59 days | 2,175 | | | 1,873 | | | 1,257 | | | 842 | | | 544 | | | 134 | | | — | | | — | | | 6,825 | |
60-89 days | 329 | | | 689 | | | 312 | | | 351 | | | 109 | | | 45 | | | — | | | — | | | 1,835 | |
90 days or greater | 170 | | | 527 | | | 217 | | | 57 | | | 102 | | | 3 | | | — | | | — | | | 1,076 | |
Total | 524,393 | | | 343,683 | | | 221,383 | | | 105,530 | | | 50,627 | | | 9,786 | | | — | | | — | | | 1,255,402 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 53,842 | | | 27,117 | | | 10,911 | | | 7,159 | | | 2,980 | | | 29,336 | | | 415,044 | | | — | | | 546,389 | |
30-59 days | 322 | | | 114 | | | 77 | | | 18 | | | 11 | | | 7 | | | 3,061 | | | — | | | 3,610 | |
60-89 days | 102 | | | 20 | | | 13 | | | 18 | | | 3 | | | 23 | | | 1,285 | | | — | | | 1,464 | |
90 days or greater | 53 | | | 84 | | | 8 | | | — | | | — | | | — | | | 1,360 | | | — | | | 1,505 | |
Total | 54,319 | | | 27,335 | | | 11,009 | | | 7,195 | | | 2,994 | | | 29,366 | | | 420,750 | | | — | | | 552,968 | |
Total consumer | $ | 2,679,097 | | | $ | 1,444,947 | | | $ | 929,030 | | | $ | 728,918 | | | $ | 536,569 | | | $ | 951,150 | | | $ | 2,339,505 | | | $ | 161,817 | | | $ | 9,771,033 | |
PCD loans | | | | | | | | | | | | | | | | | |
Current | $ | 31,475 | | | $ | 25,425 | | | $ | 27,183 | | | $ | 27,955 | | | $ | 28,995 | | | $ | 232,186 | | | $ | 13,212 | | | $ | 21,027 | | | $ | 407,458 | |
30-59 days | 999 | | | 925 | | | 801 | | | 718 | | | 1,341 | | | 12,637 | | | 156 | | | 745 | | | 18,322 | |
60-89 days | 447 | | | 81 | | | 312 | | | 695 | | | 97 | | | 4,098 | | | 9 | | | 337 | | | 6,076 | |
90 days or greater | 721 | | | 2,325 | | | 4,755 | | | 1,208 | | | 897 | | | 19,963 | | | 111 | | | 1,046 | | | 31,026 | |
Total PCD | $ | 33,642 | | | $ | 28,756 | | | $ | 33,051 | | | $ | 30,576 | | | $ | 31,330 | | | $ | 268,884 | | | $ | 13,488 | | | $ | 23,155 | | | $ | 462,882 | |
Total loans and leases | $ | 11,172,270 | | | $ | 5,690,922 | | | $ | 3,749,427 | | | $ | 2,812,829 | | | $ | 2,215,777 | | | $ | 3,458,369 | | | $ | 3,500,512 | | | $ | 191,869 | | | $ | 32,791,975 | |
Consumer Loans - Delinquency Status by Class | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Days Past Due: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | | Total |
Residential mortgage | | | | | | | | | | | | | | | | | |
Current | $ | 2,139 | | | $ | 1,663 | | | $ | 627 | | | $ | 368 | | | $ | 349 | | | $ | 867 | | | $ | 22 | | | $ | — | | | $ | 6,035 | |
30-59 days | 2 | | | 3 | | | 2 | | | 2 | | | 1 | | | 14 | | | — | | | — | | | 24 | |
60-89 days | — | | | — | | | — | | | 1 | | | 1 | | | 4 | | | — | | | — | | | 6 | |
90 days or greater | 1 | | | 1 | | | 1 | | | 2 | | | 1 | | | 17 | | | — | | | — | | | 23 | |
Total residential mortgage | 2,142 | | | 1,667 | | | 630 | | | 373 | | | 352 | | | 902 | | | 22 | | | — | | | 6,088 | |
Revolving mortgage | | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,678 | | | 126 | | | 1,804 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 2 | | | 6 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 4 | | | 6 | |
Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,684 | | | 134 | | | 1,818 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 597 | | | 343 | | | 198 | | | 119 | | | 48 | | | 19 | | | — | | | — | | | 1,324 | |
30-59 days | 1 | | | 2 | | | 1 | | | 1 | | | — | | | 1 | | | — | | | — | | | 6 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Total consumer auto | 598 | | | 345 | | | 199 | | | 120 | | | 48 | | | 22 | | | — | | | — | | | 1,332 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 131 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 342 | | | — | | | 543 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
60-89 days | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Total consumer other | 132 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 346 | | | — | | | 548 | |
Total consumer | $ | 2,872 | | | $ | 2,036 | | | $ | 840 | | | $ | 497 | | | $ | 402 | | | $ | 953 | | | $ | 2,052 | | | $ | 134 | | | $ | 9,786 | |
Purchased loans and leases
The following table provides information regarding loans pledged as collateral for borrowing capacity through the FHLB of Atlanta and the Federal Reserve Bank (“FRB”) as of September 30, 2021 and December 31, 2020:
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
FHLB of Atlanta | | | |
Lendable collateral value of pledged non-PCD loans | $ | 9,171,610 | | | $ | 8,637,844 | |
Less: Advances | 645,663 | | | 652,675 | |
Available borrowing capacity | $ | 8,525,947 | | | $ | 7,985,169 | |
Pledged non-PCD loans | $ | 12,646,208 | | | $ | 12,157,153 | |
| | | |
FRB | | | |
Lendable collateral value of pledged non-PCD loans | $ | 3,795,878 | | | $ | 3,321,762 | |
Less: Advances | — | | | — | |
Available borrowing capacity | $ | 3,795,878 | | | $ | 3,321,762 | |
Pledged non-PCD loans | $ | 4,610,291 | | | $ | 4,104,866 | |
NOTE E - ALLOWANCE FOR CREDIT LOSSES
The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period ended September 30, 2021, the ACL change since December 31, 2020 was driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years. For most pools, BancShares uses a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. BancShares’ ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario, but the September 30, 2021 ACL forecast was calculated using the consensus baseline scenario. This scenario showed improvements in the most significant economic factors compared to what was used to generate the December 31, 2020 ACL. These loss estimates were also influenced by BancShares’ strong credit quality and low net charge-offs.
Activity in the ACL by portfolio segment is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three months ended September 30, 2021 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 1 | | | | | | | | | $ | 76,082 | | | | | | | | | | | | | $ | 94,272 | | | $ | 18,740 | | | $ | 189,094 | |
Provision (credit) | | | | | | | | | 975 | | | | | | | | | | | | | (223) | | | (1,872) | | | (1,120) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs | | | | | | | | | (5,967) | | | | | | | | | | | | | (4,307) | | | (799) | | | (11,073) | |
Recoveries | | | | | | | | | 1,594 | | | | | | | | | | | | | 2,330 | | | 2,369 | | | 6,293 | |
Balance at September 30 | | | | | | | | | $ | 72,684 | | | | | | | | | | | | | $ | 92,072 | | | $ | 18,438 | | | $ | 183,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three months ended September 30, 2020 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at July 1 | | | | | | | | | $ | 76,177 | | | | | | | | | | | | | $ | 119,345 | | | $ | 26,928 | | | $ | 222,450 | |
Provision (credit) | | | | | | | | | 4,793 | | | | | | | | | | | | | 1,874 | | | (2,625) | | | 4,042 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs | | | | | | | | | (3,328) | | | | | | | | | | | | | (5,109) | | | (495) | | | (8,932) | |
Recoveries | | | | | | | | | 2,338 | | | | | | | | | | | | | 2,719 | | | 1,319 | | | 6,376 | |
Balance at September 30 | | | | | | | | | $ | 79,980 | | | | | | | | | | | | | $ | 118,829 | | | $ | 25,127 | | | $ | 223,936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Nine months ended September 30, 2021 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at January 1 | | | | | | | | | $ | 80,842 | | | | | | | | | | | | | $ | 119,485 | | | $ | 23,987 | | | $ | 224,314 | |
Provision (credit) | | | | | | | | | 332 | | | | | | | | | | | | | (23,208) | | | (8,821) | | | (31,697) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs | | | | | | | | | (12,342) | | | | | | | | | | | | | (12,804) | | | (2,018) | | | (27,164) | |
Recoveries | | | | | | | | | 3,852 | | | | | | | | | | | | | 8,599 | | | 5,290 | | | 17,741 | |
Balance at September 30 | | | | | | | | | $ | 72,684 | | | | | | | | | | | | | $ | 92,072 | | | $ | 18,438 | | | $ | 183,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Nine months ended September 30, 2020 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at December 31 | | | | | | | | | $ | 142,369 | | | | | | | | | | | | | $ | 75,236 | | | $ | 7,536 | | | $ | 225,141 | |
Adoption of ASC 326 | | | | | | | | | (87,554) | | | | | | | | | | | | | 30,629 | | | 19,001 | | | (37,924) | |
Balance at January 1 | | | | | | | | | 54,815 | | | | | | | | | | | | | 105,865 | | | 26,537 | | | 187,217 | |
Provision (credit) | | | | | | | | | 32,854 | | | | | | | | | | | | | 25,066 | | | (4,971) | | | 52,949 | |
Initial allowance on PCD loans | | | | | | | | | — | | | | | | | | | | | | | — | | | 1,193 | | | 1,193 | |
Charge-offs | | | | | | | | | (12,712) | | | | | | | | | | | | | (19,535) | | | (3,010) | | | (35,257) | |
Recoveries | | | | | | | | | 5,023 | | | | | | | | | | | | | 7,433 | | | 5,378 | | | 17,834 | |
Balance at September 30 | | | | | | | | | $ | 79,980 | | | | | | | | | | | | | $ | 118,829 | | | $ | 25,127 | | | $ | 223,936 | |
BancShares records an allowance for credit losses on unfunded commitments within other liabilities. Activity in the allowance for credit losses for unfunded commitments is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Allowance for credit losses: | | | | | | | |
Beginning balance | $ | 11,103 | | | $ | 13,685 | | | $ | 12,814 | | | $ | 1,055 | |
Adoption of ASC 326 | — | | | — | | | — | | | 8,885 | |
Adjusted beginning balance | $ | 11,103 | | | $ | 13,685 | | | $ | 12,814 | | | $ | 9,940 | |
Provision (credit) | 369 | | | 286 | | | (1,342) | | | 4,031 | |
Ending balance | 11,472 | | | 13,971 | | | 11,472 | | | 13,971 | |
BancShares individually reviews loans greater than $500 thousand that are determined to be collateral-dependent. These collateral-dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Commercial and industrialsummarizes PCD loans and leases are collateralized by business assets, whilethat BancShares acquired in the remaining loan classes are collateralized by real property.CIT Merger.
PCD Loans and Leases - CIT Merger
| | | | | | | | |
dollars in millions | | Total PCD from CIT Merger |
UPB | | $ | 3,550 | |
Initial PCD ACL | | (272) | |
Fair value discount, net of the PCD Gross-Up | | (45) | |
Purchase price | | $ | 3,233 | |
The following table presents information on collateral-dependentrecorded fair values of Non-PCD loans by class and includesacquired in the amortized cost of collateral-dependent loans and leases, the net realizable valueCIT Merger as of the collateral, the extent to which collateral secures collateral-dependent loans and the associated ACL asacquisition date was $29.5 billion, resulting in a PAA discount of September 30, 2021 and December 31, 2020 were as follows:$61 million.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
(Dollars in thousands) | Collateral-Dependent Loans | | Net Realizable Value of Collateral | | Collateral Coverage | | Allowance for Credit Losses |
Commercial: | | | | | | | |
Construction and land development | $ | 1,424 | | | $ | 1,964 | | | 137.9 | % | | $ | — | |
Owner occupied commercial mortgage | 7,411 | | | 8,367 | | | 112.9 | | | — | |
Non-owner occupied commercial mortgage | 8,204 | | | 11,307 | | | 137.8 | | | 1,203 | |
Commercial and industrial and leases | 4,787 | | | 6,530 | | | 136.4 | | | 230 | |
Total commercial loans | 21,826 | | | 28,168 | | | 129.1 | | | 1,433 | |
Consumer: | | | | | | | |
Residential mortgage | 11,423 | | | 14,625 | | | 128.0 | | | — | |
Revolving mortgage | — | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total consumer loans | 11,423 | | | 14,625 | | | 128.0 | | | — | |
PCD loans | 18,154 | | | 32,788 | | | 180.6 | | | — | |
Total collateral-dependent loans | $ | 51,403 | | | $ | 75,581 | | | 147.0 | % | | $ | 1,433 | |
| | | | | | | |
| December 31, 2020 |
(Dollars in thousands) | Collateral-Dependent Loans | | Net Realizable Value of Collateral | | Collateral Coverage | | Allowance for Credit Losses |
Commercial: | | | | | | | |
Construction and land development | $ | 1,424 | | | $ | 1,795 | | | 126.1 | % | | $ | — | |
Owner occupied commercial mortgage | 9,792 | | | 14,253 | | | 145.6 | | | — | |
Non-owner occupied commercial mortgage | 5,556 | | | 7,577 | | | 136.4 | | | — | |
| | | | | | | |
Total commercial loans | 16,772 | | | 23,625 | | | 140.9 | | | — | |
Consumer: | | | | | | | |
Residential mortgage | 23,011 | | | 29,775 | | | 129.4 | | | 131 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
PCD loans | 19,042 | | | 27,872 | | | 146.4 | | | — | |
Total collateral-dependent loans | $ | 58,825 | | | $ | 81,272 | | | 138.2 | % | | $ | 131 | |
Collateral-dependent nonaccrual loans with no recorded allowance totaled $45.5 million and $57.5 million as of September 30, 2021 and December 31, 2020, respectively. All other nonaccrual loans have a recorded allowance.
Troubled Debt RestructuringsRestructuring
As part of BancShares’ ongoing risk-management practices, BancShares attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications are made in accordance with internal policies and guidelines to conform to regulatory guidance. BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, thea modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. BancShares may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.
Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. Within BancShares’ ACL loss models,The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR. In accordance with regulatory guidance discussed below, certain loan modifications that might ordinarily have qualified as TDRs arewere not individually evaluated unless determined to be collateral-dependent. Consumer TDRs are included in the definition of default which providesaccounted for a 100% probability of default applied within the models. As a result, subsequent changes in credit quality metrics do not impact the calculation of the ACL on consumeras TDRs. For commercial TDRs, the TDR distinction does impact the calculation of ACL, as the standard definition of default is utilized.
The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (the “Interagency Statement”) was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and Interagency Statement offer some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. Any loan modification that meets these practical expedients would not automatically be considered a TDR because the borrower is presumed not to be experiencing financial difficulty due to COVID-19.at the time of the loan modification. BancShares applied this regulatory guidance during its TDR identification process through January 1, 2022 for short-term loan forbearance agreements as a result of COVID-19 and in most cases did not record these as TDRs.
Modified loans that meet the definition of a TDR are subject to BancShares’ individually reviewed loans policy.
The following tables provides a summarytable presents amortized cost of total TDRs by accrual status:TDRs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Accruing | | Nonaccruing | | Total | | Accruing | | Nonaccruing | | Total |
Commercial: | | | | | | | | | | | |
Construction and land development | $ | 346 | | | $ | 33 | | | $ | 379 | | | $ | 578 | | | $ | 54 | | | $ | 632 | |
Owner occupied commercial mortgage | 46,255 | | | 10,661 | | | 56,916 | | | 37,574 | | | 10,889 | | | 48,463 | |
Non-owner occupied commercial mortgage | 20,022 | | | 3,763 | | | 23,785 | | | 18,336 | | | 1,649 | | | 19,985 | |
Commercial and industrial and leases | 12,506 | | | 11,295 | | | 23,801 | | | 29,131 | | | 3,528 | | | 32,659 | |
Total commercial loans | 79,129 | | | 25,752 | | | 104,881 | | | 85,619 | | | 16,120 | | | 101,739 | |
Consumer: | | | | | | | | | | | |
Residential mortgage | 22,106 | | | 14,937 | | | 37,043 | | | 29,458 | | | 19,380 | | | 48,838 | |
Revolving mortgage | 16,533 | | | 6,925 | | | 23,458 | | | 20,124 | | | 7,128 | | | 27,252 | |
Construction and land development | 2,380 | | | 282 | | | 2,662 | | | 1,573 | | | 9 | | | 1,582 | |
Consumer auto | 1,888 | | | 636 | | | 2,524 | | | 2,018 | | | 696 | | | 2,714 | |
Consumer other | 774 | | | 61 | | | 835 | | | 955 | | | 137 | | | 1,092 | |
Total consumer loans | 43,681 | | | 22,841 | | | 66,522 | | | 54,128 | | | 27,350 | | | 81,478 | |
PCD loans | 29,207 | | | 12,365 | | | 41,572 | | | 17,617 | | | 7,346 | | | 24,963 | |
Total loans | $ | 152,017 | | | $ | 60,958 | | | $ | 212,975 | | | $ | 157,364 | | | $ | 50,816 | | | $ | 208,180 | |
TDRs
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Accruing | | Non-Accruing | | Total |
Commercial | | | | | |
Commercial construction | $ | 2 | | | $ | 1 | | | $ | 3 | |
Owner occupied commercial mortgage | 45 | | | 10 | | | 55 | |
Non-owner occupied commercial mortgage | 28 | | | 31 | | | 59 | |
Commercial and industrial | 49 | | | 11 | | | 60 | |
Leases | — | | | 1 | | | 1 | |
Total commercial | 124 | | | 54 | | | 178 | |
Consumer | | | | | |
Residential mortgage | 32 | | | 18 | | | 50 | |
Revolving mortgage | 17 | | | 6 | | | 23 | |
Consumer auto | 2 | | | — | | | 2 | |
Consumer other | — | | | — | | | — | |
Total consumer | 51 | | | 24 | | | 75 | |
Total TDRs | $ | 175 | | | $ | 78 | | | $ | 253 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Accruing | | Non-Accruing | | Total |
Commercial | | | | | |
Commercial construction | $ | 2 | | | $ | — | | | $ | 2 | |
Owner occupied commercial mortgage | 57 | | | 8 | | | 65 | |
Non-owner occupied commercial mortgage | 26 | | | 3 | | | 29 | |
Commercial and industrial | 12 | | | 9 | | | 21 | |
Leases | — | | | 1 | | | 1 | |
Total commercial | 97 | | | 21 | | | 118 | |
Consumer | | | | | |
Residential mortgage | 29 | | | 18 | | | 47 | |
Revolving mortgage | 17 | | | 7 | | | 24 | |
Consumer auto | 2 | | | — | | | 2 | |
Consumer other | 1 | | | — | | | 1 | |
Total consumer | 49 | | | 25 | | | 74 | |
Total TDRs | $ | 146 | | | $ | 46 | | | $ | 192 | |
The following table providessummarizes the types of modifications designated as TDRsloan restructurings during the three and nine months ended September 30, 2022 and 2021 that were designated as TDRs. BancShares defines payment default as movement of the TDR to non-accrual status, which is generally 90 days past due, foreclosure or charge-off, whichever occurs first.
Restructurings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions (except for number of loans) | Three Months Ended September 30, | | | | |
| 2022 | | 2021 | | | | |
| Number of Loans | | Amortized Cost at Period End | | | | | | Number of Loans | | Amortized Cost at Period End | | | | |
Loans and leases | | | | | | | | | | | | | | | |
Interest only | 5 | | | $ | 31 | | | | | | | 7 | | | $ | 10 | | | | | |
Loan term extension | 35 | | | 30 | | | | | | | 41 | | | 6 | | | | | |
Below market rates | 17 | | | 4 | | | | | | | 47 | | | 3 | | | | | |
Discharge from bankruptcy | 36 | | | 2 | | | | | | | 21 | | | 3 | | | | | |
Total | 93 | | | $ | 67 | | | | | | | 116 | | | $ | 22 | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2022 | | 2021 | | | | |
| Number of Loans | | Amortized Cost at Period End | | | | | | Number of Loans | | Amortized Cost at Period End | | | | |
Loans and leases | | | | | | | | | | | | | | | |
Interest only | 13 | | | $ | 37 | | | | | | | 17 | | | $ | 20 | | | | | |
Loan term extension | 110 | | | 51 | | | | | | | 112 | | | 15 | | | | | |
Below market rates | 62 | | | 8 | | | | | | | 148 | | | 21 | | | | | |
Discharge from bankruptcy | 78 | | | 4 | | | | | | | 110 | | | 12 | | | | | |
Total | 263 | | | $ | 100 | | | | | | | 387 | | | $ | 68 | | | | | |
There were $3 million and $0.4 million of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs as of September 30, 2022 and December 31, 2021, respectively.
After a loan is determined to be a TDR, BancShares continues to track its performance under its most recent restructured terms. TDRs that subsequently defaulted during the three and nine months ended September 30, 2022 and 2021, and 2020.were classified as TDRs during the applicable 12-month period preceding September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 | | Three months ended September 30, 2020 |
| All restructurings | | | | All restructurings | | |
(Dollars in thousands) | Number of Loans | Recorded investment at period end | | | | | Number of Loans | Recorded investment at period end | | | |
Loans and leases | | | | | | | | | | | |
Interest only | 7 | | $ | 9,639 | | | | | | 6 | | $ | 5,703 | | | | |
Loan term extension | 41 | | 6,371 | | | | | | 29 | | 2,380 | | | | |
Below market interest rate | 47 | | 3,126 | | | | | | 55 | | 15,341 | | | | |
Discharged from bankruptcy | 21 | | 2,783 | | | | | | 55 | | 1,654 | | | | |
Total restructurings | 116 | | $ | 21,919 | | | | | | 145 | | $ | 25,078 | | | | |
| | | | | | | | | | | |
| Nine months ended September 30, 2021 | | Nine months ended September 30, 2020 |
| All restructurings | | | | All restructurings | | |
(Dollars in thousands) | Number of Loans | Recorded investment at period end | | | | | Number of Loans | Recorded investment at period end | | | |
Loans and leases | | | | | | | | | | | |
Interest only | 17 | | $ | 19,728 | | | | | | 23 | | $ | 24,847 | | | | |
Loan term extension | 112 | | 14,500 | | | | | | 62 | | 5,885 | | | | |
Below market interest rate | 148 | | 21,004 | | | | | | 212 | | 38,740 | | | | |
Discharged from bankruptcy | 110 | | 12,478 | | | | | | 165 | | 7,025 | | | | |
Total restructurings | 387 | | $ | 67,710 | | | | | | 462 | | $ | 76,497 | | | | |
TDR Defaults
| | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, |
| 2022 | | 2021 |
TDR Defaults | $ | 2 | | | $ | 1 | |
| | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
TDR Defaults | $ | 4 | | | $ | 5 | |
Loans Pledged
The following table provides information regarding loans pledged as collateral for borrowing capacity through the FHLB of Atlanta and the Federal Reserve Bank (“FRB”) as of September 30, 2022 and December 31, 2021:
Loans Pledged
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
FHLB of Atlanta | | | |
Lendable collateral value of pledged non-PCD loans | $ | 14,390 | | | $ | 9,564 | |
Less: Advances | 5,800 | | | 645 | |
Less: Letters of Credit | 1,450 | | | — | |
Available borrowing capacity | $ | 7,140 | | | $ | 8,919 | |
Pledged non-PCD loans (contractual balance) | $ | 21,093 | | | $ | 14,507 | |
| | | |
FRB | | | |
Lendable collateral value of pledged non-PCD loans | $ | 4,464 | | | $ | 3,951 | |
Less: Advances | — | | | — | |
Available borrowing capacity | $ | 4,464 | | | $ | 3,951 | |
Pledged non-PCD loans (contractual balance) | $ | 5,533 | | | $ | 4,806 | |
NOTE 5 — ALLOWANCE FOR CREDIT LOSSES
The ACL for loans and leases is reported in the allowance for credit losses on the Consolidated Balance Sheets, while the ACL for unfunded commitments is reported in other liabilities. The provision or benefit for credit losses related to both (i) loans and leases and (ii) unfunded commitments is reported in the Consolidated Statements of Income as provision or benefit for credit losses. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. Forecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management’s expectations over the lives of the portfolios. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads.
The processes and methodologies we utilized to determine the ACL at September 30, 2022 were consistent with those utilized to determine the ACL at June 30, 2022. As previously disclosed in our Quarterly Report on Form 10-Q as of and for the quarterly period ended March 31, 2022, we changed certain aspects of our ACL methodology during the three month period ended March 31, 2022. BancShares made these changes to integrate the ACL methodologies of CIT and BancShares. The most significant changes in the ACL methodology compared to that utilized to determine the ACL at December 31, 2021 include the following: (i) utilized economic scenario forecasts over the lives of the loan portfolios instead of using a two year reasonable and supportable period with a one year reversion period followed by a historical long run average economic forecast for the remainder of the portfolio life; and (ii) implemented scenario weighting of a range of economic scenarios, including baseline, upside, and downside scenarios instead of utilizing just the consensus baseline scenario as the basis of the quantitative ACL estimate.
The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) of $272 million was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 — Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $454 million to the provision for credit losses (the “Initial Non-PCD Provision”).
The ACL activity for loans and leases and the ACL for unfunded commitments is summarized in the following tables.
ACL for Loans and Leases
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total |
Balance at beginning of period | $ | 740 | | | $ | 110 | | | $ | 850 | | | $ | 80 | | | $ | 98 | | | $ | 178 | |
Initial PCD ACL(1) | — | | | — | | | — | | | 258 | | | 14 | | | 272 | |
Initial Non-PCD Provision | — | | | — | | | — | | | 432 | | | 22 | | | 454 | |
Provision (benefit) for credit losses - loans and leases | 43 | | | 7 | | | 50 | | | 53 | | | (20) | | | 33 | |
Total provision for credit losses- loans and leases | 43 | | | 7 | | | 50 | | | 485 | | | 2 | | | 487 | |
Charge-offs(1) | (28) | | | (5) | | | (33) | | | (92) | | | (15) | | | (107) | |
Recoveries | 11 | | | 4 | | | 15 | | | 35 | | | 17 | | | 52 | |
| | | | | | | | | | | |
Balance at September 30, 2022 | $ | 766 | | | $ | 116 | | | $ | 882 | | | $ | 766 | | | $ | 116 | | | $ | 882 | |
| | | | | | | | | | | |
| Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total |
Balance at beginning of period | $ | 86 | | | $ | 103 | | | $ | 189 | | | $ | 92 | | | $ | 133 | | | $ | 225 | |
Provision (benefit) for credit losses - loans and leases | — | | | (1) | | | (1) | | | (3) | | | (29) | | | (32) | |
Charge-offs | (7) | | | (4) | | | (11) | | | (14) | | | (13) | | | (27) | |
Recoveries | 3 | | | 3 | | | 6 | | | 7 | | | 10 | | | 17 | |
| | | | | | | | | | | |
Balance at September 30, 2021 | $ | 82 | | | $ | 101 | | | $ | 183 | | | $ | 82 | | | $ | 101 | | | $ | 183 | |
(1) The Initial PCD ACL related to the CIT Merger was $272 million, net of an additional $243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial) which met BancShares’ charge-off policy at the Merger Date.
ACL for Unfunded Commitments
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Beginning balance | $ | 81 | | | $ | 11 | | | $ | 12 | | | $ | 13 | |
Provision (benefit) for credit losses - unfunded commitments | 10 | | | — | | | 79 | | | (2) | |
Ending balance | $ | 91 | | | $ | 11 | | | $ | 91 | | | $ | 11 | |
For the period ended September 30, 2022, the increase in the ACL for unfunded commitments compared to September 30, 2021 primarily reflected the additional commitments acquired in the CIT Merger.
NOTE 6 — LEASES
Lessee
BancShares leases primarily include administrative offices and bank locations. Substantially all of our lease liabilities relate to United States real estate leases under operating lease arrangements. Our real estate leases have remaining lease terms of up to 17 years. Our lease terms may include options to extend or terminate the lease. The options are included in the lease term when it is determined that it is reasonably certain the option will be exercised.
The following table presents supplemental balance sheet information and remaining weighted average lease terms and discount rates.
Supplemental Lease Information
| | | | | | | | | | | | | | | | | |
dollars in millions | Classification | | September 30, 2022 | | December 31, 2021 |
ROU assets: | | | | | |
Operating leases | Other assets | | $ | 366 | | | $ | 64 | |
Finance leases | Premises and equipment | | 7 | | | 4 | |
Total ROU assets | | | $ | 373 | | | $ | 68 | |
Lease liabilities: | | | | | |
Operating leases | Other liabilities | | $ | 373 | | | $ | 64 | |
Finance leases | Other borrowings | | 8 | | | 4 | |
Total lease liabilities | | | $ | 381 | | | $ | 68 | |
Weighted-average remaining lease terms: | | | | | |
Operating leases | | | 9.6 years | | 8.9 years |
Finance leases | | | 4.4 years | | 3.5 years |
Weighted-average discount rate: | | | | | |
Operating leases | | | 2.13 | % | | 3.00 | % |
Finance leases | | | 2.34 | % | | 3.12 | % |
The following table presents components of lease cost:
Components of Net Lease Cost
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Classification | | 2022 | | 2021 | | 2022 | | 2021 |
Lease cost | | | | | | | | | |
Operating lease cost(1)(2) | Occupancy Expense | | $ | 14 | | | $ | 3 | | | $ | 44 | | | $ | 10 | |
Finance lease cost | | | | | | | | | |
Amortization of leased assets | Equipment expense | | 1 | | | 1 | | | 2 | | | 2 | |
Interest on lease liabilities | Interest expense - Other borrowings | | — | | | — | | | — | | | — | |
Variable lease cost | Occupancy Expense | | 3 | | | 1 | | | 9 | | | 3 | |
Sublease income | Occupancy Expense | | (1) | | | — | | | (2) | | | — | |
Net lease cost | | | $ | 17 | | | $ | 5 | | | $ | 53 | | | $ | 15 | |
(1) Includes short-term lease cost, which is not significant.
(2) In addition, approximately $2 million and $6 million of costs related to leased branches to be closed or subleased was included in merger-related expenses in the consolidated statements of income for the three and nine months ended September 30, 2021 and 2020, the pre-modification and post-modification outstanding amortized cost of loans modified as TDRs were not materially different.
NOTE F - OTHER REAL ESTATE OWNEDVariable lease cost includes common area maintenance, property taxes, utilities, and other operating expenses related to leased premises recognized in the period in which the expense was incurred. Certain of our lease agreements also include rental payments adjusted periodically for inflation. While lease liabilities are not remeasured because of these changes, these adjustments are treated as variable lease costs and recognized in the period in which the expense is incurred. Sublease income results from leasing excess building space that BancShares is no longer utilizing under operating leases, which have remaining lease terms of up to 14 years.
The following table explains changes in other real estate owned (“OREO”) duringpresents supplemental cash flow information related to leases:
Supplemental Cash Flow Information
| | | | | | | | | | | |
dollars in millions | Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 40 | | | $ | 10 | |
Operating cash flows from finance leases | — | | | — | |
Financing cash flows from finance leases | 2 | | | 2 | |
ROU assets obtained in exchange for new operating lease liabilities | 17 | | | 3 | |
ROU assets obtained in exchange for new finance lease liabilities | 5 | | | — | |
The following table presents lease liability maturities for the nine months endedremainder of 2022 through 2027 and thereafter at September 30, 20212022:
Maturity of Lease Liabilities
| | | | | | | | | | | | | | | | | |
dollars in millions | Operating Leases | | Finance Leases | | Total |
Remainder of 2022 | $ | 8 | | | $ | — | | | $ | 8 | |
2023 | 55 | | | 2 | | | 57 | |
2024 | 52 | | | 2 | | | 54 | |
2025 | 47 | | | 2 | | | 49 | |
2026 | 44 | | | 1 | | | 45 | |
2027 | 41 | | | 1 | | | 42 | |
Thereafter | 167 | | | — | | | 167 | |
Total undiscounted lease payments | $ | 414 | | | $ | 8 | | | $ | 422 | |
Difference between undiscounted cash flows and discounted cash flows | 41 | | | — | | | 41 | |
Lease liabilities, at present value | $ | 373 | | | $ | 8 | | | $ | 381 | |
Lessor
BancShares leases equipment to commercial end-users under operating lease and 2020:finance lease arrangements. The majority of operating lease equipment is long-lived rail equipment, which is typically leased several times over its life. We also lease technology and office equipment, and large and small industrial, medical, and transportation equipment under both operating leases and finance leases.
Our Rail operating leases typically do not include purchase options. Many of our finance leases, and other equipment operating leases, offer the lessee the option to purchase the equipment at fair market value or for a nominal fixed purchase option; and many of the leases that do not have a nominal purchase option include renewal provisions resulting in some leases continuing beyond the initial contractual term. Our leases typically do not include early termination options; and continued rent payments are due if leased equipment is not returned at the end of the lease.
The following table provides the net book value of operating lease equipment (net of accumulated depreciation of $236 million at September 30, 2022) by equipment type.
Operating Lease Equipment
| | | | | |
(Dollarsdollars in thousands)millions | OREOSeptember 30, 2022 |
Railcars and locomotives(1) | $ | 7,248 | |
Other equipment | 736 | |
Total(1) | $ | 7,984 | |
(1) Includes off-lease rail equipment of $509 million at September 30, 2022.
The following table presents the components of the finance lease net investment on a discounted basis:
Components of Net Investment in Finance Leases
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Lease receivables | $ | 1,803 | | | $ | 246 | |
Unguaranteed residual assets | 318 | | | 25 | |
Total net investment in finance leases | 2,121 | | | 271 | |
Leveraged lease net investment(1) | 63 | | | — | |
Total | $ | 2,184 | | | $ | 271 | |
(1) Leveraged leases are reported net of non-recourse debt of $23 million at September 30, 2022. Our leveraged lease arrangements commenced before the Accounting Standards Codification (“ASC”) 842 effective date and continue to be reported under the leveraged lease accounting model. ASC 842 eliminated leveraged lease accounting for new leases and for existing leases modified on or after the standard’s effective date.
The table that follows presents lease income related to BancShares’ operating and finance leases:
Lease Income
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Lease income – Operating leases | $ | 201 | | | $ | — | | | $ | 592 | | | $ | — | |
Variable lease income – Operating leases(1) | 18 | | | — | | | 48 | | | — | |
Rental income on operating leases | 219 | | | — | | | 640 | | | — | |
Interest income - Sales type and direct financing leases | 43 | | | 4 | | | 127 | | | 14 | |
Variable lease income included in Other noninterest income(2) | 13 | | | — | | | 37 | | | — | |
Interest income - Leveraged leases | 5 | | | — | | | 14 | | | — | |
Total lease income | $ | 280 | | | $ | 4 | | | $ | 818 | | | $ | 14 | |
(1) Primarily includes per diem railcar operating lease rental income earned on a time or mileage usage basis.
(2) Includes leased equipment property tax reimbursements due from customers of $4 million and $13 million for the three and nine months ended September 30, 2022, respectively and revenue related to insurance coverage on leased equipment of $9 million and $24 million for the three and nine months ended September 30, 2022, respectively. There was no revenue related to property tax reimbursements due from customers or insurance coverage on leased equipment during 2021.
The following tables present lease payments due on non-cancellable operating leases and lease receivables due on finance leases at September 30, 2022. Excluded from these tables are variable lease payments, including rentals calculated based on asset usage levels, rentals from future renewal and re-leasing activity, and expected sales proceeds from remarketing equipment at lease expiration, all of which are components of lease profitability.
Maturity Analysis of Operating Lease Payments
| | | | | |
dollars in millions | |
Remainder of 2022 | $ | 221 | |
2023 | 611 | |
2024 | 448 | |
2025 | 285 | |
2026 | 179 | |
2027 | 99 | |
Thereafter | 218 | |
Total | $ | 2,061 | |
Maturity Analysis of Lease Receivable Payments - Sales Type and Direct Financing Leases
| | | | | |
dollars in millions | |
Remainder of 2022 | $ | 245 | |
2023 | 757 | |
2024 | 492 | |
2025 | 285 | |
2026 | 144 | |
2027 | 56 | |
Thereafter | 14 | |
Total undiscounted lease receivables | $ | 1,993 | |
Difference between undiscounted cash flows and discounted cash flows | 190 | |
Lease receivables, at present value | $ | 1,803 | |
NOTE 7 — GOODWILL AND OTHER INTANGIBLES
Goodwill
BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at September 30, 2022 and December 31, 2021. The entire amount of goodwill relates to business combinations that BancShares completed prior to the CIT Merger and is reported in the General Banking segment. There was no goodwill impairment during 2022.
Core Deposit Intangibles
Core deposit intangibles represent the estimated fair value of core deposits and other customer relationships acquired. Core deposit intangibles are being amortized over their estimated useful life. The following tables summarize the activity for core deposit intangibles during the quarter ending September 30, 2022.
Core Deposit Intangibles
| | | | | |
dollars in millions | 2022 |
Balance, net of accumulated amortization at December 31, 2020January 1 | $ | 50,89019 | |
AdditionsCore deposit intangibles related to the CIT Merger | 16,454143 | |
| |
SalesAmortization for the period | (24,311) | |
Write-downs/losses | (2,384)(17) | |
Balance at September 30, 2021net of accumulated amortization | $ | 40,649145 | |
Core Deposit Intangible Accumulated Amortization
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Gross balance | $ | 271 | | | $ | 128 | |
Accumulated amortization | (126) | | | (109) | |
Balance, net of accumulated amortization | $ | 145 | | | $ | 19 | |
The following table summarizes the expected amortization expense as of September 30, 2022 in subsequent periods for core deposit intangibles.
Core Deposit Intangible Expected Amortization
| | | | | |
dollars in millions | |
Remainder 2022 | $ | 5 | |
2023 | 19 | |
2024 | 17 | |
2025 | 16 | |
2026 | 15 | |
2027 | 15 | |
Thereafter | 58 | |
Total | $ | 145 | |
Intangible Liability
An intangible liability of $52 million was recorded in other liabilities for net below market lessor lease contract rental rates related to the rail portfolio as a result of the CIT Merger. This lease intangible is being amortized on a straight-line basis over the lease term, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements.
The following tables summarize the activity for the intangible liability during the nine month period ending September 30, 2022.
Intangible Liability
| | | | | |
dollars in millions | 2022 |
Balance at December 31, 2019January 1 | $ | 46,591 | |
Additions | 18,428— | |
Acquired in business combinationsCIT Merger | 9,81352 | |
SalesAmortization | (18,645) | |
Write-downs/losses | (3,398)(12) | |
Balance at September 30, 2020net of accumulated amortization | $ | 52,78940 | |
At
The following table summarizes the expected amortization as of September 30, 2021 and December 31, 2020, BancShares had $3.0 million and $5.8 million, respectively, of foreclosed residential real estate property2022 in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $19.6 million and $29.4 million at September 30, 2021 and December 31, 2020, respectively. Net gains recorded on the sale of OREO properties were $5.2 millionsubsequent periods for the nine months ended September 30, 2021. Net gains recorded on the sale of OREO properties were $1.0 million for the nine months ended September 30, 2020.intangible liability.
Intangible Liability
| | | | | |
dollars in millions | |
Remainder 2022 | $ | 4 | |
2023 | 12 | |
2024 | 6 | |
2025 | 4 | |
2026 | 3 | |
2027 | 2 | |
Thereafter | 9 | |
Total | $ | 40 | |
NOTE G -8 — MORTGAGE SERVICING RIGHTS
BancShares originates certain residential mortgages loans to sell in the secondary market. BancShares’ portfolio of residential mortgage loans serviced for third parties was $3.3approximately $3.7 billion as of September 30, 20212022 and December 31, 2020. These2021. For certain loans, arethe originated andloans are sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights are recorded as a servicing asset and are reported in other intangible assets. The associated amortization expense and any changes in the valuation allowance recognized arewere included as a reduction of mortgage income. Mortgage servicing rights (“MSRs”) are initially recorded at fair value and then carried at the lower of amortized cost or fair value.
Contractually specified mortgage servicing fees, late fees and ancillary fees earned are reported in mortgage income and were $2.1$2 million for each of the three month periodsmonths ended September 30, 2022 and 2021, and 2020,$7 million and are reported in mortgage income. For$6 million for the nine months ended September 30, 2022 and 2021, and 2020, mortgage servicing fees, late fees and ancillary fees earned were each $6.4 million.respectively.
The following table presents changes in the servicing asset during the three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | $ | 21,985 | | | $ | 18,664 | | | $ | 18,426 | | | $ | 22,963 | |
Servicing rights originated | 1,891 | | | 1,994 | | | 8,436 | | | 5,673 | |
Amortization | (2,180) | | | (2,208) | | | (6,505) | | | (6,150) | |
| | | | | | | |
Valuation allowance (increase) decrease | — | | | (305) | | | 1,339 | | | (4,341) | |
Ending balance | $ | 21,696 | | | $ | 18,145 | | | $ | 21,696 | | | $ | 18,145 | |
Servicing Asset
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Beginning balance | $ | 28 | | | $ | 22 | | | $ | 23 | | | $ | 18 | |
Servicing rights originated | — | | | 2 | | | 4 | | | 9 | |
Servicing rights obtained in CIT Merger | — | | | — | | | 3 | | | — | |
Amortization | (2) | | | (2) | | | (5) | | | (6) | |
Valuation allowance benefit | — | | | — | | | 1 | | | 1 | |
Ending balance | $ | 26 | | | $ | 22 | | | $ | 26 | | | $ | 22 | |
The following table presents the activity in the servicing asset valuation allowance for the three and nine months ended September 30, 2021 and 2020:allowance:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | $ | 3,026 | | | $ | 4,258 | | | $ | 4,365 | | | $ | 222 | |
Valuation allowance increase (decrease) | — | | | 305 | | | (1,339) | | | 4,341 | |
Ending balance | $ | 3,026 | | | $ | 4,563 | | | $ | 3,026 | | | $ | 4,563 | |
Servicing Asset Valuation Allowance
24 | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Beginning balance | $ | — | | | $ | 3 | | | $ | 1 | | | $ | 4 | |
Valuation allowance benefit | — | | | — | | | (1) | | | (1) | |
Ending balance | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
Mortgage servicing rightsMSRs valuations are performed using a pooling methodology where loans with similar risk characteristics are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value mortgage servicing rightsMSRs were as follows:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Discount rate - conventional fixed loans | 8.49 | % | | 7.92 | % |
Discount rate - all loans excluding conventional fixed loans | 9.49 | % | | 8.92 | % |
Weighted average constant prepayment rate | 17.32 | % | | 20.62 | % |
Weighted average cost to service a loan | $ | 87.58 | | | $ | 87.58 | |
MSRs Valuation Assumptions
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Discount rate | 9.62 | % | | 8.55 | % |
| | | |
| | | |
Weighted average constant prepayment rate | 6.70 | % | | 15.69 | % |
Weighted average cost to service a loan | $ | 81 | | | $ | 88 | |
The fair value of mortgage servicing rights isMSRs are sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is basedrates applied to the cash flows in the valuation of MSRs are market-based and provided on the 10-year U.S. Treasury rate plus a risk premium of 700 basis points for conventional fixed loans and 800 basis points for all other loans.pretax basis. The prepayment rate is derived from the Public Securities Association Standard Prepayment model. Generally, as interestdynamic modeling, which is compared to actual prepayment rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value and may result in the recognition of a valuation allowance.annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costcosts to service the loans.
NOTE H - REPURCHASE AGREEMENTS9 — OTHER ASSETS
The following table includes the components of other assets. The increases from December 31, 2021 primarily reflect the other assets acquired in the CIT Merger.
Other Assets
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Low-income housing tax credit and other unconsolidated investments | $ | 722 | | | $ | 169 | |
Right of use assets | 366 | | | 64 | |
Pension assets | 378 | | | 289 | |
Accrued interest receivable | 286 | | | 134 | |
Counterparty receivables | 107 | | | — | |
Fair value of derivative financial instruments | 149 | | | 3 | |
Nonmarketable equity securities | 55 | | | 1 | |
Other real estate owned | 54 | | | 40 | |
Mortgage servicing assets | 26 | | | 23 | |
Federal Home Loan Bank stock | 234 | | | 40 | |
Income tax receivable | 816 | | | 799 | |
Other | 467 | | | 177 | |
Total other assets | $ | 3,660 | | | $ | 1,739 | |
NOTE 10 — DEPOSITS
The following table provides detail on deposit types. The deposit balances as of September 30, 2022 reflect those acquired in the CIT Merger, as described in Note 2 — Business Combinations.
Deposit Types
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Noninterest-bearing demand | $ | 26,587 | | | $ | 21,405 | |
Checking with interest | 16,118 | | | 12,694 | |
Money market | 21,818 | | | 10,590 | |
Savings | 14,722 | | | 4,236 | |
Time | 8,308 | | | 2,481 | |
Total deposits | $ | 87,553 | | | $ | 51,406 | |
At September 30, 2022, the scheduled maturities of time deposits were:
Deposit Maturities
| | | | | |
dollars in millions | |
Twelve months ended September 30, | |
2023 | $ | 6,178 | |
2024 | 1,187 | |
2025 | 685 | |
2026 | 95 | |
2027 | 41 | |
Thereafter | 122 | |
Total time deposits | $ | 8,308 | |
Time deposits with a denomination of $250,000 or more were $1.5 billion and $593 million at September 30, 2022 and December 31, 2021, respectively.
As of December 31, 2021, FCB’s primary deposit markets were North Carolina and South Carolina, which represent approximately 50.8% and 22.7%, respectively, of total FCB deposits. The CIT Merger added deposits that were primarily in California (which also includes its internet banking). Deposits (based on branch location) as of September 30, 2022, in North Carolina, California, and South Carolina represented approximately 41.5%, 28.9%, and 13.6%, respectively, of total deposits.
NOTE 11 — VARIABLE INTEREST ENTITIES
Variable Interest Entities
Described below are the results of BancShares’ assessment of its variable interests in order to determine its current status with regard to being the VIE PB. Refer to Note 1 — Accounting Policies and Basis of Presentationfor additional information on accounting for VIEs.
Consolidated VIEs
At September 30, 2022 and December 31, 2021, there were no consolidated VIEs.
Unconsolidated VIEs
Unconsolidated VIEs include limited partnership interests and joint ventures where BancShares’ involvement is limited to an investor interest and BancShares utilizesdoes not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance or obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The table below presents potential losses that would be incurred under hypothetical circumstances, such that the value of its interests and any associated collateral declines to zero and assuming no recovery or offset from any economic hedges. BancShares believes the possibility is remote under this hypothetical scenario; accordingly, this disclosure is not an indication of expected loss.
Unconsolidated VIEs Carrying Value
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Tax credit equity investments | $ | 563 | | | $ | 157 | |
Equity investments | 155 | | | 12 | |
Total assets | $ | 718 | | | $ | 169 | |
Commitments to tax credit investments(1) | $ | 264 | | | $ | 43 | |
Total liabilities | $ | 264 | | | $ | 43 | |
Maximum loss exposure | $ | 718 | | | $ | 169 | |
(1) Represents commitments to invest in affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand and are recorded in other liabilities.
NOTE 12 — BORROWINGS
Short-term Borrowings
Short-term borrowings at September 30, 2022 and December 31, 2021 include:
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Securities sold under customer repurchase agreements | $ | 578 | | | $ | 589 | |
Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.18% to 0.20%. | 2,550 | | | — | |
| | | |
| | | |
Total short-term borrowings | $ | 3,128 | | | $ | 589 | |
Securities Sold under Agreements to Repurchase
At September 30, 2022, BancShares held $578 million of securities sold under agreements to repurchase, to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon price, and which obligates BancShares to repurchase the security at an agreed upon date, repurchase price, and interest rate. These agreements are recorded at the amount of cash received in connection with the transactionovernight contractual maturities, and are reflected as securities sold under customer repurchase agreements.
BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings ofcollateralized by government agency securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of investment securities pledged as collateral under repurchase agreements was $685.9 million and $689.3 million at September 30, 2021 andAt December 31, 2020, respectively.
At September 30, 2021, BancShares held $663.6$589 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, including $571.6of which $508 million were collateralized by government agency securities and $92.0 million collateralized by commercial mortgage-backed securities. At December 31, 2020, BancShares held securities sold under agreements to repurchase of $641.5 million, with overnight and continuous remaining contractual maturities, including $432.8 million collateralized by government agency securities and $208.7$81 million collateralized by commercial mortgage-backed securities.
NOTE I - FDIC SHARED-LOSS PAYABLEBancShares utilizes securities sold under agreements to repurchase to facilitate the needs for collateralization of commercial customers and secure wholesale funding needs. The carrying value of investment securities pledged as collateral under repurchase agreements was $572 million and $619 million at September 30, 2022 and December 31, 2021, respectively.
For certain FDIC-assisted transactions,
Long-term Borrowings
Long-term borrowings at September 30, 2022 and December 31, 2021 include:
| | | | | | | | | | | | | | | | | |
dollars in millions | Maturity | | September 30, 2022 | | December 31, 2021 |
Parent Company: | | | | | |
Senior: | | | | | |
Unsecured term loan at 1-month LIBOR plus 1.10% | September 2022 | | $ | — | | | $ | 68 | |
Subordinated: | | | | | |
| | | | | |
| | | | | |
Fixed-to-Floating subordinated notes at 3.375% | March 2030 | | 350 | | | 350 | |
Junior subordinated debenture at 3-month LIBOR plus 2.25% (FCB/SC Capital Trust II) | June 2034 | | 20 | | | 20 | |
Junior subordinated debenture at 3-month LIBOR plus 1.75% (FCB/NC Capital Trust III) | June 2036 | | 88 | | | 88 | |
Subsidiaries: | | | | | |
Senior: | | | | | |
Senior unsecured fixed to floating rate notes at 3.929%(1) | June 2024 | | 500 | | | — | |
Senior unsecured fixed to floating rate notes at 2.969%(1) | September 2025 | | 315 | | | — | |
Fixed senior unsecured notes at 6.00%(1) | April 2036 | | 51 | | | — | |
Subordinated: | | | | | |
Fixed subordinated notes at 6.125%(1) | March 2028 | | 400 | | | — | |
Fixed-to-Fixed subordinated notes at 4.125%(1) | November 2029 | | 100 | | | — | |
Junior subordinated debentures at 3-month LIBOR plus 2.80% (Macon Capital Trust I) | March 2034 | | 14 | | | 14 | |
Junior subordinated debentures at 3-month LIBOR plus 2.85% (SCB Capital Trust I) | April 2034 | | 10 | | | 10 | |
Secured: | | | | | |
Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.24% to 0.37%. | Maturities through September 2025 | | 3,250 | | | — | |
Fixed notes payable to FHLB of Atlanta | Maturities through March 2032 | | — | | | 645 | |
Other secured financings(1) | Maturities through January 2024 | | 17 | | | — | |
Capital lease obligations | Maturities through June 2027 | | 8 | | | 4 | |
Unamortized issuance costs | | | (2) | | | (2) | |
Unamortized purchase accounting adjustments(2) | | | 94 | | | (2) | |
Total long-term borrowings | | | $ | 5,215 | | | $ | 1,195 | |
(1) Reflects the related shared-loss agreement included a provision requiring a payment owed toremaining outstanding debt securities assumed by the FDIC atBancShares in connection with the terminationCIT Merger.On February 24, 2022, BancShares redeemed all of the agreement.outstanding (i) 5.00% senior unsecured notes due 2022, (ii) 5.00%, senior unsecured notes due 2023; (iii) 4.750% senior unsecured notes due 2024; and (iv) 5.250% senior unsecured notes due 2025 that it had assumed in the CIT Merger.
(2) As ofAt September 30, 2021, these agreements have been satisfied following2022 a $16.1 million payment made to the FDIC during the first quarter of 2021 related to the final active agreement.
The following table provides changes in the FDIC shared-loss payable sincend December 31, 2020:
| | | | | |
(Dollars in thousands)2021, unamortized purchase accounting adjustments were $72 million and $2 million, respectively, for subordinated debentures. | Total |
Balance at December 31, 2020 | $ | 15,601 | |
Accretion | 502 | |
Payment made to the FDIC to settle shared-loss agreement | (16,103) | |
Balance at September 30, 2021 | $ | — | |
NOTE J - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) incomeLong-term borrowings maturing in each of the five years subsequent to September 30, 2022 and thereafter include:
Long-term Borrowings Maturities
| | | | | |
dollars in millions | |
Twelve months ended September 30, | |
2023 | $ | 19 | |
2024 | 2,186 | |
2025 | 1,931 | |
2026 | 16 | |
2027 | 19 | |
Thereafter | 1,044 | |
Total long-term borrowings | $ | 5,215 | |
Senior Unsecured Notes
Senior unsecured notes included the following as of September 30, 20212022:
•Fixed-rate senior unsecured notes outstanding totaled $866 million with a weighted average coupon rate of 3.70%. These notes were assumed by FCB as part of the CIT Merger.On February 24, 2022, FCB completed a redemption of approximately $2.9 billion of senior unsecured notes that were assumed in the CIT Merger, resulting in a gain of approximately $6 million.
Subordinated Unsecured Notes
Subordinated unsecured notes included the following as of September 30, 2022:
•$350 million aggregate principal amount of its 3.375% fixed-to-floating rate subordinated notes due 2030 and redeemable at the option of BancShares starting with the interest payment due March 15, 2025.
•$400 million aggregate principal amount of 6.125% fixed rate subordinated notes with a maturity date of March 2028 and $100 million aggregate principal amount of 4.125% fixed-to-fixed rate subordinated notes with a maturity date of November 2029, which were assumed by BancShares as part of the CIT Merger.
•$132 million in junior subordinated debentures representing obligations to Macon Capital Trust I, SCB Capital Trust I, FCB/SC Capital Trust II, and FCB/NC Capital Trust III special purpose entities and grantor trusts (the “Trusts”) for trust preferred securities. The Trusts had outstanding trust preferred securities of $128 million at September 30, 2022 and December 31, 2020:2021, which mature in 2034, 2034, 2034 and 2036, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Accumulated other comprehensive income (loss) | | Deferred tax expense (benefit) | | Accumulated other comprehensive income (loss), net of tax | | Accumulated other comprehensive income (loss) | | Deferred tax expense (benefit) | | Accumulated other comprehensive income (loss), net of tax |
Unrealized gains on securities available for sale | $ | 25,986 | | | $ | 5,977 | | | $ | 20,009 | | | $ | 102,278 | | | $ | 23,524 | | | $ | 78,754 | |
| | | | | | | | | | | |
Unrealized gains on securities available for sale transferred to held to maturity | 3,709 | | | 853 | | | 2,856 | | | 5,399 | | | 1,242 | | | 4,157 | |
Defined benefit pension items | (71,431) | | | (16,429) | | | (55,002) | | | (91,751) | | | (21,103) | | | (70,648) | |
Total | $ | (41,736) | | | $ | (9,599) | | | $ | (32,137) | | | $ | 15,926 | | | $ | 3,663 | | | $ | 12,263 | |
Secured Borrowings
At September 30, 2022, BancShares had pledged $26.6 billion of loans to several financing facilities.
Notes Payable to FHLB
As a member of the FHLB, FCB can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. Pledged assets related to these financings totaled $21.1 billion at September 30, 2022. FCB may at any time grant a security interest in, sell, convey or otherwise dispose of any of the assets used for collateral, provided that FCB is in compliance with the collateral maintenance requirement immediately following such disposition.
Other Secured Financings
Other secured (other than FHLB) financings were not significant and totaled $17 million at September 30, 2022. Pledged assets related to these financings totaled $17 million. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings.
At September 30, 2022, BancShares had other unused credit lines allowing contingent access to borrowings of up to $100 million on an unsecured basis.
Under borrowing arrangements with the FRB of Richmond, BancShares has access to an additional $4.5 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 2022 and December 31, 2021. Assets pledged to the FRB of Richmond totaled $5.5 billion at September 30, 2022.
NOTE 13 — DERIVATIVE FINANCIAL INSTRUMENTS
BancShares acquired various derivative financial instruments in the CIT Merger. The following table presents notional amount and fair value of derivative financial instruments on a gross basis.
Notional Amount and Fair Value of Derivative Financial Instruments
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Notional Amount | | Asset Fair Value | | Liability Fair Value |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Derivatives not designated as hedging instruments (Non-qualifying hedges) | | | | | |
Interest rate contracts(1)(3) | $ | 18,604 | | | $ | 143 | | | $ | (500) | |
Foreign exchange contracts | 145 | | | 6 | | | — | |
Other contracts(2) | 769 | | | — | | | — | |
Total derivatives not designated as hedging instruments | $ | 19,518 | | | 149 | | | (500) | |
Gross derivatives fair values presented in the Consolidated Balance Sheets | | | 149 | | | (500) | |
Less: Gross amounts offset in the Consolidated Balance Sheets | | | — | | | — | |
Net amount presented in the Consolidated Balance Sheets | | | 149 | | | (500) | |
Less: Amounts subject to master netting agreements(4) | | | (6) | | | 6 | |
Less: Cash collateral pledged(received) subject to master netting agreements(5) | | | (129) | | | — | |
Total net derivative fair value | | | $ | 14 | | | $ | (494) | |
(1) Fair value balances include accrued interest.
(2) Other derivative contracts not designated as hedging instruments include risk participation agreements.
(3) BancShares accounts for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet as “settled-to-market”. As a result, variation margin payments are characterized as settlement of the derivative exposure and variation margin balances are netted against the corresponding derivative mark-to-market balances. Gross amounts of recognized assets and liabilities were lowered by $413 million and $20 million, respectively, at September 30, 2022.
(4) BancShares’ derivative transactions are governed by International Swaps and Derivatives Association (“ISDA”) agreements that allow for net settlements of certain payments as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. BancShares believes its ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure.
(5) In conjunction with the ISDA agreements described above, BancShares has entered into collateral arrangements with its counterparties, which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties. Collateral pledged or received is included in other assets or other liabilities, respectively.
Non-Qualifying Hedges
The following table highlights changes in accumulated other comprehensive (loss) income by component forpresents gains of non-qualifying hedges recognized on the three and nine months ended September 30, 2021 and 2020:Condensed Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
(Dollars in thousands, net of tax) | Unrealized gains (losses) on securities available for sale | | Unrealized gains on securities available for sale transferred to held to maturity | | | | Defined benefit pension items | | Total |
Beginning balance | $ | 34,910 | | | $ | 3,187 | | | | | $ | (60,217) | | | $ | (22,120) | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized losses arising during period | (8,677) | | | — | | | | | — | | | (8,677) | |
Amounts reclassified from accumulated other comprehensive loss | (6,224) | | | (331) | | | | | 5,215 | | | (1,340) | |
Net current period other comprehensive (loss) income | (14,901) | | | (331) | | | | | 5,215 | | | (10,017) | |
Ending balance | $ | 20,009 | | | $ | 2,856 | | | | | $ | (55,002) | | | $ | (32,137) | |
| | | | | | | | | |
| Three months ended September 30, 2020 |
(Dollars in thousands, net of tax) | Unrealized gains (losses) on securities available for sale | | Unrealized gains on securities available for sale transferred to held to maturity | | | | Defined benefit pension items | | Total |
Beginning balance | $ | 113,102 | | | $ | — | | | | | $ | (122,766) | | | $ | (9,664) | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized gains arising during period | 7,530 | | | — | | | | | — | | | 7,530 | |
Amounts reclassified from accumulated other comprehensive loss | (16,497) | | | — | | | | | 4,875 | | | (11,622) | |
Net current period other comprehensive income | (8,967) | | | — | | | | | 4,875 | | | (4,092) | |
Ending balance | $ | 104,135 | | | $ | — | | | | | $ | (117,891) | | | $ | (13,756) | |
| | | | | | | | | |
Gains on Non-Qualifying Hedges
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Amounts Recognized | | 2022 | | 2021 | | 2022 | | 2021 |
Interest rate contracts | Other noninterest income | | $ | 5 | | | $ | — | | | $ | 11 | | | $ | — | |
Foreign currency forward contracts | Other noninterest income | | 20 | | | — | | | 26 | | | — | |
| | | | | | | | | |
Total non-qualifying hedges - income statement impact | | | $ | 25 | | | $ | — | | | $ | 37 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
(Dollars in thousands, net of tax) | Unrealized gains on securities available for sale | | Unrealized gains on securities available for sale transferred to held to maturity | | | | Defined benefit pension items | | Total |
Beginning balance | $ | 78,754 | | | $ | 4,157 | | | | | $ | (70,648) | | | $ | 12,263 | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized losses arising during period | (33,243) | | | — | | | | | — | | | (33,243) | |
Amounts reclassified from accumulated other comprehensive income | (25,502) | | | (1,301) | | | | | 15,646 | | | (11,157) | |
Net current period other comprehensive (loss) income | (58,745) | | | (1,301) | | | | | 15,646 | | | (44,400) | |
Ending balance | $ | 20,009 | | | $ | 2,856 | | | | | $ | (55,002) | | | $ | (32,137) | |
| | | | | | | | | |
| Nine months ended September 30, 2020 |
(Dollars in thousands, net of tax) | Unrealized gains on securities available for sale | | Unrealized gains on securities available for sale transferred to held to maturity | | | | Defined benefit pension items | | Total |
Beginning balance | $ | 5,792 | | | $ | — | | | | | $ | (132,515) | | | $ | (126,723) | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized gains arising during period | 140,671 | | | — | | | | | — | | | 140,671 | |
Amounts reclassified from accumulated other comprehensive loss | (42,328) | | | — | | | | | 14,624 | | | (27,704) | |
Net current period other comprehensive income | 98,343 | | | — | | | | | 14,624 | | | 112,967 | |
Ending balance | $ | 104,135 | | | $ | — | | | | | $ | (117,891) | | | $ | (13,756) | |
NOTE 14 — OTHER LIABILITIES
The following table presents the amounts reclassifiedcomponents of other liabilities. The increases from accumulatedDecember 31, 2021 primarily reflect the other comprehensive (loss) income and the line item affectedliabilities assumed in the statement where net income is presented for the three and nine months ended September 30, 2021 and 2020:CIT Merger.
| | | | | | | | | | | | | | |
(Dollars in thousands)
| | Three months ended September 30, 2021 |
Details about accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
Unrealized gains on securities available for sale | | $ | 8,082 | | | Realized gains on investment securities available for sale, net |
| | (1,858) | | | Income taxes |
| | $ | 6,224 | | | |
| | | | |
Accretion of unrealized gains on securities available for sale transferred to held to maturity | | $ | 430 | | | Net interest income |
| | (99) | | | Income taxes |
| | $ | 331 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Amortization of defined benefit pension actuarial losses | | (6,773) | | | Other noninterest expense |
| | | | |
| | 1,558 | | | Income taxes |
| | $ | (5,215) | | | |
Total reclassifications for the period | | $ | 1,340 | | | |
| | | | |
(Dollars in thousands) | | Three months ended September 30, 2020 |
Details about accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
Unrealized gains on securities available for sale | | $ | 21,425 | | | Realized gains on investment securities available for sale, net |
| | (4,928) | | | Income taxes |
| | $ | 16,497 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Amortization of defined benefit pension actuarial losses | | (6,332) | | | Other noninterest expense |
| | 1,457 | | | Income taxes |
| | $ | (4,875) | | | |
Total reclassifications for the period | | $ | 11,622 | | | |
| | |
| | | | |
(Dollars in thousands) | | Nine months ended September 30, 2021 |
Details about accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
Unrealized gains on securities available for sale | | $ | 33,119 | | | Realized gains on investment securities available for sale, net |
| | (7,617) | | | Income taxes |
| | $ | 25,502 | | | |
| | | | |
Amortization of unrealized losses on securities available for sale transferred to held to maturity | | $ | 1,690 | | | Net interest income |
| | (389) | | | Income taxes |
| | $ | 1,301 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Amortization of defined benefit pension actuarial losses | | $ | (20,320) | | | Other noninterest expense |
| | 4,674 | | | Income taxes |
| | $ | (15,646) | | | |
Total reclassifications for the period | | $ | 11,157 | | | |
| | | | |
(Dollars in thousands) | | Nine months ended September 30, 2020 |
Details about accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
Unrealized gains on securities available for sale | | $ | 54,972 | | | Realized gains on investment securities available for sale, net |
| | (12,644) | | | Income taxes |
| | $ | 42,328 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Amortization of defined benefit pension actuarial losses | | (18,994) | | | Other noninterest expense |
| | | | |
| | 4,370 | | | Income taxes |
| | $ | (14,624) | | | |
Total reclassifications for the period | | $ | 27,704 | | | |
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Accrued expenses and accounts payable | $ | 295 | | | $ | 5 | |
Lease liabilities | 373 | | | 64 | |
Fair value of derivative financial instruments | 500 | | | 1 | |
Commitments to fund tax credit investments | 264 | | | 43 | |
Deferred taxes | 173 | | | 33 | |
Reserve for off-balance sheet credit exposure | 91 | | | 12 | |
Incentive plan liabilities | 199 | | | 84 | |
Accrued interest payable | 35 | | | 8 | |
Other | 504 | | | 131 | |
Total other liabilities | $ | 2,434 | | | $ | 381 | |
NOTE K - ESTIMATED15 — FAIR VALUESVALUE
Fair Value Hierarchy
BancShares measures certain financial assets and liabilities at fair value. Fair value estimates are intended to representis defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as ofat the measurement date. Where there is no active market forU.S. GAAP also establishes a financial instrument, BancShares has made estimates using discounted cash flows or other valuation techniques. Inputs used in thesefair value hierarchy, which prioritizes the inputs to valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derivedused to measure fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange.into three levels.
ASC 820,
Fair Value Measurements and Disclosures, indicates that assets
Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the highestlowest level of input that is significant to the fair value measurement (withwith Level 1 inputs considered highest and Level 3 inputs considered lowest).lowest. A brief description of each input level follows:
•Level 1 valuesinputs are based on quoted prices in active markets for identical instruments in active markets.assets and liabilities.
•Level 2 valuesinputs are based on quoted prices for similar instrumentsassets or liabilities in active markets, quoted prices for identical or similar instrumentsassets or liabilities in markets that are not active and model-based valuation techniquesinputs other than quoted prices observable for which all significant assumptions are observable in the market.assets or liabilities and market corroborated inputs.
•Level 3 valuesinputs are derived from valuation techniques in which oneunobservable inputs for the asset or more significant inputs or assumptions are not observable in the market.liability. These unobservable inputs and assumptions reflect the estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models
Assets and similar techniques.Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes BancShares’ management reviews any changes to its valuation methodologies to ensure they are appropriateassets and supportable, and refines valuation methodologies as more market-based data becomes available. Accuracy of the levels of theliabilities measured at estimated fair value hierarchy are validatedon a recurring basis.
Assets and transfers between levels of theLiabilities Measured at Fair Value - Recurring Basis (dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 1,900 | | | $ | — | | | $ | 1,900 | | | $ | — | |
Government agency | 173 | | | — | | | 173 | | | — | |
Residential mortgage-backed securities | 4,784 | | | — | | | 4,784 | | | — | |
Commercial mortgage-backed securities | 1,673 | | | — | | | 1,673 | | | — | |
Corporate bonds | 558 | | | — | | | 382 | | | 176 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,088 | | | $ | — | | | $ | 8,912 | | | $ | 176 | |
Marketable equity securities | 92 | | | 30 | | | 62 | | | — | |
Loans held for sale | 7 | | | — | | | 7 | | | — | |
Derivative assets(1) | | | | | | | |
Interest rate contracts — non-qualifying hedges | 143 | | | — | | | 142 | | | 1 | |
Other derivative — non-qualifying hedges | 6 | | | — | | | 6 | | | — | |
Total derivative assets | $ | 149 | | | $ | — | | | $ | 148 | | | $ | 1 | |
Liabilities | | | | | | | |
Derivative liabilities(1) | | | | | | | |
Interest rate contracts — non-qualifying hedges | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | |
Other derivative— non-qualifying hedges | — | | | — | | | — | | | — | |
Total derivative liabilities | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | |
| | | | | | | |
| December 31, 2021 |
dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,005 | | | $ | — | | | $ | 2,005 | | | $ | — | |
Government agency | 221 | | | — | | | 221 | | | — | |
Residential mortgage-backed securities | 4,729 | | | — | | | 4,729 | | | — | |
Commercial mortgage-backed securities | 1,640 | | | — | | | 1,640 | | | — | |
Corporate bonds | 608 | | | — | | | 401 | | | 207 | |
Total investment securities available for sale | $ | 9,203 | | | $ | — | | | $ | 8,996 | | | $ | 207 | |
Marketable equity securities | 98 | | | 34 | | | 64 | | | — | |
Loans held for sale | 99 | | | — | | | 99 | | | — | |
(1) Derivative fair value hierarchy are recognized at the end of the reporting period.values include accrued interest.
The methodologiesmethods and assumptions used to estimate the fair value of each class of financial assets and financial liabilitiesinstruments measured at fair value on a recurring basis are discussed below:as follows:
Investment securities available for sale and held to maturity. The fair value of U.S. Treasury, government agency, and mortgage-backed securities, municipal securities, as well asand a portion of the corporate bonds isare generally estimated using a third partythird-party pricing service. To obtain an understanding of the processes and methodologies used, management reviews correspondence from the third-party pricing service. Management also performs a price variance analysis process to corroborate the reasonableness of prices. The third partythird-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models thatwhich use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers which are unadjusted andusing inputs that are not directly observable. These securities are consideredclassified as Level 3.
Investment in marketable
Marketable equity securities. Equity securities are measured at fair value using observable closing prices andprices. The valuation also considers the amount of market activity.activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market.
Loans held for sale. Management elects the fair value option on certainCertain residential real estate loans originated to be sold to investors. The loansinvestors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified asconsidered Level 2 inputs.
Derivative Assets and Liabilities. Derivatives were valued using models that incorporate inputs depending on the type of derivative. Other than the fair value of credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on observed pricing for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 13 — Derivative Financial Instruments for notional principal amounts and fair values.
The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis.
Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis
| | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | | | | | | | | |
Financial Instrument | Estimated Fair Value | | Valuation Technique(s) | | Significant Unobservable Inputs | | | | |
September 30, 2022 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 176 | | | Indicative bid provided by broker | | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer. | | | | |
Interest rate & other derivative — non-qualifying hedges | $ | 1 | | | Internal valuation model | | Not material | | | | |
| | | | | | | | | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 207 | | | Indicative bid provided by broker | | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer. | | | | |
| | | | | | | | | |
The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3).
Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| Corporate Bonds | | Other Derivative Assets — Non-Qualifying | | Other Derivative Liabilities — Non-Qualifying | | Corporate Bonds |
Beginning balance | $ | 207 | | | $ | — | | | $ | — | | | $ | 317 | |
Purchases | — | | | — | | | 1 | | | 31 | |
Included in earnings | — | | | 1 | | | (1) | | | 2 | |
Included in comprehensive income | (17) | | | — | | | — | | | 4 | |
| | | | | | | |
Transfers out | (14) | | | — | | | — | | | — | |
Maturity and settlements | — | | | — | | | — | | | (46) | |
Ending balance | $ | 176 | | | $ | 1 | | | $ | — | | | $ | 308 | |
Fair Value Option
The following table summarizes the difference between the aggregate fair value and the UPB for residential real estate loans originated for sale measured at fair value as of September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 7 | | | $ | 7 | | | $ | — | |
| | | | | |
| December 31, 2021 |
| Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 99 | | | $ | 96 | | | $ | 3 | |
BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included a loss of $1 million for each of the three months ended September 30, 2022 and 2021 and a loss of $3 million for each of the nine months ended September 30, 2022 and 2021. Interest earned on loans held for sale is recorded within interest income on loans and leases in the Consolidated Statements of Income.
No originated loans held for sale were 90 or more days past due or on non-accrual status as of September 30, 2022 or December 31, 2021.
Assets Measured at Estimated Fair Value on a Non-recurring Basis
Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses from a non-recurring fair value adjustment have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end.
Assets Measured at Fair Value - Non-recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Fair Value Measurements | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
September 30, 2022 | | | | | | | | | |
Assets held for sale - loans | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | (1) | |
Loans - collateral dependent loans | 78 | | | — | | | — | | | 78 | | | (10) | |
Other real estate owned | 51 | | | — | | | — | | | 51 | | | 13 | |
Mortgage servicing rights | — | | | — | | | — | | | — | | | 1 | |
Total | $ | 132 | | | $ | — | | | $ | — | | | $ | 132 | | | $ | 3 | |
December 31, 2021 | | | | | | | | | |
Loans - collateral dependent loans | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | (2) | |
Other real estate owned | 34 | | | — | | | — | | | 34 | | | (4) | |
Mortgage servicing rights | 22 | | | — | | | — | | | 22 | | | 3 | |
Total | $ | 59 | | | $ | — | | | $ | — | | | $ | 59 | | | $ | (3) | |
Certain other assets are adjusted to their fair value on a non-recurring basis, including certain loans, OREO, and goodwill, which are periodically tested for impairment, and MSRs, which are carried at the lower of amortized cost or market. Most loans held for investment, deposits, and borrowings are not reported at fair value.
The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows:
Assets held for sale - loans. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. Transfers occur when management intends to sell a pool ofWhen available, the fair values for the transferred loans inare based on quoted prices from the secondary market. This typically occurs when a firm commitment to purchase from a counterparty exists.commitments for the individual loans being transferred and are considered Level 1 inputs. The fair value of Level 2 assets was primarily estimated based on prices of recent trades of similar assets. For other loans held for sale, the transferredfair value of Level 3 assets was primarily measured under the income approach using the discounted cash flow model based on Level 3 inputs including discount rate or the price of committed trades.
Loans - collateral dependent loans. The population of Level 3 loans measured at fair value on a non-recurring basis includes collateral-dependent loans evaluated individually. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, and immaterial adjustments for other external factors that may impact the marketability of the collateral.
Other real estate owned. OREO is carried at the lower of cost or fair value. OREO asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts, generally between 6% and 15%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2022 and December 31, 2021, the weighted average discount applied was 6.82% and 8.79%, respectively. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.
Mortgage servicing rights. MSRs are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than amortized cost. The fair value of MSRs is determined using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is based onused to determine the quoted pricesfair value.
Financial Instruments Fair Value
The table below presents the carrying values and is considered a Level 1 input.estimated fair values for financial instruments, excluding leases and certain other assets and liabilities for which these disclosures are not required.
Carrying Values and Fair Values of Financial Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 |
| | | Estimated Fair Value |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | | | |
Cash and due from banks | $ | 481 | | | $ | 481 | | | $ | — | | | $ | — | | | $ | 481 | |
Interest earning deposits at banks | 6,172 | | | 6,172 | | | — | | | — | | | 6,172 | |
Investment in marketable equity securities | 92 | | | 30 | | | 62 | | | — | | | 92 | |
Investment securities available for sale | 9,088 | | | — | | | 8,912 | | | 176 | | | 9,088 | |
Investment securities held to maturity | 9,661 | | | — | | | 8,166 | | | — | | | 8,166 | |
Loans held for sale | 18 | | | — | | | 7 | | | 14 | | | 21 | |
Net loans | 66,757 | | | — | | | 1,612 | | | 61,280 | | | 62,892 | |
Accrued interest receivable | 286 | | | — | | | 286 | | | — | | | 286 | |
Federal Home Loan Bank stock | 234 | | | — | | | 234 | | | — | | | 234 | |
| | | | | | | | | |
Mortgage and other servicing rights | 26 | | | — | | | — | | | 48 | | | 48 | |
Derivative assets | 149 | | | — | | | 148 | | | 1 | | | 149 | |
Financial Liabilities | | | | | | | | | |
Deposits | 87,553 | | | — | | | 87,435 | | | — | | | 87,435 | |
| | | | | | | | | |
Credit balances of factoring clients | 1,147 | | | — | | | — | | | 1,147 | | | 1,147 | |
Securities sold under customer repurchase agreements | 578 | | | — | | | 578 | | | — | | | 578 | |
Other short-term borrowings | 2,550 | | | — | | | 2,550 | | | — | | | 2,550 | |
Long-term borrowings | 5,207 | | | — | | | 5,042 | | | 17 | | | 5,059 | |
Accrued interest payable | 35 | | | — | | | 35 | | | — | | | 35 | |
Derivative liabilities | 500 | | | — | | | 500 | | | — | | | 500 | |
| | | | | | | | | |
| December 31, 2021 |
| | | Estimated Fair Value |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | | | |
Cash and due from banks | $ | 338 | | | $ | 338 | | | $ | — | | | $ | — | | | $ | 338 | |
Interest earning deposits at banks | 9,115 | | | 9,115 | | | — | | | — | | | 9,115 | |
Investment in marketable equity securities | 98 | | | 34 | | | 64 | | | — | | | 98 | |
Investment securities available for sale | 9,203 | | | — | | | 8,996 | | | 207 | | | 9,203 | |
Investment securities held to maturity | 3,809 | | | — | | | 3,759 | | | — | | | 3,759 | |
Loans held for sale | 99 | | | — | | | 99 | | | — | | | 99 | |
Net loans | 32,193 | | | — | | | — | | | 31,890 | | | 31,890 | |
Accrued interest receivable | 134 | | | — | | | 134 | | | — | | | 134 | |
Federal Home Loan Bank stock | 40 | | | — | | | 40 | | | — | | | 40 | |
| | | | | | | | | |
Mortgage and other servicing rights | 23 | | | — | | | — | | | 23 | | | 23 | |
Financial Liabilities | | | | | | | | | |
Deposits with no stated maturity | 48,925 | | | — | | | 48,925 | | | — | | | 48,925 | |
Time deposits | 2,481 | | | — | | | 2,471 | | | — | | | 2,471 | |
Securities sold under customer repurchase agreements | 589 | | | — | | | 589 | | | — | | | 589 | |
| | | | | | | | | |
Long-term borrowings | 1,195 | | | — | | | 1,222 | | | — | | | 1,222 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued interest payable | 8 | | | — | | | 8 | | | — | | | 8 | |
The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows:
Net loans. The carrying value of net loans and leases. Fair value is estimated based on discounted futurenet of the ACL. Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the current interest ratessignificance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which loansapproximates their fair value and classified as Level 3.
Investment securities held to maturity. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and FDIC guaranteed CDs with similar terms would be madeother financial institutions. We primarily use prices obtained from pricing services to borrowers of similar credit quality. The inputs used indetermine the fair value measurements for loans and leasesof securities, which are considered Level 32 inputs.
FHLB stockstock. . The carrying amount of FHLB stock is a reasonable estimate of fair value, as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs.
Mortgage and other servicing rights. Mortgage and other servicing rights are initially recorded at fair value and subsequently carried at the lower of amortized cost or market value andmarket. Therefore, servicing rights are therefore, carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is performeddetermined using a pooling methodology. Similar loans are pooled together and a model thatwhich relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage and other servicing rights are considered Level 3 inputs.
Deposits. For non-timeThe estimated fair value of deposits carrying value is a reasonable estimate of fair value.with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 2 inputs appropriate to the contractual maturity.
Credit balances of factoring clients. The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is estimated by discounting future cash flows usinginconsequential due to the interest rates currently offered for deposits with similar remaining maturities. The inputs used inshort term nature of these balances, therefore, the fair value measurement for deposits are consideredapproximated carrying value, and the credit balances were classified as Level 2 inputs. 3
Borrowings.
Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables. The fair value approximates carrying value and are classified as Level 2.
Long-term Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security, if available. Otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, senior and subordinated debentures, and other borrowings are considered Level 2 inputs.
Payable to the FDIC for shared-loss agreements. The fair value of the payable to the FDIC for shared-loss agreementsother secured borrowings was determinedestimated based on payments to the FDIC in accordance with the shared-loss agreements. Cash flows were discounted using current discount rates to reflect the timing of the estimated amounts due to the FDIC. Theunobservable inputs used in the fair value measurement for the payable to the FDIC were consideredand are classified as Level 3 inputs.3.
Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 20212022 and December 31, 2020.2021. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short termshort-term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks, isand interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, securities sold under customer repurchase agreements,Accrued interest receivable and accrued interest payable are consideredclassified as Level 2.
NOTE 16 — STOCKHOLDERS' EQUITY
A roll forward of common stock activity is presented in the following table.
Number of Shares of Common Stock
| | | | | | | | | | | |
| Outstanding |
| Class A | | Class B |
Common stock - June 30, 2022 | 14,997,202 | | | 1,005,185 | |
Shares purchased under authorized repurchase plan | (1,027,414) | | | — | |
Restricted stock units vested, net of shares held to cover taxes | 1,156 | | | — | |
Common stock - September 30, 2022 | 13,970,944 | | | 1,005,185 | |
| | | | | | | | | | | |
| Outstanding |
| Class A | | Class B |
Common stock - December 31, 2021 | 8,811,220 | | | 1,005,185 | |
Common stock issuance - CIT Merger | 6,140,010 | | | — | |
Restricted stock units vested, net of shares held to cover taxes | 47,128 | | | — | |
Shares purchased under authorized repurchase plan | (1,027,414) | | | — | |
Common stock - September 30, 2022 | 13,970,944 | | | 1,005,185 | |
Common Stock
The Parent Company has Class A Common Stock and Class B Common Stock. Class A Common Stock have one vote per share, while shares of Class B Common Stock have 16 votes per share. In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of Class A Common Stock as further discussed in Note 2 — Business Combinations.
Restricted Stock Units
Refer to Note 21 — Employee Benefit Plans for discussion of the BancShares RSUs.
Non-Cumulative Perpetual Preferred Stock
On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares (the “Depositary Shares”), each representing a 1/40th interest in a share of 5.375% non-cumulative perpetual preferred stock, series A (“BancShares Series A Preferred Stock”) (equivalent to $1,000 per share of the BancShares Series A Preferred Stock) for a total of $345 million. As part of the CIT Merger, each issued and outstanding share of CIT Series A Preferred Stock and CIT Series B Preferred Stock automatically converted into the right to receive one share of BancShares Series B Preferred Stock and BancShares Series C Preferred Stock, respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that were not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The following table summarizes BancShares’ non-cumulative perpetual preferred stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions, except per share and par value data |
Preferred Stock | | Issuance Date | | Earliest Redemption Date | | Par Value | | Shares Authorized, Issued and Outstanding | | | | | | Liquidation Preference Per Share | | Total Liquidation Preference | | Dividend | | Dividend Payment Dates |
Series A | | March 12, 2020 | | March 15, 2025 | | $0.01 | | 345,000 | | | | | | $ | 1,000 | | | $ | 345 | | | 5.375% | | Quarterly in arrears, beginning June 15, 2020 |
Series B | | January 3, 2022 | | January 4, 2027 | | $0.01 | | 325,000 | | | | | | 1,000 | | | 325 | | 5.8%, converting to LIBOR + 3.972% beginning June 15, 2022 | | Semi-annually during the fixed rate period, then quarterly in arrears, beginning June 15, 2022 |
Series C | | January 3, 2022 | | January 4, 2027 | | $0.01 | | 8,000,000 | | | | | | 25 | | | 200 | | 5.625% | | Quarterly in arrears, beginning March 15, 2022 |
Dividends on BancShares Series A, B, and C Preferred Stock (together, “BancShares Preferred Stock”) will be paid when, as, and if declared by the Board of Directors of the Parent Company, or a duly authorized committee thereof, to the extent that the Parent Company has lawfully available funds to pay dividends. If declared, dividends with respect to the BancShares Series A Preferred Stock and BancShares Series C Preferred Stock will accrue and be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year, beginning on the “Dividend Payment Dates” in the table above. Dividends on the BancShares Series B Preferred Stock initially accrued and were payable on a semi-annual basis during the fixed rate period. Upon expiration of the fixed rate period on June 15, 2022, dividends with respect to the BancShares Series B Preferred Stock, if declared, now accrue and are payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year. Dividends on the BancShares Preferred Stock will not be cumulative.
The Parent Company may redeem the BancShares Preferred Stock at its option, and subject to any required regulatory approval, at a redemption price equal to the “Liquidation Preference Per Share” in the table above, plus any declared and unpaid dividends to, but excluding, the redemption date, (i) in whole or in part, from time to time, on any dividend payment date on or after the “Earliest Redemption Date” in the table above, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event.
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table details the components of Accumulated Other Comprehensive (Loss) Income (“AOCI”):
Components of Accumulated Other Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
| Gross Unrealized | | Income Taxes | | Net Unrealized | | Gross Unrealized | | Income Taxes | | Net Unrealized |
Unrealized loss on securities available for sale | $ | (995) | | | $ | 239 | | | $ | (756) | | | $ | (12) | | | $ | 3 | | | $ | (9) | |
Unrealized loss on securities available for sale transferred to securities held to maturity | (8) | | | 2 | | | (6) | | | (9) | | | 2 | | | (7) | |
Defined benefit pension items | 43 | | | (10) | | | 33 | | | 34 | | | (8) | | | 26 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total accumulated other comprehensive (loss) income | $ | (960) | | | $ | 231 | | | $ | (729) | | | $ | 13 | | | $ | (3) | | | $ | 10 | |
The following table details the changes in the components of AOCI, net of income taxes:
Changes in Accumulated Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Unrealized (loss) gain on securities available for sale | | Unrealized loss on securities available for sale transferred to securities held to maturity | | Net change in Defined Benefit Pension Items | | | | Total AOCI |
Balance as of December 31, 2021 | $ | (9) | | | $ | (7) | | | $ | 26 | | | | | $ | 10 | |
AOCI activity before reclassifications | (747) | | | — | | | — | | | | | (747) | |
Amounts reclassified from AOCI | — | | | 1 | | | 7 | | | | | 8 | |
Net current period AOCI | (747) | | | 1 | | | 7 | | | | | (739) | |
Balance as of September 30, 2022 | $ | (756) | | | $ | (6) | | | $ | 33 | | | | | $ | (729) | |
| | | | | | | | | |
Balance as of December 31, 2020 | $ | 79 | | | $ | 4 | | | $ | (71) | | | | | $ | 12 | |
AOCI activity before reclassifications | (33) | | | — | | | — | | | | | (33) | |
Amounts reclassified from AOCI | (26) | | | (1) | | | 16 | | | | | (11) | |
Net current period AOCI | (59) | | | (1) | | | 16 | | | | | (44) | |
Balance as of September 30, 2021 | $ | 20 | | | $ | 3 | | | $ | (55) | | | | | $ | (32) | |
Other Comprehensive Income
The amounts included in the Condensed Consolidated Statements of Comprehensive Income are net of income taxes. The following table presents the carrying valuespretax and estimated fair valuesafter-tax components of other comprehensive income.
Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | |
| 2022 | | 2021 | | |
| Gross Amount | | Tax | | Net Amount | | Gross Amount | | Tax | | Net Amount | | Income Statement Line Item |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net change in pension obligations | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Reclassifications out of AOCI | 2 | | | — | | | 2 | | | 7 | | | (1) | | | 6 | | | Other noninterest expense |
Net Change | $ | 2 | | | $ | — | | | $ | 2 | | | $ | 7 | | | $ | (1) | | | $ | 6 | | | |
| | | | | | | | | | | | | |
Unrealized loss on securities available for sale transferred to securities held to maturity | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Reclassifications out of AOCI | — | | | — | | | — | | | (1) | | | — | | | (1) | | | Interest on investment securities |
Net Change | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | | | |
| | | | | | | | | | | | | |
Unrealized loss on securities available for sale | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | (348) | | | $ | 82 | | | $ | (266) | | | $ | (11) | | | $ | 3 | | | $ | (8) | | | |
Reclassifications out of AOCI | — | | | — | | | — | | | (8) | | 1 | | (7) | | Realized gain on sales of investment securities available for sale, net |
Net Change | $ | (348) | | | $ | 82 | | | $ | (266) | | | $ | (19) | | | $ | 4 | | | $ | (15) | | | |
Net current period AOCI | $ | (346) | | | $ | 82 | | | $ | (264) | | | $ | (13) | | | $ | 3 | | | $ | (10) | | | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2022 | | 2021 | | |
| | | | | | | | | | | | | |
| Gross Amount | | Tax | | Net Amount | | Gross Amount | | Tax | | Net Amount | | Income Statement Line Item |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net change in pension obligations | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Reclassifications out of AOCI | 9 | | | (2) | | | 7 | | | 20 | | | (4) | | | 16 | | | Other noninterest expense |
Net Change | $ | 9 | | | $ | (2) | | | $ | 7 | | | $ | 20 | | | $ | (4) | | | $ | 16 | | | |
| | | | | | | | | | | | | |
Unrealized loss on securities available for sale transferred to securities held to maturity | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Reclassifications out of AOCI | 1 | | | — | | | 1 | | | (1) | | | — | | | (1) | | | Interest on investment securities |
Net Change | $ | 1 | | | $ | — | | | $ | 1 | | | $ | (1) | | | $ | — | | | $ | (1) | | | |
| | | | | | | | | | | | | |
Unrealized loss on securities available for sale | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | (983) | | | $ | 236 | | | $ | (747) | | | $ | (43) | | | $ | 10 | | | $ | (33) | | | |
Reclassifications out of AOCI | — | | | — | | | — | | | (33) | | | 7 | | | (26) | | | Realized gain on sales of investment securities available for sale, net |
Net Change | $ | (983) | | | $ | 236 | | | $ | (747) | | | $ | (76) | | | $ | 17 | | | $ | (59) | | | |
Net current period AOCI | $ | (973) | | | $ | 234 | | | $ | (739) | | | $ | (57) | | | $ | 13 | | | $ | (44) | | | |
NOTE 18 — REGULATORY CAPITAL
BancShares and FCB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the BancShares’ Consolidated Financial Statements. Certain activities, such as the ability to undertake new business initiatives, including acquisitions, the access to and cost of funding for new business initiatives, the ability to pay dividends, the ability to repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight, largely depend on a financial instrumentsinstitution’s capital strength.
Federal banking agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening previous capital requirements for banking organizations. Basel III became effective for BancShares on January 1, 2015 and the associated capital conservation buffers of 2.5% were fully phased in by January 1, 2019.
The following table includes the Basel III requirements for regulatory capital ratios.
| | | | | | | | | | | | | | | | | |
| Basel III Minimums | | Basel III Conservation Buffers | | Basel III Requirements |
Regulatory capital ratios | | | | | |
Total risk-based capital | 8.00 | % | | 2.50 | % | | 10.50 | % |
Tier 1 risk-based capital | 6.00 | | | 2.50 | | | 8.50 | |
Common equity Tier 1 | 4.50 | | | 2.50 | | | 7.00 | |
Tier 1 leverage | 4.00 | | | — | | | 4.00 | |
The FDIC also has Prompt Corrective Action (“PCA”) thresholds for regulatory capital ratios. The regulatory capital ratios for BancShares and FCB are calculated in accordance with the guidelines of the federal banking authorities. The regulatory capital ratios for BancShares and FCB exceed the Basel III requirements and the PCA well-capitalized thresholds as of September 30, 20212022 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Carrying value | | Fair value | | Carrying value | | Fair value |
Assets | | | | | | | |
Cash and due from banks | $ | 337,450 | | | $ | 337,450 | | | $ | 362,048 | | | $ | 362,048 | |
Overnight investments | 9,875,063 | | | 9,875,063 | | | 4,347,336 | | | 4,347,336 | |
Investment in marketable equity securities | 123,147 | | | 123,147 | | | 91,680 | | | 91,680 | |
Investment securities available for sale | 7,371,129 | | | 7,371,129 | | | 7,014,243 | | | 7,014,243 | |
Investment securities held to maturity | 3,381,078 | | | 3,353,078 | | | 2,816,982 | | | 2,838,499 | |
Loans held for sale | 98,451 | | | 98,451 | | | 124,837 | | | 124,837 | |
Net loans and leases | 32,332,995 | | | 32,349,172 | | | 32,567,661 | | | 33,298,166 | |
Income earned not collected | 132,911 | | | 132,911 | | | 145,694 | | | 145,694 | |
Federal Home Loan Bank stock | 40,450 | | | 40,450 | | | 45,392 | | | 45,392 | |
| | | | | | | |
Mortgage and other servicing rights | 22,263 | | | 22,624 | | | 19,628 | | | 20,283 | |
Liabilities | | | | | | | |
Deposits with no stated maturity | 47,492,194 | | | 47,492,194 | | | 40,542,596 | | | 40,542,596 | |
Time deposits | 2,573,568 | | | 2,573,131 | | | 2,889,013 | | | 2,905,577 | |
Securities sold under customer repurchase agreements | 663,575 | | | 663,575 | | | 641,487 | | | 641,487 | |
| | | | | | | |
Federal Home Loan Bank borrowings | 645,663 | | | 659,625 | | | 655,175 | | | 677,579 | |
Subordinated debt | 497,427 | | | 520,871 | | | 504,518 | | | 525,610 | |
Other borrowings | 76,139 | | | 76,643 | | | 88,470 | | | 89,263 | |
FDIC shared-loss payable | — | | | — | | | 15,601 | | | 15,843 | |
Accrued interest payable | 6,560 | | | 6,560 | | | 9,414 | | | 9,414 | |
For assets and liabilities carried at fair value on a recurring basis,2021 as summarized in the following table provides fair value informationtable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | | | | September 30, 2022 | | December 31, 2021 |
| Basel III Requirements | | PCA well-capitalized thresholds | | Amount | | Ratio | | Amount | | Ratio |
BancShares | | | | | | | | | | | |
Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 11,927 | | | 13.46 | % | | $ | 5,042 | | | 14.35 | % |
Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,066 | | | 11.36 | | | 4,380 | | | 12.47 | |
Common equity Tier 1 | 7.00 | | | 6.50 | | | 9,185 | | | 10.37 | | | 4,041 | | | 11.50 | |
Tier 1 leverage | 4.00 | | | 5.00 | | | 10,066 | | | 9.31 | | | 4,380 | | | 7.59 | |
FCB | | | | | | | | | | | |
Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 11,732 | | | 13.26 | % | | $ | 4,858 | | | 13.85 | % |
Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,327 | | | 11.67 | | | 4,651 | | | 13.26 | |
Common equity Tier 1 | 7.00 | | | 6.50 | | | 10,327 | | | 11.67 | | | 4,651 | | | 13.26 | |
Tier 1 leverage | 4.00 | | | 5.00 | | | 10,327 | | | 9.56 | | | 4,651 | | | 8.07 | |
At September 30, 2022, BancShares and FCB had total risk-based capital ratio conservation buffers of 5.36% and 5.26%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers of 6.35% and 5.85%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of September 30, 20212022 and December 31, 2020:2021 over the Basel III minimum.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| | | Fair value measurements using: |
(Dollars in thousands) | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
Assets measured at fair value | | | | | | | |
Investment securities available for sale | | | | | | | |
| | | | | | | |
Government agency | $ | 853,728 | | | $ | — | | | $ | 853,728 | | | $ | — | |
Residential mortgage-backed securities | 4,801,646 | | | — | | | 4,801,646 | | | — | |
Commercial mortgage-backed securities | 1,090,652 | | | — | | | 1,090,652 | | | — | |
Corporate bonds | 625,103 | | | — | | | 316,968 | | | 308,135 | |
| | | | | | | |
Total investment securities available for sale | $ | 7,371,129 | | | $ | — | | | $ | 7,062,994 | | | $ | 308,135 | |
Marketable equity securities | $ | 123,147 | | | $ | 52,991 | | | $ | 70,156 | | | $ | — | |
Loans held for sale | $ | 98,451 | | | $ | — | | | $ | 98,451 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| December 31, 2020 |
| | | Fair value measurements using: |
| Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
Assets measured at fair value | | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 499,933 | | | $ | — | | | $ | 499,933 | | | $ | — | |
Government agency | 701,391 | | | — | | | 701,391 | | | — | |
Residential mortgage-backed securities | 4,438,103 | | | — | | | 4,438,103 | | | — | |
Commercial mortgage-backed securities | 771,537 | | | — | | | 771,537 | | | — | |
Corporate bonds | 603,279 | | | — | | | 286,655 | | | 316,624 | |
| | | | | | | |
Total investment securities available for sale | $ | 7,014,243 | | | $ | — | | | $ | 6,697,619 | | | $ | 316,624 | |
Marketable equity securities | $ | 91,680 | | | $ | 32,855 | | | $ | 58,825 | | | $ | — | |
Loans held for sale | $ | 124,837 | | | $ | — | | | $ | 124,837 | | | $ | — | |
| | | | | | | |
| | | | | | | |
Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 16 — Stockholders’ Equity. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
Dividend Restrictions
Dividends paid from FCB to the Parent Company are the primary source of funds available to the Parent Company for payment of dividends to its stockholders. The Board of Directors of FCB may approve distributions, including dividends, as it deems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, provided that the distributions do not reduce the regulatory capital ratios below the applicable requirements. FCB could have paid additional dividends to the Parent Company in the amount of $2.9 billion while continuing to meet the requirements for well-capitalized banks at September 30, 2022. Dividends declared by FCB and paid to the Parent Company amounted to $930 million for the nine months ended September 30, 2022. Payment of dividends is made at the discretion of FCB’s Board of Directors and is contingent upon satisfactory earnings as well as projected capital needs.
NOTE 19 — EARNINGS PER COMMON SHARE
The following tables summarize activitytable sets forth the computation of the basic and diluted earnings per common share:
Earnings per Common Share
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions, except per share data | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 315 | | | $ | 124 | | | $ | 841 | | | $ | 424 | |
Preferred stock dividends | 12 | | | 5 | | | 36 | | | 14 | |
Net income available to common stockholders | $ | 303 | | | $ | 119 | | | $ | 805 | | | $ | 410 | |
Weighted average common shares outstanding | | | | | | | |
Basic shares outstanding | 15,711,976 | | | 9,816,405 | | | 15,849,219 | | | 9,816,405 | |
Stock-based awards | 16,017 | | | — | | | 18,095 | | | — | |
Diluted shares outstanding | 15,727,993 | | | 9,816,405 | | | 15,867,314 | | | 9,816,405 | |
Earnings per common share | | | | | | | |
Basic | $ | 19.27 | | | $ | 12.17 | | | $ | 50.76 | | | $ | 41.79 | |
Diluted | $ | 19.25 | | | $ | 12.17 | | | $ | 50.70 | | | $ | 41.79 | |
BancShares RSUs are discussed in Note 21 — Employee Benefit Plans.
NOTE 20 — INCOME TAXES
BancShares’ global effective income tax rate was 22.9% and 13.3% for Level 3 assets carried at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | $ | 325,448 | | | $ | 169,977 | | | $ | 316,624 | | | $ | 69,685 | |
Purchases | 23,878 | | | 78,000 | | | 30,878 | | | 178,595 | |
Unrealized net losses (gains) included in other comprehensive income | 436 | | | 2,818 | | | 3,927 | | | 901 | |
Amounts included in net income | 2,504 | | | (81) | | | 2,687 | | | (249) | |
Transfers in | — | | | — | | | — | | | 1,782 | |
Sales / Calls | (44,131) | | | — | | | (45,981) | | | — | |
Ending balance | $ | 308,135 | | | $ | 250,714 | | | $ | 308,135 | | | $ | 250,714 | |
Duringthe three and nine months ended September 30, 2022, respectively, and 21.5% and 22.6% for the three and nine months ended September 30, 2021, respectively. The increase in the income tax rate for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily driven by the increase in state and 2020, there were no transfers between levels. Duringlocal taxes resulting from the CIT Merger. The decrease in the income tax rate for the nine months ended September 30, 2022 from the nine months ended September 30, 2021 there were no transferswas primarily driven by the non-taxable nature of the bargain purchase gain arising from Level 2the CIT Merger.
The quarterly income tax expense is based on a projection of BancShares’ annual effective tax rate (“ETR”). This annual ETR is applied to Level 3, comparedthe year-to-date consolidated pre-tax income to $1.8 milliondetermine the interim provision for income taxes before discrete items. The ETR each period is also impacted by a number of factors, including the same periodrelative mix of 2020.domestic and international earnings, effects of changes in enacted tax laws, adjustments to the valuation allowances, and discrete items. The transfers werecurrently forecasted ETR may vary from the actual year-end 2022 ETR due to the changes in these factors.
Uncertain Tax Benefits
BancShares’ recognizes tax benefits when it is more likely than not that the position will prevail, based solely on the technical merits under the tax law of the relevant jurisdiction. BancShares will recognize the tax benefit if the position meets this recognition threshold determined based on the largest amount of the benefit that is more than likely to be realized.
Net Operating Loss Carryforwards and Valuation Adjustments
As a lackresult of observable inputsthe CIT Merger, BancShares’ net deferred tax liabilities increased by approximately $297 million. That amount included an increase to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costs and trade activity for those securities.tax credits net of deferred tax liabilities primarily from operating leases.
The following table presents quantitative information about Level 3 fair value measurements for fair value
BancShares’ ability to recognize DTAs is evaluated on a recurringquarterly basis at September 30, 2021:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | September 30, 2021 |
Level 3 assets | | Valuation technique | | Significant unobservable input | | Fair Value |
Corporate bonds | | Indicative bid provided by broker | | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer | | $ | 308,135 | |
Fair Value Option
BancShares has elected the fair value option for residential real estate loans originated to be sold. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included losses of $0.6 million and gains of $0.6 million for the three months ended September 30, 2021 and 2020, respectively. The changes in fair value included a loss of $2.9 million and a gain of $4.2 million for nine months ended September 30, 2021 and 2020, respectively. Interest earned on loans held for sale is recorded within interest income on loans and leases in the consolidated statements of income.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of September 30, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | |
| September 30, 2021 |
(Dollars in thousands) | Fair value | | Aggregate unpaid principal balance | | Difference |
Originated loans held for sale | $ | 98,451 | | | $ | 95,396 | | | $ | 3,055 | |
| | | | | |
| December 31, 2020 |
| Fair value | | Aggregate unpaid principal balance | | Difference |
Originated loans held for sale | $ | 124,837 | | | $ | 118,902 | | | $ | 5,935 | |
No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2021 or December 31, 2020.
BancShares may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.
The population of loans measured at fair value on a non-recurring basis is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be at fair valuedetermine if there is an associated ACL or if a charge-off has been recorded in the previous 12 months. A large majority of collateral for these loans is real property. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5% and 10%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied to real estate collateral was 8%.
OREO acquired or written down within the previous 12 months is deemed to be at fair value. Asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts generally between 6% and 15% applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2021, the weighted average discount applied was 8%. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuationsevents that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation adjustments may be adjusted or new appraisals ordered to ensure the reported values reflect the most current information.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| | | Fair value measurements using: |
(Dollars in thousands) | Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
Collateral-dependent loans | $ | 12,185 | | | $ | — | | | $ | — | | | $ | 12,185 | |
Other real estate owned | 32,391 | | | — | | | — | | | 32,391 | |
Mortgage servicing rights | 20,210 | | | — | | | — | | | 20,210 | |
| | | | | | | |
| December 31, 2020 |
| | | Fair value measurements using: |
| Fair value | | Level 1 inputs | | Level 2 inputs | | Level 3 inputs |
Collateral-dependent loans | $ | 11,779 | | | $ | — | | | $ | — | | | $ | 11,779 | |
Other real estate owned | 40,115 | | | — | | | — | | | 40,115 | |
Mortgage servicing rights | 16,966 | | | — | | | — | | | 16,966 | |
No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.accordingly.
NOTE L -21 — EMPLOYEE BENEFIT PLANS
BancShares sponsors noncontributorynon-contributory defined benefit pension plans for its qualifying employees. The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.
For the three and nine months ended September 30, 2021 and 2020, the
The components of net periodic benefit cost are as follows:
| dollars in millions | | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Three months ended September 30 | | Nine months ended September 30 | | 2022 | | 2021 | | 2022 | | 2021 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 | |
Service cost | Service cost | $ | 3,838 | | | $ | 3,570 | | | $ | 11,514 | | | $ | 10,709 | | Service cost | $ | 3 | | | $ | 4 | | | $ | 10 | | | $ | 12 | |
Interest cost | Interest cost | 7,466 | | | 8,549 | | | 22,398 | | | 25,648 | | Interest cost | 11 | | | 7 | | | 33 | | | 22 | |
Expected return on assets | Expected return on assets | (19,607) | | | (16,423) | | | (58,823) | | | (49,267) | | Expected return on assets | (22) | | | (20) | | | (65) | | | (59) | |
| Amortization of prior service cost | | Amortization of prior service cost | — | | | — | | | — | | | — | |
Amortization of net actuarial loss | Amortization of net actuarial loss | 6,773 | | | 6,332 | | | 20,320 | | | 18,994 | | Amortization of net actuarial loss | 3 | | | 7 | | | 9 | | | 20 | |
Net periodic (benefit) cost | $ | (1,530) | | | $ | 2,028 | | | $ | (4,591) | | | $ | 6,084 | | |
Net periodic benefit | | Net periodic benefit | $ | (5) | | | $ | (2) | | | $ | (13) | | | $ | (5) | |
No discretionary contribution was made to the pension plans during the nine months ended September 30, 2021. A discretionary contribution of $100.0 million was made to the pension plans during the nine months ended September 30, 2020.2022. The funding policy of the pension plans is to contribute an amount each year to meet all Employee Retirement Income Security Act minimum requirements, including amounts to meet quarterly funding requirements, avoid “at-risk” status and avoid any benefit restrictions. BancShares may also contribute additional voluntary amounts each year (up to the maximum tax-deductible amount) in order to achieve certain target funding levels in the plans, with consideration also given to current and future cash flow and tax positions. No contributions are currently expected for the year ending December 31, 2021.2022.
Certain retirement benefit plans and stock-based awards of CIT were acquired by BancShares upon the closing of the CIT Merger.
CIT had both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain U.S. and non-U.S. employees, each of which was designed in accordance with the practices and regulations in the related countries. CIT maintained a frozen U.S. non-contributory pension plan (the "Plan") qualified under the Internal Revenue Code (“IRC”). CIT also maintained a frozen U.S. non-contributory supplemental retirement plan (the "Supplemental Plan”), and an Executive Retirement Plan, which had been closed to new members since 2006, and whose participants were all inactive. Accumulated balances under the Plan and the Supplemental Plan continue to receive periodic interest, subject to certain government limits. Fair value of the plan assets and benefit obligation at December 31, 2021 were $387 million and $409 million, respectively.
CIT provided healthcare and life insurance benefits to eligible retired employees. For most eligible retirees, healthcare was contributory and life insurance was non-contributory. All postretirement benefit plans were funded on a pay-as-you-go basis. These plans were terminated in the first quarter of 2022, effective April 1, and BancShares recognized a reduction in other noninterest expenses of approximately $27 million in the first quarter of 2022 related to amounts previously accrued.
CIT had a defined contribution retirement plan covering certain of its U.S. employees that qualifies under section 401(k) of the IRC and was assumed by BancShares. Under this plan employees may contribute a portion of their eligible compensation, as defined, subject to regulatory limits and plan provisions, and BancShares matches these contributions up to a threshold. Participants are also eligible for an additional discretionary company contribution.
In February 2016, CIT adopted the CIT Group Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which provided for grants of stock-based awards to employees, executive officers, and directors. The BancShares RSUs are the only outstanding awards subject to the terms of the 2016 Plan and no further awards will be made under the 2016 Plan. Compensation expense is recognized over the vesting period or the requisite service period, which is generally three years for BancShares RSUs, under the graded vesting method, whereby each vesting tranche of the award is amortized separately as if each were a separate award.
CIT had compensation awards that either converted to BancShares RSUs or immediately vested at completion of the CIT Merger as further described in the “Stock-Based Compensation” discussion in Note 1 — Accounting Policies and Basis of Presentation. The following table presents the unvested BancShares RSUs at September 30, 2022, which have vesting periods through 2024. There were no grants of stock-based compensation awards during 2022.
Stock-Settled Awards Outstanding
| | | | | | | | | | | |
per share amounts in whole dollars | Stock-Settled Awards |
| Number of Shares | | Weighted Average Grant Date Value |
Unvested BancShares at December 31, 2021 | — | | | $ | — | |
Unvested CIT RSUs converted to BancShares RSUs at Merger Date | 116,958 | | | 859.76 | |
Unvested CIT PSUs converted to RSUs at Merger Date | 10,678 | | | 859.76 | |
Forfeited / cancelled | (4,922) | | | 859.76 | |
Vested / settled awards | (74,500) | | | 859.76 | |
| | | |
Unvested BancShares RSUs at September 30, 2022 | 48,214 | | | $ | 859.76 | |
NOTE M - LEASES22 — BUSINESS SEGMENT INFORMATION
As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger. BancShares' reportable segments are primarily based upon industry categories, target markets, distribution channels and customers served, and, to a lesser extent, the core competencies relating to product origination, operations and servicing and the nature of their regulatory environment. Segment reporting is reflective of BancShares' internal reporting structure and is consistent with the presentation of financial information to the chief operating decision maker. Each of the segments are described below.
General Banking
General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides: a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to homeowner associations (“HOA”) and property management companies. As part of the CIT Merger, Community Association Banking (“CAB”) products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services.
Commercial Banking
Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities.
Rail
Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenue is primarily from operating lease income.
Corporate
Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related costs, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the preliminary gain on acquisition, each of which are related to the CIT Merger.
Segment Net Income (Loss) and Select Period End Balances
The following table presents right-of-use lease assets and liabilities as of September 30, 2021 and December 31, 2020:the condensed income statement by segment.
| | | | | | | | | | | | | | |
(Dollars in thousands) | Classification | September 30, 2021 | | December 31, 2020 |
Assets: | | | | |
Operating | Other assets | $ | 62,214 | | | $ | 68,048 | |
Finance | Premises and equipment | 4,852 | | | 6,478 | |
Total leased assets | | $ | 67,066 | | | $ | 74,526 | |
Liabilities: | | | | |
Operating | Other liabilities | $ | 63,025 | | | $ | 68,343 | |
Finance | Other borrowings | 4,720 | | | 6,308 | |
Total lease liabilities | | $ | 67,745 | | | $ | 74,651 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, 2022 |
| General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | $ | 495 | | | $ | 230 | | | $ | (20) | | | $ | 90 | | | $ | 795 | |
Provision for credit losses | 2 | | | 58 | | | — | | | — | | | 60 | |
Net interest income (expense) after provision for credit losses | 493 | | | 172 | | | (20) | | | 90 | | | 735 | |
Noninterest income | 118 | | | 133 | | | 170 | | | 12 | | | 433 | |
Noninterest expense | 410 | | | 186 | | | 110 | | | 54 | | | 760 | |
Income before income taxes | 201 | | | 119 | | | 40 | | | 48 | | | 408 | |
Income tax expense | 55 | | | 25 | | | 10 | | | 3 | | | 93 | |
Net income | $ | 146 | | | $ | 94 | | | $ | 30 | | | $ | 45 | | | $ | 315 | |
Select Period End Balances | | | | | | | | | |
| | | | | | | | | |
Loans and leases | $ | 41,693 | | | $ | 28,023 | | | $ | 74 | | | $ | — | | | $ | 69,790 | |
Deposits | 82,730 | | | 3,682 | | | 14 | | | 1,127 | | | 87,553 | |
Operating lease equipment, net | — | | | 736 | | | 7,248 | | | — | | | 7,984 | |
| | | | | | | | | |
| Three Months Ended September 30, 2021 |
| General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | $ | 363 | | | $ | 5 | | | $ | — | | | $ | (21) | | | $ | 347 | |
Benefit for credit losses | (1) | | | — | | | — | | | — | | | (1) | |
Net interest income (expense) after benefit for credit losses | 364 | | | 5 | | | — | | | (21) | | | 348 | |
Noninterest income | 110 | | | — | | | — | | | 14 | | | 124 | |
Noninterest expense | 295 | | | 1 | | | — | | | 18 | | | 314 | |
Income (loss) before income taxes | 179 | | | 4 | | | — | | | (25) | | | 158 | |
Income tax expense (benefit) | 38 | | | 1 | | | — | | | (5) | | | 34 | |
Net income (loss) | $ | 141 | | | $ | 3 | | | $ | — | | | $ | (20) | | | $ | 124 | |
Select Period End Balances | | | | | | | | | |
| | | | | | | | | |
Loans and leases | $ | 31,849 | | | $ | 667 | | | $ | — | | | $ | — | | | $ | 32,516 | |
Deposits | 49,992 | | | 73 | | | — | | | — | | | 50,065 | |
Operating lease equipment, net | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Nine Months Ended September 30, 2022 |
| General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | $ | 1,400 | | | $ | 641 | | | $ | (58) | | | $ | 161 | | | $ | 2,144 | |
(Benefit) provision for credit losses | (7) | | | 60 | | | — | | | 513 | | | 566 | |
Net interest income (expense) after provision for credit losses | 1,407 | | | 581 | | | (58) | | | (352) | | | 1,578 | |
Noninterest income | 365 | | | 376 | | | 493 | | | 473 | | | 1,707 | |
Noninterest expense | 1,210 | | | 557 | | | 320 | | | 228 | | | 2,315 | |
Income (loss) before income taxes | 562 | | | 400 | | | 115 | | | (107) | | | 970 | |
Income tax expense (benefit) | 134 | | | 90 | | | 28 | | | (123) | | | 129 | |
Net income | $ | 428 | | | $ | 310 | | | $ | 87 | | | $ | 16 | | | $ | 841 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | $ | 1,071 | | | $ | 12 | | | $ | — | | | $ | (50) | | | $ | 1,033 | |
Benefit for credit losses | (32) | | | — | | | — | | | — | | | (32) | |
Net interest income (expense) after benefit for credit losses | 1,103 | | | 12 | | | — | | | (50) | | | 1,065 | |
Noninterest income | 325 | | | — | | | — | | | 69 | | | 394 | |
Noninterest expense | 875 | | | 3 | | | — | | | 33 | | | 911 | |
Income (loss) before income taxes | 553 | | | 9 | | | — | | | (14) | | | 548 | |
Income tax expense (benefit) | 125 | | | 2 | | | — | | | (3) | | | 124 | |
Net income (loss) | $ | 428 | | | $ | 7 | | | $ | — | | | $ | (11) | | | $ | 424 | |
NOTE N -23 — COMMITMENTS AND CONTINGENCIES
Commitments
To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit.
The accompanying table summarizes credit-related commitments and other purchase and funding commitments:
| | | | | | | | | | | |
dollars in millions | September 30, 2022 | | December 31, 2021 |
Financing Commitments | | | |
Financing assets (excluding leases) | $ | 23,373 | | | $ | 13,011 | |
Letters of Credit | | | |
Standby letters of credit | 412 | | | 92 | |
Other letters of credit | 47 | | | 24 | |
Deferred Purchase Agreements | 2,152 | | | — | |
Purchase and Funding Commitments(1) | 922 | | | — | |
(1) BancShares’ purchase and funding commitments relate to the equipment leasing businesses’ commitments to fund finance leases and operating leases, and Rail’s railcar manufacturer purchase and upgrade commitments.
Financing Commitments
Commitments to extend credit are legally binding agreements to lend to customers. These commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires collateral be pledged to secure the commitment, including cash deposits, securities and other assets.
Financing commitments, referred to as loan commitments or lines of credit, primarily reflect BancShares’ agreements to lend to its customers, subject to the customers’ compliance with contractual obligations. At September 30, 2022, substantially all undrawn financing commitments were senior facilities. Most of the undrawn and available financing commitments are in the Commercial Banking segment. Financing commitments also include approximately $67 million related to off-balance sheet commitments to fund equity investments. Commitments to fund equity investments are contingent on events that have yet to occur and may be subject to change.
As financing commitments may not be fully drawn, may expire unused, may be reduced or canceled at the customer’s request, and may require the customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements.
The table above excludes uncommitted revolving credit facilities extended by Commercial Services to its clients for working capital purposes. In connection with these facilities, Commercial Services has the sole discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and whether to honor any specific advance requests made by its clients under these credit facilities.
Letters of Credit
Standby letters of credit are commitments guaranteeing performanceto pay the beneficiary thereof if drawn upon by the beneficiary upon satisfaction of a customer to a third party.the terms of the letter of credit. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as in extending loans to clients and, therefore, these letters of credit are collateralized when necessary. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets.
Deferred Purchase Agreements (“DPA”)
A DPA is provided in conjunction with factoring, whereby a client is provided with credit protection for trade receivables without purchasing the receivables. The trade receivables terms generally require payment in 90 days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, BancShares is then required to purchase the receivable from the client, less any borrowings for such client based on such defaulted receivable. The outstanding amount in the table above, less $191 million at September 30, 2022 of borrowings for such clients, is the maximum amount that BancShares would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring BancShares to purchase all such receivables from the DPA clients.
The following table presentsabove includes $2.0 billion of DPA exposures at September 30, 2022, related to receivables on which BancShares has assumed the commitmentscredit risk. The table also includes $123 million available under DPA credit line agreements provided at September 30, 2022. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period, which is typically 90 days or less.
Litigation and other Contingencies
The Parent Company and certain of its subsidiaries have been named as a defendant in legal actions arising from its normal business activities in which damages in various amounts are claimed. BancShares is also exposed to extend creditlitigation risk relating to the prior business activities of banks from which assets were acquired and standby lettersliabilities assumed.
As part of creditthe CIT Merger, BancShares assumed litigation in which CIT and CIT Bank, N.A. d/b/a OneWest Bank (“OneWest”) were named as defendants in a then existing lawsuit brought as a qui tam (i.e., whistleblower) action by a former OneWest employee on behalf of the U.S. Government. The lawsuit asserted claims related to OneWest’s participation in the Home Affordable Modification Program (“HAMP”) administered by the United States Treasury Department, as well as Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) programs. On October 15, 2019, the plaintiff filed a second amended complaint in the United States District Court for the Eastern District of Texas alleging that, beginning in 2009, CIT (and its predecessor, OneWest) falsely certified its compliance with HAMP, submitted false claims for incentive payments for loan modifications, submitted false claims for FHA and VA insurance payments, and failed to self-report these violations. Plaintiff sought the return of all U.S. Government payments to CIT under the HAMP, FHA, and VA programs. CIT has received approximately $93 million in servicer incentives under HAMP, and the U.S. Government has paid more than $440 million in the aggregate in borrower, servicer, and investor incentives in connection with loans modified by OneWest or CIT under HAMP. OneWest and CIT denied all allegations of liability.The Department of Justice declined to intervene in the case.
The parties have settled all claims for $18.5 million. On July 26, 2022, pursuant to the terms of the settlement, the parties filed a joint stipulation of dismissal with prejudice. The settlement payment of $18.5 million was paid on August 4, 2022. On August 29, 2022, the Court entered an Order dismissing the case.
BancShares is also involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory, and arbitration proceedings as well as proceedings, investigations, examinations and other actions brought or considered by governmental and self-regulatory agencies. These matters arise in connection with the ordinary conduct of BancShares’ business. At any given time, BancShares may also be in the process of responding to subpoenas, requests for documents, data and testimony relating to such matters and engaging in discussions to resolve the matters (all of the foregoing collectively being referred to as “Litigation”). While most Litigation relates to individual claims, BancShares may be subject to putative class action claims and similar broader claims and indemnification obligations.
In light of the inherent difficulty of predicting the outcome of Litigation matters and indemnification obligations, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, BancShares cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, BancShares’ establishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can reasonably be estimated. Based on currently available information, BancShares believes that the outcome of Litigation that is currently pending will not have a material adverse effect on BancShares’ financial condition, but may be material to BancShares’ operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved.
For certain Litigation matters in which BancShares is involved, BancShares is able to estimate a range of reasonably possible losses in excess of established reserves and insurance. For other matters for which a loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation and other matters where losses are reasonably possible, management currently estimates an aggregate range of reasonably possible losses of up to $10 million in excess of any established reserves and any insurance we reasonably believe we will collect related to those matters. This estimate represents reasonably possible losses (in excess of established reserves and insurance) over the life of such Litigation, which may span a currently indeterminable number of years, and is based on information currently available as of September 30, 20212022. The Litigation matters underlying the estimated range will change from time to time, and December 31, 2020:actual results may vary significantly from this estimate.
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Unused commitments to extend credit | $ | 12,775,929 | | | $ | 12,098,417 | |
Standby letters of credit | 116,302 | | | 129,819 | |
33Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent BancShares’ maximum loss exposure.
The foregoing statements about BancShares’ Litigation are based on BancShares’ judgments, assumptions, and estimates and are necessarily subjective and uncertain. In the event of Contentsunexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to BancShares’ consolidated financial position in a particular period.
NOTE 24 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CIT Northbridge Credit LLC (“Northbridge”) is an asset-based-lending joint venture between FCB (as successor to CIT Bank) and Allstate Insurance Company and its subsidiary (“Allstate”) that extends credit in asset-based lending middle-market loans. FCB holds a 20% equity investment in Northbridge, and CIT Asset Management LLC, a non-bank subsidiary of FCB, acts as an investment advisor and servicer of the loan portfolio. Allstate is an 80% equity investor. FCB’s investment was $36 million at September 30, 2022, with the expectation of additional investment as the joint venture grows. Management fees were earned on loans under management. The joint venture is not consolidated, and the investment is being accounted for using the equity method.
BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. Affordable housing projectThese investments are accounted for using the proportional amortization method. BancShares also has investments in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects and workout transactions. BancShares’ interests in these entities were $162.3entered into in the ordinary course of business that are accounted for under the equity or cost methods. Other assets included $722 million and $163.9 million as ofat September 30, 20212022 and $169 million at December 31, 2020, respectively,2021, of tax credit investments and were recorded in other assets. Unfunded commitments to fund future investments in affordable housing projects totaled $49.8 million and $53.7 million as of September 30, 2021 and December 31, 2020, respectively, and were recorded in other liabilities.
BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts were claimed. BancShares has also been exposed to litigation riskunconsolidated entities relating to the prior business activitiessuch transactions.
The combination of banks from which assets were acquiredinvestments in and liabilities assumed in the various merger transactions. Although the amountloans to unconsolidated entities represents BancShares’ maximum exposure to loss, as BancShares does not provide guarantees or other forms of any ultimate liability with respectindemnification to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.unconsolidated entities.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) of earnings and related financial data areis 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 subsidiariesbanking subsidiary, First-Citizens Bank & Trust Company (“BancShares”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 BancShares’ financial condition and results of operations from our management’s perspective. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our 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, 2020 (“2020 Annual Report”2021 (the “2021 Form 10-K”). Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2021,2022, the reclassifications had no effect on shareholders’stockholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer
Throughout this MD&A we reference specific "Notes" to our financial statements. These are Notes to the consolidated financial positionstatements in Part I, Item 1. Financial Statements.
Management uses certain non-GAAP financial measures in its analysis of the financial condition and consolidated results of operations of BancShares. See "Non-GAAP Financial Measurements" for BancShares.a reconciliation of these financial measures to the most directly comparable financial measures in accordance with GAAP.
On January 3, 2022, BancShares completed its largest acquisition to date with the merger with CIT Group Inc. (“CIT”) and its subsidiary CIT Bank, N.A., a national banking association (“CIT Bank”), pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (as amended, the “Merger Agreement”) (such acquisition, the “CIT Merger”). CIT had consolidated total assets of approximately $53.2 billion as of December 31, 2021. The CIT Merger is described further below and in Note 2 — Business Combinations. Financial data for periods prior to the CIT Merger does not include any CIT related data, and therefore is not directly comparable to the three and nine months ended September 30, 2022.
EXECUTIVE OVERVIEW
The Parent Company is a bank holding company ("BHC") and Financial Holding Company (“FHC”). BancShares is regulated by the Board of Governors of the Federal Reserve System under the U.S. Bank Holding Company Act of 1956, as amended. BancShares 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 (“NCCOB”). BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (“FCB”),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 (“FDIC”).
BancShares’ earnings and cash flows are primarily derived from ourits commercial and retail banking activities. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of BancShares. We expanded our products and services with the CIT Merger, and now have leased assets, primarily rail-related, and offer factoring services. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments.interest-earning deposits at banks. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income, which is an essential component of our total revenue.
We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people.
Refer to our 2020 Annual Report2021 Form 10-K for further discussion of our strategy.
RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS
Significant Events in 2022
CIT Merger
As discussed in detail in Note 2 — Business Combinations, the CIT Merger closed on January 3, 2022.
Significant items related to the CIT Merger are as follows:
•The fair value of total assets acquired was $53.8 billion, which mainly consisted of approximately $32.7 billion of loans, $7.8 billion of operating lease equipment and approximately $6.6 billion of investment securities. Loans consisted of commercial and industrial loans, commercial real estate loans and finance leases, which are included in our Commercial Banking segment, and consumer loans (primarily residential mortgages), which are in our General Banking segment, as further discussed below. Acquired rail assets were mostly operating lease equipment and reported in the new Rail segment.
•The fair value of deposits acquired was $39.4 billion that included deposits derived from online banking and Home Owner’s Association (“HOA”) deposits related to Community Association Banking (“CAB”), and commercial deposits. The transaction also included approximately 80 bank branches, about 60 of which were in Southern California and the remaining primarily in the Southwest, Midwest and Southeast.
•FCB assumed certain issued and outstanding series of CIT debt securities with a fair value of $4.5 billion in connection with the CIT Merger. On February 24, 2022, BancShares redeemed approximately $2.9 billion of senior unsecured notes that were assumed in the CIT Merger as part of a liability management transaction.
•FCB recorded a preliminary gain on acquisition of $431 million, representing the excess of the net assets acquired over the purchase price, and recorded a $143 million core deposit intangible and a $52 million intangible liability for net below market lessor lease contract rental rates related to the rail portfolio.
Share Repurchase Program
On July 26, 2022, our Board of Directors (the “Board”) authorized a share repurchase program for up to 1,500,000 shares of BancShares’ Class A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, we purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, we purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q for further details on these purchases.
Segment Updates
As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2020,2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a novel strainnon-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of coronavirus (“COVID-19”) spread throughoutBancShares’ operations for historical periods prior to completion of the world, causing significant disruptions to the domestic and global economies. In response to the outbreak, governments imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability. Although vaccines for COVID-19 have been made available to the general publicCIT Merger are included in the United StatesGeneral Banking segment. The Commercial Banking and many places aroundRail segments primarily relate to operations acquired in the world, vaccination rates vary and effectiveness may decrease over time. We cannot predict how widely utilized the vaccines and boosters will be or whether and for how long they will be effective in preventing the spread of COVID-19 (including its variants).CIT Merger.
Although we cannot predict when or if normal economic activityInformation about our segments is included in Note 22 — Business Segment Information and business operations will resume, we observed general declines in the level of economic uncertainty and stabilization of macroeconomic forecasts during the first three quarters of 2021. The US experienced an upticksection entitled “Results by Business Segments” later in the number of new cases during the third quarter of 2021. We are unable to predict whether these trends will continue and how this will affect the overall economy at the current time. However, we remain vigilant in our review and monitoring efforts around the duration and severity of the COVID-19 pandemic (including any of its variants) and its effects on the overall economy and our financial results.MD&A.
DuringFinancial Performance Summary
The following table summarizes the third quarter of 2021, the Federal Reserve’s Federal Open Market Committee (“FOMC”) maintained the federal funds rate at a target range of 0.00% to 0.25%. The FOMC acknowledged the economy’s accelerating recovery from the COVID-19 pandemic, but maintained that the recovery is incomplete and economic risks remain. The FOMC expects to maintain this target range, but rate hikes are expectedBancShares’ results in late 2022 or early 2023. Further, the committee suggested that they will begin tapering asset purchases, potentially as early as the fourth quarter of 2021 if economic progress continues as expected.
In responseaccordance with U.S. GAAP, unless otherwise noted. Refer to the COVID-19 pandemic,section entitled “Non-GAAP Financial Measurements” at the Small Business Administration Paycheck Protection Program (“SBA-PPP”) was established throughend of this MD&A for a reconciliation of non-GAAP measures to the Coronavirus Aid Reliefmost directly comparable GAAP measures.
Additionally, due to the CIT Merger, current quarter and Economic Security Act (the “CARES Act”)year-to-date activity and ending and average balances are not comparable to the Consolidated Appropriations Act 2021 to direct aid via loans to small businesses impacted by the COVID-19 pandemic.
We completed the first round of SBA-PPP funding in the second half 2020 and the second round of funding duringperiods. Beginning with the second quarter of 2021. As2022, we presented a linked quarter comparison in the discussions of September 30, 2021, there were $1.1 billion SBA-PPP loans outstanding with remaining net deferred feesour consolidated results of $39.4 million.
With respectoperations and consolidated financial position, as permitted by applicable rules of the Securities and Exchange Commission. We believe this provides relevant information to our investors relating to our performance due to the first roundinclusion of SBA-PPP, we began accepting and processing applications for forgiveness during the third quarterCIT Merger in both quarters. Further discussions are included in the remaining sections of 2020. As of September 30, 2021, we have received approximately 98% of forgiveness decisions from the SBA to date, representing over $3.1 billion in forgiveness payments.this MD&A.
Table 1
Selected Quarterly Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions, except share data | Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
SUMMARY OF OPERATIONS | | | | | | | | | |
Interest income | $ | 906 | | | $ | 757 | | | $ | 363 | | | $ | 2,373 | | | $ | 1,080 | |
Interest expense | 111 | | | 57 | | | 16 | | | 229 | | | 47 | |
Net interest income | 795 | | | 700 | | | 347 | | | 2,144 | | | 1,033 | |
Provision (benefit) for credit losses | 60 | | | 42 | | | (1) | | | 566 | | | (32) | |
Net interest income after provision for credit losses | 735 | | | 658 | | | 348 | | | 1,578 | | | 1,065 | |
Noninterest income | 433 | | | 424 | | | 124 | | | 1,707 | | | 394 | |
Noninterest expense | 760 | | | 745 | | | 314 | | | 2,315 | | | 911 | |
Income before income taxes | 408 | | | 337 | | | 158 | | | 970 | | | 548 | |
Income taxes | 93 | | | 82 | | | 34 | | | 129 | | | 124 | |
Net income | 315 | | | 255 | | | 124 | | | 841 | | | 424 | |
Preferred stock dividends | 12 | | | 17 | | | 5 | | | 36 | | | 14 | |
Net income available to common stockholders | $ | 303 | | | $ | 238 | | | $ | 119 | | | $ | 805 | | | $ | 410 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
PER COMMON SHARE DATA | | | | | | | | | |
Average diluted common shares | 15,727,993 | | | 16,035,090 | | | 9,816,405 | | | 15,867,314 | | | 9,816,405 | |
Net income available to common stockholders (diluted) | $ | 19.25 | | | $ | 14.86 | | | $ | 12.17 | | | $ | 50.70 | | | $ | 41.79 | |
| | | | | | | | | |
Book value per common share | $ | 597.75 | | | $ | 609.95 | | | $ | 432.07 | | | $ | 597.75 | | | $ | 432.07 | |
| | | | | | | | | |
| | | | | | | | | |
KEY PERFORMANCE METRICS | | | | | | | | | |
Return on average assets (ROA) | 1.16 | % | | 0.95 | % | | 0.88 | % | | 1.03 | % | | 1.05 | % |
| | | | | | | | | |
Return on average common stockholders' equity (ROE) | 12.49 | % | | 9.87 | % | | 11.29 | % | | 11.18 | % | | 13.50 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net interest margin (NIM)(1) | 3.40 | % | | 3.04 | % | | 2.61 | % | | 3.06 | % | | 2.69 | % |
| | | | | | | | | |
SELECTED QUARTERLY AVERAGE BALANCES | | | | | | | | | |
Total investments | $ | 19,119 | | | $ | 19,185 | | | $ | 10,708 | | | $ | 19,264 | | | $ | 10,337 | |
Total loans and leases(2) | 68,824 | | | 66,488 | | | 32,708 | | | 66,885 | | | 32,985 | |
Total operating lease equipment (net) | 7,981 | | | 7,973 | | | — | | | 7,960 | | | — | |
Total assets | 107,987 | | | 107,575 | | | 55,922 | | | 108,643 | | | 53,927 | |
Total deposits | 88,422 | | | 90,621 | | | 49,107 | | | 90,209 | | | 47,254 | |
Total common stockholders' equity | 9,618 | | | 9,686 | | | 4,197 | | | 9,622 | | | 4,063 | |
| | | | | | | | | |
| | | | | | | | | |
SELECTED QUARTER-END BALANCES | | | | | | | | | |
Total investments | $ | 18,841 | | | $ | 19,136 | | | $ | 10,875 | | | $ | 18,841 | | | $ | 10,875 | |
Total loans and leases | 69,790 | | | 67,735 | | | 32,516 | | | 69,790 | | | 32,516 | |
Total operating lease equipment (net) | 7,984 | | | 7,971 | | | — | | | 7,984 | | | — | |
Total assets | 109,310 | | | 107,673 | | | 56,902 | | | 109,310 | | | 56,902 | |
Total deposits | 87,553 | | | 89,329 | | | 50,065 | | | 87,553 | | | 50,065 | |
Total common stockholders' equity | 8,952 | | | 9,761 | | | 4,242 | | | 8,952 | | | 4,242 | |
| | | | | | | | | |
Loan to deposit ratio | 79.71 | % | | 75.83 | % | | 64.95 | % | | 79.71 | % | | 64.95 | % |
Noninterest-bearing deposits to total deposits | 30.37 | % | | 29.75 | % | | 42.97 | % | | 30.37 | % | | 42.97 | % |
| | | | | | | | | |
CAPITAL RATIOS | | | | | | | | | |
Common equity tier 1 ratio | 10.37 | % | | 11.35 | % | | 11.34 | % | | 10.37 | % | | 11.34 | % |
Tier 1 risk-based capital ratio | 11.36 | % | | 12.37 | % | | 12.32 | % | | 11.36 | % | | 12.32 | % |
Total risk-based capital ratio | 13.46 | % | | 14.46 | % | | 14.30 | % | | 13.46 | % | | 14.30 | % |
Tier 1 leverage capital ratio | 9.31 | % | | 9.85 | % | | 7.68 | % | | 9.31 | % | | 7.68 | % |
| | | | | | | | | |
| | | | | | | | | |
ASSET QUALITY | | | | | | | | | |
Ratio of nonaccrual loans to total loans | 0.65 | % | | 0.76 | % | | 0.50 | % | | 0.65 | % | | 0.50 | % |
Allowance for credit losses to loans ratio | 1.26 | % | | 1.26 | % | | 0.56 | % | | 1.26 | % | | 0.56 | % |
Net charge off ratio | 0.10 | % | | 0.13 | % | | 0.06 | % | | 0.11 | % | | 0.04 | % |
With respect to the second round(1) The rate presented is calculated net of SBA-PPP, we began acceptingaverage credit balances of factoring clients.
(2) Average loan balances include held for sale and processing applications for forgiveness during the third quarter of 2021.As of September 30, 2021, we have received approximately 14% of forgiveness decisions from the SBA, representing over $175 million in forgiveness payments.non-accrual loans.
Table 1
SBA-PPP LOAN FORGIVENESS STATUS
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | |
| Round 1 | | Round 2 |
Status | $ of Loans | | % of Round Total | | $ of Loans | | % of Round Total |
Total Funded | $ | 3,199,897 | | | 100.0 | % | | $ | 1,223,797 | | | 100.0 | % |
Payments Received | 3,121,746 | | | 97.6 | | | 175,660 | | | 14.4 | |
Total Remaining | $ | 78,151 | | | 2.4 | % | | $ | 1,048,137 | | | 85.6 | % |
Through
Third Quarter Income Statement Highlights
For the three months ended September 30, 2021, over 99% of all COVID-19-related loan extensions have begun repayment. Delinquency trends among loans entering repayment are in line with the remainder of the portfolio, and we have not seen significant declines in overall credit quality.
SIGNIFICANT EVENTS IN 2021
On October 15, 2020, BancShares and CIT Group Inc., a Delaware corporation (“CIT”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB (“Merger Sub”), and CIT, the parent company of CIT Bank, N.A., a national banking association (“CIT Bank”). Pursuant2022 compared to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the “First-Step Merger”), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the “Mergers”). The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the “Transaction”).
The Merger Agreement was unanimously approved by the Board of Directors of each of BancShares and CIT. The Transaction has been approved by the shareholders of both companies and has received regulatory approval from the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporationthree months ended June 30, 2022 (“FDIC”).
On September 30, 2021, the parties entered into an amendment to the merger agreement pursuant to which the parties mutually agreed to extend until March 1, 2022 the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed. Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System and both parties are committed to continuing to seek such approval. The parties have responded to all questions issued by the Staff of the Federal Reserve Board, and the Staff has informed us that they do not have further questions at this time. The parties have been informed that the application is presently at the Governor level, but the Board of Governors has not provided a time frame for its decision on the application. Closing is expected to occur as soon as practicable following receipt of such approval and the satisfaction or waiver of other customary closing conditions.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”), each share of CIT common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (“CIT Common Stock”), except for certain shares of CIT Common Stock owned by CIT or BancShares, will be converted into the right to receive 0.06200 shares of BancShares Class A common stock, par value $1.00 per share. Holders of CIT Common Stock will receive cash in lieu of fractional shares.
In addition, at the Effective Time, each share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, of CIT and 5.625% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, of CIT issued and outstanding will automatically be converted into the right to receive one share of a newly created series of preferred stock, Series B, of BancShares and one share of a newly created series of preferred stock, Series C, of BancShares, respectively.
The Merger Agreement requires that, effective as of the Effective Time, the Boards of Directors of the combined company and the combined bank will consist of 14 directors, (i) 11 of whom will be members of the current Board of Directors of BancShares, and (ii) three of whom will be selected from among the current Board of Directors of CIT and will include as one of those three Ellen R. Alemany, Chairwoman and Chief Executive Officer of CIT. We intend to appoint Michael A. Carpenter and Vice Admiral John R. Ryan, USN (Ret.), as the two other members from CIT’s current Board of Directors who will join the Boards of Directors of the combined company and the combined bank.
FINANCIAL PERFORMANCE SUMMARY
Third Quarter Highlightslinked quarter” comparisons):
•Net income for the third quarterthree months ended September 30, 2022 was $315 million, an increase of 2021 was $124.1 million, a decrease of $18.6$60 million, or 13.0%23% compared to the same quarter in 2020.linked quarter. The increase was primarily due to higher net interest income, partially offset by higher provision for credit losses and operating expenses. Net income available to common shareholders totaled $119.4 millionstockholders for the third quarterthree months ended September 30, 2022 totaled $303 million, an increase of 2021.$65 million, or 27% compared to the linked quarter. Net income per diluted common share decreased $1.86, or 13.3%, to $12.17 infor the third quarterthree months ended September 30, 2022 was $19.25, an increase of 2021, from $14.03 per share during30% over the comparable quarter in 2020.linked quarter.
•Return on average assets for the third quarter of 2021three months ended September 30, 2022 was 0.88%1.16%, down from 1.18% in the third quarter of 2020. Return on average equitycompared to 0.95% for the third quarter of 2021 was 11.29%, down from 14.93% during the comparable quarter of 2020.three months ended June 30, 2022.
•Net interest income was $346.9 million (“NII”) for the third quarterthree months ended September 30, 2022 was $795 million, an increase of 2021, a decrease of $6.8$95 million, or 1.9%13% compared to the same quarter in 2020, butthree months ended June 30, 2022. This was relatively stable comparedprimarily due to the second quarter of 2021.loan growth, higher yields on loans and overnight investments, and higher purchase accounting accretion, partially offset by higher costs on interest-bearing deposits and borrowings. The taxable-equivalent net interest margin (“NIM”) was 2.61% for the third quarterthree months ended September 30, 2022 was 3.40%, an increase of 2021, a decrease of 45 basis points36 bps from 3.06%3.04% for the third quarter in 2020three months ended June 30, 2022, reflecting the rising interest rate environment that increased yields on our earning assets, partially offset by a higher rate paid on interest-bearing deposits and a decrease of 7 basis points from 2.68% from the second quarter of 2021.borrowings.
•Provision for credit losses for the three months ended September 30, 2022 was $60 million compared to a benefitprovision of $1.1$42 million for the third quarter of 2021 compared to an expense of $4.0 million forthree months ended June 30, 2022. The increase reflects moderate deterioration in the same quartermacroeconomic forecast used in 2020.the CECL forecasting process and loan portfolio growth, partially offset by benefits from improved credit quality and portfolio mix. The net charge-off ratio was 0.06% for the third quarter of 2021, upthree months ended September 30, 2022 was 0.10%, down from 0.02%0.13% for the second quarter of 2021 and 0.03% for the third quarter of 2020.three months ended June 30, 2022.
•Noninterest income for the three months ended September 30, 2022 was $122.9$433 million, compared to $424 million for the third quarter of 2021, anthree months ended June 30, 2022. The increase of $2.4 million, or 2.0%, compared to $120.6 million for the same quarter of 2020.included higher rental income on operating lease equipment, higher capital markets fees revenue, and various other miscellaneous income items, partially offset by lower service charges on deposit accounts.
•Noninterest expense for the three months ended September 30, 2022 was $312.8$760 million, compared to $745 million in the three months ended June 30, 2022. The increase of $15 million primarily reflects higher personnel costs and higher marketing expenses due to digital marketing efforts, partially offset by lower FDIC insurance expense and professional fees.
•Select items in the current and linked quarters include:
•For the three months ended September 30, 2022:
•A settlement gain related to returned equipment in other non-interest income of $5 million.
•Impairment charge in noninterest expense of $5 million related to the closure of an office facility.
•CIT Merger-related expenses of $33 million in noninterest expense.
•For the three months ended June 30, 2022:
•Gain on sale of corporate aircraft acquired in the CIT Merger of $6 million in other noninterest income.
•CIT Merger-related expenses of $34 million in noninterest expense.
For the three months ended September 30, 2022 compared to the three months ended September 30, 2021:
•Net income for the three months ended September 30, 2022 was $315 million, an increase of $191 million, or 154% compared to the three months ended September 30, 2021. Net income available to common stockholders for the three months ended September 30, 2022 totaled $303 million, an increase of $184 million, or 154% compared to the three months ended September 30, 2021. Net income per diluted common share for the three months ended September 30, 2022 was $19.25, an increase of 58% over the three months ended September 30, 2021.
•Select items for the three months ended September 30, 2022 are mentioned above.
•Return on average assets for the three months ended September 30, 2022 was 1.16%, compared to 0.88% in the same quarter in 2021.
•NII was $795 million for the third quarter of 2021,three months ended September 30, 2022, an increase of $21.2$448 million, or by 7.3%129% compared to the same quarter of 2020.
•The allowance for credit losses was $183.2 million atthree months ended September 30, 2021, compared2021. This was primarily due to $189.1 million at Junethe CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a decline in interest income on SBA-PPP loans. NIM was 3.40% for the three months ended September 30, 2021. The $5.9 million change was due primarily to a reserve release2022, an increase of 79 bps from 2.61% for the three months ended September 30, 2021, driven by continued strong credit performance, low net charge-offs,reflecting higher interest rate environment and improvementthe assets acquired and liabilities assumed in macroeconomic factors.the CIT Merger.
•Total loans were $32.5 billion asProvision for credit losses for the three months ended September 30, 2022 was $60 million, compared to a benefit of $1 million for the three months ended September 30, 2021, primarily due to the CIT Merger, as well as moderate deterioration in the macroeconomic forecast used in the CECL forecasting process and loan growth, compared to a decreasereserve release in the third quarter of $173.5 million, or by 2.1% on an annualized basis, since June2021. The net charge-off ratio for the three months ended September 30, 2021. Excluding loans originated under2022 was 0.10%, up from 0.06% for the SBA-PPP, total loans increased $437.4 million, or by 5.6% on an annualized basis, since Junethree months ended September 30, 2021.
•Total deposits grewNoninterest income for the three months ended September 30, 2022 was $433 million, compared to $50.1 billion, an$124 million for the three months ended September 30, 2021. The largest component of the increase of $1.7 billion, orwas rental income on operating leases totaling $219 million. The remaining increase was driven primarily by 13.6% on an annualized basis, since June 30, 2021.the added activity due to the CIT Merger.
•AtNoninterest expense for the three months ended September 30, 2021, BancShares remained “well-capitalized”2022was $760 million, compared to $314 million for the three months ended September 30, 2021. The increase is associated with higher expenses for the combined company, led by higher salaries and benefit costs of $157 million due to the increase in employees and certain new costs, such as defined by regulatory standards$139 million of depreciation and maintenance costs associated with a total risk-based capital ratio of 14.3%, a Tier 1 risk-based capital of 12.3%, a common equity Tier 1 ratio of 11.3% and a leverage ratio of 7.7%.the operating lease portfolio.
Year to Date Income Statement Highlights
•Net income for the nine months ended September 30, 2021 totaled $424.22022 was $841 million, an increase of $70.5$417 million, or 19.9%98% compared to the same period in 2020.2021. Net income available to common shareholders totaled $410.3 million. Earnings per share increased $7.83, or 23.1%, to $41.79stockholders for the nine months ended September 30, 2021, from $33.96 during2022 totaled $805 million, an increase of $395 million, or 96% compared to the comparablesame period in 2020.2021. Net income per diluted common share for the nine months ended September 30, 2022 was $50.70, an increase 21% over the same period in 2021. The increases are primarily attributed to the CIT Merger.
•Return on average assets for the nine months ended September 30, 20212022 was 1.05%1.03%, consistent withcompared to 1.05% in the same period in 2020. Return on average equity2021.
•NII for the nine months ended September 30, 20212022 was 13.50%, up 91 basis points$2,144 million, an increase of $1,111 million, or 108% compared to the same period in 2020.
•Net2021. This was primarily due to the CIT Merger, as well as loan growth and a higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans. NIM for the nine months ended September 30, 2021,2022 was $1.0 billion,3.06%, an increase of $3.5 million, or 0.3% compared to37 bps from 2.69% for the same period of 2020. The taxable-equivalent NIM was 2.69%in 2021.
•Provision for credit losses for the nine months ended September 30, 2021, a decrease of 54 basis points from 3.23% during the comparable period of 2020.
•Provision for credit losses2022 was $566 million, compared to a benefit of $31.7$32 million for the same period in 2021. The provision in 2022 included the day 2 CECL provision of $513 million, and reflects the CIT Merger, as well as moderate deterioration in the macroeconomic forecast used in the CECL forecasting process and loan growth. The net charge-off ratio for the nine months ended September 30, 2021, compared to $52.9 million in expense2022 was 0.11%, up from 0.04% for the same period in 2020. The net charge-off ratio was 0.04%2021.
•Noninterest income for the nine months ended September 30, 2021, a 3 basis point decrease2022 was $1,707 million, compared to $394 million for the same period in 2021. The nine months ended September 30, 2022 includes a preliminary gain on acquisition of 2020.$431 million and rental income on operating leases of $640 million. The remaining increase was primarily driven by the added activity due to the CIT Merger.
•Noninterest income was $393.7 million expense for the nine months ended September 30, 2021, an increase of $43.82022 was $2,315 million, or 12.5%, compared to $350.0$911 million for the same quarterperiod in 2021. The increase is primarily associated with the CIT Merger, including higher salaries and benefit costs of 2020.$478 million due to the increase in employees, $399 million of depreciation and maintenance costs associated with the operating lease portfolio and higher merger-related costs of $182 million.
•Noninterest expense was $910.3 millionSelect items for the nine months ended September 30, 2021,2022 are as follows:
•Current expected credit losses (“CECL”) day 2 provision for loans and leases and unfunded commitments of $513 million.
•Preliminary gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price.
•Gain on sale of corporate aircraft acquired in the CIT Merger of $6 million in other noninterest income.
•Gain on debt redemptions in noninterest income of $6 million from $2.9 billion of borrowings assumed in the CIT Merger.
•Merger-related expenses of $202 million in noninterest expenses.
•A reduction in other noninterest expense of $27 million related to the termination of certain legacy CIT retiree benefits, reflecting amounts previously accrued.
Balance Sheet Highlights
•Total loans and leases at September 30, 2022 were $69.8 billion, an increase of $27.0 million$2.1 billion or by 3.1% compared12.0% annualized, from June 30, 2022. We continued to see growth in our branch network, as well as growth in our commercial bank from a number of our industry verticals, such as healthcare and technology, and small business lending, and growth in both commercial mortgage loans and consumer mortgage loans. Total loans and leases increased $37.4 billion from December 31, 2021, primarily reflecting the same quarteraddition of 2020.$32.7 billion from the CIT Merger.
•The allowance for credit losses was $183.2 million Total deposits at September 30, 2021,2022 were $87.6 billion, a decrease of $1.8 billion or 7.9% annualized, from June 30, 2022. Total deposits declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the target federal funds rate. The decline in total deposits as compared to $224.3 million atJune 30, 2022 was primarily concentrated in acquired branches and commercial banking, partially offset by growth in our Direct Bank. Total deposits increased $36.1 billion from December 31, 2020.2021, reflecting the addition of $39.4 billion from the CIT Merger, partially offset by the noted declines.
•At September 30, 2022, BancShares remained well capitalized with a total risk-based capital ratio of 13.46%, a Tier 1 risk-based capital of 11.36%, a common equity Tier 1 ratio of 10.37% and a leverage ratio of 9.31%.
Recent Economic and Industry Developments
Throughout 2022, the Federal Reserve’s Federal Open Market Committee (“FOMC”) has significantly raised its target for the federal funds rate in an effort to combat rising inflation. The $41.1 million change was due primarilyFOMC raised interest rates at its March, May, June, July and September meetings by 25, 50, 75, 75 and 75 basis points, respectively. With the latest increase at the September meeting, the FOMC raised their benchmark federal funds rate to a reserve releaserange between 3.00% - 3.25%. Possible further increases could be made at their remaining meetings in November and December 2022. The FOMC’s efforts to control inflation has increased concerns over the possibility of a recession within the next twelve months. In addition, geopolitical events, including the ongoing conflict between Russia and Ukraine and related events, are likely to create additional upward pressure on inflation and weigh on economic activity. The timing and impact of inflation, continued volatility in the stock market, rising interest rates and possible recession will depend on future developments, which are highly uncertain and difficult to predict.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
NII is the difference between interest income earned on assets such as loans, leases, securities and cash, and interest expense incurred on liabilities such as deposits and borrowings and is included as a line item on the Consolidated Statements of Income. NII for the three months ended September 30, 2022 was $795 million, up from $700 million in the three months ended June 30, 2022, and up from $347 million for the three months ended September 30, 2021. NII for the nine months ended September 30, 2021 driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors.
•Total loans were $32.5 billion, a decrease of $275.8 million since December 31, 2020. Excluding SBA-PPP loans, total loans increased $1.0 billion, or by 4.6% on an annualized basis, since December 31, 2020.
•Total deposits grew to $50.12022 was $2.14 billion, an increase of $6.6$1.11 billion, since December 31, 2020 or 108% from $1.03 billion in the same period in 2021.
NII is affected by 20.4%changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The following table presents the average balance sheet and related rates, along with disaggregated quarter-over-quarter changes in NII between volume (level of lending, investing or borrowing) and rate (rates charged to customers, received on an annualized basis.investments or incurred on borrowings). Volume change is calculated as change in volume times the previous rate, while rate change is calculated as change in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Tax equivalent net interest income was not materially different from NII, therefore we present NII in our analysis.
Table 2
SELECTED QUARTERLY DATAAverage Balances and Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | Nine months ended September 30 |
| Third | | Second | | First | | Fourth | | Third | |
(Dollars in thousands, except share data) | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | 2021 | | 2020 |
SUMMARY OF OPERATIONS | | | | | | | | | | | | | |
Interest income | $ | 361,855 | | | $ | 361,825 | | | $ | 355,323 | | | $ | 376,876 | | | $ | 374,334 | | | $ | 1,079,003 | | | $ | 1,107,150 | |
Interest expense | 14,968 | | | 15,432 | | | 15,671 | | | 18,160 | | | 20,675 | | | 46,071 | | | 77,697 | |
Net interest income | 346,887 | | | 346,393 | | | 339,652 | | | 358,716 | | | 353,659 | | | 1,032,932 | | | 1,029,453 | |
Provision (credit) for credit losses | (1,120) | | | (19,603) | | | (10,974) | | | 5,403 | | | 4,042 | | | (31,697) | | | 52,949 | |
Net interest income after provision for credit losses | 348,007 | | | 365,996 | | | 350,626 | | | 353,313 | | | 349,617 | | | 1,064,629 | | | 976,504 | |
| | | | | | | | | | | | | |
Noninterest income | 122,944 | | | 134,150 | | | 136,649 | | | 126,765 | | | 120,572 | | | 393,743 | | | 349,985 | |
Noninterest expense | 312,818 | | | 301,578 | | | 295,926 | | | 305,373 | | | 291,662 | | | 910,322 | | | 883,312 | |
Income before income taxes | 158,133 | | | 198,568 | | | 191,349 | | | 174,705 | | | 178,527 | | | 548,050 | | | 443,177 | |
Income taxes | 34,060 | | | 45,780 | | | 44,033 | | | 36,621 | | | 35,843 | | | 123,873 | | | 89,538 | |
Net income | 124,073 | | | 152,788 | | | 147,316 | | | 138,084 | | | 142,684 | | | 424,177 | | | 353,639 | |
Net income available to common shareholders | $ | 119,437 | | | $ | 148,152 | | | $ | 142,680 | | | $ | 133,448 | | | $ | 138,048 | | | $ | 410,269 | | | $ | 344,213 | |
Net interest income, taxable equivalent | $ | 347,451 | | | $ | 347,035 | | | $ | 340,271 | | | $ | 359,370 | | | $ | 354,256 | | | $ | 1,034,758 | | | $ | 1,031,395 | |
PER COMMON SHARE DATA | | | | | | | | | | | | | |
Net income | $ | 12.17 | | | $ | 15.09 | | | $ | 14.53 | | | $ | 13.59 | | | $ | 14.03 | | | $ | 41.79 | | | $ | 33.96 | |
Cash dividends on common shares | 0.47 | | | 0.47 | | | 0.47 | | | 0.47 | | | 0.40 | | | 1.41 | | | 1.20 | |
Market price at period end (Class A) | 843.17 | | | 832.74 | | | 835.77 | | | 574.27 | | | 318.78 | | | 843.17 | | | 318.78 | |
Book value per share at period-end | 432.07 | | | 421.39 | | | 405.59 | | | 396.21 | | | 380.43 | | | 432.07 | | | 380.43 | |
SELECTED QUARTERLY AVERAGE BALANCES | | | | | | | | | | | | |
Total assets | $ | 55,922,358 | | | $ | 54,399,331 | | | $ | 51,409,634 | | | $ | 49,557,803 | | | $ | 48,262,155 | | | $ | 53,926,971 | | | $ | 44,834,045 | |
Investment securities | 10,707,519 | | | 10,534,348 | | | 9,757,650 | | | 9,889,124 | | | 9,930,197 | | | 10,336,652 | | | 8,774,840 | |
Loans and leases (1) | 32,707,591 | | | 33,166,049 | | | 33,086,656 | | | 32,964,390 | | | 32,694,996 | | | 32,985,376 | | | 31,148,683 | |
Interest-earning assets | 52,371,165 | | | 51,519,684 | | | 48,715,279 | | | 46,922,823 | | | 45,617,376 | | | 50,882,100 | | | 42,151,861 | |
Deposits | 49,107,087 | | | 47,751,103 | | | 44,858,198 | | | 43,123,312 | | | 41,905,844 | | | 47,254,360 | | | 38,612,836 | |
Interest-bearing liabilities | 29,662,791 | | | 28,909,320 | | | 27,898,525 | | | 26,401,222 | | | 25,591,707 | | | 28,830,007 | | | 24,388,339 | |
Securities sold under customer repurchase agreements | 672,114 | | | 677,451 | | | 641,236 | | | 684,311 | | | 710,237 | | | 663,713 | | | 614,920 | |
Other short-term borrowings | — | | | — | | | — | | | — | | | — | | | — | | | 67,522 | |
Long-term borrowings | 1,222,452 | | | 1,227,755 | | | 1,235,576 | | | 1,250,682 | | | 1,256,331 | | | 1,228,546 | | | 1,164,475 | |
Common shareholders' equity | 4,196,655 | | | 4,058,236 | | | 3,935,267 | | | 3,786,158 | | | 3,679,138 | | | 4,063,386 | | | 3,651,132 | |
Shareholders’ equity | $ | 4,536,592 | | | $ | 4,398,173 | | | $ | 4,275,204 | | | $ | 4,126,095 | | | $ | 4,019,075 | | | $ | 4,403,323 | | | $ | 3,896,645 | |
Common shares outstanding | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,836,629 | | | 9,816,405 | | | 10,137,321 | |
SELECTED QUARTER-END BALANCES | | | | | | | | | | | | |
Total assets | $ | 56,901,977 | | | $ | 55,175,318 | | | $ | 53,908,606 | | | $ | 49,957,680 | | | $ | 48,666,873 | | | $ | 56,901,977 | | | $ | 48,666,873 | |
Investment securities | 10,875,354 | | | 10,894,227 | | | 10,222,107 | | | 9,922,905 | | | 9,860,594 | | | 10,875,354 | | | 9,860,594 | |
Loans and leases | 32,516,189 | | | 32,689,652 | | | 33,180,851 | | | 32,791,975 | | | 32,845,144 | | | 32,516,189 | | | 32,845,144 | |
Deposits | 50,065,762 | | | 48,410,596 | | | 47,330,997 | | | 43,431,609 | | | 42,250,606 | | | 50,065,762 | | | 42,250,606 | |
Securities sold under customer repurchase agreements | 663,575 | | | 692,604 | | | 680,705 | | | 641,487 | | | 693,889 | | | 663,575 | | | 693,889 | |
Other short-term borrowings | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Long-term borrowings | 1,219,229 | | | 1,224,488 | | | 1,230,326 | | | 1,248,163 | | | 1,252,016 | | | 1,219,229 | | | 1,252,016 | |
Shareholders’ equity | $ | 4,581,295 | | | $ | 4,476,490 | | | $ | 4,321,400 | | | $ | 4,229,268 | | | $ | 4,074,414 | | | $ | 4,581,295 | | | $ | 4,074,414 | |
Common shares outstanding | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,816,405 | | | 9,816,405 | |
SELECTED RATIOS AND OTHER DATA | | | | | | | | | | | | |
Return on average assets (annualized) | 0.88 | % | | 1.13 | % | | 1.16 | % | | 1.11 | % | | 1.18 | % | | 1.05 | % | | 1.05 | % |
Return on average common shareholders’ equity (annualized) | 11.29 | | | 14.64 | | | 14.70 | | | 14.02 | | | 14.93 | | | 13.50 | | | 12.59 | |
Net yield on interest-earning assets (taxable equivalent) | 2.61 | | | 2.68 | | | 2.80 | | | 3.02 | | | 3.06 | | | 2.69 | | | 3.23 | |
Net charge-offs to average loans and leases (annualized) | 0.06 | | | 0.02 | | | 0.03 | | | 0.06 | | | 0.03 | | | 0.04 | | | 0.07 | |
Allowance for credit losses to total loans and leases(2): | | | | | | | | | | | | | |
PCD | 4.94 | | | 4.73 | | | 5.30 | | | 5.18 | | | 5.07 | | | 4.94 | | | 5.07 | |
Non-PCD | 0.51 | | | 0.53 | | | 0.57 | | | 0.62 | | | 0.61 | | | 0.51 | | | 0.61 | |
Total | 0.56 | | | 0.58 | | | 0.63 | | | 0.68 | | | 0.68 | | | 0.56 | | | 0.68 | |
Ratio of total nonperforming assets to total loans, leases and other real estate owned | 0.63 | | | 0.71 | | | 0.73 | | | 0.74 | | | 0.73 | | | 0.63 | | | 0.73 | |
Total risk-based capital ratio | 14.30 | | | 14.15 | | | 14.14 | | | 13.81 | | | 13.70 | | | 14.30 | | | 13.70 | |
Tier 1 risk-based capital ratio | 12.32 | | | 12.13 | | | 12.02 | | | 11.63 | | | 11.48 | | | 12.32 | | | 11.48 | |
Common equity Tier 1 ratio | 11.34 | | | 11.14 | | | 11.00 | | | 10.61 | | | 10.43 | | | 11.34 | | | 10.43 | |
Tier 1 leverage capital ratio | 7.68 | | | 7.67 | | | 7.84 | | | 7.86 | | | 7.80 | | | 7.68 | | | 7.80 | |
Dividend payout ratio | 3.86 | | | 3.11 | | | 3.23 | | | 3.46 | | | 2.85 | | | 3.37 | | | 3.53 | |
Average loans and leases to average deposits | 66.60 | | | 69.46 | | | 73.76 | | | 76.44 | | | 78.02 | | | 69.80 | | | 80.67 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | | | | | |
| September 30, 2022 | | June 30, 2022 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 67,733 | | | $ | 785 | | | 4.58 | % | | $ | 65,298 | | | $ | 655 | | | 4.01 | % | | $ | 28 | | | $ | 102 | | | $ | 130 | |
Total investment securities | 19,119 | | | 90 | | | 1.88 | | | 19,185 | | | 89 | | | 1.85 | | | — | | | 1 | | | 1 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 5,685 | | | 31 | | | 2.17 | | | 7,629 | | | 13 | | | 0.72 | | | (4) | | | 22 | | | 18 | |
Total interest-earning assets (2) | $ | 92,537 | | | $ | 906 | | | 3.87 | % | | $ | 92,112 | | | $ | 757 | | | 3.28 | % | | $ | 24 | | | $ | 125 | | | $ | 149 | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | 7,981 | | | | | | | $ | 7,973 | | | | | | | | | | | |
Cash and due from banks | 489 | | | | | | | 524 | | | | | | | | | | | |
Allowance for credit losses | (851) | | | | | | | (849) | | | | | | | | | | | |
All other noninterest-earning assets | 7,831 | | | | | | | 7,815 | | | | | | | | | | | |
Total assets | $ | 107,987 | | | | | | | $ | 107,575 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 16,160 | | | $ | 7 | | | 0.17 | % | | $ | 16,503 | | | $ | 4 | | | 0.12 | % | | $ | 1 | | | $ | 2 | | | $ | 3 | |
Money market | 22,993 | | | 32 | | | 0.55 | | | 25,468 | | | 18 | | | 0.28 | | | (2) | | | 16 | | | 14 | |
Savings | 13,956 | | | 28 | | | 0.78 | | | 13,303 | | | 11 | | | 0.34 | | | 1 | | | 16 | | | 17 | |
Time deposits | 8,436 | | | 11 | | | 0.54 | | | 8,796 | | | 9 | | | 0.38 | | | (1) | | | 3 | | | 2 | |
Total interest-bearing deposits | 61,545 | | | 78 | | | 0.50 | | | 64,070 | | | 42 | | | 0.26 | | | (1) | | | 37 | | | 36 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 617 | | | 1 | | | 0.16 | | | 627 | | | — | | | 0.16 | | | 1 | | | — | | | 1 | |
Short-term FHLB borrowings | 1,188 | | | 8 | | | 2.57 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Short-term borrowings | 1,805 | | | 9 | | | 1.74 | | | 627 | | | — | | | 0.16 | | | 9 | | | — | | | 9 | |
Federal Home Loan Bank borrowings | 1,784 | | | 11 | | | 2.45 | | | 386 | | | 2 | | | 1.64 | | | 8 | | | 1 | | | 9 | |
Senior unsecured borrowings | 898 | | | 5 | | | 2.00 | | | 894 | | | 4 | | | 2.05 | | | 1 | | | — | | | 1 | |
Subordinated debt | 1,054 | | | 8 | | | 3.21 | | | 1,057 | | | 8 | | | 3.06 | | | — | | | — | | | — | |
Other borrowings | 67 | | | — | | | 4.51 | | | 83 | | | 1 | | | 2.46 | | | (1) | | | — | | | (1) | |
Long-term borrowings | 3,803 | | | 24 | | | 2.59 | | | 2,420 | | | 15 | | | 2.43 | | | 8 | | | 1 | | | 9 | |
Total borrowings | 5,608 | | | 33 | | | 2.32 | | | 3,047 | | | 15 | | | 1.96 | | | 17 | | | 1 | | | 18 | |
Total interest-bearing liabilities | $ | 67,153 | | | $ | 111 | | | 0.65 | % | | $ | 67,117 | | | $ | 57 | | | 0.34 | % | | $ | 16 | | | $ | 38 | | | $ | 54 | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 26,877 | | | | | | | $ | 26,551 | | | | | | | | | | | |
Credit balances of factoring clients | 1,089 | | | | | | | 1,189 | | | | | | | | | | | |
Other noninterest-bearing liabilities | 2,369 | | | | | | | 2,151 | | | | | | | | | | | |
Stockholders' equity | 10,499 | | | | | | | 10,567 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 107,987 | | | | | | | $ | 107,575 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 3.22 | % | | | | | | 2.94 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 795 | | | 3.40 | % | | | | $ | 700 | | | 3.04 | % | | | | | | |
(1) Average loanLoans and lease balancesleases include non-PCD and PCD loans, non-PCDnonaccrual loans and held for sale. Interest income on loans and leases loans held for saleincludes accretion income and nonaccrual loans and leases.loan fees.
(2) Loans originated in relation to the SBA-PPP ($1.7 billion asThe balance and rate presented is calculated net of September 30, 2021) do not have a recorded ACL. Asaverage credit balances of September 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.53%, while the ratio of ACL to total loans excluding SBA-PPP loans is 0.58%.factoring clients.
BUSINESS COMBINATIONS
CIT Group Inc.
On October 15, 2020, BancShares and CIT, entered into the Merger Agreement by and among BancShares, FCB, the Merger Sub, and CIT, the parent company of CIT Bank. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub and CIT will ultimately merge with and into FCB, with FCB as the surviving entity. The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank.
The Merger Agreement was unanimously approved by the Board of Directors of each of BancShares and CIT. The transaction has been approved by the shareholders of both companies and has received regulatory approval from the North Carolina Commissioner of Banks and the FDIC.
On September 30, 2021, the parties entered into an amendment to the merger agreement pursuant to which the parties mutually agreed to extend until March 1, 2022 the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed. Completion of the proposed merger remains subject to approval from the Board of Governors of the Federal Reserve System and both parties are committed to continuing to seek such approval. The parties have responded to all questions issued by the Staff of the Federal Reserve Board, and the Staff has informed us that they do not have further questions at this time. The parties have been informed that the application is presently at the Governor level, but the Board of Governors has not provided a time frame for its decision on the application. Closing is expected to occur as soon as practicable following receipt of such approval and the satisfaction or waiver of other customary closing conditions.
Federal Deposit Insurance Corporation Assisted Transactions
BancShares completed fourteen FDIC-assisted transactions between 2009 and 2017. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protected us from a substantial portion of the credit and asset quality risk we would otherwise have incurred.
For certain FDIC-assisted transactions, the shared-loss agreement included a provision related to a payment owed to the FDIC at the termination of the agreement.As of September 30, 2021, these agreements have been satisfied following a $16.1 million payment made to the FDIC for the final active agreement during the first quarter of 2021.
Table 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | | | | | |
| September 30, 2022 | | September 30, 2021 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 67,733 | | | $ | 785 | | | 4.58 | % | | $ | 32,708 | | | $ | 320 | | | 3.85 | % | | $ | 456 | | | $ | 9 | | | $ | 465 | |
Total investment securities | 19,119 | | | 90 | | | 1.88 | | | 10,708 | | | 40 | | | 1.47 | | | 33 | | | 17 | | | 50 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 5,685 | | | 31 | | | 2.17 | | | 8,956 | | | 3 | | | 0.15 | | | 16 | | | 12 | | | 28 | |
Total interest-earning assets (2) | $ | 92,537 | | | $ | 906 | | | 3.87 | % | | $ | 52,372 | | | $ | 363 | | | 2.73 | % | | $ | 505 | | 505 | | $ | 38 | | | $ | 543 | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | 7,981 | | | | | | | $ | — | | | | | | | | | | | |
Cash and due from banks | 489 | | | | | | | 365 | | | | | | | | | | | |
Allowance for credit losses | (851) | | | | | | | (190) | | | | | | | | | | | |
All other noninterest-earning assets | 7,831 | | | | | | | 3,377 | | | | | | | | | | | |
Total assets | $ | 107,987 | | | | | | | $ | 55,924 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 16,160 | | | $ | 7 | | | 0.17 | % | | $ | 11,324 | | | $ | 1 | | | 0.05 | % | | $ | 4 | | | $ | 2 | | | $ | 6 | |
Money market | 22,993 | | | 32 | | | 0.55 | | | 9,866 | | | 2 | | | 0.09 | | | 23 | | | 7 | | | 30 | |
Savings | 13,956 | | | 28 | | | 0.78 | | | 3,979 | | | 1 | | | 0.03 | | | 18 | | | 9 | | | 27 | |
Time deposits | 8,436 | | | 11 | | | 0.54 | | | 2,599 | | | 4 | | | 0.61 | | | 9 | | | (2) | | | 7 | |
Total interest-bearing deposits | 61,545 | | | 78 | | | 0.50 | | | 27,768 | | | 8 | | | 0.12 | | | 54 | | | 16 | | 16 | | 70 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 617 | | | 1 | | | 0.16 | | | 672 | | | — | | | 0.21 | | | 1 | | | — | | | 1 | |
Short-term FHLB borrowings | 1,188 | | | 8 | | | 2.57 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Short-term borrowings | 1,805 | | | 9 | | | 1.74 | | | 672 | | | — | | | 0.21 | | | 9 | | | — | | | 9 | |
Federal Home Loan Bank borrowings | 1,784 | | | 11 | | | 2.45 | | | 646 | | | 4 | | | 1.28 | | | 4 | | | 3 | | | 7 | |
Senior unsecured borrowings | 898 | | | 5 | | | 2.00 | | | — | | | — | | | — | | | 5 | | | — | | | 5 | |
Subordinated debt | 1,054 | | | 8 | | | 3.21 | | | 497 | | | 3 | | | 3.35 | | | 5 | | | — | | | 5 | |
Other borrowings | 67 | | | — | | | 4.51 | | | 79 | | | 1 | | | 1.24 | | | (2) | | | 1 | | | (1) | |
Long-term borrowings | 3,803 | | | 24 | | | 2.59 | | | 1,222 | | | 8 | | | 2.12 | | | 12 | | | 4 | | | 16 | |
Total borrowings | 5,608 | | | 33 | | | 2.32 | | | 1,894 | | | 8 | | | 1.44 | | | 21 | | | 4 | | | 25 | |
Total interest-bearing liabilities | $ | 67,153 | | | $ | 111 | | | 0.65 | % | | $ | 29,662 | | | $ | 16 | | | 0.20 | % | | $ | 75 | | | $ | 20 | | | $ | 95 | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 26,877 | | | | | | | $ | 21,339 | | | | | | | | | | | |
Credit balances of factoring clients | 1,089 | | | | | | | — | | | | | | | | | | | |
Other noninterest-bearing liabilities | 2,369 | | | | | | | 362 | | | | | | | | | | | |
Stockholders' equity | 10,499 | | | | | | | 4,561 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 107,987 | | | | | | | $ | 55,924 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 3.22 | % | | | | | | 2.53 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 795 | | | 3.40 | % | | | | $ | 347 | | | 2.61 | % | | | | | | |
CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS(1), (2) See footnotes to previous table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 |
| 2021 | | 2020 |
| | | Interest | | | | | | Interest | | |
| Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
(Dollars in thousands) | Balance | | Expense | | Rate | | Balance | | Expense | | Rate |
Assets | | | | | | | | | | | |
Loans and leases | $ | 32,707,591 | | | $ | 319,738 | | | 3.85 | % | | $ | 32,694,996 | | | $ | 336,934 | | | 4.06 | % |
Investment securities: | | | | | | | | | | | |
U.S. Treasury | — | | | — | | | — | | | 695,419 | | | 497 | | | 0.28 | |
Government agency | 824,499 | | | 2,076 | | | 1.01 | | | 587,377 | | | 1,335 | | | 0.91 | |
Mortgage-backed securities | 9,164,180 | | | 29,056 | | | 1.27 | | | 8,047,247 | | | 28,236 | | | 1.40 | |
Corporate bonds | 597,386 | | | 7,610 | | | 5.10 | | | 489,602 | | | 6,433 | | | 5.26 | |
| | | | | | | | | | | |
Other investments | 121,454 | | | 544 | | | 1.78 | | | 110,552 | | | 739 | | | 2.66 | |
Total investment securities | 10,707,519 | | | 39,286 | | | 1.47 | | | 9,930,197 | | | 37,240 | | | 1.50 | |
Overnight investments | 8,956,055 | | | 3,395 | | | 0.15 | | | 2,992,183 | | | 757 | | | 0.10 | |
Total interest-earning assets | 52,371,165 | | | 362,419 | | | 2.73 | | | 45,617,376 | | | 374,931 | | | 3.24 | |
Cash and due from banks | 364,593 | | | | | | | 349,079 | | | | | |
Premises and equipment | 1,239,111 | | | | | | | 1,261,864 | | | | | |
Allowance for credit losses | (189,885) | | | | | | | (222,793) | | | | | |
Other real estate owned | 40,786 | | | | | | | 52,716 | | | | | |
Other assets | 2,096,588 | | | | | | | 1,203,913 | | | | | |
Total assets | $ | 55,922,358 | | | | | | | $ | 48,262,155 | | | | | |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Checking with interest | $ | 11,323,503 | | | $ | 1,350 | | | 0.05 | % | | $ | 9,239,838 | | | $ | 1,369 | | | 0.06 | % |
Savings | 3,979,389 | | | 342 | | | 0.03 | | | 3,070,619 | | | 314 | | | 0.04 | |
Money market accounts | 9,866,327 | | | 2,357 | | | 0.09 | | | 8,108,832 | | | 3,634 | | | 0.18 | |
Time deposits | 2,599,006 | | | 4,024 | | | 0.61 | | | 3,205,850 | | | 8,151 | | | 1.01 | |
Total interest-bearing deposits | 27,768,225 | | | 8,073 | | | 0.12 | | | 23,625,139 | | | 13,468 | | | 0.23 | |
Securities sold under customer repurchase agreements | 672,114 | | | 358 | | | 0.21 | | | 710,237 | | | 395 | | | 0.22 | |
Other short-term borrowings | — | | | — | | | — | | | — | | | — | | | — | |
Long-term borrowings | 1,222,452 | | | 6,537 | | | 2.09 | | | 1,256,331 | | | 6,812 | | | 2.15 | |
Total interest-bearing liabilities | 29,662,791 | | | 14,968 | | | 0.20 | | | 25,591,707 | | | 20,675 | | | 0.32 | |
Noninterest-bearing deposits | 21,338,862 | | | | | | | 18,280,705 | | | | | |
Other liabilities | 384,113 | | | | | | | 370,668 | | | | | |
Shareholders’ equity | 4,536,592 | | | | | | | 4,019,075 | | | | | |
Total liabilities and shareholders’ equity | $ | 55,922,358 | | | | | | | $ | 48,262,155 | | | | | |
Interest rate spread | | | | | 2.53 | % | | | | | | 2.92 | % |
| | | | | | | | | | | |
Net interest income and net yield on interest-earning assets | | | $ | 347,451 | | | 2.61 | % | | | | $ | 354,256 | | | 3.06 | % |
Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale. Yields related | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Nine Months Ended | | | | | | |
| September 30, 2022 | | September 30, 2021 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 65,739 | | | $ | 2,061 | | | 4.17 | % | | $ | 32,985 | | | $ | 967 | | | 3.89 | % | | $ | 1,022 | | | $ | 72 | | | $ | 1,094 | |
Total investment securities | 19,264 | | | 262 | | | 1.81 | % | | 10,337 | | | 106 | | | 1.36 | % | | 112 | | | 44 | | | 156 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 8,242 | | | 50 | | | 0.81 | % | | 7,560 | | | 7 | | | 0.12 | % | | 1 | | | 42 | | | 43 | |
Total interest-earning assets (2) | $ | 93,245 | | | $ | 2,373 | | | 3.39 | % | | $ | 50,882 | | | $ | 1,080 | | | 2.81 | % | | $ | 1,135 | | | $ | 158 | | | $ | 1,293 | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | 7,960 | | | | | | | $ | — | | | | | | | | | | | |
Cash and due from banks | 517 | | | | | | | 354 | | | | | | | | | | | |
Allowance for credit losses | (871) | | | | | | | (208) | | | | | | | | | | | |
All other noninterest-earning assets | 7,792 | | | | | | | 2,899 | | | | | | | | | | | |
Total assets | $ | 108,643 | | | | | | | $ | 53,927 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 16,437 | | | $ | 16 | | | 0.14 | % | | $ | 11,010 | | | $ | 4 | | | 0.05 | % | | $ | 3 | | | $ | 9 | | | $ | 12 | |
Money market | 24,875 | | | 65 | | | 0.35 | % | | 9,489 | | | 7 | | | 0.11 | % | | 24 | | | 34 | | | 58 | |
Savings | 13,640 | | | 48 | | | 0.47 | % | | 3,748 | | | 1 | | | 0.03 | % | | 8 | | | 39 | | | 47 | |
Time deposits | 9,004 | | | 30 | | | 0.45 | % | | 2,692 | | | 13 | | | 0.63 | % | | 22 | | | (5) | | | 17 | |
Total interest-bearing deposits | 63,956 | | | 159 | | | 0.33 | % | | 26,939 | | | 25 | | | 0.13 | % | | 57 | | | 77 | | | 134 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 615 | | | 1 | | | 0.16 | % | | 664 | | | 1 | | | 0.21 | % | | — | | | — | | | — | |
Short-term FHLB borrowings | 400 | | | 8 | | | 2.57 | % | | — | | | — | | | — | % | | 8 | | | — | | | 8 | |
Short-term borrowings | 1,015 | | | 9 | | | 1.11 | % | | 664 | | | 1 | | | 0.21 | % | | 8 | | | — | | | 8 | |
Federal Home Loan Bank borrowings | 941 | | | 15 | | | 2.07 | % | | 649 | | | 7 | | | 1.28 | % | | 3 | | | 5 | | | 8 | |
Senior unsecured borrowings | 1,497 | | | 21 | | | 1.83 | % | | — | | | — | | | — | % | | 21 | | | — | | | 21 | |
Subordinated debt | 1,057 | | | 24 | | | 3.07 | % | | 497 | | | 10 | | | 3.36 | % | | 15 | | | (1) | | | 14 | |
Other borrowings | 79 | | | 1 | | | 2.86 | % | | 83 | | | 4 | | | 1.22 | % | | (4) | | | 1 | | | (3) | |
Long-term borrowings | 3,574 | | | 61 | | | 2.29 | % | | 1,229 | | | 21 | | | 2.12 | % | | 35 | | | 5 | | | 40 | |
Total borrowings | 4,589 | | | 70 | | | 2.03 | % | | 1,893 | | | 22 | | | 1.45 | % | | 43 | | | 5 | | | 48 | |
Total interest-bearing liabilities | $ | 68,545 | | | $ | 229 | | | 0.45 | % | | $ | 28,832 | | | $ | 47 | | | 0.21 | % | | $ | 100 | | | $ | 82 | | | $ | 182 | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 26,253 | | | | | | | $ | 20,316 | | | | | | | | | | | |
Credit balances of factoring clients | 1,146 | | | | | | | — | | | | | | | | | | | |
Other noninterest-bearing liabilities | 2,202 | | | | | | | 352 | | | | | | | | | | | |
Stockholders' equity | 10,497 | | | | | | | 4,427 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 108,643 | | | | | | | $ | 53,927 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 2.94 | % | | | | | | 2.60 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 2,144 | | | 3.06 | % | | | | $ | 1,033 | | | 2.69 | % | | | | | | |
(1), (2) See footnotes to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 21.0%, as well as a blended state income tax rate of 3.3% and 3.4%,previous table.
Third Quarter 2022 compared to Second Quarter 2022
•NII for the three months ended September 30, 20212022 was $795 million, an increase of $95 million compared to the second quarter of 2022. This was primarily due to higher yields on loans and 2020, respectively. The taxable-equivalent adjustment was $564 thousandovernight investments, loan growth and $597 thousandhigher purchase accounting accretion, partially offset by higher costs on interest-bearing deposit and borrowings.
◦Interest income earned on loans and leases for the three months ended September 30, 20212022 was $785 million, an increase of $130 million compared to the second quarter of 2022. The increase was primarily due to higher yields and 2020, respectively.growth in the average loans and leases balance from $65.3 billion in the previous quarter to $67.7 billion in the current quarter. In addition, the third quarter benefited from higher purchase accounting accretion, an increase of $15 million, partially offset by lower SBA PPP income, down $3 million.
◦Interest income earned on investment securities for the three months ended September 30, 2022 was $90 million, an increase of $1 million compared to the second quarter of 2022. The slight increase was primarily due to higher reinvestment rates.
Table 4◦Interest income earned on interest earning deposits at banks for the three months ended September 30, 2022 was $31 million, an increase of $18 million, reflecting higher Fed Funds rates that offset the decline in the average balance.
CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS◦Interest expense on interest-bearing deposits for the three months ended September 30, 2022 was $78 million, an increase of $36 million compared to the second quarter of 2022, as higher deposit rates were partially offset by lower balances, with the decline primarily concentrated in higher cost money market accounts. Interest expense on borrowings for the three months ended September 30, 2022 was $33 million, an increase of $18 million compared to the second quarter of 2022, driven by higher FHLB borrowings to fund our loan growth.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| 2021 | | 2020 |
| | | Interest | | | | | | Interest | | |
| Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
(Dollars in thousands) | Balance | | Expense | | Rate | | Balance | | Expense | | Rate |
Assets | | | | | | | | | | | |
Loans and leases | $ | 32,985,376 | | | $ | 968,231 | | | 3.89 | % | | $ | 31,148,683 | | | $ | 989,708 | | | 4.20 | % |
Investment securities: | | | | | | | | | | | |
U.S. Treasury | 126,363 | | | 172 | | | 0.18 | | | 401,666 | | | 2,853 | | | 0.95 | |
Government agency | 818,591 | | | 5,942 | | | 0.97 | | | 655,097 | | | 6,883 | | | 1.40 | |
Mortgage-backed securities | 8,676,573 | | | 74,936 | | | 1.15 | | | 7,224,224 | | | 87,475 | | | 1.61 | |
Corporate bonds | 604,241 | | | 23,158 | | | 5.11 | | | 332,029 | | | 12,692 | | | 5.10 | |
| | | | | | | | | | | |
Other investments | 110,884 | | | 1,442 | | | 1.74 | | | 161,824 | | | 3,653 | | | 3.02 | |
Total investment securities | 10,336,652 | | | 105,650 | | | 1.36 | | | 8,774,840 | | | 113,556 | | | 1.73 | |
Overnight investments | 7,560,072 | | | 6,948 | | | 0.12 | | | 2,228,338 | | | 5,828 | | | 0.35 | |
Total interest-earning assets | 50,882,100 | | | 1,080,829 | | | 2.81 | | | 42,151,861 | | | 1,109,092 | | | 3.48 | |
Cash and due from banks | 354,104 | | | | | | | 351,334 | | | | | |
Premises and equipment | 1,244,405 | | | | | | | 1,258,147 | | | | | |
Allowance for credit losses | (208,477) | | | | | | | (206,737) | | | | | |
Other real estate owned | 45,122 | | | | | | | 53,871 | | | | | |
Other assets | 1,609,717 | | | | | | | 1,225,569 | | | | | |
Total assets | $ | 53,926,971 | | | | | | | $ | 44,834,045 | | | | | |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Checking with interest | $ | 11,009,608 | | | $ | 4,263 | | | 0.05 | % | | $ | 8,665,758 | | | $ | 4,380 | | | 0.07 | % |
Savings | 3,747,847 | | | 966 | | | 0.03 | | | 2,837,867 | | | 911 | | | 0.04 | |
Money market accounts | 9,488,641 | | | 7,500 | | | 0.11 | | | 7,583,359 | | | 19,262 | | | 0.34 | |
Time deposits | 2,691,652 | | | 12,679 | | | 0.63 | | | 3,454,438 | | | 31,025 | | | 1.20 | |
Total interest-bearing deposits | 26,937,748 | | | 25,408 | | | 0.13 | | | 22,541,422 | | | 55,578 | | | 0.33 | |
Securities sold under customer repurchase agreements | 663,713 | | | 1,052 | | | 0.21 | | | 614,920 | | | 1,236 | | | 0.27 | |
Other short-term borrowings | — | | | — | | | — | | | 67,522 | | | 1,052 | | | 2.05 | |
Long-term borrowings | 1,228,546 | | | 19,611 | | | 2.10 | | | 1,164,475 | | | 19,831 | | | 2.24 | |
Total interest-bearing liabilities | 28,830,007 | | | 46,071 | | | 0.21 | | | 24,388,339 | | | 77,697 | | | 0.42 | |
Noninterest-bearing deposits | 20,316,612 | | | | | | | 16,071,414 | | | | | |
Other liabilities | 377,029 | | | | | | | 477,647 | | | | | |
Shareholders’ equity | 4,403,323 | | | | | | | 3,896,645 | | | | | |
Total liabilities and shareholders’ equity | $ | 53,926,971 | | | | | | | $ | 44,834,045 | | | | | |
Interest rate spread | | | | | 2.60 | % | | | | | | 3.06 | % |
| | | | | | | | | | | |
Net interest income and net yield on interest-earning assets | | | $ | 1,034,758 | | | 2.69 | % | | | | $ | 1,031,395 | | | 3.23 | % |
•NIM for the three months ended September 30, 2022 was 3.40%, an increase of 36 bps from the second quarter of 2022, due to the impact of the items noted above, including higher earning asset yields, strong loan growth and higher purchase accounting accretion, partially offset by higher interest-bearing deposit and borrowing costs and higher borrowings.Loans•Average interest-earning assets for the three months ended September 30, 2022 were $92.5 billion. This is an increase from $92.1 billion for the three months ended June 30, 2022, reflecting an increase in average loans and leases include PCD loans, non-PCD loans, nonaccrual loanspresented above of $2.4 billion, which offset a decline in lower yielding average interest-earning cash deposits of $1.9 billion.
•Average interest-bearing liabilities for the three months ended September 30, 2022 were $67.2 billion, essentially unchanged from the three months ended June 30, 2022, reflecting higher FHLB borrowings that offset lower deposits. The average rate on interest-bearing liabilities for the three months ended September 30, 2022 was 0.65%. This is an increase of 31 bps compared to the three months ended June 30, 2022, reflecting the higher interest rate environment and loans heldshift in funding mix as the declines in interest-bearing deposits were replaced by increased borrowings to fund loan growth. Total deposits had declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the federal funds rate. The decline in total deposits compared to June 30, 2022 was primarily concentrated in acquired branches and commercial banking, partially offset by growth in our Direct Bank.
Third Quarter 2022 compared to Third Quarter 2021
•NII for sale. Yields relatedthe three months ended September 30, 2022 was $795 million, an increase of $448 million compared to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming a statutory federal income tax ratethe third quarter of 21.0%,2021, primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a blended statedecline in interest income taxon SBA-PPP loans.
◦Interest income earned on loans and leases for the three months ended September 30, 2022 was $785 million, an increase of $465 million compared to the third quarter of 2021. The increase was primarily due to the addition of $32.7 billion of loans acquired in the CIT Merger, along with organic growth in loans, partially offset by lower SBA-PPP interest income. SBA-PPP loans contributed $2 million of interest income during the third quarter of 2022 compared to $20 million in the third quarter of 2021.
◦Interest income earned on investment securities for the three months ended September 30, 2022 was $90 million, an increase of $50 million compared to the third quarter of 2021. The increase was due to the addition of $6.6 billion of investment securities acquired in the CIT Merger partially offset by maturities, and a higher portfolio yield.
◦Interest income earned on interest-earning deposits at banks for the three months ended September 30, 2022 was $31 million, an increase of $28 million compared to the third quarter of 2021, reflecting higher interest rates, which offset the decline in balance.
◦Interest expense on interest-bearing deposits for the three months ended September 30, 2022 was $78 million, an increase of $70 million compared to third quarter of 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried a higher average rate than legacy FCB interest-bearing deposits, and due to increases in rates paid on deposits. Interest expense on borrowings for the three months ended September 30, 2022 was $33 million, an increase of 3.3%$25 million compared to the third quarter of 2021. The increase was primarily due to the assumed borrowings in the CIT Merger along with the noted increase in FHLB borrowings and 3.4%,higher rate environment.
•NIM was 3.40% for the three months ended September 30, 2022, an increase of 79 bps from the third quarter of 2021, primarily reflective of the higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.
•Average interest-earning assets for the three months ended September 30, 2022 were $92.5 billion, an increase of $40.2 billion compared to the third quarter of 2021. This increase was primary due to the added interest-earning assets from the CIT Merger.
•Average interest-bearing liabilities for the three months ended September 30, 2022 were $67.2 billion, an increase of $37.5 billion compared to the third quarter of 2021. The increase was primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the three months ended September 30, 2022 were 0.65%. This increase of 45 bps from the third quarter of 2021 was primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.
Year to Date 2022 compared to 2021
•NII for the nine months ended September 30, 2022 was $2.14 billion, an increase of $1.11 billion compared to the same period in 2021, primarily due to the CIT Merger, as well as loan growth and 2020, respectively. The taxable-equivalent adjustment was $1.8 milliona higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans.
◦Interest income earned on loans and $1.9 millionleases for the nine months ended September 30, 2021 and 2020, respectively.
Table 5
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 | | Nine months ended September 30, 2021 |
| Change from prior year period due to: | | Change from prior year period due to: |
(Dollars in thousands) | Volume(1) | | Yield/Rate(1) | | Total Change | | Volume(1) | | Yield/Rate(1) | | Total Change |
Assets | | | | | | | | | | | |
Loans and leases | $ | (4) | | | $ | (17,192) | | | $ | (17,196) | | | $ | 50,823 | | | $ | (72,300) | | | $ | (21,477) | |
Investment securities: | | | | | | | | | | | |
U.S. Treasury | (497) | | | — | | | (497) | | | (1,956) | | | (725) | | | (2,681) | |
Government agency | 539 | | | 202 | | | 741 | | | 1,718 | | | (2,659) | | | (941) | |
Mortgage-backed securities | 3,787 | | | (2,967) | | | 820 | | | 17,444 | | | (29,983) | | | (12,539) | |
Corporate bonds | 1,416 | | | (239) | | | 1,177 | | | 10,406 | | | 60 | | | 10,466 | |
| | | | | | | | | | | |
Other investments | 75 | | | (270) | | | (195) | | | (1,180) | | | (1,031) | | | (2,211) | |
Total investment securities | 5,320 | | | (3,274) | | | 2,046 | | | 26,432 | | | (34,338) | | | (7,906) | |
Overnight investments | 1,516 | | | 1,122 | | | 2,638 | | | 13,953 | | | (12,833) | | | 1,120 | |
Total interest-earning assets | $ | 6,832 | | | $ | (19,344) | | | $ | (12,512) | | | $ | 91,208 | | | $ | (119,471) | | | $ | (28,263) | |
Liabilities | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Checking with interest | $ | 313 | | | $ | (332) | | | $ | (19) | | | $ | 1,195 | | | $ | (1,312) | | | $ | (117) | |
Savings | 94 | | | (66) | | | 28 | | | 294 | | | (239) | | | 55 | |
Money market accounts | 800 | | | (2,077) | | | (1,277) | | | 4,845 | | | (16,607) | | | (11,762) | |
Time deposits | 1,525 | | | (5,652) | | | (4,127) | | | (6,827) | | | (11,519) | | | (18,346) | |
Total interest-bearing deposits | 2,732 | | | (8,127) | | | (5,395) | | | (493) | | | (29,677) | | | (30,170) | |
Securities sold under customer repurchase agreements | 12 | | | (49) | | | (37) | | | 101 | | | (285) | | | (184) | |
Other short-term borrowings | (248) | | | 248 | | | — | | | (1,052) | | | — | | | (1,052) | |
Long-term borrowings | (271) | | | (4) | | | (275) | | | 2,169 | | | (2,389) | | | (220) | |
Total interest-bearing liabilities | 2,225 | | | (7,932) | | | (5,707) | | | 725 | | | (32,351) | | | (31,626) | |
Change in net interest income | $ | 4,607 | | | $ | (11,412) | | | $ | (6,805) | | | $ | 90,483 | | | $ | (87,120) | | | $ | 3,363 | |
(1) The rate/volume variance is allocated proportionally between the changes in volume and rate. |
RESULTS OF OPERATIONS
Net Interest Income and Margin (Taxable-Equivalent Basis)
Third Quarter 2021 compared to Third Quarter 2020
Taxable-equivalent net interest income totaled $347.5 million for the third quarter of 2021, a decrease of $6.8 million, or 1.9%,$1.09 billion compared to the third quarter of 2020.same period in 2021. The decline in net interest incomeincrease was driven primarily by a decline in the yield on interest-earning assetsvolume driven due to the sustained low rate environment and a reductionaddition of $32.7 billion of loans acquired in interest and fee income on SBA-PPP loans. These declines werethe CIT Merger, along with organic growth in loans, partially offset by organic loan growth, higher average investment balances as we have deployed some of the excess liquidity on our balance sheet, and a decline in the rate paid onlower SBA-PPP interest bearing deposits. SBA-PPP loans contributed $20.0 million in interest and fee income for the third quarter of 2021 compared to $28.9 million for the same quarter in 2020. While SBA-PPP loans continue to support overall net interest income, the contribution from these loans continues to decline as forgiveness activity continues.
Net interest income increased $0.5 million compared to the linked quarter despite a decline in SBA-PPP income and continued low interest rates. Higher investment and overnight yields and balances, organic loan growth and slightly lower deposit costs more than offset rate pressure on loans and a decline in SBA-PPP income. SBA-PPP loans contributed $27.2$16 million of interest income during the nine months ended September 30, 2022 compared to $78 million in interest and fee income for the second quarter ofsame period in 2021.
◦
The taxable-equivalent NIM was 2.61% in the third quarter of 2021, a decrease of 45 basis points from the comparable quarter of 2020. The margin decline was primarily due to changes in earning asset mix driven by excess liquidity and higher balances in overnight investments as well as declines in loan yields. These declines were partially offset by lower rates paidInterest income earned on interest-bearing deposits and increased yield on SBA-PPP loans. As with prior quarters, we continue to operate with liquidity above normal operating ranges which puts downward pressure on net interest margin. The level of organic loan growth has helped to somewhat protect taxable equivalent NIM from the impacts of the low interest rate environment. We have also opportunistically deployed incremental liquidity of $1 billion into the investment portfolio since the third quarter of 2020.
The taxable-equivalent NIM declined 7 basis points from 2.68% for the linked quarter primarily due to changes in earning asset mix as our overnight investments continued to grow, partially offset by higher investment yields.
Nine Months of 2021 compared to Nine Months of 2020
The taxable-equivalent net interest incomesecurities for the nine months ended September 30, 20212022 was $1.0 billion,$262 million, an increase of $3.4$156 million or 0.3%, compared to the same period in 2020. This2021. The increase was primarily due to organic loan growth, an increase in interest and fee income on SBA-PPP loans, and lower rates paid on interest-bearing deposits. These increases were largely offset by a declinethe addition of $6.6 billion of investment securities acquired in the yieldCIT Merger and a higher portfolio yield.
◦Interest income earned on interest-earning assets. SBA-PPP loans contributed $78.1 million in interest and fee incomedeposits at banks for the nine months ended September 30, 2021,2022 was $50 million, an increase of $43 million compared to $47.9 million for the same period in 2020.2021, reflecting higher interest rates.
The taxable-equivalent NIM was 2.69%◦Interest expense on interest-bearing deposits for the nine months ended September 30, 2021, a decrease2022 was $159 million, an increase of 54 basis points from$134 million compared to the comparablesame period of 2020.in 2021. The margin declineincrease was primarily due to changes in earning asset mix and a declinethe additional interest-bearing deposits acquired in the yield on interest-earning assets, partially offset by lower rates paid on interest-bearingCIT Merger, which carried a higher average rate than legacy FCB deposits, and increased income on SBA-PPP loans.
Provision for Credit Losses
Provision for credit losses was a benefit of $1.1 million for the third quarter of 2021, compared to an expense of $4.0 million for the comparable quarter in 2020. The third quarter of 2021 was favorablyalso impacted by a $5.9 million reserve release driven primarily by continued strong credit performance, low net charge-offs and improvement in macroeconomic factors. The comparable quarter in 2020 included a $1.5 million reserve build due to continued uncertainties surrounding the COVID-19 pandemic and net loan growth. Total net charge-offsrising interest rate environment. Interest expense on borrowings for the third quarter of 2021 were $4.8 million, an increase from $2.6 million for the comparable quarter in 2020 due to a higher volume of charge-offs and lower recoveries. The net charge-off ratio was 0.06% for the third quarter of 2021 compared to 0.03% for the same quarter in 2020. The impact of SBA-PPP loans on average loan balances did not affect the net charge-off ratio in either three-month period.
For the nine months ended September 30, 2022 was $70 million, an increase of $48 million compared to the same period in 2021. The increase was primarily due to the assumed borrowings in the CIT Merger. Utilizing excess cash, we redeemed approximately $2.9 billion of the $4.5 billion assumed debt during the first quarter.
•NIM for the nine months ended September 30, 2022 was 3.06%, an increase of 37 bps from the same period in 2021, reflective of the higher interest rate environment and the impacts from the CIT Merger.
•Average interest-earning assets for the nine months ended September 30, 2022 were $93.2 billion, compared to $50.9 billion in 2021. The change was primarily due to the interest-earning assets acquired in the CIT Merger.
•Average interest-bearing liabilities for nine months ended September 30, 2022 were $68.5 billion. This is an increase from $28.8 billion in the same period in 2021, primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the nine months ended September 30, 2022 were 0.45%. This increase of 24 bps from the same period in 2021 was primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.
The following table details the average interest earning assets by category.
Table 3
Average Interest-earning Asset Mix
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % of Total Interest-earning Assets |
| Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Loans and leases | 73 | % | | 71 | % | | 62 | % | | 70 | % | | 65 | % |
Investment securities | 21 | % | | 21 | % | | 21 | % | | 21 | % | | 20 | % |
| | | | | | | | | |
Interest-earning deposits at banks | 6 | % | | 8 | % | | 17 | % | | 9 | % | | 15 | % |
Total interest earning assets | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
The following table shows our average funding mix.
Table 4
Average Funding Mix | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % of Total Interest-bearing Liabilities |
| Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Total interest-bearing deposits | 92 | % | | 95 | % | | 94 | % | | 93 | % | | 94 | % |
Short-term borrowings | 3 | % | | 1 | % | | 2 | % | | 2 | % | | 2 | % |
| | | | | | | | | |
Long-term borrowings | 5 | % | | 4 | % | | 4 | % | | 5 | % | | 4 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
PROVISION FOR CREDIT LOSSES
BancShares provides an amount for expected credit losses within the loan and lease portfolio and for unfunded commitments that is based on factors discussed in the Critical Accounting Estimates section of our 2021 Form 10-K. The provision is recorded to bring the ACL and reserve for unfunded commitments to a level deemed appropriate to cover losses expected in the portfolios.
The provision for credit losses for the three months ended September 30, 2022 was $60 million, compared to a provision of $42 million for the three months ended June 30, 2022 and a benefit of $31.7$1 million compared to $52.9 million in expense for the first nine months of 2020. Provisionsame quarter in 2021. The provision for credit losses for the nine months ended September 30, 20212022 was favorably impacted by$566 million, compared to a $41.1benefit of $32 million reserve release drivenin the same period of 2021.
The increase in the provision for credit losses for the three months ended September 30, 2022 compared to the three months ended June 30, 2022 was primarily by continued strongdue to moderate deterioration in the macroeconomic forecast used in the CECL forecasting process. The provision for credit performance, low net charge-offs and improvement in macroeconomic factors. The comparable period in 2020losses included $36.1$10 million reserve build related to uncertainties surrounding the COVID-19 pandemic. Net charge-offsprovision for unfunded commitments, which is up from $6 million for the three months ended June 30, 2022. The ACL is further discussed in Risk Management - Credit Risk below.
The increases in the provision for credit losses compared to the three and nine months ended September 30, 2021 were $9.4 million, a decreaseprimarily related to the impact of the CIT Merger and the moderate deterioration in the macroeconomic forecast used in the CECL forecasting process, while the prior year benefited from $17.4 million for the comparable period in 2020 due to a lower volume of charge-offs and stable recoveries.reserve releases. The net charge-off ratio was 0.04% for the nine months ended September 30, 2021 compared2022 provision for credit losses includes the initial ACL for Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases acquired in the CIT Merger, which was established through an increase of $454 million to 0.07%the provision for credit losses (the “Initial Non-PCD Provision”). Also, the same period in 2020. The impact of SBA-PPP loans on average loan balances did not have an impactprovision for credit losses included $59 million related to unfunded commitments on the net charge-off ratio forMerger Date related to off balance sheet exposures acquired at the nine months ended September 30, 2021. Excludingtime of the impact of SBA-PPP loans on average loan balances, the net charge-off ratio was 0.08% for the nine months ended September 30, 2020.CIT Merger.
NONINTEREST INCOME
Noninterest Income
Table 6
NONINTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Wealth management services | $ | 31,935 | | | $ | 26,369 | | | $ | 95,886 | | | $ | 75,152 | |
Service charges on deposit accounts | 24,858 | | | 20,841 | | | 68,277 | | | 64,776 | |
Cardholder services, net | 22,879 | | | 19,756 | | | 65,310 | | | 55,503 | |
Other service charges and fees | 9,205 | | | 7,892 | | | 26,653 | | | 22,829 | |
Merchant services, net | 8,409 | | | 6,763 | | | 25,858 | | | 18,014 | |
Mortgage income | 6,106 | | | 13,106 | | | 25,026 | | | 28,141 | |
Insurance commissions | 4,000 | | | 3,576 | | | 11,702 | | | 10,453 | |
ATM income | 1,481 | | | 1,537 | | | 4,534 | | | 4,354 | |
Realized gains on investment securities available for sale, net | 8,082 | | | 21,425 | | | 33,119 | | | 54,972 | |
Marketable equity securities gains (losses), net | 3,350 | | | (2,701) | | | 31,015 | | | 10,461 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other | 2,639 | | | 2,008 | | | 6,363 | | | 5,330 | |
Total noninterest income | $ | 122,944 | | | $ | 120,572 | | | $ | 393,743 | | | $ | 349,985 | |
Noninterest income is an essential component of our total revenue and is critical to our profitability level.revenue. The primary sources of noninterest income consist of rental income on operating leases, fee income and other service charges, wealth management services, fees and service charges generated from deposit accounts, cardholder and merchant services, factoring commissions and mortgage lending and servicing.
Table 5
Noninterest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Rental income on operating leases | $ | 219 | | | $ | 213 | | | $ | — | | | $ | 640 | | | $ | — | |
Other noninterest income: | | | | | | | | | |
Fee income and other service charges | 44 | | | 39 | | | 10 | | | 118 | | | 31 | |
Wealth management services | 35 | | | 37 | | | 32 | | | 107 | | | 96 | |
Service charges on deposit accounts | 21 | | | 28 | | | 26 | | | 77 | | | 69 | |
Factoring commissions | 24 | | | 27 | | | — | | | 78 | | | — | |
Cardholder services, net | 25 | | | 26 | | | 23 | | | 76 | | | 65 | |
Merchant services, net | 8 | | | 9 | | | 9 | | | 27 | | | 26 | |
Insurance commissions | 11 | | | 11 | | | 4 | | | 34 | | | 12 | |
Realized gain on sale of investment securities available for sale, net | — | | | — | | | 8 | | | — | | | 33 | |
Fair value adjustment on marketable equity securities, net | (2) | | | (6) | | | 3 | | | (5) | | | 31 | |
Bank-owned life insurance | 8 | | | 9 | | | 1 | | | 25 | | | 2 | |
Gain on sale of leasing equipment, net | 2 | | | 5 | | | — | | | 13 | | | — | |
Gain on acquisition | — | | | — | | | — | | | 431 | | | — | |
Gain on extinguishment of debt | 1 | | | — | | | — | | | 7 | | | — | |
Other noninterest income | 37 | | | 26 | | | 8 | | | 79 | | | 29 | |
Total other noninterest income | 214 | | | 211 | | | 124 | | | 1,067 | | | 394 | |
Total noninterest income | $ | 433 | | | $ | 424 | | | $ | 124 | | | $ | 1,707 | | | $ | 394 | |
Rental Income on Operating Leases
Rental income from equipment we lease for the three months ended September 30, 2022 was $219 million, an increase of $6 million compared to three months ended June 30, 2022. Rental income is generated primarily in the Rail segment and to a lesser extent, in the Commercial Banking segment. Revenue is generally dictated by the size of the portfolio, utilization of the railcars, re-pricing of equipment upon lease maturities and pricing on new equipment leases. Re-pricing refers to the rental rate in the renewed equipment contract compared to the prior contract. Refer to the Rail discussion in the section entitled “Results by Business Segment” of this MD&A for further details.
Other Noninterest Income
Other noninterest income for the third quarter of 2021three months ended September 30, 2022 was $122.9$214 million, compared to $120.6$211 million in the three months ended June 30, 2022 and $124 million for the same period in 2021. Other noninterest income for the nine months ended September 30, 2022 was $1.07 billion, compared to $394 million in the same period of 2020, an increase2021. The increases for the comparable 2021 periods were primarily due to the additional activity related to the CIT Merger, both complimentary to existing BancShares services and products, as well as new items such as factoring services and gain on sale of $2.4leasing equipment, along with the preliminary estimated gain of $431 million or 2.0%. on acquisition related to the CIT Merger. See Note 2 — Business Combinations for details.
The mostlinked quarter comparison to the three months ended June 30, 2022 reflects increases and decreases among various noninterest income accounts. The more significant components of the change were as follows:variances follow:
•A $6.1 million favorable change in the fair market value adjustments on marketable equity securities.
•Wealth management servicesFee 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 $5.6$5 million, primarily due to growth in assets under management drivingreflecting higher advisory and transactioncapital market fees.
•Service charges on deposit accounts increaseddecreased by $4.0 million due$7 million. While the volume of transactions was up, the decline reflected lower rates we are charging our customers, for items such as overdraft fees. As previously disclosed, in January we announced our intent to volume.eliminate our nonsufficient funds (“NSF”) fees and lower our overdraft fees from $36 to $10 on consumer accounts beginning mid-year 2022.
•Cardholder servicesOther noninterest income net increased by $3.1 million and merchant services, net increased by $1.6 million, primarily due to an increase in transaction volume.
•Realized gains on investment securities available for sale, net declined by $13.3 million.
•Mortgageconsisted of bank owned life insurance (“BOLI”) income, decreased by $7.0 million, driven by reductions in gain on sale marginsof loans and lower production volumeOREO. Other noninterest income also includes derivative-related gains and losses and other various income items. Other noninterest income increased by $11 million, which included a $5 million settlement gain related to returned equipment, a $4 million recovery on a restructured transaction, a $2 million reserve release on prior loan sales, and a net $2 million derivative gain. The prior quarter included a $6 million gain on sale of a corporate aircraft acquired in 2021 due to higher mortgage rates and increased competition.the CIT Merger.
Noninterest income was $393.7 million for the first nine months of 2021, compared to $350.0 million for the same period of 2020, an increase of $43.8 million, or 12.5%. The most significant components of the change were as follows:
•Wealth management services increased by $20.7 million, primarily due to growth in assets under management driving higher advisory and transaction fees.
•A $20.6 million favorable change in the fair market value adjustments on marketable equity securities.
•Cardholder services income, net increased by $9.8 million and merchant services, net increased by $7.8 million, primarily due to an increase in transaction volume.
•Realized gains on investment securities available for sale declined by $21.9 million.
Noninterest Expense
Table 7
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Salaries and wages | $ | 160,947 | | | $ | 147,297 | | | $ | 462,420 | | | $ | 439,185 | |
Employee benefits | 32,146 | | | 31,788 | | | 103,169 | | | 100,663 | |
Occupancy expense | 29,101 | | | 27,990 | | | 87,283 | | | 85,026 | |
Equipment expense | 30,229 | | | 29,430 | | | 88,934 | | | 86,054 | |
Processing fees paid to third parties | 15,602 | | | 11,927 | | | 43,702 | | | 32,485 | |
FDIC insurance expense | 3,661 | | | 2,167 | | | 10,261 | | | 9,364 | |
Collection and foreclosure-related expenses | 836 | | | 2,168 | | | 3,207 | | | 10,171 | |
Merger-related expenses | 7,013 | | | 3,507 | | | 19,601 | | | 12,108 | |
Telecommunications expense | 3,111 | | | 3,197 | | | 9,331 | | | 8,985 | |
Consultant expense | 3,338 | | | 2,936 | | | 8,176 | | | 9,223 | |
Advertising expense | 3,024 | | | 2,396 | | | 7,210 | | | 7,045 | |
Core deposit intangible amortization | 2,638 | | | 3,468 | | | 8,523 | | | 10,999 | |
Other | 21,172 | | | 23,391 | | | 58,505 | | | 72,004 | |
Total noninterest expense | $ | 312,818 | | | $ | 291,662 | | | $ | 910,322 | | | $ | 883,312 | |
Table 6
Noninterest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Depreciation on operating lease equipment | $ | 87 | | | $ | 89 | | | $ | — | | | $ | 257 | | | $ | — | |
Maintenance and other operating lease expenses | 52 | | | 47 | | | — | | | 142 | | | — | |
Operating expenses: | | | | | | | | | |
Salaries and benefits | 351 | | | 341 | | | 194 | | | 1,044 | | | 566 | |
Net occupancy expense | 47 | | | 48 | | | 29 | | | 144 | | | 87 | |
Equipment expense | 55 | | | 54 | | | 30 | | | 161 | | | 89 | |
Professional fees | 13 | | | 15 | | | 5 | | | 44 | | | 13 | |
Third-party processing fees | 27 | | | 26 | | | 16 | | | 77 | | | 44 | |
FDIC insurance expense | 5 | | | 9 | | | 3 | | | 26 | | | 10 | |
Marketing | 15 | | | 9 | | | 3 | | | 32 | | | 7 | |
Merger-related expenses | 33 | | | 34 | | | 7 | | | 202 | | | 20 | |
Intangible asset amortization | 5 | | | 6 | | | 3 | | | 17 | | | 9 | |
Other noninterest expense | 70 | | | 67 | | | 24 | | | 169 | | | 66 | |
Total operating expenses | 621 | | | 609 | | | 314 | | | 1,916 | | | 911 | |
Total noninterest expense | $ | 760 | | | $ | 745 | | | $ | 314 | | | $ | 2,315 | | | $ | 911 | |
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Depreciation on Operating Lease Equipment
Depreciation expense is driven by rail equipment and small and large ticket equipment we own and lease to others. The decrease in expense from the prior quarter reflects higher adjustments to residual values that were recorded in the prior quarter. Operating lease activity is in the Rail and Commercial Banking segments. The useful lives of rail equipment is generally longer in duration, 40-50 years, whereas small and large ticket equipment is generally 3-10 years. Refer to the Rail discussion in the section entitled “Results by Business Segments” of this MD&A for further details.
Maintenance and Other Operating Lease Expenses
Rail provides railcars primarily pursuant to full-service lease contracts under which Rail as lessor is responsible for railcar maintenance and repair. Maintenance and other operating lease expenses for the three months ended September 30, 2022 and June 30, 2022 were $52 million and $47 million, respectively, and $142 million for nine months ended September 30, 2022. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. The increase from the prior quarter reflects higher repair costs for railcars put back on lease and inflationary pressures. Refer to the Rail discussion in the section entitled “Results by Business Segments” of this MD&A for further details.
Operating Expenses
The primary components of noninterest expenseoperating expenses are salaries and related employee benefits, occupancy and equipment expense.
Noninterest expense was $312.8
Operating expenses for the three months ended September 30, 2022 were $621 million, during the third quarter of 2021, an increase of $21.2 million, or 7.3%, compared to the same quarter in 2020. The most significant components of the change were as follows:
•Salaries and wages increased $13.7 million driven primarily by annual merit increases, increases in revenue-driven incentives, and an increase in temporary personnel costs.
•Processing fees paid to third parties increased $3.7 million driven by our continued investments in digital and technology to support revenue-generating businesses and improve internal processes.
•Merger-related expenses increased $3.5$609 million in anticipation of the upcoming merger with CIT.
Noninterest expense was $910.3 million for the first ninethree months of 2021, compared to $883.3ended June 30, 2022 and $314 million for the same period in 2020,2021. Operating expenses for the nine months ended September 30, 2022 were $1.92 billion compared to $911 million in the same period of 2021. The increases compared to the same periods in 2021 were primarily driven by the CIT Merger, of which significant drivers included higher employee headcount, more branches and office space, additional technology systems and merger-related expenses. Other expense for nine months ended September 30, 2022 included a $27 million reversal of an increase of $27.0accrual related to legacy CIT postretirement plans that were terminated after the Merger Date. See Note 21 — Employee Benefit Plans.
Operating expenses for the three months ended September 30, 2022 increased by $12 million or 3.1%. The most significant componentscompared to the linked quarter, primarily comprised of the change were as follows:following:
•Salaries and wagesbenefits increased $23.2by $10 million, driven primarily reflecting higher salary expense due to new hires, promotions and other salary adjustments, higher costs for temporary workers, and higher revenue-based incentive compensation, partially offset by annual merit increases, increases in revenue-driven incentives, and an increase in temporary personnellower employee benefit costs. The staff additions were the result of building out teams to support our move to large bank compliance, as well as to backfill vacancies.
•Processing fees paid to third parties increased $11.2A $4 million by our continued investmentsdecrease in digital and technology to support revenue-generating businesses and improve internal processes.FDIC insurance expense.
•Merger-related expensesMarketing costs increased $7.5by $6 million, in anticipationreflecting the timing of our advertising relating to marketing efforts for the upcoming merger with CIT.Direct Bank.
•Other expenses decreased $16.5consisted of other insurance and taxes (other than income tax), foreclosure, collection and other OREO-related expenses, consulting, telecommunications and other miscellaneous expenses including travel, postage, supplies, and appraisal expense. Changes in these items were not material, while a select item included an impairment charge of $5 million primarily duerelated to the closure of an office facility, and the prior quarter included a decrease in pension expense as a result of higher returns on plan assets, coupled with a reduction in the reserve for unfunded commitments.legal settlement accrual.
•Collection and foreclosure-related expenses declined $7.0 million.
Income TaxesINCOME TAXES
Table 7
Income tax expense was $34.1 million and $35.8 million for the third quarter of 2021 and 2020, respectively, representing effective tax rates of 21.5% and 20.1% during the respective periods.Tax Data
Income tax expense totaled $123.9 million and $89.5 million for the first nine months of 2021 and 2020, respectively, representing effective tax rates of 22.6% and 20.2% for the respective nine month periods. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Income before income taxes | $ | 408 | | | $ | 337 | | | $ | 158 | | | $ | 970 | | | $ | 548 | |
Income tax expense | $ | 93 | | | $ | 82 | | | $ | 34 | | | $ | 129 | | | $ | 124 | |
Effective tax rate | 22.9 | % | | 24.2 | % | | 21.5 | % | | 13.3 | % | | 22.6 | % |
The effective tax rates during 2020 were favorablyrate (“ETR”) was 22.9% in the three months ended September 30, 2022, compared to 24.2% for the three months ended June 30, 2022 and 21.5% for the same period in 2021. The increase in effective rate from 21.5% in the year ago quarter to 22.9% for the three months ended September 30, 2022 was primarily driven by the increase in state and local taxes resulting from the CIT Merger. The decrease in the ETR from 24.2% for the three months ended June 30, 2022 to 22.9% for the three months ended September 30, 2022 was primarily driven by the effects of changes from enacted state tax laws. The decrease in the ETR from 22.6% for the nine months ended September 30, 2021 to 13.3% for the nine months ended September 30, 2022 was driven by the non-taxable nature of the preliminary bargain purchase gain arising from the CIT Merger.
The ETR each quarter is impacted by BancShares’ decisiona number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to utilize an allowable alternative for computing its federal income tax liability.valuation allowances, and discrete items. The allowable alternative provided BancSharesETR in future periods may vary from the abilityactual 2022 ETR due to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable whenchanges in these amounts were originally subjected to tax. Without this alternative, the effective tax rate is materially unchanged for the third quarter and first nine months of 2021 and the effective tax rate for the third quarter and first nine months of 2020 would have been approximately 22.0% and 22.6% respectively.factors.
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expensesexpense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, 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.
See Note 20 — Income Taxes for additional information.
RESULTS BY BUSINESS SEGMENT
Prior to the CIT Merger, BancShares operated with centralized management and combined reporting and, therefore, BancShares operated as one consolidated reportable segment. In connection with the CIT Merger, we made changes to reflect the inclusion of CIT operations and to reflect how we manage the combined business. As summarized in the sections below, BancShares now reports financial results in three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. We conformed prior period comparisons to this new segment presentation. Based on the approach for segment disclosures, the substantial majority of BancShares’ operations for historical periods prior to the CIT Merger are reflected in the General Banking segment. See Note 22 — Business Segments for related disclosures on the segments.
Results in our business segments reflect our funds transfer policy and allocation of expenses. Unallocated balances and, when applicable, certain select items, are reflected in Corporate.
General Banking
General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to HOA and property management companies. As part of the CIT Merger, CAB products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services.
Table 8
General Banking: Financial Data and Metrics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | Nine Months Ended |
Earnings Summary | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net interest income | $ | 495 | | | $ | 468 | | | $ | 363 | | | $ | 1,400 | | | $ | 1,071 | |
Provision (benefit) for credit losses | 2 | | | 7 | | | (1) | | | (7) | | | (32) | |
Net interest income after provision (benefit) for credit losses | 493 | | | 461 | | | 364 | | | 1,407 | | | 1,103 | |
Noninterest income | 118 | | | 126 | | | 110 | | | 365 | | | 325 | |
Noninterest expense | 410 | | | 391 | | | 295 | | | 1,210 | | | 875 | |
Income before income taxes | 201 | | | 196 | | | 179 | | | 562 | | | 553 | |
Income tax expense | 55 | | | 40 | | | 38 | | | 134 | | | 125 | |
Net income | $ | 146 | | | $ | 156 | | | $ | 141 | | | $ | 428 | | | $ | 428 | |
Select Period End Balances | | | | | | | | | |
Loans and leases | $ | 41,693 | | | $ | 40,444 | | | $ | 31,849 | | | $ | 41,693 | | | $ | 31,849 | |
Deposits | 82,730 | | | 83,535 | | | 49,992 | | | 82,730 | | | 49,992 | |
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Results for the 2022 periods reflect the additional activity from the CIT Merger, which were not included in 2021 income statements.
Net income for the three months ended September 30, 2022 decreased compared to the three months ended June 30, 2022, reflecting higher NII, mostly due to growth in the loan portfolio, offset by lower noninterest income, higher noninterest expenses and higher taxes. Noninterest income for the three months ended September 30, 2022 decreased compared to the three months ended June 30, 2022, reflecting lower service charges on deposits. Noninterest expenses for the three months ended September 30, 2022 increased compared to the three months ended June 30, 2022, reflecting items discussed previously in the section entitled “Noninterest Expenses” of this MD&A. Net income compared to the 2021 periods was relatively unchanged as higher NII and noninterest income was essentially offset by higher expense levels, resulting from the increased size due to the CIT Merger.
Loans and leases at September 30, 2022 increased from June 30, 2022 reflecting strong demand through our branch network. Growth was primarily concentrated in commercial and business loans. Our consumer mortgage loans also grew, reflecting lower prepayments and originating loans that were held on-balance sheet. Compared to September 30, 2021, loans and leases increased reflecting the additional residential mortgages and consumer loans acquired in the CIT Merger, partially offset by run-off of SBA-PPP loans.
Deposits include deposits from the branch, online and CAB channels. The additional branches acquired in the CIT Merger were mostly in California. Deposits at September 30, 2022 were down from June 30, 2022, driven by lower money market accounts, partially offset by an increase in savings accounts. While deposits were down in our branch network, deposits from our direct banking grew. The increase compared to September 30, 2021 reflects deposits acquired in the CIT Merger. See consolidated discussions in the sections entitled “Net Interest Income,” “Net Interest Margin” and “Balance Sheet Analysis—Deposits” of this MD&A for additional information.
Commercial Banking
Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across various industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities.
We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor).
Table 9
Commercial Banking: Financial Data and Metrics
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dollars in millions | Three Months Ended | | Nine Months Ended |
Earnings Summary | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net interest income | $ | 230 | | | $ | 203 | | | $ | 5 | | | $ | 641 | | | $ | 12 | |
Provision for credit losses | 58 | | | 35 | | | — | | | 60 | | | — | |
Net interest income after provision for credit losses | 172 | | | 168 | | | 5 | | | 581 | | | 12 | |
Noninterest income | 133 | | | 129 | | | — | | | 376 | | | — | |
Noninterest expense | 186 | | | 180 | | | 1 | | | 557 | | | 3 | |
Income before income taxes | 119 | | | 117 | | | 4 | | | 400 | | | 9 | |
Income tax expense | 25 | | | 24 | | | 1 | | | 90 | | | 2 | |
Net income | $ | 94 | | | $ | 93 | | | $ | 3 | | | $ | 310 | | | $ | 7 | |
Select Period End Balances | | | | | | | | | |
Loans and leases | $ | 28,023 | | | $ | 27,220 | | | $ | 667 | | | $ | 28,023 | | | $ | 667 | |
Deposits | 3,682 | | | 4,449 | | | 73 | | | 3,682 | | | 73 | |
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Results for the 2022 periods primarily reflect activity from the former CIT businesses, which were not included in 2021 periods.
Net income for the three months ended September 30, 2022 was essentially unchanged compared to the three months ended June 30, 2022, reflecting higher NII and noninterest income, which offset higher provision for credit losses and noninterest expenses. The provision for credit losses for the three months ended September 30, 2022 reflects moderate deterioration in the macroeconomic forecasts and loan portfolio growth. For the three months ended September 30, and June 30, 2022, noninterest income included rental income on operating lease equipment of $54 million and $53 million, respectively, and $155 million for the nine months ended September 30, 2022. Noninterest expense includes operating expenses and depreciation on operating lease equipment. Noninterest expenses for the three months ended September 30, 2022 increased compared to the three months ended June 30, 2022, reflecting items discussed previously in the section entitled “Noninterest Expense” of this MD&A. Depreciation on operating lease equipment totaled $43 million for the three months ended September 30, 2022 and $42 million for the three months ended June 30, 2022 ($125 million for the nine months ended September 30, 2022).
Loans and leases at September 30, 2022 increased from June 30, 2022, reflecting growth in a number of our industry verticals, such as healthcare and technology, and small business lending, while middle market banking was down. The increase in loans and leases and deposits for the 2022 periods compared to 2021 was driven by those acquired in the CIT Merger.
Rail
Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenues are primarily generated from operating lease income.
Table 10
Rail: Financial Data and Metrics
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dollars in millions | Three Months Ended | | Nine Months Ended |
Earnings Summary | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Rental income on operating leases | $ | 165 | | | $ | 160 | | | $ | — | | | $ | 485 | | | $ | — | |
Depreciation on operating lease equipment | 44 | | | 47 | | | — | | | 132 | | | — | |
Maintenance and other operating lease expenses | 52 | | | 47 | | | — | | | 142 | | | — | |
Net revenue on operating leases(1) | 69 | | | 66 | | | — | | | 211 | | | — | |
Interest expense, net | 20 | | | 18 | | | — | | | 57 | | | — | |
Noninterest income | 6 | | | — | | | — | | | 8 | | | — | |
Operating expenses | 15 | | | 16 | | | — | | | 47 | | | — | |
Income before income taxes | 40 | | | 32 | | | — | | | 115 | | | — | |
Income tax expense | 10 | | | 8 | | | — | | | 28 | | | — | |
Net income | $ | 30 | | | $ | 24 | | | $ | — | | | $ | 87 | | | $ | — | |
Select Period End Balances | | | | | | | | | |
Operating lease equipment, net | $ | 7,248 | | | $ | 7,247 | | | $ | — | | | $ | 7,248 | | | $ | — | |
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(1) Net revenue on operating leases is a non-GAAP measure. See the “Non-GAAP Financial Measures” section for a reconciliation from the GAAP measure (segment net income) to the non-GAAP measure (net revenue on operating leases).
Net income and net revenue on operating leases are utilized to measure the profitability of our Rail segment. Net revenue on operating leases reflects rental income on operating lease equipment less depreciation, maintenance and other operating lease expenses. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this business. NII is not used because it includes the impact of debt costs of our operating lease assets but excludes the associated rental income.
Net income and net revenue on operating leases for the three months ended September 30, 2022 were $30 million and $69 million, respectively, both up from the three months ended June 30, 2022. Depreciation is recognized on railcars, and the prior quarter included higher costs driven by adjustments to residual values. Maintenance and other operating lease expenses increased from the prior quarter, reflecting higher costs for railcars put back on lease and inflationary pressures. Other noninterest income for the three months ended September 30, 2022 reflects a $5 million settlement gain related to returned equipment.
Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 105% of the average prior or expiring lease rate during the quarter. Our railcar utilization, including commitments to lease, at September 30, 2022 was 96.2%, unchanged from June 30, 2022.
Portfolio
Rail customers include all of the U.S. and Canadian Class I railroads (i.e., railroads with annual revenues of approximately $500 million and greater), other railroads, as well as manufacturers and commodity shippers. Our total operating lease fleet at September 30, 2022 consisted of approximately 118,500 railcars, down slightly from June 30, 2022. The following table reflects the proportion of railcars by type based on units and net investment, respectively:
Table 11
Operating lease Railcar Portfolio by Type (units and net investment)
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| September 30, 2022 | | June 30, 2022 |
Railcar Type | Total Owned Fleet - % Total Units | | Total Owned Fleet - % Total Net Investment | | Total Owned Fleet - % Total Units | | Total Owned Fleet - % Total Net Investment |
Covered Hoppers | 43 | % | | 40 | % | | 42 | % | | 40 | % |
Tank Cars | 30 | % | | 41 | % | | 30 | % | | 41 | % |
Mill/Coil Gondolas | 8 | % | | 6 | % | | 8 | % | | 6 | % |
Coal | 8 | % | | 1 | % | | 8 | % | | 1 | % |
Boxcars | 6 | % | | 7 | % | | 6 | % | | 7 | % |
Other | 5 | % | | 5 | % | | 6 | % | | 5 | % |
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Table 12
Rail Operating Lease Equipment by Obligor Industry
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dollars in millions | September 30, 2022 | | June 30, 2022 |
Manufacturing | $ | 2,985 | | | 41 | % | | $ | 3,057 | | | 42 | % |
Rail | 2,010 | | | 28 | % | | 1,937 | | | 27 | % |
Wholesale | 991 | | | 14 | % | | 980 | | | 14 | % |
Oil and gas extraction / services | 538 | | | 7 | % | | 556 | | | 8 | % |
Energy and utilities | 245 | | | 3 | % | | 237 | | | 3 | % |
Other | 479 | | | 7 | % | | 480 | | | 6 | % |
Total | $ | 7,248 | | | 100 | % | | $ | 7,247 | | | 100 | % |
Corporate
Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related expenses, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as the Initial Non-PCD Provision for loans and leases and unfunded commitments, and the preliminary gain on acquisition, both of which related to the CIT Merger.
Table 13
Corporate: Financial Data and Metrics
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dollars in millions | Three Months Ended | | Nine Months Ended |
Earnings Summary | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net interest income (expense) | $ | 90 | | | $ | 47 | | | $ | (21) | | | $ | 161 | | | $ | (50) | |
Provision for credit losses | — | | | — | | | — | | | 513 | | | — | |
Net interest income (expense) after provision for credit losses | 90 | | | 47 | | | (21) | | | (352) | | | (50) | |
Noninterest income | 12 | | | 9 | | | 14 | | | 473 | | | 69 | |
Noninterest expense | 54 | | | 64 | | | 18 | | | 228 | | | 33 | |
Income (loss) before income taxes | 48 | | | (8) | | | (25) | | | (107) | | | (14) | |
Income tax expense (benefit) | 3 | | | 10 | | | (5) | | | (123) | | | (3) | |
Net income (loss) | $ | 45 | | | $ | (18) | | | $ | (20) | | | $ | 16 | | | $ | (11) | |
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Results for 2022 were driven by impacts from the CIT Merger. Results for the three months ended September 30, 2022 benefited from higher NII reflecting higher interest income. Included in noninterest expenses for the 2022 periods were $33 million, $34 million and $202 million of merger-related expenses, for the three months ended September 30, 2022, June 30, 2022 and nine months ended September 30, 2022, respectively. In addition to these items, the nine months ended September 30, 2022 also included a provision for credit losses of $513 million related to the Initial Non-PCD Provision, a preliminary gain on acquisition of $431 million and a benefit of approximately $27 million related to the termination of certain legacy CIT retiree benefit plans in noninterest expenses.
BALANCE SHEET ANALYSIS
INTEREST-EARNING ASSETS
Interest-earning assets include overnight investments,interest-bearing cash, investment securities, assets held for sale and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. RiskierHigher 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 assets totaled $53.4 billion and $47.2 billionDeposits at Banks
Interest-earning deposits at banks at September 30, 20212022 totaled $6.2 billion. This was down from $6.5 billion at June 30, 2022 and $9.1 billion at December 31, 2020, respectively. The $6.22021. These declines related to lower deposits, loan growth, and the timing of investment maturities. While the CIT Merger added approximately $2.9 billion increaseof interest-earning deposits at banks as of the Merger Date, that amount was primarily composed of a $5.5 billion increase in overnight investments and a $952.4 million increase in investment securities, partially offset by a $275.8 million decreasethe use of cash for the redemption of approximately $2.9 billion of assumed debt from the CIT Merger in loans.February.
Investment Securities
The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities withthat have minimal liquidity and credit risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely 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 andor into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C -1 — Accounting Policies and Basis of Presentation and Note 3 — Investments to our consolidated financial statements for additional disclosures.disclosures regarding investment securities.
The carrying value of investment securities totaled $10.9 billion at September 30, 2021, an increase of $952.4 million compared to December 31, 2020 attributable to our continued growth in deposits. During the period we had $5.02022 totaled $18.8 billion. This was down from $19.1 billion inat June 30, 2022, reflecting investment security purchases partially offset by sales of $1.4$0.5 billion, and maturities and paydowns of $2.6$0.5 billion, and the remaining due to change in fair value. The increase from $13.1 billion at December 31, 2021 primarily reflected the CIT Merger, which added $6.6 billion. The remaining year to date activity in the portfolio included investment securities purchases of $1.8 billion, partially offset by maturities and paydowns of $1.7 billion, and fair value changes.
Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income,AOCI, net of deferred taxes. As of September 30, 2021,2022, investment securities available for sale had a net pre-tax unrealized gainloss of $26.0$995 million, compared to a net pre-tax unrealized gainloss of $102.3$647 million as of June 30, 2022 and $12 million as of December 31, 2020.2021. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the investment securities portfolio generally decreases when interest rates increase or when credit spreads widen. Management evaluated the available for sale securities in an unrealized loss position and concluded that the unrealized losses relaterelated to changes in interest rates relative to when the securities were purchased, and therefore BancShares management determined that no allowance for credit lossesACL was recordedneeded at September 30, 2021 or December 31, 2020.2022.
BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities.entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and FDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the World Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, BancShares management determined that no allowance for credit lossesACL was needed at September 30, 20212022 and December 31, 2020.
Table 8
INVESTMENT SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | Composition(1) | | Amortized cost | | Fair value | | Composition(1) | | Amortized cost | | Fair value |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | — | % | | $ | — | | | $ | — | | | 5.0 | % | | $ | 499,832 | | | $ | 499,933 | |
Government agency | 7.9 | | | 851,860 | | | 853,728 | | | 7.0 | | | 706,241 | | | 701,391 | |
Residential mortgage-backed securities | 44.3 | | | 4,800,194 | | | 4,801,646 | | | 44.5 | | | 4,369,130 | | | 4,438,103 | |
Commercial mortgage-backed securities | 10.0 | | | 1,092,183 | | | 1,090,652 | | | 7.9 | | | 745,892 | | | 771,537 | |
Corporate bonds | 5.8 | | | 600,906 | | | 625,103 | | | 6.1 | | | 590,870 | | | 603,279 | |
| | | | | | | | | | | |
Total investment securities available for sale | 68.0 | | | 7,345,143 | | | 7,371,129 | | | 70.5 | | | 6,911,965 | | | 7,014,243 | |
Investment in marketable equity securities | 1.1 | | | 85,554 | | | 123,147 | | | 0.9 | | | 84,837 | | | 91,680 | |
Investment securities held to maturity | | | | | | | | | | | |
Residential mortgage-backed securities | 19.4 | | | 2,122,299 | | | 2,112,561 | | | 19.1 | | | 1,877,692 | | | 1,895,381 | |
Commercial mortgage-backed securities | 11.4 | | | 1,256,771 | | | 1,238,509 | | | 9.4 | | | 937,034 | | | 940,862 | |
Other | 0.1 | | | 2,008 | | | 2,008 | | | 0.1 | | | 2,256 | | | 2,256 | |
Total investment securities held to maturity | 30.9 | | | 3,381,078 | | | 3,353,078 | | | 28.6 | | | 2,816,982 | | | 2,838,499 | |
Total investment securities | 100.0 | % | | $ | 10,811,775 | | | $ | 10,847,354 | | | 100.0 | % | | $ | 9,813,784 | | | $ | 9,944,422 | |
(1) Calculated as a percent of the total fair value of investment securities. | | | | |
2021.
Table 914 presents the weighted average taxable-equivalent yields for investment securities available for sale and held to maturityportfolio at September 30, 2022, June 30, 2022, and December 31, 2021, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level yields.
Table 9
WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Within One Year | | One to Five Years | | Five to 10 Years | | After 10 Years | | Total |
Investment securities available for sale | | | | | | | | | |
| | | | | | | | | |
Government agency | — | % | | 2.15 | % | | 1.08 | % | | 1.07 | % | | 1.07 | % |
Residential mortgage-backed securities(1) | — | | | — | | | 1.80 | | | 1.26 | | | 1.27 | |
Commercial mortgage-backed securities(1) | — | | | — | | | 3.19 | | | 2.04 | | | 2.09 | |
Corporate bonds | 4.05 | | | 5.87 | | | 5.21 | | | 4.76 | | | 5.24 | |
Total investment securities available for sale | 4.05 | % | | 5.70 | % | | 3.71 | % | | 1.38 | % | | 1.71 | % |
| | | | | | | | | |
Investment securities held to maturity | | | | | | | | | |
Residential mortgage-backed securities(1) | — | % | | — | % | | — | % | | 1.17 | % | | 1.17 | % |
Commercial mortgage-backed securities(1) | — | | | — | | | — | | | 1.46 | | | 1.46 | |
Other investments | 0.81 | | | 1.17 | | | — | | | — | | | 0.94 | |
Total investment securities held to maturity | 0.81 | % | | 1.17 | % | | — | % | | 1.28 | % | | 1.28 | % |
(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. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.
Loans and Leases
Loans held for sale were $98.5 million at September 30, 2021, a net decrease of $26.4 million since December 31, 2020.
At September 30, 2021, loans totaled $32.5 billion, a decrease of $275.8 million, or by 1.1% on an annualized basis since December 31, 2020. Excluding SBA-PPP loans, total loans increased $1.0 billion, or by 4.6% on an annualized basis since December 31, 2020.
BancShares reports non-PCD and PCD loan portfolios separately, and the non-PCD portfolio is further divided into commercial and consumer segments. Non-PCD loans and leases were $32.1 billion at September 30, 2021 and $32.3 billion at December 31, 2020, representing 98.9% and 98.6% of total loans, respectively. PCD loans at September 30, 2021 were $373.3 million, compared to $462.9 million at December 31, 2020, representing 1.1% and 1.4% of total loans, respectively.
The discount related to acquired non-PCD loans and leases was $13.4 million and $19.5 million at September 30, 2021 and December 31, 2020, respectively. The discount related to PCD loans was $32.6 million and $45.3 million at September 30, 2021 and December 31, 2020, respectively.
During the three months ended September 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $1.2 million and $2.8 million, respectively, while interest and accretion income on PCD loans was $10.8 million and $15.0 million, respectively. During the nine months ended September 30, 2021 and 2020, accretion income on purchased non-PCD loans and leases was $6.1 million and $7.8 million, respectively, while interest and accretion income on PCD loans was $34.5 million and $48.0 million, respectively
Table 10
LOANS AND LEASES
| | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Commercial: | | | |
Construction and land development | $ | 1,247,680 | | | $ | 985,424 | |
Owner occupied commercial mortgage | 11,625,554 | | | 11,165,012 | |
Non-owner occupied commercial mortgage | 3,002,928 | | | 2,987,689 | |
| | | |
| | | |
Commercial and industrial and leases | 5,266,266 | | | 5,013,644 | |
| | | |
SBA-PPP | 1,086,917 | | | 2,406,291 | |
Total commercial loans | 22,229,345 | | | 22,558,060 | |
Consumer: | | | |
Residential mortgage | 5,701,346 | | | 5,561,686 | |
Revolving mortgage | 1,834,690 | | | 2,052,854 | |
Construction and land development | 391,768 | | | 348,123 | |
Consumer auto | 1,350,377 | | | 1,255,402 | |
Consumer other | 635,408 | | | 552,968 | |
| | | |
Total consumer loans | 9,913,589 | | | 9,771,033 | |
Total non-PCD loans and leases | 32,142,934 | | | 32,329,093 | |
PCD loans | 373,255 | | | 462,882 | |
Total loans and leases | 32,516,189 | | | 32,791,975 | |
Less allowance for credit losses | (183,194) | | | (224,314) | |
Net loans and leases | $ | 32,332,995 | | | $ | 32,567,661 | |
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses (“ACL”) was $183.2 million at September 30, 2021, representing a decrease of $41.1 million since December 31, 2020. The ACL as a percentage of total loans and leases was 0.56% at September 30, 2021, compared to 0.68% at December 31, 2020. The ACL as a percentage of loans and leases excluding SBA-PPP loans, which have no recorded ACL, was 0.58% at September 30, 2021, compared to 0.74% at December 31, 2020.
The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period ended September 30, 2021, the ACL change since December 31, 2020 was driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years. For most pools, we use a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Our ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario, but the September 30, 2021 ACL forecast was calculated using the consensus baseline scenario. This scenario showed improvements in the most significant economic factors compared to what was used to generate the December 31, 2020 ACL. These loss estimates were also influenced by our strong credit quality and low net charge-offs.
As of September 30, 2021, the consensus baseline forecast utilized the following significant inputs over the two-year reasonable and supportable forecast period:
Unemployment - Rates are expected to improve to below 4% through the end of 2022 and stabilizing into early 2023.
GDP Growth - Peak growth of just under 7% in the fourth quarter of 2021, decreasing to below 3% in 2022 and thereafter.
Home Pricing Index - Growth rates of over 7% declining to below 4% over the forecast period.
Commercial Real Estate Index - Small forecasted downturn through the first half of 2022 and then improving to over 6% into 2023.
At September 30, 2021, the ACL allocated to non-PCD loans and leases was $164.8 million, or 0.51% of non-PCD loans and leases, compared to $200.3 million, or 0.62%, at December 31, 2020. The decrease of 11 basis points since December 31, 2020 was primarily due to continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.53% at September 30, 2021 compared to 0.67% at December 31, 2020.
At September 30, 2021, the ACL for PCD loans totaled $18.4 million compared to $24.0 million at December 31, 2020. The decrease was due to paydowns and the decline in the portfolio coupled with the impact of improved macroeconomic factors.
In the period ended September 30, 2021, the ACL on our commercial portfolio decreased $8.2 million, with the largest share of the decrease within commercial real estate. The ACL on the consumer portfolio decreased $27.4 million, with decreases across all portfolios with the largest change in residential mortgages. These portfolios were largely impacted by the improvement in macroeconomic factors.
Net charge-offs for loans and leases were $4.8 million during the third quarter of 2021, compared to $2.6 million during the third quarter of 2020. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.06% and 0.03% for the third quarter of 2021 and 2020, respectively. The impact of SBA-PPP loans on average loans balances did not affect the net charge-off ratio in either period.
Net charge-offs for loans and leases were $9.4 million during the nine months ended September 30, 2021, compared to $17.4 million during the same period of 2020. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.04% and 0.07% for the nine months ended September 30, 2021 and 2020, respectively. The impact of SBA-PPP loans on average loan balances did not have an impact on the net charge-off ratio for the nine months ended September 30, 2021. Excluding the impact of SBA-PPP loans on average loan balances, the net charge-off ratio was 0.08% for the nine months ended September 30, 2020.
category.
Table 14
Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
| Composition(1) | | Amortized cost | | Fair value | | Composition(1) | | Amortized cost | | Fair value | | Composition(1) | | Amortized cost | | Fair value |
Investment securities available for sale: | | | | | | | | | | | | | | | | | |
U.S. Treasury | 11.0 | % | | $ | 2,047 | | | $ | 1,900 | | | 10.5 | % | | $ | 2,005 | | | $ | 1,903 | | | 15.4 | % | | $ | 2,007 | | | $ | 2,005 | |
Government agency | 1.0 | % | | 175 | | | 173 | | | 1.1 | % | | 191 | | | 190 | | | 1.7 | % | | 221 | | | 221 | |
Residential mortgage-backed securities | 27.6 | % | | 5,450 | | | 4,784 | | | 27.7 | % | | 5,448 | | | 5,020 | | | 36.2 | % | | 4,757 | | | 4,729 | |
Commercial mortgage-backed securities | 9.6 | % | | 1,828 | | | 1,673 | | | 8.4 | % | | 1,632 | | | 1,527 | | | 12.6 | % | | 1,648 | | | 1,640 | |
Corporate bonds | 3.2 | % | | 583 | | | 558 | | | 3.1 | % | | 581 | | | 570 | | | 4.7 | % | | 582 | | | 608 | |
| | | | | | | | | | | | | | | | | |
Total investment securities available for sale | 52.4 | % | | $ | 10,083 | | | $ | 9,088 | | | 50.8 | % | | $ | 9,857 | | | $ | 9,210 | | | 70.6 | % | | $ | 9,215 | | | $ | 9,203 | |
Investment in marketable equity securities | 0.5 | % | | $ | 73 | | | $ | 92 | | | 0.5 | % | | $ | 73 | | | $ | 94 | | | 0.7 | % | | $ | 73 | | | $ | 98 | |
Investment securities held to maturity: | | | | | | | | | | | | | | | | | |
U.S. Treasury | 2.4 | % | | $ | 473 | | | $ | 419 | | | 2.4 | % | | $ | 472 | | | $ | 437 | | | — | % | | $ | — | | | $ | — | |
Government agency | 7.8 | % | | 1,546 | | | 1,350 | | | 7.9 | % | | 1,544 | | | 1,424 | | | — | % | | — | | | — | |
Residential mortgage-backed securities | 21.6 | % | | 4,510 | | | 3,745 | | | 22.8 | % | | 4,633 | | | 4,119 | | | 17.7 | % | | 2,322 | | | 2,306 | |
Commercial mortgage-backed securities | 13.8 | % | | 2,834 | | | 2,397 | | | 14.1 | % | | 2,886 | | | 2,563 | | | 11.0 | % | | 1,485 | | | 1,451 | |
Supranational securities | 1.5 | % | | 295 | | | 252 | | | 1.5 | % | | 294 | | | 266 | | | — | % | | — | | | — | |
Other investments | — | % | | 3 | | | 3 | | | — | % | | 3 | | | 3 | | | — | % | | 2 | | | 2 | |
Total investment securities held to maturity | 47.1 | % | | $ | 9,661 | | | $ | 8,166 | | | 48.7 | % | | $ | 9,832 | | | $ | 8,812 | | | 28.7 | % | | $ | 3,809 | | | $ | 3,759 | |
Total investment securities | 100 | % | | $ | 19,817 | | | $ | 17,346 | | | 100 | % | | $ | 19,762 | | | $ | 18,116 | | | 100 | % | | $ | 13,097 | | | $ | 13,060 | |
(1) Calculated as a percent of the total fair value of investment securities. |
Table 11
ALLOWANCE FOR CREDIT LOSSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three months ended September 30, 2021 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 1 | | | | | | | | | $ | 76,082 | | | | | | | | | | | | | $ | 94,272 | | | $ | 18,740 | | | $ | 189,094 | |
Provision (credit) | | | | | | | | | 975 | | | | | | | | | | | | | (223) | | | (1,872) | | | (1,120) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs | | | | | | | | | (5,967) | | | | | | | | | | | | | (4,307) | | | (799) | | | (11,073) | |
Recoveries | | | | | | | | | 1,594 | | | | | | | | | | | | | 2,330 | | | 2,369 | | | 6,293 | |
Balance at September 30 | | | | | | | | | $ | 72,684 | | | | | | | | | | | | | $ | 92,072 | | | $ | 18,438 | | | $ | 183,194 | |
Percent of loans in each category to total loans | | | | | | | | | 68.4 | % | | | | | | | | | | | | 30.5 | % | | 1.2 | % | | 100.0 | % |
Annualized net charge-off ratio | | | | | | | | | 0.08 | % | | | | | | | | | | | | 0.08 | % | | (0.55) | % | | 0.06 | % |
Net charge-offs | | | | | | | | | $ | 4,373 | | | | | | | | | | | | | $ | 1,977 | | | $ | (1,570) | | | $ | 4,780 | |
Average loans | | | | | | | | | 22,331,889 | | | | | | | | | | | | | 9,891,071 | | | 384,673 | | | 32,607,633 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three months ended September 30, 2020 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at July 1 | | | | | | | | | $ | 76,177 | | | | | | | | | | | | | $ | 119,345 | | | $ | 26,928 | | | $ | 222,450 | |
Provision (credit) | | | | | | | | | 4,793 | | | | | | | | | | | | | 1,874 | | | (2,625) | | | 4,042 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs | | | | | | | | | (3,328) | | | | | | | | | | | | | (5,109) | | | (495) | | | (8,932) | |
Recoveries | | | | | | | | | 2,338 | | | | | | | | | | | | | 2,719 | | | 1,319 | | | 6,376 | |
Balance at September 30 | | | | | | | | | $ | 79,980 | | | | | | | | | | | | | $ | 118,829 | | | $ | 25,127 | | | $ | 223,936 | |
Percent of loans in each category to total loans | | | | | | | | | 68.9 | % | | | | | | | | | | | | 29.6 | % | | 1.5 | % | | 100.0 | % |
Annualized net charge-off ratio | | | | | | | | | 0.02 | % | | | | | | | | | | | | 0.10 | % | | (0.21) | % | | 0.03 | % |
Net charge-offs | | | | | | | | | $ | 990 | | | | | | | | | | | | | $ | 2,390 | | | $ | (824) | | | $ | 2,556 | |
Average loans | | | | | | | | | 22,361,650 | | | | | | | | | | | | | 9,703,434 | | | 512,559 | | | 32,577,643 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Nine months ended September 30, 2021 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at January 1 | | | | | | | | | $ | 80,842 | | | | | | | | | | | | | $ | 119,485 | | | $ | 23,987 | | | $ | 224,314 | |
Provision (credit) | | | | | | | | | 332 | | | | | | | | | | | | | (23,208) | | | (8,821) | | | (31,697) | |
Initial allowance on PCD loans | | | | | | | | | — | | | | | | | | | | | | | — | | | — | | | — | |
Charge-offs | | | | | | | | | (12,342) | | | | | | | | | | | | | (12,804) | | | (2,018) | | | (27,164) | |
Recoveries | | | | | | | | | 3,852 | | | | | | | | | | | | | 8,599 | | | 5,290 | | | 17,741 | |
Balance at September 30 | | | | | | | | | $ | 72,684 | | | | | | | | | | | | | $ | 92,072 | | | $ | 18,438 | | | $ | 183,194 | |
Percent of loans in each category to total loans | | | | | | | | | 68.4 | % | | | | | | | | | | | | 30.5 | % | | 1.2 | % | | 100.0 | % |
Annualized net charge-off ratio | | | | | | | | | 0.05 | % | | | | | | | | | | | | 0.06 | % | | (1.05) | % | | 0.04 | % |
Net charge-offs | | | | | | | | | $ | 8,490 | | | | | | | | | | | | | $ | 4,205 | | | $ | (3,272) | | | $ | 9,423 | |
Average loans | | | | | | | | | 22,680,602 | | | | | | | | | | | | | 9,773,946 | | | 417,536 | | | 32,872,084 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Nine months ended September 30, 2020 |
(Dollars in thousands) | | | | | | | | | Commercial | | | | | | | | | | | | Consumer | | PCD | | Total |
Balance at December 31 | | | | | | | | | $ | 142,369 | | | | | | | | | | | | | $ | 75,236 | | | $ | 7,536 | | | $ | 225,141 | |
Adoption of ASC 326 | | | | | | | | | (87,554) | | | | | | | | | | | | | 30,629 | | | 19,001 | | | (37,924) | |
Balance at January 1 | | | | | | | | | 54,815 | | | | | | | | | | | | | 105,865 | | | 26,537 | | | 187,217 | |
Provision (credit) | | | | | | | | | 32,854 | | | | | | | | | | | | | 25,066 | | | (4,971) | | | 52,949 | |
Initial allowance on PCD loans | | | | | | | | | — | | | | | | | | | | | | | — | | | 1,193 | | | 1,193 | |
Charge-offs | | | | | | | | | (12,712) | | | | | | | | | | | | | (19,535) | | | (3,010) | | | (35,257) | |
Recoveries | | | | | | | | | 5,023 | | | | | | | | | | | | | 7,433 | | | 5,378 | | | 17,834 | |
Balance at September 30 | | | | | | | | | $ | 79,980 | | | | | | | | | | | | | $ | 118,829 | | | $ | 25,127 | | | $ | 223,936 | |
Percent of loans in each category to total loans | | | | | | | | | 68.9 | % | | | | | | | | | | | | 29.6 | % | | 1.5 | % | | 100.0 | % |
Annualized net charge-off ratio | | | | | | | | | 0.05 | % | | | | | | | | | | | | 0.16 | % | | (0.60) | % | | 0.07 | % |
Net charge-offs | | | | | | | | | $ | 7,689 | | | | | | | | | | | | | $ | 12,102 | | | $ | (2,368) | | | $ | 17,423 | |
Average loans | | | | | | | | | 20,687,348 | | | | | | | | | | | | | 9,838,064 | | | 529,819 | | | 31,055,231 | |
15presents the weighted average yields for investment securities available for sale and held to maturity at September 30, 2022, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields.
The reserve for unfunded loan commitments was $11.5 million and $12.8 million at September 30, 2021 and December 31, 2020, respectively.Table 15
Weighted Average Yield on Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Within One Year | | One to Five Years | | Five to 10 Years | | After 10 Years | | Total |
Investment securities available for sale: | | | | | | | | | |
U.S. Treasury | 3.25 | % | | 0.96 | % | | — | % | | — | % | | 1.01 | % |
Government agency | 4.42 | % | | 4.58 | % | | 4.09 | % | | 4.14 | % | | 4.09 | % |
Residential mortgage-backed securities | 1.09 | % | | 2.38 | % | | 2.12 | % | | 1.78 | % | | 1.78 | % |
Commercial mortgage-backed securities | 4.06 | % | | 3.55 | % | | 5.37 | % | | 2.71 | % | | 2.86 | % |
Corporate bonds | 5.00 | % | | 6.61 | % | | 5.28 | % | | 4.67 | % | | 5.40 | % |
| | | | | | | | | |
Total investment securities available for sale | 3.65 | % | | 1.42 | % | | 4.84 | % | | 1.99 | % | | 2.07 | % |
| | | | | | | | | |
Investment securities held to maturity: | | | | | | | | | |
U.S. Treasury | — | % | | 1.37 | % | | 1.57 | % | | — | % | | 1.38 | % |
Government agency | 0.44 | % | | 1.36 | % | | 1.75 | % | | — | % | | 1.49 | % |
Residential mortgage-backed securities(1) | — | % | | 4.03 | % | | 3.71 | % | | 1.76 | % | | 1.76 | % |
Commercial mortgage-backed securities(1) | — | % | | — | % | | 2.20 | % | | 1.83 | % | | 1.83 | % |
Supranational Securities | — | % | | 1.23 | % | | 1.64 | % | | — | % | | 1.56 | % |
Other investments | 0.78 | % | | — | % | | — | % | | — | % | | 0.78 | % |
Total investment securities held to maturity | 0.46 | % | | 1.36 | % | | 1.73 | % | | 1.79 | % | | 1.72 | % |
(1)
Table of ContentsResidential 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. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.Table 12
ALLOWANCE FOR CREDIT LOSSES RATIOS
| | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | September 30, 2021 | | December 31, 2020 |
Allowance for credit losses to total loans and leases(1): | | | | | 0.56 | % | | 0.68 | % |
Allowance for credit losses | | | | | $ | 183,194 | | | $ | 224,314 | |
Total loans and leases | | | | | 32,516,189 | | | 32,791,975 | |
Allowance for credit losses to non-PCD loans and leases(1): | | | | | 0.51 | % | | 0.62 | % |
Allowance for credit losses on non-PCD loans and leases | | | | | $ | 164,756 | | | $ | 200,327 | |
Total non-PCD loans and leases | | | | | 32,142,934 | | | 32,329,093 | |
Allowance for credit losses to PCD loans: | | | | | 4.94 | % | | 5.18 | % |
Allowance for credit losses on PCD loans | | | | | $ | 18,438 | | | $ | 23,987 | |
Total PCD loans | | | | | 373,255 | | | 462,882 | |
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(1) Loans originated in relation to the SBA-PPP ($1.1 billion as of September 30, 2021 and $2.4 billion as of December 31, 2020) do not have a recorded ACL. As of September 30, 2021, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.53% while the ratio of ACL to total loans excluding SBA-PPP loans was 0.58%. As of December 31, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans was 0.67% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.74%. |
NONPERFORMING ASSETSAssets Held for Sale
NonperformingAssets held for sale at September 30, 2022 were $21 million, of which $18 million related to loans and the remainder to non-interest earning operating lease equipment. Assets held for sale totaled $38 million at June 30, 2022 and $99 million at December 31, 2021. The declines were primarily due to loan sales.
Certain residential real estate loans and commercial loans are originated to be sold to investors or lenders, respectively, and are recorded in assets include nonaccrualheld for sale at fair value. In addition, BancShares may change its strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.
Loans and Leases
Loans and leases held for investment at September 30, 2022 were $69.8 billion, an increase from $67.7 billion, at June 30, 2022. Our commercial loans were up $1.5 billion from June 30, 2022. We continued to see strong loan growth in our branch network, as well as commercial banking. The increase in our branch network loans was driven by higher commercial loans. In commercial banking, growth was in a number of our industry verticals, such as healthcare and technology, and small business lending, while middle market banking was down. We also had growth in consumer mortgage loans. Our consumer loans were up $0.6 billion from June 30, 2022. Total loans and leases and other real estate owned (“OREO”). At September 30, 2021, BancShares’ nonperforming assets totaled $204.4 million, a decrease of $37.9 million sinceincreased from $32.4 billion at December 31, 2020.2021, reflecting the addition of $32.7 billion from the CIT Merger and the above noted activity, partially offset by a reduction in SBA-PPP loans.
Nonaccrual
Upon completion of the CIT Merger, we re-evaluated our loan classes to reflect the risk characteristics of the combined portfolio. BancShares reports its commercial loan portfolio in the following classes: commercial construction, owner occupied commercial mortgage, non-owner occupied commercial mortgage, commercial and industrial, and leases. The consumer portfolio includes residential mortgage, revolving mortgage, consumer auto and consumer other. Commercial loans and leases at September 30, 20212022 were $163.8 million, reflecting a decrease of $27.7 million since$53.0 billion compared to $51.5 billion at June 30, 2022 and $22.6 billion at December 31, 2020. Nonaccrual loans2021, representing 76%, 76% and leases as a percentage70% of total loans and leases, was 0.50% and 0.58%respectively. Consumer loans at September 30, 2022 were $16.8 billion, compared to $16.3 billion at June 30, 2022 and $9.8 billion at December 31, 2021, representing 24%, 24% and 30% of total loans and leases, respectively.
Table 16
Loans and Leases
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Commercial: | | | | | |
Commercial construction | $ | 2,752 | | | $ | 2,783 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 14,053 | | | 13,795 | | | 12,099 | |
Non-owner occupied commercial mortgage | 9,683 | | | 9,167 | | | 3,041 | |
Commercial and industrial | 24,288 | | | 23,554 | | | 5,937 | |
Leases | 2,184 | | | 2,178 | | | 271 | |
Total commercial | $ | 52,960 | | | $ | 51,477 | | | $ | 22,586 | |
Consumer: | | | | | |
Residential mortgage | 12,910 | | | 12,441 | | | 6,088 | |
Revolving mortgage | 1,923 | | | 1,893 | | | 1,818 | |
Consumer auto | 1,385 | | | 1,338 | | | 1,332 | |
Consumer other | 612 | | | 586 | | | 548 | |
Total consumer | $ | 16,830 | | | $ | 16,258 | | | $ | 9,786 | |
Total loans and leases | 69,790 | | | 67,735 | | | 32,372 | |
Less allowance for credit losses | 882 | | | 850 | | | 178 | |
Net loans and leases | $ | 68,908 | | | $ | 66,885 | | | $ | 32,194 | |
The discount related to acquired loans was $131 million, $146 million and $40 million at September 30, 2022, June 30, 2022 and December 31, 2020,2021, respectively. At September 30, 2021, OREO totaled $40.6 million, representing a decrease of $10.2 million since December 31, 2020. Nonperforming assets as a percentage of total loans, leases and OREO was 0.63% as of September 30, 2021 compared to 0.74% as of December 31, 2020.
Table 13
NONPERFORMING ASSETS
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| 2021 | | 2020 |
| Third | | Second | | First | | Fourth | | Third |
(Dollars in thousands) | Quarter | | Quarter | | Quarter | | Quarter | | Quarter |
Nonaccrual loans and leases: | | | | | | | | | |
Non-PCD | $ | 118,737 | | | $ | 136,530 | | | $ | 141,369 | | | $ | 136,544 | | | $ | 130,927 | |
PCD | 45,038 | | | 50,934 | | | 53,165 | | | 54,939 | | | 55,527 | |
Total nonaccrual loans and leases | 163,775 | | | 187,464 | | | 194,534 | | | 191,483 | | | 186,454 | |
Other real estate owned | 40,649 | | | 43,685 | | | 48,512 | | | 50,890 | | | 52,789 | |
Total nonperforming assets | $ | 204,424 | | | $ | 231,149 | | | $ | 243,046 | | | $ | 242,373 | | | $ | 239,243 | |
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Accruing loans and leases 90 days or more past due | | | | | | | | | |
Non-PCD | $ | 3,827 | | | $ | 3,413 | | | $ | 5,945 | | | $ | 5,507 | | | $ | 3,587 | |
PCD | 1,787 | | | 363 | | | 1,432 | | | 355 | | | — | |
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Ratio of total nonperforming assets to total loans, leases and other real estate owned | 0.63 | % | | 0.71 | % | | 0.73 | % | | 0.74 | % | | 0.73 | % |
Ratio of nonaccrual loans and leases to total loans and leases | 0.50 | | | 0.57 | | | 0.59 | | | 0.58 | | | 0.57 | |
Ratio of allowance for credit losses to nonaccrual loans and leases | 111.9 | | | 100.9 | | | 108.3 | | | 117.1 | | | 120.1 | |
TROUBLED DEBT RESTRUCTURINGS
We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Troubled debt restructurings (“TDRs”) not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.
52OPERATING LEASE EQUIPMENT, NET
As detailed in the following table, our operating lease portfolio is mostly comprised of Contentsrail assets. See the Rail segment discussion in the section entitled “Results by Business Segment” of this MD&A for further details on the rail portfolio.
Table 1417
TROUBLED DEBT RESTRUCTURINGSOperating Lease Equipment
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(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Accruing TDRs: | | | |
Non-PCD | $ | 122,810 | | | $ | 139,747 | |
PCD | 29,207 | | | 17,617 | |
Total accruing TDRs | 152,017 | | | 157,364 | |
Nonaccruing TDRs: | | | |
Non-PCD | 48,593 | | | 43,470 | |
PCD | 12,365 | | | 7,346 | |
Total nonaccruing TDRs | 60,958 | | | 50,816 | |
All TDRs: | | | |
Non-PCD | 171,403 | | | 183,217 | |
PCD | 41,572 | | | 24,963 | |
Total TDRs | $ | 212,975 | | | $ | 208,180 | |
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dollars in millions | September 30, 2022 | | June 30, 2022 |
Railcars and locomotives | $ | 7,248 | | | $ | 7,247 | |
Other equipment | 736 | | | 724 | |
Total(1) | $ | 7,984 | | | $ | 7,971 | |
(1)Includes off-lease Rail equipment of $509 million at September 30, 2022 and $492 million at June 30, 2022.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities at September 30, 2022 totaled $30.4$69.3 billion, compared to $67.1 billion at June 30, 2022 and $31.8 billion at December 31, 2021. As discussed further below, the increase from June 30, 2022 reflects lower deposits offset by higher FHLB borrowings. The increase from December 31, 2021 was mostly due to deposits and borrowings from the CIT Merger, partially offset by current year activity that included post-merger decline in deposits, the redemption of assumed debt during the first quarter, and higher FHLB borrowings. See Note 2 — Business Combinations for details on deposits and borrowings associated with the CIT Merger.
Deposits
Total deposits at September 30, 2022 were $87.6 billion, a decrease of $1.8 billion compared to June 30, 2022 and an increase of $36.1 billion compared to December 31, 2021. Interest-bearing deposits totaled $61.0 billion, $62.7 billion and $30.0 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. Noninterest-bearing deposits totaled $26.6 billion, $26.6 billion and $21.4 billion at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. During the quarter deposits in our branch network and commercial customers were down, partially offset by our growth in direct banking deposits. Total deposits declined during the second quarter and continued lower in the third quarter, reflecting the most rate sensitive customers moving funds in response to increases in the federal funds rate. The decline in total deposits compared to $27.3 billion atJune 30, 2022 was driven by lower money market accounts, partially offset by an increase in savings accounts.
The reduction in deposits since the CIT Merger have been primarily concentrated in acquired higher cost channels, including legacy OneWest branches and the Direct Bank. These declines were partially offset by growth in noninterest-bearing deposits, primarily from our branch network. The increase in total deposits as compared to December 31, 2020. The increase2021 was mostly due todriven by the $39.4 billion of deposits acquired in the CIT Merger, partially offset by the noted declines. As part of the CIT Merger, we acquired CIT’s online banking platform and an increase of $3.1 billion in interest-bearing deposits.HOA deposit channel.
Table 18
Deposits
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dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Noninterest-bearing demand | $ | 26,587 | | | $ | 26,645 | | | $ | 21,405 | |
Checking with interest | 16,118 | | | 16,285 | | | 12,694 | |
Money market | 21,818 | | | 24,699 | | | 10,590 | |
Savings | 14,722 | | | 13,319 | | | 4,236 | |
Time | 8,308 | | | 8,381 | | | 2,481 | |
Total deposits | $ | 87,553 | | | $ | 89,329 | | | $ | 51,406 | |
We strive to maintain a strong liquidity position, and therefore a focus on core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers, as evidenced by the significant deposit growth the industry has experienced over the past 18 months.customers. As economic conditions improve,change, we recognize that our liquidity position could be adversely affected asif bank deposits are withdrawn. Our ability to fund future loan growth is significantly dependent on our success atin retaining existing deposits and generating new deposits at a reasonable cost.
At
Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to the Bank’s regulators. We estimate total uninsured deposits were $31.0 billion and $23.0 billion at September 30, 2021, total deposits were $50.1 billion, an increase of $6.6 billion, representing annualized growth of 20.4% since2022 and December 31, 2020, driven by organic growth.2021, respectively. Table 19 provides the expected maturity of time deposits in excess of $250,000, the FDIC insurance limit, as of September 30, 2022.
Table 1519
DEPOSITSMaturities of Time Deposits In Excess of $250,000
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(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Demand | $ | 21,514,407 | | | $ | 18,014,029 | |
Checking with interest | 11,768,943 | | | 10,591,687 | |
Money market | 10,145,752 | | | 8,632,713 | |
Savings | 4,063,092 | | | 3,304,167 | |
Time | 2,573,568 | | | 2,889,013 | |
Total deposits | $ | 50,065,762 | | | $ | 43,431,609 | |
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dollars in millions | September 30, 2022 |
Time deposits maturing in: | |
Three months or less | $ | 296 | |
Over three months through six months | 206 | |
Over six months through 12 months | 766 | |
More than 12 months | 215 | |
Total | $ | 1,483 | |
Borrowings
Total borrowings were relatively unchanged, totaling $1.9 billion at September 30, 20212022 were $8.3 billion, compared to $4.5 billion at June 30, 2022 and $1.8 billion at December 31, 2020.
Table 16
BORROWINGS
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(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
Securities sold under customer repurchase agreements | $ | 663,575 | | | $ | 641,487 | |
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Federal Home Loan Bank borrowings | 645,663 | | | 655,175 | |
Subordinated debt | | | |
SCB Capital Trust I | 9,808 | | | 9,779 | |
FCB/SC Capital Trust II | 17,764 | | | 17,664 | |
FCB/NC Capital Trust III | 88,145 | | | 88,145 | |
Macon Capital Trust I | 14,433 | | | 14,433 | |
3.375 % Fixed-to-Floating Rate Subordinated Notes due 2030 | 347,163 | | | 346,541 | |
Other subordinated debt | 20,114 | | | 27,956 | |
Total subordinated debt | 497,427 | | | 504,518 | |
Other borrowings | 76,139 | | | 88,470 | |
Total borrowings | $ | 1,882,804 | | | $ | 1,889,650 | |
BancShares owns four special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III and Macon Capital Trust I (the “Trusts”), which mature in 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to2021. The increase from June 30, 2022 primarily reflected third quarter FHLB borrowings of $4.5 billion, partially offset by repayments of $0.5 billion. Of the Trusts, which may be redeemednet new FHLB borrowings remaining at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
The table below shows Class A common stock repurchase activity for the three and nine months ended September 30, 20212022, $2.6 billion and 2020. All Class A common stock repurchases completed$1.6 billion were short-term and long-term, respectively. The increase in 2020 were consummated under previously approved authorizations. There were no repurchases of Class B common stock orborrowings in the preferred stockthird quarter was to replace declines in interest-bearing deposits and support the loan growth. In addition, during the three and nine months ended September 30,third quarter we repaid a $61 million senior unsecured term loan that matured. The increase from December 31, 2021 or 2020.
Table 17
CLASS A COMMON STOCK REPURCHASE ACTIVITY
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Dollars in thousands, expect per share data) | 2021 | | 2020 | | 2021 | | 2020 |
Number of shares repurchased | — | | | 117,700 | | | — | | | 813,090 | |
Total cost | $ | — | | | $ | 47,060 | | | $ | — | | | $ | 333,756 | |
Average price per share | $ | — | | | $ | 399.82 | | | $ | — | | | $ | 410.48 | |
Upon expirationalso reflected $4.5 billion of the most recent authorization on July 31, 2020, share repurchase activity ended and will be reevaluated in subsequent periods.
We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. 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 changesdebt assumed in the regulatory or external environment. Failure to meet certain capital requirements may resultCIT Merger, partially offset by a debt redemption of approximately $2.9 billion in actions by regulatory agencies that could have a material impact on our consolidated financial statements.February.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders’ equity. These amounts are excluded from shareholders’ equity in the calculation of our capital ratios under current regulatory guidelines.
Table 1820 presents borrowings, including the respective unamortized purchase accounting adjustments and issuance costs.
ANALYSIS OF CAPITAL ADEQUACY
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| Requirements to be well-capitalized | | September 30, 2021 | | December 31, 2020 |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio |
BancShares | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 4,944,822 | | | 14.30 | % | | $ | 4,577,212 | | | 13.81 | % |
Tier 1 risk-based capital | 8.00 | | | 4,260,729 | | | 12.32 | | | 3,856,086 | | | 11.63 | |
Common equity Tier 1 | 6.50 | | | 3,920,792 | | | 11.34 | | | 3,516,149 | | | 10.61 | |
Tier 1 leverage ratio | 5.00 | | | 4,260,729 | | | 7.68 | | | 3,856,086 | | | 7.86 | |
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FCB | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 4,811,214 | | | 13.93 | % | | $ | 4,543,496 | | | 13.72 | % |
Tier 1 risk-based capital | 8.00 | | | 4,581,621 | | | 13.26 | | | 4,276,870 | | | 12.92 | |
Common equity Tier 1 | 6.50 | | | 4,581,621 | | | 13.26 | | | 4,276,870 | | | 12.92 | |
Tier 1 leverage ratio | 5.00 | | | 4,581,621 | | | 8.27 | | | 4,276,870 | | | 8.72 | |
Table 20As of September 30, 2021, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.Borrowings
BancShares and FCB had capital conservation buffers of 6.30% and 5.93%, respectively, at September 30, 2021, and resulted | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Securities sold under customer repurchase agreements | $ | 578 | | | $ | 646 | | | $ | 589 | |
Federal Home Loan Bank borrowings | | | | | |
Floating rate notes due through September 2025 | 5,800 | | | 1,650 | | | — | |
Fixed rate notes due through March 2032 | — | | | 135 | | | 645 | |
Senior Unsecured Borrowings | | | | | |
3.929% fixed-to-floating rate notes due June 2024(1) | 508 | | | 510 | | | — | |
2.969% fixed-to-floating rate notes due September 2025(1) | 321 | | | 322 | | | — | |
6.000% fixed rate notes due April 2036(1) | 59 | | | 60 | | | — | |
Subordinated debt | | | | | |
6.125% fixed rate notes due March 2028(1) | 472 | | | 475 | | | — | |
4.125% fixed-to-fixed rate notes due November 2029(1) | 102 | | | 102 | | | — | |
3.375% fixed-to-floating rate notes due March 2030 | 348 | | | 348 | | | 347 | |
Macon Capital Trust I - floating rate debenture due March 2034 | 14 | | | 14 | | | 14 | |
SCB Capital Trust I - floating rate debenture due April 2034 | 10 | | | 10 | | | 11 | |
FCB/SC Capital Trust II - floating rate debenture due June 2034 | 18 | | | 18 | | | 18 | |
FCB/NC Capital Trust III - floating rate debenture due June 2036 | 88 | | | 88 | | | 88 | |
Total subordinated debt | 1,052 | | | 1,055 | | | 478 | |
Other borrowings | 25 | | | 81 | | | 72 | |
Total borrowings | $ | 8,343 | | | $ | 4,459 | | | $ | 1,784 | |
(1) Denotes outstanding debt assumed in no limitthe CIT Merger.
See Note 12 — Borrowings for further information on distributions.the various components. Also see Liquidity Risk later in this MD&A.
RISK MANAGEMENT
BancShares provided detail risk management information in our 2021 Form 10-K. The following is a summary of those disclosures or updates to those disclosures, primarily due to the CIT Merger.
Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservativebalanced approach to risk taking, with a philosophy thatwhich does not preclude higher risk business activities balancedcommensurate with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, 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 activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk managementRisk Management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’Board’s role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee.
The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the full Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategicCredit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic and reputationalReputational risks; review, approve, and monitor adherence to the risk appetiteRisk 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. The Board Risk Committee also reviews:reviews reports of examination by and communications from regulatory agencies;agencies, the results of internal and third party testing and qualitative and quantitative assessments related to risk management;management, and any other matters within the scope of the Board Risk Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information securitycompensation risk management and other areas of joint responsibility.
In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.
55BancShares is subject to a variety of risks that may arise through its business activities. As identified in our 2021 Form 10-K, our primary risks are credit, market, capital, liquidity, operational, compliance, strategic and reputational risks. Due to the CIT Merger, further below we added asset risk (due to the operating lease portfolio) as a primary risk and enhanced our credit risk to highlight counterparty risk (due to the increased use of derivatives).
Given several factors including but not limited to positive internal and external trends, positive risk metrics, effective incident, oversight and monitoring, the Company returned to business as usual operations and lifted internal COVID-19 related restrictions in early April. BancShares will continue to comply with any state and local orders that are in place. Monitoring of Contentsassociated credit and operational risks has now been integrated into normal risk monitoring activities.
Since the filing of our 2021 Form 10-K, BancShares has been assessing the emerging impacts of the rising international tensions that could impact the economy and exacerbate headwinds of rising inflation, elevated market volatility, global supply chain disruptions, and recessionary pressures as well as operational risks such as those associated with potential cyber-attacks 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 condition continues to exist.
Credit risk management
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 adequateappropriate ACL that accounts for expected credit losses inover the life of the loan and lease portfolio.portfolios.
We continue
Commercial Lending and Leasing
Commercial loans and leases acquired in the CIT Merger, which are primarily within the Commercial Banking segment, are graded according to actively monitor our loan portfolioa rating system that was used by CIT prior to the merger with respect to probability of obligor default (“PD”) and loss given default (severity) based on various risk factors. The PD and severity are derived through historical observations of default and subsequent losses within each risk grading. When these loans and leases were graded at underwriting, or when updated periodically, a model is run to generate a preliminary risk rating. The model incorporates both internal and external historical default and loss data to develop loss rates for areas of increasedeach risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts that in management’s judgment warrant a modification of the COVID-19 pandemicmodeled risk rating to arrive at the final approved risk ratings.
For small-ticket lending and leasing portfolio acquired in the CIT Merger, automated credit scoring models for origination (scorecards) and re-grading (auto re-grade algorithms) are also employed. These are supplemented by business rules and expert judgment. Adjustments to date havecredit scorecards, auto re-grading algorithms, business rules and lending programs may be made periodically based on these evaluations. A credit approval hierarchy is enforced to ensure that an underwriter with the appropriate level of authority reviews applications.
Consumer Lending
Consumer lending begins with an evaluation of a consumer borrower’s credit profile against published standards. Credit decisions are made after analyzing quantitative and qualitative factors, including borrower’s ability to repay the loan, collateral values, and considering the transaction from a judgmental perspective.
Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Credit standards follow industry standard documentation requirements. Performance is largely evaluated based on an acceptable pay history along with a quarterly assessment which incorporates current market conditions. Non-traditional loans may also be monitored by way of a quarterly review of the borrower’s refreshed credit score. Loans are placed on non-accrual status at 90 days past due or more, except for government guaranteed loans. When warranted, an additional review of the underlying collateral’s loan-to-value may be conducted.
Allowance for Credit Losses
The ACL is calculated using a variety of factors, including, but not seen any significant declineslimited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. ThroughForecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management’s expectations over the lives of the portfolios. Significant macroeconomic factors used in estimating the expected losses include unemployment, GDP, home price index, commercial real estate index, corporate profits, and credit spreads.
The ACL at September 30, 2022 was $882 million, compared to $850 million at June 30, 2022 and $178 million at December 31, 2021. The ACL as a percentage of total loans and leases at September 30, 2022 was 1.26%, compared to 1.26% at June 30, 2022 and 0.55% at December 31, 2021.
The ACL at September 30, 2022 increased compared to June 30, 2022 primarily due to moderate deterioration in the macroeconomic forecasts related to GDP, interest rates, home prices, and commercial real estate prices. In contemplation of additional uncertainty, primarily based on the elevated levels of inflation and its impact on other macroeconomic variables such as interest rates, which could in turn impact home prices, commercial real estate values, and other variables, we do not believe the current baseline scenario fully incorporates the potential downside impacts of future macroeconomic deterioration, so an additional weighting on the downside scenario was incorporated into the estimate. In the three months ended September 30, 2022, the ACL on commercial loans increased $26 million and the ACL on consumer portfolios increased $6 million.
Compared to December 31, 2021, the increase in the ACL at September 30, 2022 on commercial portfolios was $686 million and $18 million on the consumer portfolios. The increases were primarily due to the impact of the CIT Merger, as well as the above noted moderate deterioration in the macroeconomic forecasts and loan growth. The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) of $272 million was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 — Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $454 million to the provision for credit losses for the “Initial Non-PCD Provision”. In addition to the impact on the ACL from the CIT Merger, revisions to the CECL macroeconomic forecasts during 2022 impacted the ACL. The loss estimates were also influenced by BancShares’ strong credit quality and low net charge-offs.
While management utilizes its best judgment and information available, the ACL is dependent upon factors that are inherently difficult to predict, the most significant being the factors in the economic scenarios. ACL estimates in these scenarios ranged from approximately $630 million to approximately $1.1 billion. BancShares management determined that an ACL of $882 million was appropriate as of September 30, 2022.
Table 21
Allowance for Credit Losses
| | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, 2022 |
| Commercial | | Consumer | | Total |
Balance at June 30, 2022 | $ | 740 | | | $ | 110 | | | $ | 850 | |
Initial PCD ACL(1) | — | | | — | | | — | |
| | | | | |
Provision for credit losses - loans and leases | 43 | | | 7 | | | 50 | |
| | | | | |
Charge-offs(1) | (28) | | | (5) | | | (33) | |
Recoveries | 11 | | | 4 | | | 15 | |
| | | | | |
Balance at September 30, 2022 | $ | 766 | | | $ | 116 | | | $ | 882 | |
Annualized net charge-off ratio | | | | | 0.10 | % |
Net charge-offs (recoveries) | $ | 17 | | | $ | 1 | | | $ | 18 | |
Average loans | | | | | $ | 68,795 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | 100 | % |
| | | | | |
| Three Months Ended June 30, 2022 |
| Commercial | | Consumer | | Total |
Balance at March 31, 2022 | $ | 743 | | | $ | 105 | | | $ | 848 | |
Initial PCD ACL(1) | (12) | | | — | | | (12) | |
| | | | | |
Provision for credit losses - loans and leases | 33 | | | 3 | | | 36 | |
| | | | | |
Charge-offs(1) | (36) | | | (5) | | | (41) | |
Recoveries | 12 | | | 7 | | | 19 | |
| | | | | |
Balance at June 30, 2022 | $ | 740 | | | $ | 110 | | | $ | 850 | |
Annualized net charge-off ratio | | | | | 0.13 | % |
Net charge-offs (recoveries) | $ | 24 | | | $ | (2) | | | $ | 22 | |
Average loans | | | | | $ | 66,431 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | 100 | % |
| | | | | |
| Three Months Ended September 30, 2021 |
| Commercial | | Consumer | | Total |
Balance at June 30, 2021 | $ | 86 | | | $ | 103 | | | $ | 189 | |
Provision (benefit) for credit losses - loans and leases | — | | | (1) | | | (1) | |
Charge-offs | (7) | | | (4) | | | (11) | |
Recoveries | 3 | | | 3 | | | 6 | |
| | | | | |
Balance at September 30, 2021 | $ | 82 | | | $ | 101 | | | $ | 183 | |
Annualized net charge-off ratio | | | | | 0.06 | % |
Net charge-offs | $ | 4 | | | $ | 1 | | | $ | 5 | |
Average loans | | | | | $ | 32,608 | |
Percent of loans in each category to total loans | 70 | % | | 30 | % | | 100 | % |
(1) The Initial PCD ACL related to the CIT Merger was $272 million, net of an additional $243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial) which met BancShares’ charge-off policy at the Merger Date. The $12 million reflects second quarter adjustment to the original amount recorded on the Merger Date, with an equal adjustment to the UPB of PCD loans. There was no income statement impact or adjustment to the purchase price.
| | | | | | | | | | | | | | | | | |
dollars in millions | Nine Months Ended September 30, 2022 |
| Commercial | | Consumer | | Total |
Balance at December 31, 2021 | $ | 80 | | | $ | 98 | | | $ | 178 | |
Initial PCD ACL(1) | 258 | | | 14 | | | 272 | |
Initial Non-PCD Provision | 432 | | | 22 | | | 454 | |
Provision (benefit) for credit losses - loans and leases | 53 | | | (20) | | | 33 | |
Total provision (benefit) for credit losses - loans and leases | 485 | | | 2 | | | 487 | |
Charge-offs(1) | (92) | | | (15) | | | (107) | |
Recoveries | 35 | | | 17 | | | 52 | |
| | | | | |
Balance at September 30, 2022 | $ | 766 | | | $ | 116 | | | $ | 882 | |
Annualized net charge-off ratio | | | | | 0.11 | % |
Net charge-offs (recoveries) | $ | 57 | | | $ | (2) | | | $ | 55 | |
Average loans | | | | | $ | 66,816 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | 100 | % |
| | | | | |
| Nine Months Ended September 30, 2021 |
| Commercial | | Consumer | | Total |
Balance at December 31, 2020 | $ | 92 | | | $ | 133 | | | $ | 225 | |
Benefit for credit losses - loans and leases | (3) | | | (29) | | | (32) | |
Charge-offs | (14) | | | (13) | | | (27) | |
Recoveries | 7 | | | 10 | | | 17 | |
| | | | | |
Balance at September 30, 2021 | $ | 82 | | | $ | 101 | | | $ | 183 | |
Annualized net charge-off ratio | | | | | 0.04 | % |
Net charge-offs | $ | 7 | | | $ | 3 | | | $ | 10 | |
Average loans | | | | | $ | 32,872 | |
Percent of loans in each category to total loans | 70 | % | | 30 | % | | 100 | % |
(1) See footnote to table above.
Net charge-offs during the three months ended September 30, 2022 were $18 million, compared to $22 million during the second quarter of 2022 and $5 million during the third quarter of 2021. On an annualized basis, the net charge-off ratio was 0.10%, 0.13% and 0.06% for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021, over 99%respectively. Net charge-offs for the nine months ended September 30, 2022 and 2021 were $55 million (net charge-off ratio of all COVID-19 related loan extensions have begun repayment.
Additionally, we participated0.11%) and $10 million (net charge-off ratio of 0.04%), respectively. The increase in both rounds of fundingnet charge-offs compared to the 2021 periods reflects the impact from the loans acquired in the SBA-PPP program, which provided much needed funds to our existing small business customers. AtCIT Merger.
The following table provides trends in the ACL ratios.
Table 22
Allowance for Credit Losses Ratios
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Allowance for credit losses | $ | 882 | | | $ | 850 | | | $ | 178 | |
Total loans and leases | $ | 69,790 | | | $ | 67,735 | | | $ | 32,372 | |
Allowance for credit losses to total loans and leases: | 1.26 | % | | 1.26 | % | | 0.55 | % |
Commercial loans and leases: | | | | | |
Allowance for credit losses - commercial | $ | 766 | | | $ | 740 | | | $ | 80 | |
Commercial loans and leases | $ | 52,960 | | | $ | 51,477 | | | $ | 22,586 | |
Commercial allowance for credit losses to commercial loans and leases: | 1.44 | % | | 1.43 | % | | 0.35 | % |
Consumer loans: | | | | | |
Allowance for credit losses - consumer | $ | 116 | | | $ | 110 | | | $ | 98 | |
Consumer loans | $ | 16,830 | | | $ | 16,258 | | | $ | 9,786 | |
Consumer allowance for credit losses to consumer loans: | 0.70 | % | | 0.69 | % | | 1.01 | % |
The reserve for unfunded loan commitments was $91 million, $81 million and $12 million at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. The increase of $10 million compared to June 30, 2022 was driven by moderate deterioration in the macroeconomic forecasts. The 2022 increases from December 31, 2021 were primarily driven by the additional commitments from the CIT Merger. The additional off-balance sheet commitments primarily reflect loan commitments or lines of credit and DPAs. See Note 23 — Commitments and Contingencies for information relating to off-balance sheet commitments and Note 5 — Allowance for Credit Losses for a roll forward of the ACL for unfunded commitments.
Credit Metrics
Non-performing Assets
Non-performing assets include non-accrual loans and leases and OREO. Non-performing assets at September 30, 2022 totaled $508 million, compared to $558 million at June 30, 2022 and $161 million at December 31, 2021.
The following table presents total nonperforming assets.
Table 23
Non-Performing Assets
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Non-accrual loans: | | | | | |
Commercial loans | $ | 356 | | | $ | 413 | | | $ | 45 | |
Consumer loans | 98 | | | 100 | | | 76 | |
Total non-accrual loans | $ | 454 | | | $ | 513 | | | $ | 121 | |
Other real estate owned | 54 | | | 45 | | | 40 | |
Total non-performing assets | $ | 508 | | | $ | 558 | | | $ | 161 | |
| | | | | |
Allowance for credit losses to total loans and leases: | 1.26 | % | | 1.26 | % | | 0.55 | % |
Ratio of total non-performing assets to total loans, leases and other real estate owned | 0.73 | % | | 0.83 | % | | 0.49 | % |
Ratio of non-accrual loans and leases to total loans and leases | 0.65 | % | | 0.76 | % | | 0.37 | % |
Ratio of allowance for credit losses to non-accrual loans and leases | 194.18 | % | | 165.41 | % | | 148.37 | % |
Non-accrual loans and leases at September 30, 2022 were $454 million, a decrease of $59 million from June 30, 2022 and an increase of $333 million since December 31, 2021. Non-accrual loans and leases as a percentage of total loans and leases was 0.65%, 0.76% and 0.37% at September 30, 2022, June 30, 2022 and December 31, 2021, respectively. The increase from December 31, 2021 was primarily driven by the CIT Merger.
OREO at September 30, 2022 totaled $54 million, representing an increase of $9 million from June 30, 2022 and $14 million since December 31, 2021. Non-performing assets as a percentage of total loans, leases and OREO at September 30, 2022 was 0.73% compared to 0.83% at June 30, 2022 and 0.49% at December 31, 2021.
Past Due Accounts
The percentage of loans 30 days or more past due at September 30, 2022 was 0.72% of loans, compared to 0.78% at June 30, 2022 and 0.43% at December 31, 2021. Delinquency status of loans is presented in Note 4 — Loans and Leases.
Troubled Debt Restructurings
We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.
The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty. BancShares had $1.1 billionapplied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in SBA-PPPmost cases, did not record these as TDRs.
Table 24
Troubled Debt Restructurings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 |
| Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total |
Accruing TDRs | $ | 124 | | | $ | 51 | | | $ | 175 | | | $ | 105 | | | $ | 49 | | | $ | 154 | |
Non-accruing TDRs | 54 | | | 24 | | | 78 | | | 25 | | | 24 | | | 49 | |
Total TDRs | $ | 178 | | | $ | 75 | | | $ | 253 | | | $ | 130 | | | $ | 73 | | | $ | 203 | |
| | | | | | | | | | | |
| | | | | | | December 31, 2021 |
Accruing TDRs | | | | | | | $ | 97 | | | $ | 49 | | | $ | 146 | |
Non-accruing TDRs | | | | | | | 21 | | | 25 | | | 46 | |
Total TDRs | | | | | | | $ | 118 | | | $ | 74 | | | $ | 192 | |
Concentration Risk
We aim to maintain a well-diversified loan portfolio and seek to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries.
Commercial Concentrations
Geographic Concentrations
The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location.
Table 25
Commercial Loans - Geography
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
State | | | | | | | | | | | |
California | $ | 8,800 | | | 16.6 | % | | $ | 8,636 | | | 16.8 | % | | $ | 3,163 | | | 14.0 | % |
North Carolina | 8,609 | | | 16.3 | % | | 8,639 | | | 16.8 | % | | 7,181 | | | 31.8 | % |
Texas | 3,486 | | | 6.6 | % | | 3,330 | | | 6.5 | % | | 879 | | | 3.9 | % |
| | | | | | | | | | | |
Florida | 3,253 | | | 6.1 | % | | 3,156 | | | 6.1 | % | | 1,496 | | | 6.6 | % |
South Carolina | 3,016 | | | 5.7 | % | | 2,989 | | | 5.8 | % | | 2,855 | | | 12.6 | % |
All other states | 24,431 | | | 46.1 | % | | 23,217 | | | 45.1 | % | | 7,012 | | | 31.1 | % |
Total U.S. | $ | 51,595 | | | 97.4 | % | | $ | 49,967 | | | 97.1 | % | | $ | 22,586 | | | 100.0 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total International | 1,365 | | | 2.6 | % | | 1,510 | | | 2.9 | % | | — | | | — | % |
Total | $ | 52,960 | | | 100.0 | % | | $ | 51,477 | | | 100.0 | % | | $ | 22,586 | | | 100.0 | % |
Industry Concentrations
The following table represents loans outstanding.by industry of obligor:
Table 26
Commercial Loans - Industry
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
Real Estate | $ | 11,427 | | | 21.6 | % | | $ | 10,968 | | | 21.3 | % | | $ | 4,279 | | | 18.9 | % |
Healthcare | 7,985 | | | 15.1 | % | | 7,817 | | | 15.2 | % | | 6,997 | | | 31.0 | % |
Business Services | 5,372 | | | 10.1 | % | | 5,150 | | | 10.0 | % | | 2,307 | | | 10.2 | % |
Transportation, Communication, Gas, Utilities | 4,938 | | | 9.3 | % | | 4,828 | | | 9.4 | % | | 774 | | | 3.4 | % |
| | | | | | | | | | | |
Manufacturing | 4,342 | | | 8.2 | % | | 4,539 | | | 8.8 | % | | 1,347 | | | 6.0 | % |
Service Industries | 4,087 | | | 7.7 | % | | 3,986 | | | 7.7 | % | | 722 | | | 3.2 | % |
| | | | | | | | | | | |
Retail | 3,693 | | | 7.0 | % | | 3,355 | | | 6.5 | % | | 1,301 | | | 5.8 | % |
Wholesale | 2,572 | | | 4.9 | % | | 2,485 | | | 4.8 | % | | 882 | | | 3.9 | % |
Finance and Insurance | 2,569 | | | 4.8 | % | | 2,549 | | | 5.0 | % | | 1,361 | | | 6.0 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | 5,975 | | | 11.3 | % | | 5,800 | | | 11.3 | % | | 2,616 | | | 11.6 | % |
Total | $ | 52,960 | | | 100.0 | % | | $ | 51,477 | | | 100.0 | % | | $ | 22,586 | | | 100.0 | % |
Consumer Concentrations
Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or other conditions. The following table summarizes state concentrations greater than 5.0% based on property address.
Table 27
Consumer Loans - Geography
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
| Net Investment | | % of Total | | Net Investment | | % of Total | | Net Investment | | % of Total |
State | | | | | | | | | | | |
North Carolina | $ | 5,515 | | | 32.8 | % | | $ | 5,266 | | | 32.4 | % | | $ | 4,931 | | | 50.4 | % |
California | 3,936 | | | 23.4 | % | | 3,796 | | | 23.4 | % | | 161 | | | 1.6 | % |
South Carolina | 2,903 | | | 17.2 | % | | 2,786 | | | 17.1 | % | | 2,626 | | | 26.9 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other states | 4,476 | | | 26.6 | % | | 4,410 | | | 27.1 | % | | 2,068 | | | 21.1 | % |
Total | $ | 16,830 | | | 100.0 | % | | $ | 16,258 | | | 100.0 | % | | $ | 9,786 | | | 100.0 | % |
Counterparty Risk
We enter into interest rate derivatives and foreign exchange forward contracts as part of our overall risk management practices and also on behalf of our clients. We establish risk metrics and evaluate and manage the counterparty risk associated with these derivative instruments in accordance with the comprehensive Risk Management Framework and Risk Appetite Framework.
Counterparty credit exposure or counterparty risk is a primary risk of derivative instruments, relating to the ability of a counterparty to perform its financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures, which are integrated with our cash and issuer related credit processes.
The Chief Credit Officer, or delegate, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements for BancShares’ risk management purposes and for the hedging of client transactions are executed with major financial institutions and are settled through the major clearing exchanges, which are rated investment grade by nationally recognized statistical rating agencies. Credit exposure is mitigated via the exchange of collateral between the counterparties covering mark-to-market valuations. Client related derivative transactions, which are primarily related to lending activities, are incorporated into our loan underwriting and reporting processes.
ASSET RISK
Asset risk is a form of price risk and is a primary risk of our leasing businesses related to the risk to earning of capital arising from changes in the value of owned leasing equipment. Reflecting the addition of operating lease equipment and additional asset-based lending from the CIT Merger, we are subject to increased asset risk. 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 GDP 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 business, 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 or government policy 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 management
Interestcan arise from many of the BancShares’ business activities, such as lending, leasing, investing, deposit taking, derivatives, and funding activities. We evaluate and monitor interest rate risk (“IRR”primarily through two metrics.
•Net Interest Income Sensitivity (“NII Sensitivity”) results principally from: assets and liabilities maturing or repricing at different pointsmeasures the net impact of hypothetical changes in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes.on forecasted NII; and
We assess our short-term IRR•Economic Value of Equity Sensitivity (“EVE Sensitivity”) measures the net impact of these hypothetical changes on the value of equity by forecasting net interest income over 24 months under various interest rate scenariosassessing the economic value of assets, liabilities and comparing those resultsoff-balance sheet instruments.
BancShares uses a holistic process to forecasted net interest income, assuming stable rates. IRR scenarios modeled include,measure and monitor both short term and long term risks which includes, but areis not limited to, gradual and immediate parallel rate shocks, interest rate ramps, changes in the shape of the yield curve, and changes in the relationshipsrelationship of our rates to market rates. Market interest rates have increased since year-end, driven by improving economic conditions.
Table 19 providesvarious yield curves.NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios aslonger-term risk of September 30, 2021 and December 31, 2020.
Table 19
NET INTEREST INCOME SENSITIVITY ANALYSIS
| | | | | | | | | | | | | | |
| | Estimated percentage (decrease) increase in net interest income |
Change in interest rate (basis points) | | September 30, 2021 | | December 31, 2020 |
-100 | | (6.94) | % | | (6.24) | % |
+100 | | 7.42 | | | 8.09 | |
+200 | | 15.41 | | | 14.57 | |
| | | | |
the existing balance sheet.
NetOur exposure to NII Sensitivity is guided by the Risk Appetite Framework and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest income sensitivity metrics as of September 30, 2021 remain largely unchanged when compared to December 31, 2020.rate risk exposures, including through business line actions and actions within the investment, funding and derivative activities.
Long-termThe composition of our interest rate sensitive assets and liabilities generally results in a net asset-sensitive position for NII Sensitivity, whereby our assets will reprice faster than our liabilities, which is generally concentrated at the short end of the yield curve.
Our funding sources consist primarily of non-maturity deposits and time deposits. 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.
Table 28 below summarizes the results of 12-month NII Sensitivity simulations produced our asset/liability management system. These simulations assume static balance sheet replacement with like products and implied forward market rates, but also incorporates additional assumptions, such as, but not limited to prepayment estimates, pricing estimates and deposit behaviors. The below simulations assume an immediate 25, 100 and 200 bps parallel increase and 25 and 100 bps decrease from the market-based forward curve for September 30, 2022, June 30, 2022, and December 2021.
Table 28
Net Interest Income Sensitivity Simulation Analysis
| | | | | | | | | | | | | | | | | | | | |
| | Estimated (Decrease) Increase in NII |
Change in interest rate (bps) | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
-100 | | (3.63) | % | | (5.34) | % | | (5.77) | % |
-25 | | (0.80) | % | | (1.25) | % | | (1.15) | % |
+25 | | 0.91 | % | | 1.34 | % | | 1.05 | % |
+100 | | 3.44 | % | | 5.17 | % | | 3.21 | % |
+200 | | 6.81 | % | | 10.20 | % | | 6.30 | % |
NII Sensitivity metrics at September 30, 2022, compared to June 30, 2022, were primarily affected by a reduction in cash as well as liability management actions which included borrowing FHLB advances to support loan growth and to offset deposit runoff. BancShares continues to have an asset sensitive interest rate risk profile and the potential exposure to forecasted earnings is measured usinglargely 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 45% of our loans have floating contractual reference rates, indexed primarily to 1-month London Inter-Bank Offered Rate (“LIBOR”), 3-month LIBOR, Prime and Secured Overnight Financing Rate (“SOFR”). Deposit betas for the combined company are modeled to have a portfolio average of approximately 20%-25% over the forecast horizon. 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 value of the economic value of equity (“EVE”) sensitivity analysisdriven by changes in assets, liabilities, and off-balance sheet instruments in response to studya change in interest rates. EVE Sensitivity is calculated by estimating the impact of long-term cash flows on earnings and capital. EVE representschange in the difference between the sum of thenet present value of all asset cash flowsassets, liabilities, and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balanceoff-balance sheet items under different interestvarious rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet.movements.
Table 2029 presents the EVE profile as of September 30, 20212022, June 30, 2022, and December 31, 2020.2021.
Table 2029
ECONOMIC VALUE OF EQUITY MODELING ANALYSISEconomic Value of Equity Modeling Analysis
| | | Estimated percentage (decrease) increase in EVE | | Estimated (Decrease) Increase in EVE |
Change in interest rate (basis points) | | September 30, 2021 | | December 31, 2020 | |
Change in interest rate (bps) | | Change in interest rate (bps) | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
-100 | -100 | | (15.09) | % | | (21.20) | % | -100 | | (5.39) | % | | (7.17) | % | | (13.68) | % |
-25 | | -25 | | (1.21) | % | | (1.67) | % | | — | % |
+100 | +100 | | 8.32 | | | 12.18 | | +100 | | 4.29 | % | | 5.92 | % | | 6.10 | % |
+200 | +200 | | 8.77 | | | 15.71 | | +200 | | 3.54 | % | | 7.21 | % | | 5.93 | % |
|
The economic value of equity metrics at September 30, 20212022 compared to December 31, 2020June 30, 2022 were primarily affected by ongoing growth in non-maturity deposits during 2021, coupled with higherbalance sheet composition changes as well as increasing market interest rates. We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to hedge our overall balance sheet interest rate sensitivity and risk.
LIBOR Transition
In 2017,addition to the United Kingdom’s Financial Conduct Authority announcedabove reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that after 2021 it would no longer compel banksimpact management volumes, specific risk events, or the sensitivity to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). Subsequent announcements have delayed the potential date for certain LIBOR tenors until June 30, 2023.key assumptions are also evaluated.
We continueuse results of our various interest rate risk analyses to transition awayformulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility.
The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to represent our current view of the expected range of future interest rate movements.
Table 30 provides loan maturity distribution information.
Table 30
Loan Maturity Distribution
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | At September 30, 2022, Maturing |
| Within One Year | | One to Five Years | | Five to 15 Years | | After 15 Years | | Total |
Commercial | | | | | | | | | |
Commercial construction | $ | 578 | | | $ | 1,316 | | | $ | 753 | | | $ | 105 | | | $ | 2,752 | |
Owner occupied commercial mortgage | 630 | | | 3,903 | | | 9,068 | | | 452 | | | 14,053 | |
Non-owner occupied commercial mortgage | 2,005 | | | 5,370 | | | 2,059 | | | 249 | | | 9,683 | |
Commercial and industrial | 7,136 | | | 13,359 | | | 3,618 | | | 175 | | | 24,288 | |
Leases | 759 | | | 1,370 | | | 55 | | | — | | | 2,184 | |
Total commercial | $ | 11,108 | | | $ | 25,318 | | | $ | 15,553 | | | $ | 981 | | | $ | 52,960 | |
Consumer | | | | | | | | | |
Residential mortgage | 268 | | | 1,088 | | | 3,599 | | | 7,955 | | | 12,910 | |
Revolving mortgage | 89 | | | 164 | | | 77 | | | 1,593 | | | 1,923 | |
Consumer auto | 10 | | | 673 | | | 702 | | | — | | | 1,385 | |
Consumer other | 302 | | | 157 | | | 115 | | | 38 | | | 612 | |
Total consumer | $ | 669 | | | $ | 2,082 | | | $ | 4,493 | | | $ | 9,586 | | | $ | 16,830 | |
Total loans and leases | $ | 11,777 | | | $ | 27,400 | | | $ | 20,046 | | | $ | 10,567 | | | $ | 69,790 | |
Table 31 provides information regarding the sensitivity of loans and leases to changes in interest rates.
Table 31
Loan Interest Rate Sensitivity
| | | | | | | | | | | |
dollars in millions | Loans Maturing One Year or After with |
| Fixed Interest Rates | | Variable Interest Rates |
Commercial | | | |
Commercial construction | $ | 958 | | | $ | 1,216 | |
Owner occupied commercial mortgage | 11,913 | | | 1,510 | |
Non-owner occupied commercial mortgage | 2,929 | | | 4,749 | |
Commercial and industrial | 7,546 | | | 9,606 | |
Leases | 1,425 | | | — | |
Total commercial | $ | 24,771 | | | $ | 17,081 | |
Consumer | | | |
Residential mortgage | 7,303 | | | 5,339 | |
Revolving mortgage | 38 | | | 1,796 | |
Consumer auto | 1,375 | | | — | |
Consumer other | 272 | | | 38 | |
Total consumer | $ | 8,988 | | | $ | 7,173 | |
Total loans and leases | $ | 33,759 | | | $ | 24,254 | |
Reference Rate Reform
The administrator of LIBOR in orderhas announced that publication of the most commonly used tenors of U.S. Dollar LIBOR will cease to be provided or cease to be representative after June 30, 2023. The U.S. federal banking agencies had also issued guidance strongly encouraging banking organizations to cease issuance of loans indexed tousing the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021. Conforming2021 at the latest. Accordingly, prior to the CIT Merger, FCB and nonconforming adjustable rate mortgage originations transitionedCIT had ceased originating new products using LIBOR by the end of 2021.
In April 2018, the FRB of New York commenced publication of SOFR, which has been recommended as an alternative to alternative rates in 2020. TheU.S. Dollar LIBOR by the Alternative Reference Rates Committee, hasa group of market and official sector participants. On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act, which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the Secured Overnight Financing Rate (“SOFR”)LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. BancShares anticipates using the safe harbors that are expected in the final regulations.
BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares’ LIBOR exposure is primarily to tenures other than one week and two-month USD LIBOR.
LIBOR is a benchmark interest rate for most of our floating rate loans and our Series B Preferred Stock, as well as certain liabilities and off-balance sheet exposures. We continue to monitor industry and regulatory developments and have a well-established transition program in place to manage the implementation of alternative reference rates as the preferred alternativemarket transitions away from LIBOR. Coordination is being handled by a cross-functional project team governed by executive sponsors. Its mission is to LIBOR. Wework with our businesses to ensure a smooth transition for BancShares and its customers to an appropriate LIBOR alternative. Certain financial markets and products have introducedalready migrated to alternatives. The project team ensures that BancShares is ready to move quickly and efficiently as consensus around LIBOR alternatives emerge. BancShares has processes in place to complete its review of the population of legal contracts impacted by the LIBOR transition, and updates to our operational systems and processes are substantially in place.
BancShares is utilizing SOFR as anour preferred replacement index for LIBOR. However, we are positioned to accommodate other alternative reference rates (e.g., credit sensitive rates) in response to how the market evolves.
For a further discussion of risks BancShares faces in connection with the replacement of LIBOR on its operations, see “Risk Factors—Market Risks—We may be adversely impacted by the transition from LIBOR as a reference rate for other.” in Item 1A. Risk Factors of our 2021 Form 10-K.
LIQUIDITY RISK
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain sufficient amounts of Available Cash and High Quality Liquid Securities (“HQLS”). Additional sources of liquidity include FHLB borrowing capacity, committed credit facilities, repurchase agreements, brokered CD issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties.
We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business linesstrategy, risk appetite, levels of liquid assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in mid-2021. We do not expectidentifying potential liquidity risk and stress events.
BancShares maintains a material financial impactframework 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 or our customers from this transition.maintains a contingent funding plan which details protocols and potential actions to be taken under liquidity stress conditions.
Liquidity risk managementincludes Available Cash and HQLS. At September 30, 2022 we had $19.2 billion of total Liquid Assets (17.5% of total assets) and $11.7 billion of contingent liquidity sources available.
Table 32
Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common
| | | | | |
dollars in millions | September 30, 2022 |
Available Cash | $ | 6,050 | |
High Quality Liquid Securities | 13,111 | |
Liquid Assets | $ | 19,161 | |
| |
FHLB capacity(1) | $ | 7,140 | |
FRB capacity | 4,464 | |
Line of credit with bank | 100 | |
Total contingent sources | $ | 11,704 | |
Total Liquid Assets and contingent sources | $ | 30,865 | |
(1) See Table 33 for additional details.
We fund our operations through deposits and borrowings. Our primary source of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile.
We utilize various limit-based measures to monitor, measure and control three different categories of liquidity risk:
•Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
•Structural - Measures the amount by which illiquid assets are supported by long-term funding; and
•Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner.
We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary funding source is our branch-generated retail deposit portfolio due to the generally stable balances and low cost. Sources of liquidity include cash in excess of our reserve requirement at the Federal Reserve Bank,Deposits totaled $87.6 billion, $89.3 billion and various other corresponding bank accounts and unencumbered securities, which totaled $15.1$51.4 billion at September 30, 2022, June 30, 2022 and December 31, 2021, comparedrespectively. As needed, we use borrowings to $9.6diversify the funding of our business operations. Borrowings totaled $8.3 billion, $4.5 billion and $1.8 billion at September 30, 2022, June 30, 2022 and December 31, 2020. Another2021, respectively. Borrowings primarily consist of FHLB advances, senior unsecured notes, securities sold under customer repurchase agreements, and subordinated notes.
A source of available funds is advances from the FHLB of Atlanta. OutstandingWe 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.
FHLB Advances
Table 33
FHLB Balances
| | | | | | | | | | | | | | | | | |
dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
| Total | | Total | | Total |
Total borrowing capacity | $ | 14,390 | | | $ | 14,097 | | | $ | 9,564 | |
Less: | | | | | |
Advances | 5,800 | | | 1,785 | | | 645 | |
Letter of credit(1) | 1,450 | | | 750 | | | — | |
Available capacity | $ | 7,140 | | | $ | 11,562 | | | $ | 8,919 | |
Pledged non-PCD loans (contractual balance) | $ | 21,093 | | | $ | 20,680 | | | $ | 14,507 | |
Weighted Average Rate | 3.14 | % | | 1.88 | % | | 1.28 | % |
(1) A letter of credit was established with the FHLB to collateralize public funds.
The increase in advances from June 30, 2022 primarily reflected third quarter FHLB borrowings of $4.5 billion, partially offset by repayments of $0.5 billion, and in June 2022, we had borrowed $1.65 billion. We do not expect FHLB advances to grow materially as a percentage of total funding as our long-term strategy is to rely on deposits as our core funding source.
Under borrowing arrangements with the FRB of Richmond, FCB has access to an additional $4.5 billion on a secured basis. There were $645.7 millionno outstanding borrowings with the FRB Discount Window at September 30, 2022, June 30, 2022, and December 31, 2021.
Commitments and Contractual Obligations
Table 34 identifies significant obligations and commitments as of September 30, 2021,2022, representing required and we had sufficient collateral pledged to secure $8.5 billion of additional borrowings from the FHLB of Atlanta. Also, at September 30, 2021, $4.6 billion in non-PCD loans with a lendable collateral value of $3.8 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines and other credit lines, which had $556.0 million of available capacity at September 30, 2021.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we are a party to certain financial instruments with off-balance sheet risk, which we enter into in order to meet the financing needs of our customers. These off-balance sheet instruments include commitments to extend credit and standby letters of credit. For more information on these commitments, seepotential cash outflows. See Note N -23 — 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 34
Commitments and Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Payments Due by Period |
Type of Obligation | Less than 1 year | | 1-3 years | | 4-5 years | | Thereafter | | Total |
Contractual obligations: | | | | | | | | | |
Time deposits | $ | 6,178 | | | $ | 1,872 | | | $ | 136 | | | $ | 122 | | | $ | 8,308 | |
Short-term borrowings | 3,128 | | | — | | | — | | | — | | | 3,128 | |
Long-term obligations | 19 | | | 4,117 | | | 35 | | | 1,044 | | | 5,215 | |
Total contractual obligations | $ | 9,325 | | | $ | 5,989 | | | $ | 171 | | | $ | 1,166 | | | $ | 16,651 | |
Commitments: | | | | | | | | | |
Financing commitments | $ | 12,050 | | | $ | 4,197 | | | $ | 2,693 | | | $ | 4,433 | | | $ | 23,373 | |
Letters of credit | 166 | | | 175 | | | 91 | | | 27 | | | 459 | |
Deferred purchase agreements | 2,152 | | | — | | | — | | | — | | | 2,152 | |
Purchase and funding commitments | 914 | | | 8 | | | — | | | — | | | 922 | |
Affordable housing partnerships(1) | 117 | | | 104 | | | 32 | | | 11 | | | 264 | |
Total commitments | $ | 15,399 | | | $ | 4,484 | | | $ | 2,816 | | | $ | 4,471 | | | $ | 27,170 | |
(1) On-balance sheet commitments, included in other liabilities.
CAPITAL
Capital requirements applicable to BancShares are discussed in Item 1. Business — Regulation, subsections “Regulatory Considerations” of our 2021 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.
Share Repurchase Program
On July 26, 2022, the Board authorized a share repurchase program for up to 1,500,000 shares of BancShares’ Class A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of BancShares’ Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, we purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, we purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q for further details on purchases.
Common and Preferred Stock Dividends
On October 25, 2022, our Board of Directors declared a quarterly dividend increase on the Class A Common Stock and Class B Common Stock to $0.75 per common share from $0.47 per common share. The dividends are payable on December 15, 2022 to shareholders of record as of November 30, 2022.
On October 25, 2022, our Board of Directors also declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The dividends are payable on December 15, 2022 to shareholders of record as of November 30, 2022. Dividend payment information on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is disclosed in Note 16 — Stockholders’ Equity.
Capital Composition and Ratios
In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of its Class A Common Stock. Additionally, shares of CIT Series A Preferred Stock and CIT Series B Preferred Stock were automatically converted into the right to receive shares of BancShares Series B Preferred Stock and BancShares Series C Preferred Stock, respectively. In connection with the consummation of the CIT Merger, the Parent Company issued (a) 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in a total liquidation preference of $325 million, and (b) 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $25 per share, resulting in a total liquidation preference of $200 million.
The table below shows activities that caused the change in outstanding Class A Common Stock for the quarter.
Table 35
Changes in Shares of Class A Common Stock Outstanding
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Class A shares outstanding at beginning of period | | 14,997,202 | | | 8,811,220 | |
Share issuance in conjunction with the CIT Merger | | — | | | 6,140,010 | |
Restricted stock units vested, net of shares held to cover taxes | | 1,156 | | | 47,128 | |
Shares purchased under authorized repurchase plan | | (1,027,414) | | | (1,027,414) | |
Class A shares outstanding at end of period | | 13,970,944 | | | 13,970,944 | |
We also had 1,005,185 Class B Common Stock outstanding at September 30, 2022,June 30, 2022 and December 31, 2021.
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 regulatory in the calculation of our regulatory capital ratios under current regulatory guidelines.
Table 36
Analysis of Capital Adequacy
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Requirements to be Well-Capitalized | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
BancShares | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 11,927 | | | 13.46 | % | | $ | 12,396 | | | 14.46 | % | | $ | 5,042 | | | 14.35 | % |
Tier 1 risk-based capital | 8.00 | % | | 10,066 | | | 11.36 | % | | 10,605 | | | 12.37 | % | | 4,380 | | | 12.47 | % |
Common equity Tier 1 | 6.50 | % | | 9,185 | | | 10.37 | % | | 9,724 | | | 11.35 | % | | 4,041 | | | 11.50 | % |
Tier 1 leverage ratio | 5.00 | % | | 10,066 | | | 9.31 | % | | 10,605 | | | 9.85 | % | | 4,380 | | | 7.59 | % |
| | | | | | | | | | | | | |
FCB | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 11,732 | | | 13.26 | % | | $ | 12,233 | | | 14.28 | % | | $ | 4,858 | | | 13.85 | % |
Tier 1 risk-based capital | 8.00 | % | | 10,327 | | | 11.67 | % | | 10,899 | | | 12.73 | % | | 4,651 | | | 13.26 | % |
Common equity Tier 1 | 6.50 | % | | 10,327 | | | 11.67 | % | | 10,899 | | | 12.73 | % | | 4,651 | | | 13.26 | % |
Tier 1 leverage ratio | 5.00 | % | | 10,327 | | | 9.56 | % | | 10,899 | | | 10.14 | % | | 4,651 | | | 8.07 | % |
As of September 30, 2022, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. At September 30, 2022, BancShares and FCB had risk-based capital ratio conservation buffers of 5.36% and 5.26%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers were 6.35% and 5.85%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio over the Basel III minimum. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
CRITICAL ACCOUNTING ESTIMATES
There have been no significant changes in our Critical
Accounting Estimatespolicies related to the ACL are considered critical accounting estimates as described in our 2020 Annual Report.2021 Form 10-K. The ACL as of September 30, 2022 is discussed in Note 5 — Allowance for Credit Losses and the Credit Risk discussion in the section entitled “Risk Management” above.
Fair values of loans acquired in and the core deposit intangibles associated with the CIT Merger are considered critical accounting estimates. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments. The fair values for these items are further discussed in Note 2 — Business Combinations.
RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncements were issued by the FASB but are not yet effective for BancShares. | | | | | | | | |
Standard | Summary of Guidance | Effect on BancShares’ Financial Statements |
ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020
ASU 2021-01 - Reference Rate Reform (Topic 848): Scope Issued January 2021 | The amendments in these updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Allows entities to prospectively apply certain optional expedients for contract modifications and removes the requirements to remeasure contract modifications or de-designate hedging relationships. In addition, potential sources of ineffectiveness as a result of reference rate reform may be disregarded when performing certain effectiveness assessments. ASU 2021-01 refines the scope of ASC 848 and clarifies which optional expedients may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified in connection with the market-wide transition to new reference rates. Guidance in these ASUs are effective as of March 12, 2020 through December 31, 2022. | The amendments are effective for all entities at issuance date of March 12, 2020, and once adopted will apply to contract modifications made and hedging relationships entered into on or before December 31, 2022. BancShares is in the process of evaluating the optional expedients as applicable for eligible contract modifications and any hedge relationships. However, we do not expect the guidance to have a material impact on the financial statements. |
ASU 2022-01, Fair Value Hedging - Portfolio Layer Method Issued March 2022 | The amendments in this Update allow entities to designate multiple hedged layers of a single closed portfolio, and expands the scope of the portfolio layer method to include non-prepayable financial assets. Provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method. In addition, as of the adoption date the Update permits reclassification of debt securities from the held-to-maturity category to the available-for-sale category if the entity intends to include those securities in a portfolio designated in a portfolio layer method hedge. Also provides 30 days post adoption to reclassify securities and include them in a hedged closed portfolio. | Effective for BancShares as of January 1, 2023. Early adoption is permitted. The guidance on hedging multiple layers in a closed portfolio is applied prospectively. The guidance on the accounting for fair value basis adjustments is applied on a modified retrospective basis. BancShares is currently evaluating timing of adoption of this guidance and the impact of the guidance on its consolidated financial statements and disclosures. |
| | | | | | | | |
ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures Issued March 2022 | The amendments in this ASU eliminate the recognition and measurement guidance for TDRs for creditors that have adopted the CECL model and enhances disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.
The guidance also requires disclosure of current-period gross write-offs by year of origination in the vintage disclosure. | Effective for BancShares as of January 1, 2023. Early adoption is permitted. Provides the option to early adopt the amendments related to TDRs separately from the amendments related to vintage disclosures. Allows adoption using either a prospective or modified retrospective transition methods. Under prospective method, entities are permitted to apply this guidance to modifications occurring after the first day of the fiscal year of adoption. If the modified retrospective transition method is elected, a cumulative effect adjustment to retained earnings is recorded in the period of adoption to recognize any change in the ACL that had been recognized for receivables previously modified in a TDR.
BancShares is currently evaluating the transition methods along with the impact on its consolidated financial statements and disclosures, and plans to adopt the ASU at the effective date. |
GLOSSARY OF KEY TERMS
To assist the users of this document, we have added the following Glossary of key terms:
Allowance for Credit Losses (“ACL”) reflects the estimated credit losses over the full remaining expected life of the portfolio. See CECL below.
Assets Held for Sale include loans and operating lease equipment that we no longer have the intent or ability to hold until maturity. As applicable, assets held for sale could also include a component of goodwill associated with portfolios or businesses held for sale.
Available Cash consists of the unrestricted portions of ‘Cash and due from banks’ and ‘Interest-bearing deposits at banks’, excluding cash not accessible for liquidity, such as vault cash and deposits in transit.
Available for sale is a classification that pertains to debt securities. We classify debt securities as available for sale when they are not considered trading securities, securities carried at fair value, or held-to-maturity securities. Available for sale securities are included in investment securities in the balance sheet.
Average Interest-Earning Assets is a measure that is the sum of average loans and leases (as defined below, less the credit balances of factoring clients), loans and leases held for sale, interest-bearing cash, and investment securities. Average interest earning assets is computed using daily balances of Interest-Earning Assets. We use this average for certain key profitability ratios, including NIM (as defined below) for the respective period.
Average Loans and Leases is computed using daily balances and is used to measure the rate of return on loans and leases (finance leases) and the rate of net charge-offs, for the respective period.
Capital Conservation Buffer (“CCB”) is the excess 2.5% of each of the capital tiers that banks are required to hold in accordance with Basel III rules, above the minimum CET 1 Capital, Tier 1 capital and Total capital requirements, designed to absorb losses during periods of economic stress.
Common Equity Tier 1 ("CET1"), Additional Tier 1 Capital, Tier 1 Capital, Tier 2 Capital, and Total Capital are regulatory capital measures as defined in the capital adequacy guidelines issued by the Federal Reserve. CET1 is common stockholders' equity reduced by capital deductions such as goodwill, intangible assets and DTAs that arise from net operating loss and tax credit carryforwards and adjusted by elements of other comprehensive income and other items. Tier 1 Capital is Common Equity Tier 1 Capital plus other Additional Tier 1 Capital instruments, including non-cumulative preferred stock. Total Capital consists of Tier 1 Capital and Tier 2 Capital, which includes subordinated debt, and qualifying allowance for credit losses and other reserves.
Current Expected Credit Losses (“CECL”) is a forward-looking “expected loss” model used to estimate credit losses over the full remaining expected life of the portfolio. Estimates under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forecasts regarding the collectability of reported amounts. Generally, the model requires that an ACL be estimated and recognized for financial assets measured at amortized cost within its scope.
Delinquent Loan categorization occurs when payment is not received when contractually due. Delinquent loan trends are used as a gauge of potential portfolio degradation or improvement.
Derivative Contract is a contract whose value is derived from a specified asset or an index, such as an interest rate. As the value of that asset or index changes, so does the value of the derivative contract.
Economic Value of Equity Sensitivity ("EVE Sensitivity") measures the net impact of hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.
Finance leases - lessor is an agreement in which the party who owns the property (lessor), which is BancShares as part of our finance business, permits another party (lessee), which is our customer, to use the property with substantially all of the economic benefits and risks of asset ownership passed to the lessee. Finance leases are commonly known as sales-type leases and direct finance leases and are included in the consolidated balance sheet in the line “Loans and leases.”
High Quality Liquid Securities(“HQLS”) consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.
Impaired Loan is a loan for which, based on current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan.
Interest income includes interest earned on loans, interest-bearing cash balances, debt investments and dividends on investments.
Liquid Assets includes Available Cash and HQLS.
Loansand Leases include loans, finance lease receivables, and factoring receivables, and do not include amounts contained within assets held for sale (unless otherwise noted) or operating leases.
Loan-to-Value Ratio("LTV") is a calculation of a loan's collateral coverage that is used in underwriting and assessing risk in our lending portfolio. LTV is calculated as the total loan obligations (unpaid principal balance) secured by collateral divided by the fair value of the collateral.
Net Interest Income (“NII”) reflects interest and fees on loans, interest on interest-bearing cash, and interest/dividends on investments less interest expense on deposits and borrowings. When divided by average interest earning assets, the quotient is defined as Net Interest Margin ("NIM").
Net Interest Income Sensitivity("NII Sensitivity") measures the net impact of hypothetical changes in interest rates on forecasted NII.
Net Operating Loss Carryforward / Carryback("NOLs") is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. The rules pertaining to the number of years allowed for the carryback or carryforward of an NOL varies by jurisdiction.
Non-accrual Loans include loans greater than or equal to $500,000 that are individually evaluated and determined to be impaired, as well as loans less than $500,000 that are delinquent (generally for 90 days or more), unless it is both well secured and in the process of collection. Non-accrual loans also include loans with revenue recognition on a cash basis because of deterioration in the financial position of the borrower.
Non-performing Assets include Non-accrual Loans, OREO, and repossessed assets.
Operating leases - lessor is a lease in which BancShares retains ownership of the asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence.
Other Noninterest Income includes (1) fee income and other revenue, (2) wealth management services, (3) gains and losses on leasing equipment, net, (4) Service charges on deposit accounts, (5) factoring commissions, (6) cardholder services, net, (7) merchant services, (8) realized gains and losses on investment securities available for sale, net, (9) marketable equity securities gains and losses, net, (10) gain on acquisition, (11) gain and losses on extinguishments of debt, and (12) other income.
Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.
Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain HQLS that are available for secured funding at the FHLB.
Purchase Accounting Adjustments(“PAA”) reflect the fair value adjustments to acquired assets and liabilities assumed in a business combination.
Purchased Credit Deteriorated (“PCD”) financial assets are acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment.
Regulatory Credit Classifications used by BancShares are as follows:
•Pass — A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification;
•Special Mention — A special mention asset has potential weaknesses which deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification;
•Substandard — A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected;
•Doubtful — An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values; and
•Loss — Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.
Residual Values for finance leases represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the value to which the asset is depreciated at the end of lease term or at the end of estimated useful life.
Right of Use Asset (“ROU Asset”) represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.
Risk Weighted Assets("RWA") is the denominator to which CET1, Tier 1 Capital and Total Capital is compared to derive the respective risk based regulatory ratios. RWA is comprised of both on-balance sheet assets and certain off-balance sheet items (for example loan commitments, purchase commitments or derivative contracts). RWA items are adjusted by certain risk-weightings as defined by the regulators, which are based upon, among other things, the relative credit risk of the counterparty.
Troubled Debt Restructuring("TDR") occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower's financial difficulties that it would not otherwise consider.
Variable Interest Entity("VIE") is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity's operations; and/or have equity owners that do not have an obligation to absorb the entity's losses or the right to receive the entity's returns.
Yield-related Fees are collected in connection with our assumption of underwriting risk in certain transactions in addition to interest income. We recognize yield-related origination fees in interest income over the life of the lending transaction and recognize yield-related prepayment fees when the loan is prepaid.
NON-GAAP FINANCIAL MEASUREMENTS
BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares’ consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions.
Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation between the U.S. 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.
The following table provides a reconciliation of net income (GAAP) to net revenue on operating leases (non-GAAP) for the Rail Segment.
Net Revenue on Operating Leases for Rail Segment
Net revenue on operating leases within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.
The table below presents a reconciliation of net income to net revenue on operating leases.
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dollars in millions | Three Months Ended | | Nine Months Ended |
| September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net income (GAAP) | $ | 30 | | | $ | 24 | | | $ | — | | | $ | 87 | | | $ | — | |
Plus: Provision for income taxes | 10 | | | 8 | | | — | | | 28 | | | — | |
Plus: Other noninterest expense | 15 | | | 16 | | | — | | | 47 | | | — | |
Less: Other noninterest income | 6 | | | — | | | — | | | 8 | | | — | |
Plus: Interest expense, net | 20 | | | 18 | | | — | | | 57 | | | — | |
Net revenue on operating leases (non-GAAP) | $ | 69 | | | $ | 66 | | | $ | — | | | $ | 211 | | | $ | — | |
FORWARD-LOOKING STATEMENTSForward-Looking Statements
Statements in this Quarterly Report on Form 10-Q and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statementscontains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 Section 27Aregarding the financial condition, results of the Securities Actoperations, business plans and future performance of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our 2020 Annual Report and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by termsBancShares. Words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,“expects,” “forecasts,” “intends,” “plans,” “projects,” “potential” or“targets,” “designed,” “could,” “may,” “should,” “will,” “potential,” “continue,” or similar terms or the negative of these terms,“aims” or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of thosesimilar words and expressions are intended to identify these forward-looking statements. These forward-looking statements include, but are not limitedbased 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 relatingthat are difficult to our announced merger with CIT through a seriespredict. Many possible events or factors could affect BancShares’ future financial results and performance and could cause the actual results, performance or achievements of merger transactions, includingBancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including the ability to obtainmilitary conflict between Russia and Ukraine) and market conditions, the remaining regulatory approvals and meet other closing conditions toimpacts of the Transaction, and delay in closing the Transaction, as well as risks, uncertainties and other factors relating to the impact ofglobal COVID-19 pandemic on ourBancShares’ business, and the economy,customers, the financial success or changing conditions or strategies of ourBancShares’ customers customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutionsor vendors, fluctuations in our banking markets,interest rates, rising inflation, actions of government regulators, including the level of market interest ratesrecent and our ability to manage ourprojected interest rate risk, changeshikes by the Board of Governors of the Federal Reserve Board (the “Federal Reserve”), the potential impact of decisions by the Federal Reserve on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions, including the significant turbulence in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral,capital or financial markets, the impact of our prior acquisitions, the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, regulators, the availability of capital and personnel, the failure to realize the anticipated benefits of BancShares’ previously announced acquisition transaction(s), including the recently-completed transaction with CIT, which acquisition risks discussedinclude (1) disruption from the transaction, or recently completed mergers, with customer, supplier or employee relationships, (2) the possibility that the amount of the costs, fees, expenses and charges related to the transaction may be greater than anticipated, including as a result of unexpected or unknown factors, events or liabilities, (3) reputational risk and the reaction of the parties’ customers to the transaction, (4) the risk that the cost savings and any revenue synergies from the transaction may not be realized or take longer than anticipated to be realized, and (5) difficulties experienced in Part I, Item 1A. Risk Factorsthe integration of our 2020 Annual Report and other developments or changes in our business that we do not expect. Actual results may differ materially from those expressed in or implied by any forward-looking statements.the businesses.
Except to the extent required by applicable law or regulation, BancShares undertakes nodisclaims any obligation to reviseupdate such factors or updateto publicly announce the results of any revisions to any of the forward-looking statements for any reason.included herein to reflect future events or developments. Additional factors which could affect the forward-looking statements can be found in the 2021 Form 10-K and its other filings with the Securities and Exchange Commission.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
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 net interest incomeNII in future periods. As of September 30, 2022, BancShares’ market risk profile has changed since December 31, 2021, primarily due to the CIT Merger. See the sections entitled “Risk Management” and “Results of Operations”Risk Management within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of this Quarterly ReportOperations for discussion of changes, which are incorporated herein by reference.changes. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.
Item 4. Controls and Procedures
BancShares’ management,
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision of and with the participation of its Chief Executive Officermanagement, including our principal executive officer and Chief Financial Officer, hasprincipal financial officer, we evaluated the effectiveness of the design and operation of BancShares’our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report,such term is defined in accordance with Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of the Exchange Act. Based upon that evaluation,1934 (the “Exchange Act”), as of the end of the period covered by this report, the Chief Executive OfficerSeptember 30, 2022. Based on such evaluation, our principal executive officer and the Chief Financial Officerprincipal financial officer concluded that BancShares’our disclosure controls and procedures were effective to provide reasonable assurance that it iswe are able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it fileswe file under the Exchange Act.
No
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We review our internal controls over financial reporting on an ongoing basis and make changes in BancShares’intended to ensure the quality of our financial reporting. During the first quarter of 2022, as the result of the acquisition of CIT, we commenced the evaluation of the acquired entities controls, and designed and implemented new controls as needed. The evaluation of the changes to processes, information technology systems and other components of internal control over financial reporting occurredrelated to our acquisition of CIT is ongoing. Otherwise, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the third quarter of 2021ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.
Part II
PART II
Item 1. Legal Proceedings
BancSharesThe Parent Company and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts were claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions currently exist that are expected to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note N -23 — Commitments and Contingencies, which information is incorporated by reference into this item.
Item 1A. Risk Factors
There have been no material changes fromin the risk factors describedduring 2022 from those reported in our Annual2021 Form 10-K, which had contemplated anticipated changes due to the CIT Merger. For a discussion of the risks and uncertainties that management believes are material to an investment in us, see Part I, Item 1A. Risk Factors, of our 2021 Form 10-K, and Forward-Looking Statements of this Quarterly Report on Form 10-K for the year ended December 31, 2020. The risks described may not be the only risks facing us.10-Q. Additional risks and uncertainties that are not currently known to usmanagement or that aremanagement does not currently considered to not bedeem material could also may materially adversely affecthave a material adverse impact on our business, financial condition, and/the results of our operations or operating results.our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, we could be adversely affected, and the market price of our securities could significantly decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)The table below summarizes our stock repurchase activity during the quarter ended September 30, 2022.
ISSUER PURCHASES OF EQUITY SECURITIES
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Class A Common Stock | Total Number of Class A Shares Repurchased | | Average Price Paid per Share | | Total Number of Shares Repurchased as Part of Publicly Announced Plan | | Maximum Number of Shares that May Yet be Repurchased Under Plan |
Repurchases from July 1 - 31, 2022 | — | | | $ | — | | | — | | | 1,500,000 |
Repurchases from August 1 - 31, 2022 | 487,284 | | | $ | 820.11 | | | 487,284 | | | 1,012,716 |
Repurchases from September 1 - 30, 2022 | 540,130 | | | $ | 819.53 | | | 540,130 | | | 472,586 |
Total | 1,027,414 | | | $ | 819.80 | | | 1,027,414 | | | 472,586 |
On July 26, 2022, the Board authorized a share repurchase program for up to 1,500,000 shares of ContentsClass A Common Stock for the period commencing August 1, 2022 through July 28, 2023. Under the authorized share repurchase program, shares of Class A Common Stock were authorized to be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. During the three months ended September 30, 2022, BancShares purchased 1,027,414 shares of Class A Common Stock, and subsequent to September 30, 2022, BancShares purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program.
Item 5. Other Information
COMPLETION OF SHARE REPURCHASE PROGRAM
Subsequent to September 30, 2022, BancShares purchased an additional 472,586 shares of Class A Common Stock, thereby completing the share repurchase program. Refer to Part II, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds above for additional information.
Item 6. Exhibits
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2.1 | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
*101.INS | |
101.INS | Inline XBRL Instance Document (filed herewith) |
*101.SCH | |
101.SCH | Inline XBRL Taxonomy Extension Schema (filed herewith) |
*101.CAL | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) |
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101.DEF*101.LAB | Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) |
*101.PRE | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) |
*101.DEF | | Inline XBRL Taxonomy Definition Linkbase (filed herewith) |
*104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document filed as Exhibit 101) |
* | | Interactive data files are furnished but not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | November 2, 20214, 2022 | | | FIRST CITIZENS BANCSHARES, INC. |
| | | | (Registrant) |
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| | By: | | /s/ CRAIGCraig L. NIXNix |
| | | | Craig L. Nix |
| | | | Chief Financial Officer |