0000798941fcnca:AOCIAccumulatedGainLossDebtSecuritiesAvailableForSaleExcludingTransfersParentMember2023-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2022March 31, 2023 |
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☐ | 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 Registrant 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) |
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: |
Title of each class | Trading Symbol(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 |
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”, “smaller reporting company” and ‘emerging growth 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— 13,498,53513,514,808 shares
Class B Common Stock— 1,005,185 shares
(Number of shares outstanding, by class, as of October 31, 2022)April 30, 2023
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CONTENTS |
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Part One — Financial Information: |
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Item 1. | | | | |
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Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
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Part Two — Other Information: |
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Item 1. | | | | |
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 | IRCHOA | Internal Revenue CodeHome Owner’s Association |
AFS | Available for Sale | HQLS | High Quality Liquid Securities |
AOCI | Accumulated Other Comprehensive Income | ISDAHTM | International Swaps and Derivative AssociationHeld to Maturity |
ASC | Accounting Standards Codification | LIBOR | London Inter-Bank Offered Rate |
ASU | Accounting Standards Update | LGD | Loss Given Default |
BHC | Bank Holding Company | LOCOM | Lower of the Cost or Market Value |
BHCBOLI | Bank Holding CompanyOwned Life Insurance | MD&A | Management’s Discussion and Analysis |
BOLI | Bank Owned Life Insurance | MSRs | Mortgage Servicing Rights |
bps | Basis point(s); 1 bp = 0.01% | MSRs | Mortgage Servicing Rights |
CAB | Community Association Banking | NCCOB | North Carolina Commissioner of Banks |
CABCCAR | Community Association BankingComprehensive Capital Analysis and Review | 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 | NSFOREO | Nonsufficient FundsOther Real Estate Owned |
ETR | Effective Tax Rate | OREOPAA | Other Real Estate OwnedPurchase Accounting Adjustments |
EVE Sensitivity | Economic Value of Equity Sensitivity | PAAPCA | Purchase Accounting AdjustmentsPrompt corrective action |
FASB | Financial Accounting Standards Board | PBPCAOB | Primary BeneficiaryPublic Company Accounting Oversight Board |
FCB | First-Citizens Bank & Trust Company | PCAPCD | Prompt corrective actionPurchased Credit Deteriorated |
FDIC | Federal Deposit Insurance Corporation | PCDPD | Purchased Credit DeterioratedProbability of Obligor Default |
FHA | Federal Housing Administration | PDPPP | Probability of Obligor DefaultPaycheck Protection Program |
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-PPPSOFR | Small Business Administration Paycheck Protection PlanSecured Overnight Financing Rate |
GAAP | Accounting Principles Generally Accepted in the U.S. | SOFRTDRs | Secured Overnight Financing RateTroubled Debt Restructuring |
GDP | Gross Domestic Product | TDRs | Troubled Debt Restructuring |
HAMP | Home Affordable Modification Program | UPB | Unpaid Principal Balance |
HOAHFI | Home Owner’s Association | VA | Veteran’s Administration |
HQLS | High Quality Liquid SecuritiesHeld for Investment | VIE | Variable Interest Entity |
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PART I
Item 1. Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
| dollars in millions, except share data | dollars in millions, except share data | September 30, 2022 | | December 31, 2021 | dollars in millions, except share data | March 31, 2023 | | December 31, 2022 |
Assets | Assets | | | | Assets | | | |
Cash and due from banks | Cash and due from banks | $ | 481 | | | $ | 338 | | Cash and due from banks | $ | 1,598 | | | $ | 518 | |
Interest-earning deposits at banks | Interest-earning deposits at banks | 6,172 | | | 9,115 | | Interest-earning deposits at banks | 38,522 | | | 5,025 | |
| 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 | | |
Investment in marketable equity securities (cost of $75 at March 31, 2023 and $75 at December 31, 2022) | | Investment in marketable equity securities (cost of $75 at March 31, 2023 and $75 at December 31, 2022) | 85 | | | 95 | |
Investment securities available for sale (cost of $9,955 at March 31, 2023 and $9,967 at December 31, 2022), net of allowance for credit losses | | Investment securities available for sale (cost of $9,955 at March 31, 2023 and $9,967 at December 31, 2022), net of allowance for credit losses | 9,061 | | | 8,995 | |
Investment securities held to maturity (fair value of $8,993 at March 31, 2023 and $8,795 at December 31, 2022) | | Investment securities held to maturity (fair value of $8,993 at March 31, 2023 and $8,795 at December 31, 2022) | 10,381 | | | 10,279 | |
Assets held for sale | Assets held for sale | 21 | | | 99 | | Assets held for sale | 94 | | | 60 | |
Loans and leases | Loans and leases | 69,790 | | | 32,372 | | Loans and leases | 138,288 | | | 70,781 | |
Allowance for credit losses | Allowance for credit losses | (882) | | | (178) | | Allowance for credit losses | (1,605) | | | (922) | |
Loans and leases, net of allowance for credit losses | Loans and leases, net of allowance for credit losses | 68,908 | | | 32,194 | | Loans and leases, net of allowance for credit losses | 136,683 | | | 69,859 | |
Operating lease equipment, net | Operating lease equipment, net | 7,984 | | | — | | Operating lease equipment, net | 8,331 | | | 8,156 | |
Premises and equipment, net | Premises and equipment, net | 1,410 | | | 1,233 | | Premises and equipment, net | 1,743 | | | 1,456 | |
Bank-owned life insurance | 1,342 | | | 116 | | |
Goodwill | Goodwill | 346 | | | 346 | | Goodwill | 346 | | | 346 | |
Other intangible assets | Other intangible assets | 145 | | | 19 | | Other intangible assets | 364 | | | 140 | |
Other assets | Other assets | 3,660 | | | 1,739 | | Other assets | 7,450 | | | 4,369 | |
Total assets | Total assets | $ | 109,310 | | | $ | 58,309 | | Total assets | $ | 214,658 | | | $ | 109,298 | |
Liabilities | Liabilities | | | | Liabilities | | | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing | Noninterest-bearing | $ | 26,587 | | | $ | 21,405 | | Noninterest-bearing | $ | 54,649 | | | $ | 24,922 | |
Interest-bearing | Interest-bearing | 60,966 | | | 30,001 | | Interest-bearing | 85,401 | | | 64,486 | |
Total deposits | Total deposits | 87,553 | | | 51,406 | | Total deposits | 140,050 | | | 89,408 | |
Credit balances of factoring clients | Credit balances of factoring clients | 1,147 | | | — | | Credit balances of factoring clients | 1,126 | | | 995 | |
Borrowings: | Borrowings: | | Borrowings: | |
| Short-term borrowings | Short-term borrowings | 3,128 | | | 589 | | Short-term borrowings | 1,009 | | | 2,186 | |
| Long-term borrowings | Long-term borrowings | 5,215 | | | 1,195 | | Long-term borrowings | 45,085 | | | 4,459 | |
Total borrowings | Total borrowings | 8,343 | | | 1,784 | | Total borrowings | 46,094 | | | 6,645 | |
Other liabilities | Other liabilities | 2,434 | | | 381 | | Other liabilities | 8,172 | | | 2,588 | |
Total liabilities | Total liabilities | 99,477 | | | 53,571 | | Total liabilities | 195,442 | | | 99,636 | |
Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
Preferred stock - $0.01 par value (10,000,000 shares authorized at September 30, 2022 and December 31, 2021) | 881 | | | 340 | | |
Preferred stock - $0.01 par value (10,000,000 shares authorized at March 31, 2023 and December 31, 2022) | | Preferred stock - $0.01 par value (10,000,000 shares authorized at March 31, 2023 and December 31, 2022) | 881 | | | 881 | |
Common stock: | Common stock: | | 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 | | |
Class A - $1 par value (16,000,000 shares authorized at March 31, 2023; 13,514,808 and 13,501,017 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively) | | Class A - $1 par value (16,000,000 shares authorized at March 31, 2023; 13,514,808 and 13,501,017 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively) | 14 | | | 14 | |
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 31, 2023 and December 31, 2022) | | Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at March 31, 2023 and December 31, 2022) | 1 | | | 1 | |
Additional paid in capital | Additional paid in capital | 4,506 | | | — | | Additional paid in capital | 4,104 | | | 4,109 | |
Retained earnings | Retained earnings | 5,160 | | | 4,378 | | Retained earnings | 14,885 | | | 5,392 | |
Accumulated other comprehensive (loss) income | (729) | | | 10 | | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (669) | | | (735) | |
Total stockholders’ equity | Total stockholders’ equity | 9,833 | | | 4,738 | | Total stockholders’ equity | 19,216 | | | 9,662 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 109,310 | | | $ | 58,309 | | Total liabilities and stockholders’ equity | $ | 214,658 | | | $ | 109,298 | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
dollars in millions, except share and per share data | dollars in millions, except share and per share data | 2022 | | 2021 | | 2022 | | 2021 | dollars in millions, except share and per share data | 2023 | | 2022 | |
Interest income | Interest income | | | | | | | | Interest income | | | | |
Interest and fees on loans | Interest and fees on loans | $ | 785 | | | $ | 320 | | | $ | 2,061 | | | $ | 967 | | Interest and fees on loans | $ | 1,017 | | | $ | 621 | | |
Interest on investment securities | Interest on investment securities | 90 | | 40 | | 262 | | 106 | Interest on investment securities | 107 | | | 83 | | |
Interest on deposits at banks | Interest on deposits at banks | 31 | | 3 | | 50 | | 7 | Interest on deposits at banks | 87 | | | 6 | | |
Total interest income | Total interest income | 906 | | | 363 | | | 2,373 | | | 1,080 | | Total interest income | 1,211 | | | 710 | | |
Interest expense | Interest expense | | Interest expense | | |
Deposits | Deposits | 78 | | 8 | | 159 | | 25 | Deposits | 288 | | | 39 | | |
Borrowings | Borrowings | 33 | | 8 | | 70 | | 22 | Borrowings | 73 | | | 22 | | |
Total interest expense | Total interest expense | 111 | | | 16 | | | 229 | | | 47 | | Total interest expense | 361 | | | 61 | | |
Net interest income | Net interest income | 795 | | 347 | | 2,144 | | 1,033 | Net interest income | 850 | | | 649 | | |
Provision (benefit) for credit losses | 60 | | (1) | | 566 | | (32) | |
Provision for credit losses | | Provision for credit losses | 783 | | | 464 | | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 735 | | | 348 | | | 1,578 | | | 1,065 | | Net interest income after provision for credit losses | 67 | | | 185 | | |
Noninterest income | Noninterest income | | Noninterest income | | |
Rental income on operating leases | 219 | | — | | 640 | | — | |
Rental income on operating lease equipment | | Rental income on operating lease equipment | 233 | | | 208 | | |
Fee income and other service charges | Fee income and other service charges | 44 | | 10 | | 118 | | 31 | Fee income and other service charges | 50 | | | 36 | | |
Wealth management services | Wealth management services | 35 | | 32 | | 107 | | 96 | Wealth management services | 42 | | | 35 | | |
Service charges on deposit accounts | Service charges on deposit accounts | 21 | | 26 | | 77 | | 69 | Service charges on deposit accounts | 24 | | | 27 | | |
Factoring commissions | Factoring commissions | 24 | | — | | 78 | | — | Factoring commissions | 19 | | | 27 | | |
Cardholder services, net | Cardholder services, net | 25 | | 23 | | 76 | | 65 | Cardholder services, net | 21 | | | 25 | | |
Merchant services, net | Merchant services, net | 8 | | 9 | | 27 | | 26 | Merchant services, net | 10 | | | 10 | | |
Insurance commissions | Insurance commissions | 11 | | 4 | | 34 | | 12 | Insurance commissions | 13 | | | 12 | | |
Realized gain on sale of investment securities available for sale, net | — | | 8 | | — | | 33 | |
Realized loss on sale of investment securities available for sale, net | | Realized loss on sale of investment securities available for sale, net | (14) | | | — | | |
Fair value adjustment on marketable equity securities, net | Fair value adjustment on marketable equity securities, net | (2) | | 3 | | (5) | | 31 | Fair value adjustment on marketable equity securities, net | (9) | | | 3 | | |
Bank-owned life insurance | Bank-owned life insurance | 8 | | 1 | | 25 | | 2 | Bank-owned life insurance | 5 | | | 8 | | |
Gain on sale of leasing equipment, net | Gain on sale of leasing equipment, net | 2 | | — | | 13 | | — | Gain on sale of leasing equipment, net | 4 | | | 6 | | |
Gain on acquisition | Gain on acquisition | — | | — | | 431 | | — | Gain on acquisition | 9,824 | | | 431 | | |
Gain on extinguishment of debt | Gain on extinguishment of debt | 1 | | — | | 7 | | — | Gain on extinguishment of debt | — | | | 6 | | |
Other noninterest income | Other noninterest income | 37 | | 8 | | 79 | | 29 | Other noninterest income | 37 | | | 16 | | |
Total noninterest income | Total noninterest income | 433 | | | 124 | | | 1,707 | | | 394 | | Total noninterest income | 10,259 | | | 850 | | |
Noninterest expense | Noninterest expense | | Noninterest expense | | |
Depreciation on operating lease equipment | Depreciation on operating lease equipment | 87 | | — | | 257 | | — | Depreciation on operating lease equipment | 89 | | | 81 | | |
Maintenance and other operating lease expenses | Maintenance and other operating lease expenses | 52 | | — | | 142 | | — | Maintenance and other operating lease expenses | 56 | | | 43 | | |
Salaries and benefits | Salaries and benefits | 351 | | 194 | | 1,044 | | 566 | Salaries and benefits | 420 | | | 356 | | |
Net occupancy expense | Net occupancy expense | 47 | | 29 | | 144 | | 87 | Net occupancy expense | 50 | | | 48 | | |
Equipment expense | Equipment expense | 55 | | 30 | | 161 | | 89 | Equipment expense | 58 | | | 52 | | |
Professional fees | Professional fees | 13 | | 5 | | 44 | | 13 | Professional fees | 12 | | | 12 | | |
Third-party processing fees | Third-party processing fees | 27 | | 16 | | 77 | | 44 | Third-party processing fees | 29 | | | 24 | | |
FDIC insurance expense | FDIC insurance expense | 5 | | 3 | | 26 | | 10 | FDIC insurance expense | 18 | | | 12 | | |
Marketing | 15 | | 3 | | 32 | | 7 | |
Merger-related expenses | 33 | | 7 | | 202 | | 20 | |
Marketing expense | | Marketing expense | 15 | | | 8 | | |
Acquisition-related expenses | | Acquisition-related expenses | 28 | | | 135 | | |
Intangible asset amortization | Intangible asset amortization | 5 | | 3 | | 17 | | 9 | Intangible asset amortization | 5 | | | 6 | | |
Other noninterest expense | Other noninterest expense | 70 | | 24 | | 169 | | 66 | Other noninterest expense | 75 | | | 33 | | |
Total noninterest expense | Total noninterest expense | 760 | | | 314 | | | 2,315 | | | 911 | | Total noninterest expense | 855 | | | 810 | | |
Income before income taxes | Income before income taxes | 408 | | 158 | | 970 | | 548 | Income before income taxes | 9,471 | | | 225 | | |
Income tax expense | 93 | | 34 | | 129 | | 124 | |
Income tax (benefit) expense | | Income tax (benefit) expense | (47) | | | (46) | | |
Net income | Net income | $ | 315 | | | $ | 124 | | | $ | 841 | | | $ | 424 | | Net income | $ | 9,518 | | | $ | 271 | | |
Preferred stock dividends | Preferred stock dividends | 12 | | 5 | | 36 | | 14 | Preferred stock dividends | 14 | | | 7 | | |
Net income available to common stockholders | Net income available to common stockholders | $ | 303 | | | $ | 119 | | | $ | 805 | | | $ | 410 | | Net income available to common stockholders | $ | 9,504 | | | $ | 264 | | |
Earnings per common share | Earnings per common share | | | | | | | | Earnings per common share | | | | |
Basic | Basic | $ | 19.27 | | | $ | 12.17 | | | $ | 50.76 | | | $ | 41.79 | | Basic | $ | 654.22 | | | $ | 16.70 | | |
Diluted | Diluted | $ | 19.25 | | | $ | 12.17 | | | $ | 50.70 | | | $ | 41.79 | | Diluted | $ | 653.64 | | | $ | 16.70 | | |
Weighted average common shares outstanding | Weighted average common shares outstanding | | Weighted average common shares outstanding | | |
Basic | Basic | 15,711,976 | | 9,816,405 | | 15,849,219 | | 9,816,405 | Basic | 14,526,693 | | 15,779,153 | |
Diluted | Diluted | 15,727,993 | | 9,816,405 | | 15,867,314 | | 9,816,405 | Diluted | 14,539,709 | | 15,779,153 | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (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 | |
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| Three Months Ended March 31, | | |
dollars in millions | 2023 | | 2022 | | | | |
Net income | $ | 9,518 | | | $ | 271 | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | |
Net unrealized gain (loss) on securities available for sale | 58 | | | (318) | | | | | |
Net change in unrealized loss on securities available for sale transferred to securities held to maturity | — | | | 1 | | | | | |
Net change in defined benefit pension items | 8 | | | 2 | | | | | |
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Other comprehensive income (loss), net of tax | $ | 66 | | | $ | (315) | | | | | |
Total comprehensive income (loss) | $ | 9,584 | | | $ | (44) | | | | | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
dollars in millions, except share data | 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 | 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 | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | | $ | 881 | | | $ | 14 | | | $ | 1 | | | $ | 4,109 | | | $ | 5,392 | | | $ | (735) | | | $ | 9,662 | |
Net income | Net income | | — | | | — | | | — | | | — | | | 315 | | | — | | | 315 | | Net income | | — | | | — | | | — | | | — | | | 9,518 | | | — | | | 9,518 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (264) | | | (264) | | |
Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | | — | | | — | | | — | | | — | | | — | | | 66 | | | 66 | |
| Stock based compensation | Stock based compensation | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | | Stock based compensation | | — | | | — | | | — | | | (5) | | | — | | | — | | | (5) | |
Repurchased 1,027,414 shares of Class A common stock | | — | | | (1) | | | — | | | (841) | | | — | | | — | | | (842) | | |
Cash dividends declared ($0.47 per common share): | | |
| Cash dividends declared ($0.75 per common share): | | Cash dividends declared ($0.75 per common share): | |
Class A common stock | Class A common stock | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | | Class A common stock | | — | | | — | | | — | | | — | | | (10) | | | — | | | (10) | |
Class B common stock | Class B common stock | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | Class B common stock | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Preferred stock dividends declared: | Preferred stock dividends declared: | | Preferred stock dividends declared: | |
Series A | Series A | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | | Series A | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
Series B | Series B | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | | Series B | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Series C | Series C | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | Series C | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Balance at September 30, 2022 | | 881 | | | 14 | | | 1 | | | 4,506 | | | 5,160 | | | (729) | | | 9,833 | | |
Balance at March 31, 2023 | | Balance at March 31, 2023 | | $ | 881 | | | $ | 14 | | | $ | 1 | | | $ | 4,104 | | | $ | 14,885 | | | $ | (669) | | | $ | 19,216 | |
| Balance at June 30, 2021 | | 340 | | | 9 | | | 1 | | | — | | | 4,149 | | | (22) | | | 4,477 | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | | $ | 340 | | | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 4,378 | | | $ | 10 | | | $ | 4,738 | |
Net income | Net income | | — | | | — | | | — | | | — | | | 124 | | | — | | | 124 | | Net income | | — | | | — | | | — | | | — | | | 271 | | | — | | | 271 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | | |
Cash dividends declared ($0.47 per common share): | | |
Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | | — | | | — | | | — | | | — | | | — | | | (315) | | | (315) | |
Issued in CIT Merger: | | Issued in CIT Merger: | |
Common stock | | Common stock | | — | | | 6 | | | — | | | 5,273 | | | — | | | — | | | 5,279 | |
Series B preferred stock | | Series B preferred stock | | 334 | | | — | | | — | | | — | | | — | | | — | | | 334 | |
Series C preferred stock | | Series C preferred stock | | 207 | | | — | | | — | | | — | | | — | | | — | | | 207 | |
Stock based compensation | | Stock based compensation | | — | | | — | | | — | | | 71 | | | — | | | — | | | 71 | |
Cash dividends declared ( $0.47 per common share): | | Cash dividends declared ( $0.47 per common share): | |
Class A common stock | Class A common stock | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | | Class A common stock | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Class B common stock | Class B common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Class B common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Preferred stock dividends declared | Preferred stock dividends declared | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | | Preferred stock dividends declared | |
Balance at September 30, 2021 | | $ | 340 | | | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 4,264 | | | $ | (32) | | | $ | 4,582 | | |
Series A | | Series A | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Series C | | Series C | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | | $ | 881 | | | $ | 15 | | | $ | 1 | | | $ | 5,344 | | | $ | 4,634 | | | $ | (305) | | | $ | 10,570 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, | | Three Months Ended March 31, |
dollars in millions | dollars in millions | 2022 | | 2021 | dollars in millions | 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | Net income | $ | 841 | | | $ | 424 | | Net income | $ | 9,518 | | | $ | 271 | |
Adjustments to reconcile net income to cash provided by (used in) operating activities: | Adjustments to reconcile net income to cash provided by (used in) operating activities: | | 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 | | |
Provision for credit losses | | Provision for credit losses | 783 | | | 464 | |
Deferred tax benefit | | Deferred tax benefit | (69) | | | (61) | |
Depreciation, amortization, and accretion, net | Depreciation, amortization, and accretion, net | 399 | | | 102 | | Depreciation, amortization, and accretion, net | 124 | | | 114 | |
Stock based compensation expense | Stock based compensation expense | 17 | | | — | | Stock based compensation expense | 1 | | | 12 | |
Realized gain on sales of investment securities available for sale, net | — | | | (33) | | |
Realized loss on sale of investment securities available for sale, net | | Realized loss on sale of investment securities available for sale, net | 14 | | | — | |
Fair value adjustment on marketable equity securities, net | Fair value adjustment on marketable equity securities, net | 5 | | | (31) | | Fair value adjustment on marketable equity securities, net | 9 | | | (3) | |
Gain on sale of loans, net | Gain on sale of loans, net | (16) | | | (27) | | Gain on sale of loans, net | (1) | | | (3) | |
Gain on sale of operating lease equipment, net | Gain on sale of operating lease equipment, net | (10) | | | — | | Gain on sale of operating lease equipment, net | (4) | | | (6) | |
Loss on sale of premises and equipment, net | Loss on sale of premises and equipment, net | 1 | | | — | | Loss on sale of premises and equipment, net | — | | | 1 | |
Gain on other real estate owned, net | Gain on other real estate owned, net | (13) | | | (3) | | Gain on other real estate owned, net | — | | | (2) | |
Gain on acquisition | Gain on acquisition | (431) | | | — | | Gain on acquisition | (9,824) | | | (431) | |
| Gain on extinguishment of debt | Gain on extinguishment of debt | (7) | | | — | | Gain on extinguishment of debt | — | | | (6) | |
Origination of loans held for sale | Origination of loans held for sale | (320) | | | (861) | | Origination of loans held for sale | (82) | | | (235) | |
Proceeds from sale of loans held for sale | Proceeds from sale of loans held for sale | 388 | | | 808 | | Proceeds from sale of loans held for sale | 67 | | | 248 | |
Net change in other assets | Net change in other assets | 84 | | | (747) | | Net change in other assets | (486) | | | 343 | |
Net change in other liabilities | Net change in other liabilities | 216 | | | (11) | | Net change in other liabilities | (347) | | | (118) | |
Other operating activities | Other operating activities | (29) | | | (9) | | Other operating activities | (65) | | | (11) | |
Net cash provided by (used in) operating activities | 1,771 | | | (411) | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (362) | | | 577 | |
CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | | 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 | | |
Net (increase) decrease in interest-earning deposits at banks | | Net (increase) decrease in interest-earning deposits at banks | (88) | | | 2,705 | |
| Purchases of investment securities available for sale | Purchases of investment securities available for sale | (1,813) | | | (3,621) | | Purchases of investment securities available for sale | (125) | | | (810) | |
Proceeds from maturities of investment securities available for sale | Proceeds from maturities of investment securities available for sale | 927 | | | 1,968 | | Proceeds from maturities of investment securities available for sale | 227 | | | 330 | |
Proceeds from sales of investment securities available for sale | Proceeds from sales of investment securities available for sale | — | | | 1,367 | | Proceeds from sales of investment securities available for sale | 1 | | | — | |
Purchases of investment securities held to maturity | Purchases of investment securities held to maturity | — | | | (1,199) | | Purchases of investment securities held to maturity | (212) | | | — | |
Proceeds from maturities of investment securities held to maturity | Proceeds from maturities of investment securities held to maturity | 699 | | | 606 | | Proceeds from maturities of investment securities held to maturity | 117 | | | 283 | |
| Net change in loans | (4,648) | | | 275 | | |
Net decrease in loans | | Net decrease in loans | 1,060 | | | 107 | |
Proceeds from sales of loans | Proceeds from sales of loans | 173 | | | — | | Proceeds from sales of loans | 113 | | | 53 | |
Net increase (decrease) in credit balances of factoring clients | | Net increase (decrease) in credit balances of factoring clients | 131 | | | (383) | |
Purchases of operating lease equipment | Purchases of operating lease equipment | (464) | | | — | | Purchases of operating lease equipment | (288) | | | (226) | |
Proceeds from sales of operating lease equipment | Proceeds from sales of operating lease equipment | 58 | | | — | | Proceeds from sales of operating lease equipment | 33 | | | 19 | |
Purchases of premises and equipment | Purchases of premises and equipment | (81) | | | (72) | | Purchases of premises and equipment | (44) | | | (15) | |
Proceeds from sales of premises and equipment | 13 | | | 1 | | |
| | Proceeds from sales of other real estate owned | Proceeds from sales of other real estate owned | 38 | | | 30 | | Proceeds from sales of other real estate owned | 3 | | | 11 | |
Acquisition, net of cash acquired | Acquisition, net of cash acquired | 134 | | | — | | Acquisition, net of cash acquired | 1,347 | | | 134 | |
Other investing activities | Other investing activities | (67) | | | (35) | | Other investing activities | 353 | | | (13) | |
Net cash provided by (used in) investing activities | 786 | | | (6,209) | | |
Net cash provided by investing activities | | Net cash provided by investing activities | 2,628 | | | 2,195 | |
CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | | 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 increase (decrease) in time deposits | | Net increase (decrease) in time deposits | 2,124 | | | (823) | |
Net (decrease) increase in demand and other interest-bearing deposits | | Net (decrease) increase in demand and other interest-bearing deposits | (7,570) | | | 1,275 | |
Net change in securities sold under customer repurchase agreements | Net change in securities sold under customer repurchase agreements | (11) | | | 22 | | Net change in securities sold under customer repurchase agreements | 63 | | | 27 | |
Repayment of short-term borrowings | Repayment of short-term borrowings | (450) | | | ��� | | Repayment of short-term borrowings | (1,750) | | | — | |
Proceeds from issuance of short-term borrowings | Proceeds from issuance of short-term borrowings | 3,000 | | | — | | Proceeds from issuance of short-term borrowings | 500 | | | — | |
Repayment of long-term borrowings | Repayment of long-term borrowings | (3,740) | | | (29) | | Repayment of long-term borrowings | (1,021) | | | (3,031) | |
Proceeds from issuance of long-term borrowings | Proceeds from issuance of long-term borrowings | 3,253 | | | — | | Proceeds from issuance of long-term borrowings | 6,500 | | | 1 | |
| Repurchase of Class A common stock | (792) | | | — | | |
| Cash dividends paid | Cash dividends paid | (58) | | | (32) | | Cash dividends paid | (26) | | | (14) | |
Other financing activities | Other financing activities | (44) | | | — | | Other financing activities | (6) | | | (22) | |
Net cash (used in) provided by financing activities | (2,414) | | | 6,596 | | |
Net cash used in financing activities | | Net cash used in financing activities | (1,186) | | | (2,587) | |
| Change in cash and due from banks | Change in cash and due from banks | 143 | | | (24) | | Change in cash and due from banks | 1,080 | | | 185 | |
Cash and due from banks at beginning of period | Cash and due from banks at beginning of period | 338 | | | 362 | | Cash and due from banks at beginning of period | 518 | | | 338 | |
Cash and due from banks at end of period | Cash and due from banks at end of period | $ | 481 | | | $ | 338 | | Cash and due from banks at end of period | $ | 1,598 | | | $ | 523 | |
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
dollars in millions | dollars in millions | 2022 | | 2021 | dollars in millions | 2023 | | 2022 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid (refunded) during the period for: | Cash paid (refunded) during the period for: | | Cash paid (refunded) during the period for: | |
Interest | Interest | $ | 315 | | | $ | 49 | | Interest | $ | 366 | | | $ | 146 | |
Income taxes | Income taxes | (12) | | | 871 | | Income taxes | — | | | (1) | |
Significant non-cash investing and financing activities: | Significant non-cash investing and financing activities: | | Significant non-cash investing and financing activities: | |
Transfers of loans to other real estate | Transfers of loans to other real estate | 13 | | | 8 | | Transfers of loans to other real estate | — | | | 1 | |
Transfers of premises and equipment to other real estate | Transfers of premises and equipment to other real estate | 18 | | | 9 | | Transfers of premises and equipment to other real estate | 1 | | | 4 | |
| Dividends declared but not paid | Dividends declared but not paid | 1 | | | — | | Dividends declared but not paid | — | | | 1 | |
Transfer of assets from held for investment to held for sale | Transfer of assets from held for investment to held for sale | 98 | | | 73 | | Transfer of assets from held for investment to held for sale | 115 | | | 25 | |
Transfer of assets from held for sale to held for investment | Transfer of assets from held for sale to held for investment | 19 | | | 2 | | Transfer of assets from held for sale to held for investment | 1 | | | 12 | |
Loans held for sale exchanged for investment securities | Loans held for sale exchanged for investment securities | 38 | | | 177 | | Loans held for sale exchanged for investment securities | — | | | 38 | |
Commitments extended during the period on affordable housing investment credits | Commitments extended during the period on affordable housing investment credits | 55 | | | 15 | | Commitments extended during the period on affordable housing investment credits | 3 | | | — | |
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 | | | — | | |
Issuance of common stock as consideration for CIT Merger | | Issuance of common stock as consideration for CIT Merger | — | | | 5,278 | |
Stock based compensation as consideration for CIT Merger | | Stock based compensation as consideration for CIT Merger | — | | | 81 | |
Issuance of preferred stock as consideration for CIT Merger | | Issuance of preferred stock as consideration for CIT Merger | — | | | 541 | |
Purchase Money Note as consideration for SVBB Acquisition | | Purchase Money Note as consideration for SVBB Acquisition | 35,150 | | | — | |
Value Appreciation Instrument as consideration for SVBB Acquisition | | Value Appreciation Instrument as consideration for SVBB Acquisition | 500 | | | — | |
See accompanying Notes to the Unaudited Consolidated Financial Statements.
Notes to the Unaudited Consolidated Financial Statements
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Nature of Operations
First Citizens BancShares, Inc. (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 that conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (“FCB,” or the “Bank”), which is headquartered in Raleigh, North Carolina. BancShares and its subsidiaries operate a network of more than 550 branches in 2223 states, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States. BancShares provides various types of commercial and consumer banking services, including lending, leasing and wealth management services. Deposit services include checking, savings, money market and time deposit accounts.
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, 20212022 (the “2021“2022 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
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. All significant intercompany accounts and transactions are eliminated upon consolidation. Assets held in agency or fiduciary capacity are not included in the consolidated financial statements.
Reclassifications
In certain instances, amounts reported in the 20212022 consolidated financial statements have been reclassified to conform to the current financial statement presentation, primarily driven by impacts from the CIT Merger, as defined below.presentation. Such reclassifications had no effect on previously reported 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 impactingbased on available information. These estimates and assumptions impact the amounts reported in the consolidated financial statements and accompanying notes. Actualnotes and the disclosures provided, and actual results could differ from those estimates. BancShares considersThe significant estimates relate to the determination of the allowance for credit losses (“ACL”) to beand fair values of loans acquired in and the core deposit intangibles associated with a significant estimate.business combination are considered critical accounting estimates.
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 as of the date of acquisition, with any excess of purchase price over the fair value of the net tangible and intangible assets acquired recognized as either finite lived intangibles or capitalized as goodwill. To the extent the fair value of identifiable net assets acquired including other identifiable assets, exceeds the purchase price, a gain on acquisition is recognized. Acquisition-related and restructuring costs are recognized as period expenses as incurred.
On March 27, 2023, FCB acquired substantially all loans and certain other assets and assumed all customer deposits and certain other liabilities, of Silicon Valley Bridge Bank, N.A. (“SVBB”) from the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to the terms of a purchase and assumption agreement (the “SVBB Purchase Agreement”) by and among FCB, the FDIC and the FDIC, as receiver of SVBB (the “SVBB Acquisition”).
On January 3, 2022 (the “CIT Merger Date”), BancShares completed its previously announced merger (the “CIT Merger”) with CIT Group Inc. (“CIT”), pursuant to an Agreement and Plan of Merger, dated as of October 15, 2020, as amended by Amendment No. 1, dated as of September 30, 2021 (as amended, the “Merger“CIT Merger Agreement”). Results as of and for the three and nine months ended September 30, 2022 include activity of the combined entity. See Note 2 — Business Combinations for additional information.
Refer to Note 2 — Business Combinations for additional information.
Reportable Segments
As of December 31, 2022, BancShares reported its financial results in the following reportable segments: General Banking, Commercial Banking, Rail, and Corporate segments. During the first quarter of 2023, BancShares added the Silicon Valley Banking (“SVB”) reportable segment, which includes the assets acquired, liabilities assumed and related operations from the SVBB Acquisition.
ACCOUNTING POLICIES
Significant accounting policies are described in the 20212022 Form 10-K. We have further described relevant updates to the significant accounting policies presented below.
Reportable SegmentsSecurities Purchased Under Agreement to Resell
As of December 31, 2021, BancShares managed its business and reported its financial resultsSecurities purchased under agreement to resell (“reverse repos”) are accounted for 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. 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 BancShares’ 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 wellcollateralized financing transactions 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 possible 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 income-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 purchase agreement do not qualify for sale accounting and are therefore recorded at the loan.
Factoring - We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importersamount 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). The most prevalent risk in factoring transactions is customer credit risk, which relates to the financial inability of a customer to pay undisputed factored trade accounts receivable. Factoringcash advanced. Accrued interest receivables are primarily includedrecorded in the commercial and industrial loan class.
Leases – Leases consists of finance 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 landother assets. Interest earned is recorded 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.interest income.
Assets Held for Sale
Assets held for sale at September 30, 2022(“AHFS”) primarily consistconsists 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 (“LOCOM”). The remainder related to and residential mortgage loans carried at fair value. AHFS also includes operating lease equipment held for sale.sale carried at LOCOM.
GoodwillLoans and Leases
BancShares applied the acquisition methodextends credit to commercial customers through a variety 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.financing arrangements including term loans, revolving credit facilities, finance leases and operating leases. BancShares had goodwill of $346 million at September 30, 2022also extends credit through consumer loans, including residential mortgages 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 no goodwill impairment during the three or nine month periods ended September 30, 2022. Goodwill and other intangiblesauto loans. Our loan classes 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 the CIT Merger as further described in Note 131 — Derivative Financial Instruments. BancShares manages economic riskSignificant Accounting Policies and exposure to interest rate and foreign currency risk through derivative transactionsBasis of Presentation 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.the 2022 Form 10-K.
Derivatives utilized by BancShares may include swaps, forward settlement contracts and options contracts. A swap agreement is a contract between two partiesSVB Loan Classes
SVB loan classes were added to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contractsreflect the loans acquired in the SVBB Acquisition. The SVB loan classes are agreementsdescribed below. There was no impact 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 specificour prior period of time.disclosures.
BancShares documents, at inception, all relationships between hedging instrumentsGlobal Fund Banking – Global fund banking is the largest class of SVB loans and hedged items, as well asconsists of capital call lines of credit, the risk management objectivesrepayment of which is dependent on the payment of capital calls by the underlying limited partner investors in funds managed by certain private equity 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.venture capital firms.
Investor Dependent – The investor dependent class includes loans made primarily to technology and life science/healthcare companies. These borrowers typically have modest or negative cash flows and rarely have an established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or other investors, or in some cases, a successful sale to a third party or an initial public offering (“IPO”). The investor dependent loans are disaggregated into two classes:
•Early-Stage – These include loans to pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million.
•Growth Stage – These include loans to growth-stage enterprises. Companies with revenues between $5 million and $15 million, or pre-revenue clinical-stage biotechnology companies, are considered to be mid stage, and companies with revenues in excess of $15 million are considered to be later stage.
Cash Flow Dependent and Innovation Commercial and Industrial (“C&I”) – Cash flow dependent and innovation C&I loans are made primarily to technology and life science/healthcare companies that are not investor dependent. Repayment of these loans is not dependent on additional equity financing, a successful sale or an IPO.
•Cash Flow Dependent – Cash flow dependent loans are typically used to assist a select group of private equity sponsors with the acquisition of businesses, are larger in size and repayment is generally dependent upon the cash flows of the combined entities. Acquired companies are typically established, later-stage businesses of scale, and characterized by reasonable levels of leverage with loan structures that include meaningful financial covenants. The sponsor’s equity contribution is often 50 percent or more of the acquisition price.
BancShares provides interest rate derivative contracts•Innovation C&I – These include loans in innovation sectors such as technology and life science/healthcare industries. Innovation C&I loans are dependent on either the borrower’s cash flows or balance sheet for repayment. Cash flow dependent loans require the borrower to supportmaintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business requirements of its customers.business. Balance sheet dependent loans include asset-backed loans and are structured to require constant current asset coverage (e.g., cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a sellerrepayment 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 Chicago Mercantile Exchange and LCH Clearnet. These swap contracts are accounted as “settled-to-market” and cash variation margin paid or receivedarrangements is characterized as settlement of the derivative exposure and variation margin balances are offset against the corresponding derivative asset and liability balancesdependent on the balance sheet. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, butfinancial condition, and payment ability, of third parties 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 credit risk to the extent that the counterparty fails to 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 by 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 daily 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 certain officers and employees and are the owner and beneficiary of the policies. These policies, known as BOLI, offset the cost of providing employee benefits. BancShares had BOLI of $1.3 billion and $116 million at September 30, 2022 and December 31, 2021, respectively. BancShares acquired BOLI of $1.2 billion in the CIT Merger. BancShares records BOLI as a separate line item in the Consolidated 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 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 fair value of 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 requisite 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 CIT 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 common 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 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 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.whom our clients do business.
Factoring commissionsPrivate Bank, which – Private banking includes loans to clients who are earnedprimarily private equity/venture capital professionals and executives in the Commercial Banking segment, are driven by factoring volumes, principally in the retail sectors. Factoring commissions are chargedinnovation companies, as well as high net worth clients. We offer a percentagecustomized suite of the invoice amountprivate banking services, including mortgages, home equity lines of the receivables assigned to BancShares. The volumecredit, restricted and private stock loans, personal capital call lines of factoring activitycredit, lines of credit against liquid assets and the commission rates charged impact factoring commission income earned. Factoring commissions are deferredother secured and recognized as income over time based on the underlying terms of the assigned receivables. See Commercial Loansunsecured lending products. In addition, we provide owner occupied commercial mortgages and Leases section for additional commentary on factoring.
Gains on leasing equipment are recognized upon completion of sale (sale closing) and transfer of title. The gain is determined based on sales price less book carrying value (net of accumulated depreciation).real estate secured loans.
BOLI incomeCommercial Real Estate (“CRE”) reflects income earned on changes in the cash surrender value– CRE consists generally of the BOLI.acquisition financing loans for commercial properties such as office buildings, retail properties, apartment buildings and industrial/warehouse space.
Other Newly Adopted Accounting Standards– The remaining smaller acquired portfolios are aggregated into this category. These include other C&I, premium wine and other acquired portfolios.
The following pronouncements•Other C&I loans include working capital and revolving lines of credit, as well as term loans for equipment and fixed assets. These loans are primarily to clients that are not in the technology and life sciences/healthcare industries. Additionally, other C&I loans contain commercial tax-exempt loans to not-for-profit private schools, colleges, public charter schools and other not-for-profit organizations.
•Premium wine loans are made to wine producers, vineyards and wine industry or Accounting Standards Updateshospitality businesses across the Western United States. A large portion of these loans are secured by real estate collateral such as vineyards and wineries.
▪Other acquired portfolios consist primarily of construction and land loans for financing new developments as well as financing for improvements to existing buildings. These also include community development loans made as part of our responsibilities under the Community Reinvestment Act of 1977, and a small amount of Paycheck Protection Program (“ASUs”PPP”) loans, which are loans guaranteed by the SBA that were issued bythrough 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 2020PPP.
The amendments in this ASU reduceAcquired Loans and Leases
BancShares’ accounting methods for acquired loans and leases depends on whether or not the numberloans reflect more than insignificant credit deterioration since origination at the date 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 is 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 and disclosures as BancShares does not have any convertible instruments within the scope of this ASU.acquisition.
ASU 2021-04, Issuer’s AccountingNon-Purchased Credit Deteriorated Loans and Leases
Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases do not reflect more than insignificant credit deterioration since origination at the date of acquisition. These loans are recorded at fair value and an increase to the ACL is recorded with a corresponding increase to the provision for Certain Modifications or Exchangescredit losses at the date of Freestanding Equity-Classified Written Call Options - Issued May 2021
acquisition. 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 and the unpaid principal balance (“UPB”) at the acquisition date is amortized or accreted to interest income over the contractual life of the modified instrument andloan using 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.effective interest method.
ASU 2021-05,Purchased Credit Deteriorated Loans and 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 2 — BUSINESS COMBINATIONS
CIT Group Inc.
BancShares completed the CIT Merger on January 3, 2022 (the “Merger Date”). Pursuant to the Merger Agreement, each share of CIT common stock, par value $0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, par value $1.00 per share, plus cash in lieu of fractional 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.
Pursuant to the terms of the Merger Agreement, each issued and outstanding share of fixed-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, series B, par value $0.01 per share, of CIT (“CIT Series B Preferred Stock” and together with CIT Series A Preferred Stock, “CIT Preferred Stock”), converted into the right to receive one share of a newly created series of preferred stock, series B, of the Parent Company (“BancShares Series B Preferred Stock”) and one 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 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 whichthat reflect a more than insignificant credit deterioration since origination as ofat 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 initial ACL for PCD loans and leases is established through the PCD Gross-Up and there is no corresponding increase to the provision for credit losses. The difference between the unpaid principal balance (“UPB”)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 Goodwill
BancShares applied the acquisition method of accounting for the SVBB Acquisition and CIT Merger. The fair value of the net assets acquired exceeded the purchase price for each transaction. Consequently, there was a gain on acquisition (and no goodwill) related to the SVBB Acquisition and the CIT Merger. Refer to further discussion in Note 2 — Business Combinations and Note 7 — Goodwill and Core Deposit Intangibles.
Derivative Assets and Liabilities
Foreign Exchange Contracts
SVB has foreign exchange forwards and swaps contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients’ needs. These are structured as back-to-back contracts to mitigate the risk of fluctuations in currency rates. The foreign exchange forward contracts are with correspondent banks to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments.
Equity Warrant Assets
In connection with negotiating credit facilities and certain other services, SVB often obtained rights that gave an option to purchase a position in a client company's stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare industries. These were generally categorized as Level 3 on the fair value hierarchy due to lack of direct observable pricing and a general lack of liquidity due to the private nature of the associated underlying company. FCB did not acquire equity warrant assets in the SVBB Acquisition. FCB may obtain equity warrant assets for certain loans originated or funded after the SVBB Acquisition Date.
Newly Adopted Accounting Standards
BancShares adopted the following accounting standards as of January 1, 2023:
ASU 2022-02 Financial Instruments—Credit DeterioratedLosses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures- Issued March 2022 (“Non-PCD”ASU 2022-02”)
The amendments in this ASU: (i) eliminate the previous recognition and measurement guidance for TDRs, (ii) require new disclosures for loan modifications when a borrower is experiencing financial difficulty (the “Modification Disclosures”) and (iii) require disclosures of current period gross charge-offs by year of origination in the vintage disclosures (the “Gross Charge-off Vintage Disclosures”).
The Modification Disclosures apply to the following modification types: principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or a combination thereof. Creditors are required to disclose the following by loan class: (i) amounts and relative percentages of each modification type, (ii) the financial effect of each modification type, (iii) the performance of the loan in the 12 months following the modification and (iv) qualitative information discussing how the modifications factored into the determination of the ACL.
BancShares elected to apply the modified retrospective transition method for ACL recognition and measurement. The adoption of this ASU did not result in a cumulative effect adjustment to retained earnings. The Modification Disclosures and Gross Charge-off Vintage Disclosures are applied prospectively starting in the period of adoption and are presented in Note 4 — Loans and Leases.
ASU 2022-01, Fair Value Hedging - Portfolio Layer Method - Issued March 2022
The amendments in this ASU 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. The ASU provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method. In addition, upon adoption the update permits a one-time reclassification of certain debt securities from the held-to-maturity category to the available-for-sale category if the portfolio layer hedging method is applied to those securities. Upon adoption, we did not make any one-time reclassifications. Adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares did not have any hedged portfolios.
NOTE 2 — BUSINESS COMBINATIONS
Silicon Valley Bridge Bank Acquisition
FCB completed the SVBB Acquisition on March 27, 2023 (the “SVBB Acquisition Date”) and acquired substantially all loans and leases consistcertain other assets and assumed all customer deposits and certain other liabilities of SVBB in an FDIC-assisted transaction. Pursuant to the terms of the SVBB Purchase Agreement, FCB acquired assets with an estimated total fair value of approximately $106.60 billion, primarily including $68.50 billion of loans and $35.28 billion of cash and interest-earning deposits at banks. FCB also assumed liabilities with an estimated total fair value of approximately $61.13 billion, primarily including $55.96 billion of customer deposits. The deposits were acquired without a premium and the assets were acquired at a discount of approximately $16.45 billion pursuant to the terms of the SVBB Purchase Agreement. Further details regarding the fair values of the acquired assets and assumed liabilities are provided in the “Purchase Price Consideration; Unaudited Statement of Assets Acquired and Liabilities Assumed” table below.
In connection with the SVBB Acquisition, FCB issued a five-year note of approximately $35 billion payable to the FDIC (the “Purchase Money Note”). The Purchase Money Note will be primarily secured by all loans (other than certain consumer loans and related collateral) and certain real estate and bank premises acquired by FCB from the FDIC, as well as certain other assets acquired, including specified rights under the SVBB Purchase Agreement and Shared-Loss Agreement (as defined below). The interest rate is 3.50% per annum. FCB may prepay the principal of the Purchase Money Note at any time, without premium or penalty, upon notice to the FDIC. The principal amount of the Purchase Money Note is based on the book value of net assets acquired less the asset discount of approximately $16.45 billion pursuant to the terms of the SVBB Purchase Agreement. The principal amount of the Purchase Money Note is subject to change upon Final Settlement (as defined and described below).
In addition, as part of the consideration for the SVBB Acquisition, BancShares issued a Cash Settled Value Appreciation Instrument to the FDIC (the “Value Appreciation Instrument”) in which FCB agreed to make a cash payment to the FDIC equal to the product of (i) 5 million and (ii) the excess amount by which the average volume weighted price of one share of BancShares’ Class A common stock, par value $1 (“Class A Common Stock”), over the two Nasdaq trading days immediately prior to the date on which the Value Appreciation Instrument is exercised exceeds $582.55; provided that dothe settlement amount does not reflect moreexceed $500 million. The Value Appreciation Instrument was exercisable by the holder thereof, in whole or in part, from and including March 27, 2023 to April 14, 2023. The FDIC exercised its right under the Value Appreciation Instrument on March 28, 2023 and a $500 million payment was made on April 4, 2023.
FCB and the FDIC also entered into terms and conditions for a five-year, up to $70 billion line of credit to FCB (the “Credit Facility”) provided by the FDIC. During the two-year period following the SVBB Acquisition Date, FCB may draw on the Credit Facility to support liquidity, including for deposit withdrawal or runoff and to fund the unfunded commercial lending commitments acquired in the SVBB Acquisition (the “Acquired Unfunded Commitments”). The Credit Facility is secured by the commercial loans and other extensions of commercial credit acquired pursuant to the SVBB Acquisition, including Acquired Unfunded Commitments subsequently funded by FCB. Interest on outstanding principal will accrue at a variable rate equal to the Secured Overnight Financing Rate plus 25 basis points (but in no event less than insignificant credit deterioration since origination0.00%).
In connection with the SVBB Purchase Agreement, FCB also entered into a commercial shared loss agreement with the FDIC (the “Shared-Loss Agreement”). The Shared-Loss Agreement covers an estimated $60 billion of commercial loans (collectively, the “Covered Assets”). The FDIC will reimburse FCB for 0% of losses of up to $5 billion with respect to Covered Assets and 50% of losses in excess of $5 billion with respect to Covered Assets (“FDIC Loss Sharing”) and FCB will reimburse the FDIC for 50% of recoveries related to such Covered Assets (“FCB reimbursement”). The Shared-Loss Agreement provides for FDIC loss sharing for five years and FCB reimbursement for eight years. The Shared-Loss Agreement extends to loans funded after the SVBB Acquisition Date that were unfunded commitments to loans at the SVBB Acquisition Date for a period of one year after the SVBB Acquisition Date. If certain conditions are met pursuant to the Shared-Loss Agreement, FCB has agreed to pay to the FDIC, 45 days after March 31, 2031 (or, if earlier, the time of disposition of all acquired assets pursuant to the Shared-Loss Agreement), a true-up amount up to $1.5 billion calculated using a formula set forth in the Shared-Loss Agreement.
FCB and the FDIC are awaiting conclusion of the customary final settlement process to determine whether certain assets and liabilities of SVBB will remain with the FDIC or be acquired or assumed by FCB (“Final Settlement”). Final Settlement is expected to occur in the second quarter of 2023. Final Settlement primarily relates to: (i) FCB’s option to purchase SVBB branches, office buildings and certain other premises and equipment and (ii) certain subsidiaries of SVBB. These pending items are not reflected in the “Purchase Price Consideration; Unaudited Statement of Assets Acquired and Liabilities Assumed” table below.
BancShares has determined that the SVBB Acquisition constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values based on preliminary valuations as of March 27, 2023. 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 SVBB Acquisition and other future events that are highly subjective in nature and may require adjustments.
We believe the preliminary fair value estimates of assets acquired and liabilities assumed provide a reasonable basis for determining the preliminary gain on acquisition. We continue to review information relating to events or circumstances existing at the SVBB Acquisition Date that could impact the preliminary fair value estimates. The preliminary gain on acquisition could change until management finalizes its fair value estimates for the acquired assets and assumed liabilities, up to one year from the SVBB Acquisition Date. As of March 31, 2023, fair value measurements of loans, core deposit intangibles, low-income housing tax credits, unfunded commitments, premises and equipment, and intangibles related to the Shared-Loss Agreement are preliminary as we identify and assess information regarding the nature of these assets and liabilities and review the associated valuation assumptions and methodologies. Further, as described above, whether certain assets and liabilities are acquired or assumed by FCB is subject to the conclusion of Final Settlement. The tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the SVBB Acquisition Date. As such, the amounts recorded for 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, as well as the tax impact on the preliminary gain on acquisition.
The following table provides the purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the SVBB Acquisition Date:
Purchase Price Consideration; Unaudited Statement of Assets Acquired and Liabilities Assumed
| | | | | |
dollars in millions | Fair Value Purchase Price Allocation as of March 27, 2023 |
Purchase price consideration | |
Purchase Money Note (1) | $ | 35,150 |
Value Appreciation Instrument | 500 |
Purchase price consideration | $ | 35,650 |
Assets | |
Cash and due from banks | 1,347 | |
Interest-earning deposits at banks | 33,932 | |
Investment securities | 122 | |
| |
Loans and leases | 68,503 | |
Affordable housing tax credit investments | 1,134 | |
| |
Core deposit intangibles | 230 | |
Other assets | 1,332 | |
Total assets acquired | $ | 106,600 | |
Liabilities | |
Deposits | 55,959 | |
Borrowings | 10 | |
Deferred tax liabilities | 3,310 | |
Other liabilities | 1,847 | |
Total liabilities assumed | $ | 61,126 | |
Fair value of net assets acquired | 45,474 | |
Preliminary gain on acquisition, after income taxes (2) | $ | 9,824 | |
Preliminary gain on acquisition, before income taxes (2) | $ | 13,134 | |
(1) The principal amount of the Purchase Money Note is the book value of net assets acquired of approximately $51.82 billion less the asset discount of $16.45 billion pursuant to the SVBB Purchase Agreement. The $35.15 billion above is net of a fair value discount of approximately $220 million.
(2) The difference between the preliminary gain on acquisition before and after taxes reflects the deferred tax liabilities recorded in the SVBB Acquisition, as presented above.
BancShares recorded a preliminary gain on acquisition of $9.82 billion in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The following is a description of the methods used to determine the estimated fair values of the Purchase Money Note and significant assets acquired and liabilities assumed, as presented above.
Purchase Money Note
The fair value of the Purchase Money Note was estimated based on the income approach, which includes: (i) projecting cash flows over a certain discrete projection period and (ii) discounting those projected cash flows to present value at a rate of return that considers the relative risk of the cash flows and the time value of money.
Cash and interest-earning deposits at banks
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 securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are 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 is estimated based on pricing models and/or discounted cash flow methodologies.
Loans
Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, remaining term of loan, credit quality ratings or scores, amortization status and current discount rate. Loans with similar risk characteristics were pooled together and treated in aggregate 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.
BancShares’ accounting methods for acquired Non-PCD and PCD loans and leases are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger.SVBB Acquisition. The UPB for PCD loans and leases includes the PCD Gross-Up of $272$200 million as discussed further in Note 4 — Loans and Leases.
Loans Acquired
| dollars in millions | dollars in millions | Loans and Leases | dollars in millions | Loans and Leases |
| UPB | | Fair Value | |
| | | | | | UPB | | Fair Value |
Non-PCD loans and leases | Non-PCD loans and leases | $ | 29,542 | | | $ | 29,481 | | Non-PCD loans and leases | $ | 68,742 | | | $ | 66,473 | |
PCD loans and leases | PCD loans and leases | 3,550 | | | 3,233 | | PCD loans and leases | 2,529 | | | 2,030 | |
Total loans and leases | Total loans and leases | $ | 33,092 | | | $ | 32,714 | | Total loans and leases | $ | 71,271 | | | $ | 68,503 | |
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 InsuranceAffordable housing tax credit investments
The fair values of BOLI policiesthe affordable housing tax credit investments were determined by the policy administrator and calculated based on the net present value of investmentdiscounted cash flows. Expected premium payments, death benefitsThe cash flow projections considered tax credits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysiscash flows from operating losses and management’s review of the analysis, fair valuetax depreciation. The discount rate was determined to equate to book value as of the merger date.using observable market data points for similar investments.
Intangible assetsCore deposit intangibles
The following table presents the intangible asset recorded in conjunction with the CIT Merger related to the valuation of core deposits:
Intangible AssetsAsset
| | | | | | | | | | | | | | | | | |
dollars in millions | Fair Value | | Estimated Useful Life | | Amortization Method |
Core deposit intangibles | $143 | 230 | | | 108 years | | Straight-lineEffective Yield |
Certain core deposits were acquired as part of the CIT Merger,SVBB Acquisition, which provide an additional source of funds for BancShares. The core deposit intangibles representintangible represents 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.method under the income approach. 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 valuation considered a dynamic approach to interest rates and alternative cost of funds. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to further discussion in Note 7 — Goodwill and Other Intangibles for further discussion.Core Deposit Intangibles.
Other assets and liabilities
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. | | | | | |
dollars in millions | Fair Value |
Accrued interest receivable | $ | 412 |
Fair value of derivative financial instruments, net | 197 |
Premises and equipment | 286 |
| |
| |
Other | 437 | |
Total other assets | $ | 1,332 |
The fair values of the derivative financial instruments, as well as counterparty receivables,assets in the table above and derivative liabilities in the table below were valued using prices of financial instruments with similar characteristics and observable inputs. The fair value of accrued interest receivable and the remaining other assets was determined to approximate book value. Refer to further discussion in Note 12 — Derivative Financial Instruments and Note 14 — Fair Value.
Deposits
The fair values for timeAcquired 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. Foressentially all transactional deposits,deposits. Thus, we determined carrying amounts approximate fair value.
BorrowingsDeferred Tax liability
In connectionThe SVBB Acquisition is an asset acquisition for tax purposes and is therefore considered a taxable transaction. The deferred tax liability (“DTL”) for the SVBB Acquisition was calculated by applying FCB’s deferred tax rate to the book and tax basis differences on the SVBB Acquisition Date for acquired assets and assumed liabilities. Deferred taxes were not recorded for the affordable housing tax credit investments in accordance 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.proportional amortization method.
Other Liabilitiesliabilities
OtherThe following table details 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. assumed:
| | | | | |
dollars in millions | Fair Value |
| |
Fair value of derivative financial instruments, net | $ | 333 |
| |
Accrued interest payable | 113 | |
Commitments to fund tax credit investments | 716 |
Other | 685 | |
Total other liabilities | $ | 1,847 |
The fair value of the remaining liabilitiesliability representing our commitment for future capital contributions to the affordable housing tax credit investments was determined to approximate book value. For all accrued liabilities and accounts payable, it was determinedbased on discounted cash flows. Projected cash flows for future capital contributions were discounted at a rate that the carrying value equals book value.represented FCB’s cost of debt.
Shared-Loss Agreement Intangibles
Preliminary estimates indicate there is no material value to attribute to the loss indemnification asset or true-up liability. This is primarily based on evaluation of historical loss experience and the credit quality of the portfolio.
Unaudited Pro Forma Information - SVBB Acquisition
The amount of net interest income, noninterest income and net income of $1,199$65 million, $920$14 million and $461$35 million, respectively, attributable to the acquisition of CITSVBB Acquisition were included in BancShares’ Consolidated Statement of Income for the ninethree months ended September 30, 2022. CIT’sMarch 31, 2023. SVBB’s net 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 unauditedSVBB was only in operation from March 10 to March 27, 2023 and does not have historical financial information on which we could base pro forma financial information for illustrative purposes only, for the three information. Additionally, we did not acquire all assets or assume all liabilities of SVBBand 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 resultan essential part of the acquisition that areSVBB Acquisition is the federal assistance governed by the SVBB Purchase Agreement and Shared-Loss Agreement, which is not reflected in the pro forma amounts that follow. Theprevious operations of SVBB. Therefore, it is impracticable to provide pro forma information should not be relied upon as being indicative ofon revenues and earnings for 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.
SVBB Acquisition in accordance with ASC 805-10-50-2.
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 | |
CIT Group Inc.
BancShares completed the CIT Merger on January 3, 2022 (the “Merger Date”). Pursuant to the CIT Merger Agreement, each share of CIT common stock, par value $0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, plus cash in lieu of fractional 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 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 the Merger Date. 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 following table provides the 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 | |
Gain on acquisition | | | | | $ | 431 | |
BancShares recorded a 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 gain on acquisition was not taxable.
For a description of the fair value and unpaid principal balance of loans from the CIT Merger, as well as the methods used to determine the fair values of significant assets and liabilities, see Note 2 — Business Combinations in Item 8 of our 2022 Form 10-K.
NOTE 3 — INVESTMENT SECURITIES
The following tables as of September 30, 2022include 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, 2022March 31, 2023 and December 31, 2021, were as follows:2022.
Amortized Cost and Fair Value - Debt Securities
| dollars in millions | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | Investment securities available for sale | | | | | | | | Investment securities available for sale | | | | | | | |
U.S. Treasury | U.S. Treasury | $ | 2,047 | | | $ | — | | | $ | (147) | | | $ | 1,900 | | U.S. Treasury | $ | 2,091 | | | $ | — | | | $ | (113) | | | $ | 1,978 | |
Government agency | Government agency | 175 | | | — | | | (2) | | | 173 | | Government agency | 152 | | | — | | | (2) | | | 150 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 5,450 | | | — | | | (666) | | | 4,784 | | Residential mortgage-backed securities | 5,415 | | | 3 | | | (570) | | | 4,848 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,828 | | | — | | | (155) | | | 1,673 | | Commercial mortgage-backed securities | 1,755 | | | — | | | (170) | | | 1,585 | |
Corporate bonds | 583 | | | — | | | (25) | | | 558 | | |
Corporate bonds(1) | | Corporate bonds(1) | 542 | | | — | | | (42) | | | 500 | |
| Total investment securities available for sale(1) | Total investment securities available for sale(1) | $ | 10,083 | | | $ | — | | | $ | (995) | | | $ | 9,088 | | Total investment securities available for sale(1) | $ | 9,955 | | | $ | 3 | | | $ | (897) | | | $ | 9,061 | |
Investment in marketable equity securities | Investment in marketable equity securities | $ | 73 | | | $ | 20 | | | $ | (1) | | | $ | 92 | | Investment in marketable equity securities | $ | 75 | | | $ | 14 | | | $ | (4) | | | $ | 85 | |
Investment securities held to maturity | Investment securities held to maturity | | | | | | | | Investment securities held to maturity | | | | | | | |
U.S. Treasury | U.S. Treasury | $ | 473 | | | $ | — | | | $ | (54) | | | $ | 419 | | U.S. Treasury | $ | 475 | | | $ | — | | | $ | (42) | | | $ | 433 | |
Government agency | Government agency | 1,546 | | | — | | | (196) | | | 1,350 | | Government agency | 1,550 | | | — | | | (163) | | | 1,387 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 4,510 | | | — | | | (765) | | | 3,745 | | Residential mortgage-backed securities | 4,511 | | | 2 | | | (655) | | | 3,858 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 2,834 | | | — | | | (437) | | | 2,397 | | Commercial mortgage-backed securities | 3,547 | | | 1 | | | (497) | | | 3,051 | |
Supranational securities | Supranational securities | 295 | | | — | | | (43) | | | 252 | | Supranational securities | 296 | | | — | | | (34) | | | 262 | |
Other | Other | 3 | | | — | | | — | | | 3 | | Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | Total investment securities held to maturity | $ | 9,661 | | | $ | — | | | $ | (1,495) | | | $ | 8,166 | | Total investment securities held to maturity | $ | 10,381 | | | $ | 3 | | | $ | (1,391) | | | $ | 8,993 | |
Total investment securities(1) | Total investment securities(1) | $ | 19,817 | | | $ | 20 | | | $ | (2,491) | | | $ | 17,346 | | Total investment securities(1) | $ | 20,411 | | | $ | 20 | | | $ | (2,292) | | | $ | 18,139 | |
| (1) Balances presented net of allowance for credit losses of $4 million | | (1) Balances presented net of allowance for credit losses of $4 million | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | Investment securities available for sale | | | | | | | | Investment securities available for sale | | | | | | | |
U.S. Treasury | U.S. Treasury | $ | 2,007 | | | $ | — | | | $ | (2) | | | $ | 2,005 | | U.S. Treasury | $ | 2,035 | | | $ | — | | | $ | (137) | | | $ | 1,898 | |
Government agency | Government agency | 221 | | | 1 | | | (1) | | | 221 | | Government agency | 164 | | | — | | | (2) | | | 162 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 4,757 | | | 8 | | | (36) | | | 4,729 | | Residential mortgage-backed securities | 5,424 | | | 1 | | | (630) | | | 4,795 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,648 | | | 9 | | | (17) | | | 1,640 | | Commercial mortgage-backed securities | 1,774 | | | — | | | (170) | | | 1,604 | |
Corporate bonds | Corporate bonds | 582 | | | 27 | | | (1) | | | 608 | | Corporate bonds | 570 | | | — | | | (34) | | | 536 | |
| Total investment securities available for sale | Total investment securities available for sale | $ | 9,215 | | | $ | 45 | | | $ | (57) | | | $ | 9,203 | | Total investment securities available for sale | $ | 9,967 | | | $ | 1 | | | $ | (973) | | | $ | 8,995 | |
Investment in marketable equity securities | Investment in marketable equity securities | $ | 73 | | | $ | 25 | | | $ | — | | | $ | 98 | | Investment in marketable equity securities | $ | 75 | | | $ | 21 | | | $ | (1) | | | $ | 95 | |
Investment securities held to maturity | Investment securities held to maturity | | | | | | | | Investment securities held to maturity | | | | | | | |
U.S. Treasury | | U.S. Treasury | $ | 474 | | | $ | — | | | $ | (50) | | | $ | 424 | |
Government agency | | Government agency | 1,548 | | | — | | | (186) | | | 1,362 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 2,322 | | | $ | 6 | | | $ | (22) | | | $ | 2,306 | | Residential mortgage-backed securities | 4,605 | | | — | | | (723) | | | 3,882 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,485 | | | — | | | (34) | | | 1,451 | | Commercial mortgage-backed securities | 3,355 | | | — | | | (484) | | | 2,871 | |
Supranational securities | | Supranational securities | 295 | | | — | | | (41) | | | 254 | |
Other | Other | 2 | | | — | | | — | | | 2 | | Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | Total investment securities held to maturity | $ | 3,809 | | | $ | 6 | | | $ | (56) | | | $ | 3,759 | | Total investment securities held to maturity | $ | 10,279 | | | $ | — | | | $ | (1,484) | | | $ | 8,795 | |
Total investment securities | Total investment securities | $ | 13,097 | | | $ | 76 | | | $ | (113) | | | $ | 13,060 | | Total investment securities | $ | 20,321 | | | $ | 22 | | | $ | (2,458) | | | $ | 17,885 | |
Investments in 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 Small Business Association (“SBA”), Federal Home Loan Bank (“FHLB”) and other agencies. Investments in supranational securities represent securities issued by the World Bank.Supranational Entities and Multilateral Development Banks. Investments in corporate bonds represent positions in debt securities of other financial institutions. Investments in marketable equity securities represent positions in common stock of publicly 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 stockholders 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 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.
As of September 30, 2022 and December 31, 2021, no ACL was required for available for sale or 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,March 31, 2023, accrued interest receivables for available for sale and held to maturity debt securities were $30 million and $17 million, respectively. At December 31, 2022, accrued interest receivables for available for sale and held to maturity debt securities were $29$33 million and $16 million, respectively. At December 31, 2021, accrued interest receivables for available for sale and held to maturity debt securities were $22 million and $7$19 million, respectively. During the three and nine months ended September 30,March 31, 2023 and 2022, and 2021, 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. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers 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.
Maturities - Debt Securities
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
| | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value |
Investment securities available for sale | Investment securities available for sale | | | | | | | | Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | Non-amortizing securities maturing in: | | Non-amortizing securities maturing in: | |
One year or less | One year or less | $ | 48 | | | $ | 48 | | | $ | — | | | $ | — | | One year or less | $ | 34 | | | $ | 33 | | | $ | 37 | | | $ | 37 | |
After one through five years | After one through five years | 2,063 | | | 1,914 | | | 2,049 | | | 2,048 | | After one through five years | 2,120 | | | 2,004 | | | 2,068 | | | 1,928 | |
After five through 10 years | After five through 10 years | 503 | | | 481 | | | 523 | | | 548 | | After five through 10 years | 463 | | | 427 | | | 483 | | | 455 | |
After 10 years | After 10 years | 16 | | | 15 | | | 17 | | | 17 | | After 10 years | 16 | | | 14 | | | 17 | | | 14 | |
| Government agency | Government agency | 175 | | | 173 | | | 221 | | | 221 | | Government agency | 152 | | | 150 | | | 164 | | | 162 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 5,450 | | | 4,784 | | | 4,757 | | | 4,729 | | Residential mortgage-backed securities | 5,415 | | | 4,848 | | | 5,424 | | | 4,795 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,828 | | | 1,673 | | | 1,648 | | | 1,640 | | Commercial mortgage-backed securities | 1,755 | | | 1,585 | | | 1,774 | | | 1,604 | |
Total investment securities available for sale(1) | Total investment securities available for sale(1) | $ | 10,083 | | | $ | 9,088 | | | $ | 9,215 | | | $ | 9,203 | | Total investment securities available for sale(1) | $ | 9,955 | | | $ | 9,061 | | | $ | 9,967 | | | $ | 8,995 | |
Investment securities held to maturity | Investment securities held to maturity | | | | | | | | Investment securities held to maturity | | | | | | | |
Non-amortizing securities maturing in: | Non-amortizing securities maturing in: | | Non-amortizing securities maturing in: | |
One year or less | One year or less | $ | 53 | | | $ | 51 | | | $ | 2 | | | $ | 2 | | One year or less | $ | 51 | | | $ | 51 | | | $ | 51 | | | $ | 51 | |
After one through five years | After one through five years | 1,334 | | | 1,190 | | | — | | | — | | After one through five years | 1,579 | | | 1,440 | | | 1,479 | | | 1,328 | |
After five through 10 years | After five through 10 years | 930 | | | 783 | | | — | | | — | | After five through 10 years | 693 | | | 593 | | | 789 | | | 663 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | 4,510 | | | 3,745 | | | 2,322 | | | 2,306 | | Residential mortgage-backed securities | 4,511 | | | 3,858 | | | 4,605 | | | 3,882 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 2,834 | | | 2,397 | | | 1,485 | | | 1,451 | | Commercial mortgage-backed securities | 3,547 | | | 3,051 | | | 3,355 | | | 2,871 | |
| Total investment securities held to maturity | Total investment securities held to maturity | $ | 9,661 | | | $ | 8,166 | | | $ | 3,809 | | | $ | 3,759 | | Total investment securities held to maturity | $ | 10,381 | | | $ | 8,993 | | | $ | 10,279 | | | $ | 8,795 | |
|
(1)
Balances as of March 31, 2023 are presented net of the allowance for credit losses of $4 million.
The following table presents interest and dividend income on investment securities.securities:
Interest and Dividends on Investment Securities
| dollars in millions | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Interest income - taxable investment securities | Interest income - taxable investment securities | $ | 89 | | | $ | 39 | | | $ | 260 | | | $ | 104 | | Interest income - taxable investment securities | $ | 106 | | | $ | 82 | | |
| Dividend income - marketable equity securities | Dividend income - marketable equity securities | 1 | | | 1 | | | 2 | | | 2 | | Dividend income - marketable equity securities | 1 | | | 1 | | |
Interest on investment securities | Interest on investment securities | $ | 90 | | | $ | 40 | | | $ | 262 | | | $ | 106 | | Interest on investment securities | $ | 107 | | | $ | 83 | | |
The following table providespresents the gross realized gains and losses on the sales of investment securities available for sale:
Realized GainsLosses on Debt Securities Available For Sale
| dollars in millions | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Gross realized gains on sales of investment securities available for sale | Gross realized gains on sales of investment securities available for sale | $ | — | | | $ | 8 | | | $ | — | | | $ | 33 | | Gross realized gains on sales of investment securities available for sale | $ | — | | | $ | — | | |
Gross realized losses on sales of investment securities available for sale | Gross realized losses on sales of investment securities available for sale | — | | | — | | | — | | | — | | Gross realized losses on sales of investment securities available for sale | (14) | | | — | | |
Net realized gains on sales of investment securities available for sale | $ | — | | | $ | 8 | | | $ | — | | | $ | 33 | | |
Net realized losses on sales of investment securities available for sale | | Net realized losses on sales of investment securities available for sale | $ | (14) | | | $ | — | | |
The following table provides the fair value adjustment on marketable equity securities:
Fair Value Adjustment on Marketable Equity Securities
| dollars in millions | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Fair value adjustment on marketable equity securities, net | Fair value adjustment on marketable equity securities, net | $ | (2) | | | $ | 3 | | | $ | (5) | | | $ | 31 | | Fair value adjustment on marketable equity securities, net | $ | (9) | | | $ | 3 | | |
The following table provides information regarding investment securities available for sale with unrealized losses for which an ACL has not been recorded:losses:
Gross Unrealized Losses on Debt Securities Available For Sale
| dollars in millions | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 |
| | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | Investment securities available for sale | | | | | | | | | | | | Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | U.S. Treasury | $ | 1,900 | | | $ | (147) | | | $ | — | | | $ | — | | | $ | 1,900 | | | $ | (147) | | U.S. Treasury | $ | 28 | | | $ | (1) | | | $ | 1,889 | | | $ | (112) | | | $ | 1,917 | | | $ | (113) | |
Government agency | Government agency | 70 | | | (1) | | | 65 | | | (1) | | | 135 | | | (2) | | Government agency | 75 | | | (1) | | | 75 | | | (1) | | | 150 | | | (2) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 2,178 | | | (231) | | | 2,573 | | | (435) | | | 4,751 | | | (666) | | Residential mortgage-backed securities | 656 | | | (26) | | | 3,955 | | | (544) | | | 4,611 | | | (570) | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 938 | | | (64) | | | 688 | | | (91) | | | 1,626 | | | (155) | | Commercial mortgage-backed securities | 568 | | | (13) | | | 1,003 | | | (157) | | | 1,571 | | | (170) | |
Corporate bonds | 493 | | | (23) | | | 44 | | | (2) | | | 537 | | | (25) | | |
Total | $ | 5,579 | | | $ | (466) | | | $ | 3,370 | | | $ | (529) | | | $ | 8,949 | | | $ | (995) | | |
Corporate bonds(1) | | Corporate bonds(1) | 360 | | | (25) | | | 140 | | | (17) | | | 500 | | | (42) | |
Total(1) | | Total(1) | $ | 1,687 | | | $ | (66) | | | $ | 7,062 | | | $ | (831) | | | $ | 8,749 | | | $ | (897) | |
| | | December 31, 2021 | | December 31, 2022 |
| | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | Investment securities available for sale | | | | | | | | | | | | Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | U.S. Treasury | $ | 1,811 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | 1,811 | | | $ | (2) | | U.S. Treasury | $ | 403 | | | $ | (27) | | | $ | 1,495 | | | $ | (110) | | | $ | 1,898 | | | $ | (137) | |
Government agency | Government agency | 17 | | | — | | | 79 | | | (1) | | | 96 | | | (1) | | Government agency | 65 | | | (1) | | | 62 | | | (1) | | | 127 | | | (2) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 3,992 | | | (36) | | | 1 | | | — | | | 3,993 | | | (36) | | Residential mortgage-backed securities | 1,698 | | | (165) | | | 3,001 | | | (465) | | | 4,699 | | | (630) | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 852 | | | (15) | | | 111 | | | (2) | | | 963 | | | (17) | | Commercial mortgage-backed securities | 836 | | | (53) | | | 752 | | | (117) | | | 1,588 | | | (170) | |
Corporate bonds | Corporate bonds | 52 | | | (1) | | | — | | | — | | | 52 | | | (1) | | Corporate bonds | 499 | | | (30) | | | 37 | | | (4) | | | 536 | | | (34) | |
Total | Total | $ | 6,724 | | | $ | (54) | | | $ | 191 | | | $ | (3) | | | $ | 6,915 | | | $ | (57) | | Total | $ | 3,501 | | | $ | (276) | | | $ | 5,347 | | | $ | (697) | | | $ | 8,848 | | | $ | (973) | |
(1) Balances as of March 31, 2023 are presented net of the allowance for credit losses of $4 million.
As of September 30, 2022,March 31, 2023, there were 124337 investment securities available for sale with continuous unrealized losses for more than 12 months, of which 118315 were government sponsored enterprise-issued mortgage-backed securities, or government agency securities, or U.S. treasury securities and the remaining six related to22 were corporate bonds.
None of the unrealized losses identified as of September 30, 2022, or December 31, 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 ACL. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Given the consistently strong credit rating of the U.S. Treasury, and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, as of March 31, 2023, no ACL was required. For corporate bonds, we analyzed the changes in interest rates relative to when the investment securities were purchased and considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors. As a result of this analysis, we determined that one corporate bond had a credit-related loss of $4 million as of March 31, 2023, which is reflected in the provision for credit losses as further discussed in Note 5 — Allowance for Credit Losses.
Investment securities having an aggregate carrying value of $3.9 billion at September 30, 2022, and $5.7 billion at December 31, 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, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, and securities issued by the World BankSupranational Entities and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions.Multilateral Development Banks. Given the consistently strong credit rating of the U.S. Treasury, the World BankSupranational Entities and Multilateral Development Banks and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, as of March 31, 2023, no ACL has been recorded on these securities. In the event there are 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 onwas required for held to maturity debt securities.
Investment securities having an aggregate carrying value of $4.16 billion at March 31, 2023, and $4.20 billion at December 31, 2022, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
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 andMarch 31, 2023 or December 31, 2021.2022.
There were no debt securities held to maturity on non-accrual status as of September 30, 2022 andMarch 31, 2023 or December 31, 2021.2022.
Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $234$393 million and $40$197 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively; these securities are recorded at cost. BancShares held $55$62 million and $1$58 million of nonmarketable securities without readily determinable fair values, which are measured under the measurement exception at September 30, 2022cost at March 31, 2023 and December 31, 2021,2022, respectively. Investments in qualified affordable housing projects, thatall of which qualify for the proportional amortization method were $558 million$1.66 billion and $156$598 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
NOTE 4 — LOANS AND LEASES
The following tables as of September 30, 2022 include loan and lease balances acquired in the CIT Merger, which were recorded at fair 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.
Unless otherwise noted, loans held for sale are not included in the following tables. Leases in the following tables include finance leases, but exclude operating lease equipment. As disclosed in Note 2 — Business Combinations, the following tables as of March 31, 2023 include loans acquired in the SVBB Acquisition.
Loans by Class | dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Commercial | Commercial | | | | Commercial | | | |
Commercial construction | Commercial construction | $ | 2,752 | | | $ | 1,238 | | Commercial construction | $ | 2,971 | | | $ | 2,804 | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | 14,053 | | | 12,099 | | Owner occupied commercial mortgage | 14,456 | | | 14,473 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | 9,683 | | | 3,041 | | Non-owner occupied commercial mortgage | 10,292 | | | 9,902 | |
Commercial and industrial | Commercial and industrial | 24,288 | | | 5,937 | | Commercial and industrial | 24,508 | | | 24,105 | |
Leases | Leases | 2,184 | | | 271 | | Leases | 2,163 | | | 2,171 | |
Total commercial | Total commercial | 52,960 | | | 22,586 | | Total commercial | 54,390 | | | 53,455 | |
Consumer | Consumer | | Consumer | |
Residential mortgage | Residential mortgage | 12,910 | | | 6,088 | | Residential mortgage | 13,727 | | | 13,309 | |
Revolving mortgage | Revolving mortgage | 1,923 | | | 1,818 | | Revolving mortgage | 1,916 | | | 1,951 | |
Consumer auto | Consumer auto | 1,385 | | | 1,332 | | Consumer auto | 1,452 | | | 1,414 | |
Consumer other | Consumer other | 612 | | | 548 | | Consumer other | 632 | | | 652 | |
Total consumer | Total consumer | 16,830 | | | 9,786 | | Total consumer | 17,727 | | | 17,326 | |
SVB | | SVB | |
Global fund banking | | Global fund banking | 36,097 | | | — | |
Investor dependent - early stage | | Investor dependent - early stage | 1,994 | | | — | |
Investor dependent - growth stage | | Investor dependent - growth stage | 4,418 | | | — | |
Innovation C&I and cash flow dependent | | Innovation C&I and cash flow dependent | 9,193 | | | — | |
Private Bank | | Private Bank | 9,476 | | | — | |
CRE | | CRE | 2,444 | | | — | |
Other | | Other | 2,549 | | | — | |
Total SVB | | Total SVB | 66,171 | | | — | |
Total loans and leases | Total loans and leases | $ | 69,790 | | | $ | 32,372 | | Total loans and leases | $ | 138,288 | | | $ | 70,781 | |
At September 30, 2022March 31, 2023 and December 31, 2021,2022, accrued interest receivable on loans included in other assets was $171$643 million and $87$203 million, respectively, and was excluded from the estimate of credit losses.
The following table presents selected components of the amortized cost of loans.loans:
Components of Amortized Cost
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Deferred fees, including unearned fees and unamortized costs on non-PCD loans | $ | 72 | | $ | 32 | |
Deferred costs, including unamortized costs and unearned fees on non-PCD loans | | Deferred costs, including unamortized costs and unearned fees on non-PCD loans | $ | 26 | | $ | 34 |
| Net unamortized discount on purchased loans | Net unamortized discount on purchased loans | | Net unamortized discount on purchased loans | |
Non-PCD | Non-PCD | $ | 81 | | $ | 11 | Non-PCD | $ | 2,337 | | $ | 73 |
PCD | PCD | 50 | | 29 | | PCD | 337 | | 45 | |
Total net unamortized discount | Total net unamortized discount | $ | 131 | | $ | 40 | Total net unamortized discount | $ | 2,674 | | $ | 118 |
The aging of the outstanding loans and leases, by class, at September 30, 2022March 31, 2023 and December 31, 20212022 is provided in the tables below. Loans and leases 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 remain in compliance with the respective agreement.
Loans and Leases - Delinquency Status
| dollars in millions | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total |
Commercial | Commercial | | | | | | | | | | | | Commercial | | | | | | | | | | | |
Commercial construction | Commercial construction | $ | 5 | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 2,747 | | | $ | 2,752 | | Commercial construction | $ | 9 | | | $ | 1 | | | $ | — | | | $ | 10 | | | $ | 2,961 | | | $ | 2,971 | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | 23 | | | 3 | | | 26 | | | 52 | | | 14,001 | | | 14,053 | | Owner occupied commercial mortgage | 30 | | | — | | | 34 | | | 64 | | | 14,392 | | | 14,456 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | 34 | | | — | | | 46 | | | 80 | | | 9,603 | | | 9,683 | | Non-owner occupied commercial mortgage | 165 | | | 67 | | | 190 | | | 422 | | | 9,870 | | | 10,292 | |
Commercial and industrial | Commercial and industrial | 80 | | | 20 | | | 21 | | | 121 | | | 24,167 | | | 24,288 | | Commercial and industrial | 158 | | | 30 | | | 61 | | | 249 | | | 24,259 | | | 24,508 | |
Leases | Leases | 41 | | | 15 | | | 14 | | | 70 | | | 2,114 | | | 2,184 | | Leases | 55 | | | 13 | | | 14 | | | 82 | | | 2,081 | | | 2,163 | |
Total commercial | Total commercial | 183 | | | 38 | | | 107 | | | 328 | | | 52,632 | | | 52,960 | | Total commercial | 417 | | | 111 | | | 299 | | | 827 | | | 53,563 | | | 54,390 | |
Consumer | Consumer | | Consumer | |
Residential mortgage | Residential mortgage | 74 | | | 16 | | | 48 | | | 138 | | | 12,772 | | | 12,910 | | Residential mortgage | 77 | | | 17 | | | 46 | | | 140 | | | 13,587 | | | 13,727 | |
Revolving mortgage | Revolving mortgage | 9 | | | 2 | | | 8 | | | 19 | | | 1,904 | | | 1,923 | | Revolving mortgage | 10 | | | 3 | | | 8 | | | 21 | | | 1,895 | | | 1,916 | |
Consumer auto | Consumer auto | 7 | | | 1 | | | 2 | | | 10 | | | 1,375 | | | 1,385 | | Consumer auto | 7 | | | 2 | | | 1 | | | 10 | | | 1,442 | | | 1,452 | |
Consumer other | Consumer other | 4 | | | 2 | | | 4 | | | 10 | | | 602 | | | 612 | | Consumer other | 4 | | | 2 | | | 3 | | | 9 | | | 623 | | | 632 | |
Total consumer | Total consumer | 94 | | | 21 | | | 62 | | | 177 | | | 16,653 | | | 16,830 | | Total consumer | 98 | | | 24 | | | 58 | | | 180 | | | 17,547 | | | 17,727 | |
SVB | | SVB | |
Global fund banking | | Global fund banking | 37 | | | — | | | — | | | 37 | | | 36,060 | | | 36,097 | |
Investor dependent - early stage | | Investor dependent - early stage | 17 | | | 3 | | | 2 | | | 22 | | | 1,972 | | | 1,994 | |
Investor dependent - growth stage | | Investor dependent - growth stage | 25 | | | 8 | | | — | | | 33 | | | 4,385 | | | 4,418 | |
Innovation C&I and cash flow dependent | | Innovation C&I and cash flow dependent | 27 | | | 11 | | | — | | | 38 | | | 9,155 | | | 9,193 | |
Private Bank | | Private Bank | 39 | | | 1 | | | 17 | | | 57 | | | 9,419 | | | 9,476 | |
CRE | | CRE | 4 | | | 1 | | | — | | | 5 | | | 2,439 | | | 2,444 | |
Other | | Other | 10 | | | — | | | 4 | | | 14 | | | 2,535 | | | 2,549 | |
Total SVB | | Total SVB | 159 | | | 24 | | | 23 | | | 206 | | | 65,965 | | | 66,171 | |
Total loans and leases | Total loans and leases | $ | 277 | | | $ | 59 | | | $ | 169 | | | $ | 505 | | | $ | 69,285 | | | $ | 69,790 | | Total loans and leases | $ | 674 | | | $ | 159 | | | $ | 380 | | | $ | 1,213 | | | $ | 137,075 | | | $ | 138,288 | |
| | | December 31, 2021 | | December 31, 2022 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total |
Commercial | Commercial | | | | | | | | | | | | Commercial | | | | | | | | | | | |
Commercial construction | Commercial construction | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 3 | | | $ | 1,235 | | | $ | 1,238 | | Commercial construction | $ | 50 | | | $ | — | | | $ | 1 | | | $ | 51 | | | $ | 2,753 | | | $ | 2,804 | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | 21 | | | 1 | | | 9 | | | 31 | | | 12,068 | | | 12,099 | | Owner occupied commercial mortgage | 29 | | | 5 | | | 25 | | | 59 | | | 14,414 | | | 14,473 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | 3 | | | — | | | 2 | | | 5 | | | 3,036 | | | 3,041 | | Non-owner occupied commercial mortgage | 76 | | | 144 | | | 11 | | | 231 | | | 9,671 | | | 9,902 | |
Commercial and industrial | Commercial and industrial | 8 | | | 3 | | | 5 | | | 16 | | | 5,921 | | | 5,937 | | Commercial and industrial | 173 | | | 26 | | | 53 | | | 252 | | | 23,853 | | | 24,105 | |
Leases | Leases | — | | | 1 | | | 1 | | | 2 | | | 269 | | | 271 | | Leases | 59 | | | 17 | | | 16 | | | 92 | | | 2,079 | | | 2,171 | |
Total commercial | Total commercial | 33 | | | 5 | | | 19 | | | 57 | | | 22,529 | | | 22,586 | | Total commercial | 387 | | | 192 | | | 106 | | | 685 | | | 52,770 | | | 53,455 | |
Consumer | Consumer | | Consumer | |
Residential mortgage | Residential mortgage | 24 | | | 6 | | | 23 | | | 53 | | | 6,035 | | | 6,088 | | Residential mortgage | 73 | | | 16 | | | 52 | | | 141 | | | 13,168 | | | 13,309 | |
Revolving mortgage | Revolving mortgage | 6 | | | 2 | | | 6 | | | 14 | | | 1,804 | | | 1,818 | | Revolving mortgage | 9 | | | 3 | | | 8 | | | 20 | | | 1,931 | | | 1,951 | |
Consumer auto | Consumer auto | 6 | | | 1 | | | 1 | | | 8 | | | 1,324 | | | 1,332 | | Consumer auto | 7 | | | 1 | | | 1 | | | 9 | | | 1,405 | | | 1,414 | |
Consumer other | Consumer other | 2 | | | 2 | | | 1 | | | 5 | | | 543 | | | 548 | | Consumer other | 4 | | | 2 | | | 3 | | | 9 | | | 643 | | | 652 | |
Total consumer | Total consumer | 38 | | | 11 | | | 31 | | | 80 | | | 9,706 | | | 9,786 | | Total consumer | 93 | | | 22 | | | 64 | | | 179 | | | 17,147 | | | 17,326 | |
| Total loans and leases | Total loans and leases | $ | 71 | | | $ | 16 | | | $ | 50 | | | $ | 137 | | | $ | 32,235 | | | $ | 32,372 | | Total loans and leases | $ | 480 | | | $ | 214 | | | $ | 170 | | | $ | 864 | | | $ | 69,917 | | | $ | 70,781 | |
The amortized cost, by class, of loans and leases on non-accrual status, and loans and leases greater than 90 days past due and still accruing at September 30, 2022March 31, 2023 and December 31, 20212022 are presented below.
Loans on Non-Accrual Status (1) (2)
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
| | Non-Accrual Loans | | Loans > 90 Days and Accruing | | Non-Accrual Loans | | Loans > 90 Days and Accruing | | Non-Accrual Loans | | Loans > 90 Days and Accruing | | Non-Accrual Loans | | Loans > 90 Days and Accruing |
Commercial | Commercial | | | | | | | | Commercial | | | | | | | |
Commercial construction | Commercial construction | $ | 20 | | | $ | — | | | $ | 4 | | | $ | — | | Commercial construction | $ | 2 | | | $ | — | | | $ | 48 | | | $ | — | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | 41 | | | 3 | | | 18 | | | 5 | | Owner occupied commercial mortgage | 46 | | | 8 | | | 41 | | | 2 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | 96 | | | 28 | | | 5 | | | — | | Non-owner occupied commercial mortgage | 219 | | | 114 | | | 228 | | | — | |
Commercial and industrial | Commercial and industrial | 172 | | | 3 | | | 15 | | | 1 | | Commercial and industrial | 214 | | | 20 | | | 184 | | | 41 | |
Leases | Leases | 27 | | | 5 | | | 3 | | | — | | Leases | 29 | | | 4 | | | 28 | | | 7 | |
Total commercial | Total commercial | 356 | | | 39 | | | 45 | | | 6 | | Total commercial | 510 | | | 146 | | | 529 | | | 50 | |
Consumer | Consumer | | Consumer | |
Residential mortgage | Residential mortgage | 74 | | | 8 | | | 54 | | | — | | Residential mortgage | 71 | | | 8 | | | 75 | | | 10 | |
Revolving mortgage | Revolving mortgage | 19 | | | — | | | 18 | | | — | | Revolving mortgage | 18 | | | — | | | 18 | | | — | |
Consumer auto | Consumer auto | 4 | | | — | | | 3 | | | — | | Consumer auto | 4 | | | — | | | 4 | | | — | |
Consumer other | Consumer other | 1 | | | 3 | | | 1 | | | 1 | | Consumer other | 1 | | | 3 | | | 1 | | | 3 | |
Total consumer | Total consumer | 98 | | | 11 | | | 76 | | | 1 | | Total consumer | 94 | | | 11 | | | 98 | | | 13 | |
SVB | | SVB | |
Global fund banking | | Global fund banking | — | | | — | | | — | | | — | |
Investor dependent - early stage | | Investor dependent - early stage | 56 | | | — | | | — | | | — | |
Investor dependent - growth stage | | Investor dependent - growth stage | 60 | | | — | | | — | | | — | |
Innovation C&I and cash flow dependent | | Innovation C&I and cash flow dependent | 78 | | | — | | | — | | | — | |
Private Bank | | Private Bank | 27 | | | — | | | — | | | — | |
CRE | | CRE | 2 | | | — | | | — | | | — | |
Other | | Other | 1 | | | 4 | | | — | | | — | |
Total SVB | | Total SVB | 224 | | | 4 | | | — | | | — | |
Total loans and leases | Total loans and leases | $ | 454 | | | $ | 50 | | | $ | 121 | | | $ | 7 | | Total loans and leases | $ | 828 | | | $ | 161 | | | $ | 627 | | | $ | 63 | |
(1) Accrued interest that was reversed when the loan went to non-accrual status was $2$1 million for the ninethree months ended September 30,March 31, 2023 and $4 million for the year ended December 31, 2022.
(2) Non-accrual loans for which there was no related ACL totaled $41$59 million at September 30, 2022March 31, 2023 and $15$63 million at December 31, 2021.2022.
Other real estate owned (“OREO”) and repossessed assets were $54$47 million as of September 30, 2022March 31, 2023 and $40$47 million as of December 31, 2021.2022.
Credit quality indicatorsQuality Indicators
Loans and leases are monitored for credit quality on a recurring basis. Commercial loans and leases and consumer loans have different credit quality indicators as a result of the unique characteristics of the loan classes being evaluated. The credit quality indicators for Non-PCD commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. The indicators 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 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.
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.
Ungraded – Ungraded loans represent loans 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, 2022March 31, 2023 and December 31, 2021,2022, 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 credit quality indicator for consumer loans is 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 summarizestables summarize the commercial and SVB 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 | |
March 31, 2023 | | March 31, 2023 |
Risk Classification: | Risk Classification: | Term Loans by Origination Year | | Revolving Converted to Term Loans | | Risk Classification: | Term Loans by Origination Year | | Revolving Converted to Term Loans | |
dollars in millions | dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | Total | dollars in millions | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 & Prior | | Revolving | | Total |
Commercial construction | Commercial construction | | | | | | | | | | | | | | | | | Commercial construction | | | | | | | | | | | | | | | | |
Pass | Pass | $ | 782 | | | $ | 816 | | | $ | 628 | | | $ | 222 | | | $ | 27 | | | $ | 81 | | | $ | 67 | | | $ | — | | | $ | 2,623 | | Pass | $ | 187 | | | $ | 1,226 | | | $ | 772 | | | $ | 384 | | | $ | 119 | | | $ | 96 | | | $ | 60 | | | $ | — | | | $ | 2,844 | |
Special Mention | Special Mention | 3 | | | — | | | 17 | | | 18 | | | 29 | | | — | | | — | | | — | | | 67 | | Special Mention | — | | | 4 | | | — | | | 48 | | | 40 | | | — | | | — | | | — | | | 92 | |
Substandard | Substandard | 2 | | | — | | | — | | | 42 | | | 11 | | | 4 | | | — | | | — | | | 59 | | Substandard | 1 | | | 1 | | | — | | | — | | | 28 | | | 5 | | | — | | | — | | | 35 | |
Doubtful | Doubtful | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | Total commercial construction | 787 | | | 816 | | | 645 | | | 285 | | | 67 | | | 85 | | | 67 | | | — | | | 2,752 | | Total commercial construction | 188 | | | 1,231 | | | 772 | | | 432 | | | 187 | | | 101 | | | 60 | | | — | | | 2,971 | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | | Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | Pass | 2,095 | | | 3,261 | | | 3,043 | | | 1,883 | | | 1,095 | | | 2,031 | | | 174 | | | — | | | 13,582 | | Pass | 393 | | | 2,709 | | | 3,292 | | | 2,877 | | | 1,767 | | | 2,728 | | | 165 | | | — | | | 13,931 | |
Special Mention | Special Mention | 31 | | | 23 | | | 38 | | | 33 | | | 17 | | | 49 | | | 1 | | | — | | | 192 | | Special Mention | — | | | 40 | | | 20 | | | 46 | | | 30 | | | 72 | | | 1 | | | — | | | 209 | |
Substandard | Substandard | 7 | | | 29 | | | 40 | | | 43 | | | 40 | | | 114 | | | 5 | | | — | | | 278 | | Substandard | 5 | | | 22 | | | 47 | | | 52 | | | 29 | | | 154 | | | 6 | | | — | | | 315 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | Total owner occupied commercial mortgage | 2,133 | | | 3,313 | | | 3,121 | | | 1,959 | | | 1,152 | | | 2,195 | | | 180 | | | — | | | 14,053 | | Total owner occupied commercial mortgage | 398 | | | 2,771 | | | 3,359 | | | 2,975 | | | 1,826 | | | 2,955 | | | 172 | | | — | | | 14,456 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | | Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | Pass | 1,918 | | | 1,668 | | | 1,833 | | | 1,575 | | | 774 | | | 1,147 | | | 43 | | | — | | | 8,958 | | Pass | 612 | | | 2,500 | | | 1,666 | | | 1,772 | | | 1,202 | | | 1,456 | | | 49 | | | — | | | 9,257 | |
Special Mention | Special Mention | — | | | 1 | | | 32 | | | 83 | | | 3 | | | 10 | | | 1 | | | — | | | 130 | | Special Mention | — | | | — | | | — | | | 79 | | | 130 | | | 81 | | | — | | | — | | | 290 | |
Substandard | Substandard | 4 | | | 12 | | | 66 | | | 293 | | | 60 | | | 148 | | | — | | | — | | | 583 | | Substandard | — | | | 4 | | | 13 | | | 67 | | | 312 | | | 313 | | | — | | | — | | | 709 | |
Doubtful | Doubtful | — | | | — | | | — | | | 5 | | | — | | | 7 | | | — | | | — | | | 12 | | Doubtful | — | | | — | | | — | | | — | | | 26 | | | 10 | | | — | | | — | | | 36 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | Total non-owner occupied commercial mortgage | 1,922 | | | 1,681 | | | 1,931 | | | 1,956 | | | 837 | | | 1,312 | | | 44 | | | — | | | 9,683 | | Total non-owner occupied commercial mortgage | 612 | | | 2,504 | | | 1,679 | | | 1,918 | | | 1,670 | | | 1,860 | | | 49 | | | — | | | 10,292 | |
Commercial and industrial | Commercial and industrial | | | | | | | | | | | | | | | | | | Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | Pass | 6,784 | | | 4,502 | | | 2,278 | | | 1,745 | | | 997 | | | 1,108 | | | 5,046 | | | 33 | | | 22,493 | | Pass | 3,482 | | | 5,434 | | | 3,890 | | | 1,863 | | | 1,342 | | | 1,529 | | | 5,125 | | | 28 | | | 22,693 | |
Special Mention | Special Mention | 84 | | | 126 | | | 86 | | | 73 | | | 60 | | | 31 | | | 31 | | | — | | | 491 | | Special Mention | 52 | | | 84 | | | 120 | | | 93 | | | 47 | | | 54 | | | 100 | | | — | | | 550 | |
Substandard | Substandard | 70 | | | 109 | | | 184 | | | 150 | | | 173 | | | 192 | | | 289 | | | 1 | | | 1,168 | | Substandard | 24 | | | 103 | | | 135 | | | 175 | | | 148 | | | 272 | | | 239 | | | 1 | | | 1,097 | |
Doubtful | Doubtful | — | | | 1 | | | 1 | | | 3 | | | 13 | | | 18 | | | 5 | | | — | | | 41 | | Doubtful | — | | | 4 | | | 5 | | | 1 | | | 14 | | | 30 | | | 10 | | | — | | | 64 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 95 | | | — | | | 95 | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 104 | | | — | | | 104 | |
Total commercial and industrial | Total commercial and industrial | 6,938 | | | 4,738 | | | 2,549 | | | 1,971 | | | 1,243 | | | 1,349 | | | 5,466 | | | 34 | | | 24,288 | | Total commercial and industrial | 3,558 | | | 5,625 | | | 4,150 | | | 2,132 | | | 1,551 | | | 1,885 | | | 5,578 | | | 29 | | | 24,508 | |
Leases | Leases | | | | | | | | | | | | | | | | | | Leases | | | | | | | | | | | | | | | | | |
Pass | Pass | 547 | | | 523 | | | 457 | | | 257 | | | 106 | | | 116 | | | — | | | — | | | 2,006 | | Pass | 235 | | | 648 | | | 425 | | | 338 | | | 177 | | | 152 | | | — | | | — | | | 1,975 | |
Special Mention | Special Mention | 13 | | | 18 | | | 26 | | | 10 | | | 5 | | | 2 | | | — | | | — | | | 74 | | Special Mention | 5 | | | 21 | | | 20 | | | 14 | | | 8 | | | 3 | | | — | | | — | | | 71 | |
Substandard | Substandard | 21 | | | 32 | | | 19 | | | 16 | | | 8 | | | 1 | | | — | | | — | | | 97 | | Substandard | 5 | | | 35 | | | 28 | | | 23 | | | 10 | | | 6 | | | — | | | — | | | 107 | |
Doubtful | Doubtful | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 7 | | Doubtful | — | | | 3 | | | 3 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | 10 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | Total leases | 582 | | | 575 | | | 504 | | | 284 | | | 120 | | | 119 | | | — | | | — | | | 2,184 | | Total leases | 245 | | | 707 | | | 476 | | | 377 | | | 196 | | | 162 | | | — | | | — | | | 2,163 | |
Total commercial | Total commercial | $ | 12,362 | | | $ | 11,123 | | | $ | 8,750 | | | $ | 6,455 | | | $ | 3,419 | | | $ | 5,060 | | | $ | 5,757 | | | $ | 34 | | | $ | 52,960 | | Total commercial | $ | 5,001 | | | $ | 12,838 | | | $ | 10,436 | | | $ | 7,834 | | | $ | 5,430 | | | $ | 6,963 | | | $ | 5,859 | | | $ | 29 | | | $ | 54,390 | |
SVB - Risk Classifications by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 |
Risk Classification: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 & Prior | | Revolving | | | Total |
Global fund banking | | | | | | | | | | | | | | | | |
Pass | $ | 78 | | | $ | 191 | | | $ | 134 | | | $ | 103 | | | $ | 44 | | | $ | 9 | | | $ | 35,453 | | | $ | 75 | | | $ | 36,087 | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | 10 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total global fund banking | 78 | | | 191 | | | 134 | | | 103 | | | 44 | | | 9 | | | 35,463 | | | 75 | | | 36,097 | |
Investor dependent - early stage | | | | | | | | | | | | | | | | | |
Pass | 76 | | | 848 | | | 406 | | | 115 | | | 48 | | | 10 | | | 169 | | | — | | | 1,672 | |
Special Mention | — | | | 15 | | | 1 | | | 1 | | | — | | | — | | | 3 | | | — | | | 20 | |
Substandard | — | | | 61 | | | 89 | | | 38 | | | 8 | | | 2 | | | 47 | | | — | | | 245 | |
Doubtful | — | | | 27 | | | 20 | | | 4 | | | 2 | | | — | | | 4 | | | — | | | 57 | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total investor dependent - early stage | 76 | | | 951 | | | 516 | | | 158 | | | 58 | | | 12 | | | 223 | | | — | | | 1,994 | |
Investor dependent - growth stage | | | | | | | | | | | | | | | | | |
Pass | 206 | | | 1,372 | | | 1,137 | | | 512 | | | 145 | | | 186 | | | 314 | | | 5 | | | 3,877 | |
Special Mention | — | | | 8 | | | 15 | | | 17 | | | — | | | — | | | — | | | — | | | 40 | |
Substandard | 3 | | | 76 | | | 150 | | | 120 | | | 20 | | | 38 | | | 35 | | | — | | | 442 | |
Doubtful | — | | | 5 | | | 42 | | | 1 | | | 9 | | | 2 | | | — | | | — | | | 59 | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total investor dependent - growth stage | 209 | | | 1,461 | | | 1,344 | | | 650 | | | 174 | | | 226 | | | 349 | | | 5 | | | 4,418 | |
Innovation C&I and cash flow dependent | | | | | | | | | | | | | | | | | |
Pass | 129 | | | 1,684 | | | 1,191 | | | 1,309 | | | 586 | | | 669 | | | 2,948 | | | — | | | 8,516 | |
Special Mention | 41 | | | — | | | — | | | 26 | | | 28 | | | — | | | 15 | | | — | | | 110 | |
Substandard | — | | | 37 | | | 133 | | | 117 | | | 7 | | | 34 | | | 160 | | | — | | | 488 | |
Doubtful | — | | | — | | | 2 | | | 61 | | | — | | | — | | | 16 | | | — | | | 79 | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total innovation C&I and cash flow dependent | 170 | | | 1,721 | | | 1,326 | | | 1,513 | | | 621 | | | 703 | | | 3,139 | | | — | | | 9,193 | |
Private bank | | | | | | | | | | | | | | | | | |
Pass | 398 | | | 2,379 | | | 2,332 | | | 1,443 | | | 788 | | | 1,171 | | | 889 | | | 14 | | | 9,414 | |
Special Mention | — | | | — | | | 2 | | | — | | | — | | | 9 | | | 2 | | | — | | | 13 | |
Substandard | — | | | — | | | 13 | | | 1 | | | 3 | | | 20 | | | 2 | | | — | | | 39 | |
Doubtful | — | | | — | | | — | | | — | | | 1 | | | 9 | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total private bank | 398 | | | 2,379 | | | 2,347 | | | 1,444 | | | 792 | | | 1,209 | | | 893 | | | 14 | | | 9,476 | |
CRE | | | | | | | | | | | | | | | | | |
Pass | 53 | | | 516 | | | 260 | | | 194 | | | 195 | | | 889 | | | 98 | | | 5 | | | 2,210 | |
Special Mention | — | | | 3 | | | 10 | | | — | | | 3 | | | 27 | | | — | | | — | | | 43 | |
Substandard | — | | | — | | | 4 | | | 18 | | | 102 | | | 65 | | | 2 | | | — | | | 191 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total CRE | 53 | | | 519 | | | 274 | | | 212 | | | 300 | | | 981 | | | 100 | | | 5 | | | 2,444 | |
Other | | | | | | | | | | | | | | | | | |
Pass | 43 | | | 419 | | | 416 | | | 356 | | | 163 | | | 625 | | | 364 | | | 64 | | | 2,450 | |
Special Mention | — | | | — | | | 2 | | | 11 | | | — | | | 11 | | | 2 | | | — | | | 26 | |
Substandard | — | | | 10 | | | 6 | | | 7 | | | 8 | | | 29 | | | 13 | | | — | | | 73 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total Other | 43 | | | 429 | | | 424 | | | 374 | | | 171 | | | 665 | | | 379 | | | 64 | | | 2,549 | |
Total SVB | $ | 1,027 | | | $ | 7,651 | | | $ | 6,365 | | | $ | 4,454 | | | $ | 2,160 | | | $ | 3,805 | | | $ | 40,546 | | | $ | 163 | | | $ | 66,171 | |
Consumer Loans - Delinquency Status by Class
| September 30, 2022 | |
March 31, 2023 | | March 31, 2023 |
Days Past Due: | Days Past Due: | Term Loans by Origination Year | | Revolving Converted to Term Loans | | Days Past Due: | Term Loans by Origination Year | | Revolving Converted to Term Loans | |
dollars in millions | dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | Total | dollars in millions | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 & Prior | | Revolving | | Total |
Residential mortgage | Residential mortgage | | | | | | | | | | | | | | | | | | Residential mortgage | | | | | | | | | | | | | | | | | |
Current | Current | $ | 2,797 | | | $ | 3,759 | | | $ | 2,156 | | | $ | 842 | | | $ | 432 | | | $ | 2,763 | | | $ | 23 | | | $ | — | | | $ | 12,772 | | Current | $ | 726 | | | $ | 3,527 | | | $ | 3,681 | | | $ | 2,043 | | | $ | 774 | | | $ | 2,819 | | | $ | 17 | | | $ | — | | | $ | 13,587 | |
30-59 days | 30-59 days | 6 | | | 5 | | | 3 | | | 5 | | | 5 | | | 50 | | | — | | | — | | | 74 | | 30-59 days | — | | | 5 | | | 9 | | | 6 | | | 2 | | | 55 | | | — | | | — | | | 77 | |
60-89 days | 60-89 days | — | | | 3 | | | 1 | | | — | | | 1 | | | 11 | | | — | | | — | | | 16 | | 60-89 days | — | | | — | | | 2 | | | 2 | | | 1 | | | 12 | | | — | | | — | | | 17 | |
90 days or greater | 90 days or greater | — | | | 1 | | | 1 | | | 2 | | | 2 | | | 42 | | | — | | | — | | | 48 | | 90 days or greater | — | | | 1 | | | 1 | | | 3 | | | 1 | | | 40 | | | — | | | — | | | 46 | |
Total residential mortgage | Total residential mortgage | 2,803 | | | 3,768 | | | 2,161 | | | 849 | | | 440 | | | 2,866 | | | 23 | | | — | | | 12,910 | | Total residential mortgage | 726 | | | 3,533 | | | 3,693 | | | 2,054 | | | 778 | | | 2,926 | | | 17 | | | — | | | 13,727 | |
Revolving mortgage | Revolving mortgage | | | | | | | | | | | | | | Revolving mortgage | | | | | | | | | | | | | |
Current | Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,784 | | | 120 | | | 1,904 | | Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,803 | | | 92 | | | 1,895 | |
30-59 days | 30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 3 | | | 9 | | 30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 7 | | | 3 | | | 10 | |
60-89 days | 60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | 2 | | 60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | 3 | |
90 days or greater | 90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 5 | | | 8 | | 90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 3 | | | 8 | |
Total revolving mortgage | Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,794 | | | 129 | | | 1,923 | | Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,816 | | | 100 | | | 1,916 | |
Consumer auto | Consumer auto | | | | | | | | | | | | | | | | | | Consumer auto | | | | | | | | | | | | | | | | | |
Current | Current | 470 | | | 437 | | | 241 | | | 128 | | | 71 | | | 28 | | | — | | | — | | | 1,375 | | Current | 165 | | | 565 | | | 360 | | | 193 | | | 95 | | | 64 | | | — | | | — | | | 1,442 | |
30-59 days | 30-59 days | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 7 | | 30-59 days | — | | | 2 | | | 2 | | | 1 | | | 1 | | | 1 | | | — | | | — | | | 7 | |
60-89 days | 60-89 days | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | 60-89 days | — | | | 1 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 2 | |
90 days or greater | 90 days or greater | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 2 | | 90 days or greater | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Total consumer auto | Total consumer auto | 471 | | | 441 | | | 243 | | | 129 | | | 72 | | | 29 | | | — | | | — | | | 1,385 | | Total consumer auto | 165 | | | 568 | | | 364 | | | 194 | | | 96 | | | 65 | | | — | | | — | | | 1,452 | |
Consumer other | Consumer other | | | | | | | | | | | | | | | | | | Consumer other | | | | | | | | | | | | | | | | | |
Current | Current | 121 | | | 91 | | | 15 | | | 7 | | | 3 | | | 19 | | | 346 | | | — | | | 602 | | Current | 30 | | | 142 | | | 73 | | | 12 | | | 5 | | | 20 | | | 341 | | | — | | | 623 | |
30-59 days | 30-59 days | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | | | — | | | 4 | | 30-59 days | — | | | 1 | | | — | | | — | | | — | | | 1 | | | 2 | | | — | | | 4 | |
60-89 days | 60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 2 | | 60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
90 days or greater | 90 days or greater | — | | | — | | | — | | | — | | | — | | | 3 | | | 1 | | | — | | | 4 | | 90 days or greater | — | | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | — | | | 3 | |
Total consumer other | Total consumer other | 121 | | | 91 | | | 15 | | | 7 | | | 3 | | | 25 | | | 350 | | | — | | | 612 | | Total consumer other | 30 | | | 143 | | | 73 | | | 12 | | | 5 | | | 22 | | | 347 | | | — | | | 632 | |
Total consumer | Total consumer | $ | 3,395 | | | $ | 4,300 | | | $ | 2,419 | | | $ | 985 | | | $ | 515 | | | $ | 2,920 | | | $ | 2,167 | | | $ | 129 | | | $ | 16,830 | | Total consumer | $ | 921 | | | $ | 4,244 | | | $ | 4,130 | | | $ | 2,260 | | | $ | 879 | | | $ | 3,013 | | | $ | 2,180 | | | $ | 100 | | | $ | 17,727 | |
The following tables represent current credit quality indicators by origination year as of December 31, 2021.2022:
Commercial Loans - Risk Classifications by Class
| December 31, 2021 | |
December 31, 2022 | | December 31, 2022 |
Risk Classification: | Risk Classification: | Term Loans by Origination Year | | Revolving Converted to Term Loans | | Risk Classification: | Term Loans by Origination Year | | Revolving Converted to Term Loans | |
dollars in millions | dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | Total | dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | Total |
Commercial construction | Commercial construction | | | | | | | | | | | | | | | | | Commercial construction | | | | | | | | | | | | | | | | |
Pass | Pass | $ | 540 | | | $ | 400 | | | $ | 189 | | | $ | 29 | | | $ | 48 | | | $ | 11 | | | $ | 10 | | | $ | — | | | $ | 1,227 | | Pass | $ | 1,140 | | | $ | 759 | | | $ | 511 | | | $ | 157 | | | $ | 27 | | | $ | 75 | | | $ | 42 | | | $ | — | | | $ | 2,711 | |
Special Mention | Special Mention | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | Special Mention | 4 | | | — | | | 18 | | | 18 | | | — | | | — | | | — | | | — | | | 40 | |
Substandard | Substandard | 2 | | | — | | | 1 | | | 2 | | | 4 | | | 1 | | | — | | | — | | | 10 | | Substandard | 2 | | | — | | | — | | | 43 | | | — | | | 5 | | | — | | | — | | | 50 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | Total commercial construction | 542 | | | 400 | | | 190 | | | 31 | | | 52 | | | 13 | | | 10 | | | — | | | 1,238 | | Total commercial construction | 1,146 | | | 759 | | | 529 | | | 221 | | | 27 | | | 80 | | | 42 | | | — | | | 2,804 | |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | | Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | Pass | 3,045 | | | 3,022 | | | 1,873 | | | 1,194 | | | 963 | | | 1,572 | | | 125 | | | — | | | 11,794 | | Pass | 2,773 | | | 3,328 | | | 2,966 | | | 1,825 | | | 1,048 | | | 1,867 | | | 177 | | | — | | | 13,984 | |
Special Mention | Special Mention | 3 | | | 35 | | | 37 | | | 22 | | | 13 | | | 33 | | | 5 | | | — | | | 148 | | Special Mention | 33 | | | 14 | | | 32 | | | 33 | | | 18 | | | 49 | | | 2 | | | — | | | 181 | |
Substandard | Substandard | 31 | | | 16 | | | 18 | | | 12 | | | 18 | | | 56 | | | 6 | | | — | | | 157 | | Substandard | 24 | | | 47 | | | 41 | | | 28 | | | 47 | | | 114 | | | 6 | | | — | | | 307 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | Total owner occupied commercial mortgage | 3,079 | | | 3,073 | | | 1,928 | | | 1,228 | | | 994 | | | 1,661 | | | 136 | | | — | | | 12,099 | | Total owner occupied commercial mortgage | 2,830 | | | 3,389 | | | 3,039 | | | 1,886 | | | 1,113 | | | 2,031 | | | 185 | | | — | | | 14,473 | |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | | Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | Pass | 644 | | | 737 | | | 578 | | | 263 | | | 266 | | | 412 | | | 37 | | | — | | | 2,937 | | Pass | 2,501 | | | 1,658 | | | 1,794 | | | 1,397 | | | 680 | | | 933 | | | 48 | | | — | | | 9,011 | |
Special Mention | Special Mention | 1 | | | — | | | — | | | 3 | | | 3 | | | 10 | | | — | | | — | | | 17 | | Special Mention | — | | | 1 | | | 69 | | | 38 | | | 35 | | | 10 | | | 1 | | | — | | | 154 | |
Substandard | Substandard | 9 | | | 11 | | | 24 | | | 12 | | | 7 | | | 22 | | | 1 | | | — | | | 86 | | Substandard | 3 | | | 11 | | | 68 | | | 324 | | | 58 | | | 236 | | | — | | | — | | | 700 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | Doubtful | — | | | — | | | — | | | 17 | | | — | | | 20 | | | — | | | — | | | 37 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | Total non-owner occupied commercial mortgage | 654 | | | 748 | | | 602 | | | 278 | | | 277 | | | 444 | | | 38 | | | — | | | 3,041 | | Total non-owner occupied commercial mortgage | 2,504 | | | 1,670 | | | 1,931 | | | 1,776 | | | 773 | | | 1,199 | | | 49 | | | — | | | 9,902 | |
Commercial and industrial | Commercial and industrial | | | | | | | | | | | | | | | | | | Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | Pass | 2,107 | | | 1,018 | | | 599 | | | 257 | | | 149 | | | 281 | | | 1,342 | | | 5 | | | 5,758 | | Pass | 7,695 | | | 4,145 | | | 2,035 | | | 1,533 | | | 872 | | | 845 | | | 5,252 | | | 29 | | | 22,406 | |
Special Mention | Special Mention | 9 | | | 7 | | | 20 | | | 2 | | | 4 | | | 5 | | | 5 | | | — | | | 52 | | Special Mention | 87 | | | 153 | | | 79 | | | 63 | | | 52 | | | 23 | | | 40 | | | — | | | 497 | |
Substandard | Substandard | 20 | | | 7 | | | 3 | | | 4 | | | 2 | | | 2 | | | 16 | | | 1 | | | 55 | | Substandard | 106 | | | 117 | | | 194 | | | 132 | | | 166 | | | 145 | | | 200 | | | 1 | | | 1,061 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | 1 | | | 4 | | | 3 | | | 11 | | | 6 | | | 16 | | | 7 | | | — | | | 48 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 72 | | | — | | | 72 | | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 93 | | | — | | | 93 | |
Total commercial and industrial | Total commercial and industrial | 2,136 | | | 1,032 | | | 622 | | | 263 | | | 155 | | | 288 | | | 1,435 | | | 6 | | | 5,937 | | Total commercial and industrial | 7,889 | | | 4,419 | | | 2,311 | | | 1,739 | | | 1,096 | | | 1,029 | | | 5,592 | | | 30 | | | 24,105 | |
Leases | Leases | | | | | | | | | | | | | | | | | | Leases | | | | | | | | | | | | | | | | | |
Pass | Pass | 93 | | | 68 | | | 38 | | | 42 | | | 17 | | | 8 | | | — | | | — | | | 266 | | Pass | 718 | | | 466 | | | 389 | | | 216 | | | 80 | | | 108 | | | — | | | — | | | 1,977 | |
Special Mention | Special Mention | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | Special Mention | 21 | | | 22 | | | 17 | | | 9 | | | 4 | | | — | | | — | | | — | | | 73 | |
Substandard | Substandard | 2 | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 4 | | Substandard | 32 | | | 32 | | | 27 | | | 12 | | | 7 | | | 1 | | | — | | | — | | | 111 | |
Doubtful | Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | 2 | | | 3 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 9 | |
Ungraded | Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Ungraded | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Total leases | Total leases | 95 | | | 70 | | | 38 | | | 43 | | | 17 | | | 8 | | | — | | | — | | | 271 | | Total leases | 773 | | | 523 | | | 435 | | | 238 | | | 92 | | | 110 | | | — | | | — | | | 2,171 | |
Total commercial | Total commercial | $ | 6,506 | | | $ | 5,323 | | | $ | 3,380 | | | $ | 1,843 | | | $ | 1,495 | | | $ | 2,414 | | | $ | 1,619 | | | $ | 6 | | | $ | 22,586 | | Total commercial | $ | 15,142 | | | $ | 10,760 | | | $ | 8,245 | | | $ | 5,860 | | | $ | 3,101 | | | $ | 4,449 | | | $ | 5,868 | | | $ | 30 | | | $ | 53,455 | |
Consumer Loans - Delinquency Status by Class
| December 31, 2021 | |
December 31, 2022 | | December 31, 2022 |
Days Past Due: | Days Past Due: | Term Loans by Origination Year | | Revolving Converted to Term Loans | | Days Past Due: | Term Loans by Origination Year | | Revolving Converted to Term Loans | |
dollars in millions | dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | Total | dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | Total |
Residential mortgage | Residential mortgage | | | | | | | | | | | | | | | | | | Residential mortgage | | | | | | | | | | | | | | | | | |
Current | Current | $ | 2,139 | | | $ | 1,663 | | | $ | 627 | | | $ | 368 | | | $ | 349 | | | $ | 867 | | | $ | 22 | | | $ | — | | | $ | 6,035 | | Current | $ | 3,485 | | | $ | 3,721 | | | $ | 2,097 | | | $ | 805 | | | $ | 413 | | | $ | 2,625 | | | $ | 22 | | | $ | — | | | $ | 13,168 | |
30-59 days | 30-59 days | 2 | | | 3 | | | 2 | | | 2 | | | 1 | | | 14 | | | — | | | — | | | 24 | | 30-59 days | 3 | | | 7 | | | 6 | | | 5 | | | 3 | | | 49 | | | — | | | — | | | 73 | |
60-89 days | 60-89 days | — | | | — | | | — | | | 1 | | | 1 | | | 4 | | | — | | | — | | | 6 | | 60-89 days | 1 | | | 1 | | | 2 | | | — | | | 1 | | | 11 | | | — | | | — | | | 16 | |
90 days or greater | 90 days or greater | 1 | | | 1 | | | 1 | | | 2 | | | 1 | | | 17 | | | — | | | — | | | 23 | | 90 days or greater | — | | | 1 | | | 1 | | | 2 | | | 2 | | | 46 | | | — | | | — | | | 52 | |
Total residential mortgage | Total residential mortgage | 2,142 | | | 1,667 | | | 630 | | | 373 | | | 352 | | | 902 | | | 22 | | | — | | | 6,088 | | Total residential mortgage | 3,489 | | | 3,730 | | | 2,106 | | | 812 | | | 419 | | | 2,731 | | | 22 | | | — | | | 13,309 | |
Revolving mortgage | Revolving mortgage | | | | | | | | | | | | | | | | Revolving mortgage | | | | | | | | | | | | | | | |
Current | Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,678 | | | 126 | | | 1,804 | | Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,839 | | | 92 | | | 1,931 | |
30-59 days | 30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 2 | | | 6 | | 30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 4 | | | 9 | |
60-89 days | 60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | | 60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 1 | | | 3 | |
90 days or greater | 90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 4 | | | 6 | | 90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 3 | | | 8 | |
Total revolving mortgage | Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,684 | | | 134 | | | 1,818 | | Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,851 | | | 100 | | | 1,951 | |
Consumer auto | Consumer auto | | | | | | | | | | | | | | | | | | Consumer auto | | | | | | | | | | | | | | | | | |
Current | Current | 597 | | | 343 | | | 198 | | | 119 | | | 48 | | | 19 | | | — | | | — | | | 1,324 | | Current | 599 | | | 398 | | | 216 | | | 111 | | | 59 | | | 22 | | | — | | | — | | | 1,405 | |
30-59 days | 30-59 days | 1 | | | 2 | | | 1 | | | 1 | | | — | | | 1 | | | — | | | — | | | 6 | | 30-59 days | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | 7 | |
60-89 days | 60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | 60-89 days | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
90 days or greater | 90 days or greater | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | 90 days or greater | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Total consumer auto | Total consumer auto | 598 | | | 345 | | | 199 | | | 120 | | | 48 | | | 22 | | | — | | | — | | | 1,332 | | Total consumer auto | 600 | | | 402 | | | 218 | | | 112 | | | 60 | | | 22 | | | — | | | — | | | 1,414 | |
Consumer other | Consumer other | | | | | | | | | | | | | | | | | | Consumer other | | | | | | | | | | | | | | | | | |
Current | Current | 131 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 342 | | | — | | | 543 | | Current | 160 | | | 82 | | | 13 | | | 6 | | | 2 | | | 19 | | | 361 | | | — | | | 643 | |
30-59 days | 30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | | 30-59 days | — | | | — | | | — | | | — | | | — | | | 1 | | | 3 | | | — | | | 4 | |
60-89 days | 60-89 days | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 2 | | 60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 2 | |
90 days or greater | 90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | | 90 days or greater | — | | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | — | | | 3 | |
Total consumer other | Total consumer other | 132 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 346 | | | — | | | 548 | | Total consumer other | 160 | | | 82 | | | 13 | | | 6 | | | 2 | | | 22 | | | 367 | | | — | | | 652 | |
Total consumer | Total consumer | $ | 2,872 | | | $ | 2,036 | | | $ | 840 | | | $ | 497 | | | $ | 402 | | | $ | 953 | | | $ | 2,052 | | | $ | 134 | | | $ | 9,786 | | Total consumer | $ | 4,249 | | | $ | 4,214 | | | $ | 2,337 | | | $ | 930 | | | $ | 481 | | | $ | 2,775 | | | $ | 2,240 | | | $ | 100 | | | $ | 17,326 | |
Purchased loans and leases
The following table summarizes PCD loans and leases that BancShares acquired in the CIT Merger.
Gross Charge-offs
PCD LoansGross Charge-off Vintage Disclosures by origination year 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 | |
loan class are summarized in the following table for the three months ended March 31, 2023:
The recorded fair values of Non-PCD loans acquired in the CIT Merger as of the acquisition date was $29.5 billion, resulting in a PAA discount of $61 million.Gross Charge-offs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2023 |
| Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 & Prior | | Revolving | | | Total |
Commercial | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Non-owner occupied commercial mortgage | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 12 | | | $ | — | | | $ | — | | | $ | 12 | |
Commercial and industrial | — | | | 14 | | | 9 | | | 4 | | | 2 | | | 1 | | | 8 | | | — | | | 38 | |
Leases | — | | | 2 | | | 1 | | | 1 | | | — | | | — | | | — | | | — | | | 4 | |
Total commercial | — | | | 16 | | | 10 | | | 5 | | | 2 | | | 13 | | | 8 | | | — | | | 54 | |
Consumer | | | | | | | | | | | | | | | | | |
Residential mortgage | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Consumer other | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Total consumer | — | | | — | | | — | | | — | | | — | | | 2 | | | 3 | | | — | | | 5 | |
SVB | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total SVB | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total loans and leases | $ | — | | | $ | 16 | | | $ | 10 | | | $ | 5 | | | $ | 2 | | | $ | 15 | | | $ | 11 | | | $ | — | | | $ | 59 | |
Troubled Debt RestructuringLoan Modifications for Borrowers Experiencing Financial Difficulties
On January 1, 2023, we adopted ASU 2022-02 as further discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. The Modification Disclosures required by ASU 2022-02 are included below.
As part of BancShares’ ongoing risk-managementcredit risk management practices, BancShares attempts to work with borrowers when necessary to extend or modify loan terms to better align with theirborrowers current ability to repay. Extensions andBancShares’ modifications granted to debtors experiencing financial difficulties typically take the form of term extensions, interest rate reductions, other-than-insignificant payment delays, principal forgiveness, or a combination thereof. Modifications are made in accordance with internal policies and guidelines to conform to regulatory guidance. BancShares accounts
The following table presents loan modifications made to debtors experiencing financial difficulty, disaggregated by class and type of loan modification. The table also includes the weighted average term extensions, as well as the modification total
relative to the total period-end amortized cost basis of loans in the respective loan class.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty (three months ended March 31, 2023)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Term Extension(1) | | Term Extension and Interest Rate Reduction | | Term Extension and Other Than Insignificant Payment Delay | | Total |
| Amortized Cost | | Weighted Average Term Extension (Months) | | Amortized Cost | | Weighted Average Term Extension (Months) | | Weighted Average Interest Rate Reduction | | Amortized Cost | | Weighted Average Term Extension (Months) | | Weighted Average Payment Delay (Months) | | Amortized Cost | | Total as a % of Loan and Lease Class |
Commercial | | | | | | | | | | | | | | | | | | | |
Commercial construction | $ | 1 | | | 9 | | | $ | — | | | — | | | — | % | | $ | — | | | — | | | — | | | $ | 1 | | | 0.02 | % |
Owner occupied commercial mortgage | 10 | | | 11 | | | — | | | 36 | | | 2.00 | % | | — | | | — | | | — | | | 10 | | | 0.07 | % |
Non-owner occupied commercial mortgage | 53 | | | 3 | | | — | | | — | | | 1.10 | % | | — | | | — | | | — | | | 53 | | | 0.51 | % |
Commercial and industrial | 12 | | | 6 | | | 6 | | | 3 | | | 1.17 | % | | 3 | | | 8 | | | 8 | | | 21 | | | 0.09 | % |
| | | | | | | | | | | | | | | | | | | |
Total commercial | 76 | | | 5 | | | 6 | | | 4 | | | 1.19 | % | | 3 | | | 8 | | | 8 | | | 85 | | | 0.16 | % |
Consumer | | | | | | | | | | | | | | | | | | | |
Residential mortgage | 1 | | | 29 | | | — | | | — | | | — | % | | — | | | — | | | — | | | 1 | | | 0.01 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total consumer | 1 | | | 29 | | | — | | | 60 | | | 0.39 | % | | — | | | — | | | — | | | 1 | | | 0.01 | % |
SVB | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Investor dependent - growth stage | 6 | | | 6 | | | — | | | — | | | — | % | | — | | | — | | | — | | | 6 | | | 0.14 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total SVB | 6 | | | 6 | | | — | | | — | | | — | % | | — | | | — | | | — | | | 6 | | | 0.01 | % |
Total loans and leases | $ | 83 | | | 5 | | | $ | 6 | | | 4 | | | 1.18 | % | | $ | 3 | | | 8 | | | 8 | | | $ | 92 | | | 0.07 | % |
(1)Term extensions include loans where the balloon payment has been deferred to a later date or is amortizing over an extended period.
Borrowers experiencing financial difficulties are typically identified in our credit risk management process before loan modifications occur. An assessment of whether a borrower is experiencing financial difficulty is reassessed or performed on the date of a modification. Since the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Upon BancShares’ determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. There were no significant amounts of modified loans that subsequently defaulted during the first quarter of 2023.
The following table presents the amortized cost and performance of modified loans to borrowers experiencing financial difficulties in the three months ended March 31, 2023. The period of delinquency is based on the number of days the scheduled payment is contractually past due.
Modified Loans Payment Status
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Current | | 30–59 Days Past Due | | 60–89 Days Past Due | | 90 days or greater Past Due | | Total |
Commercial | | | | | | | | | |
Commercial construction | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | |
Owner occupied commercial mortgage | 10 | | | — | | | — | | | — | | | 10 | |
Non-owner occupied commercial mortgage | 53 | | | — | | | — | | | — | | | 53 | |
Commercial and industrial | 21 | | | — | | | — | | | — | | | 21 | |
| | | | | | | | | |
Total commercial | 85 | | | — | | | — | | | — | | | 85 | |
Consumer | | | | | | | | | |
Residential mortgage | 1 | | | — | | | — | | | — | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total consumer | 1 | | | — | | | — | | | — | | | 1 | |
SVB | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Investor dependent - growth stage | 6 | | | — | | | — | | | — | | | 6 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total SVB | 6 | | | — | | | — | | | — | | | 6 | |
Total loans and leases | $ | 92 | | | $ | — | | | $ | — | | | $ | — | | | $ | 92 | |
At March 31, 2023, there were no significant commitments to lend additional funds to debtors experiencing financial difficulty for which the terms of the loan were modified.
Prior Period Troubled Debt Restructuring
The following includes disclosures for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). for historical periods prior to adoption of ASU 2022-02. In general, a modification or restructuring of a loan iswas 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 relatehave related to the contractual interest rate, maturity date, payment structure or other actions. The assessments of whether a borrower iswas experiencing (or is likely to experience) financial difficulty, and whether a concession hashad been granted, arewere subjective in nature and management’s judgment iswas required when determining whether a modification iswas classified as a TDR. In accordance with regulatory guidance discussed below, certain loan modifications that might ordinarily have qualified as TDRs were not accounted for as TDRs.
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 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 meetmet the definition of a TDR arewere subject to BancShares’ individually reviewed loans policy.
The following table presents amortized cost of TDRs.TDRs:
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 | |
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 |
| Accruing | | Non-Accruing | | Total |
Commercial | | | | | |
Commercial construction | $ | 2 | | | $ | 1 | | | $ | 3 | |
Owner occupied commercial mortgage | 46 | | | 9 | | | 55 | |
Non-owner occupied commercial mortgage | 24 | | | 30 | | | 54 | |
Commercial and industrial | 26 | | | 8 | | | 34 | |
Leases | — | | | 1 | | | 1 | |
Total commercial | 98 | | | 49 | | | 147 | |
Consumer | | | | | |
Residential mortgage | 33 | | | 17 | | | 50 | |
Revolving mortgage | 17 | | | 5 | | | 22 | |
Consumer auto | 2 | | | — | | | 2 | |
Consumer other | — | | | — | | | — | |
Total consumer | 52 | | | 22 | | | 74 | |
Total TDRs | $ | 150 | | | $ | 71 | | | $ | 221 | |
The following table summarizes the loan restructurings during the three and nine months ended September 30,March 31, 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) | dollars in millions (except for number of loans) | Three Months Ended September 30, | | dollars in millions (except for number of loans) | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | | | 2022 | |
| | Number of Loans | | Amortized Cost at Period End | | | Number of Loans | | Amortized Cost at Period End | | | | Number of Loans | | Amortized Cost at Period End | |
Loans and leases | Loans and leases | | | | | | | | | | Loans and leases | | | | | |
Interest only | Interest only | 5 | | | $ | 31 | | | | 7 | | | $ | 10 | | | Interest only | | 2 | | | $ | — | | |
Loan term extension | Loan term extension | 35 | | | 30 | | | | 41 | | | 6 | | | Loan term extension | | 35 | | | 20 | | |
Below market rates | Below market rates | 17 | | | 4 | | | | 47 | | | 3 | | | Below market rates | | 20 | | | 2 | | |
Discharge from bankruptcy | Discharge from bankruptcy | 36 | | | 2 | | | | 21 | | | 3 | | | Discharge from bankruptcy | | 24 | | | 2 | | |
Total | Total | 93 | | | $ | 67 | | | | 116 | | | $ | 22 | | | Total | | 81 | | | $ | 24 | | |
| | | 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$1.5 million of commitments to lend additional funds to borrowers whose loan terms have beenthat were modified in TDRs as of September 30, 2022 and December 31, 2021, respectively.2022.
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,March 31, 2022, and 2021, and were classified as TDRs during the applicable 12-month period preceding September 30,March 31, 2022 and 2021 were as follows:
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 | |
| | | | | | | | |
dollars in millions | | Three Months Ended March 31, |
| | 2022 |
TDR Defaults | | $ | 2 | |
| | |
| |
| | |
| | |
Purchased loans and leases
The following table summarizes PCD loans and leases that BancShares acquired in the SVBB Acquisition.
PCD Loans and Leases - SVBB Acquisition
| | | | | |
| Total PCD from SVBB Acquisition |
UPB | $ | 2,529 | |
Initial PCD ACL | (200) | |
Fair value discount, net of the PCD Gross-Up | (299) | |
Purchase price | $ | 2,030 | |
The recorded fair values of Non-PCD loans acquired in the SVBB Acquisition as of the acquisition date was $66.47 billion, resulting in a purchase accounting adjustment discount of $2.27 billion. BancShares’ accounting methods for acquired loans are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. See Note 2 — Business Combinations for further discussion of the SVBB Acquisition.
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, 2022March 31, 2023 and December 31, 2021:2022.
Loans Pledged
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
FHLB of Atlanta | FHLB of Atlanta | | | | FHLB of Atlanta | | | |
Lendable collateral value of pledged non-PCD loans | Lendable collateral value of pledged non-PCD loans | $ | 14,390 | | | $ | 9,564 | | Lendable collateral value of pledged non-PCD loans | $ | 14,662 | | | $ | 14,918 | |
Less: Advances | Less: Advances | 5,800 | | | 645 | | Less: Advances | 8,500 | | | 4,250 | |
Less: Letters of Credit | Less: Letters of Credit | 1,450 | | | — | | Less: Letters of Credit | 1,450 | | | 1,450 | |
Available borrowing capacity | Available borrowing capacity | $ | 7,140 | | | $ | 8,919 | | Available borrowing capacity | $ | 4,712 | | | $ | 9,218 | |
Pledged non-PCD loans (contractual balance) | Pledged non-PCD loans (contractual balance) | $ | 21,093 | | | $ | 14,507 | | Pledged non-PCD loans (contractual balance) | $ | 23,743 | | | $ | 23,491 | |
| FRB | FRB | | FRB | |
Lendable collateral value of pledged non-PCD loans | Lendable collateral value of pledged non-PCD loans | $ | 4,464 | | | $ | 3,951 | | Lendable collateral value of pledged non-PCD loans | $ | 4,676 | | | $ | 4,203 | |
Less: Advances | Less: Advances | — | | | — | | Less: Advances | — | | | — | |
Available borrowing capacity | Available borrowing capacity | $ | 4,464 | | | $ | 3,951 | | Available borrowing capacity | $ | 4,676 | | | $ | 4,203 | |
Pledged non-PCD loans (contractual balance) | Pledged non-PCD loans (contractual balance) | $ | 5,533 | | | $ | 4,806 | | Pledged non-PCD loans (contractual balance) | $ | 5,864 | | | $ | 5,697 | |
In connection with the SVBB Acquisition, FCB and the FDIC entered into terms and conditions for a five-year, up to $70 billion line of credit to FCB provided by the FDIC and a Purchase Money Note, both of which are or will be primarily secured by all loans acquired and related commitments that subsequently were drawn and outstanding as of March 31, 2023. See Note 2 — Business Combinations for further discussion of the facility and note.
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 and (iii) investment securities available for sale 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 SVBB Acquisition and the CIT Merger (the “Initial PCD ACL”) of $272 million waswere established through thea PCD Gross-Up and there waswere no corresponding increaseincreases to the provision for credit losses. The PCD Gross-Up isGross-Ups are discussed further in Note 21 — Business Combinations.Significant Accounting Policies and Basis of Presentation. The initial ACL for Non-PCD loans and leases acquired in the SVBB Acquisition and the CIT Merger waswere established through a corresponding increase of $454 millionincreases to the provision for credit losses (the “Initial Non-PCD Provision”“day 2 provision for loans and leases”). The initial ACL for unfunded commitments acquired in the SVBB Acquisition and the CIT Merger were established through a corresponding increase to the provision for unfunded commitments (the “day 2 provision for unfunded commitments”).
The ACL activity for loans and leases, and the ACL for unfunded commitments and investment securities is summarized in the following tables.
ACL for Loans and Leases
| dollars in millions | dollars in millions | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | dollars in millions | | Three Months Ended March 31, 2023 |
| | Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total | | | Commercial | | Consumer | | SVB | | Total |
Balance at beginning of period | Balance at beginning of period | $ | 740 | | | $ | 110 | | | $ | 850 | | | $ | 80 | | | $ | 98 | | | $ | 178 | | Balance at beginning of period | | $ | 789 | | | $ | 133 | | | $ | — | | | $ | 922 | |
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 | | |
Initial PCD ACL | | Initial PCD ACL | | — | | | — | | | 200 | | | 200 | |
Day 2 provision for loans and leases | | Day 2 provision for loans and leases | | — | | | — | | | 462 | | | 462 | |
Provision for credit losses - loans and leases | | Provision for credit losses - loans and leases | | 58 | | | 13 | | | — | | | 71 | |
Total provision for credit losses- loans and leases | Total provision for credit losses- loans and leases | 43 | | | 7 | | | 50 | | | 485 | | | 2 | | | 487 | | Total provision for credit losses- loans and leases | | 58 | | | 13 | | | 462 | | | 533 | |
Charge-offs(1) | Charge-offs(1) | (28) | | | (5) | | | (33) | | | (92) | | | (15) | | | (107) | | Charge-offs(1) | | (55) | | | (7) | | | — | | | (62) | |
Recoveries | Recoveries | 11 | | | 4 | | | 15 | | | 35 | | | 17 | | | 52 | | Recoveries | | 8 | | | 4 | | | — | | | 12 | |
| Balance at September 30, 2022 | $ | 766 | | | $ | 116 | | | $ | 882 | | | $ | 766 | | | $ | 116 | | | $ | 882 | | |
Balance at March 31, 2023 | | Balance at March 31, 2023 | | $ | 800 | | | $ | 143 | | | $ | 662 | | | $ | 1,605 | |
| | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | | Three Months Ended March 31, 2022 |
| | Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total | | | Commercial | | Consumer | | SVB | | Total |
Balance at beginning of period | Balance at beginning of period | $ | 86 | | | $ | 103 | | | $ | 189 | | | $ | 92 | | | $ | 133 | | | $ | 225 | | Balance at beginning of period | | $ | 80 | | | $ | 98 | | | $ | — | | | $ | 178 | |
Provision (benefit) for credit losses - loans and leases | — | | | (1) | | | (1) | | | (3) | | | (29) | | | (32) | | |
Initial PCD ACL | | Initial PCD ACL | | 270 | | | 14 | | | — | | | 284 | |
Day 2 provision for loans and leases | | Day 2 provision for loans and leases | | 432 | | | 22 | | | — | | | 454 | |
Benefit for credit losses - loans and leases | | Benefit for credit losses - loans and leases | | (23) | | | (30) | | | — | | | (53) | |
Total provision (benefit) for credit losses- loans and leases | | Total provision (benefit) for credit losses- loans and leases | | 409 | | | (8) | | | — | | | 401 | |
Charge-offs | Charge-offs | (7) | | | (4) | | | (11) | | | (14) | | | (13) | | | (27) | | Charge-offs | | (28) | | | (5) | | | — | | | (33) | |
Recoveries | Recoveries | 3 | | | 3 | | | 6 | | | 7 | | | 10 | | | 17 | | Recoveries | | 12 | | | 6 | | | — | | | 18 | |
| Balance at September 30, 2021 | $ | 82 | | | $ | 101 | | | $ | 183 | | | $ | 82 | | | $ | 101 | | | $ | 183 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | | $ | 743 | | | $ | 105 | | | $ | — | | | $ | 848 | |
(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 | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 |
Beginning balance | Beginning balance | $ | 81 | | | $ | 11 | | | $ | 12 | | | $ | 13 | | Beginning balance | | $ | 106 | | | $ | 12 | |
Provision (benefit) for credit losses - unfunded commitments | 10 | | | — | | | 79 | | | (2) | | |
Day 2 provision for unfunded commitments | | Day 2 provision for unfunded commitments | | 254 | | | 59 | |
(Benefit) provision for unfunded commitments | | (Benefit) provision for unfunded commitments | | (8) | | | 4 | |
Total provision for credit losses - unfunded commitments | | Total provision for credit losses - unfunded commitments | | 246 | | | 63 | |
Ending balance | Ending balance | $ | 91 | | | $ | 11 | | | $ | 91 | | | $ | 11 | | Ending balance | | $ | 352 | | | $ | 75 | |
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.Investment Securities
| | | | | | | | | | | | | | | |
dollars in millions | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Beginning balance | | | | | $ | — | | | $ | — | |
Provision for credit losses - investment securities available for sale | | | | | 4 | | | — | |
Ending balance | | | | | $ | 4 | | | $ | — | |
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 1716 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 | dollars in millions | Classification | | September 30, 2022 | | December 31, 2021 | dollars in millions | Classification | | March 31, 2023 | | December 31, 2022 |
ROU assets: | ROU assets: | | | | | ROU assets: | | | | |
Operating leases | Operating leases | Other assets | | $ | 366 | | | $ | 64 | | Operating leases | Other assets | | $ | 337 | | | $ | 345 | |
Finance leases | Finance leases | Premises and equipment | | 7 | | | 4 | | Finance leases | Premises and equipment | | 7 | | | 7 | |
Total ROU assets | Total ROU assets | | $ | 373 | | | $ | 68 | | Total ROU assets | | $ | 344 | | | $ | 352 | |
Lease liabilities: | Lease liabilities: | | | | | Lease liabilities: | | | | |
Operating leases | Operating leases | Other liabilities | | $ | 373 | | | $ | 64 | | Operating leases | Other liabilities | | $ | 345 | | | $ | 352 | |
Finance leases | Finance leases | Other borrowings | | 8 | | | 4 | | Finance leases | Other borrowings | | 7 | | | 7 | |
Total lease liabilities | Total lease liabilities | | $ | 381 | | | $ | 68 | | Total lease liabilities | | $ | 352 | | | $ | 359 | |
Weighted-average remaining lease terms: | Weighted-average remaining lease terms: | | | | | Weighted-average remaining lease terms: | | | | |
Operating leases | Operating leases | | 9.6 years | | 8.9 years | Operating leases | | 9.4 years | | 9.6 years |
Finance leases | Finance leases | | 4.4 years | | 3.5 years | Finance leases | | 3.8 years | | 4.1 years |
Weighted-average discount rate: | Weighted-average discount rate: | | Weighted-average discount rate: | |
Operating leases | Operating leases | | 2.13 | % | | 3.00 | % | Operating leases | | 2.22 | % | | 2.19 | % |
Finance leases | Finance leases | | 2.34 | % | | 3.12 | % | Finance leases | | 2.34 | % | | 2.34 | % |
The following table presents components of lease cost:
Components of Net Lease Cost
| dollars in millions | dollars in millions | | | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | | | Three Months Ended March 31, |
| | Classification | | 2022 | | 2021 | | 2022 | | 2021 | | Classification | | 2023 | | 2022 |
Lease cost | Lease cost | | | | | | | | | | Lease cost | | | | |
Operating lease cost(2)(1) | Operating lease cost(2)(1) | Occupancy Expense | | $ | 14 | | | $ | 3 | | | $ | 44 | | | $ | 10 | | Operating lease cost(2)(1) | Occupancy Expense | | $ | 13 | | | $ | 16 | |
Finance lease cost | Finance lease cost | | Finance lease cost | |
Amortization of leased assets | Amortization of leased assets | Equipment expense | | 1 | | | 1 | | | 2 | | | 2 | | Amortization of leased assets | Equipment expense | | — | | | 1 | |
Interest on lease liabilities | Interest on lease liabilities | Interest expense - Other borrowings | | — | | | — | | | — | | | — | | Interest on lease liabilities | Interest expense - other borrowings | | — | | | — | |
Variable lease cost | Variable lease cost | Occupancy Expense | | 3 | | | 1 | | | 9 | | | 3 | | Variable lease cost | Occupancy Expense | | 4 | | | 3 | |
Sublease income | Sublease income | Occupancy Expense | | (1) | | | — | | | (2) | | | — | | Sublease income | Occupancy Expense | | (1) | | | (1) | |
Net lease cost | Net lease cost | | $ | 17 | | | $ | 5 | | | $ | 53 | | | $ | 15 | | Net lease cost | | $ | 16 | | | $ | 19 | |
(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, 2022, respectively.
Variable 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 1413 years.
The following table presents supplemental cash flow information related to leases:
Supplemental Cash Flow Information
| dollars in millions | dollars in millions | Nine Months Ended September 30, | dollars in millions | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | Operating cash flows from operating leases | $ | 40 | | | $ | 10 | | Operating cash flows from operating leases | $ | 13 | | | $ | 14 | |
Operating cash flows from finance leases | — | | | — | | |
Financing cash flows from finance leases | 2 | | | 2 | | |
| ROU assets obtained in exchange for new operating lease liabilities | ROU assets obtained in exchange for new operating lease liabilities | 17 | | | 3 | | ROU assets obtained in exchange for new operating lease liabilities | 4 | | | 8 | |
ROU assets obtained in exchange for new finance lease liabilities | 5 | | | — | | |
|
The following table presents lease liability maturities for the remainder of 2022 through 2027 and thereafter at September 30, 2022:
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 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
| | | | | |
dollars in millions | September 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 | dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Lease income – Operating leases | Lease income – Operating leases | $ | 201 | | | $ | — | | | $ | 592 | | | $ | — | | Lease income – Operating leases | $ | 214 | | | $ | 195 | | |
Variable lease income – Operating leases(1) | Variable lease income – Operating leases(1) | 18 | | | — | | | 48 | | | — | | Variable lease income – Operating leases(1) | 19 | | | 13 | | |
Rental income on operating leases | Rental income on operating leases | 219 | | | — | | | 640 | | | — | | Rental income on operating leases | 233 | | | 208 | | |
Interest income - Sales type and direct financing leases | Interest income - Sales type and direct financing leases | 43 | | | 4 | | | 127 | | | 14 | | Interest income - Sales type and direct financing leases | 41 | | | 42 | | |
Variable lease income included in Other noninterest income(2) | Variable lease income included in Other noninterest income(2) | 13 | | | — | | | 37 | | | — | | Variable lease income included in Other noninterest income(2) | 15 | | | 11 | | |
Interest income - Leveraged leases | Interest income - Leveraged leases | 5 | | | — | | | 14 | | | — | | Interest income - Leveraged leases | 5 | | | 5 | | |
Total lease income | Total lease income | $ | 280 | | | $ | 4 | | | $ | 818 | | | $ | 14 | | Total lease income | $ | 294 | | | $ | 266 | | |
(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$3 million for the three and nine months ended September 30,March 31, 2023 and 2022, respectively and revenue related to insurance coverage on leased equipment of $9$10 million and $24$7 million for the three and nine months ended September 30,March 31, 2023 and 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 OTHERCORE DEPOSIT INTANGIBLES
Goodwill
BancShares applied the acquisition method of accounting for the SVBB Acquisition and the CIT Merger. The fair value of the net assets acquired exceeded the purchase price.prices for both acquisitions. 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, 2022March 31, 2023 and December 31, 2021. The entire amount of goodwill2022 that relates to business combinations that BancShares completed prior to the SVBB Acquisition and the CIT Merger and is reported inMerger. All of the goodwill relates to the General Banking reporting segment. There was no goodwill impairment during the three months ended March 31, 2023 or 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.March 31, 2023.
Core Deposit Intangibles
| | | | | |
dollars in millions | 20222023 |
Balance, net of accumulated amortization at January 1 | $ | 19140 | |
Core deposit intangibles related to the CIT MergerSVBB Acquisition | 143230 | |
Amortization for the period | (17)(6) | |
Balance at September 30,March 31, net of accumulated amortization | $ | 145364 | |
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 January 1 | $ | — | |
Acquired in CIT Merger | 52 | |
Amortization | (12) | |
Balance at September 30, net of accumulated amortization | $ | 40 | |
| | | | | | | | | | | |
dollars in millions | March 31, 2023 | | December 31, 2022 |
Gross balance | $ | 501 | | | $ | 271 | |
Accumulated amortization | (137) | | | (131) | |
Balance, net of accumulated amortization | $ | 364 | | | $ | 140 | |
The following table summarizes the expected amortization expense as of September 30, 2022March 31, 2023 in subsequent periods for the intangible liability.core deposit intangibles.
Core Deposit Intangible LiabilityExpected Amortization
| | | | | |
dollars in millions | |
Remainder 2022 | $ | 4 | |
2023 | 12 | |
2024 | 6 | |
2025 | 4 | |
2026 | 3 | |
2027 | 2 | |
Thereafter | 9 | |
Total | $ | 40 | |
| | | | | |
dollars in millions | |
Remainder 2023 | $ | 52 | |
2024 | 63 | |
2025 | 54 | |
2026 | 46 | |
2027 | 39 | |
2028 | 34 | |
Thereafter | 76 | |
Balance, net of accumulated amortization | $ | 364 | |
NOTE 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 approximately $3.7 billion as of September 30, 2022 and December 31, 2021. For certain loans, the originated loans 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 assets. The associated amortization expense and any changes in the valuation allowance recognized were 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 million for each of the three months ended September 30, 2022 and 2021, and $7 million and $6 million for the nine months ended September 30, 2022 and 2021, respectively.
The following table presents changes in the servicing asset during the three and nine months ended September 30, 2022 and 2021:
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:
Servicing Asset Valuation Allowance
| | | | | | | | | | | | | | | | | | | | | | | |
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 | |
MSRs 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 MSRs were as follows:
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 MSRs 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 rates applied to the cash flows in the valuation of MSRs are market-based and provided on a pretax basis. The prepayment rate is derived from dynamic modeling, which is compared to actual prepayment rates annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.
NOTE 9 — 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 118 — 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.primary beneficiary. Refer to Note 1 — Significant Accounting Policies and Basis of Presentation for additional information on accounting for VIEs.VIEs and investments in qualified housing projects.
Consolidated VIEs
At September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 does 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 itsBancShares’ 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. As disclosed in Note 2 — Business Combinations, the following tables as of March 31, 2023 include VIEs acquired in the SVBB Acquisition.
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 | |
| | | | | | | | | | | |
dollars in millions | March 31, 2023 | | December 31, 2022 |
Investment in qualified affordable housing projects | $ | 1,662 | | | $ | 598 | |
Other tax credit equity investments | 5 | | | 5 | |
Total tax credit equity investments | $ | 1,667 | | | $ | 603 | |
Other unconsolidated investments | 166 | | | 159 | |
Total assets (maximum loss exposure)(1) | $ | 1,833 | | | $ | 762 | |
Liabilities for commitments to tax credit investments(2)(3) | $ | 991 | | | $ | 295 | |
(1)Included in other assets. Balance presented net of purchase accounting adjustments of $273 million at March 31, 2023.
(2) Represents commitments to invest in qualified affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand and are recordedincluded in other liabilities.
(3) Balance presented net of purchase accounting adjustment of $70 million at March 31, 2023.
NOTE 9 — OTHER ASSETS
The below table reflects the impact of approximately $2.18 billion of miscellaneous assets acquired in conjunction with the SVBB Acquisition. These consisted primarily of affordable housing tax credit investments, accrued interest receivable, derivative assets, and other miscellaneous assets. Refer to Note 2 — Business Combinations for further discussion. The following table includes the components of other assets:
Other Assets
| | | | | | | | | | | |
dollars in millions | March 31, 2023 | | December 31, 2022 |
Affordable housing tax credit and other unconsolidated investments (1) | $ | 1,869 | | | $ | 762 | |
Right of use assets for operating leases, net | 337 | | | 345 | |
Pension assets | 359 | | | 343 | |
Accrued interest receivable | 772 | | | 329 | |
Income tax receivable | 284 | | | 275 | |
Federal Home Loan Bank stock | 393 | | | 197 | |
Fair value of derivative financial instruments | 547 | | | 159 | |
Bank-owned life insurance | 530 | | | 586 | |
Counterparty receivables | 171 | | | 98 | |
Nonmarketable equity securities | 62 | | | 58 | |
Other real estate owned | 46 | | | 47 | |
Mortgage servicing assets | 25 | | | 25 | |
Other (2) | 2,055 | | | 1,145 | |
Total other assets | $ | 7,450 | | | $ | 4,369 | |
(1) Refer to Note 8 — Variable Interest Entities for additional information.
(2) The balances at March 31, 2023 and December 31, 2022 include $428 million and $607 million, respectively, in “Other” related to bank-owned life insurance policies that had terminated, but not cash-settled as further discussed in the 2022 Form 10-K.
NOTE 10 — DEPOSITS
The following table provides detail on deposit types. The deposit balances as of March 31, 2023 include those acquired in the SVBB Acquisition, as described in Note 2 — Business Combinations.
Deposit Types
| | | | | | | | | | | |
dollars in millions | March 31, 2023 | | December 31, 2022 |
Noninterest-bearing demand | $ | 54,649 | | | $ | 24,922 | |
Checking with interest | 23,743 | | | 16,202 | |
Money market | 30,598 | | | 21,040 | |
Savings | 17,932 | | | 16,634 | |
Time | 13,128 | | | 10,610 | |
Total deposits | $ | 140,050 | | | $ | 89,408 | |
At March 31, 2023, the scheduled maturities of time deposits were:
Deposit Maturities
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2024 | $ | 9,199 | |
2025 | 3,281 | |
2026 | 437 | |
2027 | 55 | |
2028 | 31 | |
Thereafter | 125 | |
Total time deposits | $ | 13,128 | |
Time deposits with a denomination of $250,000 or more were $3.74 billion and $2.22 billion at March 31, 2023 and December 31, 2022, respectively.
NOTE 1211 — BORROWINGS
Short-term Borrowings
Short-term borrowings at September 30, 2022March 31, 2023 and December 31, 20212022 include:
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Securities sold under customer repurchase agreements | Securities sold under customer repurchase agreements | $ | 578 | | | $ | 589 | | Securities sold under customer repurchase agreements | $ | 509 | | | $ | 436 | |
Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.18% to 0.20%. | 2,550 | | | — | | |
| Notes payable to FHLB of Atlanta at overnight SOFR plus 0.28%. | | Notes payable to FHLB of Atlanta at overnight SOFR plus 0.28%. | 500 | | | 1,750 | |
| Total short-term borrowings | Total short-term borrowings | $ | 3,128 | | | $ | 589 | | Total short-term borrowings | $ | 1,009 | | | $ | 2,186 | |
Securities Sold under Agreements to Repurchase
At September 30, 2022, BancShares held $578$509 million and $436 million at March 31, 2023 and December 31, 2022, respectively, of securities sold under agreements to repurchase withthat have overnight contractual maturities and are collateralized by government agency securities. At December 31, 2021, BancShares held $589 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, of which $508 million were collateralized by government agency securities and $81 million collateralized by commercial mortgage-backed securities.
BancShares utilizes securities sold under agreements to repurchase to facilitate the needs for collateralization of commercial 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 purchase 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 transactions 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 fractional interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of 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 $572$545 million and $619$496 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
Long-term Borrowings
Long-term borrowings at September 30, 2022March 31, 2023 and December 31, 20212022 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 | |
Long-term Borrowings
| | | | | | | | | | | | | | | | | |
dollars in millions | Maturity | | March 31, 2023 | | December 31, 2022 |
Parent Company: | | | | | |
| | | | | |
| | | | | |
Subordinated: | | | | | |
| | | | | |
| | | | | |
Fixed-to-Floating subordinated notes at 3.375% | March 2030 | | $ | 350 | | | $ | 350 | |
Junior subordinated debentures at 3-month LIBOR plus 2.25% (FCB/SC Capital Trust II) | June 2034 | | 20 | | | 20 | |
Junior subordinated debentures 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% | June 2024 | | 500 | | | 500 | |
Senior unsecured fixed-to-floating rate notes at 2.969% | September 2025 | | 315 | | | 315 | |
Fixed senior unsecured notes at 6.00% | April 2036 | | 51 | | | 51 | |
Subordinated: | | | | | |
Fixed subordinated notes at 6.125% | March 2028 | | 400 | | | 400 | |
Fixed-to-Fixed subordinated notes at 4.125% | November 2029 | | 100 | | | 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 0.48%. | Maturities through September 2025 | | 8,000 | | | 2,500 | |
Purchase Money Note to FDIC fixed at 3.50%(1) | March 2028 | | 35,370 | | | — | |
Other secured financings | Maturities through January 2024 | | — | | | 18 | |
Capital lease obligations | Maturities through June 2027 | | 7 | | | 7 | |
Unamortized issuance costs | | | (1) | | | (1) | |
Unamortized purchase accounting adjustments(2) | | | (139) | | | 87 | |
Total long-term borrowings | | | $ | 45,085 | | | $ | 4,459 | |
(1)Reflects the remaining outstanding debt securities assumed by the BancShares Issued in connection with the CIT Merger.On February 24, 2022, BancShares redeemed all of the 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;SVBB Acquisition and (iv) 5.250% senior unsecured notes due 2025 that it had assumed in the CIT Merger.will be secured by acquired loans. See below and Note 2 — Business Combinations for further information.
(2) At September 30, 2022March 31, 2023 and December 31, 2021,2022, unamortized purchase accounting adjustments were $72$65 million and $2$69 million, respectively, for subordinated debentures.
Long-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, 2022:
•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, 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.
Secured BorrowingsPledged Assets
At September 30, 2022,March 31, 2023, BancShares had pledged $26.6$29.6 billion of loans to several financing facilities.the FHLB and FRB.
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$23.7 billion at September 30, 2022.March 31, 2023. 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 FinancingsUnder borrowing arrangements with the FRB of Richmond, BancShares has access to an additional $4.7 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at March 31, 2023 and December 31, 2022. Assets pledged to the FRB of Richmond totaled $5.9 billion at March 31, 2023.
Other
In connection with the SVBB Acquisition, FCB and the FDIC entered into a Purchase Money Note, which is primarily secured (other than FHLB) financingsby all loans acquired and related commitments that subsequently were not significantdrawn 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 recordedoutstanding as secured borrowings.of March 31, 2023.
At September 30, 2022,March 31, 2023, 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 1312 — 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. At March 31, 2023, and December 31, 2022 BancShares’ derivatives are not designated as hedging instruments.
Notional Amount and Fair Value of Derivative Financial Instruments
| dollars in millions | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 | | December 31, 2022 |
| | Notional Amount | | Asset Fair Value | | Liability Fair Value | | Notional Amount | | Asset Fair Value | | Liability Fair Value | | Notional Amount | | Asset Fair Value | | Liability Fair Value |
| Derivatives not designated as hedging instruments (Non-qualifying hedges) | Derivatives not designated as hedging instruments (Non-qualifying hedges) | | | | | | Derivatives not designated as hedging instruments (Non-qualifying hedges) | | | | | | | | | | | |
Interest rate contracts(1)(3) | Interest rate contracts(1)(3) | $ | 18,604 | | | $ | 143 | | | $ | (500) | | Interest rate contracts(1)(3) | $ | 23,557 | | | $ | 285 | | | $ | (535) | | | $ | 18,173 | | | $ | 158 | | | $ | (482) | |
Foreign exchange contracts | Foreign exchange contracts | 145 | | | 6 | | | — | | Foreign exchange contracts | 18,419 | | | 262 | | | (255) | | | 125 | | | 1 | | | (4) | |
Other contracts(2) | Other contracts(2) | 769 | | | — | | | — | | Other contracts(2) | 713 | | | — | | | (1) | | | 507 | | | — | | | — | |
Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | $ | 19,518 | | | 149 | | | (500) | | Total derivatives not designated as hedging instruments | $ | 42,689 | | | 547 | | | (791) | | | $ | 18,805 | | | 159 | | | (486) | |
Gross derivatives fair values presented in the Consolidated Balance Sheets | Gross derivatives fair values presented in the Consolidated Balance Sheets | | | 149 | | | (500) | | Gross derivatives fair values presented in the Consolidated Balance Sheets | | | 547 | | | (791) | | | | | 159 | | | (486) | |
Less: Gross amounts offset in the Consolidated Balance Sheets | Less: Gross amounts offset in the Consolidated Balance Sheets | | — | | | — | | Less: Gross amounts offset in the Consolidated Balance Sheets | | — | | | — | | | — | | | — | |
Net amount presented in the Consolidated Balance Sheets | Net amount presented in the Consolidated Balance Sheets | | 149 | | | (500) | | Net amount presented in the Consolidated Balance Sheets | | 547 | | | (791) | | | 159 | | | (486) | |
Less: Amounts subject to master netting agreements(4) | Less: Amounts subject to master netting agreements(4) | | (6) | | | 6 | | Less: Amounts subject to master netting agreements(4) | | (179) | | | 179 | | | (13) | | | 13 | |
Less: Cash collateral pledged(received) subject to master netting agreements(5) | Less: Cash collateral pledged(received) subject to master netting agreements(5) | | (129) | | | — | | Less: Cash collateral pledged(received) subject to master netting agreements(5) | | (255) | | | 16 | | | (124) | | | — | |
Total net derivative fair value | Total net derivative fair value | | $ | 14 | | | $ | (494) | | Total net derivative fair value | | $ | 113 | | | $ | (596) | | | $ | 22 | | | $ | (473) | |
(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$324 million and $20$24 million, respectively, at September 30,March 31, 2023, and $376 million and $19 million, respectively at December 31, 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 presents gains of non-qualifying hedges recognized on the Condensed Consolidated Statements of Income:
Gains on Non-Qualifying Hedges
| dollars in millions | dollars in millions | | Three Months Ended September 30, | | Nine Months Ended September 30, | dollars in millions | | Three Months Ended March 31, | |
| | Amounts Recognized | | 2022 | | 2021 | | 2022 | | 2021 | | Amounts Recognized | | 2023 | | 2022 | |
Interest rate contracts | Interest rate contracts | Other noninterest income | | $ | 5 | | | $ | — | | | $ | 11 | | | $ | — | | Interest rate contracts | Other noninterest income | | $ | 21 | | | $ | 4 | | |
Foreign currency forward contracts | Foreign currency forward contracts | Other noninterest income | | 20 | | | — | | | 26 | | | — | | Foreign currency forward contracts | Other noninterest income | | (2) | | | — | | |
| Total non-qualifying hedges - income statement impact | Total non-qualifying hedges - income statement impact | | $ | 25 | | | $ | — | | | $ | 37 | | | $ | — | | Total non-qualifying hedges - income statement impact | | $ | 19 | | | $ | 4 | | |
NOTE 14 — OTHER13 —OTHER LIABILITIES
We assumed approximately $1.85 billion of other liabilities in conjunction with the SVBB Acquisition, comprised of commitments to fund tax credit investments, derivative liabilities, accrued interest payable and other miscellaneous liabilities. In addition, we recorded $3.31 billion of deferred tax liabilities, primarily related to the purchase of the acquired assets. Refer to Note 2 — Business Combinations for further discussion. The following table presents the components of other liabilities. The increases from December 31, 2021 primarily reflect the other liabilities assumed in the CIT Merger.liabilities:
Other Liabilities
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Fair value of derivative financial instruments | | Fair value of derivative financial instruments | $ | 791 | | | $ | 486 | |
Lease liabilities | | Lease liabilities | 345 | | | 352 | |
Accrued expenses and accounts payable | Accrued expenses and accounts payable | $ | 295 | | | $ | 5 | | Accrued expenses and accounts payable | 476 | | | 275 | |
Lease liabilities | 373 | | | 64 | | |
Fair value of derivative financial instruments | 500 | | | 1 | | |
Commitments to fund tax credit investments | Commitments to fund tax credit investments | 264 | | | 43 | | Commitments to fund tax credit investments | 991 | | | 295 | |
Deferred taxes | Deferred taxes | 173 | | | 33 | | Deferred taxes | 3,551 | | | 286 | |
Reserve for off-balance sheet credit exposure | 91 | | | 12 | | |
ACL for unfunded commitments | | ACL for unfunded commitments | 352 | | | 106 | |
Incentive plan liabilities | Incentive plan liabilities | 199 | | | 84 | | Incentive plan liabilities | 156 | | | 267 | |
Accrued interest payable | Accrued interest payable | 35 | | | 8 | | Accrued interest payable | 150 | | | 57 | |
Other(1) | Other(1) | 504 | | | 131 | | Other(1) | 1,360 | | | 464 | |
Total other liabilities | Total other liabilities | $ | 2,434 | | | $ | 381 | | Total other liabilities | $ | 8,172 | | | $ | 2,588 | |
(1) The balance at March 31, 2023 includes $500 million payable to the FDIC for the Value Appreciation Instrument discussed further in Note 2 — Business Combinations.
NOTE 1514 — FAIR VALUE
Fair Value Hierarchy
BancShares measures certain financial assets and liabilities at fair value. Fair value is 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 at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels.
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 lowest level of input significant to the fair value measurement with Level 1 inputs considered highest and Level 3 inputs considered lowest. A brief description of each input level follows:
•Level 1 inputs are quoted prices in active markets for identical assets and liabilities.
•Level 2 inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices observable for the assets or liabilities and market corroborated inputs.
•Level 3 inputs are unobservable inputs for the asset or liability. These unobservable inputs and assumptions reflect the estimates market participants would use in pricing the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes BancShares’ assets and liabilities measured at estimated fair value on a recurring basis.basis:
Assets and Liabilities Measured at Fair Value - Recurring Basis(dollars in millions)
| dollars in millions | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Investment securities available for sale | Investment securities available for sale | | Investment securities available for sale | |
U.S. Treasury | U.S. Treasury | $ | 1,900 | | | $ | — | | | $ | 1,900 | | | $ | — | | U.S. Treasury | $ | 1,978 | | | $ | — | | | $ | 1,978 | | | $ | — | |
Government agency | Government agency | 173 | | | — | | | 173 | | | — | | Government agency | 150 | | | — | | | 150 | | | — | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 4,784 | | | — | | | 4,784 | | | — | | Residential mortgage-backed securities | 4,848 | | | — | | | 4,848 | | | — | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,673 | | | — | | | 1,673 | | | — | | Commercial mortgage-backed securities | 1,585 | | | — | | | 1,585 | | | — | |
Corporate bonds | Corporate bonds | 558 | | | — | | | 382 | | | 176 | | Corporate bonds | 500 | | | — | | | 340 | | | 160 | |
| Total investment securities available for sale | Total investment securities available for sale | $ | 9,088 | | | $ | — | | | $ | 8,912 | | | $ | 176 | | Total investment securities available for sale | $ | 9,061 | | | $ | — | | | $ | 8,901 | | | $ | 160 | |
Marketable equity securities | Marketable equity securities | 92 | | | 30 | | | 62 | | | — | | Marketable equity securities | 85 | | | 29 | | | 56 | | | — | |
Loans held for sale | Loans held for sale | 7 | | | — | | | 7 | | | — | | Loans held for sale | 9 | | | — | | | 9 | | | — | |
Derivative assets(1) | Derivative assets(1) | | Derivative assets(1) | |
Interest rate contracts — non-qualifying hedges | Interest rate contracts — non-qualifying hedges | 143 | | | — | | | 142 | | | 1 | | Interest rate contracts — non-qualifying hedges | $ | 285 | | | $ | — | | | $ | 284 | | | $ | 1 | |
Other derivative — non-qualifying hedges | 6 | | | — | | | 6 | | | — | | |
Foreign exchange contracts — non-qualifying hedges | | Foreign exchange contracts — non-qualifying hedges | 262 | | | — | | | 262 | | | — | |
Other derivative contracts — non-qualifying hedges | | Other derivative contracts — non-qualifying hedges | — | | | — | | | — | | | — | |
Total derivative assets | Total derivative assets | $ | 149 | | | $ | — | | | $ | 148 | | | $ | 1 | | Total derivative assets | $ | 547 | | | $ | — | | | $ | 546 | | | $ | 1 | |
Liabilities | Liabilities | | Liabilities | |
Derivative liabilities(1) | Derivative liabilities(1) | | Derivative liabilities(1) | |
Interest rate contracts — non-qualifying hedges | Interest rate contracts — non-qualifying hedges | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | | Interest rate contracts — non-qualifying hedges | $ | 535 | | | $ | — | | | $ | 535 | | | $ | — | |
Other derivative— non-qualifying hedges | — | | | — | | | — | | | — | | |
Foreign exchange contracts — non-qualifying hedges | | Foreign exchange contracts — non-qualifying hedges | 255 | | | — | | | 255 | | | — | |
Other derivative contracts — non-qualifying hedges | | Other derivative contracts — non-qualifying hedges | 1 | | | — | | | — | | | 1 | |
Total derivative liabilities | Total derivative liabilities | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | | Total derivative liabilities | $ | 791 | | | $ | — | | | $ | 790 | | | $ | 1 | |
| |
| |
| | December 31, 2021 | | December 31, 2022 |
dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 | |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Investment securities available for sale | Investment securities available for sale | | Investment securities available for sale | |
U.S. Treasury | U.S. Treasury | $ | 2,005 | | | $ | — | | | $ | 2,005 | | | $ | — | | U.S. Treasury | $ | 1,898 | | | $ | — | | | $ | 1,898 | | | $ | — | |
Government agency | Government agency | 221 | | | — | | | 221 | | | — | | Government agency | 162 | | | — | | | 162 | | | — | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 4,729 | | | — | | | 4,729 | | | — | | Residential mortgage-backed securities | 4,795 | | | — | | | 4,795 | | | — | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1,640 | | | — | | | 1,640 | | | — | | Commercial mortgage-backed securities | 1,604 | | | — | | | 1,604 | | | — | |
Corporate bonds | Corporate bonds | 608 | | | — | | | 401 | | | 207 | | Corporate bonds | 536 | | | — | | | 362 | | | 174 | |
| Total investment securities available for sale | Total investment securities available for sale | $ | 9,203 | | | $ | — | | | $ | 8,996 | | | $ | 207 | | Total investment securities available for sale | $ | 8,995 | | | $ | — | | | $ | 8,821 | | | $ | 174 | |
Marketable equity securities | Marketable equity securities | 98 | | | 34 | | | 64 | | | — | | Marketable equity securities | 95 | | | 32 | | | 63 | | | — | |
Loans held for sale | Loans held for sale | 99 | | | — | | | 99 | | | — | | Loans held for sale | 4 | | | — | | | 4 | | | — | |
Derivative assets(1) | | Derivative assets(1) | |
Interest rate contracts — non-qualifying hedges | | Interest rate contracts — non-qualifying hedges | $ | 158 | | | $ | — | | | $ | 158 | | | $ | — | |
Foreign exchange contracts — non-qualifying hedges | | Foreign exchange contracts — non-qualifying hedges | 1 | | | — | | | 1 | | | — | |
Other derivative contracts — non-qualifying hedges | | Other derivative contracts — non-qualifying hedges | — | | | — | | | — | | | — | |
Total derivative assets | | Total derivative assets | $ | 159 | | | $ | — | | | $ | 159 | | | $ | — | |
Liabilities | | Liabilities | |
Derivative liabilities(1) | | Derivative liabilities(1) | |
Interest rate contracts — non-qualifying hedges | | Interest rate contracts — non-qualifying hedges | $ | 482 | | | $ | — | | | $ | 482 | | | $ | — | |
Foreign exchange contracts — non-qualifying hedges | | Foreign exchange contracts — non-qualifying hedges | 4 | | | — | | | 4 | | | — | |
Other derivative contracts — non-qualifying hedges | | Other derivative contracts — non-qualifying hedges | — | | | — | | | — | | | — | |
Total derivative liabilities | | Total derivative liabilities | $ | 486 | | | $ | — | | | $ | 486 | | | $ | — | |
(1) Derivative fair values include accrued interest.
The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows:
Investment securities available for sale. The fair value of U.S. Treasury, government agency, mortgage-backed securities, and a portion of the corporate bonds are generally estimated using a third-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-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, 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 using inputs that are not directly observable. These securities are classified as Level 3.
Marketable equity securities. Equity securities are measured at fair value using observable closing prices. The valuation also considers the amount of market 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. Certain residential real estate loans originated to be soldfor sale to investors 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 considered 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 1312 — 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.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, 2022March 31, 2023 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 176160 | | | 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 | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Interest rate & other derivative — non-qualifying hedges | $ | 1 | | | Internal valuation model | | Not material | | | | |
December 31, 20212022 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 207174 | | | 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 | dollars in millions | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | dollars in millions | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| | Corporate Bonds | | Other Derivative Assets — Non-Qualifying | | Other Derivative Liabilities — Non-Qualifying | | Corporate Bonds | | Corporate Bonds | | Other Derivative Assets — Non-Qualifying | | Other Derivative Liabilities — Non-Qualifying | | Corporate Bonds | | Other Derivative Assets — Non-Qualifying | | Other Derivative Liabilities — Non-Qualifying |
Beginning balance | Beginning balance | $ | 207 | | | $ | — | | | $ | — | | | $ | 317 | | Beginning balance | $ | 174 | | | $ | — | | | $ | — | | | $ | 207 | | | $ | — | | | $ | — | |
Purchases | Purchases | — | | | — | | | 1 | | | 31 | | Purchases | — | | | — | | | — | | | — | | | — | | | 1 | |
Included in earnings | — | | | 1 | | | (1) | | | 2 | | |
Included in comprehensive income | (17) | | | — | | | — | | | 4 | | |
| Changes in FV included in earnings | | Changes in FV included in earnings | — | | | 1 | | | — | | | — | | | 1 | | | — | |
Changes in FV included in comprehensive income | | Changes in FV included in comprehensive income | (5) | | | — | | | — | | | (7) | | | — | | | — | |
Transfers in | | Transfers in | — | | | — | | | 1 | | | — | | | — | | | — | |
Transfers out | Transfers out | (14) | | | — | | | — | | | — | | Transfers out | — | | | — | | | — | | | (14) | | | — | | | — | |
Maturity and settlements | Maturity and settlements | — | | | — | | | — | | | (46) | | Maturity and settlements | (9) | | | — | | | — | | | — | | | — | | | — | |
Ending balance | Ending balance | $ | 176 | | | $ | 1 | | | $ | — | | | $ | 308 | | Ending balance | $ | 160 | | | $ | 1 | | | $ | 1 | | | $ | 186 | | | $ | 1 | | | $ | 1 | |
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, 2022March 31, 2023 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 | |
2022:
Aggregate Fair Value and UPB - Residential Real Estate Loans
48 | | | | | | | | | | | | | | | | | |
dollars in millions | March 31, 2023 |
| Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 9 | | | $ | 9 | | | $ | — | |
| | | | | |
| December 31, 2022 |
| Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 4 | | | $ | 4 | | | $ | — | |
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$0 million for each of the three months ended September 30, 2022 and 2021 and a loss of $3 million for each of the ninethree months ended September 30,March 31, 2023 and 2022, and 2021.respectively. 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, 2022March 31, 2023 or December 31, 2021.2022.
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. Gains and losses related to assets held for sale and OREO for the three months ended March 31, 2023 were not significant.
Assets Measured at Fair Value - Non-recurring Basis
| dollars in millions | dollars in millions | Fair Value Measurements | | dollars in millions | Fair Value Measurements | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
September 30, 2022 | | | | | | | | | | |
March 31, 2023 | | March 31, 2023 | | | | | | | | | |
Assets held for sale - loans | | Assets held for sale - loans | $ | 9 | | | $ | — | | | $ | — | | | $ | 9 | | | $ | — | |
Loans - collateral dependent loans | | Loans - collateral dependent loans | 87 | | | — | | | — | | | 87 | | | (15) | |
Other real estate owned | | Other real estate owned | 36 | | | — | | | — | | | 36 | | | — | |
| Total | | Total | $ | 132 | | | $ | — | | | $ | — | | | $ | 132 | | | $ | (15) | |
December 31, 2022 | | December 31, 2022 | | | | | | | | | |
Assets held for sale - loans | Assets held for sale - loans | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | (1) | | Assets held for sale - loans | $ | 23 | | | $ | — | | | $ | — | | | $ | 23 | | | $ | (1) | |
Loans - collateral dependent loans | Loans - collateral dependent loans | 78 | | | — | | | — | | | 78 | | | (10) | | Loans - collateral dependent loans | 149 | | | — | | | — | | | 149 | | | (24) | |
Other real estate owned | Other real estate owned | 51 | | | — | | | — | | | 51 | | | 13 | | Other real estate owned | 43 | | | — | | | — | | | 43 | | | 14 | |
Mortgage servicing rights | Mortgage servicing rights | — | | | — | | | — | | | — | | | 1 | | Mortgage servicing rights | — | | | — | | | — | | | — | | | 1 | |
Total | Total | $ | 132 | | | $ | — | | | $ | — | | | $ | 132 | | | $ | 3 | | Total | $ | 215 | | | $ | — | | | $ | — | | | $ | 215 | | | $ | (10) | |
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. When available, the fair values for the transferred loans are based on quoted prices from the purchase 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 fair 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.LOCOM. 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%11%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2022March 31, 2023 and December 31, 2021,2022, the weighted average discount applied was 6.82%8.48% and 8.79%9.31%, 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 used to determine the fair value.
Financial Instruments Fair Value
The table below presents the carrying values and 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 | dollars in millions | September 30, 2022 | dollars in millions | March 31, 2023 |
| | | Estimated Fair Value | | | Estimated Fair Value |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | Financial Assets | | | | | | | | | | Financial Assets | | | | | | | | | |
Cash and due from banks | Cash and due from banks | $ | 481 | | | $ | 481 | | | $ | — | | | $ | — | | | $ | 481 | | Cash and due from banks | $ | 1,598 | | | $ | 1,598 | | | $ | — | | | $ | — | | | $ | 1,598 | |
Interest earning deposits at banks | Interest earning deposits at banks | 6,172 | | | 6,172 | | | — | | | — | | | 6,172 | | Interest earning deposits at banks | 38,522 | | | 38,522 | | | — | | | — | | | 38,522 | |
Investment in marketable equity securities | Investment in marketable equity securities | 92 | | | 30 | | | 62 | | | — | | | 92 | | Investment in marketable equity securities | 85 | | | 29 | | | 56 | | | — | | | 85 | |
Investment securities available for sale | Investment securities available for sale | 9,088 | | | — | | | 8,912 | | | 176 | | | 9,088 | | Investment securities available for sale | 9,061 | | | — | | | 8,901 | | | 160 | | | 9,061 | |
Investment securities held to maturity | Investment securities held to maturity | 9,661 | | | — | | | 8,166 | | | — | | | 8,166 | | Investment securities held to maturity | 10,381 | | | — | | | 8,993 | | | — | | | 8,993 | |
Loans held for sale | Loans held for sale | 18 | | | — | | | 7 | | | 14 | | | 21 | | Loans held for sale | 90 | | | — | | | 9 | | | 81 | | | 90 | |
Net loans | Net loans | 66,757 | | | — | | | 1,612 | | | 61,280 | | | 62,892 | | Net loans | 134,556 | | | — | | | 1,576 | | | 130,572 | | | 132,148 | |
Accrued interest receivable | Accrued interest receivable | 286 | | | — | | | 286 | | | — | | | 286 | | Accrued interest receivable | 772 | | | — | | | 772 | | | — | | | 772 | |
Federal Home Loan Bank stock | Federal Home Loan Bank stock | 234 | | | — | | | 234 | | | — | | | 234 | | Federal Home Loan Bank stock | 393 | | | — | | | 393 | | | — | | | 393 | |
| Mortgage and other servicing rights | Mortgage and other servicing rights | 26 | | | — | | | — | | | 48 | | | 48 | | Mortgage and other servicing rights | 25 | | | — | | | — | | | 45 | | | 45 | |
Derivative assets | Derivative assets | 149 | | | — | | | 148 | | | 1 | | | 149 | | Derivative assets | 547 | | | — | | | 546 | | | 1 | | | 547 | |
Financial Liabilities | Financial Liabilities | | Financial Liabilities | |
Deposits | 87,553 | | | — | | | 87,435 | | | — | | | 87,435 | | |
| Deposits with no stated maturity | | Deposits with no stated maturity | 126,922 | | | — | | | 126,922 | | | — | | | 126,922 | |
Time deposits | | Time deposits | 13,128 | | | — | | | 13,055 | | | — | | | 13,055 | |
Credit balances of factoring clients | Credit balances of factoring clients | 1,147 | | | — | | | — | | | 1,147 | | | 1,147 | | Credit balances of factoring clients | 1,126 | | | — | | | — | | | 1,126 | | | 1,126 | |
Securities sold under customer repurchase agreements | Securities sold under customer repurchase agreements | 578 | | | — | | | 578 | | | — | | | 578 | | Securities sold under customer repurchase agreements | 509 | | | — | | | 509 | | | — | | | 509 | |
Other short-term borrowings | Other short-term borrowings | 2,550 | | | — | | | 2,550 | | | — | | | 2,550 | | Other short-term borrowings | 500 | | | — | | | 500 | | | — | | | 500 | |
Long-term borrowings | Long-term borrowings | 5,207 | | | — | | | 5,042 | | | 17 | | | 5,059 | | Long-term borrowings | 45,078 | | | — | | | 45,048 | | | — | | | 45,048 | |
Accrued interest payable | Accrued interest payable | 35 | | | — | | | 35 | | | — | | | 35 | | Accrued interest payable | 150 | | | — | | | 150 | | | — | | | 150 | |
Derivative liabilities | Derivative liabilities | 500 | | | — | | | 500 | | | — | | | 500 | | Derivative liabilities | 791 | | | — | | | 790 | | | 1 | | | 791 | |
| | | December 31, 2021 | | December 31, 2022 |
| | | Estimated Fair Value | | | Estimated Fair Value |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | Financial Assets | | | | | | | | | | Financial Assets | | | | | | | | | |
Cash and due from banks | Cash and due from banks | $ | 338 | | | $ | 338 | | | $ | — | | | $ | — | | | $ | 338 | | Cash and due from banks | $ | 518 | | | $ | 518 | | | $ | — | | | $ | — | | | $ | 518 | |
Interest earning deposits at banks | Interest earning deposits at banks | 9,115 | | | 9,115 | | | — | | | — | | | 9,115 | | Interest earning deposits at banks | 5,025 | | | 5,025 | | | — | | | — | | | 5,025 | |
Investment in marketable equity securities | Investment in marketable equity securities | 98 | | | 34 | | | 64 | | | — | | | 98 | | Investment in marketable equity securities | 95 | | | 32 | | | 63 | | | — | | | 95 | |
Investment securities available for sale | Investment securities available for sale | 9,203 | | | — | | | 8,996 | | | 207 | | | 9,203 | | Investment securities available for sale | 8,995 | | | — | | | 8,821 | | | 174 | | | 8,995 | |
Investment securities held to maturity | Investment securities held to maturity | 3,809 | | | — | | | 3,759 | | | — | | | 3,759 | | Investment securities held to maturity | 10,279 | | | — | | | 8,795 | | | — | | | 8,795 | |
Loans held for sale | Loans held for sale | 99 | | | — | | | 99 | | | — | | | 99 | | Loans held for sale | 52 | | | — | | | 4 | | | 45 | | | 49 | |
Net loans | Net loans | 32,193 | | | — | | | — | | | 31,890 | | | 31,890 | | Net loans | 67,720 | | | — | | | 1,679 | | | 62,633 | | | 64,312 | |
Accrued interest receivable | Accrued interest receivable | 134 | | | — | | | 134 | | | — | | | 134 | | Accrued interest receivable | 329 | | | — | | | 329 | | | — | | | 329 | |
Federal Home Loan Bank stock | Federal Home Loan Bank stock | 40 | | | — | | | 40 | | | — | | | 40 | | Federal Home Loan Bank stock | 197 | | | — | | | 197 | | | — | | | 197 | |
| Mortgage and other servicing rights | Mortgage and other servicing rights | 23 | | | — | | | — | | | 23 | | | 23 | | Mortgage and other servicing rights | 25 | | | — | | | — | | | 47 | | | 47 | |
Derivative assets | | Derivative assets | 159 | | | — | | | 159 | | | — | | | 159 | |
Financial Liabilities | Financial Liabilities | | Financial Liabilities | |
Deposits with no stated maturity | Deposits with no stated maturity | 48,925 | | | — | | | 48,925 | | | — | | | 48,925 | | Deposits with no stated maturity | 78,798 | | | — | | | 78,798 | | | — | | | 78,798 | |
Time deposits | Time deposits | 2,481 | | | — | | | 2,471 | | | — | | | 2,471 | | Time deposits | 10,610 | | | — | | | 10,504 | | | — | | | 10,504 | |
Credit balances of factoring clients | | Credit balances of factoring clients | 995 | | | — | | | — | | | 995 | | | 995 | |
Securities sold under customer repurchase agreements | Securities sold under customer repurchase agreements | 589 | | | — | | | 589 | | | — | | | 589 | | Securities sold under customer repurchase agreements | 436 | | | — | | | 436 | | | — | | | 436 | |
| Other short-term borrowings | | Other short-term borrowings | 1,750 | | | — | | | 1,750 | | | — | | | 1,750 | |
Long-term borrowings | Long-term borrowings | 1,195 | | | — | | | 1,222 | | | — | | | 1,222 | | Long-term borrowings | 4,452 | | | — | | | 4,312 | | | 18 | | | 4,330 | |
| Accrued interest payable | Accrued interest payable | 8 | | | — | | | 8 | | | — | | | 8 | | Accrued interest payable | 57 | | | — | | | 57 | | | — | | | 57 | |
Derivative liabilities | | Derivative liabilities | 486 | | | — | | | 486 | | | — | | | 486 | |
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 is net 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 significance 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 approximates 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 BankSupranational Entities and Multilateral Development Banks and FDIC guaranteed CDs with other financial institutions. We primarily use prices obtained from pricing services to determine the fair value of securities, which are Level 2 inputs.
FHLB stock. 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 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. Therefore, servicing rights are carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is determined using a pooling methodology. Similar loans are pooled together and a model which 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. The estimated fair value of deposits 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 inconsequential due to the short term nature of these balances, therefore, the fair value approximated carrying value, and the credit balances were classified as Level 33.
Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables.borrowings. The fair value approximates carrying value and are classified as Level 2.
Long-term Borrowings. For certain long-term senior and subordinated unsecured borrowings, the fair values are determined based on recent trades or salessourced from a third-party pricing service. The fair value of the actual security, if available. Otherwise, fair valuesother long-term borrowings are estimateddetermined 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 consideredclassified as Level 2 inputs.2. The fair value of other secured borrowings wasare estimated based on unobservable inputs and aretherefore classified as Level 3.
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2022March 31, 2023 and December 31, 2021.2022. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short-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, and interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Accrued interest receivable and accrued interest payable are classified as Level 2.
NOTE 1615 — STOCKHOLDERS' EQUITY
A roll forward of common stock activity is presented in the following table.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 | |
| | | | | | | | | | | |
| Outstanding |
| Class A | | Class B |
Common stock - December 31, 2022 | 13,501,017 | | | 1,005,185 | |
| | | |
Restricted stock units vested, net of shares held to cover taxes | 13,791 | | | — | |
Common stock - March 31, 2023 | 13,514,808 | | | 1,005,185 | |
Common Stock
The Parent Company has Class A Common Stock and Class B common stock (“Class B Common Stock.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.
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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 |
Preferred Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions, except per share and par value data |
Preferred Stock | | Issuance Date | | Earliest Redemption Date | | Par Value | | Authorized Shares | | | | | | 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 on March 15, June 15, September 15, and December 15 |
Series B | | January 3, 2022 | | January 4, 2027 | | $ | 0.01 | | | 325,000 | | | | | | $ | 1,000 | | | 325 | | LIBOR + 3.792% | |
Series C | | January 3, 2022 | | January 4, 2027 | | $ | 0.01 | | | 8,000,000 | | | | | | $ | 25 | | | 200 | | 5.625% | |
Dividends on BancShares Series A, B, and C Preferred Stock (together, “BancShares Preferred Stock”) will be paid when, as, and if declared by the BoardFor further description of DirectorsBancShares’ non-cumulative perpetual preferred stock, refer to Note 17 — Stockholders’ Equity in Item 8 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,our 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.Form 10-K.
NOTE 1716 — 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 | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
| | Gross Unrealized | | Income Taxes | | Net Unrealized | | Gross Unrealized | | Income Taxes | | Net Unrealized | | Gross Unrealized | | Income Taxes | | Net Unrealized | | Gross Unrealized | | Income Taxes | | Net Unrealized |
Unrealized loss on securities available for sale | Unrealized loss on securities available for sale | $ | (995) | | | $ | 239 | | | $ | (756) | | | $ | (12) | | | $ | 3 | | | $ | (9) | | Unrealized loss on securities available for sale | $ | (894) | | | $ | 213 | | | $ | (681) | | | $ | (972) | | | $ | 233 | | | $ | (739) | |
Unrealized loss on securities available for sale transferred to securities held to maturity | Unrealized loss on securities available for sale transferred to securities held to maturity | (8) | | | 2 | | | (6) | | | (9) | | | 2 | | | (7) | | Unrealized loss on securities available for sale transferred to securities held to maturity | (8) | | | 2 | | | (6) | | | (8) | | | 2 | | | (6) | |
Defined benefit pension items | Defined benefit pension items | 43 | | | (10) | | | 33 | | | 34 | | | (8) | | | 26 | | Defined benefit pension items | 23 | | | (5) | | | 18 | | | 13 | | | (3) | | | 10 | |
| Total accumulated other comprehensive (loss) income | $ | (960) | | | $ | 231 | | | $ | (729) | | | $ | 13 | | | $ | (3) | | | $ | 10 | | |
Total accumulated other comprehensive loss | | Total accumulated other comprehensive loss | $ | (879) | | | $ | 210 | | | $ | (669) | | | $ | (967) | | | $ | 232 | | | $ | (735) | |
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 | 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 | 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, 2022 | | Balance as of December 31, 2022 | $ | (739) | | | $ | (6) | | | $ | 10 | | | | $ | (735) | |
AOCI activity before reclassifications | | AOCI activity before reclassifications | 45 | | | — | | | 8 | | | | 53 | |
Amounts reclassified from AOCI | | Amounts reclassified from AOCI | 13 | | | — | | | — | | | | 13 | |
Other comprehensive income for the period | | Other comprehensive income for the period | 58 | | | — | | | 8 | | | | 66 | |
Balance as of March 31, 2023 | | Balance as of March 31, 2023 | $ | (681) | | | $ | (6) | | | $ | 18 | | | | $ | (669) | |
| Balance as of December 31, 2021 | Balance as of December 31, 2021 | $ | (9) | | | $ | (7) | | | $ | 26 | | | | $ | 10 | | Balance as of December 31, 2021 | $ | (9) | | | $ | (7) | | | $ | 26 | | | | $ | 10 | |
AOCI activity before reclassifications | AOCI activity before reclassifications | (747) | | | — | | | — | | | | (747) | | AOCI activity before reclassifications | (318) | | | — | | | — | | | | (318) | |
Amounts reclassified from AOCI | Amounts reclassified from AOCI | — | | | 1 | | | 7 | | | | 8 | | Amounts reclassified from AOCI | — | | | 1 | | | 2 | | | | 3 | |
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 (loss) income for the period | | Other comprehensive (loss) income for the period | (318) | | | 1 | | | 2 | | | | (315) | |
Balance as of March 31, 2022 | | Balance as of March 31, 2022 | $ | (327) | | | $ | (6) | | | $ | 28 | | | | $ | (305) | |
Other Comprehensive Income
The amounts included in the Condensed Consolidated Statements of Comprehensive Income are net of income taxes. The following table presents the pretax and after-tax components of other comprehensive income.income:
Other Comprehensive Income (Loss) by Component
| dollars in millions | dollars in millions | Three Months Ended September 30, | | dollars in millions | Three Months Ended March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| | Gross Amount | | Tax | | Net Amount | | Gross Amount | | Tax | | Net Amount | | Income Statement Line Item | | Gross Amount | | Tax | | Net Amount | | Gross Amount | | Tax | | Net Amount | | Income Statement Line Items |
| 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 | | | |
Defined benefit pension items | | Defined benefit pension items | | | | | | | | | | | | |
Actuarial (loss) gain | | Actuarial (loss) gain | $ | 10 | | | $ | (2) | | | $ | 8 | | | $ | — | | | $ | — | | | $ | — | | |
Amounts reclassified from AOCI | | Amounts reclassified from AOCI | — | | | — | | | — | | | 3 | | | (1) | | | 2 | | | Other noninterest expense |
Other comprehensive (loss) income for defined benefit pension items | | Other comprehensive (loss) income for defined benefit pension items | $ | 10 | | | $ | (2) | | | $ | 8 | | | $ | 3 | | | $ | (1) | | | $ | 2 | | |
| Unrealized loss on securities available for sale transferred to securities held to maturity | Unrealized loss on securities available for sale transferred to securities held to maturity | | Unrealized loss on securities available for sale transferred to securities held to maturity | |
AOCI activity before reclassification | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Amounts reclassified from AOCI | | Amounts reclassified from AOCI | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
Reclassifications out of AOCI | Reclassifications out of AOCI | — | | | — | | | — | | | (1) | | | — | | | (1) | | | Interest on investment securities | Reclassifications out of AOCI | — | | | — | | | — | | | 1 | | | — | | | 1 | | | Interest on investment securities |
Net Change | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | | | |
Other comprehensive income (loss) on securities available for sale transferred to securities held to maturity | | Other comprehensive income (loss) on securities available for sale transferred to securities held to maturity | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | | |
| Unrealized loss on securities available for sale | Unrealized loss on securities available for sale | | Unrealized loss on securities available for sale | |
AOCI activity before reclassification | AOCI activity before reclassification | $ | (348) | | | $ | 82 | | | $ | (266) | | | $ | (11) | | | $ | 3 | | | $ | (8) | | | AOCI activity before reclassification | $ | 60 | | | $ | (15) | | | $ | 45 | | | $ | (419) | | | $ | 101 | | | $ | (318) | | |
Reclassifications out of AOCI | Reclassifications out of AOCI | — | | | — | | | — | | | (8) | | 1 | | (7) | | Realized gain on sales of investment securities available for sale, net | Reclassifications out of AOCI | 18 | | | (5) | | | 13 | | | — | | | — | | | — | | | $14 realized loss on sales of investment securities available for sale, net; $4 provision for credit losses |
Net Change | $ | (348) | | | $ | 82 | | | $ | (266) | | | $ | (19) | | | $ | 4 | | | $ | (15) | | | |
Net current period AOCI | $ | (346) | | | $ | 82 | | | $ | (264) | | | $ | (13) | | | $ | 3 | | | $ | (10) | | | |
Other comprehensive loss on securities available for sale | | Other comprehensive loss on securities available for sale | $ | 78 | | | $ | (20) | | | $ | 58 | | | $ | (419) | | | $ | 101 | | | $ | (318) | | |
Total other comprehensive loss | | Total other comprehensive loss | $ | 88 | | | $ | (22) | | | $ | 66 | | | $ | (415) | | | $ | 100 | | | $ | (315) | | |
| | | 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 1817 — 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 institution’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%2.50% were fully phased in by January 1, 2019.
The following table includes the Basel III requirements for regulatory capital ratios.
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| 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, 2022March 31, 2023 and December 31, 20212022 as summarized in the following table.
| dollars in millions | dollars in millions | | September 30, 2022 | | December 31, 2021 | dollars in millions | | March 31, 2023 | | December 31, 2022 |
| | Basel III Requirements | | PCA well-capitalized thresholds | | Amount | | Ratio | | Amount | | Ratio | | Basel III Requirements | | PCA well-capitalized thresholds | | Amount | | Ratio | | Amount | | Ratio |
BancShares | BancShares | | | | | | | | | | | | BancShares | | | | | | | | | | | |
Total risk-based capital | Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 11,927 | | | 13.46 | % | | $ | 5,042 | | | 14.35 | % | Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 21,764 | | | 14.86 | % | | $ | 11,799 | | | 13.18 | % |
Tier 1 risk-based capital | Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,066 | | | 11.36 | | | 4,380 | | | 12.47 | | Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 19,225 | | | 13.13 | | | 9,902 | | | 11.06 | |
Common equity Tier 1 | Common equity Tier 1 | 7.00 | | | 6.50 | | | 9,185 | | | 10.37 | | | 4,041 | | | 11.50 | | Common equity Tier 1 | 7.00 | | | 6.50 | | | 18,344 | | | 12.53 | | | 9,021 | | | 10.08 | |
Tier 1 leverage | Tier 1 leverage | 4.00 | | | 5.00 | | | 10,066 | | | 9.31 | | | 4,380 | | | 7.59 | | Tier 1 leverage | 4.00 | | | 5.00 | | | 19,225 | | | 16.72 | | | 9,902 | | | 8.99 | |
FCB | FCB | | FCB | |
Total risk-based capital | Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 11,732 | | | 13.26 | % | | $ | 4,858 | | | 13.85 | % | Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 21,578 | | | 14.74 | % | | $ | 11,627 | | | 12.99 | % |
Tier 1 risk-based capital | Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,327 | | | 11.67 | | | 4,651 | | | 13.26 | | Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 19,495 | | | 13.32 | | | 10,186 | | | 11.38 | |
Common equity Tier 1 | Common equity Tier 1 | 7.00 | | | 6.50 | | | 10,327 | | | 11.67 | | | 4,651 | | | 13.26 | | Common equity Tier 1 | 7.00 | | | 6.50 | | | 19,495 | | | 13.32 | | | 10,186 | | | 11.38 | |
Tier 1 leverage | Tier 1 leverage | 4.00 | | | 5.00 | | | 10,327 | | | 9.56 | | | 4,651 | | | 8.07 | | Tier 1 leverage | 4.00 | | | 5.00 | | | 19,495 | | | 16.97 | | | 10,186 | | | 9.25 | |
At September 30, 2022,March 31, 2023, BancShares and FCB had total risk-based capital ratio conservation buffers of 5.36%6.86% and 5.26%6.74%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021,2022, BancShares and FCB had risk-based capital ratio conservation buffers of 6.35%5.06% and 5.85%4.99%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of September 30, 2022March 31, 2023 and December 31, 20212022 over the Basel III minimum.minimum for the ratio that is the binding constraint.
Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 1615 — 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$6.94 billion while continuing to meet the requirements for well-capitalized banks at September 30, 2022.March 31, 2023. Dividends declared by FCB and paid to the Parent Company amounted to $930$52 million for the ninethree months ended September 30, 2022.March 31, 2023. 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 1918 — EARNINGS PER COMMON SHARE
The following table 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. | | | | | | | | | | | | | | | |
dollars in millions, except per share data | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Net income | | | | | $ | 9,518 | | | $ | 271 | |
Preferred stock dividends | | | | | 14 | | | 7 | |
Net income available to common stockholders | | | | | $ | 9,504 | | | $ | 264 | |
Weighted average common shares outstanding | | | | | | | |
Basic shares outstanding | | | | | 14,526,693 | | | 15,779,153 | |
Stock-based awards | | | | | 13,016 | | | — | |
Diluted shares outstanding | | | | | 14,539,709 | | | 15,779,153 | |
Earnings per common share | | | | | | | |
Basic | | | | | $ | 654.22 | | | $ | 16.70 | |
Diluted | | | | | $ | 653.64 | | | $ | 16.70 | |
NOTE 2019 — INCOME TAXES
BancShares’ global effective income tax rate was 22.9%(0.5)% and 13.3%(20.4)% for the three and nine months ended September 30,March 31, 2023 and 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, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 was primarily driven by the increase in state and local 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 was primarily driven by the non-taxable nature ofdue to the bargain purchase gain arising fromrelating to the CIT Merger.SVBB Acquisition.
The quarterly income tax expense is based on a projection of BancShares’ annual effective tax rate (“ETR”). This annual ETR is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. The ETR each period is also impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to the valuation allowances, and discrete items. The currently forecasted ETR may vary from the actual year-end 20222023 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 result of the CIT Merger,SVBB Acquisition, BancShares’ net deferred tax liabilities increased by approximately $297 million. That amount included an increase$3.31 billion, primarily related to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costsacquired loans and tax credits net of deferred tax liabilities primarily from operating leases.other assets.
BancShares’ ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, adjustments to the valuation allowance adjustments may be adjusted accordingly.required.
NOTE 2120 — EMPLOYEE BENEFIT PLANS
BancShares sponsors non-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.
The components of net periodic benefit cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $ | 3 | | | $ | 4 | | | $ | 10 | | | $ | 12 | |
Interest cost | 11 | | | 7 | | | 33 | | | 22 | |
Expected return on assets | (22) | | | (20) | | | (65) | | | (59) | |
Amortization of prior service cost | — | | | — | | | — | | | — | |
Amortization of net actuarial loss | 3 | | | 7 | | | 9 | | | 20 | |
Net periodic benefit | $ | (5) | | | $ | (2) | | | $ | (13) | | | $ | (5) | |
No discretionary contribution was made to the pension plans during the nine months ended September 30, 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, 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 | |
| | | | | | | | | | | |
dollars in millions | Three Months Ended March 31, |
| 2023 | | 2022 |
Service cost | $ | 2 | | | $ | 3 | |
Interest cost | 15 | | | 11 | |
Expected return on assets | (21) | | | (22) | |
Amortization of prior service cost | — | | | — | |
Amortization of net actuarial loss | — | | | 3 | |
Net periodic benefit | $ | (4) | | | $ | (5) | |
NOTE 2221 — BUSINESS SEGMENT INFORMATION
As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multipleBancShares’ segments during the first quarter of 2022. BancShares now has three operating segments:include General Banking, Commercial Banking, anda new segment Silicon Valley Banking that includes the operating results for the SVBB Acquisition, as well as 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 products and services to individualsconsumers and businesses through an extensive branch network digital banking, telephone bankingof branches and various ATM networks,digital channels, including a full suite of deposit products, loans (primarily residential mortgages and business/commercial loans), and various fee-based services. General Banking also provides:provides a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; andservices. In addition, General Banking has a dedicated business line that supports 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.companies nationwide. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking and advisory services.
Commercial Banking
Commercial Banking provides a range of lending, leasing, capital markets, asset management and other financial and advisory services primarily to small and middle-marketmiddle market companies across selectin a wide range of industries. Loans offered are primarily senior secured loans collateralized by accounts receivable, inventory, machinery and equipment, transportation equipment and/or intangibles, and are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature of the collateral, may be referred to as collateral-backed loans, asset-based loans or cash flow loans. Commercial Banking provides senior secured loans to developers and other commercial real estate professionals, and also provides small business loans and leases, including both capital and operating leases, through a highly automated credit approval, documentation and funding process. Commercial Banking also provides asset-based lending, factoring, receivablesreceivable management, products and supply chain financing. secured financing to businesses that operate in various industries.
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.
Silicon Valley Banking
Silicon Valley Banking offers products and services to commercial clients in key innovation markets, such as healthcare and technology industries, as well as private equity and venture capital firms. The segment provides solutions to the financial needs of commercial clients through credit, treasury management, foreign exchange, trade finance and other services. In addition, the segment offers private banking and wealth management and provides a range of personal financial solutions for consumers. Private banking and wealth management clients consist of private equity/venture capital professionals and executive leaders of the innovation companies they support and premium wine clients. The segment offers a customized suite of private banking services, including mortgages, home equity lines of credit, restricted and private stock loans, capital call lines of credit, other secured and unsecured lending products and vineyard development loans, as well as planning-based financial strategies, wealth management, family office, financial planning, tax planning and trust services.
Revenue is primarily generated from interest earned on loans, and fees and other revenue from lending activities and banking services.
Deposit products include business and analysis checking accounts, money market accounts, multi-currency accounts, bank accounts, sweep accounts and positive pay services. Services are provided through online and mobile banking platforms, as well as branch locations.
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;cement, tank cars for energy products and chemicals;chemicals, gondolas for coal, steel coil and mill service products;products, open hopper cars for coal and aggregates;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.segment, inclusive of similar items related to Silicon Valley Banking. 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-relatedacquisition-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:as the Initial Non-PCD Provision for loans and leases and unfunded commitments;commitments and the preliminary gain on acquisition, each of which are related to the CIT Merger.acquisition.
Segment Net Income (Loss) and Select Period End Balances
The following table presents the condensed income statement by segment.segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | dollars in millions | Nine Months Ended September 30, 2022 | dollars in millions | Three Months Ended March 31, 2023 |
| | General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares | | General Banking | | Commercial Banking | | Silicon Valley Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | Net interest income (expense) | $ | 1,400 | | | $ | 641 | | | $ | (58) | | | $ | 161 | | | $ | 2,144 | | Net interest income (expense) | $ | 560 | | | $ | 240 | | | $ | 65 | | | $ | (28) | | | $ | 13 | | | $ | 850 | |
(Benefit) provision for credit losses | (7) | | | 60 | | | — | | | 513 | | | 566 | | |
Provision for credit losses | | Provision for credit losses | 14 | | | 49 | | | — | | | — | | | 720 | | | 783 | |
Net interest income (expense) after provision for credit losses | Net interest income (expense) after provision for credit losses | 1,407 | | | 581 | | | (58) | | | (352) | | | 1,578 | | Net interest income (expense) after provision for credit losses | 546 | | | 191 | | | 65 | | | (28) | | | (707) | | | 67 | |
Noninterest income | Noninterest income | 365 | | | 376 | | | 493 | | | 473 | | | 1,707 | | Noninterest income | 116 | | | 143 | | | 14 | | | 177 | | | 9,809 | | | 10,259 | |
Noninterest expense | Noninterest expense | 1,210 | | | 557 | | | 320 | | | 228 | | | 2,315 | | Noninterest expense | 395 | | | 211 | | | 33 | | | 120 | | | 96 | | | 855 | |
Income (loss) before income taxes | 562 | | | 400 | | | 115 | | | (107) | | | 970 | | |
Income before income taxes | | Income before income taxes | 267 | | | 123 | | | 46 | | | 29 | | | 9,006 | | | 9,471 | |
Income tax expense (benefit) | Income tax expense (benefit) | 134 | | | 90 | | | 28 | | | (123) | | | 129 | | Income tax expense (benefit) | 65 | | | 29 | | | 11 | | | 7 | | | (159) | | | (47) | |
Net income | Net income | $ | 428 | | | $ | 310 | | | $ | 87 | | | $ | 16 | | | $ | 841 | | Net income | $ | 202 | | | $ | 94 | | | $ | 35 | | | $ | 22 | | | $ | 9,165 | | | $ | 9,518 | |
Select Period End Balances | | Select Period End Balances | | | | | | | | | | | |
Loans and leases | | Loans and leases | $ | 43,353 | | | $ | 28,684 | | | $ | 66,171 | | | $ | 80 | | | $ | — | | | $ | 138,288 | |
Deposits | | Deposits | 85,982 | | | 3,045 | | | 49,259 | | | 14 | | | 1,750 | | | 140,050 | |
Operating lease equipment, net | | Operating lease equipment, net | — | | | 719 | | | — | | | 7,612 | | | — | | | 8,331 | |
| | | Nine Months Ended September 30, 2021 | | Three Months Ended March 31, 2022 |
| | General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares | | General Banking | | Commercial Banking | | Silicon Valley Banking | | Rail | | Corporate | | Total BancShares |
Net interest income (expense) | Net interest income (expense) | $ | 1,071 | | | $ | 12 | | | $ | — | | | $ | (50) | | | $ | 1,033 | | Net interest income (expense) | $ | 437 | | | $ | 207 | | | $ | — | | | $ | (19) | | | $ | 24 | | | $ | 649 | |
Benefit for credit losses | (32) | | | — | | | — | | | — | | | (32) | | |
(Benefit) provision for credit losses | | (Benefit) provision for credit losses | (15) | | | (34) | | | — | | | — | | | 513 | | | 464 | |
Net interest income (expense) after benefit for credit losses | Net interest income (expense) after benefit for credit losses | 1,103 | | | 12 | | | — | | | (50) | | | 1,065 | | Net interest income (expense) after benefit for credit losses | 452 | | | 241 | | | — | | | (19) | | | (489) | | | 185 | |
Noninterest income | Noninterest income | 325 | | | — | | | — | | | 69 | | | 394 | | Noninterest income | 123 | | | 112 | | | — | | | 162 | | | 453 | | | 850 | |
Noninterest expense | Noninterest expense | 875 | | | 3 | | | — | | | 33 | | | 911 | | Noninterest expense | 409 | | | 191 | | | — | | | 100 | | | 110 | | | 810 | |
Income (loss) before income taxes | Income (loss) before income taxes | 553 | | | 9 | | | — | | | (14) | | | 548 | | Income (loss) before income taxes | 166 | | | 162 | | | — | | | 43 | | | (146) | | | 225 | |
Income tax expense (benefit) | Income tax expense (benefit) | 125 | | | 2 | | | — | | | (3) | | | 124 | | Income tax expense (benefit) | 40 | | | 41 | | | — | | | 11 | | | (138) | | | (46) | |
Net income (loss) | Net income (loss) | $ | 428 | | | $ | 7 | | | $ | — | | | $ | (11) | | | $ | 424 | | Net income (loss) | $ | 126 | | | $ | 121 | | | $ | — | | | $ | 32 | | | $ | (8) | | | $ | 271 | |
Select Period End Balances | | Select Period End Balances | | | | | | | | | | | |
Loans and leases | | Loans and leases | $ | 38,528 | | | $ | 26,922 | | | $ | — | | | $ | 67 | | | $ | 7 | | | $ | 65,524 | |
Deposits | | Deposits | 85,458 | | | 4,698 | | | — | | | 13 | | | 1,428 | | | 91,597 | |
Operating lease equipment, net | | Operating lease equipment, net | — | | | 721 | | | — | | | 7,251 | | | — | | | 7,972 | |
NOTE 2322 — 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 below balances for March 31, 2023 include balances related to the SVBB Acquisition. The balances acquired are included in Financing Commitments and Letters of Credit.
The accompanying table summarizes credit-related commitments and other purchase and funding commitments:
| dollars in millions | dollars in millions | September 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Financing Commitments | Financing Commitments | | | | Financing Commitments | | | |
Financing assets (excluding leases) | Financing assets (excluding leases) | $ | 23,373 | | | $ | 13,011 | | Financing assets (excluding leases) | $ | 74,507 | | | $ | 23,452 | |
Letters of Credit | Letters of Credit | | Letters of Credit | |
Standby letters of credit | Standby letters of credit | 412 | | | 92 | | Standby letters of credit | 3,928 | | | 436 | |
Other letters of credit | Other letters of credit | 47 | | | 24 | | Other letters of credit | 111 | | | 44 | |
Deferred Purchase Agreements | Deferred Purchase Agreements | 2,152 | | | — | | Deferred Purchase Agreements | 1,707 | | | 2,039 | |
Purchase and Funding Commitments(1) | Purchase and Funding Commitments(1) | 922 | | | — | | Purchase and Funding Commitments(1) | 869 | | | 941 | |
(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. 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,March 31, 2023 and December 31, 2022, substantially all undrawn financing commitments were senior facilities. Most of theThe undrawn and available financing commitments are primarily in the Silicon Valley Banking and Commercial Banking segment.segments. Financing commitments also include approximately $67$74 million and $66 million at March 31, 2023 and December 31, 2022, respectively, 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 to pay the beneficiary thereof if drawn upon by the beneficiary upon satisfaction of 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$170 million and $186 million at September 30,March 31, 2023 and December 31, 2022, respectively, 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 table above includes $2.0$1.60 billion and $1.90 billion of DPA exposures at September 30,March 31, 2023 and December 31, 2022, respectively, related to receivables on which BancShares has assumed the credit risk. The table also includes $123$110 million and $138 million available under DPA credit line agreements provided at September 30, 2022.March 31, 2023 and December 31, 2022, respectively. 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 litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed.
As part of the 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, 2022.March 31, 2023. The Litigation matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate.
Those 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 unexpected 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. These 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 entered into in the ordinary course of business that are accounted for under the equity or cost methods. Other assets included $722 million at September 30, 2022 and $169 million at December 31, 2021, of tax credit investments and investments in unconsolidated entities relating to such transactions.
The combination of investments in and loans to unconsolidated entities represents BancShares’ maximum exposure to loss, as BancShares does not provide guarantees or other forms of indemnification to 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 is presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” or “BancShares”) and its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”). Unless otherwise noted, the terms “we,” “us,” “our,” and “BancShares” in this section refer to the consolidated financial position and consolidated results of operations for BancShares.
This MD&A is expected to provide our investors with a view of BancShares’our financial condition and results of operations from our management’s perspective. This discussion and analysisMD&A should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q, along with our consolidated financial statements and related MD&A of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 Form 10-K”). Throughout this MD&A, references to a specific “Note” refer to Notes to the unaudited Consolidated Financial Statements.
Intercompany accounts and transactions have been eliminated. Although certain amounts for the prior yearsyear have been reclassified to conform to statement presentations for 2022,2023, the reclassifications had no effect on stockholders’ equity or net income as previously reported.
Throughout this MD&A we reference specific "Notes" Refer to our financial statements. These are Notes to the consolidated financial statementsfurther detail in Part I, Item 1. Financial Statements.Note 1 — Significant Accounting Policies and Basis of Presentation.
Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of BancShares. See the "Non-GAAP Financial Measurements" section of this MD&A for a reconciliation of these financial measures to the most directly comparable financial measures in accordance with GAAP.
On January 3, 2022, BancShares completed its largest acquisition to date withMarch 27, 2023, FCB acquired substantially all loans and certain other assets and assumed all customer deposits and certain other liabilities, of Silicon Valley Bridge Bank, N.A. (“SVBB”) from the merger with CIT Group Inc. (“CIT”Federal Deposit Insurance Corporation (the “FDIC”) and its subsidiary CIT Bank, N.A., a national banking association (“CIT Bank”), pursuant to the terms of a purchase and subject to the conditions set forth in the Agreement and Plan of Merger (as amended, the “Mergerassumption agreement (the “SVBB Purchase Agreement”) (such acquisition,by and among FCB, the “CIT Merger”FDIC, and the FDIC, as receiver of SVBB (the “SVBB Acquisition”). CIT had consolidated total assets of approximately $53.2 billion as of December 31, 2021. The CIT MergerSVBB Acquisition is briefly described further below and further discussed in Note 2 — Business Combinations. Financial
In conjunction with the SVBB Acquisition, we added a new business segment, Silicon Valley Banking (“SVB”), as further discussed below. BancShares’ financial data for periods prior to the CIT MergerSVBB Acquisition (i.e., periods in 2022) does not include any CIT related data,SVB, and therefore ismay not be directly comparable to the three and nine months ended September 30, 2022.financial data for periods in 2023.
EXECUTIVE OVERVIEW
The Parent Company is a bank holding company ("BHC") and Financial Holding Company (“FHC”). BancSharesThe Parent Company is regulated by the Board of Governors of the Federal Reserve System under the U.S. Bank Holding Company Act of 1956, as amended. BancSharesThe Parent Company is also registered under the BHC laws of North Carolina and is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks (“NCCOB”(the “NCCOB”). BancShares conducts its banking operations through its wholly-owned subsidiary, FCB, a state-chartered bank organized under the laws of the state of North Carolina. FCB is regulated by the NCCOB. In addition, FCB, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation (“FDIC”).FDIC.
BancShares’ earningsBancShares provides financial services for a wide range of consumer and cash flows are primarily derived from itscommercial clients. This includes retail and mortgage banking, wealth management, commercial and retailmiddle market banking, activities. Changesfactoring, and leasing. BancShares provides commercial factoring, receivables management and secured financing services to businesses (generally manufacturers or importers of goods) that operate in interest rates, credit quality, economic trendsvarious industries, including apparel, textile, furniture, home furnishings, and the capital marketsconsumer electronics.
In addition, BancShares owns a fleet of railcars and locomotives that are primary factors that drive the performance of BancShares.leased to railroads and shippers. We expanded ouralso provide various investment products and services with the CIT Merger,through FCB’s wholly owned subsidiaries, First Citizens Investor Services, Inc. (“FCIS”) and now have leased assets, primarily rail-related,First Citizens Asset Management, Inc. (“FCAM”). As a registered broker-dealer, FCIS provides a full range of investment products, including annuities, discount brokerage services and offer factoring services. We gather deposits from retailthird-party mutual funds. As registered investment advisors, FCIS 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,FCAM provide investment securities and 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 otheradvice. BancShares delivers products and services typicallyto its customers through an extensive branch network and additionally operates a nationwide direct bank (the “Direct Bank”). Services offered by banks. The feesat most branches include accepting deposits, cashing checks and service charges generated from these productsproviding for consumer and services are primary sources of noninterest income, which is an essential component of our total revenue.commercial cash needs. Consumer and business customers may also conduct banking transactions through various digital channels.
We are focused on expanding
The recently completed SVBB Acquisition adds a global fund banking business to serve private equity and venture capital clients and also compliments BancShares’ existing wealth management business by adding enhanced digital capabilities. The SVBB Acquisition further diversifies our position in legacyloan portfolio and target markets through organic growthbusiness mix, particularly across technology and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards,life sciences and our people.healthcare industries, and wealth clients.
Refer to our 20212022 Form 10-K for furthera discussion of our strategy.
Significant Events in 20222023
CIT MergerSVBB Acquisition
As discussed in detail in Note 2 — Business Combinations, the CIT MergerSVBB Acquisition closed on January 3, 2022. March 27, 2023 (the “SVBB Acquisition Date”).
Significant items related to the CIT MergerSVBB Acquisition are as follows:
•The fair value of total assets acquired was $53.8$106.60 billion, which mainly consistedconsists of approximately $32.7$68.50 billion of loans $7.8and $35.28 billion of operating lease equipmentcash 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.interest-earning deposits at banks.
•The fair value of deposits acquiredassumed 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.$55.96 billion.
•FCB recorded a preliminary gain on acquisition of $431 million,$9.82 billion (net of tax), representing the excess of the net assets acquired over the purchase price, and recorded a $143$230 million core deposit intangible and a $52 million intangible liability for net below market lessor lease contract rental rates related to the rail portfolio.intangible.
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, 2021,2022, 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 Corporate segments. In conjunction with the SVBB Acquisition, BancShares added a non-operatingnew business segment, Corporate. BancShares conformed the comparative priorSVB. 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.
were not impacted by this update. Information about our segments is included in Note 2221 — Business Segment Information and in the section entitled “Results by Business Segments” laterSegment” in this MD&A.
Recent Economic and Industry Developments
The Federal Reserve’s Federal Open Market Committee (“FOMC”) continued to raise its target for the federal funds rate in an effort to combat inflation. The FOMC raised interest rates at its January, March and May meetings by 25 basis points each. With these latest increases, the FOMC raised their benchmark federal funds rate to a range between 5.00% - 5.25%.
The FOMC stands ready in its efforts to control inflation and said it will monitor economic and financial-market developments and the effects of their earlier rate increases in determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time. 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 are likely to maintain 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.
In recent months, the banking industry has experienced increased volatility due to the failure of multiple high-profile banking institutions. These failures have increased industry concerns related to liquidity, deposit outflows, uninsured deposit concentrations, and unrealized losses on securities. Due to the recent uncertainty and related bank failures, there has been ongoing discussions that banking agencies may propose certain actions, including reforms that will require higher capital and increased requirements to issue long term debt, as well as special assessments to repay losses to the FDIC’s Deposit Insurance Fund. The impact of these potential actions, and any others, is unknown at this time.
Refer to the “Funding, Liquidity and Capital Overview” discussion below in the “Financial Performance Summary” section of this MD&A.
Financial Performance Summary
The following tables in this MD&A compare financial data for the three months ended March 31, 2023 (the “current quarter”) to financial data for the three months ended December 31, 2022 (the “linked quarter”) and March 31, 2022 (the “prior year quarter”). In accordance with Item 303(c) of Regulation S-K, we focus on the linked quarter for the narrative discussion and analysis of our results of operations as we believe this provides investors and other users of our data with the most relevant information. For our financial position, the following tables compare balances as of March 31, 2023 to December 31, 2022. Our results of operations include SVB beginning on the SVBB Acquisition Date. Financial position balances as of March 31, 2023 include the assets acquired and liabilities assumed in the SVBB Acquisition.
The following table summarizes the BancShares’ results in accordance with U.S. GAAP, unless otherwise noted. Refer to the section entitled “Non-GAAP Financial Measurements” at the end of this MD&A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.
Additionally, due to the CIT Merger, current quarter and year-to-date activity and ending and average balances are not comparable to the 2021 periods. Beginning with the second quarter of 2022, we presented a linked quarter comparison in the discussions of our consolidated results of operations 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 inclusion of the CIT Merger in both quarters. Further discussions are included in the remaining sections of this MD&A.
Table 1
Selected Quarterly Data
| dollars in millions, except share data | dollars in millions, except share data | Three Months Ended | | Nine Months Ended | dollars in millions, except share data | Three Months Ended | |
| | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
SUMMARY OF OPERATIONS | SUMMARY OF OPERATIONS | | | | | | | | | | SUMMARY OF OPERATIONS | | | | | | |
Interest income | Interest income | $ | 906 | | | $ | 757 | | | $ | 363 | | | $ | 2,373 | | | $ | 1,080 | | Interest income | $ | 1,211 | | | $ | 1,040 | | | $ | 710 | | |
Interest expense | Interest expense | 111 | | | 57 | | | 16 | | | 229 | | | 47 | | Interest expense | 361 | | | 238 | | | 61 | | |
Net interest income | Net interest income | 795 | | | 700 | | | 347 | | | 2,144 | | | 1,033 | | Net interest income | 850 | | | 802 | | | 649 | | |
Provision (benefit) for credit losses | Provision (benefit) for credit losses | 60 | | | 42 | | | (1) | | | 566 | | | (32) | | Provision (benefit) for credit losses | 783 | | | 79 | | | 464 | | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 735 | | | 658 | | | 348 | | | 1,578 | | | 1,065 | | Net interest income after provision for credit losses | 67 | | | 723 | | | 185 | | |
Noninterest income | Noninterest income | 433 | | | 424 | | | 124 | | | 1,707 | | | 394 | | Noninterest income | 10,259 | | | 429 | | | 850 | | |
Noninterest expense | Noninterest expense | 760 | | | 745 | | | 314 | | | 2,315 | | | 911 | | Noninterest expense | 855 | | | 760 | | | 810 | | |
Income before income taxes | Income before income taxes | 408 | | | 337 | | | 158 | | | 970 | | | 548 | | Income before income taxes | 9,471 | | | 392 | | | 225 | | |
Income taxes | 93 | | | 82 | | | 34 | | | 129 | | | 124 | | |
Income tax (benefit) expense | | Income tax (benefit) expense | (47) | | | 135 | | | (46) | | |
Net income | Net income | 315 | | | 255 | | | 124 | | | 841 | | | 424 | | Net income | 9,518 | | | 257 | | | 271 | | |
Preferred stock dividends | Preferred stock dividends | 12 | | | 17 | | | 5 | | | 36 | | | 14 | | Preferred stock dividends | 14 | | | 14 | | | 7 | | |
Net income available to common stockholders | Net income available to common stockholders | $ | 303 | | | $ | 238 | | | $ | 119 | | | $ | 805 | | | $ | 410 | | Net income available to common stockholders | $ | 9,504 | | | $ | 243 | | | $ | 264 | | |
| | PER COMMON SHARE DATA | PER COMMON SHARE DATA | | PER COMMON SHARE DATA | | |
Average diluted common shares | Average diluted common shares | 15,727,993 | | | 16,035,090 | | | 9,816,405 | | | 15,867,314 | | | 9,816,405 | | Average diluted common shares | 14,539,709 | | | 14,607,426 | | | 15,779,153 | | |
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 | | |
| Earnings per common share (diluted) | | Earnings per common share (diluted) | $ | 653.64 | | | $ | 16.67 | | | $ | 16.70 | | |
| KEY PERFORMANCE METRICS | KEY PERFORMANCE METRICS | | KEY PERFORMANCE METRICS | | |
Return on average assets (ROA) | Return on average assets (ROA) | 1.16 | % | | 0.95 | % | | 0.88 | % | | 1.03 | % | | 1.05 | % | Return on average assets (ROA) | 33.23 | % | | 0.93 | % | | 1.00 | % | |
| Return on average common stockholders' equity (ROE) | 12.49 | % | | 9.87 | % | | 11.29 | % | | 11.18 | % | | 13.50 | % | |
| Net interest margin (NIM)(1) | Net interest margin (NIM)(1) | 3.40 | % | | 3.04 | % | | 2.61 | % | | 3.06 | % | | 2.69 | % | Net interest margin (NIM)(1) | 3.41 | | | 3.36 | | | 2.73 | | |
| SELECTED QUARTERLY AVERAGE BALANCES | SELECTED QUARTERLY AVERAGE BALANCES | | SELECTED QUARTERLY AVERAGE BALANCES | | |
Total investments | $ | 19,119 | | | $ | 19,185 | | | $ | 10,708 | | | $ | 19,264 | | | $ | 10,337 | | |
Investment securities | | Investment securities | $ | 19,416 | | | $ | 18,876 | | | $ | 19,492 | | |
Total loans and leases(2) | Total loans and leases(2) | 68,824 | | | 66,488 | | | 32,708 | | | 66,885 | | | 32,985 | | Total loans and leases(2) | 74,907 | | | 70,465 | | | 65,303 | | |
Total operating lease equipment (net) | 7,981 | | | 7,973 | | | — | | | 7,960 | | | — | | |
Operating lease equipment, net | | Operating lease equipment, net | 8,236 | | | 8,049 | | | 7,924 | | |
Total assets | Total assets | 107,987 | | | 107,575 | | | 55,922 | | | 108,643 | | | 53,927 | | Total assets | 116,164 | | | 109,792 | | | 110,394 | | |
Total deposits | Total deposits | 88,422 | | | 90,621 | | | 49,107 | | | 90,209 | | | 47,254 | | Total deposits | 93,844 | | | 89,042 | | | 91,620 | | |
Total common stockholders' equity | 9,618 | | | 9,686 | | | 4,197 | | | 9,622 | | | 4,063 | | |
| Total stockholders’ equity | | Total stockholders’ equity | 11,369 | | | 9,621 | | | 10,423 | | |
| SELECTED QUARTER-END BALANCES | SELECTED QUARTER-END BALANCES | | SELECTED QUARTER-END BALANCES | | |
Total investments | $ | 18,841 | | | $ | 19,136 | | | $ | 10,875 | | | $ | 18,841 | | | $ | 10,875 | | |
Investment securities | | Investment securities | $ | 19,527 | | | $ | 19,369 | | | $ | 19,469 | | |
Total loans and leases | Total loans and leases | 69,790 | | | 67,735 | | | 32,516 | | | 69,790 | | | 32,516 | | Total loans and leases | 138,288 | | | 70,781 | | | 65,524 | | |
Total operating lease equipment (net) | 7,984 | | | 7,971 | | | — | | | 7,984 | | | — | | |
Operating lease equipment, net | | Operating lease equipment, net | 8,331 | | | 8,156 | | | 7,972 | | |
Total assets | Total assets | 109,310 | | | 107,673 | | | 56,902 | | | 109,310 | | | 56,902 | | Total assets | 214,658 | | | 109,298 | | | 108,597 | | |
Total deposits | Total deposits | 87,553 | | | 89,329 | | | 50,065 | | | 87,553 | | | 50,065 | | Total deposits | 140,050 | | | 89,408 | | | 91,597 | | |
Total common stockholders' equity | 8,952 | | | 9,761 | | | 4,242 | | | 8,952 | | | 4,242 | | |
| Total stockholders’ equity | | Total stockholders’ equity | 19,216 | | | 9,662 | | | 10,570 | | |
Loan to deposit ratio | Loan to deposit ratio | 79.71 | % | | 75.83 | % | | 64.95 | % | | 79.71 | % | | 64.95 | % | Loan to deposit ratio | 98.74 | % | | 79.17 | % | | 71.53 | % | |
Noninterest-bearing deposits to total deposits | Noninterest-bearing deposits to total deposits | 30.37 | % | | 29.75 | % | | 42.97 | % | | 30.37 | % | | 42.97 | % | Noninterest-bearing deposits to total deposits | 39.02 | | | 27.87 | | | 28.24 | | |
| CAPITAL RATIOS | CAPITAL RATIOS | | 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 | % | |
| Common equity Tier 1 | | Common equity Tier 1 | 12.53 | % | | 10.08 | % | | 11.34 | % | |
Tier 1 risk-based capital | | Tier 1 risk-based capital | 13.13 | | | 11.06 | | | 12.39 | | |
Total risk-based capital | | Total risk-based capital | 14.86 | | | 13.18 | | | 14.47 | | |
Tier 1 leverage | | Tier 1 leverage | 16.72 | | | 8.99 | | | 9.55 | | |
| ASSET QUALITY | ASSET QUALITY | | ASSET QUALITY | | |
Ratio of nonaccrual loans to total loans | Ratio of nonaccrual loans to total loans | 0.65 | % | | 0.76 | % | | 0.50 | % | | 0.65 | % | | 0.50 | % | Ratio of nonaccrual loans to total loans | 0.60 | % | | 0.89 | % | | 0.82 | % | |
Allowance for credit losses to loans ratio | Allowance for credit losses to loans ratio | 1.26 | % | | 1.26 | % | | 0.56 | % | | 1.26 | % | | 0.56 | % | Allowance for credit losses to loans ratio | 1.16 | | | 1.30 | | | 1.29 | | |
Net charge off ratio | Net charge off ratio | 0.10 | % | | 0.13 | % | | 0.06 | % | | 0.11 | % | | 0.04 | % | Net charge off ratio | 0.27 | | | 0.14 | | | 0.09 | | |
(1) The rate presented is calculated net of average credit balances of factoring clients.
(2) Average loan balances include held for sale and non-accrual loans.
ThirdFirst Quarter Income Statement Highlights
For the three months ended September 30, 2022 compared to the three months ended June 30, 2022 (“linked quarter” comparisons):
•Net income for the three months ended September 30, 2022March 31, 2023 was $315 million,$9.52 billion, an increase of $60$9.26 billion from $257 million or 23% compared tofor the linked quarter. The increase was primarily due to higher net interest income, partially offset by higher provision for credit losses and operating expenses.three months ended December 31, 2022. Net income available to common stockholders for the three months ended September 30, 2022 totaled $303 million,March 31, 2023 was $9.50 billion, an increase of $65$9.26 billion from $243 million or 27% comparedfor the three months ended December 31, 2022. The increases were primarily due to the linked quarter.$9.82 billion preliminary gain on acquisition, partially offset by the $716 million provision for non-purchased credit deteriorated (“Non-PCD”) loans and leases and the unfunded commitments acquired in the SVBB Acquisition (the “day 2 provision for credit losses”). Results also reflected higher noninterest expenses discussed below and a lower provision for income taxes. Net income per diluted common share for the three months ended September 30, 2022March 31, 2023 was $19.25,$653.64, an increase from $16.67 for the three months ended December 31, 2022.
•Select items in the current quarter and linked quarter are summarized below:
◦For the three months ended March 31, 2023:
▪Preliminary gain on acquisition of 30% over$9.82 billion (net of tax) for the linked quarter.SVBB Acquisition in other noninterest income.
▪Day 2 provision for credit losses of $716 million related to the SVBB Acquisition.
▪Acquisition-related expenses of $28 million in noninterest expense.
◦For the three months ended December 31, 2022:
▪CIT Merger-related expenses of $29 million in noninterest expense.
▪Income tax expense of $55 million related to the strategic decision to exit $1.25 billion of BOLI policies.
•Return on average assets for the three months ended September 30, 2022March 31, 2023 was 1.16%33.23%, compared to 0.95%0.93% for the three months ended June 30,December 31, 2022.
•Net interest income (“NII”) for the three months ended September 30, 2022March 31, 2023 was $795$850 million, an increase of $95$48 million, or 13%6% compared to the three months ended June 30,December 31, 2022. This increase was primarily due to higher yields resulting in higher interest income on our earning assets, along with higher interest income from organic loan growth higher yields onas well as SVB loans, and overnight investments, and higher purchase accounting accretion, partially offset by higher costs on interest-bearing deposits and borrowings. The net
•Net interest margin (“NIM”) for the three months ended September 30, 2022March 31, 2023 was 3.40%3.41%, an increase of 36 bps from 3.04%5 basis points (“bps”) compared to 3.36% for the three months ended June 30,December 31, 2022, reflectingas the rising interest rate environment that increased yieldsbenefits on our earninginterest-earning assets partially offset by aexceeded the impacts of higher raterates paid on interest-bearing deposits and borrowings.
•Provision for credit losses for the three months ended September 30, 2022March 31, 2023 was $60$783 million compared to a provision of $42$79 million for the three months ended June 30,December 31, 2022. The increase reflects moderate deterioration inwas primarily due to the macroeconomic forecast used inday 2 provision for credit losses of $716 million related to the CECL forecasting processSVBB Acquisition, which included $462 million for acquired loans and loan portfolio growth, partially offset by benefits from improved credit qualityleases (the “day 2 provision for loans and portfolio mix.leases”) and $254 million for acquired unfunded commitments (the “day 2 provision for unfunded commitments”). The net charge-off ratio for the three months ended September 30, 2022March 31, 2023 was 0.10%0.27%, down from 0.13%compared to 0.14% for the three months ended June 30,December 31, 2022.
•Noninterest income for the three months ended September 30, 2022March 31, 2023 was $433 million,$10.26 billion, an increase of $9.83 billion compared to $424$429 million for the three months ended June 30,December 31, 2022. The increase includedwas primarily due to the preliminary gain on acquisition of $9.82 billion. The remaining increase reflected higher rental income on operating lease equipment higher capital marketsand wealth management fees, revenue, and various other miscellaneous income items, partially offset by a $14 million loss on sale of one investment security and lower service charges on deposit accounts.factoring income.
•Noninterest expense for the three months ended September 30, 2022March 31, 2023 was $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$855 million, an increase of $191$95 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$760 million for the three months ended September 30, 2022, anDecember 31, 2022. The increase of $448 million, or 129% compared to the three months ended September 30, 2021. This was primarily due to the 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, 2022, an increase of 79 bps from 2.61% for the three months ended September 30, 2021, reflecting higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.
•Provision 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 reserve release in the third quarter of 2021. The net charge-off ratio for the three months ended September 30, 2022 was 0.10%, up from 0.06% for the three months ended September 30, 2021.
•Noninterest income for the three months ended September 30, 2022 was $433 million, compared to $124 million for the three months ended September 30, 2021. The largest component of the increase was rental income on operating leases totaling $219 million. The remaining increase was driven primarily by the added activity due to the CIT Merger.
•Noninterest expense for the three months ended September 30, 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 salariessalary and benefit costs, which included higher incentive awards (these are traditionally paid in the first quarter), and the restart of $157 million due to the increase in employees and certain newannual benefit costs, such as $139 million of depreciationFederal Insurance Contributions Act (“FICA”), and maintenancesalary costs associated withfrom the SVBB Acquisition. The increase in noninterest expense also included higher FDIC insurance expense and operating lease portfolio.
Year to Date Income Statement Highlights
•Net income for the nine months ended September 30, 2022 was $841 million, an increase of $417 million, or 98% compared to the same period in 2021. Net income available to common stockholders for the nine months ended September 30, 2022 totaled $805 million, an increase of $395 million, or 96% compared to the same period in 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, 2022 was 1.03%, compared to 1.05% in the same period in 2021.
•NII for the nine months ended September 30, 2022 was $2,144 million, an increase of $1,111 million, or 108% compared to the same period in 2021. 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, 2022 was 3.06%, an increase of 37 bps from 2.69% for the same period in 2021.
•Provision for credit losses for the nine months ended September 30, 2022 was $566 million, compared to a benefit of $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, 2022 was 0.11%, up from 0.04% for the same period in 2021.
•Noninterest income for the nine months ended September 30, 2022 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 $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 expense for the nine months ended September 30, 2022 was $2,315 million, compared to $911 million for the same period in 2021. The increase is primarily associated with the CIT Merger, including higher salaries and benefit costs of $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.
•Select items for the nine months ended September 30, 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, 2022March 31, 2023 were $69.8$138.29 billion, an increase of $2.1��$67.51 billion or 12.0% annualized, from June 30,December 31, 2022. We continuedThe increase was primarily due to see growth inSVB loans of $66.17 billion at March 31, 2023. Loans from our branch network as well asin the General Banking segment increased $432 million. Loans in the Commercial Banking segment increased $902 million, primarily related to growth in our commercial bank from a number of our industry verticals, such as healthcarereal estate, maritime 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 addition of $32.7 billion from the CIT Merger.healthcare.
•Total deposits at September 30, 2022March 31, 2023 were $87.6$140.05 billion, a decreasean increase 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 June 30, 2022 was primarily concentrated in acquired branches and commercial banking, partially offset by growth in our Direct Bank. Total deposits increased $36.1$50.64 billion from December 31, 2021, reflecting2022. The increase was primarily due to SVB deposits of $49.26 billion at March 31, 2023. The remaining increase of $1.38 billion was primarily related to deposit growth in the additionDirect Bank, which is included in the General Banking segment.
•Total borrowings at March 31, 2023 were $46.09 billion, an increase of $39.4$39.45 billion from December 31, 2022. The increase was primarily due to the CIT Merger, partially offset byPurchase Money Note (as defined and described below) of $35.15 billion payable to the noted declines.FDIC related to the SVBB Acquisition as further discussed in Note 2 — Business Combinations. The remaining increase was primarily due to advances from the Federal Home Loan Bank (“FHLB”) that were drawn to improve our cash position.
•At September 30, 2022,March 31, 2023, BancShares remained well capitalized with a total risk-based capital ratio of 13.46%14.86%, a Tier 1 risk-based capital ratio of 11.36%13.13%, a common equity Tier 1 ratio of 10.37%12.53% and a leverage ratio of 9.31%16.72%.
Funding, Liquidity and Capital Overview
Deposit Composition
We fund our business primarily through deposits. Deposits represent approximately 75% of total funding at March 31, 2023. The following table summarizes the composition, average size and uninsured percentages of our deposits.
Table 2
Select Deposit Data
| | | | | | | | | | | | | | | | | |
| Deposits as of March 31, 2023 |
| Ending Balance (in millions) | | Average Size (in thousands) | | Uninsured % |
General Banking segment | $ | 85,982 | | | $ | 36 | | 29% |
Commercial Banking segment | 3,045 | | | 212 | | 86% |
SVB segment | 49,259 | | | 360 | | 86% |
Other business segments | 1,764 | | | n/m | | 7% |
Total | $ | 140,050 | | | 55 | | 50% |
The General Banking segment includes deposits from our branch network, which deploys a relationship-based approach to deposit gathering. The remaining deposits in the General Banking segment are primarily related to the Direct Bank, which enables us to increase deposits to meet the needs of our business, albeit at a higher cost compared to the branch network. The Commercial Banking segment includes deposits of commercial customers and the SVB segment includes deposits related to the SVBB Acquisition. Other business segments primarily include brokered deposits of $1.75 billion in the Corporate segment and the remaining $14 million relates to the Rail segment.
As displayed in the table above, the average size of deposits varies across our business segments. The uninsured data represents the percentage of deposits in the respective business segments. At March 31, 2023, total uninsured deposits were approximately $69.96 billion or 50% of total deposits. The increase in uninsured deposits from of $29.13 billion or 33% of total deposits at December 31, 2022 is due to deposits in the SVB segment, which have higher average customer balances.
Deposit Trends
Table 3
Deposit Trends
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Deposit Balance |
| | | Acquisition Date | | | | | | |
| December 31, 2022 | | March 27, 2023 | | March 31, 2023 | | April 14, 2023 | | April 28, 2023 |
SVB segment | $ | — | | | $ | 55,959 | | | $ | 49,259 | | | $ | 41,336 | | | $ | 41,425 | |
General Banking, Commercial Banking, Rail and Corporate segments | 89,408 | | | — | | | 90,791 | | | 92,149 | | | 92,447 | |
Total deposits | $ | 89,408 | | | $ | 55,959 | | | $ | 140,050 | | | $ | 133,485 | | | $ | 133,872 | |
SVB deposits declined from $55.96 billion at the SVBB Acquisition Date to $49.26 billion at March 31, 2023, primarily due to uncertainty in the banking industry. While SVB deposits declined to $41.43 billion as of April 28, 2023, the pace of the decline slowed and deposit amounts leveled off to approximately $41 billion during the last two weeks of April. The table above also indicates that aggregate deposits for the General Banking, Commercial Banking, Rail and Corporate segments increased during the current quarter and in April of 2023, primarily due to deposit growth in the Direct Bank, which is included in the General Banking segment.
Liquidity Position
We strive to maintain a strong liquidity position and our risk appetite for liquidity is low. At March 31, 2023, liquidity metrics remained strong as we had $51.42 billion in liquid assets consisting of $37.67 billion in cash and interest-earning deposits at banks and $13.75 billion in high-quality liquid securities. To further enhance our liquidity position, we increased our FHLB borrowings to $8.50 billion at March 31, 2023 and increased our remaining FHLB borrowing capacity by pledging an additional $4 billion of investment securities held to maturity. We have unused borrowing capacity with the FHLB and Federal Reserve Bank of $4.71 billion and $4.68 billion, respectively. Further, in conjunction with the SVBB Acquisition, we entered into binding terms and conditions for a five year, up to $70.00 billion line of credit with the FDIC. Refer to the “Liquidity Risk” section of this MD&A for further discussion.
Recent EconomicInvestment Securities Duration
At March 31, 2023, our investment securities portfolio primarily consisted of debt securities available for sale and Industry Developmentsdebt securities held to maturity as summarized below. The available for sale securities portfolio has an average duration of 3.4 years and the debt securities held to maturity portfolio has an average duration of 4.9 years. Refer to the “Interest-earning Assets - Investment securities” section of this MD&A and Note 3 — Investment Securities for further information.
Throughout 2022,Table 4
Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | March 31, 2023 |
| Composition(1) | | Amortized cost | | Fair value | | | | | | | | Fair value to cost |
Total investment securities available for sale | 49.9 | % | | $ | 9,955 | | | $ | 9,061 | | | | | | | | | 91.0 | % |
Total investment securities held to maturity | 49.6 | % | | 10,381 | | | 8,993 | | | | | | | | | 86.6 | % |
Investment in marketable equity securities | 0.5 | % | | 75 | | | 85 | | | | | | | | | 113.3 | % |
Total investment securities | 100 | % | | $ | 20,411 | | | $ | 18,139 | | | | | | | | | |
(1) Calculated as a percentage of the total fair value of investment securities. |
Capital Position
Our capital position remains strong and all regulatory capital ratios for BancShares and FCB significantly exceed the Federal Reserve’s Federal Open Market CommitteePrompt Corrective Action (“FOMC”PCA”) has significantly raised its target for the federal funds rate in an effort to combat rising inflation. The FOMC raised interest rates at its March, May, June, Julywell-capitalized thresholds 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 range between 3.00% - 3.25%. PossibleBasel III Requirements as 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 volatilitydiscussed in the stock market, rising interest rates“Capital” section of this MD&A and possible recession will depend on future developments, which are highly uncertain and difficult to predict.Note 17 — Regulatory Capital.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
NII is the difference between interest income earned on interest-earning 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, 2022 was $2.14 billion, an increase of $1.11 billion, or 108% from $1.03 billion in the same period in 2021.
interest-bearing liabilities. NII is affected by changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The following table presentstables present the average balances, yields on interest-earning assets, rates on interest-bearing liabilities, and changes in NII due to changes in: (i) volume (average balances of interest-earning assets and interest-bearing liabilities) and (ii) yields or rates.
•The change in NII due to volume is calculated as the change in average balance multiplied by the yield or rate from the prior period.
•The change in NII due to yield or rate is calculated as the change in yield or rate multiplied by the average balance sheet and related rates, along with disaggregated quarter-over-quarterfrom the prior period.
•The change in NII due to rate/volume change (i.e., portfolio mix) is calculated as the change in rate multiplied by the change in volume. This component is allocated between the changes in NII betweendue to volume (level of lending, investingand yield or borrowing) and rate (rates charged to customers, receivedbased on 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 25
Average Balances and Rates
| dollars in millions | dollars in millions | Three Months Ended | | dollars in millions | Three Months Ended | |
| | September 30, 2022 | | June 30, 2022 | | Change in NII Due to: | | March 31, 2023 | | December 31, 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 | | Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | Loans and leases (1)(2) | $ | 67,733 | | | $ | 785 | | | 4.58 | % | | $ | 65,298 | | | $ | 655 | | | 4.01 | % | | $ | 28 | | | $ | 102 | | | $ | 130 | | Loans and leases (1)(2) | $ | 73,900 | | | $ | 1,017 | | | 5.57 | % | | $ | 69,290 | | | $ | 892 | | | 5.10 | % | | $ | 52 | | | $ | 73 | | | $ | 125 | |
Total investment securities | Total investment securities | 19,119 | | | 90 | | | 1.88 | | | 19,185 | | | 89 | | | 1.85 | | | — | | | 1 | | | 1 | | Total investment securities | 19,416 | | | 107 | | | 2.21 | | | 18,876 | | | 92 | | | 1.95 | | | 3 | | | 12 | | | 15 | |
| Interest-earning deposits at banks | Interest-earning deposits at banks | 5,685 | | | 31 | | | 2.17 | | | 7,629 | | | 13 | | | 0.72 | | | (4) | | | 22 | | | 18 | | Interest-earning deposits at banks | 7,585 | | | 87 | | | 4.61 | | | 6,193 | | | 56 | | | 3.60 | | | 14 | | | 17 | | | 31 | |
Total interest-earning assets (2) | Total interest-earning assets (2) | $ | 92,537 | | | $ | 906 | | | 3.87 | % | | $ | 92,112 | | | $ | 757 | | | 3.28 | % | | $ | 24 | | | $ | 125 | | | $ | 149 | | Total interest-earning assets (2) | $ | 100,901 | | | $ | 1,211 | | | 4.85 | % | | $ | 94,359 | | | $ | 1,040 | | | 4.37 | % | | $ | 69 | | | $ | 102 | | | $ | 171 | |
| Operating lease equipment, net | Operating lease equipment, net | $ | 7,981 | | | $ | 7,973 | | | Operating lease equipment, net | $ | 8,236 | | | $ | 8,049 | | |
Cash and due from banks | Cash and due from banks | 489 | | | 524 | | | Cash and due from banks | 595 | | | 500 | | |
Allowance for credit losses | Allowance for credit losses | (851) | | | (849) | | | Allowance for credit losses | (936) | | | (886) | | |
All other noninterest-earning assets | All other noninterest-earning assets | 7,831 | | | 7,815 | | | All other noninterest-earning assets | 7,368 | | | 7,770 | | |
Total assets | Total assets | $ | 107,987 | | | $ | 107,575 | | | Total assets | $ | 116,164 | | | $ | 109,792 | | |
| Interest-bearing deposits: | Interest-bearing deposits: | | Interest-bearing deposits: | |
Checking with interest | Checking with interest | $ | 16,160 | | | $ | 7 | | | 0.17 | % | | $ | 16,503 | | | $ | 4 | | | 0.12 | % | | $ | 1 | | | $ | 2 | | | $ | 3 | | Checking with interest | $ | 16,499 | | | $ | 22 | | | 0.50 | % | | $ | 15,985 | | | $ | 13 | | | 0.24 | % | | $ | — | | | $ | 9 | | | $ | 9 | |
Money market | Money market | 22,993 | | | 32 | | | 0.55 | | | 25,468 | | | 18 | | | 0.28 | | | (2) | | | 16 | | | 14 | | Money market | 21,216 | | | 80 | | | 1.53 | | | 21,200 | | | 60 | | | 1.13 | | | — | | | 20 | | | 20 | |
Savings | Savings | 13,956 | | | 28 | | | 0.78 | | | 13,303 | | | 11 | | | 0.34 | | | 1 | | | 16 | | | 17 | | Savings | 17,521 | | | 110 | | | 2.54 | | | 15,831 | | | 69 | | | 1.73 | | | 8 | | | 33 | | | 41 | |
Time deposits | Time deposits | 8,436 | | | 11 | | | 0.54 | | | 8,796 | | | 9 | | | 0.38 | | | (1) | | | 3 | | | 2 | | Time deposits | 12,126 | | | 76 | | | 2.55 | | | 9,516 | | | 34 | | | 1.42 | | | 11 | | | 31 | | | 42 | |
Total interest-bearing deposits | Total interest-bearing deposits | 61,545 | | | 78 | | | 0.50 | | | 64,070 | | | 42 | | | 0.26 | | | (1) | | | 37 | | | 36 | | Total interest-bearing deposits | 67,362 | | | 288 | | | 1.73 | | | 62,532 | | | 176 | | | 1.12 | | | 19 | | | 93 | | | 112 | |
Borrowings: | Borrowings: | | | | | | | | | | | | | | | | | | Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | Securities sold under customer repurchase agreements | 617 | | | 1 | | | 0.16 | | | 627 | | | — | | | 0.16 | | | 1 | | | — | | | 1 | | Securities sold under customer repurchase agreements | 455 | | | — | | | 0.30 | | | 514 | | | — | | | 0.27 | | | — | | | — | | | — | |
Short-term FHLB borrowings | 1,188 | | | 8 | | | 2.57 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | | |
Short-term FHLB Borrowings | | Short-term FHLB Borrowings | 323 | | | 4 | | | 4.67 | | | 2,080 | | | 20 | | | 3.77 | | | (19) | | | 3 | | | (16) | |
Short-term borrowings | Short-term borrowings | 1,805 | | | 9 | | | 1.74 | | | 627 | | | — | | | 0.16 | | | 9 | | | — | | | 9 | | Short-term borrowings | 778 | | | 4 | | | 2.23 | | | 2,594 | | | 20 | | | 3.04 | | | (19) | | | 3 | | | (16) | |
Federal Home Loan Bank borrowings | Federal Home Loan Bank borrowings | 1,784 | | | 11 | | | 2.45 | | | 386 | | | 2 | | | 1.64 | | | 8 | | | 1 | | | 9 | | Federal Home Loan Bank borrowings | 3,284 | | | 40 | | | 4.96 | | | 2,818 | | | 28 | | | 3.90 | | | 4 | | | 8 | | | 12 | |
Senior unsecured borrowings | Senior unsecured borrowings | 898 | | | 5 | | | 2.00 | | | 894 | | | 4 | | | 2.05 | | | 1 | | | — | | | 1 | | Senior unsecured borrowings | 883 | | | 5 | | | 2.06 | | | 906 | | | 4 | | | 2.08 | | | 1 | | | — | | | 1 | |
Subordinated debt | Subordinated debt | 1,054 | | | 8 | | | 3.21 | | | 1,057 | | | 8 | | | 3.06 | | | — | | | — | | | — | | Subordinated debt | 1,048 | | | 9 | | | 3.54 | | | 1,051 | | | 9 | | | 3.38 | | | — | | | — | | | — | |
Other borrowings | Other borrowings | 67 | | | — | | | 4.51 | | | 83 | | | 1 | | | 2.46 | | | (1) | | | — | | | (1) | | Other borrowings | 1,978 | | | 15 | | | 2.95 | | | 25 | | | 1 | | | 5.76 | | | 14 | | | — | | | 14 | |
Long-term borrowings | Long-term borrowings | 3,803 | | | 24 | | | 2.59 | | | 2,420 | | | 15 | | | 2.43 | | | 8 | | | 1 | | | 9 | | Long-term borrowings | 7,193 | | | 69 | | | 3.84 | | | 4,800 | | | 42 | | | 3.45 | | | 19 | | | 8 | | | 27 | |
Total borrowings | Total borrowings | 5,608 | | | 33 | | | 2.32 | | | 3,047 | | | 15 | | | 1.96 | | | 17 | | | 1 | | | 18 | | Total borrowings | 7,971 | | | 73 | | | 3.68 | | | 7,394 | | | 62 | | | 3.32 | | | — | | | 11 | | | 11 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | $ | 67,153 | | | $ | 111 | | | 0.65 | % | | $ | 67,117 | | | $ | 57 | | | 0.34 | % | | $ | 16 | | | $ | 38 | | | $ | 54 | | Total interest-bearing liabilities | $ | 75,333 | | | $ | 361 | | | 1.94 | % | | $ | 69,926 | | | $ | 238 | | | 1.35 | % | | $ | 19 | | | $ | 104 | | | $ | 123 | |
| Noninterest-bearing deposits | Noninterest-bearing deposits | $ | 26,877 | | | $ | 26,551 | | | Noninterest-bearing deposits | $ | 26,482 | | | $ | 26,510 | | |
Credit balances of factoring clients | Credit balances of factoring clients | 1,089 | | | 1,189 | | | Credit balances of factoring clients | 1,007 | | | 1,174 | | |
Other noninterest-bearing liabilities | Other noninterest-bearing liabilities | 2,369 | | | 2,151 | | | Other noninterest-bearing liabilities | 1,973 | | | 2,561 | | |
Stockholders' equity | Stockholders' equity | 10,499 | | | 10,567 | | | Stockholders' equity | 11,369 | | | 9,621 | | |
Total liabilities and stockholders' equity | $ | 107,987 | | | $ | 107,575 | | | |
Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | $ | 116,164 | | | $ | 109,792 | | |
| Interest rate spread (2) | Interest rate spread (2) | | 3.22 | % | | 2.94 | % | | Interest rate spread (2) | | 2.91 | % | | 3.02 | % | |
Net interest income and net yield on interest-earning assets (2) | Net interest income and net yield on interest-earning assets (2) | | $ | 795 | | | 3.40 | % | | $ | 700 | | | 3.04 | % | | Net interest income and net yield on interest-earning assets (2) | | $ | 850 | | | 3.41 | % | | $ | 802 | | | 3.36 | % | |
(1) Loans and leases include non-PCD and PCD loans, nonaccrual loans and held for sale. Interest income on loans and leases includes accretion income and loan fees.
(2) The balance and rate presented is calculated net of average credit balances of factoring clients.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % | | | | | | |
(1), (2) See footnotes to previous table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 previous table.
Third Quarter 2022Current quarter compared to Second Quarter 2022linked quarter
•NII for the three months ended September 30, 2022March 31, 2023 was $795$850 million, an increase of $95$48 million compared to the second quarter ofthree months ended December 31, 2022. This increase was primarily due to higher yields on loans and overnight investments,interest-earning deposits at banks and loan growth, and higher purchase accounting accretion, partially offset by higher costs on interest-bearing depositdeposits and borrowings. The SVBB Acquisition impacted average balances and NII and NIM for only five days during the current quarter as the acquisition was completed on March 27, 2023. We expect the impacts of the SVBB Acquisition to be more prominent beginning in the second quarter of 2023 as the impacts of interest-earning deposits at banks, loans, deposits, and borrowings related to the SVBB Acquisition will be for a full quarter.
◦Interest income earned on loans and leases for the three months ended September 30, 2022March 31, 2023 was $785 million,$1.02 billion, an increase of $130$125 million compared to the second quarter ofthree months ended December 31, 2022. The increase was primarily due to higher yields and higher average balances related to loan growth in the average loansGeneral and leases balance from $65.3 billion inCommercial Banking segments, as well as 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. SVBB Acquisition.
◦Interest income earned on investment securities for the three months ended September 30, 2022March 31, 2023 was $90$107 million, an increase of $1$15 million compared to the second quarter ofthree months ended December 31, 2022. The slight increase was primarily due to higher reinvestment rates.
◦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.
◦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.
•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.
•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 presented 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 shift 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 the three months ended September 30, 2022 was $795 million, an increase of $448 million compared to the third quarter of 2021, primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a decline in interest income on 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, 2022March 31, 2023 was $31$87 million, an increase of $28$31 million compared to the third quarter of 2021,three months ended December 31, 2022, reflecting higher interestFed Funds rates which offsetand a higher average balance of interest-earning deposits at banks, as we increased liquidity due to the declinemarket uncertainty in balance.March, and the impact of the SVBB Acquisition.
◦Interest expense on interest-bearing deposits for the three months ended September 30, 2022March 31, 2023 was $78$288 million, an increase of $70$112 million compared to third quarter of 2021. The increase wasthe three months ended December 31, 2022, primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried areflecting higher deposit rates and higher average rate than legacy FCB interest-bearingbalances (mainly in higher-cost savings and time deposits and dueas we maintain competitive rates offered to increases in rates paid on deposits. customers).
◦Interest expense on borrowings for the three months ended September 30, 2022March 31, 2023 was $33$73 million, an increase of $25$11 million compared to the third quarter of 2021. The increase wasthree months ended December 31, 2022, primarily due to the assumedimpact of the Purchase Money Note related to the SVBB Acquisition, partially offset by lower average FHLB borrowings. We repaid FHLB borrowings in the CIT Merger along with the noted increase inJanuary and February, but we increased FHLB borrowings andin March to improve liquidity in light of market conditions that led to bank failures. As a result, the FHLB borrowings balance at March 31, 2023 was higher rate environment.than our average balance for the current quarter.
•NIM was 3.40% for the three months ended September 30, 2022,March 31, 2023 was 3.41%, an increase of 795 bps fromcompared to the third quarterthree months ended December 31, 2022. The higher yields on earning assets were partially offset by the increasing costs of 2021, primarily reflective of theour interest-bearing deposits and higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.borrowing costs.
•Average interest-earning assets for the three months ended September 30, 2022March 31, 2023 were $92.5 billion,$100.90 billion. This is an increase of $40.2$6.54 billion compared tofrom $94.36 billion for the third quarterthree months ended December 31, 2022, reflecting increases in average loans and leases, interest-earning deposits at banks and investment securities of 2021. This increase was primary due to the added interest-earning assets from the CIT Merger.$4.61 billion, $1.39 billion and $540 million, respectively.
•Average interest-bearing liabilities for the three months ended September 30, 2022March 31, 2023 were $67.2 billion,$75.33 billion. This is an increase of $37.5$5.41 billion compared tofrom $69.93 billion for the third quarter of 2021. The increase was primarily due to the addition ofthree months ended December 31, 2022, reflecting higher rates and average balances for deposits and borrowings from the CIT Merger. Ratesborrowings. The average rate on interest-bearing liabilities for the three months ended September 30, 2022 were 0.65%March 31, 2023 was 1.94%. This is an increase of 4559 bps from the third quarter of 2021 was primarily duecompared to the three months ended December 31, 2022, reflecting the higher rates on the deposits and borrowings acquired in the CIT Merger.interest rate environment.
YearTable 6
Average Balances and Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | | | | | |
| March 31, 2023 | | March 31, 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) | $ | 73,900 | | | $ | 1,017 | | | 5.57 | % | | $ | 64,144 | | | $ | 621 | | | 3.92 | % | | $ | 106 | | | $ | 290 | | | $ | 396 | |
Total investment securities | 19,416 | | | 107 | | | 2.21 | | | 19,492 | | | 83 | | | 1.71 | | | — | | | 24 | | | 24 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 7,585 | | | 87 | | | 4.61 | | | 11,476 | | | 6 | | | 0.19 | | | (2) | | | 83 | | | 81 | |
Total interest-earning assets (2) | $ | 100,901 | | | $ | 1,211 | | | 4.85 | % | | $ | 95,112 | | | $ | 710 | | | 3.02 | % | | $ | 104 | | | $ | 397 | | | $ | 501 | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | 8,236 | | | | | | | $ | 7,924 | | | | | | | | | | | |
Cash and due from banks | 595 | | | | | | | 536 | | | | | | | | | | | |
Allowance for credit losses | (936) | | | | | | | (914) | | | | | | | | | | | |
All other noninterest-earning assets | 7,368 | | | | | | | 7,736 | | | | | | | | | | | |
Total assets | $ | 116,164 | | | | | | | $ | 110,394 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 16,499 | | | $ | 22 | | | 0.50 | % | | $ | 16,614 | | | $ | 5 | | | 0.10 | % | | $ | 1 | | | $ | 16 | | | $ | 17 | |
Money market | 21,216 | | | 80 | | | 1.53 | | | 26,199 | | | 15 | | | 0.24 | | | (3) | | | 68 | | | 65 | |
Savings | 17,521 | | | 110 | | | 2.54 | | | 13,659 | | | 9 | | | 0.26 | | | 4 | | | 97 | | | 101 | |
Time deposits | 12,126 | | | 76 | | | 2.55 | | | 9,794 | | | 10 | | | 0.43 | | | 3 | | | 63 | | | 66 | |
Total interest-bearing deposits | 67,362 | | | 288 | | | 1.73 | | | 66,266 | | | 39 | | | 0.24 | | | 5 | | | 244 | | | 249 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 455 | | | — | | | 0.30 | | | 600 | | | — | | | 0.16 | | | — | | | — | | | — | |
Short-term FHLB Borrowings | 323 | | | 4 | | | 4.67 | | | — | | | — | | | — | | | 4 | | | — | | | 4 | |
Short-term borrowings | 778 | | | 4 | | | 2.23 | | | 600 | | | — | | | 0.16 | | | 4 | | | — | | | 4 | |
Federal Home Loan Bank borrowings | 3,284 | | | 40 | | | 4.96 | | | 641 | | | 2 | | | 1.29 | | | 22 | | | 16 | | | 38 | |
Senior unsecured borrowings | 883 | | | 5 | | | 2.06 | | | 2,719 | | | 12 | | | 1.71 | | | (9) | | | 2 | | | (7) | |
Subordinated debt | 1,048 | | | 9 | | | 3.54 | | | 1,060 | | | 8 | | | 2.96 | | | (1) | | | 2 | | | 1 | |
Other borrowings | 1,978 | | | 15 | | | 2.95 | | | 85 | | | — | | | 1.85 | | | 15 | | | — | | | 15 | |
Long-term borrowings | 7,193 | | | 69 | | | 3.84 | | | 4,505 | | | 22 | | | 1.95 | | | 27 | | | 20 | | | 47 | |
Total borrowings | 7,971 | | | 73 | | | 3.68 | | | 5,105 | | | 22 | | | 1.74 | | | 31 | | | 20 | | | 51 | |
Total interest-bearing liabilities | $ | 75,333 | | | $ | 361 | | | 1.94 | % | | $ | 71,371 | | | $ | 61 | | | 0.35 | % | | $ | 36 | | | $ | 264 | | | $ | 300 | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 26,482 | | | | | | | $ | 25,354 | | | | | | | | | | | |
Credit balances of factoring clients | 1,007 | | | | | | | 1,160 | | | | | | | | | | | |
Other noninterest-bearing liabilities | 1,973 | | | | | | | 2,086 | | | | | | | | | | | |
Stockholders' equity | 11,369 | | | | | | | 10,423 | | | | | | | | | | | |
Total liabilities and stockholders’ equity | $ | 116,164 | | | | | | | $ | 110,394 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 2.91 | % | | | | | | 2.67 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 850 | | | 3.41 | % | | | | $ | 649 | | | 2.73 | % | | | | | | |
(1), (2) See footnotes 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 a higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans.
◦Interest income earned on loans and leases for the nine months ended September 30, 2022 was $2.06 billion, an increase of $1.09 billion compared to the same period in 2021. The increase was primarily volume driven 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 $16 million of interest income during the nine months ended September 30, 2022 compared to $78 million in the same period in 2021.
◦Interest income earned on investment securities for the nine months ended September 30, 2022 was $262 million, an increase of $156 million compared to the same period in 2021. The increase was primarily due to the addition of $6.6 billion of investment securities acquired in the CIT Merger and a higher portfolio yield.
◦Interest income earned on interest-earning deposits at banks for the nine months ended September 30, 2022 was $50 million, an increase of $43 million compared to the same period in 2021, reflecting higher interest rates.
◦Interest expense on interest-bearing deposits for the nine months ended September 30, 2022 was $159 million, an increase of $134 million compared to the same period in 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 deposits, and was also impacted by the rising interest rate environment. Interest expense on borrowings 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.previous table.
The following table details the average interest earning assets by category.category:
Table 37
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 | % |
| | | | | | | | | | | | | | | | | | | | | |
| % of Total Interest-earning Assets | | | | |
| Three Months Ended | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Loans and leases | 73 | % | | 73 | % | | 67 | % | | | | |
Investment securities | 19 | % | | 20 | % | | 21 | % | | | | |
| | | | | | | | | |
Interest-earning deposits at banks | 8 | % | | 7 | % | | 12 | % | | | | |
Total interest earning assets | 100 | % | | 100 | % | | 100 | % | | | | |
The following table shows our average funding mix.mix:
Table 48
Average Funding Mix | | | % of Total Interest-bearing Liabilities | | % of Total Interest-bearing Liabilities | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
Total interest-bearing deposits | Total interest-bearing deposits | 92 | % | | 95 | % | | 94 | % | | 93 | % | | 94 | % | Total interest-bearing deposits | 89 | % | | 89 | % | | 93 | % | |
Short-term borrowings | Short-term borrowings | 3 | % | | 1 | % | | 2 | % | | 2 | % | | 2 | % | Short-term borrowings | 1 | % | | 4 | % | | 1 | % | |
| Long-term borrowings | Long-term borrowings | 5 | % | | 4 | % | | 4 | % | | 5 | % | | 4 | % | Long-term borrowings | 10 | % | | 7 | % | | 6 | % | |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | |
The above average mix tables include SVB average balances for only five days during the current quarter as the acquisition was completed on March 27, 2023. We expect average balances next quarter to be more aligned with current period end balances. Refer to “Interest-earning Assets” and “Interest-bearing Liabilities” sections of this MD&A for discussion of period end balances.
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 discussedAs presented 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 $1 million for the same quarter in 2021. The provision for credit losses for the nine months ended September 30, 2022 was $566 million, compared to a benefit of $32 million in the same period of 2021.
The increase infollowing table, the provision for credit losses for the three months ended September 30, 2022March 31, 2023 was $783 million, compared to the three months ended June 30, 2022 was primarily due to moderate deterioration in the macroeconomic forecast used in the CECL forecasting process. The provision for credit losses included $10 million related to the provision for unfunded commitments, which is up from $6$79 million for the three months ended June 30,December 31, 2022. The $704 million increase is primarily due to the day 2 provision for credit losses of $716 million related to the SVBB Acquisition, which includes the $462 million day 2 provision for loans and leases and the $254 million day 2 provision for unfunded commitments.
In addition to the day 2 provision, the increase in provision for credit losses on loans and leases was related to portfolio growth, mild credit quality deterioration, and higher specific reserves partially offset by improvement in the macroeconomic forecasts. The provision for credit losses activity also reflected a decline in the provision for credit losses on unfunded commitments and a $4 million provision for investment securities available for sale related to one corporate bond. The ACL is further discussed in the “Critical Accounting Estimates” and “Credit Risk Management - ACL” sections of this MD&A and in Note 5 — Allowance for Credit Risk below.Losses.
The increases in the provisionTable 9
Provision for credit losses compared to the three and nine months ended September 30, 2021 were primarily 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 reserve releases. The nine months ended September 30, 2022 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 the provision for credit losses (the “Initial Non-PCD Provision”). Also, the provision for credit losses included $59 million related to unfunded commitments on the Merger Date related to off balance sheet exposures acquired at the time of the CIT Merger.Losses
| | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
Day 2 provision for loans and leases | $ | 462 | | | $ | — | | | $ | 454 | | |
Provision (benefit) for credit losses - loans and leases | 71 | | | 64 | | | (53) | | |
Total provision for credit losses- loans and leases | 533 | | | 64 | | | 401 | | |
Day 2 provision for unfunded commitments | 254 | | | — | | | 59 | | |
(Benefit) provision for unfunded commitments | (8) | | | 15 | | | 4 | | |
Total provision for credit losses - unfunded commitments | 246 | | | 15 | | | 63 | | |
Provision for credit losses - investment securities available for sale | 4 | | | — | | | — | | |
Provision for credit losses | $ | 783 | | | $ | 79 | | | $ | 464 | | |
NONINTEREST INCOME
Noninterest Income
Noninterest income is an essential component of our total revenue. The primary sources of noninterest income consist of rental income on operating leases,lease equipment, 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.
The current quarter includes noninterest income related to SVB for five days as the SVBB Acquisition was completed on March 27, 2023. Noninterest income from SVB was aligned into pre-existing categories and primarily included items such as fee income and other service charges, wealth management services, and service charges on deposit accounts, and other noninterest income.
Table 510
Noninterest Income
| dollars in millions | dollars in millions | Three Months Ended | | Nine Months Ended | dollars in millions | Three Months Ended | |
| | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
Rental income on operating leases | $ | 219 | | | $ | 213 | | | $ | — | | | $ | 640 | | | $ | — | | |
Rental income on operating lease equipment | | Rental income on operating lease equipment | $ | 233 | | | $ | 224 | | | $ | 208 | | |
Other noninterest income: | Other noninterest income: | | | | | | | | | | Other noninterest income: | | |
Fee income and other service charges | Fee income and other service charges | 44 | | | 39 | | | 10 | | | 118 | | | 31 | | Fee income and other service charges | 50 | | | 46 | | | 36 | | |
Wealth management services | Wealth management services | 35 | | | 37 | | | 32 | | | 107 | | | 96 | | Wealth management services | 42 | | | 35 | | | 35 | | |
Service charges on deposit accounts | Service charges on deposit accounts | 21 | | | 28 | | | 26 | | | 77 | | | 69 | | Service charges on deposit accounts | 24 | | | 22 | | | 27 | | |
Factoring commissions | Factoring commissions | 24 | | | 27 | | | — | | | 78 | | | — | | Factoring commissions | 19 | | | 26 | | | 27 | | |
Cardholder services, net | Cardholder services, net | 25 | | | 26 | | | 23 | | | 76 | | | 65 | | Cardholder services, net | 21 | | | 26 | | | 25 | | |
Merchant services, net | Merchant services, net | 8 | | | 9 | | | 9 | | | 27 | | | 26 | | Merchant services, net | 10 | | | 8 | | | 10 | | |
Insurance commissions | Insurance commissions | 11 | | | 11 | | | 4 | | | 34 | | | 12 | | Insurance commissions | 13 | | | 13 | | | 12 | | |
Realized gain on sale of investment securities available for sale, net | — | | | — | | | 8 | | | — | | | 33 | | |
Realized loss on sale of investment securities available for sale, net | | Realized loss on sale of investment securities available for sale, net | (14) | | | — | | | — | | |
Fair value adjustment on marketable equity securities, net | Fair value adjustment on marketable equity securities, net | (2) | | | (6) | | | 3 | | | (5) | | | 31 | | Fair value adjustment on marketable equity securities, net | (9) | | | 2 | | | 3 | | |
Bank-owned life insurance | Bank-owned life insurance | 8 | | | 9 | | | 1 | | | 25 | | | 2 | | Bank-owned life insurance | 5 | | | 7 | | | 8 | | |
Gain on sale of leasing equipment, net | Gain on sale of leasing equipment, net | 2 | | | 5 | | | — | | | 13 | | | — | | Gain on sale of leasing equipment, net | 4 | | | 2 | | | 6 | | |
Gain on acquisition | Gain on acquisition | — | | | — | | | — | | | 431 | | | — | | Gain on acquisition | 9,824 | | | — | | | 431 | | |
Gain on extinguishment of debt | Gain on extinguishment of debt | 1 | | | — | | | — | | | 7 | | | — | | Gain on extinguishment of debt | — | | | — | | | 6 | | |
Other noninterest income | Other noninterest income | 37 | | | 26 | | | 8 | | | 79 | | | 29 | | Other noninterest income | 37 | | | 18 | | | 16 | | |
Total other noninterest income | Total other noninterest income | 214 | | | 211 | | | 124 | | | 1,067 | | | 394 | | Total other noninterest income | 10,026 | | | 205 | | | 642 | | |
Total noninterest income | Total noninterest income | $ | 433 | | | $ | 424 | | | $ | 124 | | | $ | 1,707 | | | $ | 394 | | Total noninterest income | $ | 10,259 | | | $ | 429 | | | $ | 850 | | |
Rental Income on Operating LeasesLease Equipment
Rental income from equipment we lease for the three months ended September 30, 2022March 31, 2023 was $219$233 million, an increase of $6$9 million compared to three months ended June 30,December 31, 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 renewed 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” section of this MD&A for further details.
Other Noninterest Income
Other noninterest income for the three months ended September 30, 2022March 31, 2023 was $214 million,$10.03 billion, compared to $211$205 million infor 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, 2022December 31, 2022. The increase was $1.07 billion, compared to $394 million in the same period of 2021. 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$9.82 billion preliminary gain on sale of leasing equipment, along with the preliminary estimated gain of $431 million on acquisition related to the CIT Merger. See Note 2 — Business Combinations for details.
acquisition. The linked quarter comparisonremaining changes compared to the three months ended June 30,December 31, 2022 reflectsreflect increases and decreases among various noninterest income accounts. The more significant variances follow:
•Fee income and other service charges, consisting of items such as capital market-related fees, fees for lines and letters of credit, and servicing fees, increased by $5 million, primarily reflecting higher capital market fees.$4 million.
•Service charges on deposit accounts decreasedWealth management services increased by $7 million. Whilemillion, reflecting higher assets under management led by our trust and brokerage channels. In brokerage, the income was driven by increases in structured notes and fixed products.
•Factoring commissions decreased $7 million, reflecting seasonally stronger fourth quarter factoring volume and slowing customer orders as they work down current inventory levels, as well as lower surcharge income.
•Cardholder services decreased $5 million, reflecting a decline in volume of transactions and higher reward expense.
•The realized loss on sale of investment securities available for sale was up, the decline reflected lower rates we are charging our customers, for items such as overdraft fees. As previously disclosed,due to a sale of a single corporate bond of a distressed entity.
•Fair value adjustments on marketable equity securities reflect changes in January we announced our intent to eliminate our nonsufficient funds (“NSF”) fees and lower our overdraft fees from $36 to $10 on consumer accounts beginning mid-year 2022.market prices of underlying portfolio investments.
•Other noninterest income primarily consisted of bank owned life insurance (“BOLI”) income, gain on sale of loans and OREO. Other noninterest income also includes derivative-relateditems such as derivative gains and losses, gain on sales of other assets including OREO, fixed assets and other various income items.loans, and non-marketable securities. Other noninterest income increased by $11$19 million, which included a $5 million settlement gain relatedprimarily due to returned equipment, a $4 million recoverynet positive marks 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 the CIT Merger.derivatives.
NONINTEREST EXPENSE
Table 6
The current quarter includes noninterest expense related to SVB for five days as the SVBB Acquisition was completed on March 27, 2023. 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 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
expense from SVB was aligned into pre-existing categories, with salaries and benefits impacted the most.
Table 11
Noninterest Expense
| | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Depreciation on operating lease equipment | $ | 89 | | | $ | 88 | | | $ | 81 | | | | | |
Maintenance and other operating lease expenses | 56 | | | 47 | | | 43 | | | | | |
Operating expenses: | | | | | | | | | |
Salaries and benefits | 420 | | | 354 | | | 356 | | | | | |
Net occupancy expense | 50 | | | 48 | | | 48 | | | | | |
Equipment expense | 58 | | | 55 | | | 52 | | | | | |
Professional fees | 12 | | | 11 | | | 12 | | | | | |
Third-party processing fees | 29 | | | 26 | | | 24 | | | | | |
FDIC insurance expense | 18 | | | 5 | | | 12 | | | | | |
Marketing expense | 15 | | | 21 | | | 8 | | | | | |
Acquisition-related expenses | 28 | | | 29 | | | 135 | | | | | |
Intangible asset amortization | 5 | | | 6 | | | 6 | | | | | |
Other noninterest expense | 75 | | | 70 | | | 33 | | | | | |
Total operating expenses | 710 | | | 625 | | | 686 | | | | | |
Total noninterest expense | $ | 855 | | | $ | 760 | | | $ | 810 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Depreciation on Operating Lease Equipment
Depreciation expense on operating lease equipment is driven byprimarily related to 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”Segment” of this MD&A for further details.
Maintenance and Other Operating Lease Expenses
Rail provides railcars primarily pursuant to full-service lease contracts under which Rail as lessor is responsible for railcar maintenance and repair. Maintenance and other operating lease expenses for the three months ended September 30, 2022 and June 30, 2022 were $52March 31, 2023 was $56 million, andcompared to $47 million respectively, and $142 million for ninethe three months ended September 30,December 31, 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 repairmaintenance costs related to readying tank cars for railcars put back on lease and inflationary pressures.service. Refer to the Rail discussion in the section entitled “Results by Business Segments”Segment” of this MD&A for further details.
Operating Expenses
The primary components of operating expenses are salaries and related employee benefits, occupancy, and equipment expense.
Operating expenses for the three months ended September 30, 2022March 31, 2023 were $621$710 million compared to $609$625 million in the three months ended June 30, 2022 and $314 million for the same period in 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 accrual related to legacy CIT postretirement plans that were terminated after the Merger Date. See Note 21 — Employee Benefit Plans.December 31, 2022.
Operating expenses for the three months ended September 30, 2022March 31, 2023 increased by $12$85 million compared to the linked quarter,three months ended December 31, 2022, primarily comprised of the following:
•Salaries and benefits increased by $10$66 million, primarily reflecting higher salary expense due to new hires, promotions and other salary adjustments, higheradded costs for temporary workers, and higher revenue-based incentive compensation, partially offset by lower employee benefit costs. The staff additions were therelated to salaries as a result of building out teams to supportemployees from the SVBB Acquisition, plus higher benefit plan expense, merit increases in compensation associated with our move to large bank compliance, as well as to backfill vacancies.annual review process, and the annual restart of payroll taxes.
•A $4 million decrease in FDIC insurance expense.increased $13 million due to a higher assessment rate charged to financial institutions, and a higher deposit balance.
•Marketing costs increaseddecreased by $6 million, reflecting the timing of our advertising relating to marketing efforts for the Direct Bank.
•Acquisition-related expenses decreased $1 million due to lower CIT Merger costs. The current quarter includes costs associated with the SVBB Acquisition of approximately $8 million. We expect acquisition-related expenses attributable to the SVBB Acquisition to increase beginning in the second quarter of 2023.
•Other expenses consisted of other insurance and taxes (other than income tax), foreclosure, collection and other OREO-related expenses, consulting, telecommunications, and other miscellaneous expenses including travel, postage, supplies, and appraisal expense. Changes in these items were not material, while a select item included an impairment charge of $5 million related to the closure of an office facility, and the prior quarter included a legal settlement accrual.material.
INCOME TAXES
Table 712
Income Tax Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % |
| | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Income before income taxes | $ | 9,471 | | | $ | 392 | | | $ | 225 | | | | | |
Income tax (benefit) expense | $ | (47) | | | $ | 135 | | | $ | (46) | | | | | |
Effective tax rate | (0.5) | % | | 34.6 | % | | (20.4) | % | | | | |
The effective tax rate (“ETR”) was 22.9% in the three months ended September 30, 2022, compared to 24.2%(0.5)% 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 quarterMarch 31, 2023, compared to 22.9%34.6% for the three months ended September 30, 2022 was primarily driven by the increase in state and local taxes resulting from the CIT Merger.December 31, 2022. The decrease in the ETR from 24.2%34.6% for the three months ended June 30,December 31, 2022 to 22.9%(0.5)% for the three months ended September 30, 2022March 31, 2023 was primarily driven by the effects of changes from enacted state tax laws. The decrease in the ETR from 22.6%preliminary gain on acquisition 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.SVBB Acquisition.
The ETR each quarter is impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to valuation allowances, and discrete items. The ETR in future periods may vary from the actual 20222023 ETR due to changes in these factors.
We monitorBancShares monitors and evaluateevaluates the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, 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 2019 — Income Taxes for additional information.
RESULTS BY BUSINESS SEGMENT
PriorRefer 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 2221 — Business SegmentsSegment Information for related disclosures on the segments.segments and detail on segment products and services. During the first quarter of 2023, we updated our segment disclosures to include SVB. There was no impact to prior period disclosures.
Results in our business segments reflect our funds transfer policy and allocation of expenses. Unallocated balances and, when applicable, certain select items, are reflected in Corporate.
General Banking
The General Banking segment delivers products and services to individualsconsumers and businesses through anour extensive branch network digital banking, telephone bankingof branches and various ATM networks, includingdigital channels. We offer a full suite of deposit products, loans, (primarily residential mortgages and commercial loans),cash management, wealth, payments and various other 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 813
General Banking: Financial Data and Metrics
| dollars in millions | dollars in millions | Three Months Ended | | Nine Months Ended | dollars in millions | Three Months Ended | |
Earnings Summary | Earnings Summary | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | Earnings Summary | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
Net interest income | Net interest income | $ | 495 | | | $ | 468 | | | $ | 363 | | | $ | 1,400 | | | $ | 1,071 | | Net interest income | $ | 560 | | | $ | 546 | | | $ | 437 | | |
Provision (benefit) for credit losses | Provision (benefit) for credit losses | 2 | | | 7 | | | (1) | | | (7) | | | (32) | | Provision (benefit) for credit losses | 14 | | | 15 | | | (15) | | |
Net interest income after provision (benefit) for credit losses | 493 | | | 461 | | | 364 | | | 1,407 | | | 1,103 | | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | 546 | | | 531 | | | 452 | | |
Noninterest income | Noninterest income | 118 | | | 126 | | | 110 | | | 365 | | | 325 | | Noninterest income | 116 | | | 111 | | | 123 | | |
Noninterest expense | Noninterest expense | 410 | | | 391 | | | 295 | | | 1,210 | | | 875 | | Noninterest expense | 395 | | | 360 | | | 409 | | |
Income before income taxes | Income before income taxes | 201 | | | 196 | | | 179 | | | 562 | | | 553 | | Income before income taxes | 267 | | | 282 | | | 166 | | |
Income tax expense | Income tax expense | 55 | | | 40 | | | 38 | | | 134 | | | 125 | | Income tax expense | 65 | | | 70 | | | 40 | | |
Net income | Net income | $ | 146 | | | $ | 156 | | | $ | 141 | | | $ | 428 | | | $ | 428 | | Net income | $ | 202 | | | $ | 212 | | | $ | 126 | | |
Select Period End Balances | Select Period End Balances | | | | | | | | | | Select Period End Balances | | | | | | |
Loans and leases | Loans and leases | $ | 41,693 | | | $ | 40,444 | | | $ | 31,849 | | | $ | 41,693 | | | $ | 31,849 | | Loans and leases | $ | 43,353 | | | $ | 42,921 | | | $ | 38,528 | | |
Deposits | Deposits | 82,730 | | | 83,535 | | | 49,992 | | | 82,730 | | | 49,992 | | Deposits | 85,982 | | | 84,361 | | | 85,458 | | |
|
Results for the 2022 periods reflect the additional activity from the CIT Merger, which were not includedThe decrease in 2021 income statements.
Netnet income for the three months ended September 30, 2022 decreasedMarch 31, 2023 compared to the three months ended June 30,December 31, 2022 reflectingwas due to higher noninterest expenses, which offset higher NII and noninterest income. NII increased, mostly due to higher yields and growth in the loan portfolio, which offset by lower noninterest income, higher noninterest expenses and higher taxes.deposit costs. Noninterest income for the three months ended September 30, 2022 decreasedMarch 31, 2023 increased compared to the three months ended June 30,December 31, 2022, reflecting lower service charges on deposits.higher wealth management fees. Noninterest expenses for the three months ended September 30, 2022March 31, 2023 increased compared to the three months ended June 30,December 31, 2022, mostly reflecting higher salary and benefit costs and other items discussed previously in the section entitled “Noninterest Expenses”Expense” 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.
LoansThe increase in loans and leases at September 30,March 31, 2023 compared to December 31, 2022 increased from June 30, 2022 reflecting strongreflected continued demand through our branch network. Growth was primarily concentrated in commercial and business loans. Our consumer mortgage loans also grew,increased, reflecting lower prepayments and originating loans that were held on-balance sheet. Comparedsheet, which offset lower activity due 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.high rate environment.
Deposits include deposits from the branch onlinenetwork, Direct Bank and CAB channels. The additional branches acquiredincrease in the CIT Merger were mostlydeposits at March 31, 2023 compared to December 31, 2022 was primarily in California. Deposits at September 30, 2022 were down from June 30, 2022, driven by lower money marketour Direct Bank, in products such as time and savings accounts, partially offset by an increasea decrease in savingsmoney market accounts. While deposits were down in our branch network, deposits from our direct banking grew. The increase comparedRefer to September 30, 2021 reflects deposits acquired in the CIT Merger. See consolidated discussions in the sections entitled “Net Interest Income” “Net and Net Interest Margin” and “Balance Sheet Analysis—Deposits” of this MD&A for additional information.
Commercial Banking
The Commercial Banking segment provides a range of lending, leasing, capital markets, asset management, and other financial and advisory services primarily to small and middle-marketmiddle market companies across variousin a wide range of 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 914
Commercial 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 | $ | 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 | |
| | | | | | | | | |
Results for the 2022 periods primarily reflect activity from the former CIT businesses, which were not included in 2021 periods. | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
Earnings Summary | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Net interest income | $ | 240 | | | $ | 244 | | | $ | 207 | | | | | |
Provision (benefit) for credit losses | 49 | | | 59 | | | (34) | | | | | |
Net interest income after provision for credit losses | 191 | | | 185 | | | 241 | | | | | |
Noninterest income | 143 | | | 141 | | | 112 | | | | | |
Noninterest expense | 211 | | | 188 | | | 191 | | | | | |
Income before income taxes | 123 | | | 138 | | | 162 | | | | | |
Income tax expense | 29 | | | 39 | | | 41 | | | | | |
Net income | $ | 94 | | | $ | 99 | | | $ | 121 | | | | | |
Select Period End Balances | | | | | | | | | |
Loans and leases | $ | 28,684 | | | $ | 27,782 | | | $ | 26,922 | | | | | |
Deposits | 3,045 | | | 3,225 | | | 4,698 | | | | | |
Operating lease equipment, net | 719 | | | 723 | | | 721 | | | | | |
NetThe decrease in net income for the three months ended September 30, 2022 was essentially unchangedMarch 31, 2023 compared to the three months ended June 30,December 31, 2022 reflectingwas mostly due to higher NII and noninterest income,expenses, which offset higherlower provision for credit losses and noninterest expenses.taxes. NII decreased, primarily due to higher deposit costs that offset growth in the loan portfolio. The decrease in the provision for credit losses reflects a lower provision for unfunded commitments. Noninterest income for the three months ended September 30, 2022 reflects moderate deterioration in the macroeconomic forecasts and loan portfolio growth. ForMarch 31, 2023 increased compared to the three months ended September 30, and June 30,December 31, 2022, noninterest income included rental incomereflecting positive marks 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.derivatives, partially offset by lower factoring commissions. Noninterest expenses for the three months ended September 30, 2022March 31, 2023 increased compared to the three months ended June 30,December 31, 2022, mostly reflecting higher salary and benefit costs and other items discussed previously in the section entitled “Noninterest Expense” of this MD&A. DepreciationNoninterest expenses for this segment also includes depreciation on operating lease equipment, which totaled $43 million for each of the three months ended September 30, 2022March 31, 2023 and $42 million for the three months ended June 30, 2022 ($125 million for the nine months ended September 30, 2022).December 31, 2022.
LoansThe increase in loans and leases at September 30,March 31, 2023 compared to December 31, 2022 increased from June 30, 2022, reflectingreflected growth in a number of our industry verticals, such as real estate, maritime and healthcare, as well as commercial mortgages.
Silicon Valley Banking
The SVB segment products and services are provided to clients primarily in the healthcare and technology industries, as well as private equity and small business lending, while middle market bankingventure capital firms. Financial solutions are provided to commercial clients through credit, treasury management, foreign exchange, trade finance and other financial products and services.
Table 15
Silicon Valley Banking: Financial Data and Metrics
| | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
Earnings Summary | March 31, 2023 | | | | | | | | |
Net interest income | $ | 65 | | | | | | | | | |
Provision (benefit) for credit losses | — | | | | | | | | | |
Net interest income after provision for credit losses | 65 | | | | | | | | | |
Noninterest income | 14 | | | | | | | | | |
Noninterest expense | 33 | | | | | | | | | |
Income before income taxes | 46 | | | | | | | | | |
Income tax expense | 11 | | | | | | | | | |
Net income | $ | 35 | | | | | | | | | |
Select Period End Balances | | | | | | | | | |
Loans and leases | $ | 66,171 | | | | | | | | | |
Deposits | 49,259 | | | | | | | | | |
| | | | | | | | | |
The current quarter includes results of operations related to SVB for only five days as the SVBB Acquisition was down. The increase in loans and leases and depositscompleted on March 27, 2023. Therefore, the results of operations for the 2022 periods compared to 2021 was driven by those acquiredSVB in the CIT Merger.current quarter (or extrapolations thereof) are not indicative of expected results of operations for subsequent periods.
The results exclude the preliminary gain on acquisition, day 2 provision for credit losses and acquisition-related expenses, all of which are included in the Corporate segment. NII reflects interest income on loans (including discount accretion), partially offset by deposit costs. There was no provision for credit losses due to the timing of SVBB Acquisition. Noninterest income was earned primarily from commercial banking products. Noninterest expenses were mostly compensation related costs.
Loans totaled $66.17 billion at March 31, 2023, which declined from the SVBB Acquisition Date balance of $68.50 billion. The decrease was primarily related to maturities and paydowns.
SVB deposits declined from $55.96 billion at the SVBB Acquisition Date to $49.26 billion at March 31, 2023, primarily due to uncertainty in the banking industry. While SVB deposits declined to $41.43 billion as of April 28, 2023, the pace of the decline slowed and deposit amounts leveled off to approximately $41 billion during the last two weeks of April. Refer to the “Funding, Liquidity and Capital Overview” discussion in the “Financial Performance Summary” section of this MD&A.
Rail
Our Rail segment offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenues are primarily generated from rental income on operating lease income.leases.
Table 1016
Rail: Financial Data and Metrics
| | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
Earnings Summary | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Rental income on operating leases | $ | 176 | | | $ | 168 | | | $ | 159 | | | | | |
Depreciation on operating lease equipment | 46 | | | 45 | | | 41 | | | | | |
Maintenance and other operating lease expenses | 56 | | | 47 | | | 43 | | | | | |
Adjusted rental income on operating lease equipment(1) | 74 | | | 76 | | | 75 | | | | | |
Interest expense, net | 28 | | | 23 | | | 19 | | | | | |
Noninterest income | 1 | | | (5) | | | 3 | | | | | |
Operating expenses | 18 | | | 15 | | | 16 | | | | | |
Income before income taxes | 29 | | | 33 | | | 43 | | | | | |
Income tax expense | 7 | | | 9 | | | 11 | | | | | |
Net income | $ | 22 | | | $ | 24 | | | $ | 32 | | | | | |
Select Period End Balances | | | | | | | | | |
Operating lease equipment, net | $ | 7,612 | | | $ | 7,433 | | | $ | 7,251 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Net revenue Adjusted rental income on operating leaseslease equipment 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(Adjusted rental income on operating leases)lease equipment).
Net income and net revenueadjusted rental income on operating leaseslease equipment are utilized to measure the profitability of our Rail segment. NAdjusted rental incomeet revenue on operating leaseslease equipment 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.segment. NII is not used because it includes the impact of debt costs offunding our operating lease assets but excludes the associated net rental income.
Net income and adjusted net revenue on operating leases for the three months ended September 30, 2022March 31, 2023 were $30$22 million and $69$74 million, respectively, both updown slightly from the three months ended June 30,December 31, 2022. DepreciationAdjusted net revenue on operating leases was down as higher rental income from the increased number of rail cars and higher re-lease rates was offset by higher maintenance costs, mostly due to readying tank cars for service. Railcar depreciation is recognized on railcars, anda straight-line basis over the prior quarter included higher costs driven by adjustments to residual values.estimated service life of the asset. Maintenance and other operating lease expenses increased from the prior quarter, reflecting higherreflect 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.lease.
Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 105%137.0% of the average prior or expiring lease rate during the quarter. Our railcar utilization, including commitments to lease, improved to 97.9% at September 30, 2022 was 96.2%, unchangedMarch 31, 2023 from June 30,97.7% at December 31, 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, 2022March 31, 2023 consisted of approximately 118,500119,700 railcars, down slightlyup from June 30,approximately 119,200 at December 31, 2022. The following table reflects the proportion of railcars by type based on units and net investment, respectively:investment:
Table 1117
Operating lease Railcar Portfolio by Type (units and net investment)
| | | September 30, 2022 | | June 30, 2022 | | March 31, 2023 | | December 31, 2022 |
Railcar Type | Railcar Type | Total Owned Fleet - % Total Units | | Total Owned Fleet - % Total Net Investment | | Total Owned Fleet - % Total Units | | Total Owned Fleet - % Total Net Investment | 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 | Covered Hoppers | 43 | % | | 40 | % | | 42 | % | | 40 | % | Covered Hoppers | 44 | % | | 42 | % | | 43 | % | | 41 | % |
Tank Cars | Tank Cars | 30 | % | | 41 | % | | 30 | % | | 41 | % | Tank Cars | 29 | % | | 39 | % | | 29 | % | | 40 | % |
Mill/Coil Gondolas | Mill/Coil Gondolas | 8 | % | | 6 | % | | 8 | % | | 6 | % | Mill/Coil Gondolas | 8 | % | | 6 | % | | 8 | % | | 6 | % |
Coal | Coal | 8 | % | | 1 | % | | 8 | % | | 1 | % | Coal | 8 | % | | 1 | % | | 8 | % | | 1 | % |
Boxcars | Boxcars | 6 | % | | 7 | % | | 6 | % | | 7 | % | Boxcars | 6 | % | | 6 | % | | 6 | % | | 6 | % |
Other | Other | 5 | % | | 5 | % | | 6 | % | | 5 | % | Other | 5 | % | | 6 | % | | 6 | % | | 6 | % |
Total | Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Table 1218
Rail Operating Lease Equipment by Obligor Industry
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Manufacturing | Manufacturing | $ | 2,985 | | | 41 | % | | $ | 3,057 | | | 42 | % | Manufacturing | $ | 3,073 | | | 40 | % | | $ | 3,016 | | | 41 | % |
Rail | Rail | 2,010 | | | 28 | % | | 1,937 | | | 27 | % | Rail | 1,958 | | | 26 | % | | 1,981 | | | 27 | % |
Wholesale | Wholesale | 991 | | | 14 | % | | 980 | | | 14 | % | Wholesale | 1,137 | | | 15 | % | | 1,101 | | | 15 | % |
Oil and gas extraction / services | Oil and gas extraction / services | 538 | | | 7 | % | | 556 | | | 8 | % | Oil and gas extraction / services | 593 | | | 8 | % | | 552 | | | 7 | % |
Energy and utilities | Energy and utilities | 245 | | | 3 | % | | 237 | | | 3 | % | Energy and utilities | 242 | | | 3 | % | | 242 | | | 3 | % |
Other | Other | 479 | | | 7 | % | | 480 | | | 6 | % | Other | 609 | | | 8 | % | | 541 | | | 7 | % |
Total | Total | $ | 7,248 | | | 100 | % | | $ | 7,247 | | | 100 | % | Total | $ | 7,612 | | | 100 | % | | $ | 7,433 | | | 100 | % |
Corporate
Certain items that are not allocated to operating segments are included in the Corporate segment. SomeFor descriptions of items not allocated, see Note 21 — Business Segment Information.
Table 19
Corporate: Financial Data and Metrics
| | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended | | |
Earnings Summary | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
Net interest income | $ | 13 | | | $ | 35 | | | $ | 24 | | | | | |
Provision for credit losses | 720 | | | 5 | | | 513 | | | | | |
Net interest (expense) income after provision for credit losses | (707) | | | 30 | | | (489) | | | | | |
Noninterest income | 9,809 | | | 14 | | | 453 | | | | | |
Noninterest expense | 96 | | | 105 | | | 110 | | | | | |
(Loss) income before income taxes | 9,006 | | | (61) | | | (146) | | | | | |
Income tax (benefit) expense | (159) | | | 17 | | | (138) | | | | | |
Net income (loss) | $ | 9,165 | | | $ | (78) | | | $ | (8) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Results for the more significantthree months ended March 31, 2023 were primarily impacted by a preliminary gain on acquisition of $9.82 billion and recurring items include interest income on investment securities, a portionthe day 2 provision for credit losses of interest expense primarily$716 million related to corporate funding costs (including brokered deposits),the SVBB Acquisition. The income on BOLI (other noninterest income), merger-related expenses, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporatetax rate also includes certain significant items that are infrequent, such asreflects the Initial Non-PCD Provision for loans and leases and unfunded commitments, andimpact of the preliminary gain on acquisition, both of which related toacquisition. Similar transactions were recorded in the three months ended March 31, 2022 for the CIT Merger.
Table 13
Corporate: 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 (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) | |
| | | | | | | | | |
| | | | | | | | | |
Results for 2022 were driven by impacts fromIn addition to the CIT Merger. Results forabove noted items, the three months ended September 30, 2022 benefited from higherMarch 31, 2023 also reflect lower NII reflecting higher interest income.due to rising brokered deposit funding costs. Included in noninterest expenses for the 2022 periodsexpense were $33 million, $34$28 million and $202$29 million of merger-relatedacquisition-related expenses, for the three months ended September 30,March 31, 2023 and December 31, 2022, June 30, 2022 and ninerespectively. For the three months ended September 30,December 31, 2022 respectively. In addition to these items, the nine months ended September 30, 2022 alsoincome tax expense included a provision for credit losses of $513$55 million related to the Initial Non-PCD Provision, a preliminary gain on acquisitionstrategic decision to surrender $1.25 billion of $431 million and a benefit of approximately $27 million related to the termination of certain legacy CIT retiree benefit plans in noninterest expenses.BOLI policies.
BALANCE SHEET ANALYSIS
INTEREST-EARNING ASSETS
Interest-earning assets include interest-bearing cash,interest-earning deposits at banks, investment securities, assets held for sale, and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.
Interest-earning Deposits at Banks
Interest-earning deposits at banks at September 30, 2022March 31, 2023 totaled $6.2$38.52 billion. This was downan increase from $6.5 billion at June 30, 2022 and $9.1$5.03 billion at December 31, 2021. These declines2022. The increase primarily related to lower deposits, loan growth, and$33.93 billion acquired in the timing of investment maturities. WhileSVBB Acquisition, plus holding additional liquidity reflecting higher FHLB borrowings. Subsequent to the CIT Merger added approximately $2.9 billion ofSVBB Acquisition Date, interest-earning deposits at banks asdecreased due to the decline in SVB deposits. The trend in deposits is further addressed in the “Funding, Liquidity and Capital Overview” section of the Merger Date, that amount was offset by the use of cash for the redemption of approximately $2.9 billion of assumed debt from the CIT Merger in February.this MD&A.
Investment Securities
The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made 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 or into overnight investments.interest-earning deposits at banks. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investmentsinterest-earning deposits at banks to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note 1 — Accounting Policies and Basis of Presentation andgrowth. Refer to Note 3 — InvestmentsInvestment Securities and the “Funding, Liquidity and Capital Overview” section of this MD&A for additional disclosures regarding investment securities.
The carrying value of investment securities at September 30, 2022March 31, 2023 totaled $18.8$19.53 billion. This was downup slightly from $19.1$19.37 billion at June 30,December 31, 2022, reflecting investment security purchases of $0.5 billion, maturities and paydowns of $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$337 million, acquired investment securities purchases of $1.8 billion, partially offset by$122 million, maturities, paydowns and paydownssales of $1.7 billion,$345 million, and other non-cash items, such as fair value changes.changes and amortization. We acquired certain mortgage-backed securities as part of the SVBB Acquisition.
AvailableBancShares’ portfolio of investment securities available for sale consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities and corporate bonds. Investment securities available for sale are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. As of September 30, 2022,March 31, 2023, investment securities available for sale had a net pre-tax unrealized loss of $995$894 million, compared to a net pre-tax unrealized loss of $647 million as of June 30, 2022 and $12$972 million as of December 31, 2021.2022. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the investment securities portfolio generally decreases when interest rates increase or when credit spreads widen. Management evaluatedGiven the available for sale securities in an unrealized loss positionconsistently strong credit rating of the U.S. Treasury, and concluded that the unrealizedlong history of no credit losses related to changes in interest rates relative to when the securities were purchased, and therefore BancShares management determined that no ACL was needed at September 30, 2022.
BancShares’ portfolio of held to maturityon debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, as of March 31, 2023, no ACL was required. For corporate bonds, we analyzed the changes in interest rates relative to when the investment securities were purchased and considered other factors, including changes in credit ratings, delinquencies, and other macroeconomic factors. As a result of this analysis, we determined that one corporate bond had a credit-related loss of $4 million as of March 31, 2023
BancShares’ portfolio of investment securities held to maturity consists of similar mortgage-backed securities, U.S. Treasury notes, unsecured bonds issued by government agenciesNotes and government sponsored entities,agency securities described above, as well as securities issued by the World BankSupranational Entities and Multilateral Development Banks and FDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the World BankSupranational Entities and Multilateral Development Banks and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, BancSharesBancShares’ management determined that no ACL was needed for investment securities held to maturity at September 30, 2022March 31, 2023 and December 31, 2021.
Table 14presents the investment securities portfolio at September 30, 2022, June 30, 2022, and December 31, 2021, segregated by major 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. |
2022.
The following table presents the investment securities portfolio at March 31, 2023, and December 31, 2022, segregated by major category:
Table 1520
Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | March 31, 2023 | | | | December 31, 2022 |
| Composition(1) | | Amortized cost | | Fair value | | | | | | | | Composition(1) | | Amortized cost | | Fair value |
Investment securities available for sale: | | | | | | | | | | | | | | | | | |
U.S. Treasury | 10.9 | % | | $ | 2,091 | | | $ | 1,978 | | | | | | | | | 10.6 | % | | $ | 2,035 | | | $ | 1,898 | |
Government agency | 0.8 | % | | 152 | | | 150 | | | | | | | | | 0.9 | % | | 164 | | | 162 | |
Residential mortgage-backed securities | 26.7 | % | | 5,415 | | | 4,848 | | | | | | | | | 26.8 | % | | 5,424 | | | 4,795 | |
Commercial mortgage-backed securities | 8.7 | % | | 1,755 | | | 1,585 | | | | | | | | | 9.0 | % | | 1,774 | | | 1,604 | |
Corporate bonds | 2.8 | % | | 542 | | | 500 | | | | | | | | | 3.0 | % | | 570 | | | 536 | |
| | | | | | | | | | | | | | | | | |
Total investment securities available for sale | 49.9 | % | | $ | 9,955 | | | $ | 9,061 | | | | | | | | | 50.3 | % | | $ | 9,967 | | | $ | 8,995 | |
Investment in marketable equity securities | 0.5 | % | | $ | 75 | | | $ | 85 | | | | | | | | | 0.5 | % | | $ | 75 | | | $ | 95 | |
Investment securities held to maturity: | | | | | | | | | | | | | | | | | |
U.S. Treasury | 2.4 | % | | $ | 475 | | | $ | 433 | | | | | | | | | 2.4 | % | | $ | 474 | | | $ | 424 | |
Government agency | 7.7 | % | | 1,550 | | | 1,387 | | | | | | | | | 7.6 | % | | 1,548 | | | 1,362 | |
Residential mortgage-backed securities | 21.3 | % | | 4,511 | | | 3,858 | | | | | | | | | 21.7 | % | | 4,605 | | | 3,882 | |
Commercial mortgage-backed securities | 16.8 | % | | 3,547 | | | 3,051 | | | | | | | | | 16.1 | % | | 3,355 | | | 2,871 | |
Supranational securities | 1.4 | % | | 296 | | | 262 | | | | | | | | | 1.4 | % | | 295 | | | 254 | |
Other | — | % | | 2 | | | 2 | | | | | | | | | — | % | | 2 | | | 2 | |
Total investment securities held to maturity | 49.6 | % | | $ | 10,381 | | | $ | 8,993 | | | | | | | | | 49.2 | % | | $ | 10,279 | | | $ | 8,795 | |
Total investment securities | 100 | % | | $ | 20,411 | | | $ | 18,139 | | | | | | | | | 100 | % | | $ | 20,321 | | | $ | 17,885 | |
(1) Calculated as a percentage of the total fair value of investment securities. |
The following table presents the weighted average yields for investment securities available for sale and held to maturity at September 30, 2022,March 31, 2023, segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields.
Table 1521
Weighted Average Yield on Investment Securities
| | | September 30, 2022 | | March 31, 2023 |
| | Within One Year | | One to Five Years | | Five to 10 Years | | After 10 Years | | Total | | Within One Year | | One to Five Years | | Five to 10 Years | | After 10 Years | | Total |
Investment securities available for sale: | Investment securities available for sale: | | | | | | | | | | Investment securities available for sale: | | | | | | | | | |
U.S. Treasury | U.S. Treasury | 3.25 | % | | 0.96 | % | | — | % | | — | % | | 1.01 | % | U.S. Treasury | 3.57 | % | | 1.09 | % | | — | % | | — | % | | 1.12 | % |
Government agency | Government agency | 4.42 | % | | 4.58 | % | | 4.09 | % | | 4.14 | % | | 4.09 | % | Government agency | 4.36 | % | | 4.56 | % | | 4.51 | % | | 4.93 | % | | 4.53 | % |
Residential mortgage-backed securities | Residential mortgage-backed securities | 1.09 | % | | 2.38 | % | | 2.12 | % | | 1.78 | % | | 1.78 | % | Residential mortgage-backed securities | 1.82 | % | | 4.08 | % | | 4.19 | % | | 1.88 | % | | 1.95 | % |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 4.06 | % | | 3.55 | % | | 5.37 | % | | 2.71 | % | | 2.86 | % | Commercial mortgage-backed securities | 2.46 | % | | 3.59 | % | | 5.74 | % | | 2.81 | % | | 2.95 | % |
Corporate bonds | Corporate bonds | 5.00 | % | | 6.61 | % | | 5.28 | % | | 4.67 | % | | 5.40 | % | Corporate bonds | 5.00 | % | | 6.29 | % | | 5.39 | % | | 4.67 | % | | 5.46 | % |
| Total investment securities available for sale | Total investment securities available for sale | 3.65 | % | | 1.42 | % | | 4.84 | % | | 1.99 | % | | 2.07 | % | Total investment securities available for sale | 3.26 | % | | 1.57 | % | | 5.02 | % | | 2.09 | % | | 2.18 | % |
| Investment securities held to maturity: | Investment securities held to maturity: | | Investment securities held to maturity: | |
U.S. Treasury | U.S. Treasury | — | % | | 1.37 | % | | 1.57 | % | | — | % | | 1.38 | % | U.S. Treasury | — | % | | 1.37 | % | | 1.57 | % | | — | % | | 1.38 | % |
Government agency | Government agency | 0.44 | % | | 1.36 | % | | 1.75 | % | | — | % | | 1.49 | % | Government agency | 0.44 | % | | 1.39 | % | | 1.84 | % | | — | % | | 1.49 | % |
Residential mortgage-backed securities(1) | Residential mortgage-backed securities(1) | — | % | | 4.03 | % | | 3.71 | % | | 1.76 | % | | 1.76 | % | Residential mortgage-backed securities(1) | — | % | | — | % | | 2.64 | % | | 1.90 | % | | 1.90 | % |
Commercial mortgage-backed securities(1) | Commercial mortgage-backed securities(1) | — | % | | — | % | | 2.20 | % | | 1.83 | % | | 1.83 | % | Commercial mortgage-backed securities(1) | — | % | | 2.43 | % | | 2.04 | % | | 2.84 | % | | 2.84 | % |
Supranational Securities | Supranational Securities | — | % | | 1.23 | % | | 1.64 | % | | — | % | | 1.56 | % | Supranational Securities | — | % | | 1.35 | % | | 1.68 | % | | — | % | | 1.56 | % |
Other investments | 0.78 | % | | — | % | | — | % | | — | % | | 0.78 | % | |
Other | | Other | 0.34 | % | | 0.20 | % | | — | % | | — | % | | 0.32 | % |
Total investment securities held to maturity | Total investment securities held to maturity | 0.46 | % | | 1.36 | % | | 1.73 | % | | 1.79 | % | | 1.72 | % | Total investment securities held to maturity | 0.44 | % | | 1.39 | % | | 1.79 | % | | 2.31 | % | | 2.12 | % |
(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.maturity at March 31, 2023. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans.
Assets Held for Sale
Assets 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 estatemortgage loans and commercial loans are originated with the intent to be sold to investors or lenders, respectively, and are recorded in assets held for sale at fair value. In addition, BancShares may change its strategy for certain portfolio loans initially held for investment and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.
Assets held for sale at March 31, 2023 were $94 million, an increase of $34 million compared to $60 million at December 31, 2022. The net increase was primarily related to loans held for sale in the SVB portfolio, partially offset by sales of commercial loans.
Table 22
Assets Held for Sale
| | | | | | | | | | | | | |
dollars in millions | March 31, 2023 | | | | December 31, 2022 |
Loans and leases: | | | | | |
Commercial | $ | 33 | | | | $ | 48 |
Consumer | 9 | | | | 4 |
SVB | 48 | | | | — |
Loans and leases | 90 | | | | 52 |
Operating lease equipment | 4 | | | | 8 |
Total assets held for sale | $ | 94 | | | | $ | 60 |
Loans and Leases
Loans and leases held for investment at September 30, 2022March 31, 2023 were $69.8$138.29 billion, an increase of $67.51 billion from $67.7$70.78 billion at June 30,December 31, 2022. OurThe increase reflects approximately $66.17 billion of SVB loans at March 31, 2023. In addition, as shown in the table below, commercial loans were up $1.5 billion from June 30, 2022. We continued to see strong loangrow during the current quarter in a number of industry verticals, such as real estate, maritime and healthcare, and growth in our branch network, as well as commercial banking.network. 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. Wecurrent quarter also hadincluded growth in both commercial mortgage loans and consumer mortgage loans. Our consumer
Commercial loans at March 31, 2023 were up $0.6$54.39 billion from June 30, 2022. Total loans and leases increased from $32.4compared to $53.46 billion at December 31, 2021, reflecting the addition of $32.7 billion from the CIT Merger2022, representing 39% and the above noted activity, partially offset by a reduction in SBA-PPP loans.
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 at September 30, 2022 were $53.0 billion compared to $51.5 billion at June 30, 2022 and $22.6 billion at December 31, 2021, representing 76%, 76% and 70%75% of total loans and leases, respectively. Consumer loans at September 30, 2022March 31, 2023 were $16.8$17.73 billion, compared to $16.3 billion at June 30, 2022 and $9.8$17.33 billion at December 31, 2021,2022, representing 24%, 24%13% and 30%25% of total loans and leases, respectively. SVB loans at March 31, 2023 were $66.17 billion, representing 48% of total loans and leases.
Table 1623
Loans and Leases
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
| | | Balance | | % to Total Loans | | | Balance | | % to Total Loans |
Commercial: | Commercial: | | | | | | Commercial: | | | | | | | | |
Commercial construction | Commercial construction | $ | 2,752 | | | $ | 2,783 | | | $ | 1,238 | | Commercial construction | $ | 2,971 | | | 2 | % | | | $ | 2,804 | | | 4 | % |
Owner occupied commercial mortgage | Owner occupied commercial mortgage | 14,053 | | | 13,795 | | | 12,099 | | Owner occupied commercial mortgage | 14,456 | | | 10 | % | | | 14,473 | | | 20 | % |
Non-owner occupied commercial mortgage | Non-owner occupied commercial mortgage | 9,683 | | | 9,167 | | | 3,041 | | Non-owner occupied commercial mortgage | 10,292 | | | 7 | % | | | 9,902 | | | 14 | % |
Commercial and industrial | Commercial and industrial | 24,288 | | | 23,554 | | | 5,937 | | Commercial and industrial | 24,508 | | | 18 | % | | | 24,105 | | | 34 | % |
Leases | Leases | 2,184 | | | 2,178 | | | 271 | | Leases | 2,163 | | | 2 | % | | | 2,171 | | | 3 | % |
Total commercial | Total commercial | $ | 52,960 | | | $ | 51,477 | | | $ | 22,586 | | Total commercial | $ | 54,390 | | | 39 | % | | | $ | 53,455 | | | 75 | % |
Consumer: | Consumer: | | Consumer: | | | | | | | | |
Residential mortgage | Residential mortgage | 12,910 | | | 12,441 | | | 6,088 | | Residential mortgage | 13,727 | | | 10 | % | | | 13,309 | | | 19 | % |
Revolving mortgage | Revolving mortgage | 1,923 | | | 1,893 | | | 1,818 | | Revolving mortgage | 1,916 | | | 1 | % | | | 1,951 | | | 3 | % |
Consumer auto | Consumer auto | 1,385 | | | 1,338 | | | 1,332 | | Consumer auto | 1,452 | | | 1 | % | | | 1,414 | | | 2 | % |
Consumer other | Consumer other | 612 | | | 586 | | | 548 | | Consumer other | 632 | | | 1 | % | | | 652 | | | 1 | % |
Total consumer | Total consumer | $ | 16,830 | | | $ | 16,258 | | | $ | 9,786 | | Total consumer | $ | 17,727 | | | 13 | % | | | $ | 17,326 | | | 25 | % |
Silicon Valley Banking: | | Silicon Valley Banking: | | | | | | | | |
Global fund banking | | Global fund banking | 36,097 | | | 26 | % | | | — | | | — | % |
Investor dependent - early stage | | Investor dependent - early stage | 1,994 | | | 1 | % | | | — | | | — | % |
Investor dependent - growth stage | | Investor dependent - growth stage | 4,418 | | | 3 | % | | | — | | | — | % |
Innovation C&I and cash flow dependent | | Innovation C&I and cash flow dependent | 9,193 | | | 7 | % | | | — | | | — | % |
Private Bank | | Private Bank | 9,476 | | | 7 | % | | | — | | | — | % |
CRE | | CRE | 2,444 | | | 2 | % | | | — | | | — | % |
Other | | Other | 2,549 | | | 2 | % | | | — | | | — | % |
Total Silicon Valley Banking | | Total Silicon Valley Banking | $ | 66,171 | | | 48 | % | | | $ | — | | | — | % |
Total loans and leases | Total loans and leases | 69,790 | | | 67,735 | | | 32,372 | | Total loans and leases | 138,288 | | | 100 | % | | | 70,781 | | | 100 | % |
Less allowance for credit losses | Less allowance for credit losses | 882 | | | 850 | | | 178 | | Less allowance for credit losses | (1,605) | | | | | | (922) | | | |
Net loans and leases | Net loans and leases | $ | 68,908 | | | $ | 66,885 | | | $ | 32,194 | | Net loans and leases | $ | 136,683 | | | | $ | 69,859 | | |
The unamortized discount related to acquired loans was $131 million, $146 million$2.67 billion and $40$118 million at September 30, 2022, June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase reflects the discount on loans acquired in the SVBB Acquisition.
OPERATING LEASE EQUIPMENT, NET
As detailed in the following table, our operating lease portfolio is mostly comprised of rail assets. SeeRefer to the Rail segment discussion in the section entitled “Results by Business Segment” of this MD&A for further details on the rail portfolio.
Table 1724
Operating Lease Equipment
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | dollars in millions | March 31, 2023 | | December 31, 2022 |
Railcars and locomotives | Railcars and locomotives | $ | 7,248 | | | $ | 7,247 | | Railcars and locomotives | $ | 7,612 | | | $ | 7,433 | |
Other equipment | Other equipment | 736 | | | 724 | | Other equipment | 719 | | | 723 | |
Total(1) | Total(1) | $ | 7,984 | | | $ | 7,971 | | Total(1) | $ | 8,331 | | | $ | 8,156 | |
(1)Includes off-lease Rail equipment of $509$409 million at September 30, 2022March 31, 2023 and $492$457 million at June 30,December 31, 2022.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, senior and subordinated debt, and other borrowings. Interest-bearing liabilities at September 30, 2022March 31, 2023 totaled $69.3$131.50 billion compared to $67.1 billion at June 30, 2022 and $31.8$71.13 billion at December 31, 2021. As discussed further below, the increase from June 30, 2022 reflects lower deposits offset by higher FHLB borrowings.2022. The increase from December 31, 20212022 was mostlyprimarily due to deposits assumed in the SVBB Acquisition, the Purchase Money Note, as well as deposit growth in the General Banking Segment which includes the Direct Bank and borrowings from the CIT Merger, partially offset by current year activity that included post-merger declinecommunity association banking, and a net increase 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 June 30, 2022 was driven by lower money market accounts, partially offset by an increase in savings accounts.
The reduction inDeposits
Refer to the “Funding, Liquidity and Capital Overview” section of this MD&A for discussion of deposit composition and recent deposit trends.
Total deposits since the CIT Merger have been primarily concentrated in acquired higher cost channels, including legacy OneWest branches and the Direct Bank. These declinesat March 31, 2023 were partially offset by growth in noninterest-bearing deposits, primarily from our branch network. The$140.05 billion, an increase in total deposits asof $50.64 billion compared to December 31, 2021 was driven by the $39.42022. The increase primarily reflects $49.26 billion of SVB deposits acquiredat March 31, 2023, plus solid deposit growth during the current quarter in the CIT Merger, partially offset by the noted declines. As part of the CIT Merger, we acquired CIT’s online banking platformour Direct Bank and an HOA deposit channel.community association banking.
Interest-bearing deposits totaled $85.40 billion and $64.49 billion at March 31, 2023 and December 31, 2022, respectively. Noninterest-bearing deposits totaled $54.65 billion and $24.92 billion at March 31, 2023 and December 31, 2022, respectively.
Table 1825
Deposits
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 26,587 | | | $ | 26,645 | | | $ | 21,405 | | Noninterest-bearing demand | $ | 54,649 | | | | $ | 24,922 | |
Checking with interest | Checking with interest | 16,118 | | | 16,285 | | | 12,694 | | Checking with interest | 23,743 | | | | 16,202 | |
Money market | Money market | 21,818 | | | 24,699 | | | 10,590 | | Money market | 30,598 | | | | 21,040 | |
Savings | Savings | 14,722 | | | 13,319 | | | 4,236 | | Savings | 17,932 | | | | 16,634 | |
Time | Time | 8,308 | | | 8,381 | | | 2,481 | | Time | 13,128 | | | | 10,610 | |
Total deposits | Total deposits | $ | 87,553 | | | $ | 89,329 | | | $ | 51,406 | | Total deposits | $ | 140,050 | | | | $ | 89,408 | |
Noninterest-bearing deposits to total deposits | | Noninterest-bearing deposits to total deposits | 39.0 | % | | | 27.9 | % |
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 economic conditions change, we recognize that our liquidity position could be adversely affected if bank deposits are withdrawn. Our ability to fund future loan growth is significantly dependent on our success in retaining existing deposits and generating new deposits at a reasonable cost.
Deposits (based on branch location) as of March 31, 2023, in North Carolina and South Carolina represented approximately 25.3% and 8.4%, respectively, of total deposits. The Direct Bank includes $18.80 billion or 13.4% of total deposits as of March 31, 2023. SVB deposits as of March 31, 2023 were $49.26 billion or 35.2% of total deposits and are primarily concentrated in online banking and California.
Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to the Bank’sour regulators. We estimate total uninsured deposits were $31.0$69.96 billion, and $23.0which represents approximately 50% of total deposits at March 31, 2023, compared to $29.13 billion or 33% of total deposits at September 30, 2022 and December 31, 2021, respectively. Table 192022. The increase in amount of uninsured deposits reflects the inclusion of SVB deposits.
The following table provides the expected maturity of time deposits in excess of $250,000, the FDIC insurance limit, as of September 30, 2022.March 31, 2023:
Table 1926
Maturities of Time Deposits In Excess of $250,000
| | | | | |
dollars in millions | September 30, 2022March 31, 2023 |
Time deposits maturing in: | |
Three months or less | $ | 296260 | |
Over three months through six months | 206385 | |
Over six months through 12 months | 7661,877 | |
More than 12 months | 2151,218 | |
Total | $ | 1,4833,740 | |
Borrowings
Total borrowings at September 30, 2022March 31, 2023 were $8.3$46.09 billion compared to $4.5 billion at June 30, 2022 and $1.8$6.65 billion at December 31, 2021. 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 net new FHLB borrowings remaining at September 30, 2022, $2.6 billion and $1.6 billion were short-term and long-term, respectively. The increase in borrowings in the third quarter was to replace declines in interest-bearing deposits and support the loan growth. In addition, during the third quarter we repaid a $61 million senior unsecured term loan that matured.2022. The increase from December 31, 2021 also reflected $4.5 billion of debt assumed in2022 primarily related to the CIT Merger, partially offset by a debt redemptionPurchase Money Note of approximately $2.9$35.15 billion payable to the FDIC, as further discussed in February.
Note 2 — Business Combinations, and net increases in FHLB borrowings during the current quarter.
Table 20FHLB borrowings were $8.50 billion at March 31, 2023, including $500 million in short-term borrowings and $8.00 billion in long-term borrowings. FHLB borrowings increased from $4.25 billion at December 31, 2022, reflecting $7.00 billion of advances taken in March 2023 to enhance available liquidity, partially offset by $2.75 billion of repayments. Prior to the March advances, we were repaying FHLB borrowings due to deposit growth. Refer to the “Liquidity Risk” section below for more information on FHLB borrowings.
The following table presents borrowings, includingnet of the respective unamortized purchase accounting adjustments and issuance costs.costs:
Table 2027
Borrowings
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
Securities sold under customer repurchase agreements | Securities sold under customer repurchase agreements | $ | 578 | | | $ | 646 | | | $ | 589 | | Securities sold under customer repurchase agreements | $ | 509 | | | | $ | 436 | |
Federal Home Loan Bank borrowings(1) | Federal Home Loan Bank borrowings(1) | | Federal Home Loan Bank borrowings(1) | | | |
Floating rate notes due through September 2025 | Floating rate notes due through September 2025 | 5,800 | | | 1,650 | | | — | | Floating rate notes due through September 2025 | 8,500 | | | | 4,250 | |
Fixed rate notes due through March 2032 | — | | | 135 | | | 645 | | |
Federal Deposit Insurance Corporation | | Federal Deposit Insurance Corporation | | | |
3.500% fixed rate note due March 2028(2) | | 3.500% fixed rate note due March 2028(2) | 35,151 | | | | — | |
Senior Unsecured Borrowings | Senior Unsecured Borrowings | | 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 | | | — | | |
3.929% fixed-to-floating rate notes due June 2024 | | 3.929% fixed-to-floating rate notes due June 2024 | 502 | | | | 505 | |
2.969% fixed-to-floating rate notes due September 2025 | | 2.969% fixed-to-floating rate notes due September 2025 | 320 | | | | 320 | |
6.000% fixed rate notes due April 2036 | | 6.000% fixed rate notes due April 2036 | 59 | | | | 59 | |
Subordinated debt | Subordinated debt | | 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 | | | — | | |
6.125% fixed rate notes due March 2028 | | 6.125% fixed rate notes due March 2028 | 466 | | | | 469 | |
4.125% fixed-to-fixed rate notes due November 2029 | | 4.125% fixed-to-fixed rate notes due November 2029 | 102 | | | | 102 | |
3.375% fixed-to-floating rate notes due March 2030 | 3.375% fixed-to-floating rate notes due March 2030 | 348 | | | 348 | | | 347 | | 3.375% fixed-to-floating rate notes due March 2030 | 348 | | | | 348 | |
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 | | |
Macon Capital Trust I - floating rate debentures due March 2034 | | Macon Capital Trust I - floating rate debentures due March 2034 | 14 | | | | 14 | |
SCB Capital Trust I - floating rate debentures due April 2034 | | SCB Capital Trust I - floating rate debentures due April 2034 | 10 | | | | 10 | |
FCB/SC Capital Trust II - floating rate debentures due June 2034 | | FCB/SC Capital Trust II - floating rate debentures due June 2034 | 18 | | | | 18 | |
FCB/NC Capital Trust III - floating rate debentures due June 2036 | | FCB/NC Capital Trust III - floating rate debentures due June 2036 | 88 | | | | 88 | |
Total subordinated debt | Total subordinated debt | 1,052 | | | 1,055 | | | 478 | | Total subordinated debt | 1,046 | | | | 1,049 | |
Other borrowings | Other borrowings | 25 | | | 81 | | | 72 | | Other borrowings | 7 | | | | 26 | |
Total borrowings | Total borrowings | $ | 8,343 | | | $ | 4,459 | | | $ | 1,784 | | Total borrowings | $ | 46,094 | | | | $ | 6,645 | |
(1) Denotes outstanding debt assumedIncludes $500 million and $1.75 billion in short-term borrowings, and $8.00 billion and $2.50 billion in long-term borrowings, at March 31, 2023 and December 31, 2022, respectively.
(2) Purchase Money Note in connection with the CIT Merger.SVBB Acquisition.
SeeRefer to Note 1211 — Borrowings for further information on the various components. Also see Liquidity Risk later“Liquidity Risk” in this MD&A.
RISK MANAGEMENT
BancShares provided detail risk management information in our 20212022 Form 10-K. There were no significant changes to those disclosures. The following is a summary of those disclosures or updates to those disclosures, primarily due to the CIT Merger.disclosures.
Risk is inherent in any business. BancShares has defined a moderate risk appetite, a balanced approach to risk taking, with a philosophy which does not preclude higher risk business activities commensurate with acceptable returns while meeting regulatory objectives. Through the comprehensive Risk Management Framework and Risk Appetite Framework and Statement, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares may be exposed, with effective challenge and oversight by management committees. In addition, theOur Board strives to ensure thethat risk management is a part of our business culture is integrated with the Risk Management program and that our policies procedures and metricsprocedures for identifying, assessing, monitoring, and managing risk are part of the decision-making process. The Board’s role in risk oversight is an integral part of our overall Risk Management Framework and Risk Appetite Framework. The Board administers its risk oversight function primarily through the Boardits 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 regarding risk exposures, including Credit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic and Reputational risks; review, approve, and monitor adherence to the Risk Appetite Statement and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework.Framework and Statement. The Board Risk Committee also reviews reports of examination by and communications from regulatory agencies, the results of internal and third party testing and qualitative and quantitative assessments related to risk management, and any other matters within the scope of the 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, compensation 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.
BancShares is subjectmonitors and stress tests its capital and liquidity consistent with the safety and soundness expectations of the federal regulators. Refer to a varietythe “Regulatory Considerations” section of risks that may arise through its business activities. As identifiedItem 1. Business included in our 2021the 2022 Form 10-K our primary risks are credit, market, capital, liquidity, operational, compliance, strategic and reputational risks. Due to the CIT Merger,for 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).discussion.
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 associated 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-attackscyberattacks 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. BancShares is also assessing the potential risk of an economic slowdown or recession that could create increased credit and market risk having downstream impacts on earnings, capital, and/or liquidity. Economic data has been mixed and markets continue to experience elevated levels of volatility in 2023. Key indicators will continue to be monitored and impacts assessed as part of our ongoing risk management framework. BancShares is in the process of integrating SVB into its existing risk management processes and procedures.
CREDIT RISK
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD,Non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an appropriate ACL that accounts for expected losses over the life of the loan and lease portfolios.
Our ACL estimate as of March 31, 2023 included extensive reviews of the changes in credit risk associated with the uncertainties around economic forecasts. These loss estimates additionally considered BancShares industry risk, and the actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen significant deterioration as of March 31, 2023. Our ACL methodology was discussed in Note 1 — Significant Accounting Policies and Basis of Presentation of our 2022 Form 10-K.
Commercial Lending and Leasing
Commercial loans and leases acquired in the CIT Merger, which are primarily within the Commercial Banking segment, are graded according toBancShares employs a ratingdual ratings system that was used by CIT prior to the merger with respect towhere each commercial loan is assigned a probability of obligor default (“PD”) and loss given default (severity) based on various risk(“LGD”) rating using scorecards developed to rate each type of transaction incorporating assessments of both quantitative and qualitative factors. The PD and severity are derived through historical observations of default and subsequent losses within each risk grading. When thesecommercial loans and leases wereare graded atduring underwriting, or when updated periodically thereafter, a model is run to generate a preliminary risk rating. The model incorporatesThese models incorporate both internal and external historical default and loss data to develop loss rates for each risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts and circumstances, that in management’s judgment, warrant a modification of the modeled risk rating to arrive at the final approved risk ratings.
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 credit 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 loansLoans may also be monitored by way of aduring quarterly reviewreviews 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 loan-to-value of the underlying collateral’s loan-to-valuecollateral may be conducted.
Silicon Valley Banking Loans
Due to the close proximity of the SVBB Acquisition Date to March 31, 2023, the acquired loans, all of which are included within the SVB segment, are graded according to a rating system that was used by Silicon Valley Bank prior to the SVBB Acquisition. The methodology for estimating the ACL is the sum of two main components: (i) modeled ACL assessed on a collective basis for pools of loans that share similar risk characteristics that includes a quantitative adjustment to account for portfolio risk not captured in the models and may include a qualitative adjustment based on management’s assessment of the risks and (ii) ACL assessed for individual loans that do not share similar risk characteristics with other loans.
For loans that share similar risk characteristics, the process derives an estimated ACL assumption from a non-discounted cash flow approach based on portfolio classes. This approach incorporates a calculation of three predictive metrics: PD, LGD andExposure at Default (“EAD”), over the estimated life of the exposure. Similar to the FCB process for other segments, PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgment. Renewals and extensions within our control are not considered in the estimated contractual term of a loan. BancShares moved SVB from a three year Reasonable and Supportable (“R&S”) period utilized by Silicon Valley Bank to a life of loan R&S period to ensure consistency with the existing Bancshares assumptions.Silicon Valley Bank and FCB were using similar scenario weighting processes, but BancShares moved SVB to the FCB scenario weights for the ACL estimate as of March 31, 2023. A qualitative adjustment may be applied to account for risk not captured by the models or emerging risks that may not yet be captured.
For loans that do not share similar risk characteristics, the ACL is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ACL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.
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. 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, GDP, home price index, commercial real estate index, corporate profits, and credit spreads.
The ACL at September 30, 2022March 31, 2023 was $882 million,$1.61 billion, compared to $850 million at June 30, 2022 and $178$922 million at December 31, 2021.2022. The ACL as a percentage of total loans and leases at September 30, 2022March 31, 2023 was 1.26%1.16%, compared to 1.26% at June 30, 2022 and 0.55%1.30% at December 31, 2021.2022.
The $683 million increase in the ACL at September 30, 2022 increased compared to June 30, 2022is primarily due to moderatethe impact of the SVBB Acquisition, including the initial ACL for PCD loans and leases (the “Initial PCD ACL”) of $200 million and the day 2 provision for loans and leases of $462 million. The increase was also related to portfolio growth, mild credit quality deterioration, and higher specific reserves partially offset by improvement 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.forecasts. In the three months ended September 30, 2022,March 31, 2023, the ACL on commercial loans increased $26$11 million and the ACL on consumer portfolios increased $6 million.
Compared to December 31, 2021,$10 million, with 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 primarilyremaining change 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.acquired loans.
While management utilizes its best judgment and information available, the ultimate adequacy of our ACL is dependent upon a variety of factors thatbeyond our control which are inherently difficult to predict, the most significant being the factorsmacroeconomic scenario forecasts that determine the economic variables utilized in the economic scenarios.ACL models. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations. At March 31, 2023, ACL estimates in these scenarios ranged from approximately $630 million$1.21 billion to approximately $1.1 billion.$1.99 billion when weighting the downside scenario 100%. BancShares management determined that an ACL of $882 million$1.61 billion was appropriate as of September 30, 2022.March 31, 2023.
Table 2128
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. | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended March 31, 2023 |
| Commercial | | Consumer | | SVB | | Total |
Balance at December 31, 2022 | $ | 789 | | | $ | 133 | | | $ | — | | | $ | 922 | |
Initial PCD ACL | — | | | — | | | 200 | | | 200 | |
Day 2 provision for loans and leases | — | | | — | | | 462 | | | 462 | |
Provision for credit losses - loans and leases | 58 | | | 13 | | | — | | | 71 | |
Total provision for credit losses - loans and leases | 58 | | | 13 | | | 462 | | | 533 | |
Charge-offs | (55) | | | (7) | | | — | | | (62) | |
Recoveries | 8 | | | 4 | | | — | | | 12 | |
| | | | | | | |
Balance at March 31, 2023 | $ | 800 | | | $ | 143 | | | $ | 662 | | | $ | 1,605 | |
Annualized net charge-off ratio | | | | | | | 0.27 | % |
Net charge-offs (recoveries) | $ | 46 | | | $ | 4 | | | $ | — | | | $ | 50 | |
Average loans | | | | | | | $ | 74,862 | |
Percent of loans in each category to total loans | 39 | % | | 13 | % | | 48 | % | | 100 | % |
| | | | | | | |
| Three Months Ended December 31, 2022 |
| Commercial | | Consumer | | SVB | | Total |
Balance at September 30, 2022 | $ | 766 | | | $ | 116 | | | $ | — | | | $ | 882 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total provision for credit losses- loans and leases | 48 | | | 16 | | | — | | | 64 | |
Charge-offs | (34) | | | (5) | | | — | | | (39) | |
Recoveries | 9 | | | 6 | | | — | | | 15 | |
| | | | | | | |
Balance at December 31, 2022 | $ | 789 | | | $ | 133 | | | $ | — | | | $ | 922 | |
Annualized net charge-off ratio | | | | | | | 0.14 | % |
Net charge-offs (recoveries) | $ | 25 | | | $ | (1) | | | $ | — | | | $ | 24 | |
Average loans | | | | | | | $ | 70,441 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | — | % | | 100 | % |
| | | | | | | |
| Three Months Ended March 31, 2022 |
| Commercial | | Consumer | | SVB | | Total |
Balance at December 31, 2021 | $ | 80 | | | $ | 98 | | | $ | — | | | $ | 178 | |
Initial PCD ACL | 270 | | | 14 | | | — | | | 284 | |
Initial Non-PCD Provision | 432 | | | 22 | | | — | | | 454 | |
Benefit for credit losses - loans and leases | (23) | | | (30) | | | — | | | (53) | |
Total provision for credit losses - loans and leases | 409 | | | (8) | | | — | | | 401 | |
Charge-offs | (28) | | | (5) | | | — | | | (33) | |
Recoveries | 12 | | | 6 | | | — | | | 18 | |
| | | | | | | |
Balance at March 31, 2022 | $ | 743 | | | $ | 105 | | | $ | — | | | $ | 848 | |
Annualized net charge-off ratio | | | | | | | 0.09 | % |
Net charge-offs | $ | 16 | | | $ | (1) | | | $ | — | | | $ | 15 | |
Average loans | | | | | | | $ | 65,182 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | — | % | | 100 | % |
Net charge-offs during the three months ended September 30, 2022March 31, 2023 were $18$50 million, compared to $22$24 million during the second quarter of 2022 and $5 million during the third quarter of 2021.three months ended December 31, 2022. On an annualized basis, the net charge-off ratio was 0.10%, 0.13%0.27% and 0.06%0.14% for the three months ended September 30,March 31, 2023 and December 31, 2022, June 30, 2022 and September 30, 2021, respectively. Net charge-offs for the nine months ended September 30, 2022 and 2021 were $55 million (net charge-off ratio of 0.11%) and $10 million (net charge-off ratio of 0.04%), respectively. The increase in net charge-offs compared to the 2021 periodsthree months ended December 31, 2022 reflects the impact from the loans acquiredhigher charge-offs in the CIT Merger.our equipment finance and real estate finance businesses.
The following table provides trends in the ACL ratios.ratios:
Table 2229
Allowance for Credit Losses Ratios
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | December 31, 2022 | |
Allowance for credit losses | Allowance for credit losses | $ | 882 | | | $ | 850 | | | $ | 178 | | Allowance for credit losses | $ | 1,605 | | | $ | 922 | | |
Total loans and leases | Total loans and leases | $ | 69,790 | | | $ | 67,735 | | | $ | 32,372 | | Total loans and leases | $ | 138,288 | | | $ | 70,781 | | |
Allowance for credit losses to total loans and leases: | 1.26 | % | | 1.26 | % | | 0.55 | % | |
Allowance for credit losses to total loans and leases | | Allowance for credit losses to total loans and leases | 1.16 | % | | 1.30 | % | |
Commercial loans and leases: | Commercial loans and leases: | | Commercial loans and leases: | | |
Allowance for credit losses - commercial | Allowance for credit losses - commercial | $ | 766 | | | $ | 740 | | | $ | 80 | | Allowance for credit losses - commercial | $ | 800 | | | $ | 789 | | |
Commercial loans and leases | Commercial loans and leases | $ | 52,960 | | | $ | 51,477 | | | $ | 22,586 | | Commercial loans and leases | $ | 54,390 | | | $ | 53,455 | | |
Commercial allowance for credit losses to commercial loans and leases: | 1.44 | % | | 1.43 | % | | 0.35 | % | |
Commercial allowance for credit losses to commercial loans and leases | | Commercial allowance for credit losses to commercial loans and leases | 1.47 | % | | 1.48 | % | |
Consumer loans: | Consumer loans: | | Consumer loans: | | |
Allowance for credit losses - consumer | Allowance for credit losses - consumer | $ | 116 | | | $ | 110 | | | $ | 98 | | Allowance for credit losses - consumer | $ | 143 | | | $ | 133 | | |
Consumer loans | Consumer loans | $ | 16,830 | | | $ | 16,258 | | | $ | 9,786 | | Consumer loans | $ | 17,727 | | | $ | 17,326 | | |
Consumer allowance for credit losses to consumer loans: | 0.70 | % | | 0.69 | % | | 1.01 | % | |
Consumer allowance for credit losses to consumer loans | | Consumer allowance for credit losses to consumer loans | 0.80 | % | | 0.77 | % | |
SVB loans: | | SVB loans: | | |
Allowance for credit losses - SVB | | Allowance for credit losses - SVB | $ | 662 | | | $ | — | | |
SVB loans | | SVB loans | $ | 66,171 | | | $ | — | | |
SVB allowance for credit losses to SVB loans | | SVB allowance for credit losses to SVB loans | 1.00 | % | | — | % | |
The reserve for unfunded loan commitments was $91 million, $81$352 million and $12$106 million at September 30, 2022, June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase of $10primarily reflects the $254 million comparedday 2 provision for unfunded commitments related 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. SeeSVBB Acquisition. Refer to Note 2322 — 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.
The following table presents the ACL by loan class at March 31, 2023 and December 31, 2022:
Table 30
ACL by Loan Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions: | March 31, 2023 | | December 31, 2022 | | |
| Allowance for Credit Losses | | Allowance for Credit Losses as a Percentage of Loans | | Allowance for Credit Losses | | Allowance for Credit Losses as a Percentage of Loans | | | | |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 36 | | | 1.22 | % | | $ | 40 | | | 1.43 | % | | | | |
Owner occupied commercial mortgage | 56 | | | 0.39 | | | 61 | | | 0.42 | | | | | |
Non-owner occupied commercial mortgage | 182 | | | 1.77 | | | 181 | | | 1.83 | | | | | |
Commercial and industrial | 490 | | | 2.00 | | | 476 | | | 1.98 | | | | | |
Leases | 36 | | | 1.69 | | | 31 | | | 1.41 | | | | | |
Total commercial | 800 | | | 1.47 | | | 789 | | | 1.48 | | | | | |
Consumer | | | | | | | | | | | |
Residential mortgage | 81 | | | 0.59 | | | 74 | | | 0.55 | | | | | |
Revolving mortgage | 16 | | | 0.84 | | | 13 | | | 0.67 | | | | | |
Consumer auto | 5 | | | 0.35 | | | 5 | | | 0.37 | | | | | |
Consumer other | 41 | | | 6.42 | | | 41 | | | 6.32 | | | | | |
Total consumer | 143 | | | 0.80 | | | 133 | | | 0.77 | | | | | |
SVB | | | | | | | | | | | |
Global fund banking | 91 | | | 0.25 | | | — | | | — | | | | | |
Investor dependent - early stage | 130 | | | 6.53 | | | — | | | — | | | | | |
Investor dependent - growth stage | 175 | | | 3.97 | | | — | | | — | | | | | |
Innovation and cash flow dependent | 171 | | | 1.85 | | | — | | | — | | | | | |
Private Bank | 44 | | | 0.47 | | | — | | | — | | | | | |
CRE | 26 | | | 1.07 | | | — | | | — | | | | | |
Other | 25 | | | 0.98 | | | — | | | — | | | | | |
Total SVB | 662 | | | 1.00 | | | — | | | — | | | | | |
Total Allowance for Credit Losses | $ | 1,605 | | | 1.16 | % | | $ | 922 | | | 1.30 | % | | | | |
Credit Metrics
Non-performing Assets
Non-performing assets include non-accrual loans and leases and OREO.other real estate owned (“OREO”). Non-performing assets at September 30, 2022March 31, 2023 totaled $508$875 million, compared to $558 million at June 30, 2022 and $161$674 million at December 31, 2021.2022.
The following table presents total nonperforming assets.assets:
Table 2331
Non-Performing Assets
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
Non-accrual loans: | Non-accrual loans: | | | | | | Non-accrual loans: | | | | |
Commercial loans | Commercial loans | $ | 356 | | | $ | 413 | | | $ | 45 | | Commercial loans | $ | 510 | | | | $ | 529 | |
Consumer loans | Consumer loans | 98 | | | 100 | | | 76 | | Consumer loans | 94 | | | | 98 | |
SVB loans | | SVB loans | 224 | | | | — | |
Total non-accrual loans | Total non-accrual loans | $ | 454 | | | $ | 513 | | | $ | 121 | | Total non-accrual loans | 828 | | | | 627 | |
Other real estate owned | Other real estate owned | 54 | | | 45 | | | 40 | | Other real estate owned | 47 | | | | 47 | |
Total non-performing assets | Total non-performing assets | $ | 508 | | | $ | 558 | | | $ | 161 | | Total non-performing assets | $ | 875 | | | | $ | 674 | |
| Allowance for credit losses to total loans and leases: | Allowance for credit losses to total loans and leases: | 1.26 | % | | 1.26 | % | | 0.55 | % | Allowance for credit losses to total loans and leases: | 1.16 | % | | | 1.30 | % |
Ratio of total non-performing assets to total loans, leases and other real estate owned | Ratio of total non-performing assets to total loans, leases and other real estate owned | 0.73 | % | | 0.83 | % | | 0.49 | % | Ratio of total non-performing assets to total loans, leases and other real estate owned | 0.63 | % | | | 0.95 | % |
Ratio of non-accrual loans and leases to total loans and leases | Ratio of non-accrual loans and leases to total loans and leases | 0.65 | % | | 0.76 | % | | 0.37 | % | Ratio of non-accrual loans and leases to total loans and leases | 0.60 | % | | | 0.89 | % |
Ratio of allowance for credit losses to non-accrual loans and leases | Ratio of allowance for credit losses to non-accrual loans and leases | 194.18 | % | | 165.41 | % | | 148.37 | % | Ratio of allowance for credit losses to non-accrual loans and leases | 193.76 | % | | | 146.88 | % |
Non-accrual loans and leases at September 30, 2022March 31, 2023 were $454$828 million, a decrease of $59 million from June 30, 2022 and an increase of $333$201 million since December 31, 2021.2022. The increase is due to the SVBB Acquisition, resulting in addition of $224 million non-accrual loans and leases. The commercial non-accruals loans decreased during the first quarter as a result of lower non-accruals in the commercial construction and non-owner occupied commercial mortgage classes partially offset by an increase in the commercial and industrial class. Refer to Note 4 — Loans and Leases for tabular presentation of non-accrual loans by loan class. Non-accrual loans and leases as a percentage of total loans and leases was 0.65%, 0.76%were 0.60% and 0.37%0.89% at September 30, 2022, June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase from December 31, 2021 was primarily driven by the CIT Merger.
OREO at September 30, 2022 totaled $54March 31, 2023 was $47 million, representing an increase of $9 million from June 30, 2022 and $14 millionno change since December 31, 2021.2022. Non-performing assets as a percentage of total loans, leases and OREO at September 30, 2022March 31, 2023 was 0.73%0.63% compared to 0.83% at June 30, 2022 and 0.49%0.95% at December 31, 2021.2022. The lower percentage was driven by the increased loan balance due to the SVBB Acquisition.
Past Due Accounts
The percentage of loans 30 days or more past due at September 30, 2022March 31, 2023 was 0.72%0.88% of total loans, compared to 0.78% at June 30, 2022 and 0.43%1.22% at December 31, 2021.2022. Delinquency status of loans is presented in Note 4 — Loans and Leases.
Troubled Debt RestructuringsWe 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 applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in most 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 seekstrive to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to risk, such as our concentrations of real estate secured loans, revolving mortgage loans and healthcare-related loans. Additionally, SVB loans are concentrated in loans with large balances and loans in certain industries and customer groups, including private equity and venture capital. The following discussions present concentration data along our portfolio classes, Commercial, Consumer, and SVB.
Commercial Loans Concentrations
Geographic Concentrations
The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location.
Table 2532
Commercial Loans and Leases - Geography
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
State | State | | | | | | State | | | | |
California | California | $ | 8,800 | | | 16.6 | % | | $ | 8,636 | | | 16.8 | % | | $ | 3,163 | | | 14.0 | % | California | $ | 9,279 | | | 17.1 | % | | | $ | 9,226 | | | 17.3 | % |
North Carolina | North Carolina | 8,609 | | | 16.3 | % | | 8,639 | | | 16.8 | % | | 7,181 | | | 31.8 | % | North Carolina | 8,795 | | | 16.2 | % | | | 8,699 | | | 16.3 | % |
Texas | Texas | 3,486 | | | 6.6 | % | | 3,330 | | | 6.5 | % | | 879 | | | 3.9 | % | Texas | 3,586 | | | 6.6 | % | | | 3,624 | | | 6.8 | % |
| Florida | Florida | 3,253 | | | 6.1 | % | | 3,156 | | | 6.1 | % | | 1,496 | | | 6.6 | % | Florida | 3,398 | | | 6.2 | % | | | 3,273 | | | 6.1 | % |
South Carolina | South Carolina | 3,016 | | | 5.7 | % | | 2,989 | | | 5.8 | % | | 2,855 | | | 12.6 | % | South Carolina | 3,076 | | | 5.7 | % | | | 3,142 | | | 5.9 | % |
All other states | All other states | 24,431 | | | 46.1 | % | | 23,217 | | | 45.1 | % | | 7,012 | | | 31.1 | % | All other states | 24,796 | | | 45.6 | % | | | 24,243 | | | 45.4 | % |
Total U.S. | Total U.S. | $ | 51,595 | | | 97.4 | % | | $ | 49,967 | | | 97.1 | % | | $ | 22,586 | | | 100.0 | % | Total U.S. | $ | 52,930 | | | 97.4 | % | | | $ | 52,207 | | | 97.8 | % |
| Total International | Total International | 1,365 | | | 2.6 | % | | 1,510 | | | 2.9 | % | | — | | | — | % | Total International | 1,460 | | | 2.6 | % | | | 1,248 | | | 2.2 | % |
Total | Total | $ | 52,960 | | | 100.0 | % | | $ | 51,477 | | | 100.0 | % | | $ | 22,586 | | | 100.0 | % | Total | $ | 54,390 | | | 100.0 | % | | | $ | 53,455 | | | 100.0 | % |
Industry Concentrations
The following table represents loans by industry of obligor:
Table 2633
Commercial Loans and Leases - 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | March 31, 2023 | | | | December 31, 2022 |
Real Estate | $ | 12,179 | | | 22.4 | % | | | | | | $ | 11,684 | | | 21.9 | % |
Healthcare | 8,264 | | | 15.2 | % | | | | | | 8,146 | | | 15.2 | % |
Business Services | 5,656 | | | 10.4 | % | | | | | | 5,518 | | | 10.3 | % |
Transportation, Communication, Gas, Utilities | 5,120 | | | 9.4 | % | | | | | | 5,002 | | | 9.4 | % |
Manufacturing | 4,400 | | | 8.1 | % | | | | | | 4,387 | | | 8.2 | % |
Service Industries | 4,118 | | | 7.6 | % | | | | | | 4,213 | | | 7.9 | % |
Retail | 3,639 | | | 6.7 | % | | | | | | 3,462 | | | 6.5 | % |
Finance and Insurance | 2,521 | | | 4.6 | % | | | | | | 2,604 | | | 4.9 | % |
Wholesale | 2,507 | | | 4.6 | % | | | | | | 2,605 | | | 4.9 | % |
Other | 5,986 | | | 11.0 | % | | | | | | 5,834 | | | 10.8 | % |
Total | $ | 54,390 | | | 100.0 | % | | | | | | $ | 53,455 | | | 100.0 | % |
Consumer Loans Concentrations
Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or other conditions. The following table summarizes state concentrations greater than 5.0% based on property address.address:
Table 2734
Consumer Loans - Geography
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
| | Net Investment | | % of Total | | Net Investment | | % of Total | | Net Investment | | % of Total | | Net Investment | | % of Total | | | Net Investment | | % of Total |
State | State | | | | | | | | | | | | State | | | | | | | | |
North Carolina | North Carolina | $ | 5,515 | | | 32.8 | % | | $ | 5,266 | | | 32.4 | % | | $ | 4,931 | | | 50.4 | % | North Carolina | $ | 5,830 | | | 32.9 | % | | | $ | 5,702 | | | 32.9 | % |
California | California | 3,936 | | | 23.4 | % | | 3,796 | | | 23.4 | % | | 161 | | | 1.6 | % | California | 4,001 | | | 22.6 | % | | | 4,014 | | | 23.2 | % |
South Carolina | South Carolina | 2,903 | | | 17.2 | % | | 2,786 | | | 17.1 | % | | 2,626 | | | 26.9 | % | South Carolina | 3,079 | | | 17.3 | % | | | 3,001 | | | 17.3 | % |
| Other states | Other states | 4,476 | | | 26.6 | % | | 4,410 | | | 27.1 | % | | 2,068 | | | 21.1 | % | Other states | 4,817 | | | 27.2 | % | | | 4,609 | | | 26.6 | % |
Total | Total | $ | 16,830 | | | 100.0 | % | | $ | 16,258 | | | 100.0 | % | | $ | 9,786 | | | 100.0 | % | Total | $ | 17,727 | | | 100.0 | % | | | $ | 17,326 | | | 100.0 | % |
Silicon Valley Banking Loans
Counterparty RiskSVB loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions.
We enter into interest rate derivatives
The table below details SVB loans that are secured by real estate, at amortized cost as of March 31, 2023.
Table 35
Silicon Valley Banking Loans Secured by Real Estate
| | | | | | | | |
dollars in millions | | March 31, 2023 |
Private bank: | | |
Loans for personal residence | | $ | 7,355 | |
Loans to eligible employees | | 519 | |
Home equity lines of credit | | 130 | |
Other | | 117 | |
Total private bank loans secured by real estate | | 8,121 | |
Commercial real estate ("CRE"): | | |
Multifamily and residential investment | | 843 | |
Retail | | 412 | |
Office and medical | | 483 | |
Manufacturing, industrial and warehouse | | 489 | |
Hospitality | | 109 | |
Other | | 108 | |
Total CRE loans secured by real estate | | 2,444 | |
Premium wine | | 913 | |
Other | | 505 | |
Total real estate secured loans | | $ | 11,983 | |
The SVB loan portfolio is focused on three primary markets: (i) Global Fund Banking, (ii) Technology and foreign exchange forward contractsLife Science/Healthcare and (iii) Private Banking. The remainder of the portfolio is made up of CRE and Other loans.
Global Fund Banking
The Global Fund Banking loan portfolio includes loans to clients in the private equity/venture capital community. Global Fund Banking represented 55% and 26% of SVB loans and total loans at March 31, 2023, respectively. The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds’ remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are typically secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
Technology and Life Science/Healthcare
The Technology and Life Science/Healthcare loan portfolios include loans to clients at the various stages of their life cycles. The classes of financing receivables for our technology and life science/healthcare market segments are classified as Investor Dependent - Early Stage, Investor Dependent - Growth Stage, and Innovation C&I and Cash Flow Dependent for reporting purposes.
Investor Dependent - Early Stage loans represented 3% and 1% of SVB loans and total loans at March 31, 2023, respectively. These include loans to pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or other investors, or in some cases, a successful sale to a third party or an initial public offering (“IPO”).
Investor Dependent - Growth Stage loans represented 7% and 3% of SVB loans and total loans at March 31, 2023, respectively. These include loans to growth-stage enterprises. Companies with revenues between $5 million and $15 million, or pre-revenue clinical-stage biotechnology companies, are considered to be mid stage, and companies with revenues in excess of $15 million are considered to be later stage.
Innovation C&I and Cash Flow Dependent loans represented 14% and 7% of SVB loans and total loans at March 31, 2023, respectively. This portfolio is comprised of two types of loans, Innovation C&I and Cash Flow Dependent. Innovation C&I include loans in innovation sectors such as technology and life science/healthcare industries. These loans are dependent on either the borrower’s cash flows or balance sheet for repayment. Cash Flow Dependent loans are typically used to assist a select group of private equity sponsors with the acquisition of businesses, and repayment is generally dependent upon the cash flows of the combined entities.
Private Banking
Private Banking clients consist of executive leaders and senior investment professionals in the innovation economy, as well as high net worth clients. Lending to Private Banking clients represented 14% and 7% of SVB loans and total loans at March 31, 2023, respectively. Many Private Banking products are secured by real estate. These products include mortgage loans, owner-occupied commercial mortgage loans, home equity lines of credit and other secured lending products. The remaining balance of the Private Banking portfolio consists of personal capital call lines of credit, restricted and private stock loans and other secured and unsecured lending products.
CRE
The CRE class represented 4% and 2% of SVB loans and total loans at March 31, 2023, respectively. This class consists generally of acquisition financing loans for commercial properties such as office buildings, retail properties, apartment buildings and industrial/warehouse space. All CRE products are secured by real estate collateral.
Other
The Other class includes Premium Wine, Other C&I and Other portfolios which represented 4% and 2% of SVB loans and total loans at March 31, 2023. Premium wine loans are to wine producers, vineyards and wine industry or hospitality businesses across the Western United States. A large portion of premium wine loans are secured by real estate collateral. Other C&I loans include tax-exempt commercial loans to non-for-profit private schools, college, public charter schools and other not-for-profit organizations as well as commercial loans to clients that are not in technology and life sciences/healthcare industries. Our Other class of loans is primarily comprised of construction and land loans for financing new developments or financing improvements to existing buildings, as well as loans made as part of our 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 obligationsresponsibilities under the derivative contract. We seek to control credit riskCommunity Reinvestment Act 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.1977.
The Chief Credit Officer, or delegate, approves each counterpartyfollowing table provides a summary of SVB loans by size and establishes exposure limitsclass. The breakout below is based on credit analysistotal client balances (individually or in the aggregate) as 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.March 31, 2023:
ASSET RISKTable 36
Silicon Valley BankingLoans by Size and Class
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | Less Than $5 Million | | $5 to < $10 Million | | $10 to < $20 Million | | $20 to < $30 Million | | > $30 Million | | Total SVB Loans |
Global fund banking | | $ | 1,275 | | | $ | 1,572 | | | $ | 3,394 | | | $ | 2,948 | | | $ | 26,908 | | | $ | 36,097 | |
Investor dependent - early stage | | 1,141 | | | 548 | | | 214 | | | — | | | 91 | | | 1,994 | |
Investor dependent - growth stage | | 746 | | | 949 | | | 1,326 | | | 534 | | | 863 | | | 4,418 | |
Innovation C&I and cash flow dependent | | 341 | | | 322 | | | 843 | | | 1,301 | | | 6,386 | | | 9,193 | |
Private Bank | | 6,887 | | | 1,007 | | | 848 | | | 309 | | | 425 | | | 9,476 | |
CRE | | 724 | | | 504 | | | 666 | | | 336 | | | 214 | | | 2,444 | |
Other | | 538 | | | 491 | | | 749 | | | 518 | | | 253 | | | 2,549 | |
Total | | $ | 11,652 | | | $ | 5,393 | | | $ | 8,040 | | | $ | 5,946 | | | $ | 35,140 | | | $ | 66,171 | |
SVB Loans - State Concentrations
The following table summarizes state concentrations greater than 5.0% within the SVB loans portfolio at March 31, 2023, based on borrower location:
Table 37
Silicon Valley Banking Loans - Geography
| | | | | | | | | | | |
dollars in millions | March 31, 2023 |
State | | | |
California | $ | 19,936 | | | 30.1 | % |
New York | 10,094 | | | 15.3 | % |
Massachusetts | 9,658 | | | 14.6 | % |
Texas | 4,578 | | | 6.9 | % |
Connecticut | 4,520 | | | 6.8 | % |
All other states | 14,375 | | | 21.7 | % |
Total U.S. | 63,161 | | | 95.4 | % |
Total International | 3,010 | | | 4.6 | % |
Total | $ | 66,171 | | | 100.0 | % |
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 can 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 primarily through two metrics.
•Net Interest Income Sensitivity (“NII Sensitivity”) measures the net impact of hypothetical changes in interest rates on forecasted NII; and
•Economic Value of Equity Sensitivity (“EVE Sensitivity”) measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.
BancShares uses a holistic process to measure and monitor both short term and long term risks which includes, but is not limited to, gradual and immediate parallel rate shocks, changes in the shape of the yield curve, and changes in the relationship of various yield curves. NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the longer-term risk of the existing balance sheet.
Our exposure to NII Sensitivity is guided by the Risk Appetite Framework and Statement and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest rate risk exposures, including through business line actions and actions within the investment, funding and derivative activities.portfolios.
The composition of our interest rate sensitive assets and liabilities generally results in a net asset-sensitive position for NII Sensitivity, whereby our assets will reprice faster than our liabilities, which is generally concentrated at the short end of the yield curve.
Our funding sources consist primarily of non-maturity deposits and time deposits. Wewe also support our funding needs through wholesale funding sources (including unsecured and secured borrowings). The SVBB Acquisition significantly increased our balance sheet and changed our rate sensitivity. At the time of the SVBB Acquisition, we assumed $55.96 billion of deposits, entered into a $35.15 billion fixed-rate Purchase Money Note payable to the FDIC, acquired $68.50 billion of loans, most of which have variable rates, and $35.28 billion of cash and interest-bearing deposits at banks.
The deposit rates we offer are influenced by market conditions and competitive factors. Market rates are the key drivers of deposit costs and we continue to optimize deposit costs by improving our deposit mix. Changes in interest rates, expected funding needs, as well as actions by competitors, can affect our deposit taking activities and deposit pricing. We believe our targeted non-maturity deposit customer retention is strong and we remain focused on optimizing our mix of deposits. We regularly assess the effect of deposit rate changes on our balances and seek to achieve optimal alignment between assets and liabilities.
Table 28For this analysis that includes the initial impacts from the assets acquired and liabilities assumed in the SVBB Acquisition, we are running scenarios for both BancShares (without SVB) and SVB and then merging those results, as there are multiple systems involved. The following table below summarizes the results of 12-month NII Sensitivity simulations produced by our asset/liability management system.systems. 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,March 31, 2023, and December 2021.2022.
Table 2838
Net Interest Income Sensitivity Simulation Analysis
| | | Estimated (Decrease) Increase in NII | | Estimated (Decrease) Increase in NII |
Change in interest rate (bps) | Change in interest rate (bps) | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | Change in interest rate (bps) | | March 31, 2023 | | | December 31, 2022 |
-100 | -100 | | (3.63) | % | | (5.34) | % | | (5.77) | % | -100 | | (11.1) | % | | | (4.0) | % |
-25 | -25 | | (0.80) | % | | (1.25) | % | | (1.15) | % | -25 | | (2.8) | % | | | (0.9) | % |
+25 | +25 | | 0.91 | % | | 1.34 | % | | 1.05 | % | +25 | | 2.8 | % | | | 0.8 | % |
+100 | +100 | | 3.44 | % | | 5.17 | % | | 3.21 | % | +100 | | 11.1 | % | | | 3.4 | % |
+200 | +200 | | 6.81 | % | | 10.20 | % | | 6.30 | % | +200 | | 22.0 | % | | | 6.7 | % |
NII Sensitivity metrics at September 30, 2022,March 31, 2023, compared to June 30,December 31, 2022, were primarily affected by a reduction in cashthe addition of the acquired loans and assumed deposits as part of the SVBB Acquisition, as well as liability management actions which included borrowing FHLB advancesthe Purchase Money Note and the higher cash balance to support loan growth and to offset deposit runoff.manage liquidity risk from the acquired portfolios. BancShares continues to have an asset sensitive interest rate risk profile and the potential exposure to forecasted earnings is largely driven by the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as estimates of modest future deposit betas. Approximately 45%65%-70% of our loans have floating contractual reference rates, indexed primarily to 1-month London Inter-Bank Offered Rate (“LIBOR”), 3-month LIBOR, Prime, SOFR and Secured Overnight Financing Rate (“SOFR”).LIBOR. Deposit betas up for the combined company, and are modeled to have a portfolio average of approximately 20%-25%30%-35% over the forecast horizon. Deposit beta is the portion of a change in the fed funds rate that is passed on to the deposit rate. 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 driven by changes in assets, liabilities, and off-balance sheet instruments in response to a change in interest rates. EVE Sensitivity is calculated by estimating the change in the net present value of assets, liabilities, and off-balance sheet items under various rate movements.
Table 29The following table presents the EVE profile as of September 30, 2022, June 30, 2022,March 31, 2023, and December 31, 2021.2022:
Table 2939
Economic Value of Equity Modeling Analysis
| | | Estimated (Decrease) Increase in EVE | | Estimated (Decrease) Increase in EVE |
Change in interest rate (bps) | Change in interest rate (bps) | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | Change in interest rate (bps) | | March 31, 2023 | | | December 31, 2022 |
-100 | -100 | | (5.39) | % | | (7.17) | % | | (13.68) | % | -100 | | (6.1) | % | | | (5.3) | % |
-25 | -25 | | (1.21) | % | | (1.67) | % | | — | % | -25 | | (1.4) | % | | | (1.2) | % |
+100 | +100 | | 4.29 | % | | 5.92 | % | | 6.10 | % | +100 | | 5.3 | % | | | 4.1 | % |
+200 | +200 | | 3.54 | % | | 7.21 | % | | 5.93 | % | +200 | | 10.0 | % | | | 3.0 | % |
|
The economic value of equity metrics at September 30, 2022March 31, 2023 compared to June 30,December 31, 2022 were primarily affected by the balance sheet composition changes as well as increasing market interest rates.noted earlier due to the SVBB Acquisition.
In addition to the above reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that impact management volumes, specific risk events, or the sensitivity to key assumptions are also evaluated.
We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility.
The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to represent our current view of the expected range of future interest rate movements.
The following table provides loan maturity distribution information:
Table 40
Loan Maturity Distribution
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | At March 31, 2023, Maturing |
| Within One Year | | One to Five Years | | Five to 15 Years | | After 15 Years | | Total |
Commercial | | | | | | | | | |
Commercial construction | $ | 806 | | | $ | 1,305 | | | $ | 757 | | | $ | 103 | | | $ | 2,971 | |
Owner occupied commercial mortgage | 647 | | | 4,331 | | | 9,039 | | | 439 | | | 14,456 | |
Non-owner occupied commercial mortgage | 2,159 | | | 5,759 | | | 2,029 | | | 345 | | | 10,292 | |
Commercial and industrial | 6,767 | | | 13,921 | | | 3,612 | | | 208 | | | 24,508 | |
Leases | 758 | | | 1,364 | | | 41 | | | — | | | 2,163 | |
Total commercial | 11,137 | | | 26,680 | | | 15,478 | | | 1,095 | | | 54,390 | |
Consumer | | | | | | | | | |
Residential mortgage | 320 | | | 676 | | | 2,398 | | | 10,333 | | | 13,727 | |
Revolving mortgage | 73 | | | 143 | | | 56 | | | 1,644 | | | 1,916 | |
Consumer auto | 11 | | | 703 | | | 738 | | | — | | | 1,452 | |
Consumer other | 306 | | | 167 | | | 123 | | | 36 | | | 632 | |
Total consumer | 710 | | | 1,689 | | | 3,315 | | | 12,013 | | | 17,727 | |
SVB | | | | | | | | | |
Global fund banking | 33,636 | | | 2,330 | | | 131 | | | — | | | 36,097 | |
Investor dependent - early stage | 234 | | | 1,728 | | | 32 | | | — | | | 1,994 | |
Investor dependent - growth stage | 405 | | | 3,885 | | | 128 | | | — | | | 4,418 | |
Innovation and cash flow dependent | 1,608 | | | 7,217 | | | 368 | | | — | | | 9,193 | |
Private Bank | 283 | | | 524 | | | 905 | | | 7,764 | | | 9,476 | |
CRE | 286 | | | 1,293 | | | 817 | | | 48 | | | 2,444 | |
Other | 480 | | | 685 | | | 800 | | | 584 | | | 2,549 | |
Total SVB | 36,932 | | | 17,662 | | | 3,181 | | | 8,396 | | | 66,171 | |
Total loans and leases | $ | 48,779 | | | $ | 46,031 | | | $ | 21,974 | | | $ | 21,504 | | | $ | 138,288 | |
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 31The following table provides information regarding the sensitivity of loans and leases to changes in interest rates.rates:
Table 3141
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 | |
| | | | | | | | | | | |
dollars in millions | Loans Maturing One Year or After with |
| Fixed Interest Rates | | Variable Interest Rates |
Commercial | | | |
Commercial construction | $ | 940 | | | $ | 1,225 | |
Owner occupied commercial mortgage | 12,312 | | | 1,497 | |
Non-owner occupied commercial mortgage | 3,251 | | | 4,882 | |
Commercial and industrial | 8,007 | | | 9,734 | |
Leases | 1,405 | | | — | |
Total commercial | 25,915 | | | 17,338 | |
Consumer | | | |
Residential mortgage | 7,302 | | | 6,105 | |
Revolving mortgage | 35 | | | 1,808 | |
Consumer auto | 1,441 | | | — | |
Consumer other | 298 | | | 28 | |
Total consumer | 9,076 | | | 7,941 | |
SVB | | | |
Global fund banking | 8 | | | 2,453 | |
Investor dependent - early stage | 22 | | | 1,738 | |
Investor dependent - growth stage | 9 | | | 4,004 | |
Innovation and cash flow dependent | — | | | 7,585 | |
Private Bank | 1,984 | | | 7,209 | |
CRE | 928 | | | 1,230 | |
Other | 1,370 | | | 699 | |
Total SVB | 4,321 | | | 24,918 | |
Total loans and leases | $ | 39,312 | | | $ | 50,197 | |
Reference Rate Reform
The administrator of LIBOR has 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 using the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021 at the latest. Accordingly, prior to the CIT Merger, FCB and CIT hadwe 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 U.S. Dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act, which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. The final rule was approved by the FRB on December 16, 2022 and became effective February 27, 2023. The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR contracts subject to the LIBOR Act. BancShares anticipates using Board-selected benchmark replacements to take advantage of the safe harbors, where applicable, that are expectedafforded in the final regulations.rule.
BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares’ LIBOR exposure is primarily to 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 market transitions away from LIBOR. Coordination is being handled by a cross-functional project team governed by executive sponsors. Its mission is to work with our businesses to ensure a smooth transition for BancShares and its customers to an appropriate LIBOR alternative. Certain financial markets and products have already 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 our preferred replacement index for LIBOR. As loans mature and new originations occur a larger percentage of BancShares’ variable-rate loans are expected to reference SOFR in response to the discontinuation of LIBOR. However, we are positioned to accommodate other alternative reference rates (e.g., credit sensitive rates) in response to how the market evolves. Further, BancShares plans to move to Term SOFR plus the Alternative Reference Rate Committee recommended credit spread adjustment for its Series B Preferred Stock since the dividends are currently based on a floating rate tied to three-month LIBOR.
Some acquired assets, such as loans and derivatives as well as derivative liabilities, from the SVBB Acquisition have LIBOR settings. Processes and procedures are in place to have these LIBOR exposures reference alternative rates, such as Term SOFR and Daily SOFR, in advance of LIBOR’s unavailability.
For a further discussion of risks BancShares faces in connection with the replacement of LIBOR on its operations, see “Risk Factors—Market Risks—We may be adversely impacted by the transition from LIBOR as a reference rate.” in Item 1A. Risk Factors of our 20212022 Form 10-K.
LIQUIDITY RISK
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain sufficient amounts of Available Cash and High Quality Liquid Securities (“HQLS”). Additional sources of liquidity include FHLB borrowing capacity, committed credit facilities, repurchase agreements, brokered CD issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties.
We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business strategy, risk appetite, levels of liquid assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in identifying potential liquidity risk and stress events.
BancShares maintains a framework to establish liquidity risk tolerances, monitoring, and breach escalation protocol to alert management of potential funding and liquidity risks and to initiate mitigating actions as appropriate. Further, BancShares maintains a contingent funding plan which details protocols and potential actions to be taken under liquidity stress conditions.
Liquidity includes Available Cash and HQLS. At September 30, 2022March 31, 2023 we had $19.2$51.42 billion of total Liquid Assets (17.5%(24.0% of total assets) and $11.7$79.49 billion of contingent liquidity sources available.
Table 3242
Liquidity
| | | | | |
dollars in millions | September 30, 2022March 31, 2023 |
Available Cash | $ | 6,05037,670 | |
High Quality Liquid Securities(1) | 13,11113,745 | |
Liquid Assets | $ | 19,16151,415 | |
| |
FHLB capacity(1)(2) | $ | 7,1404,712 | |
FRB capacity | 4,4644,676 | |
FDIC Credit Facility(3) | 70,000 | |
Line of credit with bank | 100 | |
Total contingent sources | $ | 11,70479,488 | |
Total Liquid Assets and contingent sources | $ | 30,865130,903 | |
(1) (1) Consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.
(2)See Table 33following table for additional details.
(2) Credit facility obtained in connection with SVBB Acquisition. See below for additional details and limits on use.
We fund our operations through deposits and borrowings. Our primary source of liquidity is derived from our branch-generatedvarious deposit portfolio due to the generally stable balanceschannels, including our branch network and low cost.Direct Bank. Deposits totaled $87.6 billion, $89.3$140.05 billion and $51.4$89.41 billion at September 30, 2022, June 30, 2022March 31, 2023, and December 31, 2021,2022, respectively. As needed, weThe increase in deposits from December 31, 2022 primarily reflected additional deposits from the SVBB Acquisition, and organic growth. We use borrowings to diversify the funding of our business operations. Borrowings totaled $8.3 billion, $4.5$46.09 billion and $1.8$6.65 billion at September 30, 2022, June 30, 2022March 31, 2023, and December 31, 2021,2022, respectively. BorrowingsThe increase in borrowings from December 31, 2022 primarily consistreflected the Purchase Money Note (see Note 2 — Business Combination), and net new borrowings of FHLB borrowings. In January and February, we had been repaying outstanding FHLB borrowings as our deposit base grew. In March, due to the Banking uncertainty associated with the regional bank failures we borrowed $7.00 billion. In addition to the Purchase Money Note and FHLB advances, borrowings also include senior unsecured notes, securities sold under customer repurchase agreements, and subordinated notes.
FHLB Capacity
A source of available funds is advances from the FHLB of Atlanta. We may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted.
FHLB Advances
Table 3343
FHLB Balances
| dollars in millions | dollars in millions | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | March 31, 2023 | | | December 31, 2022 |
| | Total | | Total | | Total | | Total | | | Total |
Total borrowing capacity | Total borrowing capacity | $ | 14,390 | | | $ | 14,097 | | | $ | 9,564 | | Total borrowing capacity | $ | 14,662 | | | | $ | 14,918 | |
Less: | Less: | | Less: | | | |
Advances | Advances | 5,800 | | | 1,785 | | | 645 | | Advances | 8,500 | | | | 4,250 | |
Letter of credit(1) | 1,450 | | | 750 | | | — | | |
Letters of credit(1) | | Letters of credit(1) | 1,450 | | | | 1,450 | |
Available capacity | Available capacity | $ | 7,140 | | | $ | 11,562 | | | $ | 8,919 | | Available capacity | $ | 4,712 | | | | $ | 9,218 | |
Pledged non-PCD loans (contractual balance) | Pledged non-PCD loans (contractual balance) | $ | 21,093 | | | $ | 20,680 | | | $ | 14,507 | | Pledged non-PCD loans (contractual balance) | $ | 23,743 | | | | $ | 23,491 | |
Weighted Average Rate | Weighted Average Rate | 3.14 | % | | 1.88 | % | | 1.28 | % | Weighted Average Rate | 5.21 | % | | | 3.28 | % |
(1) A letterLetters of credit waswere 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.
FRB Capacity
Under borrowing arrangements with the FRB of Richmond, FCB has access to an additional $4.5$4.68 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at September 30, 2022, June 30, 2022,March 31, 2023 and December 31, 2021.2022.
In March 2023, following the failures of Silicon Valley Bank and Signature Bank, the FRB created a new Bank Term Funding Program as an additional source of liquidity against high-quality securities in order to make additional funding available to eligible depository institutions. This program offers loans of up to one year in length to eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, provided that such collateral was owned by the borrower as of March 12, 2023. These pledged assets will be valued at par under the Program. Eligible institutions can request advances under the Program at least through March 11, 2024. As of March 31, 2023, we did not have any securities pledged or amounts advanced related to this program.
FDIC Credit Facility
FCB and the FDIC entered into binding terms and conditions for a five-year, up to $70 billion line of credit to FCB (the “Credit Facility”) provided by the FDIC. During the two-year period following the SVBB Acquisition, FCB may draw on the Credit Facility to support liquidity, including for deposit withdrawal or runoff and to fund the unfunded commercial lending commitments acquired pursuant to the SVBB Acquisition (the “Unfunded Commitments”). Interest on outstanding principal will accrue at a variable rate equal to the Secured Overnight Financing Rate plus 25 basis points (but in no event less than 0.00%).
The Credit Facility is primarily secured by all loans acquired in the SVBB Acquisition and related commitments that are subsequently drawn and outstanding as of March 31, 2023.
CommitmentsContractual Obligations and Contractual ObligationsCommitments
Table 34The following table identifies significant contractual obligations and commitments as of September 30, 2022,March 31, 2023, representing required and potential cash outflows. See Note 2322 — 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 and Commitments
| dollars in millions | dollars in millions | Payments Due by Period | dollars in millions | Payments Due by Period |
Type of Obligation | Less than 1 year | | 1-3 years | | 4-5 years | | Thereafter | | Total | |
| | | Less than 1 year | | 1-3 years | | 4-5 years | | Thereafter | | Total |
Contractual obligations: | Contractual obligations: | | | | | | | | | | Contractual obligations: | | | | | | | | | |
Time deposits(1) | Time deposits(1) | $ | 6,178 | | | $ | 1,872 | | | $ | 136 | | | $ | 122 | | | $ | 8,308 | | Time deposits(1) | $ | 9,199 | | | $ | 3,718 | | | $ | 86 | | | $ | 125 | | | $ | 13,128 | |
Short-term borrowings | Short-term borrowings | 3,128 | | | — | | | — | | | — | | | 3,128 | | Short-term borrowings | 1,009 | | | — | | | — | | | — | | | 1,009 | |
Long-term obligations(1) | Long-term obligations(1) | 19 | | | 4,117 | | | 35 | | | 1,044 | | | 5,215 | | Long-term obligations(1) | 476 | | | 8,259 | | | 35,708 | | | 642 | | | 45,085 | |
Total contractual obligations | Total contractual obligations | $ | 9,325 | | | $ | 5,989 | | | $ | 171 | | | $ | 1,166 | | | $ | 16,651 | | Total contractual obligations | $ | 10,684 | | | $ | 11,977 | | | $ | 35,794 | | | $ | 767 | | | $ | 59,222 | |
Commitments: | Commitments: | | | | | | | | | | Commitments: | | | | | | | | | |
Financing commitments | Financing commitments | $ | 12,050 | | | $ | 4,197 | | | $ | 2,693 | | | $ | 4,433 | | | $ | 23,373 | | Financing commitments | $ | 48,696 | | | $ | 14,112 | | | $ | 5,656 | | | $ | 6,043 | | | $ | 74,507 | |
Letters of credit | Letters of credit | 166 | | | 175 | | | 91 | | | 27 | | | 459 | | Letters of credit | 3,614 | | | 295 | | | 118 | | | 12 | | | 4,039 | |
Deferred purchase agreements | Deferred purchase agreements | 2,152 | | | — | | | — | | | — | | | 2,152 | | Deferred purchase agreements | 1,707 | | | — | | | — | | | — | | | 1,707 | |
Purchase and funding commitments | Purchase and funding commitments | 914 | | | 8 | | | — | | | — | | | 922 | | Purchase and funding commitments | 869 | | | — | | | — | | | — | | | 869 | |
Affordable housing partnerships(1) | Affordable housing partnerships(1) | 117 | | | 104 | | | 32 | | | 11 | | | 264 | | Affordable housing partnerships(1) | 385 | | | 547 | | | 19 | | | 40 | | | 991 | |
Total commitments | Total commitments | $ | 15,399 | | | $ | 4,484 | | | $ | 2,816 | | | $ | 4,471 | | | $ | 27,170 | | Total commitments | $ | 55,271 | | | $ | 14,954 | | | $ | 5,793 | | | $ | 6,095 | | | $ | 82,113 | |
(1) Time deposits and long-term borrowings are presented net of purchase accounting adjustments of $27 million and $139 million, respectively. On-balance sheet commitments are included in other liabilities.liabilities and presented net of a purchase accounting adjustment of $70 million.
CAPITAL
Capital requirements applicable to BancShares are discussed in “Regulatory Considerations” section in Item 1. Business — Regulation subsections “Regulatory Considerations” of our 20212022 Form 10-K. The SVBB Acquisition increased BancShares’ total assets from $109.30 billion at December 31, 2022 to $214.66 billion at March 31, 2023. Therefore, as detailed in our 2022 Form 10-K, BancShares’ total consolidated assets remain between $100 billion and $250 billion, and BancShares is required to comply with certain enhanced prudential standards applicable to Category IV banking organizations, subject to the applicable transition periods.
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
During the first quarter of 2023, we paid a quarterly dividend of $0.75 on the Class A common stock and Class B common stock. On OctoberApril 25, 2022,2023, our Board of Directors declared a quarterly dividend increase on the Class A Common Stockcommon stock and Class B Common Stock tocommon stock of $0.75 per common share from $0.47 per common share. The dividends are payable on DecemberJune 15, 20222023 to shareholdersstockholders of record as of November 30, 2022.May 31, 2023.
On OctoberApril 25, 2022,2023, our Board of Directors also declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The dividends are payable on DecemberJune 15, 20222023 to shareholdersstockholders of record as of November 30, 2022.May 31, 2023. Dividend payment information on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is disclosed in Note 1615 — 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 3545
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 | |
| | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | |
Class A shares outstanding at beginning of period | | 13,501,017 | | | |
| | | | |
Restricted stock units vested, net of shares held to cover taxes | | 13,791 | | | |
| | | | |
Class A shares outstanding at end of period | | 13,514,808 | | | |
We also had 1,005,185 Class B Common Stock outstanding at September 30, 2022,March 31, 2023 and June 30, 2022 and December 31, 2021.2022.
On April 25, 2023 Bancshares’ stockholders approved amendments to the Restated Certificate of Incorporation to increase the number of authorized shares of the Class A Common Stock from 16,000,000 shares to 32,000,000 shares and to increase the number of authorized shares of the Preferred Stock from 10,000,000 shares to 20,000,000.
We are committed to effectively managing our capital to protect our depositors, creditors and stockholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.
In accordance with GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within stockholders’ equity. These amounts are excluded from regulatory in the calculation of our regulatory capital ratios under current regulatory guidelines.
Table 3646
Analysis of Capital Adequacy
| dollars in millions | dollars in millions | Requirements to be Well-Capitalized | | September 30, 2022 | | June 30, 2022 | | December 31, 2021 | dollars in millions | Requirements to be Well-Capitalized | | March 31, 2023 | | | December 31, 2022 |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio |
BancShares | BancShares | | | | | | | | | | | | | | BancShares | | | | | | | | | | |
Risk-based capital ratios | Risk-based capital ratios | | Risk-based capital ratios | | | |
Total risk-based capital | Total risk-based capital | 10.00 | % | | $ | 11,927 | | | 13.46 | % | | $ | 12,396 | | | 14.46 | % | | $ | 5,042 | | | 14.35 | % | Total risk-based capital | 10.00 | % | | $ | 21,764 | | | 14.86 | % | | | $ | 11,799 | | | 13.18 | % |
Tier 1 risk-based capital | Tier 1 risk-based capital | 8.00 | % | | 10,066 | | | 11.36 | % | | 10,605 | | | 12.37 | % | | 4,380 | | | 12.47 | % | Tier 1 risk-based capital | 8.00 | % | | 19,225 | | | 13.13 | % | | | 9,902 | | | 11.06 | % |
Common equity Tier 1 | Common equity Tier 1 | 6.50 | % | | 9,185�� | | | 10.37 | % | | 9,724 | | | 11.35 | % | | 4,041 | | | 11.50 | % | Common equity Tier 1 | 6.50 | % | | 18,344 | | | 12.53 | % | | | 9,021 | | | 10.08 | % |
Tier 1 leverage ratio | Tier 1 leverage ratio | 5.00 | % | | 10,066 | | | 9.31 | % | | 10,605 | | | 9.85 | % | | 4,380 | | | 7.59 | % | Tier 1 leverage ratio | 5.00 | % | | 19,225 | | | 16.72 | % | | | 9,902 | | | 8.99 | % |
| FCB | FCB | | FCB | | | |
Risk-based capital ratios | Risk-based capital ratios | | Risk-based capital ratios | | | |
Total risk-based capital | Total risk-based capital | 10.00 | % | | $ | 11,732 | | | 13.26 | % | | $ | 12,233 | | | 14.28 | % | | $ | 4,858 | | | 13.85 | % | Total risk-based capital | 10.00 | % | | $ | 21,578 | | | 14.74 | % | | | $ | 11,627 | | | 12.99 | % |
Tier 1 risk-based capital | Tier 1 risk-based capital | 8.00 | % | | 10,327 | | | 11.67 | % | | 10,899 | | | 12.73 | % | | 4,651 | | | 13.26 | % | Tier 1 risk-based capital | 8.00 | % | | 19,495 | | | 13.32 | % | | | 10,186 | | | 11.38 | % |
Common equity Tier 1 | Common equity Tier 1 | 6.50 | % | | 10,327 | | | 11.67 | % | | 10,899 | | | 12.73 | % | | 4,651 | | | 13.26 | % | Common equity Tier 1 | 6.50 | % | | 19,495 | | | 13.32 | % | | | 10,186 | | | 11.38 | % |
Tier 1 leverage ratio | Tier 1 leverage ratio | 5.00 | % | | 10,327 | | | 9.56 | % | | 10,899 | | | 10.14 | % | | 4,651 | | | 8.07 | % | Tier 1 leverage ratio | 5.00 | % | | 19,495 | | | 16.97 | % | | | 10,186 | | | 9.25 | % |
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,March 31, 2023, BancShares and FCB had risk-based capital ratio conservation buffers of 5.36%6.86% and 5.26%6.74%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021,2022, BancShares and FCB had risk-based capital ratio conservation buffers were 6.35%5.06% and 5.85%4.99%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratioratios as of March 31, 2023 and December 31, 2022 over the Basel III minimum.minimum for the ratio that is the binding constraint. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
CRITICAL ACCOUNTING ESTIMATES
Accounting policies related toAs further described in our 2022 Form 10-K, the ACL and fair values of loans acquired in and the core deposit intangibles associated with a business combination are considered critical accounting estimates as described in our 2021 Form 10-K.estimates. The ACL as of September 30, 2022March 31, 2023 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 MergerSVBB Acquisition are considered critical accounting estimates. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the mergeracquisition 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
ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 Issued December 2022 | 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.
The main purpose of the practical expedients is to ease the administrative burden of accounting for contracts impacted by reference rate reform.
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
ASU 2022-06 extends the period of March 12, 2020time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to December 31, 2024.
| BancShares continues to assess the impact of the optional expedients available 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 applicable2024 for eligible contract modifications and any hedge relationships. However, we do
The reference rate reform optional expedients have not expect theyet been applied to any contracts and adoption of this guidance has not had, and is not expected to have, a material impact on the financial statements. |
ASU 2022-01, Fair Value Hedging - Portfolio Layer2023-02 – Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method Issued March 2022 2023
| The amendments in this Updateupdate allow entities to designate multiple hedged layers of a single closed portfolio, and expandselect to account for qualifying tax equity investments using the scopeproportional amortization method (“PAM”), regardless of the portfolio layer methodprogram giving rise to include non-prepayable financial assets. Provides additionalthe related income tax credits. PAM accounting had been available only for qualifying investments in qualified affordable housing projects. The guidance also requires disclosure of the nature of the investor’s tax equity investments and the effect of income tax credits and other income tax benefits from tax equity investments on the accounting forinvestor’s balance sheet 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.income statement. | Effective for BancShares as of January 1, 2023.2024. 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 2022-03 - Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions Issued MarchJune 2022
| The amendments in this ASU eliminateupdate clarify that a contractual restriction on the recognitionsale of an equity security is not considered part of the unit of account of the equity security and, measurement guidancetherefore, is not considered in measuring fair value. The amendments also require specific disclosures 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.
equity securities subject to contractual sale restrictions.
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, 2023.2024. Early adoption is permitted. Provides
BancShares does not expect 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,update to have 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 thematerial impact on itsour consolidated financial statements and disclosures, and plans to adopt the ASU at the effective date. related disclosures.
|
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 RevenueAdjusted Rental Income on Operating LeasesLease Equipment for Rail Segment
Net revenueAdjusted rental income on operating leaseslease equipment within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.
The table below presents a reconciliation of net income to net revenueadjusted rental income on operating leases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | $ | — | |
lease equipment.
Table 41
Rail Segment
| | | | | | | | | | | | | | | | | |
dollars in millions | Three Months Ended |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
Net income (GAAP) | $ | 22 | | | $ | 24 | | | $ | 32 | |
Plus: Provision for income taxes | 7 | | | 9 | | | 11 | |
Plus: Other noninterest expense | 18 | | | 15 | | | 16 | |
Less: Other noninterest income | 1 | | | (5) | | | 3 | |
Plus: Interest expense, net | 28 | | | 23 | | | 19 | |
Adjusted rental income on operating lease equipment (non-GAAP) | $ | 74 | | | $ | 76 | | | $ | 75 | |
Forward-Looking Statements
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q containscontain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans, asset quality, and future performance and other strategic goals of BancShares. Words such as “anticipates,” “believes,” “estimates,” “expects,” “predicts,” “forecasts,” “intends,” “plans,” “projects,” “targets,” “designed,” “could,” “may,” “should,” “will,” “potential,” “continue,” “aims” or other similar words and expressions are intended to identify these forward-looking statements. These forward-looking statements are based on BancShares’ current expectations and assumptions regarding BancShares’ business, the economy, and other future conditions.
Because forward-looking statements relate to future results and occurrences, they are subject to inherent risks, uncertainties, changes in circumstances and other factors that are difficult to predict. Many possible events or factors could affect BancShares’ future financial results and performance and could cause the actual results, performance or achievements of BancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including the military conflict between Russia and Ukraine) and market conditions, including changes in competitive pressures among financial institutions and the impacts of the global COVID-19 pandemic on BancShares’ business,related to or resulting from recent bank failures and customers,other volatility, the financial success or changing conditions or strategies of BancShares’ vendors or customers, or vendors,including changes in demand for deposits, loans and other financial services, fluctuations in interest rates, rising inflation,changes in the quality or composition of BancShares’ loan or investment portfolio, actions of government regulators, including the recent and projected interest rate hikes by the Board of Governors of the Federal Reserve Board (the “Federal Reserve”), changes to estimates of future costs and benefits of actions taken by BancShares, BancShares’ ability to maintain adequate sources of funding and liquidity, the potential impact of decisions by the Federal Reserve on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions,, including the significant turbulence in the capital or financial markets, the impact of the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, regulators, including the risk that such laws, regulations and regulatory interpretations may change, the availability of capital and personnel, and the failure to realize the anticipated benefits of BancShares’ previously announced acquisition transaction(s),transactions, including the recently-completedSVBB Acquisition and the previously completed transaction with CIT, which acquisition risks include (1) disruption from the transaction, or recently completed mergers,transactions with customer, supplier or employee relationships, (2) the possibility that the amount of the costs, fees, expenses and charges related to the transactiontransactions 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,transactions, (4) the risk that the cost savings and any revenue synergies from the transactiontransactions may not be realized or take longer than anticipated to be realized, and (5) difficulties experienced in completing the integration of the businesses.businesses, (6) the ability to retain customers following the transactions and (7) adjustments to BancShares’ estimated purchase accounting impacts of the SVBB Acquisition.
Except to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional factors which could affect the forward-looking statements can be found in the 20212022 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 NII in future periods. As of September 30, 2022,March 31, 2023, BancShares’ market risk profile has changed since December 31, 2021,2022, primarily due to the CIT Merger.SVBB Acquisition. See Risk Management within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of changes. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision of and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2022.March 31, 2023. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports we file under the Exchange Act.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We review our internal controls over financial reporting on an ongoing basis and make changes intended to ensure the quality of our financial reporting. During the first quarter of 2022,2023, as the result of the acquisition of CIT,SVBB Acquisition, we commenced the evaluation of the acquired entities controls, and designed and implemented new controls as needed. The evaluation of the changes to processes, information technology systems and other components of internal control over financial reporting related to our acquisition of CITthe SVBB Acquisition is ongoing. Otherwise, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the quarterthree months ended September 30, 2022March 31, 2023 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.
Part II
Item 1. Legal Proceedings
The Parent Company and various subsidiaries have beenare 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 expectedwould be material to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note 2322 — Commitments and Contingencies, which is incorporated by reference into this item.of BancShares’ Notes to Consolidated Financial Statements.
Item 1A. Risk Factors
There
Except for the new and updated risk factors related to the SVBB Acquisition set forth below, there have been no material changes in the risk factors during 20222023 from those reported in our 20212022 Form 10-K, which had contemplated anticipated changes due to the CIT Merger.10-K. For a discussion of the risks and uncertainties that management believes are material to an investment in us seein addition to those listed below, refer to Part I, Item 1A. Risk Factors, of our 20212022 Form 10-K, and Forward-Looking Statements of this Quarterly Report on Form 10-Q. Additional risks and uncertainties that are not currently known to management or that management does not currently deem material could also have a material adverse impact on our financial condition, the results of our operations or our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, we could be adversely affected, and the market price of our securities could significantly decline.
Strategic Risks
Our recently announced FDIC-assisted acquisition of Silicon Valley Bridge Bank could present additional risks to our business.
We have historically acquired, and may in the future continue to acquire, the assets and liabilities of failed banks in FDIC-assisted transactions. The SVBB Acquisition, like other FDIC-assisted transactions, presents general risks inherent in all acquisitions, as well as risks specific to FDIC-assisted transactions. For example, because these acquisitions provide for limited due diligence and negotiation of terms, these transactions may pose risks not present in more traditional transactions. In addition, the SVBB Acquisition is subject to a customary final settlement with the FDIC, and as of the date of this Form 10-Q, we are still awaiting conclusion of this process with the FDIC. To mitigate certain of those risks, including credit risks of acquired loans, FDIC-assisted transactions typically provide for FDIC-assistance, including potential loss-sharing. Although loss sharing agreements reduce the credit risks of, and capital required for, FDIC-assisted transactions, these transactions often require additional resources and time to service acquired problem loans, costs related to integration of personnel and operating systems, and the establishment of processes and internal controls to service acquired assets in accordance with applicable FDIC standards. A failure to manage these risks could result in a material adverse effect on our business, financial condition, results of operations and prospects.
Loans acquired in the SVBB Acquisition may not be covered by the commercial shared loss agreement if the FDIC determines that we have not adequately managed these loans.
In connection with the SVBB Acquisition, FCB entered into a commercial shared loss agreement with the FDIC pursuant to which the FDIC is obligated to reimburse FCB for (i) 0% of losses on the first $5 billion of covered loans and (ii) 50% of losses in excess of $5 billion on covered loans. In addition, FCB agreed to reimburse the FDIC for 50% of recoveries related to covered loans. The commercial shared loss agreement will remain in effect for five years, and the loss recovery provisions to the FDIC will remain in effect for eight years, each from March 27, 2023 (the “SVBB Acquisition Date”). Although the FDIC has agreed to reimburse FCB for a substantial portion of losses on covered loans, the FDIC has the right to refuse or delay payment for loan losses if we do not manage covered loans in accordance with the commercial shared loss agreement. In addition, reimbursable losses are based on the book value of the relevant loans as determined by the FDIC as of the effective date of the transaction. The amount that we realize on these loans could differ materially from the carrying value that will be reflected in our consolidated financial statements, based upon the timing and amount of collections on the covered loans in future periods. Any losses we experience on the assets acquired in the SVBB Acquisition that are not covered under the commercial shared loss agreement could have an adverse effect on our business, financial condition, results of operations and prospects.
In addition, in accordance with the commercial shared loss agreement, we may be required to make a “true-up” payment to the FDIC, approximately eight years following the SVBB Acquisition Date. The “true-up” payment is calculated using a defined formula set forth in the commercial shared loss agreement.
We may fail to realize all of the anticipated benefits and may incur unanticipated losses related to the SVBB Acquisition.
Achieving the anticipated benefits of the SVBB Acquisition will depend, in part, on our ability to successfully integrate our collective operations in an efficient and effective manner. As with any acquisition involving a financial institution, there may be business disruptions that result in the loss of customers or cause customers to remove their accounts and move their business to competing financial institution. It is possible that the integration could result in higher than expected deposit attrition, loss of key employees, disruption of our business or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.
Further, we did not acquire any assets from SVB Financial Group nor did we acquire all of its subsidiaries. As a result, we do not have access to all of the employees, contractual relationships, and third party vendors providing administrative and operational support for the legacy Silicon Valley Bank business. Our access to these resources is further limited by SVB Financial Group filing a voluntary petition under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York on March 17, 2023. If we are unable to effectively and efficiently replace these functions previously provided or facilitated by SVB Financial Group and certain of its subsidiaries, we could face additional disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment and third party vendor costs.
Any inability to realize the full extent, or any, of the anticipated benefits of the SVBB Acquisition could have an adverse effect on our business, financial condition, results of operations and prospects.
Our future results will suffer if we do not effectively manage our expanded operations and strengthen our reputation among legacy SVB clients following the SVBB Acquisition.
Following the consummation of the SVBB Acquisition, the size and geographic and operational scope of our business has increased significantly. The SVBB Acquisition substantially increased our asset size from total consolidated assets of approximately $109.30 billion at December 31, 2022 to approximately $214.66 billion at March 31, 2023, increased the breadth and complexity of our business with the addition of new business lines in which we have not previously engaged and expanded our geographic scope to new geographic areas. Further, legacy SVB’s client were concentrated within the certain industries, including technology, life science and healthcare, private equity and venture capital and premium wine. Our future success depends, in part, upon the ability to manage this expanded business while strengthening our reputation among the venture capital and private equity communities, and other participants in the industries that legacy SVB served, which will pose substantial challenges for management, including challenges related to the management and monitoring of new and expanded operations and associated increased costs and complexity. We may be unsuccessful in this regard or fail to realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the SVBB Acquisition.
Credit Risks
Our concentration of loans and leases in certain industries increases the risk for losses and could impair our earnings if these industries experience economic difficulties.
Prior to the SVBB Acquisition, we had a substantial concentration of loans and leases in the medical and dental industries, as well as the rail business. A significant portion of the loans acquired in the SVBB Acquisition were concentrated in the technology, life science and healthcare sectors, as well as loans to former global private equity and venture capital clients of legacy SVB. Prior to the SVBB Acquisition, we did not have significant exposure to these industries. Although we believe our current loan portfolio is well-diversified, borrowers in certain industries may have a heightened vulnerability to negative economic conditions. For example, statutory or regulatory changes relevant to the medical and dental industries, or economic conditions in the market generally, could negatively impact these borrowers’ businesses and their ability to repay their loans with us. Additionally, smaller practices such as those in the dental industry generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, and generally have a heightened vulnerability to negative economic conditions. Repayment of loans in the portfolios for early-stage and mid-stage privately held companies, including those acquired in the SVBB Acquisition, may depend upon receipt by those borrowers of additional financing from venture capitalists or others, or, in some cases, a successful sale to a third party, public offering or other form of liquidity event. In addition, decreases in the amount of equity capital available to early-stage and mid-stage companies, including through a decrease in merger and acquisition activity, could adversely impact the ability of borrowers to repay our loans in these industries. If such events occur, our levels of non-performing assets and charge offs may increase, and we may be required to increase our ACL through additional provisions on our income statement, which would reduce reported net income and could have an adverse effect on our business, financial condition, results of operations and prospects.
Due to our substantial concentration in our rail business, if there is a significant downturn in shipping by railcar, it could have a material adverse effect on our business and results of operations. In addition, volatility in the price of, and demand for oil and gas may have negative effects on not only our loan exposures in the exploration and production section, but may also lead to a decreased demand for our railcars.
Market Risks
Recent bank failures have created significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system.
The recent failures of several high-profile banking institutions have caused significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system. These recent bank failures occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and more competition for bank deposits, and may increase the risk of a potential economic recession in the United States. Given the current environment, we may experience more deposit volatility as customers react to adverse events or market speculation involving financial institutions.
In response to the bank failures, the United States government may adopt a variety of measures and new regulations designed to strengthen capital levels, liquidity standards, and risk management practices and otherwise restore confidence in financial institutions. Any reforms, if adopted, could have a significant impact on banks and BHCs, including us. We may also be subject to any special assessment that the FDIC adopts to recover the loss to the Deposit Insurance Fund, and such assessment, if significant, could have an adverse effect on our business, financial condition, results of operations and prospects.
Liquidity Risks
If our current level of balance sheet liquidity were to experience pressure, it could affect our ability to pay deposits and fund our operations.
Our deposit base represents our primary source of core funding and balance sheet liquidity. We typically have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we need access to non-core funding such as borrowings from the FHLB and the Federal Reserve, Federal Funds purchased lines and brokered deposits. In connection with the SVBB Acquisition, we also entered into binding terms and conditions pursuant to which the FDIC is providing a five-year, up to $70 billion line of credit. During the two-year period following the SVBB Acquisition Date, we may draw on the FDIC Credit Facility to support liquidity, including for deposit withdrawal or runoff and to fund the unfunded commercial lending commitments acquired in connection with the SVBB Acquisition. While we maintain access to these non-core funding sources, including the FDIC Credit Facility, some sources are dependent on the availability of collateral as well as the counterparty’s willingness and ability to lend. Failure to access sources of liquidity may affect our ability to pay deposits and fund our operations.
Capital Adequacy Risks
Increases to our level of indebtedness could adversely affect our ability to raise additional capital and to meet our obligations.
In connection with the SVBB Acquisition, as initial payment under the Purchase Agreement, FCB issued a five-year Purchase Money Note of approximately $35.0 billion payable to the FDIC. Our existing debt, together with any future incurrence of additional indebtedness and preferred stock, including under the FDIC Credit Facility, could have consequences that are materially adverse to our business, financial condition or results of operations. For example, it could: (i) limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; (ii) restrict us from making strategic acquisitions or cause us to make non-strategic divestitures; (iii) restrict us from paying dividends to our stockholders; (iv) increase our vulnerability to general economic and industry conditions; or (v) require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness and dividends on the preferred stock, thereby reducing our ability to use cash flows to fund our operations, capital expenditures and future business opportunities. Refer to the “Borrowings” sections of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q for additional information regarding our borrowings.
Financial Reporting Risks
The SVBB Acquisition has been accounted for under the purchase method of accounting and is based upon a preliminary valuation that involves significant estimates that are subject to change.
As required by U.S. GAAP, the SVBB Acquisition was accounted for under the purchase method of accounting and is based upon a preliminary valuation that involves significant estimates that are subject to change. The opening balances of acquired assets and assumed liabilities in connection with the SVBB Acquisition have not been audited and have been recorded at estimated fair value based on information currently available to the Company. In developing these fair value estimates, management was required to make significant estimates involving, among other things, the assigned risk ratings to loans based on credit quality, appraisals and estimated collateral values, estimated expected cash flows and appropriate liquidity and coupon discounts. The loans purchased in connection with the SVBB Acquisition have credit profiles that differ from most banking companies. For example, many of the legacy SVB loans acquired were made to early-stage, privately held companies with modest or negative cash flows and/or no established record of profitable operations. In addition, a significant portion of the loans were comprised of larger loans equal to or greater than $20 million, and collateral for many of the legacy SVB loans in the technology, life science and healthcare industries include intellectual property and other intangible assets, which are difficult to value and not readily salable in the case of default. Furthermore, the receivables from the FDIC for the commercial shared loss agreement involve significant estimates that involve uncertainty. In addition, the core deposit intangibles was valued using the after-tax cost savings method under the income approach. 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 valuation considered a dynamic approach to interest rates and alternative cost of funds. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. The estimates used in creating the preliminary fair value estimates of the assets acquired and liabilities assumed may change as additional information becomes available, which could lead to changes in the Company’s fair value estimates. As such, we may experience more adverse outcomes than originally estimated, and the ACL may need to be revised.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The table below summarizesThere were no repurchases of our stock repurchase activity during the quarterthree months ended September 30, 2022.March 31, 2023.
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | |
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 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, 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 | | |
3.1 | | |
4.1 | | |
10.1 | | |
10.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
*101.INS | | Inline XBRL Instance Document (filed herewith) |
*101.SCH | | Inline XBRL Taxonomy Extension Schema (filed herewith) |
*101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) |
*101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) |
*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 Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | November 4, 2022May 10, 2023 | | | FIRST CITIZENS BANCSHARES, INC. |
| | | | (Registrant) |
| | |
| | By: | | /s/ Craig L. Nix |
| | | | Craig L. Nix |
| | | | Chief Financial Officer |