Notes to the Unaudited Consolidated Financial Statements
NOTE 1 — 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 and 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 over 600 branches and serve 22 states, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States (the “U.S.”).
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, 2021 (the “2021 Form 10-K”).
The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, certain partnership interests and variable interest entities (“VIEs”) where BancShares is the primary beneficiary (“PB”), if applicable. Assets held in agency or fiduciary capacity are not included in the consolidated financial statements.
Reclassifications
In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement 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 impacting the amounts reported. Actual results could differ from those estimates. BancShares considers the allowance for credit losses (“ACL”) to be a significant estimate.
Business Combinations
BancShares accounts for all business combinations using the acquisition method of accounting. Under this method, acquired assets and assumed liabilities are included with the acquirer’s accounts at their estimated fair value as of the date of acquisition, with any excess of purchase price over the fair value of the net assets acquired recognized as either finite lived intangibles or capitalized as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a gain on acquisition is recognized. Acquisition-related and restructuring costs are recognized as period expenses as incurred.
On January 3, 2022, 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 Agreement”). Results as of and for the three months ended March 31, 2022 include activity of the combined entity. See Note 2 — Business Combinations, for additional information.
ACCOUNTING POLICIES
Significant accounting policies are described in the 2021 Form 10-K. We have further described relevant updates to the significant accounting policies presented below.
Reportable Segments
As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger. 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 loans (“PCD”) are no longer a separate loan class. The following represent our classes of loans as of March 31, 2022. Prior period disclosures have been conformed to the current presentation.
Commercial Loans and Leases
Commercial Construction - Commercial construction consists of loans to finance land for commercial development of real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.
Owner Occupied Commercial 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 and leases 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 and leases 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 and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan.
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). 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.
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 land in anticipation of completing construction of a 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. Delays in construction and development projects can cause cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Revolving Mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit or loans secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured.
Consumer Auto - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well as indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.
Consumer Other - Other consumer loans consist of loans to finance unsecured home improvements, student loans, and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.
Assets Held for Sale
Assets held for sale primarily consist of residential mortgage loans held for sale of $65 million carried at fair value and commercial loans held for sale of $16 million carried at the lower of the cost or fair market value less disposal costs (“LOCOM”).
Goodwill
BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at March 31, 2022 and December 31, 2021. The entire balance of goodwill relates to business combinations that BancShares completed prior to the CIT Merger. All of the goodwill relates to the General Banking reporting unit. There was no goodwill impairment during the first quarter of 2022. Goodwill and other intangibles are discussed further in Note 7 – Goodwill and Other Intangibles.
Derivative Financial Instruments
BancShares did not have any significant derivative financial instruments prior to completion of the CIT Merger. BancShares has derivative financial instruments at March 31, 2022 as further described in Note 13 — Derivative Financial Instruments. BancShares manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. BancShares also offers derivative products to its customers in order for them to manage their interest rate and currency risks. BancShares does not enter into derivative financial instruments for speculative purposes.
Derivatives utilized by BancShares may include swaps, forward settlement contracts and options contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time.
BancShares documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedges. Upon executing a derivative contract, BancShares designates the derivative as either a qualifying hedge or non-qualifying hedge. The designation may change based upon management’s reassessment of circumstances. BancShares does not have any qualifying fair value, cash flow or net investment hedges as of March 31, 2022.
BancShares provides interest rate derivative contracts to support the business requirements of its customers (“customer-related positions”). The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, BancShares enters into similar offsetting positions with broker-dealers.
BancShares has both bought and sold credit protection in the form of participations in interest rate swaps (risk participations). These risk participations were entered into in the ordinary course of business to facilitate customer credit needs. Swap participations where BancShares has sold credit protection have maturities ranging between 2022 and 2040 and may require BancShares to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction.
BancShares uses foreign currency forward contracts, interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges.
All derivative instruments are recorded at their respective fair value. BancShares does not offset derivative assets and liabilities and cash collateral under master netting agreements and reports all derivatives on a gross basis in the Consolidated Balance Sheets. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, but with their resulting gains or losses recognized in other noninterest income. For non-qualifying derivatives with periodic interest settlements, BancShares reports such settlements with other changes in fair value in other noninterest income.
Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Valuations of derivative assets and liabilities reflect the value of the instrument including BancShares’ and the counterparty’s credit risk.
BancShares is exposed to 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 March 31, 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 other 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. BancShares has operating lease equipment of approximately $8.0 billion, primarily related to the Rail segment, at March 31, 2022. 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 Stock on January 3, 2022 and was included in the purchase price consideration as discussed further 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 BancShares’ Class A and Class B common shares 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 securities. BancShares’ potential dilutive instruments primarily 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 U.S. and non-U.S. 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.
Factoring commissions, which are earned in the Commercial Banking segment, are driven by factoring volumes, principally in the retail sectors. We provide factoring 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). Factoring commissions are charged as a percentage of the invoice amount of the receivables assigned to BancShares. The volume of factoring activity and the commission rates charged impact factoring commission income earned. Factoring commissions are deferred and recognized as income over time based on the underlying terms of the assigned receivables.
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).
BOLI income reflects income earned on changes in the cash surrender value of the BOLI.
Other Newly Adopted Accounting Standards
The following pronouncements or Accounting Standards Updates (“ASUs”) were issued by the Financial Accounting Standards Board (“FASB”) and adopted by BancShares as of January 1, 2022:
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity - Issued August 2020
The amendments in this ASU reduce the number of models used to account for convertible instruments, amend diluted earnings per share calculations for convertible instruments, amend the requirements for a contract (or embedded derivative) that 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.
ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options - Issued May 2021
The amendments in this ASU clarifies an issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU requires that such modifications or exchanges be treated as an exchange of the original instrument for a new instrument. An issuer should measure the effect of such modifications or exchanges based on analysis of the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification or exchange. Recognition of a modification or an exchange of a freestanding equity-classified written call option is then based upon the substance of the transaction. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares currently does not have any freestanding equity-classified written call options within the scope of this ASU.
ASU 2021-05, Leases, (Topic 842), Lessors - Certain Leases with Variable Lease Payments - Issued July 2021
The amendments in this ASU improve lessor accounting for certain leases with variable lease payments so that lessors are no longer required to recognize a day-one selling loss upon lease commencement when specified criteria are met. Specifically, this ASU requires a lessor to classify a lease with variable payments that do not depend on a reference index or a rate as an operating lease if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a day-one selling loss at lease commencement. A day-one selling loss is not recognized under operating lease accounting. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares has not originated finance leases which required a day-one selling loss at lease commencement.
NOTE 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 its 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 March 31, 2022, the fair value measurements remain preliminary due to the timing of the Merger Date and BancShares’ Quarterly Report on Form 10-Q. While BancShares believes that the information available on January 3, 2022 provided a reasonable basis for estimating fair value, 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. Management anticipates that this review could result in adjustments to the Merger Date valuation amounts presented herein.
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 | |
Consideration for common stock | 5,279 | |
Fair value consideration for preferred stock | 541 | |
Consideration for stock-based compensation | 81 | |
Cash in lieu of fractional shares and other consideration paid | 51 | |
Purchase price consideration | $ | 5,952 | |
Assets | |
Cash and interest-earning deposits at banks | 3,060 | |
Investment securities | 6,561 | |
Assets held for sale | 59 | |
Loans and leases | 32,714 | |
Operating lease equipment | 7,838 | |
Bank-owned life insurance | 1,202 | |
Intangible assets | 143 | |
Other assets | 2,198 | |
Total assets acquired | $ | 53,775 | |
Liabilities | |
Deposits | 39,428 | |
Borrowings | 4,536 | |
Credit balances of factoring clients | 1,534 | |
Other liabilities | 1,894 | |
Total liabilities assumed | $ | 47,392 | |
Fair value of net assets acquired | 6,383 | |
Preliminary gain on acquisition | $ | 431 | |
BancShares recorded a preliminary gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The preliminary gain on acquisition is not taxable.
The following is a description of the methods used to determine the estimated fair values of significant assets acquired and liabilities assumed as presented above.
Cash and interest-bearing deposits
For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value.
Investment securities
Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or discounted cash flows methodologies.
Loans held for sale and portfolio loans
Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, amortization status and current discount rate. Selected larger, impaired loans were specifically reviewed to evaluate credit risk. Loans with similar risk characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and required rates of return for market participants to purchase similar assets, including adjustments for liquidity and credit quality when necessary.
Purchased loans and leases which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD loans and leases. PCD loans and leases are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus BancShares' initial ACL which results in a gross up of the loan balance (the “PCD Gross-Up”). The difference between the unpaid principal balance (“UPB”) and the acquisition date amortized cost resulting from the PCD Gross-Up is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.
Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases consist of loans that do not reflect more than insignificant credit deterioration since origination at acquisition.
The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger. The UPB for PCD loans and leases includes the PCD Gross-Up of $284 million as discussed further in Note 4 — Loans and Leases.
Loans Acquired
| | | | | | | | | | | |
| Loans and Leases |
dollars in millions | UPB | | Fair Value |
| | | |
Non-PCD loans and leases | $ | 29,542 | | | $ | 29,481 | |
PCD loans and leases | 3,562 | | | 3,233 | |
Total loans and leases | $ | 33,104 | | | $ | 32,714 | |
Operating Lease Equipment
Operating lease equipment were comprised of two sub-groups: rail and non-rail equipment. Fair values for both were based on the cost approach where market values were not available. The sales approach was used to value rail assets where market information was available, or when replacement cost less depreciation was lower than the current market value. An intangible liability was recorded for net above and below market lease contracts, for which fair value was estimated using the income approach and contemplated market lease rates and other key inputs.
A discount was recorded for net operating lease equipment, which includes railcars and 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. These adjustments (net) will be amortized, thereby increasing rental income (a component of noninterest income) over the remaining lives of the lease agreements on a straight line basis.
Bank Owned Life Insurance
The fair values of BOLI policies were determined by the policy administrator and calculated based on the net present value of investment cash flows. Expected premium payments, death benefits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysis and management’s review of the analysis, fair value was determined to equate to book value as of the merger date.
Intangible assets
The following table presents the intangible asset recorded in conjunction with the CIT Merger related to the valuation of core deposits:
Intangible Assets
| | | | | | | | | | | | | | | | | |
dollars in millions | Fair Value | | Estimated Useful Life | | Amortization Method |
Core deposit intangibles | $143 | | 10 years | | Straight-line |
Certain core deposits were acquired as part of the CIT Merger, which provide an additional source of funds for BancShares. The core deposit intangibles represent the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. This intangible was valued using the income approach, after-tax cost savings method. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances over their estimated average remaining life. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to Note 7 — Goodwill and Other Intangibles for further discussion.
Other assets
The following table details other assets acquired:
Other Assets | | | | | |
dollars in millions | Fair Value |
Low-income housing tax credit and other equity method 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, while real estate property such as land and buildings was valued using the sales comparison approach, where sales of comparable properties are adjusted for differences to estimate the value of each subject property.
The fair values of the derivative financial instruments, as well as counterparty receivables, were valued using prices of financial instruments with similar characteristics and observable inputs.
Deposits
The fair values for time deposits were estimated using a discounted cash flow analysis whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.
Borrowings
In connection with the CIT Merger, BancShares assumed the outstanding borrowings of CIT. The fair values of borrowing were estimated based on readily observable prices using reliable market sources.
Credit balances of Factoring Clients
Credit balance amounts represent short-term payables that are tied to the factoring receivables. Due to the short-term nature of these payables and given that amounts are settled at book value, it was determined that the carrying value is equivalent to fair value.
Other Liabilities
Other liabilities include items such as accounts payable and accrued liabilities, lease liabilities, current and deferred taxes, commitments to fund tax credit investments and other miscellaneous liabilities. The fair value of lease liabilities was measured using the present value of remaining lease payments, using BancShares’ discount rate at the merger date. The fair value of the remaining liabilities was determined to approximate book value. For all accrued liabilities and accounts payable, it was determined that the carrying value equals book value.
Unaudited Pro Forma Information
The amount of interest income, noninterest income and net income of $351 million, $297 million and $330 million, respectively, attributable to the acquisition of CIT were included in BancShares’ Consolidated Statement of Income for the three months ended March 31, 2022. CIT’s interest income, noninterest income and net income noted above reflect management’s best estimates, based on information available at the reporting date.
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three months ended March 31, 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; (ii) merger and integration costs of $135 million; (iii) estimated purchase accounting adjustment (“PAA”) accretion and amortization related to fair value adjustments and intangibles associated with the CIT Merger; and (iv) $431 million preliminary gain on acquisition. BancShares expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not reflected in the pro forma amounts that follow. The pro forma information should not be relied upon as being indicative of the historical results of operations that would have occurred had the acquisition taken place on January 1, 2021. Actual results may differ from the unaudited pro forma information presented below and the differences could be significant.
Selected Unaudited Pro Forma Financial Information for Consolidated BancShares
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Interest income | $ | 710 | | | $ | 726 | |
Noninterest income | 418 | | | 1,001 | |
Net income | 335 | | | 417 | |
NOTE 3 — INVESTMENT SECURITIES
The following tables as of March 31, 2022 include the investment security balances acquired in the CIT Merger, which were recorded at fair value on the acquisition date. The amortized cost and fair value of investment securities at March 31, 2022 and December 31, 2021, were as follows:
Amortized Cost and Fair Value - Debt Securities
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,014 | | | $ | — | | | $ | (83) | | | $ | 1,931 | |
Government agency | 206 | | | 1 | | | (1) | | | 206 | |
Residential mortgage-backed securities | 5,340 | | | — | | | (288) | | | 5,052 | |
Commercial mortgage-backed securities | 1,584 | | | 2 | | | (66) | | | 1,520 | |
Corporate bonds | 582 | | | 8 | | | (4) | | | 586 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,726 | | | $ | 11 | | | $ | (442) | | | $ | 9,295 | |
Investment in marketable equity securities | $ | 73 | | | $ | 27 | | | $ | — | | | $ | 100 | |
Investment securities held to maturity | | | | | | | |
U.S. Treasury | $ | 471 | | | $ | — | | | $ | (24) | | | $ | 447 | |
Government agency | 1,541 | | | — | | | (78) | | | 1,463 | |
Residential mortgage-backed securities | 4,776 | | | — | | | (315) | | | 4,461 | |
Commercial mortgage-backed securities | 2,988 | | | — | | | (183) | | | 2,805 | |
Supranational securities | 294 | | | — | | | (17) | | | 277 | |
Other | 4 | | | — | | | — | | | 4 | |
Total investment securities held to maturity | $ | 10,074 | | | $ | — | | | $ | (617) | | | $ | 9,457 | |
Total investment securities | $ | 19,873 | | | $ | 38 | | | $ | (1,059) | | | $ | 18,852 | |
| | | | | | | |
| December 31, 2021 |
dollars in millions | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,007 | | | $ | — | | | $ | (2) | | | $ | 2,005 | |
Government agency | 221 | | | 1 | | | (1) | | | 221 | |
Residential mortgage-backed securities | 4,757 | | | 8 | | | (36) | | | 4,729 | |
Commercial mortgage-backed securities | 1,648 | | | 9 | | | (17) | | | 1,640 | |
Corporate bonds | 582 | | | 27 | | | (1) | | | 608 | |
State, county and municipal | — | | | — | | | — | | | — | |
Total investment securities available for sale | $ | 9,215 | | | $ | 45 | | | $ | (57) | | | $ | 9,203 | |
Investment in marketable equity securities | $ | 73 | | | $ | 25 | | | $ | — | | | $ | 98 | |
Investment securities held to maturity | | | | | | | |
Residential mortgage-backed securities | $ | 2,322 | | | $ | 6 | | | $ | (22) | | | $ | 2,306 | |
Commercial mortgage-backed securities | 1,485 | | | — | | | (34) | | | 1,451 | |
Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | $ | 3,809 | | | $ | 6 | | | $ | (56) | | | $ | 3,759 | |
Total investment securities | $ | 13,097 | | | $ | 76 | | | $ | (113) | | | $ | 13,060 | |
Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. US Treasury investments represents T-bills and Notes issued by the US 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. 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 March 31, 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 March 31, 2022, accrued interest receivable for available for sale and held to maturity debt securities were $26 million and $16 million, respectively. At December 31, 2021, accrued interest receivable for available for sale and held to maturity debt securities were $22 million and $7 million, respectively. During the three months ended March 31, 2022 and 2021, no accrued interest 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
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
dollars in millions | Cost | | Fair value | | Cost | | Fair value |
Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 9 | | | $ | 9 | | | $ | — | | | $ | — | |
After one through five years | 2,055 | | | 1,972 | | | 2,049 | | | 2,048 | |
After five through 10 years | 515 | | | 520 | | | 523 | | | 548 | |
After 10 years | 17 | | | 16 | | | 17 | | | 17 | |
| | | | | | | |
Government agency | 206 | | | 206 | | | 221 | | | 221 | |
Residential mortgage-backed securities | 5,340 | | | 5,052 | | | 4,757 | | | 4,729 | |
Commercial mortgage-backed securities | 1,584 | | | 1,520 | | | 1,648 | | | 1,640 | |
Total investment securities available for sale | $ | 9,726 | | | $ | 9,295 | | | $ | 9,215 | | | $ | 9,203 | |
Investment securities held to maturity | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 4 | | | $ | 4 | | | $ | 2 | | | $ | 2 | |
After one through five years | 873 | | | 836 | | | — | | | — | |
After five through 10 years | 1,433 | | | 1,351 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | 4,776 | | | 4,461 | | | 2,322 | | | 2,306 | |
Commercial mortgage-backed securities | 2,988 | | | 2,805 | | | 1,485 | | | 1,451 | |
| | | | | | | |
| | | | | | | |
Total investment securities held to maturity | $ | 10,074 | | | $ | 9,457 | | | $ | 3,809 | | | $ | 3,759 | |
| | | | | | | |
The following table presents interest and dividend income on investments and other interest-bearing assets:
Other Interest and Dividend Income
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Interest income - taxable debt securities | $ | 83 | | | $ | 30 | |
| | | |
Interest income - interest-bearing cash | 5 | | | 1 | |
| | | |
Dividend income - marketable equity securities | 1 | | | 1 | |
Total other interest and dividend income | $ | 89 | | | $ | 32 | |
The following table provides the gross realized gains and losses on the sales of investment securities available for sale:
Realized Gains on Debt Securities Available For Sale
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Gross realized gains on sales of investment securities available for sale | $ | — | | | $ | 9 | |
Gross realized losses on sales of investment securities available for sale | — | | | — | |
Net realized gains on sales of investment securities available for sale | $ | — | | | $ | 9 | |
The following table provides the realized and unrealized gains and losses on marketable equity securities:
Realized and Unrealized Gains on Marketable Equity Securities
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Marketable equity securities gains, net | $ | 3 | | | $ | 16 | |
| | | |
Unrealized gains recognized on marketable equity securities held for sale | $ | 3 | | | $ | 16 | |
The following table provides information regarding investment securities available for sale with unrealized losses for which an ACL has not been recorded:
Gross Unrealized Losses on Debt Securities Available For Sale
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Less than 12 months | | 12 months or more | | Total |
dollars in millions | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 1,931 | | | $ | (83) | | | $ | — | | | $ | — | | | $ | 1,931 | | | $ | (83) | |
Government agency | 21 | | | — | | | 74 | | | (1) | | | 95 | | | (1) | |
Residential mortgage-backed securities | 4,247 | | | (239) | | | 670 | | | (49) | | | 4,917 | | | (288) | |
Commercial mortgage-backed securities | 744 | | | (42) | | | 485 | | | (24) | | | 1,229 | | | (66) | |
Corporate bonds | 187 | | | (4) | | | — | | | — | | | 187 | | | (4) | |
Total | $ | 7,130 | | | $ | (368) | | | $ | 1,229 | | | $ | (74) | | | $ | 8,359 | | | $ | (442) | |
| | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 months or more | | Total |
dollars in millions | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 1,811 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | 1,811 | | | $ | (2) | |
Government agency | 17 | | | — | | | 79 | | | (1) | | | 96 | | | (1) | |
Residential mortgage-backed securities | 3,992 | | | (36) | | | 1 | | | — | | | 3,993 | | | (36) | |
Commercial mortgage-backed securities | 852 | | | (15) | | | 111 | | | (2) | | | 963 | | | (17) | |
Corporate bonds | 52 | | | (1) | | | — | | | — | | | 52 | | | (1) | |
Total | $ | 6,724 | | | $ | (54) | | | $ | 191 | | | $ | (3) | | | $ | 6,915 | | | $ | (57) | |
As of March 31, 2022, there were 55 investment securities available for sale with continuous losses for more than 12 months, of which all were government sponsored enterprise-issued mortgage-backed securities or government agency securities.
None of the unrealized losses identified as of March 31, 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.
Investment securities having an aggregate carrying value of $5.9 billion at March 31, 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, US Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the World Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no 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 on held to maturity debt securities.
A security is considered past due once it is 30 days contractually past due under the terms of the agreement. The carrying value was zero for securities past due as of March 31, 2022 and December 31, 2021.
There were no debt securities held to maturity on non-accrual status as of March 31, 2022 and December 31, 2021.
Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $39 million and $40 million at March 31, 2022 and December 31, 2021, respectively; these securities are recorded at cost. BancShares held $67 million and $10 million of non-marketable securities without readily determinable fair values measured under the measurement exception at March 31, 2022 and December 31, 2021, respectively. All investments held in qualified affordable housing projects qualify for the proportional amortization method and totaled $533 million and $156 million at March 31, 2022 and December 31, 2021, respectively.
NOTE 4 — LOANS AND LEASES
The following tables as of March 31, 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.
Loans by Class | | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Commercial | | | |
Commercial construction | $ | 2,633 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 13,553 | | | 12,099 | |
Non-owner occupied commercial mortgage | 9,293 | | | 3,041 | |
Commercial and industrial | 22,402 | | | 5,937 | |
Leases | 2,220 | | | 271 | |
Total commercial | 50,101 | | | 22,586 | |
Consumer | | | |
Residential mortgage | 11,711 | | | 6,088 | |
Revolving mortgage | 1,840 | | | 1,818 | |
Consumer auto | 1,320 | | | 1,332 | |
Consumer other | 552 | | | 548 | |
Total consumer | 15,423 | | | 9,786 | |
Total loans and leases | $ | 65,524 | | | $ | 32,372 | |
At March 31, 2022 and December 31, 2021, accrued interest receivable on loans included in other assets was $135 million and $87 million, respectively, and was excluded from the estimate of credit losses.
The following table presents selected components of the amortized cost of loans.
Components of Amortized Cost
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Deferred fees, including unearned fees and unamortized costs on non-PCD loans | $ | 38 | | $ | 32 |
| | | |
Net unamortized discount on purchased loans | | | |
Non-PCD | $ | 75 | | $ | 11 |
PCD | 67 | | 29 | |
Total net unamortized discount | $ | 142 | | $ | 40 |
The aging of the outstanding loans and leases, by class, at March 31, 2022 and December 31, 2021 is provided in the tables below. Loans and leases 30 days or less past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the respective agreement.
Loans and Leases - Delinquency Status
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | 30-59 days past due | | 60-89 days past due | | 90 days or greater | | Total Past Due | | Current | | Total |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 55 | | | $ | — | | | $ | 2 | | | $ | 57 | | | $ | 2,576 | | | $ | 2,633 | |
Owner occupied commercial mortgage | 22 | | | 16 | | | 13 | | | 51 | | | 13,502 | | | 13,553 | |
Non-owner occupied commercial mortgage | 20 | | | — | | | 60 | | | 80 | | | 9,213 | | | 9,293 | |
Commercial and industrial | 73 | | | 15 | | | 23 | | | 111 | | | 22,291 | | | 22,402 | |
Leases | 40 | | | 13 | | | 13 | | | 66 | | | 2,154 | | | 2,220 | |
Total commercial loans | 210 | | | 44 | | | 111 | | | 365 | | | 49,736 | | | 50,101 | |
Consumer | | | | | | | | | | | |
Residential mortgage | 63 | | | 12 | | | 59 | | | 134 | | | 11,577 | | | 11,711 | |
Revolving mortgage | 6 | | | 2 | | | 9 | | | 17 | | | 1,823 | | | 1,840 | |
Consumer auto | 6 | | | 1 | | | 1 | | | 8 | | | 1,312 | | | 1,320 | |
Consumer other | 2 | | | 2 | | | 1 | | | 5 | | | 547 | | | 552 | |
Total consumer loans | 77 | | | 17 | | | 70 | | | 164 | | | 15,259 | | | 15,423 | |
Total loans and leases | $ | 287 | | | $ | 61 | | | $ | 181 | | | $ | 529 | | | $ | 64,995 | | | $ | 65,524 | |
| | | | | | | | | | | |
| December 31, 2021 |
dollars in millions | 30-59 days past due | | 60-89 days past due | | 90 days or greater | | Total Past Due | | Current | | Total |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 3 | | | $ | 1,235 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 21 | | | 1 | | | 9 | | | 31 | | | 12,068 | | | 12,099 | |
Non-owner occupied commercial mortgage | 3 | | | — | | | 2 | | | 5 | | | 3,036 | | | 3,041 | |
Commercial and industrial | 8 | | | 3 | | | 5 | | | 16 | | | 5,921 | | | 5,937 | |
Leases | — | | | 1 | | | 1 | | | 2 | | | 269 | | | 271 | |
Total commercial loans | 33 | | | 5 | | | 19 | | | 57 | | | 22,529 | | | 22,586 | |
Consumer | | | | | | | | | | | |
Residential mortgage | 24 | | | 6 | | | 23 | | | 53 | | | 6,035 | | | 6,088 | |
Revolving mortgage | 6 | | | 2 | | | 6 | | | 14 | | | 1,804 | | | 1,818 | |
Consumer auto | 6 | | | 1 | | | 1 | | | 8 | | | 1,324 | | | 1,332 | |
Consumer other | 2 | | | 2 | | | 1 | | | 5 | | | 543 | | | 548 | |
Total consumer loans | 38 | | | 11 | | | 31 | | | 80 | | | 9,706 | | | 9,786 | |
Total loans and leases | $ | 71 | | | $ | 16 | | | $ | 50 | | | $ | 137 | | | $ | 32,235 | | | $ | 32,372 | |
The amortized cost, by class, of loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at March 31, 2022 and December 31, 2021 are presented below.
Loans on Non-Accrual Status (1) (2)
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
dollars in millions | Non-Accrual Loans | | Loans > 90 days and Accruing | | Non-Accrual Loans | | Loans > 90 days and Accruing |
Commercial | | | | | | | |
Commercial construction | $ | 21 | | | $ | — | | | $ | 4 | | | $ | — | |
Owner occupied commercial mortgage | 30 | | | 6 | | | 18 | | | 5 | |
Non-owner occupied commercial mortgage | 122 | | | — | | | 5 | | | — | |
Commercial and industrial | 229 | | | 9 | | | 15 | | | 1 | |
Leases | 24 | | | 5 | | | 3 | | | — | |
Total commercial | 426 | | | 20 | | | 45 | | | 6 | |
Consumer | | | | | | | |
Residential mortgage | 86 | | | 13 | | | 54 | | | — | |
Revolving mortgage | 22 | | | — | | | 18 | | | — | |
Consumer auto | 3 | | | — | | | 3 | | | — | |
Consumer other | 1 | | | 1 | | | 1 | | | 1 | |
Total consumer | 112 | | | 14 | | | 76 | | | 1 | |
Total loans and leases | $ | 538 | | | $ | 34 | | | $ | 121 | | | $ | 7 | |
(1)Accrued interest that was reversed when the loan went to non-accrual status was $1 million for the three months ended March 31, 2022.
(2)Non-accrual loans for which there was no related ACL totaled $35 million at March 31, 2022 and $15 million at December 31, 2021.
Other real estate owned (“OREO”) and repossessed assets were $43 million as of March 31, 2022 and $40 million as of December 31, 2021.
Credit quality indicators
Loans and leases are monitored for credit quality on a recurring basis. Commercial and consumer loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segments 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 March 31, 2022 and December 31, 2021, relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.
The credit quality 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 summarizes the commercial loans disaggregated by year of origination and by risk rating. The consumer loan delinquency status by year of origination is also presented below. The tables reflect the amortized cost of the loans and include PCD loans.
Commercial Loans - Risk Classifications by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 |
Risk Classification: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | | Total |
Commercial construction | | | | | | | | | | | | | | | | |
Pass | $ | 300 | | | $ | 775 | | | $ | 790 | | | $ | 439 | | | $ | 102 | | | $ | 85 | | | $ | 15 | | | $ | — | | | $ | 2,506 | |
Special Mention | 2 | | | — | | | 30 | | | 25 | | | 28 | | | — | | | — | | | — | | | 85 | |
Substandard | 1 | | | 1 | | | — | | | 30 | | | 2 | | | 5 | | | — | | | — | | | 39 | |
Doubtful | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | 303 | | | 776 | | | 820 | | | 497 | | | 132 | | | 90 | | | 15 | | | — | | | 2,633 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 642 | | | 3,311 | | | 3,176 | | | 2,080 | | | 1,213 | | | 2,499 | | | 143 | | | — | | | 13,064 | |
Special Mention | 3 | | | 3 | | | 44 | | | 37 | | | 19 | | | 74 | | | 4 | | | — | | | 184 | |
Substandard | 2 | | | 26 | | | 37 | | | 37 | | | 74 | | | 124 | | | 4 | | | — | | | 304 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | 647 | | | 3,340 | | | 3,257 | | | 2,154 | | | 1,306 | | | 2,698 | | | 151 | | | — | | | 13,553 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 532 | | | 1,731 | | | 1,844 | | | 1,953 | | | 936 | | | 1,510 | | | 39 | | | — | | | 8,545 | |
Special Mention | — | | | 1 | | | — | | | 95 | | | 3 | | | 37 | | | — | | | — | | | 136 | |
Substandard | 2 | | | 16 | | | 26 | | | 324 | | | 60 | | | 166 | | | 1 | | | — | | | 595 | |
Doubtful | — | | | — | | | — | | | 5 | | | — | | | 12 | | | — | | | — | | | 17 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | 534 | | | 1,748 | | | 1,870 | | | 2,377 | | | 999 | | | 1,725 | | | 40 | | | — | | | 9,293 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | 3,525 | | | 5,292 | | | 2,865 | | | 2,244 | | | 1,277 | | | 1,389 | | | 4,100 | | | 50 | | | 20,742 | |
Special Mention | 32 | | | 19 | | | 117 | | | 113 | | | 103 | | | 38 | | | 52 | | | — | | | 474 | |
Substandard | 26 | | | 63 | | | 109 | | | 181 | | | 162 | | | 239 | | | 247 | | | 1 | | | 1,028 | |
Doubtful | — | | | 3 | | | 1 | | | 2 | | | 14 | | | 36 | | | 18 | | | — | | | 74 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 84 | | | — | | | 84 | |
Total commercial and industrial | 3,583 | | | 5,377 | | | 3,092 | | | 2,540 | | | 1,556 | | | 1,702 | | | 4,501 | | | 51 | | | 22,402 | |
Leases | | | | | | | | | | | | | | | | | |
Pass | 182 | | | 635 | | | 581 | | | 355 | | | 168 | | | 146 | | | — | | | — | | | 2,067 | |
Special Mention | 2 | | | 15 | | | 15 | | | 13 | | | 8 | | | 3 | | | — | | | — | | | 56 | |
Substandard | 3 | | | 28 | | | 22 | | | 21 | | | 12 | | | 4 | | | — | | | — | | | 90 | |
Doubtful | — | | | 3 | | | 1 | | | 1 | | | 1 | | | 1 | | | — | | | — | | | 7 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | 187 | | | 681 | | | 619 | | | 390 | | | 189 | | | 154 | | | — | | | — | | | 2,220 | |
Total commercial | $ | 5,254 | | | $ | 11,922 | | | $ | 9,658 | | | $ | 7,958 | | | $ | 4,182 | | | $ | 6,369 | | | $ | 4,707 | | | $ | 51 | | | $ | 50,101 | |
Consumer Loans - Delinquency Status by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 |
Days Past Due: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Revolving | | | Total |
Residential mortgage | | | | | | | | | | | | | | | | | |
Current | $ | 783 | | | $ | 3,819 | | | $ | 2,325 | | | $ | 943 | | | $ | 531 | | | $ | 3,156 | | | $ | 20 | | | $ | — | | | $ | 11,577 | |
30-59 days | 2 | | | 11 | | | 4 | | | 4 | | | 5 | | | 37 | | | — | | | — | | | 63 | |
60-89 days | — | | | 1 | | | 1 | | | — | | | 2 | | | 8 | | | — | | | — | | | 12 | |
90 days or greater | — | | | 1 | | | 1 | | | 4 | | | 4 | | | 49 | | | — | | | — | | | 59 | |
Total residential mortgage | 785 | | | 3,832 | | | 2,331 | | | 951 | | | 542 | | | 3,250 | | | 20 | | | — | | | 11,711 | |
Revolving mortgage | | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,680 | | | 143 | | | 1,823 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | | | 6 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 7 | | | 9 | |
Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,686 | | | 154 | | | 1,840 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 145 | | | 540 | | | 305 | | | 171 | | | 100 | | | 51 | | | — | | | — | | | 1,312 | |
30-59 days | — | | | 2 | | | 1 | | | 1 | | | 1 | | | 1 | | | — | | | — | | | 6 | |
60-89 days | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
90 days or greater | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Total consumer auto | 145 | | | 542 | | | 308 | | | 172 | | | 101 | | | 52 | | | — | | | — | | | 1,320 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 36 | | | 116 | | | 20 | | | 10 | | | 4 | | | 29 | | | 332 | | | — | | | 547 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Total consumer other | 36 | | | 116 | | | 20 | | | 10 | | | 4 | | | 29 | | | 337 | | | — | | | 552 | |
Total consumer | $ | 966 | | | $ | 4,490 | | | $ | 2,659 | | | $ | 1,133 | | | $ | 647 | | | $ | 3,331 | | | $ | 2,043 | | | $ | 154 | | | $ | 15,423 | |
The following tables represent current credit quality indicators by origination year as of December 31, 2021.
Commercial Loans - Risk Classifications by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Risk Classification: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | | Total |
Commercial construction | | | | | | | | | | | | | | | | |
Pass | $ | 540 | | | $ | 400 | | | $ | 189 | | | $ | 29 | | | $ | 48 | | | $ | 11 | | | $ | 10 | | | $ | — | | | $ | 1,227 | |
Special Mention | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Substandard | 2 | | | — | | | 1 | | | 2 | | | 4 | | | 1 | | | — | | | — | | | 10 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial construction | 542 | | | 400 | | | 190 | | | 31 | | | 52 | | | 13 | | | 10 | | | — | | | 1,238 | |
Owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 3,045 | | | 3,022 | | | 1,873 | | | 1,194 | | | 963 | | | 1,572 | | | 125 | | | — | | | 11,794 | |
Special Mention | 3 | | | 35 | | | 37 | | | 22 | | | 13 | | | 33 | | | 5 | | | — | | | 148 | |
Substandard | 31 | | | 16 | | | 18 | | | 12 | | | 18 | | | 56 | | | 6 | | | — | | | 157 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total owner occupied commercial mortgage | 3,079 | | | 3,073 | | | 1,928 | | | 1,228 | | | 994 | | | 1,661 | | | 136 | | | — | | | 12,099 | |
Non-owner occupied commercial mortgage | | | | | | | | | | | | | | | | | |
Pass | 644 | | | 737 | | | 578 | | | 263 | | | 266 | | | 412 | | | 37 | | | — | | | 2,937 | |
Special Mention | 1 | | | — | | | — | | | 3 | | | 3 | | | 10 | | | — | | | — | | | 17 | |
Substandard | 9 | | | 11 | | | 24 | | | 12 | | | 7 | | | 22 | | | 1 | | | — | | | 86 | |
Doubtful | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total non-owner occupied commercial mortgage | 654 | | | 748 | | | 602 | | | 278 | | | 277 | | | 444 | | | 38 | | | — | | | 3,041 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | 2,107 | | | 1,018 | | | 599 | | | 257 | | | 149 | | | 281 | | | 1,342 | | | 5 | | | 5,758 | |
Special Mention | 9 | | | 7 | | | 20 | | | 2 | | | 4 | | | 5 | | | 5 | | | — | | | 52 | |
Substandard | 20 | | | 7 | | | 3 | | | 4 | | | 2 | | | 2 | | | 16 | | | 1 | | | 55 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | 72 | | | — | | | 72 | |
Total commercial and industrial | 2,136 | | | 1,032 | | | 622 | | | 263 | | | 155 | | | 288 | | | 1,435 | | | 6 | | | 5,937 | |
Leases | | | | | | | | | | | | | | | | | |
Pass | 93 | | | 68 | | | 38 | | | 42 | | | 17 | | | 8 | | | — | | | — | | | 266 | |
Special Mention | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Substandard | 2 | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 4 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ungraded | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total leases | 95 | | | 70 | | | 38 | | | 43 | | | 17 | | | 8 | | | — | | | — | | | 271 | |
Total commercial | $ | 6,506 | | | $ | 5,323 | | | $ | 3,380 | | | $ | 1,843 | | | $ | 1,495 | | | $ | 2,414 | | | $ | 1,619 | | | $ | 6 | | | $ | 22,586 | |
Consumer Loans - Delinquency Status by Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Days Past Due: | Term Loans by Origination Year | | | | Revolving Converted to Term Loans | | |
dollars in millions | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Revolving | | | Total |
Residential mortgage | | | | | | | | | | | | | | | | | |
Current | $ | 2,139 | | | $ | 1,663 | | | $ | 627 | | | $ | 368 | | | $ | 349 | | | $ | 867 | | | $ | 22 | | | $ | — | | | $ | 6,035 | |
30-59 days | 2 | | | 3 | | | 2 | | | 2 | | | 1 | | | 14 | | | — | | | — | | | 24 | |
60-89 days | — | | | — | | | — | | | 1 | | | 1 | | | 4 | | | — | | | — | | | 6 | |
90 days or greater | 1 | | | 1 | | | 1 | | | 2 | | | 1 | | | 17 | | | — | | | — | | | 23 | |
Total residential mortgage | 2,142 | | | 1,667 | | | 630 | | | 373 | | | 352 | | | 902 | | | 22 | | | — | | | 6,088 | |
Revolving mortgage | | | | | | | | | | | | | | | | | |
Current | — | | | — | | | — | | | — | | | — | | | — | | | 1,678 | | | 126 | | | 1,804 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 2 | | | 6 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 4 | | | 6 | |
Total revolving mortgage | — | | | — | | | — | | | — | | | — | | | — | | | 1,684 | | | 134 | | | 1,818 | |
Consumer auto | | | | | | | | | | | | | | | | | |
Current | 597 | | | 343 | | | 198 | | | 119 | | | 48 | | | 19 | | | — | | | — | | | 1,324 | |
30-59 days | 1 | | | 2 | | | 1 | | | 1 | | | — | | | 1 | | | — | | | — | | | 6 | |
60-89 days | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Total consumer auto | 598 | | | 345 | | | 199 | | | 120 | | | 48 | | | 22 | | | — | | | — | | | 1,332 | |
Consumer other | | | | | | | | | | | | | | | | | |
Current | 131 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 342 | | | — | | | 543 | |
30-59 days | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
60-89 days | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 2 | |
90 days or greater | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Total consumer other | 132 | | | 24 | | | 11 | | | 4 | | | 2 | | | 29 | | | 346 | | | — | | | 548 | |
Total consumer | $ | 2,872 | | | $ | 2,036 | | | $ | 840 | | | $ | 497 | | | $ | 402 | | | $ | 953 | | | $ | 2,052 | | | $ | 134 | | | $ | 9,786 | |
Purchased loans and leases
The following table summarizes PCD loans and leases that BancShares acquired in the CIT Merger.
PCD Loans and Leases - CIT Merger
| | | | | | | | |
dollars in millions | | Total PCD from CIT Merger |
UPB | | $ | 3,562 | |
Initial PCD ACL | | (284) | |
Fair value discount, net of the PCD Gross-Up | | (45) | |
Purchase price | | $ | 3,233 | |
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.
Troubled Debt Restructuring
As part of BancShares’ ongoing risk-management practices, BancShares attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications are made in accordance with internal policies and guidelines to conform to regulatory guidance. BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, a modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. BancShares may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.
Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR. In accordance with regulatory guidance discussed below, certain loan modifications that might ordinarily have qualified as TDRs 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 for short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs.
Modified loans that meet the definition of a TDR are subject to BancShares’ individually reviewed loans policy.
The following table presents amortized cost of TDRs.
TDRs
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | Accruing | | Non-Accruing | | Total |
Commercial | | | | | |
Commercial construction | $ | 2 | | | $ | 1 | | | $ | 3 | |
Owner occupied commercial mortgage | 54 | | | 9 | | | 63 | |
Non-owner occupied commercial mortgage | 24 | | | 4 | | | 28 | |
Commercial and industrial | 23 | | | 13 | | | 36 | |
Leases | — | | | 1 | | | 1 | |
Total commercial | 103 | | | 28 | | | 131 | |
Consumer | | | | | |
Residential mortgage | 28 | | | 18 | | | 46 | |
Revolving mortgage | 17 | | | 6 | | | 23 | |
Consumer auto | 2 | | | — | | | 2 | |
Consumer other | 1 | | | — | | | 1 | |
Total consumer | 48 | | | 24 | | | 72 | |
Total TDRs | $ | 151 | | | $ | 52 | | | $ | 203 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
dollars in millions | Accruing | | Non-Accruing | | Total |
Commercial | | | | | |
Commercial construction | $ | 2 | | | $ | — | | | $ | 2 | |
Owner occupied commercial mortgage | 57 | | | 8 | | | 65 | |
Non-owner occupied commercial mortgage | 26 | | | 3 | | | 29 | |
Commercial and industrial | 12 | | | 9 | | | 21 | |
Leases | — | | | 1 | | | 1 | |
Total commercial | 97 | | | 21 | | | 118 | |
Consumer | | | | | |
Residential mortgage | 29 | | | 18 | | | 47 | |
Revolving mortgage | 17 | | | 7 | | | 24 | |
Consumer auto | 2 | | | — | | | 2 | |
Consumer other | 1 | | | — | | | 1 | |
Total consumer | 49 | | | 25 | | | 74 | |
Total TDRs | $ | 146 | | | $ | 46 | | | $ | 192 | |
The following table summarizes the loan restructurings during the quarters ended March 31, 2022 and 2021 that were designated as TDRs. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due, foreclosure or charge-off, whichever occurs first.
Restructurings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2022 | | 2021 | | | | |
dollars in millions (except for number of loans) | Number of loans | | Amortized cost at period end | | | | | | Number of loans | | Amortized cost at period end | | | | |
Loans and leases | | | | | | | | | | | | | | | |
Interest only | 2 | | | $ | — | | | | | | | 6 | | | $ | 7 | | | | | |
Loan term extension | 35 | | | 20 | | | | | | | 25 | | | 4 | | | | | |
Below market rates | 20 | | | 2 | | | | | | | 53 | | | 8 | | | | | |
Discharge from bankruptcy | 24 | | | 2 | | | | | | | 45 | | | 4 | | | | | |
Total | 81 | | | $ | 24 | | | | | | | 129 | | | $ | 23 | | | | | |
There were $1 million and $0.4 million of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs as of March 31, 2022 and December 31, 2021, respectively.
After a loan is determined to be a TDR, BancShares continues to track its performance under its most recent restructured terms. TDRs that subsequently defaulted during the three months ended March 31, 2022 and 2021, and were classified as TDRs during the applicable 12-month period preceding March 31, 2022 and 2021 were as follows:
TDR Defaults
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
TDR Defaults | $ | 2 | | | $ | 3 | |
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 March 31, 2022 and December 31, 2021:
Loans Pledged
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
FHLB of Atlanta | | | |
Lendable collateral value of pledged non-PCD loans | $ | 13,782 | | | $ | 9,564 | |
Less: Advances | 639 | | | 645 | |
Available borrowing capacity | $ | 13,143 | | | $ | 8,919 | |
Pledged non-PCD loans (contractual balance) | $ | 19,889 | | | $ | 14,507 | |
| | | |
FRB | | | |
Lendable collateral value of pledged non-PCD loans | $ | 4,242 | | | $ | 3,951 | |
Less: Advances | — | | | — |
Available borrowing capacity | $ | 4,242 | | | $ | 3,951 | |
Pledged non-PCD loans (contractual balance) | $ | 4,982 | | | $ | 4,806 | |
NOTE 5 — ALLOWANCE FOR CREDIT LOSSES
The ACL for loans and leases is reported in the allowance for credit losses on the Consolidated Balance Sheets, while the ACL for unfunded commitments is reported in other liabilities. The provision or benefit for credit losses related to both (i) loans and leases and (ii) unfunded commitments is reported in the Consolidated Statements of Income as provision or benefit for credit losses. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. Forecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management’s expectations over the lives of the portfolios. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads.
Due to completion of the CIT Merger, BancShares changed certain aspects of its methodology used to determine the ACL during the period ending March 31, 2022. BancShares made these changes to integrate the ACL methodologies of CIT and BancShares. The most significant changes in the ACL methodology utilized to determine the ACL at March 31, 2022 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 results of these changes increased the ACL for total commercial loans by approximately $13.5 million and decreased the ACL for total consumer loans by approximately $18.7 million at March 31, 2022.
The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) was $284 million. The Initial PCD ACL was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 — Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $454 million to the provision for credit losses (the “Initial Non-PCD Provision”). For the period ended March 31, 2022, the ACL increase since December 31, 2021 was primarily driven by the Initial PCD ACL and Initial Non-PCD ACL discussed above, partially offset by improvements in macroeconomic factors in the scenarios used to determine the ACL. The scenarios showed improvements in the most significant economic factors compared to what was used to generate the December 31, 2021 ACL and estimate the Initial PCD ACL and Initial Non-PCD Provision at the Merger Date. These loss estimates were also influenced by BancShares’ strong credit quality and low net charge-offs.
The activity for the ACL for loans and leases and the ACL for unfunded commitments is summarized in the following tables.
ACL for Loans and Leases
| | | | | | | | | | | | | | | | | |
dollars in millions | Commercial | | Consumer | | Total |
Balance at December 31, 2021 | $ | 80 | | | $ | 98 | | | $ | 178 | |
Initial PCD ACL(1) | 270 | | | 14 | | | 284 | |
Balance at Initial Non-PCD Provision | 432 | | | 22 | | | 454 | |
Benefit for credit losses - loans and leases | (23) | | | (30) | | | (53) | |
Balance at Total provision (benefit) for credit losses- loans and leases | 409 | | | (8) | | | 401 | |
Charge-offs(1) | (28) | | | (5) | | | (33) | |
Balance at Recoveries | 12 | | | 6 | | | 18 | |
Balance at Other | — | | | — | | | — | |
Balance at March 31, 2022 | $ | 743 | | | $ | 105 | | | $ | 848 | |
| | | | | |
Balance at December 31, 2020 | $ | 92 | | | $ | 133 | | | $ | 225 | |
Benefit for credit losses - loans and leases | (3) | | | (8) | | | (11) | |
Charge-offs | (4) | | | (5) | | | (9) | |
Recoveries | 2 | | | 4 | | | 6 | |
Other | — | | | — | | | — | |
Balance at March 31, 2021 | $ | 87 | | | $ | 124 | | | $ | 211 | |
(1) The Initial PCD ACL related to the CIT Merger was $284 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
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Beginning balance | $ | 12 | | | $ | 13 | |
Provision (benefit) for credit losses - unfunded commitments | 63 | | | (1) | |
Ending balance | $ | 75 | | | $ | 12 | |
For the period ended March 31, 2022, the increase in the ACL for unfunded commitments compared to March 31, 2021 primarily reflected the additional commitments acquired in the CIT Merger.
NOTE 6 — LEASES
Lessee
BancShares leases primarily include administrative offices and bank locations. Substantially all of our lease liabilities relate to United States real estate leases under operating lease arrangements. Our lessee finance leases are not significant. Our real estate leases have remaining lease terms of up to 17 years. Our lease terms may include options to extend or terminate the lease. The options are included in the lease term when it is determined that it is reasonably certain the option will be exercised.
The following table presents supplemental balance sheet information and remaining weighted average lease terms and discount rates.
Supplemental Lease Information
| | | | | | | | | | | | | | | | | |
dollars in millions | Classification | | March 31, 2022 | | December 31, 2021 |
ROU assets: | | | | | |
Operating leases | Other assets | | $ | 384 | | | $ | 64 | |
Finance leases | Premises and equipment | | 4 | | | 4 | |
Total ROU assets | | | $ | 388 | | | $ | 68 | |
Lease liabilities: | | | | | |
Operating leases | Other liabilities | | $ | 385 | | | $ | 65 | |
Finance leases | Other borrowings | | 4 | | | 4 | |
Total lease liabilities | | | $ | 389 | | | $ | 69 | |
Weighted-average remaining lease terms | | | | | |
Operating leases | | | 9.9 Years | | 8.9 Years |
Finance leases | | | 3.4 Years | | 3.5 Years |
Weighted-average discount rate | | | | | |
Operating leases | | | 2.07 | % | | 3.00 | % |
Finance leases | | | 3.11 | % | | 3.12 | % |
The following table presents components of operating lease expense, which are included in operating expenses:
Components of Operating Lease Expense
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
dollars in millions | Classification | | 2022 | | 2021 |
Lease cost | | | | | |
Operating lease cost(1) | Occupancy Expense | | $ | 16 | | | $ | 4 | |
Finance lease cost | | | | | |
Amortization of leased assets | Equipment expense | | 1 | | | 1 | |
Interest on lease liabilities | Interest expense - Other borrowings | | — | | | — | |
Variable lease cost | Occupancy Expense | | 3 | | | 1 | |
Sublease income | Occupancy Expense | | (1) | | | — | |
Net lease cost | | | $ | 19 | | | $ | 6 | |
(1)Includes short-term lease cost, which is not significant.
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 as a result of these changes, these adjustments are treated as variable lease costs and recognized in the period in which the expense is incurred. Sublease income results from leasing excess building space that BancShares is no longer utilizing under operating leases, which have remaining lease terms of up to 14 years.
The following table presents supplemental cash flow information related to leases:
Supplemental Cash Flow Information
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 14 | | | $ | 3 | |
Operating cash flows from finance leases | — | | | — | |
Financing cash flows from finance leases | — | | | — | |
ROU assets obtained in exchange for new lease liabilities | 8 | | | 3 | |
The following table presents lease liability maturities in the next five years and thereafter at March 31, 2022:
Maturity of Lease Liabilities
| | | | | | | | | | | | | | | | | |
dollars in millions | | | | | |
Twelve months ended March 31, | Operating Leases | | Finance Leases | | Total |
2023 | $ | 52 | | | $ | 2 | | | $ | 54 | |
2024 | 52 | | | 1 | | | 53 | |
2025 | 49 | | | 1 | | | 50 | |
2026 | 44 | | | — | | | 44 | |
2027 | 42 | | | — | | | 42 | |
Thereafter | 189 | | | — | | | 189 | |
Total undiscounted lease payments | $ | 428 | | | $ | 4 | | | $ | 432 | |
Difference between undiscounted cash flows and discounted cash flows | 43 | | | — | | | 43 | |
Lease liabilities, at present value | $ | 385 | | | $ | 4 | | | $ | 389 | |
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 $67 million at March 31, 2022 by equipment type.
Operating Lease Equipment
| | | | | |
dollars in millions | March 31, 2022 |
Railcars and locomotives | $ | 7,251 | |
Other equipment | 721 | |
Total(1) | $ | 7,972 | |
(1)Includes off-lease rail equipment of $504 million at March 31, 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 | March 31, 2022 | | December 31, 2021 |
Lease receivables | $ | 1,882 | | | $ | 246 | |
Unguaranteed residual assets | 283 | | | 25 | |
Total net investment in finance leases | 2,165 | | | 271 | |
Leveraged lease net investment(1) | 55 | | | — | |
Total | $ | 2,220 | | | $ | 271 | |
(1)Leveraged leases are reported net of non-recourse debt of $24 million at March 31, 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
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Lease income – Operating leases | $ | 195 | | | $ | — | |
Variable lease income – Operating leases (1) | 13 | | | — | |
Rental income on operating leases | 208 | | | — | |
Interest income - Sales type and direct financing leases | 42 | | | 5 | |
Variable lease income included in Other noninterest income (2) | 11 | | | — | |
Leveraged lease income | 5 | | | — | |
Total lease income | $ | 266 | | | $ | 5 | |
(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 $3.2 million for the three months ended March 31, 2022 and an insignificant amount for the three months ended March 31, 2021. Also includes revenue related to insurance coverage on leased equipment of $7.5 million for the three months ended March 31, 2022. There was no revenue related to insurance coverage on leased equipment for the three months ended March 31, 2021.
The following tables present lease payments due on non-cancellable operating leases and lease receivables due on finance leases at March 31, 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 | |
Twelve months ended March 31, | |
2023 | $ | 636 | |
2024 | 479 | |
2025 | 323 | |
2026 | 196 | |
2027 | 118 | |
Thereafter | 262 | |
Total | $ | 2,014 | |
Maturity Analysis of Lease Receivable Payments - Sales Type and Direct Financing Leases
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2023 | $ | 899 | |
2024 | 588 | |
2025 | 346 | |
2026 | 179 | |
2027 | 75 | |
Thereafter | 12 | |
Total undiscounted lease receivables | $ | 2,099 | |
Difference between undiscounted cash flows and discounted cash flows | 217 | |
Lease receivables, at present value | $ | 1,882 | |
NOTE 7 – GOODWILL AND OTHER INTANGIBLES
Goodwill
BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares had goodwill of $346 million at March 31, 2022 and December 31, 2021. The entire amount of goodwill relates to business combinations that BancShares completed prior to the CIT Merger. All of the goodwill relates to the General Banking segment. There was no goodwill impairment during the first quarter of 2022.
Other Intangible Assets
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 March 31, 2022.
Core Deposit Intangibles
| | | | | |
dollars in millions | 2022 |
Balance, net of accumulated amortization at January 1 | $ | 19 | |
Core deposit intangibles related to the CIT Merger | 143 | |
Amortization for the period | (6) | |
Balance at March 31, net of accumulated amortization | $ | 156 | |
Core Deposit Intangible Accumulated Amortization
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Gross balance | $ | 271 | | | $ | 128 | |
Accumulated amortization | (115) | | | (109) | |
Balance, net of accumulated amortization | $ | 156 | | | $ | 19 | |
The following table summarizes the expected amortization expense in subsequent periods for core deposit intangibles.
Core Deposit Intangible Expected Amortization
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2023 | $ | 21 | |
2024 | 19 | |
2025 | 16 | |
2026 | 16 | |
2027 | 15 | |
Thereafter | 69 | |
Total | $ | 156 | |
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 accreted on a straight-line over the lease term, thereby increasing rental income (a component of noninterest income) over the remaining lives of the lease agreements.
The following tables summarize the activity for the intangible liability during the quarter ending March 31, 2022.
Intangible Liability
| | | | | |
dollars in millions | 2022 |
Balance at January 1 | $ | — | |
Acquired in CIT Merger | 52 | |
Amortization | (4) | |
Balance at March 31, net of accumulated amortization | $ | 48 | |
Intangible Liability Accumulated Amortization
| | | | | |
dollars in millions | March 31, 2022 |
Gross balance | $ | 52 | |
Accumulated amortization | (4) | |
Balance, net of accumulated amortization | $ | 48 | |
The following table summarizes the expected accretion in subsequent periods for the intangible liability.
Intangible Liability
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2023 | $ | 15 | |
2024 | 11 | |
2025 | 5 | |
2026 | 3 | |
2027 | 3 | |
Thereafter | 11 | |
Total | $ | 48 | |
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 $3.4 billion as of March 31, 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 the three month periods ending March 31, 2022 and 2021.
The following table presents changes in the servicing asset during the three months ended March 31, 2022 and 2021:
Servicing Asset
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Beginning balance | $ | 23 | | | $ | 18 | |
Servicing rights originated | 2 | | | 4 | |
Servicing rights obtained in CIT Merger | 3 | | | — | |
Amortization | (1) | | | (2) | |
Valuation allowance decrease | 1 | | | 3 | |
Ending balance | $ | 28 | | | $ | 23 | |
The following table presents the activity in the servicing asset valuation allowance:
Servicing Asset Valuation Allowance
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Beginning balance | $ | 1 | | | $ | 4 | |
Valuation allowance decrease | (1) | | | (3) | |
Ending balance | $ | — | | | $ | 1 | |
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
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Discount rate - conventional fixed loans | 9.30 | % | | 8.51 | % |
Discount rate - all loans excluding conventional fixed loans | 10.61 | % | | 9.51 | % |
Weighted average constant prepayment rate | 9.56 | % | | 15.69 | % |
Weighted average cost to service a loan | $ | 90.57 | | | $ | 87.58 | |
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 rate is based on the 10-year U.S. Treasury rate plus 700 basis points (“bps”) for conventional fixed loans and 800 bps for all other loans. The 700 and 800 bps are used as a risk premium when calculating the discount rate. The prepayment rate is derived from the Public Securities Association Standard Prepayment model, 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 | March 31, 2022 | | December 31, 2021 |
Federal Home Loan Bank stock | $ | 39 | | | $ | 40 | |
Low-income housing tax credit and other equity method investments | 702 | | | 156 | |
Counterparty receivables | 106 | | | — | |
Fair value of derivative financial instruments | 110 | | | — | |
Right of use assets | 384 | | | 64 | |
Pension assets | 297 | | | 289 | |
Income taxes receivable | 834 | | | 799 | |
Other real estate owned | 43 | | | 40 | |
Mortgage servicing rights | 28 | | | 23 | |
Accrued interest receivable | 247 | | | 134 | |
Other | 540 | | | 194 | |
Total other assets | $ | 3,330 | | | $ | 1,739 | |
NOTE 10 — DEPOSITS
The following table provides detail on deposit types. The deposit balances as of March 31, 2022 reflect those acquired in the CIT Merger, as described in Note 2 — Business Combinations.
Deposit Types
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Non-interest-bearing demand | $ | 25,898 | | | $ | 21,405 | |
Checking with interest | 16,702 | | | 12,694 | |
Money market | 26,249 | | | 10,590 | |
Savings | 13,506 | | | 4,236 | |
Time | 9,242 | | | 2,481 | |
Total deposits | $ | 91,597 | | | $ | 51,406 | |
At March 31, 2022, the scheduled maturities of time deposits were:
Deposit Maturities
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2023 | $ | 6,765 | |
2024 | 1,223 | |
2025 | 695 | |
2026 | 369 | |
2027 | 67 | |
Thereafter | 123 | |
Total time deposits | $ | 9,242 | |
Time deposits with a denomination of $250,000 or more were $1.6 billion and $593 million at March 31, 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 March 31, 2022, in California, North Carolina and South Carolina represented approximately 41.2%, 29.2% and 13.1%, respectively, of total deposits.
NOTE 11 — VARIABLE INTEREST ENTITIES
Variable Interest Entities
Described below are the results of BancShares’ assessment of its variable interests in order to determine its current status with regard to being the VIE PB. Refer to Note 1 — Accounting Policies and Basis of Presentation for additional information on accounting for VIEs.
Consolidated VIEs
At March 31, 2022 and December 31, 2021, there were no consolidated VIEs.
Unconsolidated VIEs
Unconsolidated VIEs include limited partnership interests and joint ventures where BancShares’ involvement is limited to an investor interest and BancShares 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 its interests and any associated collateral declines to zero and assuming no recovery or offset from any economic hedges. BancShares believes the possibility is remote under this hypothetical scenario; accordingly, this disclosure is not an indication of expected loss.
Unconsolidated VIEs Carrying Value
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Tax credit equity investments | $ | 539 | | | $ | 157 | |
Equity investments | 178 | | | 12 | |
Total assets | $ | 717 | | | $ | 169 | |
Commitments to tax credit investments(1) | $ | 242 | | | $ | 43 | |
Total liabilities | $ | 242 | | | $ | 43 | |
Maximum loss exposure | $ | 717 | | | $ | 169 | |
(1)Represents commitments to invest in affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand and are recorded in other liabilities.
NOTE 12 — BORROWINGS
Short-term Borrowings
Short-term borrowings are as follows:
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Securities sold under customer repurchase agreements | $ | 616 | | | $ | 589 | |
| | | |
| | | |
Total short-term borrowings | $ | 616 | | | $ | 589 | |
Securities Sold under Agreements to Repurchase
At March 31, 2022, BancShares held $616 million of securities sold under agreements to repurchase, with overnight contractual maturities, consisting of $538 million collateralized by government agency securities and $78 million collateralized by commercial mortgage-backed securities. At December 31, 2021, BancShares held $589 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, made up of $508 million 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. The carrying value of investment securities pledged as collateral under repurchase agreements was $638 million and $619 million at March 31, 2022 and December 31, 2021, respectively.
Long-term Borrowings
Long-term borrowings at March 31, 2022 and December 31, 2021 include:
| | | | | | | | | | | | | | | | | |
dollars in millions | Maturity | | March 31, 2022 | | December 31, 2021 |
Parent Company: | | | | | |
Senior: | | | | | |
Unsecured term loan at 1-month LIBOR plus 1.10% | September 2022 | | $ | 64 | | | $ | 68 | |
Subordinated: | | | | | |
| | | | | |
| | | | | |
Fixed-to-Floating subordinated notes at 3.375% | March 2030 | | 350 | | | 350 | |
Junior subordinated debenture at 3-month LIBOR plus 2.25% | June 2034 | | 20 | | | 20 | |
Junior subordinated debenture at 3-month LIBOR plus 1.75% | 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: | | | | | |
Junior subordinated debentures at 3-month LIBOR plus 2.80% | March 2034 | | 14 | | | 14 | |
Junior subordinated debentures at 3-month LIBOR plus 2.85% | April 2034 | | 10 | | | 10 | |
Fixed subordinated notes at 6.125%(1) | March 2028 | | 400 | | | — | |
Fixed-to-Fixed subordinated notes at 4.125%(1) | November 2029 | | 100 | | | — | |
Secured: | | | | | |
Notes payable to FHLB of Atlanta with rates ranging from 0.75% to 2.99% | Maturities through March 2032 | | 639 | | | 645 | |
| | | | | |
Other secured financings(1) | Maturities through January 2024 | | 16 | | | — | |
Capital lease obligations | Maturities through August 2026 | | 4 | | | 4 | |
Unamortized issuance costs | | | (2) | | | (2) | |
Unamortized purchase accounting adjustments(2) | | | 107 | | | (2) | |
Total long-term borrowings | | | $ | 2,676 | | | $ | 1,195 | |
(1)Reflects the remaining outstanding debt securities assumed by the BancShares 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; and (iv) 5.250% senior unsecured notes due 2025 that it had assumed in the CIT Merger.
(2)At March 31, 2022 and December 31, 2021, unamortized purchase accounting adjustments were $78 million and $2 million, respectively, for subordinated debentures.
Long-term borrowings maturing in each of the five years subsequent to March 31, 2022 and thereafter include:
Long-term Borrowings Maturities
| | | | | |
dollars in millions | |
Twelve months ended March 31, | |
2023 | $ | 94 | |
2024 | 166 | |
2025 | 517 | |
2026 | 330 | |
2027 | 17 | |
Thereafter | 1,552 | |
Total long-term borrowings | $ | 2,676 | |
Senior Unsecured Notes
Senior unsecured notes included the following as of March 31, 2022:
•Variable-rate senior unsecured notes totaled $64 million at 1-month LIBOR plus 1.10%.
•Fixed-rate senior unsecured notes outstanding totaled $866 million and the weighted average coupon rate was 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 March 31, 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 9, 2028 and $100 million aggregate principal amount of 4.125% fixed-to-fixed rate subordinated notes with a maturity date of November 13, 2029, which were assumed by BancShares as part of the CIT Merger.
•$132 million in junior subordinated debentures representing obligations to FCB/NC Capital Trust III, FCB/SC Capital Trust II, SCB Capital Trust I and Macon Capital Trust I special purpose entities and grantor trusts (the “Trusts”) for trust preferred securities. The Trusts had outstanding trust preferred securities of $128 million at March 31, 2022 and December 31, 2021, which mature in 2036, 2034, 2034 and 2034, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of FCB/NC Capital Trust III, FCB/SC Capital Trust II, SCB Capital Trust I and Macon Capital Trust I.
Secured Borrowings
At March 31, 2022, BancShares had pledged $24.9 billion of consumer loans to several financing facilities.
Notes Payable to FHLB
As a member of the FHLB, FCB can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. Pledged assets related to these financings totaled $19.9 billion at March 31, 2022. FCB may at any time grant a security interest in, sell, convey or otherwise dispose of any of the assets used for collateral, provided that FCB is in compliance with the collateral maintenance requirement immediately following such disposition.
Other Secured Financings
Other secured (other than FHLB) financings were not significant and totaled $15 million at March 31, 2022. Pledged assets related to these financings totaled $15 million. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings.
At March 31, 2022, BancShares had other unused credit lines allowing contingent access to borrowings of up to $75 million on an unsecured basis.
Under borrowing arrangements with the FRB of Richmond, BancShares has access to an additional $4.2 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at March 31, 2022 and December 31, 2021.
NOTE 13 — DERIVATIVE FINANCIAL INSTRUMENTS
BancShares acquired various derivative financial instruments in the CIT Merger. The following table presents notional amount and fair value of derivative financial instruments on a gross basis.
Notional Amount and Fair Value of Derivative Financial Instruments
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | Notional Amount | | Asset Fair Value | | Liability Fair Value |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Derivatives not designated as hedging instruments (Non-qualifying hedges) | | | | | |
Interest rate contracts(1)(3) | $ | 20,211 | | | $ | 106 | | | $ | (199) | |
Foreign exchange contracts | 181 | | | 4 | | | (4) | |
Other contracts(2) | 822 | | | — | | | (1) | |
Total derivatives not designated as hedging instruments | 21,214 | | | 110 | | | (204) | |
Gross derivatives fair values presented in the Consolidated Balance Sheets | $ | 21,214 | | | 110 | | | (204) | |
Less: Gross amounts offset in the Consolidated Balance Sheets | | | — | | | — | |
Net amount presented in the Consolidated Balance Sheet | | | 110 | | | (204) | |
Less: Amounts subject to master netting agreements(4) | | | (13) | | | 13 | |
Less: Cash collateral pledged(received) subject to master netting agreements(5) | | | (29) | | | 2 | |
Total net derivative fair value | | | $ | 68 | | | $ | (189) | |
(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 $191 million and $60 million, respectively at March 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 (losses) of non-qualifying hedges recognized on the Condensed Consolidated Statements of Income:
Gains (Losses) on Non-Qualifying Hedges
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
dollars in millions | Amounts Recognized | | 2022 | | 2021 |
Interest rate contracts | Other noninterest income | | $ | 4 | | | $ | — | |
| | | | | |
Other contracts | Other noninterest income | | — | | | — | |
Total non-qualifying hedges - income statement impact | | | $ | 4 | | | $ | — | |
NOTE 14 — OTHER LIABILITIES
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.
Other Liabilities
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Accrued expenses and accounts payable | $ | 534 | | | $ | 5 | |
Reserve for off-balance sheet credit exposure | 75 | | | 12 | |
Lease liabilities | 385 | | | 65 | |
Commitments to fund investments in tax credits | 242 | | | 43 | |
Fair value of derivative financial instruments | 204 | | | — | |
Accrued interest payable | 24 | | | 8 | |
Deferred taxes | 160 | | | 33 | |
Other | 364 | | | 215 | |
Total other liabilities | $ | 1,988 | | | $ | 381 | |
NOTE 15 — 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.
Assets and Liabilities Measured at Fair Value - Recurring Basis (dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 1,931 | | | $ | — | | | $ | 1,931 | | | $ | — | |
Government agency | 206 | | | — | | | 206 | | | — | |
Residential mortgage-backed securities | 5,052 | | | — | | | 5,052 | | | — | |
Commercial mortgage-backed securities | 1,520 | | | — | | | 1,520 | | | — | |
Corporate bonds | 586 | | | — | | | 400 | | | 186 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,295 | | | $ | — | | | $ | 9,109 | | | $ | 186 | |
Marketable equity securities | 100 | | | 33 | | | 67 | | | — | |
Loans held for sale | 65 | | | — | | | 65 | | | — | |
Derivative assets(1) | | | | | | | |
Interest rate contracts — non-qualifying hedges | 106 | | | — | | | 105 | | | 1 | |
Other derivative — non-qualifying hedges | 4 | | | — | | | 4 | | | — | |
Total derivative assets | $ | 110 | | | $ | — | | | $ | 109 | | | $ | 1 | |
Liabilities | | | | | | | |
Derivative liabilities(1) | | | | | | | |
Interest rate contracts — non-qualifying hedges | $ | 199 | | | $ | — | | | $ | 199 | | | $ | — | |
Other derivative— non-qualifying hedges | 5 | | | — | | | 4 | | | 1 | |
Total derivative liabilities | $ | 204 | | | $ | — | | | $ | 203 | | | $ | 1 | |
| | | | | | | |
| December 31, 2021 |
dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,005 | | | $ | — | | | $ | 2,005 | | | $ | — | |
Government agency | 221 | | | — | | | 221 | | | — | |
Residential mortgage-backed securities | 4,729 | | | — | | | 4,729 | | | — | |
Commercial mortgage-backed securities | 1,640 | | | — | | | 1,640 | | | — | |
Corporate bonds | 608 | | | — | | | 401 | | | 207 | |
Total investment securities available for sale | $ | 9,203 | | | $ | — | | | $ | 8,996 | | | $ | 207 | |
Marketable equity securities | 98 | | | 34 | | | 64 | | | — | |
Loans held for sale | 99 | | | — | | | 99 | | | — | |
(1)Derivative fair 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 sold 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 13 — Derivative Financial Instruments for notional principal amounts and fair values.
The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis.
Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | | | | | | | | | |
Financial Instrument | Estimated Fair Value | | Valuation Technique(s) | | Significant Unobservable Inputs | | Range of Inputs | | Weighted Average |
March 31, 2022 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 186 | | | 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 | | Not material | | Not material |
Liabilities | | | | | | | | | |
Interest rate & other derivative — non-qualifying hedges | $ | 1 | | | Internal valuation model | | Not material | | Not material | | Not material |
December 31, 2021 | | | | | | | | | |
Assets | | | | | | | | | |
Corporate bonds | $ | 207 | | | Indicative bid provided by broker | | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer | | | | |
The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3).
Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 | | Three months ended March 31, 2021 |
dollars in millions | Corporate Bonds | | Other Derivative Assets — Non-Qualifying | | Other Derivative Liabilities — Non-Qualifying | | Corporate Bonds |
Beginning balance | $ | 207 | | | $ | — | | | $ | — | | | $ | 317 | |
Purchases | — | | | — | | | 1 | | | — | |
Included in earnings | — | | | 1 | | | — | | | — | |
Included in comprehensive income | (7) | | | — | | | — | | | 2 | |
Transfers in | — | | | — | | | — | | | — | |
Transfers out | (14) | | | — | | | — | | | — | |
Maturity and settlements | — | | | — | | | — | | | (1) | |
Ending balance | $ | 186 | | | $ | 1 | | | $ | 1 | | | $ | 318 | |
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 March 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
dollars in millions | Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 65 | | | $ | 65 | | | $ | — | |
| | | | | |
| December 31, 2021 |
| Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 99 | | | $ | 96 | | | $ | 3 | |
BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included a loss of $3 million and a loss of $3 million for the three months ended March 31, 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 March 31, 2022 or December 31, 2021.
Assets Measured at Estimated Fair Value on a Non-recurring Basis
Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses from a non-recurring fair value adjustment have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end.
Assets Measured at Fair Value - Non-recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements | | |
dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
March 31, 2022 | | | | | | | | | |
Assets held for sale - loans | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | — | |
Loans - collateral dependent loans | 109 | | | — | | | — | | | 109 | | | (8) | |
Other real estate owned | 39 | | | — | | | — | | | 39 | | | 2 | |
Mortgage servicing rights | 1 | | | — | | | — | | | 1 | | | 1 | |
Total | $ | 151 | | | $ | — | | | $ | — | | | $ | 151 | | | $ | (5) | |
December 31, 2021 | | | | | | | | | |
Other real estate owned | $ | 34 | | | $ | — | | | $ | — | | | $ | 34 | | | $ | (4) | |
Loans - collateral dependent loans | 3 | | | — | | | — | | | 3 | | | (2) | |
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. OREO asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts, generally between 6% and 15%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At March 31, 2022 and December 31, 2021, the weighted average discount applied was 8.13% and 8.79%, respectively. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.
Mortgage servicing rights. MSRs are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than amortized cost. The fair value of MSRs is determined using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value.
Financial Instruments Fair Value
The table below presents the carrying values and estimated fair values for financial instruments. The carrying values and estimated fair values of financial instruments exclude leases and certain other assets and liabilities, which were not required for disclosure.
Carrying Values and Fair Values of Financial Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| | | Estimated Fair Value |
dollars in millions | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | | | |
Cash and due from banks | $ | 523 | | | $ | 523 | | | $ | — | | | $ | — | | | $ | 523 | |
Interest earning deposits at banks | 9,285 | | | 9,285 | | | — | | | — | | | 9,285 | |
Investment securities available for sale | 9,295 | | | — | | | 9,109 | | | 186 | | | 9,295 | |
Investment securities held to maturity | 10,074 | | | — | | | 9,457 | | | — | | | 9,457 | |
Investment in marketable equity securities | 100 | | | 33 | | | 67 | | | — | | | 100 | |
Loans held for sale | 81 | | | — | | | 65 | | | 16 | | | 81 | |
Net loans | 62,489 | | | — | | | 1,574 | | | 59,757 | | | 61,331 | |
Income earned not collected | 247 | | | — | | | 247 | | | — | | | 247 | |
Federal Home Loan Bank stock | 39 | | | — | | | 39 | | | — | | | 39 | |
| | | | | | | | | |
Mortgage and other servicing rights | 28 | | | — | | | — | | | 35 | | | 35 | |
Derivative assets | 110 | | | — | | | 109 | | | 1 | | | 110 | |
Financial Liabilities | | | | | | | | | |
Deposits | 91,597 | | | — | | | 91,572 | | | — | | | 91,572 | |
Securities sold under customer repurchase agreements | 616 | | | — | | | 616 | | | — | | | 616 | |
| | | | | | | | | |
Long-term borrowings | 2,672 | | | — | | | 2,606 | | | 15 | | | 2,621 | |
Credit balances of factoring clients | 1,150 | | | — | | | — | | | 1,150 | | | 1,150 | |
Accrued interest payable | 24 | | | — | | | 24 | | | — | | | 24 | |
Derivative liabilities | 204 | | | — | | | 203 | | | 1 | | | 204 | |
| | | | | | | | | |
| December 31, 2021 |
| | | Estimated Fair Value |
dollars in millions | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | | | |
Cash and due from banks | $ | 338 | | | $ | 338 | | | $ | — | | | $ | — | | | $ | 338 | |
Interest earning deposits at banks | 9,115 | | | 9,115 | | | — | | | — | | | 9,115 | |
Investment securities available for sale | 9,203 | | | — | | | 8,996 | | | 207 | | | 9,203 | |
Investment securities held to maturity | 3,809 | | | — | | | 3,759 | | | — | | | 3,759 | |
Investment in marketable equity securities | 98 | | | 34 | | | 64 | | | — | | | 98 | |
Loans held for sale | 99 | | | — | | | 99 | | | — | | | 99 | |
Net loans | 32,193 | | | — | | | — | | | 31,890 | | | 31,890 | |
Income earned not collected | 134 | | | — | | | 134 | | | — | | | 134 | |
Federal Home Loan Bank stock | 40 | | | — | | | 40 | | | — | | | 40 | |
| | | | | | | | | |
Mortgage and other servicing rights | 23 | | | — | | | — | | | 23 | | | 23 | |
Financial Liabilities | | | | | | | | | |
Deposits with no stated maturity | 48,925 | | | — | | | 48,925 | | | — | | | 48,925 | |
Time deposits | 2,481 | | | — | | | 2,471 | | | — | | | 2,471 | |
Securities sold under customer repurchase agreements | 589 | | | — | | | 589 | | | — | | | 589 | |
| | | | | | | | | |
Long-term borrowings | 1,195 | | | — | | | 1,222 | | | — | | | 1,222 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued interest payable | 8 | | | — | | | 8 | | | — | | | 8 | |
The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows:
Net loans. The carrying value of net loans 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, US Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and FDIC guaranteed CDs with other financial institutions. 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.
Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables. The fair value approximates carrying value and are classified as Level 2.
Long-Term Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security, if available. Otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, senior and subordinated debentures, and other borrowings are considered Level 2 inputs. The fair value of other secured borrowings was estimated based on unobservable inputs and are classified as Level 3.
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 3.
For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of March 31, 2022 and December 31, 2021. 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. Income earned not collected and accrued interest payable are classified as Level 2.
NOTE 16 — STOCKHOLDERS' EQUITY
A roll forward of common stock activity is presented in the following table.
Number of Shares of Common Stock
| | | | | | | | | | | |
| Outstanding |
| Class A | | Class B |
Common stock - 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 | 45,095 | | | — | |
Common stock - March 31, 2022 | 14,996,325 | | | 1,005,185 | |
Common Stock
The Parent Company has Class A Common Stock and Class B Common Stock. Class A common shares have one vote per share, while Class B common shares have 16 votes per share. In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6 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. CIT Preferred Stock was converted into New BancShares Preferred Stock on the Merger Date as further discussed in Note 2 — Business Combinations. The following table summarizes BancShares’ non-cumulative perpetual preferred stock.
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dollars in millions, except share and per share 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 |
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.
Dividends on BancShares Series A, B, and C Preferred Stock (together, “BancShares Preferred Stock”) will be paid when, as, and if declared by the Board of Directors of the Parent Company, or a duly authorized committee thereof, to the extent that the Parent Company has lawfully available funds to pay dividends. If declared, dividends with respect to the BancShares Series A Preferred Stock and BancShares Series C Preferred Stock will accrue and be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year, beginning on the “Dividend Payment Dates” in the table above and dividends with respect to the BancShares Series B Preferred Stock will initially accrue and be payable on a semi-annual basis during the fixed rate period, and then quarterly in arrears beginning after June 15, 2022. Dividends on the BancShares Preferred Stock will not be cumulative.
The Parent Company may redeem the BancShares Preferred Stock at its option, and subject to any required regulatory approval, at a redemption price equal to the “Liquidation Preference Per Share” in the table above, plus any declared and unpaid dividends to, but excluding, the redemption date, (i) in whole or in part, from time to time, on any dividend payment date on or after the “Earliest Redemption Date” in the table above, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event.
NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table details the components of AOCI:
Components of Accumulated Other Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
dollars in millions | Gross Unrealized | | Income Taxes | | Net Unrealized | | Gross Unrealized | | Income Taxes | | Net Unrealized |
Unrealized (losses) gains on securities available for sale | $ | (431) | | | $ | 104 | | | $ | (327) | | | $ | (12) | | | $ | 3 | | | $ | (9) | |
Unrealized (losses) gains on securities available for sale transferred to held to maturity | (8) | | | 2 | | | (6) | | | (9) | | | 2 | | | (7) | |
Defined benefit pension items | 37 | | | (9) | | | 28 | | | 34 | | | (8) | | | 26 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | |
Gains (losses) on hedge derivatives | — | | | — | | | — | | | — | | | — | | | — | |
Total accumulated other comprehensive income (loss) | $ | (402) | | | $ | 97 | | | $ | (305) | | | $ | 13 | | | $ | (3) | | | $ | 10 | |
The following table details the changes in the components of AOCI, net of income taxes:
Changes in Accumulated Other Comprehensive Income (Loss) by Component
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dollars in millions | Unrealized (losses) gains on securities available for sale | | Unrealized net gains (losses) on Available for Sale Securities transferred to Held to Maturity Securities | | Net change in Defined Benefit Pension Items | | | | Total AOCI |
Balance as of December 31, 2021 | $ | (9) | | | $ | (7) | | | $ | 26 | | | | | $ | 10 | |
AOCI activity before reclassifications | (318) | | | — | | | — | | | | | (318) | |
Amounts reclassified from AOCI | — | | | 1 | | | 2 | | | | | 3 | |
Net current period AOCI | (318) | | | 1 | | | 2 | | | | | (315) | |
Balance as of March 31, 2022 | $ | (327) | | | $ | (6) | | | $ | 28 | | | | | $ | (305) | |
| | | | | | | | | |
Balance as of December 31, 2020 | $ | 79 | | | $ | 4 | | | $ | (71) | | | | | $ | 12 | |
AOCI activity before reclassifications | (44) | | | — | | | — | | | | | (44) | |
Amounts reclassified from AOCI | (7) | | | — | | | 5 | | | | | (2) | |
Net current period AOCI | (51) | | | — | | | 5 | | | | | (46) | |
Balance as of March 31, 2021 | $ | 28 | | | $ | 4 | | | $ | (66) | | | | | $ | (34) | |
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.
Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | |
dollars in millions | Gross Amount | | Tax | | Net Amount | | Gross Amount | | Tax | | Net Amount | | Income Statement Line Item |
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Net change in pension obligations | | | | | | | | | | | | | |
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Reclassifications out of AOCI | $ | 3 | | | $ | (1) | | | $ | 2 | | | $ | 7 | | | $ | (2) | | | $ | 5 | | | Other noninterest expense |
Net Change | $ | 3 | | | $ | (1) | | | $ | 2 | | | $ | 7 | | | $ | (2) | | | $ | 5 | | | |
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Unrealized net gains on securities Available for Sale | | | | | | | | | | | | | |
AOCI activity before reclassification | $ | (419) | | | $ | 101 | | | $ | (318) | | | $ | (57) | | | $ | 13 | | | $ | (44) | | | |
Reclassifications out of AOCI | 1 | | | — | | | 1 | | | (9) | | | 2 | | | (7) | | | Realized gains on investment securities available for sale, net |
Net Change | $ | (418) | | | $ | 101 | | | $ | (317) | | | $ | (66) | | | $ | 15 | | | $ | (51) | | | |
Net current period AOCI | $ | (415) | | | $ | 100 | | | $ | (315) | | | $ | (59) | | | $ | 13 | | | $ | (46) | | | |
NOTE 18 — REGULATORY CAPITAL
BancShares and FCB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the BancShares’ Consolidated Financial Statements. Certain activities, such as the ability to undertake new business initiatives, including acquisitions, the access to and cost of funding for new business initiatives, the ability to pay dividends, the ability to repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight, largely depend on a financial 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% were fully phased in by January 1, 2019.
The following table includes the Basel III requirements for regulatory capital ratios.
| | | | | | | | | | | | | | | | | |
| Basel III Minimums | | Basel III Conservation Buffers | | Basel III Requirements |
Regulatory capital ratios | | | | | |
Total risk-based capital | 8.00 | % | | 2.50 | % | | 10.50 | % |
Tier 1 risk-based capital | 6.00 | | | 2.50 | | | 8.50 | |
Common equity Tier 1 | 4.50 | | | 2.50 | | | 7.00 | |
Tier 1 leverage | 4.00 | | | — | | | 4.00 | |
The FDIC also has Prompt Corrective Action (“PCA”) thresholds for regulatory capital ratios. The regulatory capital ratios for BancShares and FCB are calculated in accordance with the guidelines of the federal banking authorities. The regulatory capital ratios for BancShares and FCB exceed the Basel III requirements and the PCA well-capitalized thresholds as of March 31, 2022 and December 31, 2021 as summarized in the following table.
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| | | | | March 31, 2022 | | December 31, 2021 |
dollars in millions | Basel III Requirements | | PCA well-capitalized thresholds | | Amount | | Ratio | | Amount | | Ratio |
BancShares | | | | | | | | | | | |
Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 12,117 | | | 14.47 | % | | $ | 5,042 | | | 14.35 | % |
Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,377 | | | 12.39 | | | 4,380 | | | 12.47 | |
Common equity Tier 1 | 7.00 | | | 6.50 | | | 9,496 | | | 11.34 | | | 4,041 | | | 11.50 | |
Tier 1 leverage | 4.00 | | | 5.00 | | | 10,377 | | | 9.55 | | | 4,380 | | | 7.59 | |
FCB | | | | | | | | | | | |
Total risk-based capital | 10.50 | % | | 10.00 | % | | $ | 11,925 | | | 14.25 | % | | $ | 4,858 | | | 13.85 | % |
Tier 1 risk-based capital | 8.50 | | | 8.00 | | | 10,641 | | | 12.71 | | | 4,651 | | | 13.26 | |
Common equity Tier 1 | 7.00 | | | 6.50 | | | 10,641 | | | 12.71 | | | 4,651 | | | 13.26 | |
Tier 1 leverage | 4.00 | | | 5.00 | | | 10,641 | | | 9.81 | | | 4,651 | | | 8.07 | |
At March 31, 2022, BancShares and FCB had total risk-based capital ratio conservation buffers of 6.47% and 6.25%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had total risk-based capital ratio conservation buffers were 6.35% and 5.85%. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of March 31, 2022 and December 31, 2021 over the Basel III minimum.
Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 16 — Stockholders’ Equity. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
Dividend Restrictions
Dividends paid from FCB to the Parent Company are the primary source of funds available to the Parent Company for payment of dividends to its stockholders. The Board of Directors of FCB may approve distributions, including dividends, as it deems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, provided that the distributions do not reduce the regulatory capital ratios below the applicable requirements. FCB could have paid additional dividends to the Parent Company in the amount of $3.6 billion while continuing to meet the requirements for well-capitalized banks at March 31, 2022. Dividends declared by FCB and paid to the Parent Company amounted to $30 million for the three months ended March 31, 2022. Payment of dividends is made at the discretion of FCB’s Board of Directors and is contingent upon satisfactory earnings as well as projected capital needs.
NOTE 19 — EARNINGS PER COMMON SHARE
The following table sets forth the computation of the basic and diluted earnings per common share:
Earnings per Common Share
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions, except share and per share data | 2022 | | 2021 |
Net income | $ | 271 | | | $ | 147 | |
Preferred stock dividends | 7 | | | 4 | |
Net income available to common stockholders | $ | 264 | | | $ | 143 | |
Weighted Average Common Shares Outstanding | | | |
Basic shares outstanding | 15,779,153 | | | 9,816,405 | |
Stock-based awards | — | | | — | |
Diluted shares outstanding | 15,779,153 | | | 9,816,405 | |
Basic income per common share | $ | 16.70 | | | $ | 14.53 | |
Diluted income per common share | $ | 16.70 | | | $ | 14.53 | |
BancShares RSUs are discussed in Note 21— Employee Benefit Plans.
NOTE 20 — INCOME TAXES
BancShares’ global effective income tax rate was (20.4)% for the three months ended March 31, 2022, and 23.0% for the three months ended March 31, 2021. The decrease in the rate from the year-ago quarter was primarily driven by the non-taxable nature of the bargain purchase gain arising from the CIT Merger.
The quarterly income tax expense is based on a projection of BancShares’ annual effective tax rate. This annual effective tax rate is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. The effective tax rate 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 effective tax rate may vary from the actual year-end 2022 effective tax rate 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, BancShares’ net deferred tax liabilities increased by approximately $297 million. That amount included an increase to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costs and tax credits net of deferred tax liabilities primarily from operating leases.
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, valuation adjustments may be adjusted accordingly.
NOTE 21 – 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.
For the three months ended March 31, 2022 and 2021, the components of net periodic benefit cost are as follows:
| | | | | | | | | | | |
| Three months ended March 31, |
dollars in millions | 2022 | | 2021 |
Service cost | $ | 3 | | | $ | 4 | |
Interest cost | 11 | | | 7 | |
Expected return on assets | (22) | | | (20) | |
Amortization of prior service cost | — | | | — | |
Amortization of net actuarial loss | 3 | | | 7 | |
Net periodic benefit | $ | (5) | | | $ | (2) | |
No discretionary contribution was made to the pension plans during the three months ended March 31, 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 Group Inc. 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 March 31, 2022, which have vesting periods through 2024. There were no grants of stock-based compensation awards during the quarter ended March 31, 2022.
Stock-Settled Awards Outstanding
| | | | | | | | | | | |
| Stock-Settled Awards |
per share amounts in whole dollars | 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 | (411) | | | 859.76 | |
Vested / settled awards | (71,171) | | | 859.76 | |
Vested / unsettled awards | (95) | | | 859.76 | |
Unvested BancShares RSUs at March 31, 2022 | 55,959 | | | $ | 859.76 | |
NOTE 22 — BUSINESS SEGMENT INFORMATION
As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger. BancShares' reportable segments are primarily based upon industry categories, target markets, distribution channels and customers served, and, to a lesser extent, the core competencies relating to product origination, operations and servicing and the nature of their regulatory environment. Segment reporting is reflective of BancShares' internal reporting structure and is consistent with the presentation of financial information to the chief operating decision maker. Each of the segments are described below.
General Banking
General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides: a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to homeowner associations (“HOA”) and property management companies. As part of the CIT Merger, Community Association Banking (“CAB”) products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services.
Commercial Banking
Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities.
Rail
Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and centerbeams and flat cars for lumber. Revenue is primarily from operating lease income.
Corporate
Certain items are not allocated to operating segments and are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related costs, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the preliminary gain on acquisition, each of which are related to the CIT Merger.
Segment Profit (Loss) and Select Period End Balances
The following table presents the condensed income statement by segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
dollars in millions | General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income | $ | 437 | | | $ | 207 | | | $ | (19) | | | $ | 24 | | | $ | 649 | |
Provision (benefit) for credit losses | (15) | | | (34) | | | — | | | 513 | | | 464 | |
Net interest income after provision for credit losses | 452 | | | 241 | | | (19) | | | (489) | | | 185 | |
Noninterest income | 123 | | | 112 | | | 162 | | | 453 | | | 850 | |
Noninterest expenses | 409 | | | 191 | | | 100 | | | 110 | | | 810 | |
Income (loss) before income taxes | 166 | | | 162 | | | 43 | | | (146) | | | 225 | |
Provision (benefit) for income taxes | 40 | | | 41 | | | 11 | | | (138) | | | (46) | |
Net income (loss) | $ | 126 | | | $ | 121 | | | $ | 32 | | | $ | (8) | | | $ | 271 | |
Select Period End Balances | | | | | | | | | |
| | | | | | | | | |
Loans and leases | $ | 38,778 | | | $ | 26,672 | | | $ | 67 | | | $ | 7 | | | $ | 65,524 | |
Deposits | 85,469 | | | 4,687 | | | 13 | | | 1,428 | | | 91,597 | |
Operating lease equipment, net | — | | | 721 | | | 7,251 | | | — | | | 7,972 | |
| | | | | | | | | |
| Three months ended March 31, 2021 |
dollars in millions | General Banking | | Commercial Banking | | Rail | | Corporate | | Total BancShares |
Net interest income | $ | 344 | | | $ | 4 | | | $ | — | | | $ | (8) | | | $ | 340 | |
Benefit for credit losses | (11) | | | — | | | — | | | — | | | (11) | |
Net interest income (loss) after benefit for credit losses | 355 | | | 4 | | | — | | | (8) | | | 351 | |
Noninterest income | 110 | | | — | | | — | | | 27 | | | 137 | |
Noninterest expenses | 290 | | | 1 | | | — | | | 6 | | | 297 | |
Income before income taxes | 175 | | | 3 | | | — | | | 13 | | | 191 | |
Provision for income taxes | 40 | | | 1 | | | — | | | 3 | | | 44 | |
Net income | $ | 135 | | | $ | 2 | | | $ | — | | | $ | 10 | | | $ | 147 | |
Select Period End Balances | | | | | | | | | |
| | | | | | | | | |
Loans and leases | $ | 32,580 | | | $ | 601 | | | $ | — | | | $ | — | | | $ | 33,181 | |
Deposits | 47,277 | | | 53 | | | — | | | 1 | | | 47,331 | |
Operating lease equipment, net | — | | | — | | | — | | | — | | | — | |
NOTE 23 — COMMITMENTS AND CONTINGENCIES
Commitments
To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit.
The accompanying table summarizes credit-related commitments and other purchase and funding commitments:
| | | | | | | | | | | |
dollars in millions | March 31, 2022 | | December 31, 2021 |
Financing Commitments | | | |
Financing assets (excluding leases) | $ | 21,807 | | | $ | 13,011 | |
Letters of credit | | | |
Standby letters of credit | 325 | | | 92 | |
Other letters of credit | 41 | | | 24 | |
Deferred purchase agreements | 2,097 | | | — | |
Purchase and Funding Commitments | | | |
Lessor commitments(1) | 513 | | | — | |
(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 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 March 31, 2022, substantially all undrawn financing commitments were senior facilities. Most of the undrawn and available financing commitments are in the Commercial Banking segment.
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 $161 million at March 31, 2022 of borrowings for such clients, is the maximum amount that BancShares would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring BancShares to purchase all such receivables from the DPA clients.
The table above includes $2.0 billion of DPA exposures at March 31, 2022, related to receivables on which BancShares has assumed the credit risk. The table also includes $115 million available under DPA credit line agreements provided at March 31, 2022. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period, which is typically 90 days or less.
Litigation and other Contingencies
The Parent Company and certain of its subsidiaries have been named as a defendant in legal actions arising from its normal business activities in which damages in various amounts are claimed. BancShares is also exposed to 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 were named as defendants in an existing lawsuit brought as a qui tam (i.e., whistleblower) action by a former OneWest Bank N.A. (“One-West”) employee on behalf of the U.S. government. The lawsuit asserts claims related to OneWest’s participation in the Home Affordable Modification Program (“HAMP”) administered by the United States Treasury Department, as well as 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 seeks 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 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. The Department of Justice has declined to intervene in this case. CIT has filed motions for summary judgment seeking dismissal of the HAMP and FHA claims. The
Court has denied those motions. CIT also has filed a motion for summary judgment seeking a dismissal of the VA claim, which the Court has not yet decided. A Final Pretrial Conference has been rescheduled for June 15, 2022, with a jury trial to commence on June 20, 2022. On May 5, 2022, the parties reached an agreement in principle to settle all claims for $18.5 million, subject to required approvals by the United States Government and memorializing the agreement in a formal writing (the “Agreement in Principle”). Based upon the Agreement in Principle, the parties also made a motion to vacate the existing pretrial conference date and trial date so that the parties can devote resources to the completion of the steps necessary to execute a formal settlement agreement. The existing accruals in BancShares’ consolidated financial statements as of and for the three month period ending March 31, 2022 include estimates that were materially consistent with the amount of $18.5 million included in the Agreement in Principle.
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 March 31, 2022. 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 TRANSACTION
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 $31 million at March 31, 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 invests 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. Other assets included $702 million at March 31, 2022 and $156 million at December 31, 2021, of tax credit investments and investments in non-consolidated entities relating to such transactions that are accounted for under the equity or cost methods.
The combination of investments in and loans to non-consolidated entities represents BancShares’ maximum exposure to loss, as BancShares does not provide guarantees or other forms of indemnification to non-consolidated entities.