|
| | | |
(Dollars in thousands) | As recorded by FCB |
Assets | |
Cash and due from banks | $ | 48,824 |
|
Overnight investments | 94,134 |
|
Investment securities | 12,140 |
|
Loans | 689,086 |
|
Premises and equipment | 8,603 |
|
Income earned not collected | 6,720 |
|
Intangible assets | 9,870 |
|
Other assets | 5,748 |
|
Total assets acquired | 875,125 |
|
Liabilities | |
Deposits | 982,307 |
|
Other liabilities | 440 |
|
Total liabilities assumed | 982,747 |
|
Fair value of net liabilities assumed | (107,622 | ) |
Cash received from FDIC | 230,350 |
|
Gain on acquisition of Guaranty | $ | 122,728 |
|
Merger-related expenses of $7.4 million from the Guaranty transaction were recorded in the Consolidated Statements of Income for the year ended December 31, 2017. Loan-related interest income generated from Guaranty was approximately $20.5 million since the acquisition date.
Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores and other quantitative and qualitative considerations, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (included in PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (included in non-PCI loans).
Harvest Community Bank
On January 13, 2017, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of HCB of Pennsville, New Jersey. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.
The HCB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the relevant acquisition as additional information regarding closing date fair values becomes available. As of December 31, 2017, there have been no refinements to the fair value of these assets acquired and liabilities assumed.
The fair value of the assets acquired was $111.6 million, including $85.1 million in PCI loans and $850 thousand in core deposit intangible. Liabilities assumed were $121.8 million, of which the majority were deposits. As a result of the transaction, FCB recorded a gain on the acquisition of $12.0 million which is included in noninterest income in the Consolidated Statements of Income.
Table 3 provides the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.
Table 3
HARVEST COMMUNITY BANK NET ASSETS ACQUIRED AND NET LIABILITIES ASSUMEDAverage Balances and Rates
|
| | | |
(Dollars in thousands) | As recorded by FCB |
Assets | |
Cash and due from banks | $ | 3,350 |
|
Overnight investments | 7,478 |
|
Investment securities | 14,455 |
|
Loans | 85,149 |
|
Income earned not collected | 31 |
|
Intangible assets | 850 |
|
Other assets | 237 |
|
Total assets acquired | 111,550 |
|
Liabilities | |
Deposits | 121,755 |
|
Other liabilities | 74 |
|
Total liabilities assumed | 121,829 |
|
Fair value of net liabilities assumed | (10,279 | ) |
Cash received from FDIC | 22,296 |
|
Gain on acquisition of HCB | $ | 12,017 |
|
Merger-related expenses of $1.2 million were recorded in the Consolidated Statements of Income for the year ended December 31, 2017. Loan-related interest income generated from HCB was approximately $3.8 million for the year ended December 31, 2017.
All loans resulting from the HCB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI under ASC 310-30.
Cordia Bancorp, Inc.
On September 1, 2016, FCB completed the merger of Cordia and its subsidiary, BVA, into FCB. Under the terms of the merger agreement, cash consideration of $5.15 was paid to Cordia’s shareholders for each of their shares of Cordia’s common stock, with total consideration paid of $37.1 million. The Cordia transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on August 31, 2017.
The fair value of assets acquired was $349.3 million, including $241.4 million in loans and $2.2 million in core deposit intangible. Liabilities assumed were $323.1 million, including $292.2 million in deposits. As a result of the transaction, FCB recorded $10.8 million of goodwill. The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired. This premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a qualified stock purchase.
Merger-related expenses of $260 thousand and $3.8 million were recorded in the Consolidated Statements of Income for the years ended December 31, 2017 and 2016, respectively. Loan-related interest income generated from Cordia was approximately $5.6 million and $4.2 million for the years ended December 31, 2017 and 2016, respectively.
Due to the immaterial amount of loans resulting from the Cordia transaction that had evidence of credit quality deterioration, all loans were accounted for as non-PCI loans under ASC 310-20.
First CornerStone Bank
On May 6, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of FCSB of King of Prussia, Pennsylvania. The FCSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on May 5, 2017.
The fair value of the assets acquired was $87.4 million, including $43.8 million in loans and $390 thousand of core deposit intangible. Liabilities assumed were $96.9 million, of which the majority were deposits. The fair value of the net liabilities assume was $9.5 million and cash received from the FDIC was $12.5 million. The total gain on the transaction was $3.0 million which is included in noninterest income in the Consolidated Statements of Income.
Merger-related expenses were immaterial for the year ended December 31, 2017 and $1.0 million was recorded in the Consolidated Statements of Income for the year ended December 31, 2016. Loan-related interest income generated from FCSB was approximately $1.7 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively.
All loans resulting from the FCSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI loans under ASC 310-30.
North Milwaukee State Bank
On March 11, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of NMSB of Milwaukee, Wisconsin. The NMSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on March 10, 2017.
The fair value of the assets acquired was $53.6 million, including $36.9 million in loans and $240 thousand of core deposit intangible. Liabilities assumed were $60.9 million, of which $59.2 million were deposits. The fair value of the net liabilities assumed was $7.3 million and cash received from the FDIC was $10.2 million. The total gain on the transaction was $2.9 million which is included in noninterest income in the Consolidated Statements of Income.
Merger-related expenses of $112 thousand and $517 thousand were recorded in the Consolidated Statements of Income for the years ended December 31, 2017 and 2016, respectively. Loan-related interest income generated from NMSB was approximately $2.4 million and $1.9 million for the years ended December 31, 2017 and 2016, respectively.
All loans resulting from the NMSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI loans under ASC 310-30.
FDIC-ASSISTED TRANSACTIONS
BancShares completed eleven FDIC-assisted transactions during the period beginning in 2009 through 2017. These transactions provided us significant contributions to capital and earnings. Prior to its merger into BancShares in 2014, First Citizens Bancorporation, Inc. (Bancorporation) completed three FDIC-assisted transactions: Georgian Bank of Atlanta, Georgia (acquired in 2009); Williamsburg First National Bank of Williamsburg, South Carolina (acquired in 2010); and Atlantic Bank & Trust of Charleston, South Carolina (acquired in 2011). Nine of the fourteen FDIC-assisted transactions (including the three completed by Bancorporation) included shared-loss agreements that, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur.
Table 4 provides information regarding the fair value of loans at the acquisition date for the fourteen FDIC-assisted transactions consummated from 2009 through 2017.
Table 4
FDIC-ASSISTED TRANSACTIONS
|
| | | | | | |
Entity | | Date of transaction | | Fair value of loans at acquisition date |
| | | | (Dollars in thousands) |
Guaranty Bank (Guaranty) | | May 5, 2017 | | $ | 689,086 |
|
Harvest Community Bank (HCB) | | January 13, 2017 | | 85,149 |
|
First Cornerstone Bank (FCSB) | | May 6, 2016 | | 43,776 |
|
North Milwaukee State Bank (NMSB) | | March 11, 2016 | | 36,914 |
|
Capitol City Bank & Trust (CCBT) | | February 13, 2015 | | 154,496 |
|
Colorado Capital Bank (CCB) | | July 8, 2011 | | 320,789 |
|
Atlantic Bank & Trust (ABT) (1) | | June 3, 2011 | | 112,238 |
|
United Western Bank (United Western) | | January 21, 2011 | | 759,351 |
|
Williamsburg First National Bank (WFNB) (1) | | July 23, 2010 | | 55,054 |
|
Sun American Bank (SAB) | | March 5, 2010 | | 290,891 |
|
First Regional Bank (First Regional) | | January 29, 2010 | | 1,260,249 |
|
Georgian Bank (GB) (1) | | September 25, 2009 | | 979,485 |
|
Venture Bank (VB) | | September 11, 2009 | | 456,995 |
|
Temecula Valley Bank (TVB) | | July 17, 2009 | | 855,583 |
|
Total | | | | $ | 6,100,056 |
|
Carrying value of FDIC-assisted acquired loans as of December 31, 2017 | | | | $ | 1,031,943 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 | | | | | | |
| 2022 | | 2021 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 66,634 | | | $ | 2,953 | | | 4.41 | % | | $ | 32,860 | | | $ | 1,295 | | | 3.91 | % | | $ | 1,479 | | | $ | 179 | | | $ | 1,658 | |
Total investment securities | 19,166 | | | 354 | | | 1.85 | % | | 10,611 | | | 145 | | | 1.37 | % | | 145 | | | 64 | | | 209 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 7,726 | | | 106 | | | 1.38 | % | | 8,349 | | | 11 | | | 0.13 | % | | (1) | | | 96 | | | 95 | |
Total interest-earning assets (2) | $ | 93,526 | | | $ | 3,413 | | | 3.63 | % | | $ | 51,820 | | | $ | 1,451 | | | 2.78 | % | | $ | 1,623 | | | $ | 339 | | | $ | 1,962 | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | 7,982 | | | | | | | $ | — | | | | | | | | | | | |
Cash and due from banks | 512 | | | | | | | 350 | | | | | | | | | | | |
Allowance for credit losses | (875) | | | | | | | (202) | | | | | | | | | | | |
All other noninterest-earning assets | 7,788 | | | | | | | 3,015 | | | | | | | | | | | |
Total assets | $ | 108,933 | | | | | | | $ | 54,983 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 16,323 | | | $ | 29 | | | 0.15 | % | | $ | 11,258 | | | $ | 6 | | | 0.05 | % | | $ | 3 | | | $ | 20 | | | $ | 23 | |
Money market | 23,949 | | | 125 | | | 0.52 | % | | 9,708 | | | 10 | | | 0.10 | % | | 29 | | | 86 | | | 115 | |
Savings | 14,193 | | | 117 | | | 0.82 | % | | 3,847 | | | 1 | | | 0.03 | % | | 12 | | | 104 | | | 116 | |
Time deposits | 9,133 | | | 64 | | | 0.70 | % | | 2,647 | | | 16 | | | 0.63 | % | | 46 | | | 2 | | | 48 | |
Total interest-bearing deposits | 63,598 | | | 335 | | | 0.53 | % | | 27,460 | | | 33 | | | 0.12 | % | | 90 | | | 212 | | | 302 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 590 | | | 1 | | | 0.19 | % | | 660 | | | 1 | | | 0.20 | % | | — | | | — | | | — | |
Short-term FHLB borrowings | 824 | | | 28 | | | 3.30 | % | | — | | | — | | | — | % | | 28 | | | — | | | 28 | |
Short-term borrowings | 1,414 | | | 29 | | | 2.00 | % | | 660 | | | 1 | | | 0.20 | % | | 28 | | | — | | | 28 | |
Federal Home Loan Bank borrowings | 1,414 | | | 43 | | | 2.96 | % | | 648 | | | 8 | | | 1.28 | % | | 17 | | | 18 | | | 35 | |
Senior unsecured borrowings | 1,348 | | | 25 | | | 1.87 | % | | — | | | — | | | — | % | | 25 | | | — | | | 25 | |
Subordinated debt | 1,056 | | | 33 | | | 3.15 | % | | 498 | | | 15 | | | 3.35 | % | | 19 | | | (1) | | | 18 | |
Other borrowings | 64 | | | 2 | | | 3.22 | % | | 80 | | | 4 | | | 1.23 | % | | (3) | | | 1 | | | (2) | |
Long-term borrowings | 3,882 | | | 103 | | | 2.64 | % | | 1,226 | | | 27 | | | 2.12 | % | | 58 | | | 18 | | | 76 | |
Total borrowings | 5,296 | | | 132 | | | 2.47 | % | | 1,886 | | | 28 | | | 1.45 | % | | 86 | | | 18 | | | 104 | |
Total interest-bearing liabilities | $ | 68,894 | | | $ | 467 | | | 0.68 | % | | $ | 29,346 | | | $ | 61 | | | 0.21 | % | | $ | 176 | | | $ | 230 | | | $ | 406 | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 26,318 | | | | | | | $ | 20,798 | | | | | | | | | | | |
Credit balances of factoring clients | 1,153 | | | | | | | — | | | | | | | | | | | |
Other noninterest-bearing liabilities | 2,292 | | | | | | | 378 | | | | | | | | | | | |
Stockholders' equity | 10,276 | | | | | | | 4,461 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 108,933 | | | | | | | $ | 54,983 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 2.95 | % | | | | | | 2.57 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 2,946 | | | 3.14 | % | | | | $ | 1,390 | | | 2.66 | % | | | | | | |
(1) Date of transaction and fair value of loans acquired represent when Bancorporation acquired the entities and the fair value of the loans on that date.
As of December 31, 2017, shared-loss agreements are still active for First Regional Bank (FRB), Georgian Bank (GB) and United Western Bank (UWB). Shared-loss protection remains for single family residential loans acquired from UWB and GB in the amount of $67.8 million. FRB remains in a recovery period, where any recoveries are shared with the FDIC, until March 2020.
FDIC shared-loss termination. During 2017, FCB entered into an agreement with the FDIC to terminate the shared-loss agreement for Venture Bank (VB). Under the terms of the agreement, FCB made a payment of $285 thousand to the FDIC as consideration for early termination of the shared-loss agreement. The early termination resulted in an adjustment of $240 thousand to the FDIC shared-loss receivable and a $45 thousand loss on the termination of the shared-loss agreement. In addition to the shared-loss agreement termination for VB, FCB terminated five shared-loss agreements in 2016, including Temecula Valley Bank, Sun American Bank, Williamsburg First National Bank, Atlantic Bank & Trust and Colorado Capital Bank. In connection with the 2016 termination, FCB recognized a positive net impact to pre-tax earnings of $16.6 million.
Table 5 provides the various terms of each shared-loss agreement and the components of the receivable from the FDIC.
Table 5
SHARED-LOSS PROVISIONS FOR FDIC-ASSISTED TRANSACTIONS |
| | | | | | | | | | | | | | | | | | | | | | |
| | Fair value at acquisition date (1) | Losses/expenses incurred through 12/31/2017 (2) | Cumulative amount reimbursed by FDIC through 12/31/2017 (3) | Carrying value at December 31, 2017 | Current portion of receivable due from (to) FDIC for 12/31/2017 filings | Prospective amortization (accretion) (4) |
(Dollars in thousands) | FDIC shared-loss receivable | FDIC shared-loss payable |
Entity |
GB - combined losses | 279,310 |
| 898,334 |
| 462,807 |
| (1,132 | ) | — |
| (1,132 | ) | — |
|
First Regional - combined losses | 378,695 |
| 206,930 |
| 132,573 |
| (1,860 | ) | 88,019 |
| (1,860 | ) | — |
|
United Western | | | | | | | |
Non-single family residential losses | 112,672 |
| 92,314 |
| 76,506 |
| 17 |
| 13,323 |
| 17 |
| — |
|
Single family residential losses | 24,781 |
| 5,918 |
| 4,580 |
| 5,198 |
| — |
| — |
| 5,215 |
|
Total | $ | 795,458 |
| $ | 1,203,496 |
| $ | 676,466 |
| $ | 2,223 |
| $ | 101,342 |
| $ | (2,975 | ) | $ | 5,215 |
|
| | | | | | | | |
(1) | Fair value at acquisition date represents the initial fair value of the receivable from FDIC, excluding the payable to FDIC. For GB the acquisition date is when Bancorporation initially acquired the banks. |
(2) | For GB the losses/expenses incurred through December 31, 2017 include amounts prior to BancShares' acquisition through merger with Bancorporation. |
(3) | For GB the cumulative amount reimbursed by FDIC through December 31, 2017 include amounts prior to BancShares' acquisition through merger with Bancorporation. |
(4) | Prospective amortization (accretion) reflects balances that, due to post-acquisition credit quality improvement, will be amortized over the shorter of the covered asset's life or the term of the loss share period. |
| |
Except where noted, each FDIC-assisted transaction has a separate shared-loss agreement for Single-Family Residential loans (SFR) and Non-Single-Family Residential loans (NSFR). |
|
For GB, combined losses are covered at 0 percent up to $327.0 million, 80 percent for losses between $327.0 million and $853.0 million and 95 percent above $853.0 million. The shared-loss agreement expired on September 25, 2014 for all GB NSFR loans and will expire on September 25, 2019 for the SFR loans. |
|
For First Regional, NSFR losses were covered at 0 percent up to $41.8 million, 80 percent for losses between $41.8 million and $1.02 billion and 95 percent for losses above $1.02 billion. The shared-loss agreement expired on January 29, 2015 for all First Regional NSFR loans. First Regional had no SFR loans. |
|
For United Western NSFR loans, losses are covered at 80 percent up to $111.5 million, 30 percent between $111.5 million and $227.0 million and 80 percent for losses above $227.0 million. The shared-loss agreement expired on January 21, 2016. |
|
For United Western SFR loans, losses are covered at 80 percent up to $32.5 million, 0 percent between $32.5 million and $57.7 million and 80 percent for losses above $57.7 million. The shared-loss agreement expires on January 21, 2021. |
|
Table 6
AVERAGE BALANCE SHEETS
|
| | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | |
(Dollars in thousands, taxable equivalent) | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | |
Assets | | | | | | | | | | | | |
Loans and leases | $ | 22,725,665 |
| | $ | 959,785 |
| | 4.22 |
| % | $ | 20,897,395 |
| | $ | 881,266 |
| | 4.22 |
| % |
Investment securities: | | | | | | | | | | | | |
U.S. Treasury | 1,628,088 |
| | 18,015 |
| | 1.11 |
| | 1,548,895 |
| | 12,078 |
| | 0.78 |
| |
Government agency | 38,948 |
| | 647 |
| | 1.66 |
| | 332,107 |
| | 2,941 |
| | 0.89 |
| |
Mortgage-backed securities | 5,206,897 |
| | 98,341 |
| | 1.89 |
| | 4,631,927 |
| �� | 79,336 |
| | 1.71 |
| |
Corporate bonds | 60,950 |
| | 3,877 |
| | 6.36 |
| | 30,347 |
| | 1,783 |
| | 5.88 |
| |
State, county and municipal | — |
| | — |
| | — |
| | 49 |
| | 1 |
| | 2.69 |
| |
Other | 101,681 |
| | 698 |
| | 0.69 |
| | 73,030 |
| | 911 |
| | 1.25 |
| |
Total investment securities | 7,036,564 |
| | 121,578 |
| | 1.73 |
| | 6,616,355 |
| | 97,050 |
| | 1.47 |
| |
Overnight investments | 2,451,417 |
| | 26,846 |
| | 1.10 |
| | 2,754,038 |
| | 14,534 |
| | 0.53 |
| |
Total interest-earning assets | 32,213,646 |
| | $ | 1,108,209 |
| | 3.44 |
| % | 30,267,788 |
| | $ | 992,850 |
| | 3.28 |
| |
Cash and due from banks | 417,229 |
| | | | | | 467,315 |
| | | | | |
Premises and equipment | 1,133,255 |
| | | | | | 1,128,870 |
| | | | | |
FDIC shared-loss receivable | 5,111 |
| | | | | | 7,370 |
| | | | | |
Allowance for loan and lease losses | (226,465 | ) | | | | | | (209,232 | ) | | | | | |
Other real estate owned | 56,478 |
| | | | | | 66,294 |
| | | | | |
Other assets | 703,613 |
| | | | | | 711,087 |
| | | | | |
Total assets | $ | 34,302,867 |
| | | | | | $ | 32,439,492 |
| | | | | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
Checking with interest | $ | 4,956,498 |
| | $ | 1,021 |
| | 0.02 |
| % | $ | 4,484,557 |
| | $ | 910 |
| | 0.02 |
| % |
Savings | 2,278,895 |
| | 717 |
| | 0.03 |
| | 2,024,656 |
| | 615 |
| | 0.03 |
| |
Money market accounts | 8,136,731 |
| | 6,969 |
| | 0.09 |
| | 8,148,123 |
| | 6,472 |
| | 0.08 |
| |
Time deposits | 2,634,434 |
| | 7,489 |
| | 0.28 |
| | 2,959,757 |
| | 10,172 |
| | 0.34 |
| |
Total interest-bearing deposits | 18,006,558 |
| | 16,196 |
| | 0.09 |
| | 17,617,093 |
| | 18,169 |
| | 0.10 |
| |
Repurchase obligations | 649,252 |
| | 2,179 |
| | 0.34 |
| | 721,933 |
| | 1,861 |
| | 0.26 |
| |
Other short-term borrowings | 77,680 |
| | 2,659 |
| | 3.39 |
| | 7,536 |
| | 104 |
| | 1.38 |
| |
Long-term obligations | 842,863 |
| | 22,760 |
| | 2.67 |
| | 811,755 |
| | 22,948 |
| | 2.83 |
| |
Total interest-bearing liabilities | 19,576,353 |
| | 43,794 |
| | 0.22 |
| | 19,158,317 |
| | 43,082 |
| | 0.22 |
| |
Demand deposits | 11,112,786 |
| | | | | | 9,898,068 |
| | | | | |
Other liabilities | 407,478 |
| | | | | | 381,838 |
| | | | | |
Shareholders' equity | 3,206,250 |
| | | | | | 3,001,269 |
| | | | | |
Total liabilities and shareholders' equity | $ | 34,302,867 |
| | | | | | $ | 32,439,492 |
| | | | | |
Interest rate spread | | | | | 3.22 |
| % | | | | | 3.06 |
| % |
Net interest income and net yield | | | | | | | | | | | | |
on interest-earning assets | | | $ | 1,064,415 |
| | 3.30 |
| % | | | $ | 949,768 |
| | 3.14 |
| % |
Loans and leases include PCINon-PCD and non-PCIPCD loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were $55.8 million, $37.5 million, $30.9 million, $16.4 million
(2) The balance and $14.1 million for the years ended 2017, 2016, 2015, 2014, and 2013, respectively. Yields relatedrate presented is calculated net of average credit balances of factoring clients.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 | | | | | | |
| 2021 | | 2020 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 32,860 | | | $ | 1,295 | | | 3.91 | % | | $ | 31,605 | | | $ | 1,333 | | | 4.18 | % | | $ | 52 | | | $ | (90) | | | $ | (38) | |
Total investment securities | 10,611 | | | 145 | | | 1.37 | % | | 9,055 | | | 144 | | | 1.60 | % | | 23 | | | (22) | | | 1 | |
| | | | | | | | | | | | | | | | | |
Interest-earning deposits at banks | 8,349 | | | 11 | | | 0.13 | % | | 2,691 | | | 7 | | | 0.25 | % | | 9 | | | (5) | | | 4 | |
Total interest-earning assets (2) | $ | 51,820 | | | $ | 1,451 | | | 2.78 | % | | $ | 43,351 | | | $ | 1,484 | | | 3.40 | % | | $ | 84 | | | $ | (117) | | | $ | (33) | |
| | | | | | | | | | | | | | | | | |
Operating lease equipment, net | $ | — | | | | | | | $ | — | | | | | | | | | | | |
Cash and due from banks | 350 | | | | | | | 345 | | | | | | | | | | | |
Allowance for credit losses | (202) | | | | | | | (211) | | | | | | | | | | | |
All other noninterest-earning assets | 3,015 | | | | | | | 2,536 | | | | | | | | | | | |
Total assets | $ | 54,983 | | | | | | | $ | 46,021 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 11,258 | | | $ | 6 | | | 0.05 | % | | $ | 8,923 | | | $ | 6 | | | 0.07 | % | | $ | 2 | | | $ | (2) | | | $ | — | |
Money market | 9,708 | | | 10 | | | 0.10 | % | | 7,821 | | | 23 | | | 0.29 | % | | 4 | | | (17) | | | (13) | |
Savings | 3,847 | | | 1 | | | 0.03 | % | | 2,937 | | | 1 | | | 0.04 | % | | — | | | — | | | — | |
Time deposits | 2,647 | | | 16 | | | 0.63 | % | | 3,344 | | | 37 | | | 1.11 | % | | (7) | | | (14) | | | (21) | |
Total interest-bearing deposits | 27,460 | | | 33 | | | 0.12 | % | | 23,025 | | | 67 | | | 0.29 | % | | (1) | | | (33) | | | (34) | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 660 | | | 1 | | | 0.20 | % | | 632 | | | 1 | | | 0.25 | % | | — | | | — | | | — | |
Short-term FHLB borrowings | — | | | — | | | — | % | | 50 | | | 1 | | | 2.03 | % | | (1) | | | — | | | (1) | |
Short-term borrowings | 660 | | | 1 | | | 0.20 | % | | 682 | | | 2 | | | 0.38 | % | | (1) | | | — | | | (1) | |
Federal Home Loan Bank borrowings | 648 | | | 8 | | | 1.28 | % | | 642 | | | 9 | | | 1.34 | % | | (1) | | | — | | | (1) | |
Senior unsecured borrowings | — | | | — | | | — | % | | — | | | — | | | — | % | | — | | | — | | | — | |
Subordinated debt | 498 | | | 15 | | | 3.35 | % | | 446 | | | 16 | | | 3.60 | % | | — | | | (1) | | | (1) | |
Other borrowings | 80 | | | 4 | | | 1.23 | % | | 99 | | | 2 | | | 1.75 | % | | 3 | | | (1) | | | 2 | |
Long-term borrowings | 1,226 | | | 27 | | | 2.12 | % | | 1,187 | | | 27 | | | 2.22 | % | | 2 | | | (2) | | | — | |
Total borrowings | 1,886 | | | 28 | | | 1.45 | % | | 1,869 | | | 29 | | | 1.55 | % | | 1 | | | (2) | | | (1) | |
Total interest-bearing liabilities | $ | 29,346 | | | $ | 61 | | | 0.21 | % | | $ | 24,894 | | | $ | 96 | | | 0.38 | % | | $ | — | | | $ | (35) | | | $ | (35) | |
| | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | $ | 20,798 | | | | | | | $ | 16,721 | | | | | | | | | | | |
Credit balances of factoring clients | — | | | | | | | — | | | | | | | | | | | |
Other noninterest-bearing liabilities | 378 | | | | | | | 452 | | | | | | | | | | | |
Stockholders' equity | 4,461 | | | | | | | 3,954 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 54,983 | | | | | | | $ | 46,021 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 2.57 | % | | | | | | 3.02 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 1,390 | | | 2.66 | % | | | | $ | 1,388 | | | 3.17 | % | | | | | | |
(1), (2) See footnotes to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent for each period and state income tax rates of 3.1 percent, 3.1 percent, 5.5 percent, 6.2 percent, and 6.9 percent for the years ended 2017, 2016, 2015, 2014, and 2013, respectively. The taxable-equivalent adjustment was $4,519, $5,093, $6,326, $3,988 and $2,660 for the years ended 2017, 2016, 2015, 2014, and 2013, respectively.previous table.
Year to Date 2022 compared to 2021
Table 6
AVERAGE BALANCE SHEETS (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | 2014 | | 2013 | |
Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | |
| | | | | | | | | | | | | | | | | |
$ | 19,528,153 |
| | $ | 880,381 |
| | 4.51 | % | $ | 14,820,126 |
| | $ | 703,716 |
| | 4.75 | % | $ | 13,163,743 |
| | $ | 759,261 |
| | 5.77 | % |
| | | | | | | | | | | | | | | | | |
2,065,750 |
| | 15,918 |
| | 0.77 | | 1,690,186 |
| | 12,139 |
| | 0.72 | | 610,327 |
| | 1,714 |
| | 0.28 | |
801,408 |
| | 7,095 |
| | 0.89 | | 1,509,868 |
| | 7,717 |
| | 0.51 | | 2,829,328 |
| | 12,783 |
| | 0.45 | |
4,141,703 |
| | 65,815 |
| | 1.59 | | 2,769,255 |
| | 36,492 |
| | 1.32 | | 1,745,540 |
| | 22,642 |
| | 1.30 | |
1,042 |
| | 178 |
| | 17.08 | | 4,779 |
| | 254 |
| | 5.31 | | — |
| | — |
| | — | |
903 |
| | 53 |
| | 5.85 | | 295 |
| | 21 |
| | 7.12 | | 276 |
| | 20 |
| | 7.25 | |
961 |
| | 28 |
| | 2.93 | | 19,697 |
| | 385 |
| | 1.95 | | 20,529 |
| | 321 |
| | 1.56 | |
7,011,767 |
| | 89,087 |
| | 1.27 | | 5,994,080 |
| | 57,008 |
| | 0.95 | | 5,206,000 |
| | 37,480 |
| | 0.72 | |
2,353,237 |
| | 6,067 |
| | 0.26 | | 1,417,845 |
| | 3,712 |
| | 0.26 | | 1,064,204 |
| | 2,723 |
| | 0.26 | |
28,893,157 |
| | $ | 975,535 |
| | 3.38 | % | 22,232,051 |
| | $ | 764,436 |
| | 3.44 | % | 19,433,947 |
| | $ | 799,464 |
| | 4.12 | % |
469,270 |
| | | | | | 493,947 |
| | | | | | 483,186 |
| | | | | |
1,125,159 |
| | | | | | 943,270 |
| | | | | | 874,862 |
| | | | | |
18,637 |
| | | | | | 61,605 |
| | | | | | 168,281 |
| | | | | |
(206,342 | ) | | | | | | (210,937 | ) | | | | | | (257,791 | ) | | | | | |
76,845 |
| | | | | | 87,944 |
| | | | | | 119,694 |
| | | | | |
695,509 |
| | | | | | 496,524 |
| | | | | | 473,408 |
| | | | | |
$ | 31,072,235 |
| | | | | | $ | 24,104,404 |
| | | | | | $ | 21,295,587 |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
$ | 4,170,598 |
| | $ | 856 |
| | 0.02 | % | $ | 2,988,287 |
| | $ | 779 |
| | 0.03 | % | $ | 2,346,192 |
| | $ | 600 |
| | 0.03 | % |
1,838,531 |
| | 479 |
| | 0.03 | | 1,196,096 |
| | 624 |
| | 0.05 | | 968,251 |
| | 482 |
| | 0.05 | |
8,236,160 |
| | 7,051 |
| | 0.09 | | 6,733,959 |
| | 6,527 |
| | 0.10 | | 6,338,622 |
| | 9,755 |
| | 0.15 | |
3,359,794 |
| | 12,844 |
| | 0.38 | | 3,159,510 |
| | 16,856 |
| | 0.53 | | 3,198,606 |
| | 23,658 |
| | 0.74 | |
17,605,083 |
| | 21,230 |
| | 0.12 | | 14,077,852 |
| | 24,786 |
| | 0.18 | | 12,851,671 |
| | 34,495 |
| | 0.27 | |
606,357 |
| | 1,481 |
| | 0.24 | | 159,696 |
| | 350 |
| | 0.22 | | 108,612 |
| | 316 |
| | 0.29 | |
227,937 |
| | 3,179 |
| | 1.39 | | 632,146 |
| | 8,827 |
| | 1.40 | | 487,813 |
| | 2,408 |
| | 0.49 | |
547,378 |
| | 18,414 |
| | 3.36 | | 403,925 |
| | 16,388 |
| | 4.06 | | 462,203 |
| | 19,399 |
| | 4.20 | |
18,986,755 |
| | 44,304 |
| | 0.23 | | 15,273,619 |
| | 50,351 |
| | 0.33 | | 13,910,299 |
| | 56,618 |
| | 0.41 | |
8,880,162 |
| | | | | | 6,290,423 |
| | | | | | 5,096,325 |
| | | | | |
408,018 |
| | | | | | 284,070 |
| | | | | | 352,068 |
| | | | | |
2,797,300 |
| | | | | | 2,256,292 |
| | | | | | 1,936,895 |
| | | | | |
$ | 31,072,235 |
| | | | | | $ | 24,104,404 |
| | | | | | $ | 21,295,587 |
| | | | | |
| | | | 3.15 | % | | | | | 3.11 | % | | | | | 3.71 | % |
| | | | | | | | | | | | | | | | | |
| | $ | 931,231 |
| | 3.22 | % | | | $ | 714,085 |
| | 3.21 | % | | | $ | 742,846 |
| | 3.82 | % |
Table 7 isolates the changes in taxable-equivalent net interest income due to changes in volume and interest rates for 2017 and 2016.
Table 7
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Change from previous year due to: | | Change from previous year due to: |
| | | Yield/ | | Total | | | | Yield/ | | Total |
(Dollars in thousands) | Volume | | Rate | | Change | | Volume | | Rate | | Change |
Assets | | | | | | | | | | | |
Loans and leases | $ | 77,836 |
| | $ | 683 |
| | $ | 78,519 |
| | $ | 59,635 |
| | $ | (58,750 | ) | | $ | 885 |
|
Investment securities: | | | | | | | | | | | |
U.S. Treasury | 722 |
| | 5,215 |
| | 5,937 |
| | (4,013 | ) | | 173 |
| | (3,840 | ) |
Government agency | (3,730 | ) | | 1,436 |
| | (2,294 | ) | | (4,165 | ) | | 11 |
| | (4,154 | ) |
Mortgage-backed securities | 10,250 |
| | 8,755 |
| | 19,005 |
| | 8,173 |
| | 5,348 |
| | 13,521 |
|
Corporate bonds | 1,874 |
| | 220 |
| | 2,094 |
| | 3,363 |
| | (1,758 | ) | | 1,605 |
|
State, county and municipal | (1 | ) | | — |
| | (1 | ) | | (37 | ) | | (15 | ) | | (52 | ) |
Other | 277 |
| | (490 | ) | | (213 | ) | | 1,505 |
| | (622 | ) | | 883 |
|
Total investment securities | 9,392 |
| | 15,136 |
| | 24,528 |
| | 4,826 |
| | 3,137 |
| | 7,963 |
|
Overnight investments | (2,495 | ) | | 14,807 |
| | 12,312 |
| | 1,578 |
| | 6,889 |
| | 8,467 |
|
Total interest-earning assets | $ | 84,733 |
| | $ | 30,626 |
| | $ | 115,359 |
| | $ | 66,039 |
| | $ | (48,724 | ) | | $ | 17,315 |
|
Liabilities | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Checking with interest | $ | 103 |
| | $ | 8 |
| | $ | 111 |
| | $ | 58 |
| | $ | (4 | ) | | $ | 54 |
|
Savings | 89 |
| | 13 |
| | 102 |
| | 96 |
| | 40 |
| | 136 |
|
Money market accounts | (163 | ) | | 660 |
| | 497 |
| | 83 |
| | (662 | ) | | (579 | ) |
Time deposits | (1,007 | ) | | (1,676 | ) | | (2,683 | ) | | (1,424 | ) | | (1,248 | ) | | (2,672 | ) |
Total interest-bearing deposits | (978 | ) | | (995 | ) | | (1,973 | ) | | (1,187 | ) | | (1,874 | ) | | (3,061 | ) |
Repurchase obligations | (224 | ) | | 542 |
| | 318 |
| | 268 |
| | 112 |
| | 380 |
|
Other short-term borrowings | 1,686 |
| | 869 |
| | 2,555 |
| | (3,058 | ) | | (17 | ) | | (3,075 | ) |
Long-term obligations | 996 |
| | (1,184 | ) | | (188 | ) | | 8,159 |
| | (3,625 | ) | | 4,534 |
|
Total interest-bearing liabilities | 1,480 |
| | (768 | ) | | 712 |
| | 4,182 |
| | (5,404 | ) | | (1,222 | ) |
Change in net interest income | $ | 83,253 |
| | $ | 31,394 |
| | $ | 114,647 |
| | $ | 61,857 |
| | $ | (43,320 | ) | | $ | 18,537 |
|
Loans and leases include PCI loans, non-PCI loans, nonaccrual loans, and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. The rate/volume variance is allocated equally between the changes in volume and rate.
NET INTEREST INCOME
Net interest income of $1.06 billion•NII for the year ended December 31, 2017 increased by $115.2 million,2022 was $2.95 billion, an increase of $1.56 billion, or 12.2 percent,112% compared to the same period in 2016. Interest income2021. This increase was up $115.9 million primarily due to higher non-PCI loan interest income of $79.0 million as a result of originatedthe CIT Merger, loan growth and the contribution from the Guaranty acquisition,higher yields on interest-earning assets, partially offset by higher rates paid on interest-bearing deposits and a $24.5 million improvementdecline in interest income earned on investments and a $12.3 million increase in interestSBA-PPP loans.
◦Interest income earned on excess cash held in overnight investments. Interest expense increased by $712 thousand resulting from higher interest expense on short-term FHLB borrowingsloans and repurchase obligations. This increase was partially offset by lower interest on deposits, primarily from continued run-off of time deposits, and long-term obligations. Net interest incomeleases for the year ended December 31, 20162022 was $944.7 million, a $19.8 million increase from 2015, primarily due to strong core originated loan growth, higher investment interest income and a decrease in interest expense, offset by a decline in loan interest income on PCI loans.
Interest income from loans and leases was $955.6 million during 2017,$2.95 billion, an increase of $79.2 million$1.66 billion compared to 2016.2021. The increase was primarily the result of a $79.0 million increase in non-PCI loan interest income due to originatedthe addition of $32.71 billion of loans and leases acquired in the CIT Merger, loan growth throughout the year as discussed further in the “Balance Sheet” section of this MD&A, and a higher yield, reflective of the contribution from Guaranty. Interest income increased $18.5 million between 2016 and 2015, reflecting an increase in non-PCI loan interest income due to originated loan growth, partially offset by a decline in PCI loan interest income due to portfolio run-off.higher rate environment.
◦Interest income earned on investment securities for the year ended December 31, 2022 was $121.2$354 million, $96.8an increase of $209 million and $88.3 million during 2017, 2016, and 2015, respectively.compared to 2021. The $24.4 million increase in 2017 was primarily due to a 26 basis point improvementthe addition of $6.56 billion of investment securities acquired in the investmentCIT Merger and a higher yield, resulting from reinvesting investment securities cash flows from maturities and sales intoreflective of the higher yielding short duration mortgage-backed securities. rate environment.
◦Interest income earned on investment securities in 2016 increased $8.5interest-earning deposits at banks for the year ended December 31, 2022 was $106 million, an increase of $95 million compared to 2015,2021, primarily due to areflecting higher interest rates.
20 basis point improvement in the investment yield resulting from reinvesting investment securities cash flows from maturities and sales into higher yielding short duration mortgage-based securities.
◦Interest expense on interest-bearing deposits for the year ended December 31, 2022 was $16.2$335 million, in 2017, a decreasean increase of $2.0$302 million compared to 2016,2021. The increase was primarily due to a decline in time deposit balances. Interest expense onthe additional interest-bearing deposits decreased $3.1 million between 2016assumed in the CIT Merger, which carried a higher average rate than legacy FCB deposits, the rising interest rate environment, and 2015 primarily duethe need to a decline in timeoffer competitive rates to maintain deposit balances and funding costs. levels.
◦Interest expense on borrowings for the year ended December 31, 2022 was $27.6$132 million, in 2017, an increase of $2.7$104 million compared to 2016, primarily related to an increase in short-term borrowings, partially offset by a decline in interest paid on long-term borrowings. Interest expense on borrowings increased $1.8 million between 2016 and 2015 primarily related to an increase in long-term borrowings, partially offset by a decline in interest paid on short-term borrowings.
2021. The year-to-date taxable-equivalent net interest margin for 2017 was 3.30 percent, compared to 3.14 percent during 2016. The margin increase was primarily due to higher loan balancesinterest rates, additional FHLB borrowings, and improved yields on investments and excess cash held in overnight investments. Investment yields improved 26 basis points compared to 2016 primarily due to reinvesting investment securities cash flows from maturities, sales and paydowns into higher yielding short duration securities, mainly U.S. Treasury and mortgage-backed securities. The yield on overnight investments improved 57 basis points compared to 2016 primarily due to the positive impact of three 25 basis point increasesassumed borrowings in the federal funds rate sinceCIT Merger. During the fourthfirst quarter of 2016. The year-to-date taxable equivalent net interest margin decreased 8 basis points to 3.14 percent2022, we redeemed approximately $2.90 billion of the $4.54 billion debt assumed in 2016, compared to 2015, primarily due to higher yielding PCI loan portfolio run-off, partially offset by the favorable impacts of originated loan growth, higher yields on investments and lower funding costs.CIT Merger.
Average interest-earning assets increased $1.94 billion, or by 6.4 percent,•NIM for the year ended December 31, 2017. Growth2022 was 3.14%, an increase of 48 bps from 2021, primarily due to the increase in averageyield on interest-earning assets, during 2017partially offset by an increase in the cost of interest-bearing liabilities.
•Average interest-earning assets for the year ended December 31, 2022 were $93.53 billion, compared to $51.82 billion in 2021. The change was primarily due to originatedthe interest-earning assets of $42.34 billion acquired in the CIT Merger and the loan growth funded largely by deposit growth and loans acquiredduring the year.
•Average interest-bearing liabilities for the year ended December 31, 2022 were $68.89 billion. This was an increase from Guaranty and HCB. The year-to-date taxable-equivalent yield on interest-earning assets improved 16 basis points$29.35 billion in 2017 to 3.44 percent. The increase was primarily the result of higher yields on investments and excess cash held in overnight investments. Average interest-earning assets increased $1.38 billion between 2016 and 20152021, primarily due to originated loanthe addition of deposits and borrowings from the CIT Merger. In addition, we increased FHLB borrowings during 2022 to supplement funding due to the decrease in deposits during the second and third quarters. With the growth and net loans acquiredin deposits in the NMSB, FCSBfourth quarter, we were able to rebalance our funding mix of deposits and Cordia acquisitions.
Average interest-bearing liabilities increased $418.0 million for the full year of 2017, compared to 2016 primarily due to growth in interest-bearing savingsborrowings and checking accounts and incrementalreduced our FHLB borrowings of $175.0 million in 2017. Average interest-bearing liabilities increased $171.6 million between 2016 and 2015 primarily due to incremental FHLB borrowings of $150.0 million in 2016.borrowings. The rate paid on average interest-bearing liabilities remained flat at 0.22 percent for the full year 2017 and 2016 and decreased 1 basis point between 2016 and 2015,ended December 31, 2022 was 0.68%. This 47 bps increase was primarily due to lower depositthe impact of the higher rate environment on both deposits and borrowing costs.borrowings, and the higher costs of deposits and borrowings assumed in the CIT Merger.
The following table includes average interest earning assets by category.
Table 4
Average Interest-earning Asset Mix
| | | | | | | | | | | | | | | | | |
| % of Total Interest-earning Assets |
| Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Loans and leases | 71 | % | | 63 | % | | 73 | % |
Investment securities | 21 | % | | 21 | % | | 21 | % |
| | | | | |
Interest-earning deposits at banks | 8 | % | | 16 | % | | 6 | % |
Total interest-earning assets | 100 | % | | 100 | % | | 100 | % |
The following table shows our average funding mix.
Table 5
Average Interest-bearing Liability Mix | | | | | | | | | | | | | | | | | |
| % of Total Interest-bearing Liabilities |
| Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Total interest-bearing deposits | 92 | % | | 94 | % | | 92 | % |
Short-term borrowings | 2 | % | | 2 | % | | 3 | % |
| | | | | |
Long-term borrowings | 6 | % | | 4 | % | | 5 | % |
Total interest-bearing liabilities | 100 | % | | 100 | % | | 100 | % |
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the year ended December 31, 2022 was $645 million, which included $551 million for loans and leases and $94 million for unfunded commitments, compared to a benefit of $37 million in 2021. The increase in 2022 was primarily due to the Day 2 provision for credit losses of $513 million, which was composed of a provision for loans and leases of $454 million (the “Day 2 provision for loans and leases”) and a provision for unfunded commitments of $59 million (the “Day 2 provision for unfunded commitments”), related to the CIT Merger. Loan growth during 2022 and deterioration in the economic outlook also contributed to the increase as further discussed in the “Credit Risk Management - ACL” section of this MD&A. The ACL is further discussed in the “Critical Accounting Estimates” and “Credit Risk Management - ACL” sections of this MD&A and in Note 5 — Allowance for Credit Losses.
NONINTEREST INCOME
Table 8
NONINTEREST INCOME
|
| | | | | | | | | | | |
| Year ended December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
Gain on acquisitions | $ | 134,745 |
| | $ | 5,831 |
| | $ | 42,930 |
|
Cardholder services | 95,365 |
| | 83,417 |
| | 77,342 |
|
Merchant services | 103,962 |
| | 95,774 |
| | 84,207 |
|
Service charges on deposit accounts | 101,201 |
| | 89,359 |
| | 90,546 |
|
Wealth management services | 86,719 |
| | 80,221 |
| | 82,865 |
|
Securities gains | 4,293 |
| | 26,673 |
| | 10,817 |
|
Other service charges and fees | 28,321 |
| | 27,011 |
| | 23,987 |
|
Mortgage income | 23,251 |
| | 20,348 |
| | 18,168 |
|
Insurance commissions | 12,465 |
| | 11,150 |
| | 11,757 |
|
ATM income | 9,143 |
| | 7,283 |
| | 7,119 |
|
Adjustments to FDIC shared-loss receivable | (6,232 | ) | | (9,725 | ) | | (19,009 | ) |
Net impact from FDIC loss share termination | (45 | ) | | 16,559 |
| | — |
|
Recoveries of PCI loans previously charged-off | 21,111 |
| | 20,126 |
| | 21,169 |
|
Other | 26,730 |
| | 14,044 |
| | 15,190 |
|
Total noninterest income | $ | 641,029 |
| | $ | 488,071 |
| | $ | 467,088 |
|
Noninterest Income
Noninterest income is an essential component of our total revenue and is critical to our ability to sustain adequate profitability levels.revenue. The primary sources of noninterest income have traditionally consistedconsist of gainsrental income on acquisitions, gains on the sale of investment securities as well asoperating leases, fee income and other service charges, wealth management services, fees and service chargecharges generated from deposit accounts, cardholder services,and merchant services, deposit accounts,
wealth management servicesfactoring commissions and mortgage lending and servicing. Recoveries
Table 6
Noninterest Income
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Rental income on operating lease equipment | $ | 864 | | | $ | — | | | $ | — | |
Other noninterest income: | | | | | |
Fee income and other service charges | 163 | | | 42 | | | 37 | |
Wealth management services | 142 | | | 129 | | | 103 | |
Service charges on deposit accounts | 100 | | | 95 | | | 88 | |
Factoring commissions | 104 | | | — | | | — | |
Cardholder services, net | 102 | | | 87 | | | 74 | |
Merchant services, net | 35 | | | 33 | | | 24 | |
Insurance commissions | 47 | | | 16 | | | 15 | |
Realized gain on sale of investment securities available for sale, net | — | | | 33 | | | 60 | |
Fair value adjustment on marketable equity securities, net | (3) | | | 34 | | | 29 | |
Bank-owned life insurance | 32 | | | 3 | | | 3 | |
Gain on sale of leasing equipment, net | 15 | | | — | | | — | |
Gain on acquisition | 431 | | | — | | | — | |
Gain on extinguishment of debt | 7 | | | — | | | — | |
Other noninterest income | 97 | | | 36 | | | 44 | |
Total other noninterest income | 1,272 | | | 508 | | | 477 | |
Total noninterest income | $ | 2,136 | | | $ | 508 | | | $ | 477 | |
Rental Income on PCI loans that have been previously charged-off are additional sources of noninterest income. BancShares records the portion of recoveries not covered under shared-loss agreements as noninterestOperating Leases
Rental income rather than as an adjustment to the allowancefrom equipment we lease for loan losses. Charge-offs on PCI loans are recorded against the discount recognized on the date of acquisition versus through the allowance for loan losses unless an allowance was established subsequent to the acquisition date due to declining expected cash flow.
For the year ended December 31, 2017, total2022 was $864 million. Rental income is a new revenue source for BancShares in 2022 due to the CIT Merger. Rental income is generated primarily in the Rail segment and, to a lesser extent, in the Commercial Banking segment. Revenue is generally dictated by the size of the portfolio, utilization of the railcars, re-pricing of equipment renewed upon lease maturities and pricing on new leases. Re-pricing refers to the rental rate in the renewed equipment contract compared to the prior contract. Refer to the Rail discussion in the “Results by Business Segment” section of this MD&A for further details.
Other Noninterest Income
Other noninterest income for the year ended December 31, 2022 was $641.0 million,$1.27 billion, compared to $488.1$508 million in 2021. The $431 million gain on acquisition related to the CIT Merger was a significant component of the increase as further discussed in Note 2 — Business Combinations. The remaining increase was primarily due to the additional activity related to the CIT Merger, both complimentary to existing BancShares services and products, as well as expanding offerings with new items such as factoring services.
The comparison for the same period in 2016, an increase of $153.0 million, or by 31.3 percent. Excluding $134.7 million in gains onyear ended December 31, 2022 to the HCByear ended December 31, 2021 reflects increases and Guaranty acquisitions in 2017 and the $5.8 million in gains on the FCSB and NMSB acquisitions in 2016, totaldecreases among various noninterest income increased $24.0 million, or by 5.0 percent.accounts. The year-to-date change was attributable to the following:more significant variances are explained below.
Merchant•Fee income and cardholder services incomeother service charges, consisting of items such as capital market-related fees, fees for lines and letters of credit, and servicing fees, increased by $20.1$121 million, primarily reflecting the added CIT activity.
•Wealth management services increased by $13 million, primarily due to increases in sales volumeadvisory and income from the Guaranty acquisition.transactions fees and assets under management.
Other income increased by $12.7 million, driven primarily by the early termination of two forward-starting FHLB advances which resulted in a realized gain of $12.5 million.
•Service charges on deposit accounts increased by $11.8$5 million. While the volume of transactions was higher compared to 2021, the modest increase in service charges on deposit accounts was reflective of our eliminating NSF fees and lowering overdraft fees on consumer accounts beginning mid-year 2022.
•Factoring commissions totaled $104 million during 2022 on factoring volume of $26.13 billion.
•Cardholder services increased by $15 million and merchant services increased by $2 million, primarily attributabledue to increases in the volume of transactions processed.
•Insurance commissions increased by $31 million, reflecting activity related to the Guaranty acquisition, as well as increased fees chargedCIT Merger.
•Realized gains on certain transactions.sale of investment securities decreased by $33 million.
Wealth management services•The fair market value adjustment on marketable equity securities resulted in a $37 million decline in noninterest income, reflecting lower stock prices on equity securities.
•BOLI income increased by $6.5$29 million driven primarily by an increase in sales volume on annuity products, increased brokerage income, and higher commissions earned on trust services.
Lower FDIC shared-loss receivable adjustments of $3.5 million primarily due to a decreasethe added policies with the CIT Merger. However, management decided in OREOlate 2022 to surrender $1.25 billion of BOLI policies early, and loan expenses relatedredeploy that cash into higher earning assets. Therefore, BOLI income going forward will be lower than the 2022 level. A portion of the proceeds were collected in December, with the remainder expected to shared-loss agreements.
Mortgage income increased $2.9be received throughout 2023. Income tax expense of $55 million primarily attributable to interest rate movements and mortgage servicing rights retained was recognized related to the early surrender of the BOLI policies. See Note 21 — Income Taxes and Note 10 — Other Assets.
•Gain on sale of certain residential mortgage loans.
leasing equipment totaled $15 million during 2022, primarily related to equipment sold in the Commercial Banking segment.Gains•The gain on extinguishment of debt primarily related to the redemption of approximately $2.90 billion of borrowings assumed in the CIT Merger, resulting in a $7 million gain.
•Other noninterest income consisted of items such as gain on sales of securities decreased by $22.4 million due to lower investment portfolio sales in 2017 compared to 2016.
Net impact from the FDIC shared-loss termination of $16.6 million recognized in 2016.
For theother assets including OREO, fixed assets and loans and non-marketable securities. The year ended December 31, 2016, total noninterest2022 included: $18 million of property tax income, was $488.1net gain of $15 million comparedrelated derivatives and foreign currency exchange, $14 million gain on sale of OREO property, $6 million gain on sale of a corporate aircraft acquired in the CIT Merger, and $5 million settlement gain related to $467.1 million for the same period in 2015, an increase of $21.0 million, or by 4.5 percent. Excluding the $5.8 million in gains on the FCSB and NMSB acquisitions in 2016 and the $42.9 million in gains on the CCBT acquisition in 2015, total noninterest income increased $58.1 million, or by 13.7 percent. The year-to-date change was attributable to the following:returned leasing equipment.
Merchant and cardholder services income increased by $17.6 million, reflecting sales volume growth.
Net impact from the FDIC shared-loss termination of $16.6 million.
Gains on sales of securities increased by $15.9 million.
Lower FDIC receivable adjustments of $9.3 million resulting from a reduction in claims and lower amortization expense due to the early termination of the shared-loss agreements.
NONINTEREST EXPENSE
Table 9
NONINTEREST EXPENSE
Table 7
Noninterest Expense
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Depreciation on operating lease equipment | $ | 345 | | | $ | — | | | $ | — | |
Maintenance and other operating lease expenses | 189 | | | — | | | — | |
Operating expenses: | | | | | |
Salaries and benefits | 1,396 | | | 759 | | | 722 | |
Net occupancy expense | 194 | | | 117 | | | 117 | |
Equipment expense | 216 | | | 119 | | | 116 | |
Professional fees | 57 | | | 20 | | | 17 | |
Third-party processing fees | 103 | | | 60 | | | 45 | |
FDIC insurance expense | 31 | | | 14 | | | 13 | |
Marketing expense | 53 | | | 10 | | | 10 | |
Merger-related expenses | 231 | | | 29 | | | 17 | |
Intangible asset amortization | 23 | | | 12 | | | 15 | |
Other noninterest expense | 237 | | | 94 | | | 117 | |
Total operating expenses | 2,541 | | | 1,234 | | | 1,189 | |
Total noninterest expense | $ | 3,075 | | | $ | 1,234 | | | $ | 1,189 | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| Year ended December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
Salaries and wages | $ | 475,214 |
| | $ | 428,351 |
| | $ | 429,742 |
|
Employee benefits | 113,231 |
| | 104,518 |
| | 113,309 |
|
Occupancy expense | 104,690 |
| | 102,609 |
| | 98,191 |
|
Equipment expense | 97,478 |
| | 92,501 |
| | 92,639 |
|
Merchant processing | 78,537 |
| | 71,150 |
| | 62,473 |
|
Cardholder processing | 30,573 |
| | 29,207 |
| | 25,296 |
|
FDIC insurance expense | 22,191 |
| | 20,967 |
| | 18,340 |
|
Collection and foreclosure-related expenses | 14,407 |
| | 13,379 |
| | 12,311 |
|
Processing fees paid to third parties | 25,673 |
| | 18,976 |
| | 18,779 |
|
Cardholder reward programs | 9,956 |
| | 10,615 |
| | 11,069 |
|
Telecommunications | 12,172 |
| | 14,496 |
| | 14,406 |
|
Consultant | 14,963 |
| | 10,931 |
| | 8,925 |
|
Advertising | 11,227 |
| | 10,239 |
| | 12,431 |
|
Core deposit intangible amortization | 17,194 |
| | 16,851 |
| | 18,892 |
|
Merger-related expenses | 9,015 |
| | 5,341 |
| | 14,174 |
|
Other | 95,014 |
| | 98,607 |
| | 87,938 |
|
Total noninterest expense | $ | 1,131,535 |
| | $ | 1,048,738 |
| | $ | 1,038,915 |
|
Depreciation on Operating Lease Equipment
ForDepreciation expense on operating lease equipment is primarily related to rail equipment and small and large ticket equipment we own and lease to others. Periodically, depreciation expense could include adjustments to residual values. Operating lease activity is in the Rail and Commercial Banking segments. The useful lives of rail equipment is generally longer in duration, 40-50 years, whereas small and large ticket equipment is generally 3-10 years. Refer to the Rail discussion in the section entitled “Results by Business Segments” of this MD&A for further details.
Maintenance and Other Operating Lease Expenses
Our Rail segment provides railcars primarily pursuant to full-service lease contracts under which Rail as lessor is responsible for railcar maintenance and repair. Maintenance and other operating lease expenses is recorded when incurred and totaled $189 million for the year ended December 31, 2017, total noninterest expense was $1.13 billion, compared2022. Maintenance and other operating lease expenses relate to $1.05 billion for the same period in 2016, an increase of $82.8 million, or 7.9 percent. The year-to-date change was primarily attributable to the following:
Personnel expense, which includes salaries, wagesequipment ownership and employee benefits, increased by $55.6 million primarily driven by acquired bank personnel, merit increases, staff additions, and payroll incentive plans.
Merchant processing expense increased by $7.4 million aligned with higher sales volumes during 2017.
Processing fees paid to third parties increased by $6.7 million primarily due to core processing expenses related to the acquisitions of Guaranty and HCB.
Equipment expense increased by $5.0 million attributable to investments in new technology as well as upgrades to existing equipment.
Consultant expenses increased by $4.0 million primarily due to regulatory, accounting and compliance-related services.
Merger-related expense increased by $3.7 million primarily driven byleasing costs associated with the GuarantyRail portfolio and HCB acquisitionstend to be variable. Maintenance and other operating lease expenses includes repair costs for railcars put back on lease and storage costs for cars coming off lease. Refer to the Rail discussion in 2017.
the section entitled “Results by Business Segments” of this MD&A for further details.For
Operating Expenses
The primary components of operating expenses are salaries and related employee benefits, occupancy, and equipment expense. Operating expenses for the year ended December 31, 2016, total noninterest expense was $1.052022 were $2.54 billion, an increase of $1.31 billion compared to $1.04$1.23 billion in 2021. The increase was primarily related to the CIT Merger due to factors such as higher employee headcount, higher merger-related expenses, more branches and office space, and additional technology systems as further described below.
•Salaries and benefits increased by $637 million, primarily reflecting higher salary expense due to the CIT Merger, as well as new hires, promotions and other salary adjustments, higher costs for temporary workers, and higher revenue-based incentive compensation, partially offset by lower employee benefit costs. The staff additions were the result of building out teams to support our move to large bank compliance, as well as to backfill vacancies.
•Net occupancy expense increased $77 million, reflecting added branches and office space from the CIT Merger. Net occupancy expense includes rent expense on leased office space and depreciation on buildings we own.
•Equipment expense increased $97 million, primarily reflecting the additional costs for the same period in 2015, an increaseIT systems from the CIT Merger.
•Professional fees increased $37 million, primarily reflecting higher levels of $9.8 million, or 0.9 percent. The year-to-date change was primarily attributable to the following:accounting, consulting and legal costs associated with being a larger company.
Processing expenses for merchant and cardholder services•Third-party processing fees increased by $12.6 million aligned with higher sales volume.
Other expense increased by $10.7$43 million, primarily as a result of higher operational losses, including losses on debitthe CIT Merger and credit cards of $4.5our continued investments in digital and technology to support revenue-generating businesses and improve internal processes.
•FDIC insurance expense increased $17 million, and costs related to branch closures of $3.2 million.reflecting the additional deposits acquired in the CIT Merger.
Occupancy•Marketing expense increased by $4.4$43 million, which includes marketing efforts related to the Direct Bank.
•Merger-related expenses increased by $202 million, and includes severance, retention, consulting and legal costs.
•Intangible amortization increased $11 million, as a result of repairs to bank buildingsadditional amortization on core deposit intangibles related to Hurricane Matthew andthe CIT Merger. See Note 2 — Business Combinations for additional information.
•Other noninterest expense for the year ended December 31, 2022 was $237 million, an increase in depreciation expense for technological investments put into production during 2016.
FDIC insurance expense increased $2.6 million due to a higher surcharge imposed during 2016.
Employee benefits expense decreased by $8.8 million drivenof $143 million. The increase was primarily by lower pension costs as a result of an increaserelated to the discount rate used to estimate pension expense in 2016.
Merger-related expense decreased by $8.8 million due primarily to increasedimpacts of the CIT Merger. Other expenses included costs related to insurance and other taxes (e.g. property tax), telecommunications, travel, consulting, foreclosure, collections, and appraisals. Some of the Bancorporation merger in 2015.larger expense categories for the year ended December 31, 2022 included: insurance and taxes of $40 million, telecommunication expenses of $23 million, property tax expenses of $20 million and travel expenses of $17 million.
INCOME TAXES
For 2017, income tax expense was $219.9 million compared to $125.6 million during 2016 and $122.0 million during 2015, reflecting effective tax rates of 40.5 percent, 35.8 percent and 36.7 percent during the respective periods. The increase in theTable 8
Income Tax Data
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Income before income taxes | $ | 1,362 | | | $ | 701 | | | $ | 618 | |
Income taxes | 264 | | | 154 | | | 126 | |
Effective tax rate | 19.4 | % | | 22.0 | % | | 20.4 | % |
BancShares’ global effective tax rate during 2017(“ETR”) was 19.4%, 22.0% and 20.4% for the years ended December 31, 2022, 2021 and 2020, respectively. The decrease in the income tax rate for the year ended December 31, 2022 from the year ended December 31, 2021 was primarily due to the re-measurement of deferred tax assets as a resultnon-taxable nature of the Taxbargain purchase gain from the CIT Merger, partially offset by the surrender of certain BOLI policies. In the fourth quarter, BancShares made a strategic decision to exit $1.25 billion of BOLI policies. The surrender of the policies resulted in a total tax charge of $55 million.
The ETR is impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to valuation allowances, and discrete items. The ETR in future periods may vary from the actual 2022 ETR due to changes in these factors.
BancShares monitors and evaluates the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.
BancShares has determined that the Inflation Reduction Act signed into law on August 16, 2022 effective for tax years beginning after December 31, 2022 is not expected to have a material impact on BancShares’ Consolidated Balance Sheets, Statements of Income, and Statements of Changes of Cash Flows.
See Note 21 — Income Taxes for additional information.
RESULTS BY BUSINESS SEGMENT
Prior to the CIT Merger, BancShares operated with centralized management and combined reporting and, therefore, BancShares operated as one consolidated reportable segment. BancShares began reporting multiple segments during the first quarter of 2022 and now reports General Banking, Commercial Banking, Rail, and Corporate segments. We 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.
For detailed descriptions of each of the segment’s products and services, refer to Item 1. Business of this Annual Report on Form 10-K and Note 23 — Business Segments. Results in our segments reflect our funds transfer policy and allocation of expenses. Items not allocated to any of the three operating segments and, when applicable, certain select items, are reflected in the Corporate segment.
General Banking
The General Banking segment delivers products and services to consumers and businesses through our extensive network of branches and various digital channels. We offer a full suite of deposit products, loans, cash management, wealth, payments and various other fee-based services.
Table 9
General Banking: Financial Data and Metrics
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
Earnings Summary | 2022 | | 2021 | | 2020 |
Net interest income | $ | 1,942 | | | $ | 1,447 | | | $ | 1,391 | |
Provision (benefit) for credit losses | 11 | | | (37) | | | 58 | |
Net interest income after provision (benefit) for credit losses | 1,931 | | | 1,484 | | | 1,333 | |
Noninterest income | 472 | | | 433 | | | 379 | |
Noninterest expense | 1,570 | | | 1,179 | | | 1,146 | |
Income before income taxes | 833 | | | 738 | | | 566 | |
Income tax expense | 204 | | | 162 | | | 116 | |
Net income | $ | 629 | | | $ | 576 | | | $ | 450 | |
Select Period End Balances | | | | | |
Loans and leases | $ | 42,930 | | | $ | 31,820 | | | $ | 32,235 | |
Deposits | 84,361 | | | 51,344 | | | 43,391 | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
Results for 2022 include additional activity from the CIT Merger.
The increase in net income for the year ended December 31, 2022 was due to higher NII and noninterest income, partially offset by higher provision for credit losses and noninterest expense. NII increased due to the added earning assets from the CIT Merger, as well as solid loan growth during the year. The increase in the provision for credit losses reflects the higher loans and leases, due to the CIT Merger and growth, as well as moderate deterioration in the macroeconomic forecasts. Noninterest expense increased reflecting the CIT Merger, and items discussed in the consolidated section entitled “Noninterest Expenses” of this MD&A.
The increase in loans and leases at December 31, 2022 reflected the additional residential mortgages and consumer loans acquired in the CIT Merger, partially offset by run-off of SBA-PPP loans. Subsequent to the CIT Merger, loans and leases increased, reflecting strong demand through our branch network. Growth was primarily concentrated in commercial and business loans. Our consumer mortgage loans grew modestly, reflecting lower prepayments and originating loans (primarily adjustable rate mortgage products) that were held on-balance sheet.
Deposits include deposits from the branch, Direct Bank, and CAB channels. The additional branches acquired in the CIT Merger were mostly in California. The increase in deposits at December 31, 2022 was reflective of deposits acquired in the CIT Merger. Subsequent to the CIT Merger, deposits declined during the second and third quarters, reflecting lower money market accounts, partially offset by an increase in savings accounts. Deposits grew in the fourth quarter of 2022, primarily due to growth in savings accounts and time deposits, partially offset by a decline in noninterest checking.
For further information, refer to the discussions in the “Net Interest Income,” “Net Interest Margin” and “Balance Sheet Analysis—Interest-Bearing Liabilities—Deposits” sections of this MD&A.
Commercial Banking
The Commercial Banking segment provides a range of lending, leasing, capital markets, asset management and other financial and advisory services primarily to small and middle market companies in a wide range of industries.
Table 10
Commercial Banking: Financial Data and Metrics
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
Earnings Summary | 2022 | | 2021 | | 2020 |
Net interest income | $ | 889 | | | $ | 17 | | | $ | 15 | |
Provision for credit losses | 121 | | | — | | | — | |
Net interest income after provision for credit losses | 768 | | | 17 | | | 15 | |
Noninterest income | 521 | | | — | | | — | |
Noninterest expense | 746 | | | 3 | | | 3 | |
Income before income taxes | 543 | | | 14 | | | 12 | |
Income tax expense | 128 | | | 3 | | | 2 | |
Net income | $ | 415 | | | $ | 11 | | | $ | 10 | |
Select Period End Balances | | | | | |
Loans and leases | $ | 27,773 | | | $ | 552 | | | $ | 554 | |
Deposits | 3,225 | | | 62 | | | 40 | |
| | | | | |
Results for 2022 primarily reflected activity from the legacy CIT commercial businesses.
The increase in net income for the year ended December 31, 2022 was due to higher NII and noninterest income, partially offset by higher provision for credit losses and noninterest expense. The provision for credit losses reflects moderate deterioration in the macroeconomic forecasts and loan portfolio growth. Net interest income increased due to the added earning assets from the CIT Merger, as well as solid loan growth during the year. Noninterest income included rental income on operating lease equipment acquired in the CIT Merger of $212 million. Noninterest expense included operating expenses, and depreciation on operating lease equipment of $169 million for the year ended December 31, 2022. Operating expenses for the year ended December 31, 2022 included items discussed previously in the “Noninterest Expense” section of this MD&A.
The increases in loans and leases and deposits at December 31, 2022 were primarily due to those acquired in the CIT Merger. Subsequent to the CIT Merger, loans and leases increased, reflecting growth related to equipment finance, as well as from a number of our industry verticals, such as healthcare and technology. This segment also includes our factoring business acquired in the CIT Merger.
For further information, refer to the discussions in the “Net Interest Income,” “Net Interest Margin” and “Balance Sheet Analysis—Interest-Bearing Liabilities—Deposits” sections of this MD&A.
Rail
Our Rail segment offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenues are primarily generated from rental income on operating leases.
Table 11
Rail: Financial Data and Metrics
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
Earnings Summary | 2022 | | 2021 | | 2020 |
Rental income on operating lease equipment | $ | 652 | | | $ | — | | | $ | — | |
Depreciation on operating lease equipment | 176 | | | — | | | — | |
Maintenance and other operating lease expenses | 189 | | | — | | | — | |
Adjusted rental income on operating lease equipment(1) | 287 | | | — | | | — | |
Interest expense, net | 80 | | | — | | | — | |
Noninterest income | 5 | | | — | | | — | |
Operating expenses | 63 | | | — | | | — | |
Income before income taxes | 149 | | | — | | | — | |
Income tax expense | 37 | | | — | | | — | |
Net income | $ | 112 | | | $ | — | | | $ | — | |
Select Period End Balances | | | | | |
Operating lease equipment, net | $ | 7,433 | | | $ | — | | | $ | — | |
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(1) Adjusted rental income on operating lease equipment is a non-GAAP measure. See the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation from the GAAP measure (segment net income) to the non-GAAP measure (adjusted rental income on operating lease equipment).
Net income and adjusted rental income on operating lease equipment are utilized to measure the profitability of our Rail segment. Adjusted rental income on operating lease equipment reflects rental income on operating lease equipment less depreciation, maintenance and other operating lease expenses. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this segment. NII is not used because it includes the impact of debt costs funding our operating lease assets but excludes the associated net rental income.
Net income and adjusted rental income on operating lease equipment for the year ended December 31, 2022 was enacted$112 million and $287 million, respectively. Railcar depreciation is recognized on a straight-line basis over the estimated service life of the asset. Maintenance and other operating lease expenses reflect costs for railcars put back on lease. Other noninterest income included a $5 million settlement gain related to returned lease equipment.
Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 130% of the average prior or expiring lease rate during the fourth quarter. Our railcar utilization, including commitments to lease, at December 22, 201731, 2022 was 97.7%.
Portfolio
Rail customers include all of the U.S. and reducesCanadian Class I railroads (i.e., railroads with annual revenues of approximately $500 million and greater), other railroads, as well as manufacturers and commodity shippers. Our total operating lease fleet at December 31, 2022 consisted of approximately 119,200 railcars, up slightly from approximately 118,700 railcars acquired in the federal corporateCIT Merger. The following table reflects the proportion of railcars by type based on units and net investment, respectively:
Table 12
Operating lease Railcar Portfolio by Type (units and net investment)
| | | | | | | | | | | |
| December 31, 2022 |
Railcar Type | Total Owned Fleet - % Total Units | | Total Owned Fleet - % Total Net Investment |
Covered Hoppers | 43 | % | | 41 | % |
Tank Cars | 29 | % | | 40 | % |
Mill/Coil Gondolas | 8 | % | | 6 | % |
Coal | 8 | % | | 1 | % |
Boxcars | 6 | % | | 6 | % |
Other | 6 | % | | 6 | % |
Total | 100 | % | | 100 | % |
Table 13
Rail Operating Lease Equipment by Obligor Industry
| | | | | | | | | | | |
dollars in millions | December 31, 2022 |
Manufacturing | $ | 3,016 | | | 41 | % |
Rail | 1,981 | | | 27 | % |
Wholesale | 1,101 | | | 15 | % |
Oil and gas extraction / services | 552 | | | 7 | % |
Energy and utilities | 242 | | | 3 | % |
Other | 541 | | | 7 | % |
Total | $ | 7,433 | | | 100 | % |
Corporate
Certain items that are not allocated to operating segments are included in the Corporate segment. For descriptions of items not allocated, see Item 1 Business, and Note 23 — Business Segments.
Table 14
Corporate: Financial Data and Metrics
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
Earnings Summary | 2022 | | 2021 | | 2020 |
Net interest income (expense) | $ | 195 | | | $ | (74) | | | $ | (18) | |
Provision for credit losses | 513 | | | — | | | — | |
Net interest income (expense) after provision for credit losses | (318) | | | (74) | | | (18) | |
Noninterest income | 486 | | | 75 | | | 98 | |
Noninterest expense | 331 | | | 52 | | | 40 | |
Income (loss) before income taxes | (163) | | | (51) | | | 40 | |
Income tax expense (benefit) | (105) | | | (11) | | | 8 | |
Net income (loss) | $ | (58) | | | $ | (40) | | | $ | 32 | |
| | | | | |
| | | | | |
Results for the year ended December 31, 2022 were primarily due to impacts from the CIT Merger, as well as net benefit from rising rates on NII. Merger-related items included the Day 2 provision for credit losses of $513 million, a gain on acquisition of $431 million in noninterest income, $231 million of merger-related expenses, a reduction of $27 million in other noninterest expense related to the termination of certain post retirement plans assumed in the CIT Merger, and income tax expense of $55 million related to the strategic decision to surrender $1.25 billion of BOLI policies. The income tax rate to 21 percent effective January 1, 2018. 2017 tax expense includes a provisional $25.8 million to reflectalso reflects the Tax Act changes. The ultimate impact may differ from this provisional amount due to additional analysis, changes in interpretations and assumptions and additional regulatory guidance that may be issued. A reduction inof the North Carolina corporate income tax rate applicable to the 2016 tax year contributed to the lower effective tax rate for 2016 compared to 2015. Based upon current 2018 projections, we expect the 2018 effective tax rate will be approximately 23 percent. The actual 2018 effective tax rate will depend upon the nature and amount of future income and expenses as well as transactions with discrete tax effects.non-taxable gain on acquisition.
BALANCE SHEET ANALYSIS
INTEREST-EARNING ASSETS
Interest-earning assets include interest-earning deposits at banks, investment securities, assets held for sale and loans and leases, investment securities, and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. RiskierHigher risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk.
We have historically focused on maintaining high-asset quality, which results in a loan and lease portfolio subjectedstrive to strenuous underwriting and monitoring procedures. We avoid high-risk industry concentrations, but we do maintain a concentrationhigh level of owner-occupied real estate loansinterest-earning assets relative to borrowers in medical and medical-related fields. Our focus on asset quality also influences the composition of our investment securities portfolio.total assets, while keeping non-earning assets at a minimum.
Interest-earning assets averaged $32.21Deposits at Banks
Interest-earning deposits at banks at December 31, 2022 totaled $5.03 billion. This was a decrease from $9.12 billion in 2017, comparedat December 31, 2021. The decline related to $30.27 billion in 2016. The increase of $1.94 billion, or 6.4 percent, was primarily the result of strong originated loan growth, the decline in total deposits, and $1.24 billion used for share repurchases. While the loans acquiredCIT Merger added approximately $2.87 billion of interest-earning deposits at banks as of the Merger Date, that amount was offset by the use of cash for the redemption in February of approximately $2.90 billion of debt assumed in the Guaranty and HCB acquisitions.CIT Merger.
Investment securities
Securities
The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity and credit risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares'BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments.interest-earning deposits at banks. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investmentsinterest-earning deposits at banks to decline and use proceeds from maturing securities and prepayments to fund loan demand.growth. See Note C in the Notes to Consolidated Financial Statements1 — Significant Accounting Policies and Basis of Presentation and Note 3 — Investment Securities for additional disclosures regarding investment securities.
The faircarrying value of investment securities was $7.18at December 31, 2022 totaled $19.37 billion. The increase from $13.11 billion at December 31, 2017, an increase2021 primarily reflected the CIT Merger, which added $6.56 billion. The remaining activity during 2022 included purchases of $173.6 million when compared to $7.01$2.74 billion, at December 31, 2016. This follows an increasematurities and paydowns of $145.1 million in total investment securities from December 31, 2015 to December 31, 2016. The increase in 2017$2.07 billion, and 2016 was primarily attributable to investing overnight funds into the investmentother non-cash items, such as fair value changes and amortization.
BancShares’ portfolio and a decline in the net pre-tax unrealized losses on the available for sale portfolio.
As of December 31, 2017, investment securities available for sale had a net pre-tax unrealized lossconsists of $48.8 million, compared to a net pre-tax unrealized loss of $72.7 million as of December 31, 2016. Availablemortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities and corporate bonds. Investment securities available for sale securities are reported at fair value and unrealized gains and losses are included as a component of other comprehensive income,AOCI, net of deferred taxes. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed asAs of December 31, 2017.
Sales of2022, investment securities available for 2017 resulted insale had a net realized gainpre-tax unrealized loss of $4.3$972 million, compared to a net realized gainpre-tax unrealized loss of $26.7$12 million in 2016. The net realized gainas of $4.3 million in 2017 includes gross gains of $11.6 million and gross losses of $7.3 million.
At December 31, 2017, mortgage-backed2021. The fair value of investment securities represented 74.5 percentis impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the investment securities portfolio generally decreases when interest rates increase or when credit spreads widen. Management evaluated the investment securities available for sale comparedin an unrealized loss position and concluded that the unrealized losses related to U.S. Treasury, equity securities, corporate bonds and other, which represented 23.1 percent, 1.5 percent, 0.8 percent and 0.1 percent of the portfolio, respectively. Overnight investments are with the Federal Reserve Bank and other financial institutions.
Due primarily to deployment of overnight funds and spread tighteningchanges in mortgage-backed securities products since December 31, 2016, the carrying value of mortgage-backed securities has increased by $174.0 million. U.S. Treasury securities increased $7.5 million benefiting from rising interest rates in 2017. Government agencyrelative to when the securities decreased $40.4 million as the maturities proceeds were reinvested primarily into other types ofpurchased, and that no ACL for investment securities in the investment portfolio. Equity securities, comprised of investments in other financial institutions, increased $21.7 million since December 31, 2016 primarily due to higher market pricesavailable for sale was needed at December 31, 2017.2022 and 2021.
Table 10
INVESTMENT SECURITIES
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31 |
| 2017 | | 2016 | | 2015 |
(Dollars in thousands) | Cost | | Fair value | | Cost | | Fair value | | Cost | | Fair value |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | 1,658,410 |
| | 1,657,864 |
| | 1,650,675 |
| | 1,650,319 |
| | 1,675,996 |
| | 1,674,882 |
|
Government agency | — |
| | — |
| | 40,291 |
| | 40,398 |
| | 498,804 |
| | 498,660 |
|
Mortgage-backed securities | 5,428,074 |
| | 5,349,426 |
| | 5,259,466 |
| | 5,175,425 |
| | 4,692,447 |
| | 4,668,198 |
|
Equity securities | 75,471 |
| | 105,208 |
| | 71,873 |
| | 83,507 |
| | 7,935 |
| | 8,893 |
|
Corporate bonds | 59,414 |
| | 59,963 |
| | 49,367 |
| | 49,562 |
| | 8,500 |
| | 8,500 |
|
Other | 7,645 |
| | 7,719 |
| | 7,615 |
| | 7,369 |
| | 2,115 |
| | 2,160 |
|
Total investment securities available for sale | $ | 7,229,014 |
| | $ | 7,180,180 |
| | 7,079,287 |
| | 7,006,580 |
| | 6,885,797 |
| | 6,861,293 |
|
Investment securities held to maturity | | | | | | | | | | | |
Mortgage-backed securities | 76 |
| | 81 |
| | 98 |
| | 104 |
| | 255 |
| | 265 |
|
Total investment securities | $ | 7,229,090 |
| | $ | 7,180,261 |
| | $ | 7,079,385 |
| | $ | 7,006,684 |
| | $ | 6,886,052 |
| | $ | 6,861,558 |
|
Table 11 presents theBancShares’ portfolio of investment securities portfolioheld to maturity consists of similar mortgage-backed securities, U.S. Treasury Notes and government agency securities described above, as well as securities issued by the Supranational Entities and Multilateral Development Banks and FDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the Supranational Entities and Multilateral Development Banks and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, BancShares management determined that no ACL was needed for investment securities held to maturity at December 31, 20172022 and 2021.
Table 15presents the major categories of investment securities at December 31, 2022, and 2021.
Table 15
Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | | | December 31, 2021 | | |
| Composition(1) | | Amortized cost | | Fair value | | | | | | | | Composition(1) | | Amortized cost | | Fair value | | | | | | |
Investment securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | 10.6 | % | | $ | 2,035 | | | $ | 1,898 | | | | | | | | | 15.4 | % | | $ | 2,007 | | | $ | 2,005 | | | | | | | |
Government agency | 0.9 | % | | 164 | | | 162 | | | | | | | | | 1.7 | % | | 221 | | | 221 | | | | | | | |
Residential mortgage-backed securities | 26.8 | % | | 5,424 | | | 4,795 | | | | | | | | | 36.2 | % | | 4,757 | | | 4,729 | | | | | | | |
Commercial mortgage-backed securities | 9.0 | % | | 1,774 | | | 1,604 | | | | | | | | | 12.6 | % | | 1,648 | | | 1,640 | | | | | | | |
Corporate bonds | 3.0 | % | | 570 | | | 536 | | | | | | | | | 4.7 | % | | 582 | | | 608 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total investment securities available for sale | 50.3 | % | | $ | 9,967 | | | $ | 8,995 | | | | | | | | | 70.6 | % | | $ | 9,215 | | | $ | 9,203 | | | | | | | |
Investment in marketable equity securities | 0.5 | % | | $ | 75 | | | $ | 95 | | | | | | | | | 0.7 | % | | $ | 73 | | | $ | 98 | | | | | | | |
Investment securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | 2.4 | % | | $ | 474 | | | $ | 424 | | | | | | | | | — | % | | $ | — | | | $ | — | | | | | | | |
Government agency | 7.6 | % | | 1,548 | | | 1,362 | | | | | | | | | — | % | | — | | | — | | | | | | | |
Residential mortgage-backed securities | 21.7 | % | | 4,605 | | | 3,882 | | | | | | | | | 17.7 | % | | 2,322 | | | 2,306 | | | | | | | |
Commercial mortgage-backed securities | 16.1 | % | | 3,355 | | | 2,871 | | | | | | | | | 11.0 | % | | 1,485 | | | 1,451 | | | | | | | |
Supranational securities | 1.4 | % | | 295 | | | 254 | | | | | | | | | — | % | | — | | | — | | | | | | | |
Other | — | % | | 2 | | | 2 | | | | | | | | | — | % | | 2 | | | 2 | | | | | | | |
Total investment securities held to maturity | 49.2 | % | | $ | 10,279 | | | $ | 8,795 | | | | | | | | | 28.7 | % | | $ | 3,809 | | | $ | 3,759 | | | | | | | |
Total investment securities | 100.0 | % | | $ | 20,321 | | | $ | 17,885 | | | | | | | | | 100.0 | % | | $ | 13,097 | | | $ | 13,060 | | | | | | | |
(1) Calculated as a percentage of the total fair value of investment securities. | | | | | | |
Table 16presents the weighted average yields for investment securities available for sale and held to maturity at December 31, 2022, segregated by major category with ranges of contractual maturities,maturities. The weighted average contractual maturities and taxable equivalentyield on the portfolio is calculated using security-level annualized yields.
Table 1116
INVESTMENT SECURITIESWeighted Average Yield on Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Within One Year | | One to Five Years | | Five to 10 Years | | After 10 Years | | Total |
Investment securities available for sale: | | | | | | | | | |
U.S. Treasury | 3.50 | % | | 0.96 | % | | — | % | | — | % | | 1.00 | % |
Government agency | 3.86 | % | | 3.62 | % | | 3.42 | % | | 3.80 | % | | 3.45 | % |
Residential mortgage-backed securities | 1.65 | % | | 2.38 | % | | 3.90 | % | | 1.83 | % | | 1.87 | % |
Commercial mortgage-backed securities | 3.75 | % | | 3.55 | % | | 4.67 | % | | 2.56 | % | | 2.74 | % |
Corporate bonds | 5.00 | % | | 6.73 | % | | 5.34 | % | | 4.67 | % | | 5.47 | % |
| | | | | | | | | |
Total investment securities available for sale | 3.72 | % | | 1.43 | % | | 4.74 | % | | 2.00 | % | | 2.08 | % |
| | | | | | | | | |
Investment securities held to maturity: | | | | | | | | | |
U.S. Treasury | — | % | | 1.37 | % | | 1.57 | % | | — | % | | 1.38 | % |
Government agency | 0.44 | % | | 1.38 | % | | 1.79 | % | | — | % | | 1.49 | % |
Residential mortgage-backed securities(1) | — | % | | 8.44 | % | | 2.63 | % | | 1.90 | % | | 1.90 | % |
Commercial mortgage-backed securities(1) | — | % | | — | % | | 2.13 | % | | 2.65 | % | | 2.65 | % |
Supranational securities | — | % | | 1.35 | % | | 1.68 | % | | — | % | | 1.56 | % |
Other | 0.34 | % | | 0.20 | % | | — | % | | — | % | | 0.32 | % |
Total investment securities held to maturity | 0.44 | % | | 1.37 | % | | 1.76 | % | | 2.21 | % | | 2.05 | % |
|
| | | | | | | | | | | | |
| December 31, 2017 |
| | | | | Average maturity (Yrs./mos.) | | Taxable equivalent yield |
(Dollars in thousands) | Cost | | Fair value | | |
Investment securities available for sale: | | | | |
U.S. Treasury | | | | | | | |
Within one year | $ | 808,768 |
| | $ | 808,301 |
| | 0/7 | | 1.35 | % |
One to five years | 849,642 |
| | 849,563 |
| | 1/4 | | 1.85 |
|
Total | 1,658,410 |
| | 1,657,864 |
| | 1/0 | | 1.61 |
|
Mortgage-backed securities(1) | | | | | | |
One to five years | 890 |
| | 886 |
| | 2/2 | | 1.73 |
|
Five to ten years | 1,086,285 |
| | 1,072,184 |
| | 9/7 | | 1.91 |
|
Over ten years | 4,340,899 |
| | 4,276,356 |
| | 14/11 | | 1.98 |
|
Total | 5,428,074 |
| | 5,349,426 |
| | 13/10 | | 1.97 |
|
Corporate bonds | | | | | | | |
Five to ten years | 59,414 |
| | 59,963 |
| | 8/4 | | 6.08 |
|
Total | 59,414 |
| | 59,963 |
| | 8/4 | | 6.08 |
|
Other | | | | | | | |
Over ten years | 7,645 |
| | 7,719 |
| | 23/9 | | 6.57 |
|
Total | 7,645 |
| | 7,719 |
| | 23/9 | | 6.57 |
|
Equity securities | 75,471 |
| | 105,208 |
| | — | | — |
|
Total investment securities available for sale | 7,229,014 |
| | 7,180,180 |
| | | | |
Investment securities held to maturity: | | | | | | | |
Mortgage-backed securities | | | | | | |
One to five years | 3 |
| | 3 |
| | 4/8 | | 2.93 |
|
Five to ten years | 3 |
| | 3 |
| | 7/5 | | 2.74 |
|
Over ten years | 70 |
| | 75 |
| | 11/7 | | 7.41 |
|
Total investment securities held to maturity | 76 |
| | 81 |
| | 11/2 | | 7.07 |
|
Total investment securities | $ | 7,229,090 |
| | $ | 7,180,261 |
| | | | |
(1) Mortgage-backedResidential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity.maturity at December 31, 2022. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers have the right to prepay the underlying loans.
Assets Held for Sale
Certain residential mortgage loans.loans and commercial loans are originated with the intent to be sold to investors or lenders, respectively, and are recorded in assets held for sale at fair value. In addition, BancShares may change its strategy for certain loans initially held for investment and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value.
Table 12 provides information on investment securities issuedAssets held for sale at December 31, 2022 were $60 million, a decrease of $39 million compared to $99 million at December 31, 2021. The decrease is primarily related to the sale of residential mortgage loans held for sale during 2022, partially offset by any one issuer exceeding ten percent of shareholders' equity.the increase in commercial loans held for sale.
Table 1217
INVESTMENT SECURITIES - ISSUERS EXCEEDING TEN PERCENT OF SHAREHOLDERS' EQUITYAssets Held for Sale
|
| | | | | | | |
| December 31, 2017 |
(Dollars in thousands) | Cost | | Fair Value |
Federal Home Loan Mortgage Corporation | $ | 1,770,572 |
| | $ | 1,744,040 |
|
Federal National Mortgage Association | 3,547,885 |
| | 3,496,787 |
|
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Commercial | $ | 48 | | $ | — | | $ | — |
Consumer | 4 | | 99 | | 125 |
Loans and leases | 52 | | 99 | | 125 |
Operating lease equipment | 8 | | — | | — |
Total assets held for sale | $ | 60 | | $ | 99 | | $ | 125 |
Loans and leases
Leases
Loans and leases held for investment at December 31, 2022 were $23.60$70.78 billion, an increase of $38.41 billion from $32.37 billion at December 31, 2017, a net increase of $1.86 billion, or 8.6 percent, since December 31, 2016. This increase was2021, primarily driven by $1.46 billion of organic growth in the non-PCI portfolio andreflecting the addition of $447.7 million in non-PCI loans$32.71 billion from the Guaranty acquisition.CIT Merger. In addition, during 2022 we continued to see loan growth in our branch network, as well as growth in our Commercial Banking segment related to equipment finance, as well as from a number of our industry verticals, such as healthcare and technology, and growth in both commercial mortgage loans and consumer mortgage loans.
Upon completion of the CIT Merger, we re-evaluated our loan classes to reflect the risk characteristics of the combined portfolio. BancShares reports its commercial loan portfolio in the following classes: commercial construction, owner occupied commercial mortgage, non-owner occupied commercial mortgage, commercial and industrial, and leases. The PCIconsumer portfolio declined over this period by $46.2 million, as a result of loan run-off of $208.8 million, offset by netincludes residential mortgage, revolving mortgage, consumer auto and consumer other. Commercial loans acquired from Guaranty and HCB, which were $97.6 million and $65.0 million, respectively, at December 31, 2017. Loans and leases2022 were $21.74$53.46 billion compared to $22.59 billion at December 31, 2016, a net increase of $1.50 billion, or 7.4 percent, from December 31, 2015 primarily due to organic non-PCI loan growth of $1.41 billion2021, representing 76% and the addition of $225.0 million in non-PCI loans from the Cordia acquisition, offset by a net decline in the PCI portfolio of $141.3 million.
BancShares reports non-PCI and PCI loan portfolios separately and each portfolio is further divided into commercial and non-commercial. Additionally, loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics, such as commercial real estate, commercial & industrial or residential mortgage. Table 13 provides the composition of non-PCI and PCI loans and leases for the past five years.
Non-PCI Loans and Leases
The non-PCI portfolio includes loans that management has the intent and ability to hold and is reported at the principal balance outstanding, net of deferred loan fees and costs. Non-PCI loans include originated commercial, originated noncommercial, purchased non-credit impaired loans and leases and certain purchased revolving credit. Purchased non-credit impaired loans included as non-PCI do not have evidence of credit deterioration at acquisition. Purchased non-impaired loans are initially recorded at their fair value at the date of acquisition.
Non-PCI loans at December 31, 2017 were $22.83 billion, an increase of $1.90 billion from $20.93 billion at December 31, 2016. Non-PCI loans represented 96.8 percent and 96.3 percent70% of total loans and leases, respectively. Consumer loans at December 31, 2017 and December 31, 2016, respectively.
Non-PCI Commercial Loans
The non-PCI commercial loan portfolio is composed of Commercial Mortgage, Commercial and Industrial, Construction and Land Development, Lease Financing, Other Commercial Real Estate and Other Commercial loans. Non-PCI commercial loans2022 were $14.80$17.33 billion, compared to $9.79 billion at December 31, 2017, an increase of $1.04 billion, or 7.5 percent, compared to December 31, 2016, following an increase of $1.13 billion, or 8.9 percent, between December 31, 20162021, representing 24% and December 31, 2015. The increase from both periods was primarily due to strong originated loan growth. The Guaranty acquisition also positively contributed $2.5 million to the non-PCI commercial loan portfolio during 2017.
Non-PCI commercial mortgage loans were $9.73 billion at December 31, 2017. The December 31, 2017 balance increased $702.8 million, or 7.8 percent, since December 31, 2016, following an increase of $751.7 million, or 9.1 percent, between December 31, 2016 and December 31, 2015. We attribute the growth in both years to improving confidence among small business customers and our continued focus on this segment.
Non-PCI commercial and industrial loans were $2.73 billion at December 31, 2017, an increase of $162.9 million, or 6.3 percent, since December 31, 2016, following an increase of $198.5 million, or 8.4 percent, between December 31, 2016 and December 31, 2015. We attribute the growth from both periods to our continued focus on small business customers, particularly among medical, dental or other professional customers.
Non-PCI other commercial real estate loans were $473.4 million at December 31, 2017, an increase of $122.1 million, or 34.8 percent, since December 31, 2016, following an increase of $30.3 million, or 9.4 percent, between December 31, 2016 and December 31, 2015. The current year growth reflects originated loan growth and contributions from the Guaranty acquisition.
Non-PCI Noncommercial Loans
The non-PCI noncommercial loan portfolio is composed of Residential Mortgage, Revolving Mortgage, Consumer and Construction and Land Development loans. Non-PCI noncommercial loans were $8.03 billion at December 31, 2017, an increase of $866.8 million, or 12.1 percent, compared to December 31, 2016, following an increase of $509.0 million, or 7.6 percent between December 31, 2016 and December 31, 2015 primarily due to originated loan growth in both periods. The Guaranty acquisition also positively contributed $445.2 million to the non-PCI noncommercial loan portfolio during 2017.
At December 31, 2017, residential mortgage loans were $3.52 billion, an increase of $634.7 million or 22.0 percent, since December 31, 2016, following an increase of $193.1 million, or 7.2 percent, between December 31, 2016 and December 31, 2015. The increase from both periods reflects originated loan growth and the current year growth was also attributable to the large residential mortgage loan portfolio of $391.4 million acquired in the Guaranty transaction. While a majority of residential mortgage loans originated were sold to investors, other loans, including affordable housing loans, medical mortgage loans and certain construction loans, were originated based on our intent to retain them in the loan portfolio.
At December 31, 2017, revolving mortgage loans were $2.70 billion, an increase of $100.2 million, or 3.9 percent, since December 31, 2016, following an increase of $78.2 million, or 3.1 percent, between December 31, 2016 and December 31, 2015. The increase from both periods was primarily the result of originated loan growth. The increase in 2017 was also attributable to loans acquired in the Guaranty acquisition which were $42.2 million.
At December 31, 2017, consumer loans were $1.56 billion, an increase of $115.0 million, or 8.0 percent, compared to December 31, 2016, following an increase of $226.3 million, or 18.6 percent, between December 31, 2016 and December 31, 2015. Growth in both periods primarily reflects increases in indirect auto lending and our credit card portfolio as well as loans acquired in the Guaranty acquisition during 2017 and the Cordia acquisition during 2016.
Management believes 2017 organic loan growth resulted from improved economic conditions and our initiatives to broaden and diversify the loan portfolio through loan products with high growth potential. Management has maintained sound underwriting standards across all loan products while achieving this growth. Originated loan growth in 2018 will be dependent on overall economic conditions and will continue to be impacted by intense competition for loans and other external factors.
PCI Loans
The PCI portfolio includes loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. All nonrevolving loans are evaluated at acquisition and where a discount is required at least in part due to credit quality, the loans are accounted for under the guidance in ASC Topic 310-30. PCI loans are valued at fair value at the date of acquisition.
PCI loans at December 31, 2017 were $763.0 million, representing 3.2 percent30% of total loans and leases, a decrease of $46.2respectively.
Table 18
Loans and Leases
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Commercial: | | | | | |
Commercial construction | $ | 2,804 | | | $ | 1,238 | | | $ | 1,095 | |
Owner occupied commercial mortgage | 14,473 | | | 12,099 | | | 11,313 | |
Non-owner occupied commercial mortgage | 9,902 | | | 3,041 | | | 3,067 | |
Commercial and industrial | 24,105 | | | 5,937 | | | 7,091 | |
Leases | 2,171 | | | 271 | | | 334 | |
Total commercial | $ | 53,455 | | | $ | 22,586 | | | $ | 22,900 | |
Consumer: | | | | | |
Residential mortgage | 13,309 | | | 6,088 | | | 5,996 | |
Revolving mortgage | 1,951 | | | 1,818 | | | 2,087 | |
Consumer auto | 1,414 | | | 1,332 | | | 1,256 | |
Consumer other | 652 | | | 548 | | | 553 | |
Total consumer | $ | 17,326 | | | $ | 9,786 | | | $ | 9,892 | |
Total loans and leases | 70,781 | | | 32,372 | | | 32,792 | |
Less allowance for credit losses | 922 | | | 178 | | | 225 | |
Net loans and leases | $ | 69,859 | | | $ | 32,194 | | | $ | 32,567 | |
The unamortized discount related to acquired loans was $118 million or 5.7 percent from $809.2and $40 million at December 31, 20162022 and 2021, respectively, as a resultfurther discussed in Note 4 — Loans and Leases.
OPERATING LEASE EQUIPMENT, NET
As detailed in the following table, our operating lease portfolio is mostly comprised of continued loan run-offrail assets. The operating lease portfolios were acquired in the CIT Merger. See the Rail segment discussion in the section entitled “Results by Business Segment” of $208.8 million, offset by net loans acquired from Guaranty and HCB, which were $97.6 million and $65.0 million, respectively, at December 31, 2017.this MD&A for further details on the rail portfolio.
PCI commercial loans were $396.9Table 19
Operating Lease Equipment
| | | | | |
dollars in millions | December 31, 2022 |
Railcars and locomotives(1) | $ | 7,433 | |
Other equipment | 723 | |
Total(1) | $ | 8,156 | |
(1)Includes off-lease rail equipment of $457 million at December 31, 2017, a decrease of $103.0 million, or 20.6 percent, since December 31, 2016, following a decrease of $93.6 million, or 15.8 percent, between December 31, 2016 and December 31, 2015. At December 31, 2017, PCI noncommercial loans were $366.1 million, an increase of $56.9 million, or 18.4 percent, since December 31, 2016, following a decrease of $47.7 million, or 13.4 percent, between December 31, 2016 and December 31, 2015.2022.
Table 13
LOANS AND LEASES
|
| | | | | | | | | | | | | | | | | | | |
| December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Non-PCI loans and leases(1): | | | | | | | | | |
Commercial: | | | | | | | | | |
Construction and land development | $ | 669,215 |
| | $ | 649,157 |
| | $ | 620,352 |
| | $ | 493,133 |
| | $ | 319,847 |
|
Commercial mortgage | 9,729,022 |
| | 9,026,220 |
| | 8,274,548 |
| | 7,552,948 |
| | 6,362,490 |
|
Other commercial real estate | 473,433 |
| | 351,291 |
| | 321,021 |
| | 244,875 |
| | 178,754 |
|
Commercial and industrial | 2,730,407 |
| | 2,567,501 |
| | 2,368,958 |
| | 1,988,934 |
| | 1,081,158 |
|
Lease financing | 894,801 |
| | 826,270 |
| | 730,778 |
| | 571,916 |
| | 381,763 |
|
Other | 302,176 |
| | 340,264 |
| | 314,832 |
| | 353,833 |
| | 175,336 |
|
Total commercial loans | 14,799,054 |
| | 13,760,703 |
| | 12,630,489 |
| | 11,205,639 |
| | 8,499,348 |
|
Noncommercial: | | | | | | | | | |
Residential mortgage | 3,523,786 |
| | 2,889,124 |
| | 2,695,985 |
| | 2,493,058 |
| | 982,421 |
|
Revolving mortgage | 2,701,525 |
| | 2,601,344 |
| | 2,523,106 |
| | 2,561,800 |
| | 2,113,285 |
|
Construction and land development | 248,289 |
| | 231,400 |
| | 220,073 |
| | 205,016 |
| | 122,792 |
|
Consumer | 1,561,173 |
| | 1,446,138 |
| | 1,219,821 |
| | 1,117,454 |
| | 386,452 |
|
Total noncommercial loans | 8,034,773 |
| | 7,168,006 |
| | 6,658,985 |
| | 6,377,328 |
| | 3,604,950 |
|
Total non-PCI loans and leases | $ | 22,833,827 |
| | $ | 20,928,709 |
| | $ | 19,289,474 |
| | $ | 17,582,967 |
| | $ | 12,104,298 |
|
PCI loans: | | | | | | | | | |
Commercial: | | | | | | | | | |
Construction and land development | $ | 13,654 |
| | $ | 20,766 |
| | $ | 33,880 |
| | $ | 78,079 |
| | $ | 78,915 |
|
Commercial mortgage | 358,103 |
| | 453,013 |
| | 525,468 |
| | 577,518 |
| | 642,891 |
|
Other commercial real estate | 17,124 |
| | 12,645 |
| | 17,076 |
| | 40,193 |
| | 41,381 |
|
Commercial and industrial | 6,374 |
| | 11,844 |
| | 15,182 |
| | 27,254 |
| | 17,254 |
|
Other | 1,683 |
| | 1,702 |
| | 2,008 |
| | 3,079 |
| | 866 |
|
Total commercial loans | 396,938 |
| | 499,970 |
| | 593,614 |
| | 726,123 |
| | 781,307 |
|
Noncommercial: | | | | | | | | | |
Residential mortgage | 299,318 |
| | 268,777 |
| | 302,158 |
| | 382,340 |
| | 213,851 |
|
Revolving mortgage | 63,908 |
| | 38,650 |
| | 52,471 |
| | 74,109 |
| | 30,834 |
|
Construction and land development | 644 |
| | — |
| | — |
| | 912 |
| | 2,583 |
|
Consumer | 2,190 |
| | 1,772 |
| | 2,273 |
| | 3,014 |
| | 851 |
|
Total noncommercial loans | 366,060 |
| | 309,199 |
| | 356,902 |
| | 460,375 |
| | 248,119 |
|
Total PCI loans | 762,998 |
| | 809,169 |
| | 950,516 |
| | 1,186,498 |
| | 1,029,426 |
|
Total loans and leases | 23,596,825 |
| | 21,737,878 |
| | 20,239,990 |
| | 18,769,465 |
| | 13,133,724 |
|
Less allowance for loan and lease losses | (221,893 | ) | | (218,795 | ) | | (206,216 | ) | | (204,466 | ) | | (233,394 | ) |
Net loans and leases | $ | 23,374,932 |
| | $ | 21,519,083 |
| | $ | 20,033,774 |
| | $ | 18,564,999 |
| | $ | 12,900,330 |
|
(1) Non-PCI loans include originated and purchased non-impaired loans, including non-accrual and TDR loans.
Allowance for loan and lease losses (ALLL)
The ALLL was $221.9 million at December 31, 2017, representing an increase of $3.1 million since December 31, 2016, following an increase of $12.6 million between December 31, 2016 and December 31, 2015. The ALLL as a percentage of total loans was 0.94 percent at December 31, 2017, compared to 1.01 percent and 1.02 percent at December 31, 2016 and December 31, 2015, respectively. The decline in the ALLL ratio from both periods was primarily due to favorable experience in certain loan loss factors.
BancShares has continued to sustain improvement in credit quality indicators which have reduced the ALLL ratio since December 31, 2016 and December 31, 2015. In the commercial non-PCI loan portfolio, loans with higher credit risk ratings continued to migrate to lower credit risk ratings. The noncommercial non-PCI loan portfolio has sustained low net charge-offs, partially offset by higher delinquency trends.
At December 31, 2017, the ALLL allocated to non-PCI loans was $211.9 million, or 0.93 percent of non-PCI loans and leases, compared to $205.0 million, or 0.98 percent, at December 31, 2016, and $189.9 million, or 0.98 percent, at December 31, 2015.
The increase in the dollar amount of reserves was primarily attributable to originated loan growth.
The ALLL allocated to originated non-PCI loans and leases of $211.3 million at December 31, 2017 was 1.00 percent of originated non-PCI loans and leases, compared to 1.09 percent and 1.14 percent at December 31, 2016 and December 31, 2015, respectively. The decline in the allowance ratio was primarily related to the sustained favorable credit quality trends, offset by originated loan growth. Originated non-PCI loans were $21.13 billion, $18.82 billion, and $16.60 billion at December 31, 2017, December 31, 2016 and December 31, 2015, respectively, and do not include purchased revolving, purchased non-PCI loans or PCI loans.
The ALLL allocated to PCI loans at December 31, 2017 was $10.0 million, or 1.31 percent of PCI loans, compared to $13.8 million, or 1.70 percent, at December 31, 2016, and $16.3 million, or 1.72 percent, at December 31, 2015. The ALLL for PCI loans decreased from both periods primarily due to improved projected cash flows, lower estimated default rates and continued portfolio run-off.
Provision
BancShares recorded $25.7 million net provision expense for loan and lease losses during 2017, compared to net provision expense of $32.9 million for 2016 and $20.7 million for 2015. The decrease in provision expense in 2017 was primarily due to favorable experience in certain loan loss factors, offset by loan growth.
Provision expense on non-PCI loans and leases was $29.1 million during 2017, compared to $34.9 million and $22.9 million in 2016 and 2015, respectively. The decrease in provision expense in 2017 primarily resulted from lower reserves on impaired loans and sustained low loan loss rates. Net charge-offs on non-PCI loans and leases were $22.3 million, $19.7 million, and $15.9 million for 2017, 2016, and 2015, respectively. On an annualized basis, net charge-offs of non-PCI loans and leases represented 0.10 percent of average non-PCI loans and leases during 2017, compared to 0.10 percent during 2016 and 0.09 percent during 2015.
The net provision credit for commercial construction and land development non-PCI loans was $4.3 million for the year ended December 31, 2017, compared to net provision expense of $12.9 million for the same period of 2016. The decrease in provision expense was primarily the result of updating loan loss factors for this portfolio given a decrease in loss experience. This follows an increase in provision expense when comparing 2016 to 2015, primarily the result of updating of loan loss factors for an increase in loss experience.
Commercial mortgage non-PCI loans had a net provision credit of $5.7 million in 2017, compared to $21.9 million in 2016. The net provision credit in both years was primarily the result of improvements in credit risk ratings and lower loan defaults.
The provision expense for commercial and industrial non-PCI loans was $10.7 million for the year ended December 31, 2017 compared to $14.6 million for the year ended December 31, 2016. The decrease was primarily the result of updating loan loss factors for this portfolio given a decrease in loss experience as well as lower loan growth within this portfolio as compared to the prior year. Provision expense also decreased when comparing 2016 to 2015 primarily due to lower loan growth.
The provision expense for residential mortgage non-PCI loans was $2.1 million in 2017, compared to $801 thousand in 2016. The increase in provision expense was primarily due to higher loan growth within this portfolio compared to the previous year. This follows a decrease in provision expense for 2016 compared to 2015 as a result of updating loan loss factors primarily related to delinquency trends.
The provision expense for revolving mortgage non-PCI loans was $2.5 million in 2017, compared to $7.4 million in 2016. The decrease in provision expense was primarily the result of updating loan loss factors for a decrease in loss experience. Provision expense for revolving mortgage non-PCI loans increased in 2016 compared to 2015 as a result of updating loan loss factors for this portfolio primarily related to an increase in loss experience as well as loan growth within this portfolio compared to the prior year.
The provision expense for consumer non-PCI loans was $17.1 million in 2017, compared to $18.6 million in 2016. The decrease in provision expense in resulted from lower loan growth within this portfolio compared to the prior year and updating loan loss factors primarily related to loan defaults. This follows an increase in provision expense for 2016 compared to 2015 as a result of updating loan loss factors for this portfolio primarily related to delinquency trends.
The PCI loan portfolio net provision credit was $3.4 million during the year ended December 31, 2017, compared to net provision credits of $1.9 million and $2.3 million during the same periods of 2016 and 2015, respectively. The higher net provision credit was attributable to improved projected cash flows and improved default rates. Net charge-offs on PCI loans were $296 thousand during 2017, compared to $614 thousand and $3.0 million for the same periods of 2016 and 2015, respectively. Net charge-offs of PCI loans represented 0.04 percent, 0.07 percent, and 0.27 percent of average PCI loans for 2017, 2016, and 2015, respectively.
Management considers the ALLL adequate to absorb estimated probable losses that relate to loans and leases outstanding at December 31, 2017, although future adjustments may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies periodically review the ALLL as part of their exam process which could result in adjustments to the ALLL based on information available to them at the time of their examination. See "Critical Accounting Policies" and Note A in the Notes to Consolidated Financial Statements for discussion of our accounting policies for the ALLL.
Table 14 provides details of the ALLL and provision components by loan class for the past five years.
Table 14
ALLOWANCE FOR LOAN AND LEASE LOSSES
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Allowance for loan and lease losses at beginning of period | $ | 218,795 |
| | $ | 206,216 |
| | $ | 204,466 |
| | $ | 233,394 |
| | $ | 319,018 |
|
Reclassification (1) | — |
| | — |
| | — |
| | — |
| | 7,368 |
|
Non-PCI provision for loan and lease losses | 29,139 |
| | 34,870 |
| | 22,937 |
| | 15,260 |
| | 19,289 |
|
PCI provision for loan losses | (3,447 | ) | | (1,929 | ) | | (2,273 | ) | | (14,620 | ) | | (51,544 | ) |
Non-PCI Charge-offs: | | | | | | | | | |
Commercial: | | | | | | | | | |
Construction and land development | (599 | ) | | (680 | ) | | (1,012 | ) | | (316 | ) | | (4,685 | ) |
Commercial mortgage | (421 | ) | | (987 | ) | | (1,498 | ) | | (1,147 | ) | | (3,904 | ) |
Other commercial real estate | (5 | ) | | — |
| | (178 | ) | | — |
| | (312 | ) |
Commercial and industrial | (10,926 | ) | | (9,013 | ) | | (5,952 | ) | | (3,014 | ) | | (4,785 | ) |
Lease financing | (995 | ) | | (442 | ) | | (402 | ) | | (100 | ) | | (272 | ) |
Other | (912 | ) | | (144 | ) | | — |
| | (13 | ) | | (6 | ) |
Total commercial loans | (13,858 | ) | | (11,266 | ) | | (9,042 | ) | | (4,590 | ) | | (13,964 | ) |
Noncommercial: | | | | | | | | | |
Residential mortgage | (1,376 | ) | | (926 | ) | | (1,619 | ) | | (1,260 | ) | | (2,387 | ) |
Revolving mortgage | (2,368 | ) | | (3,287 | ) | | (2,925 | ) | | (4,744 | ) | | (6,064 | ) |
Construction and land development | — |
| | — |
| | (22 | ) | | (118 | ) | | (392 | ) |
Consumer | (18,784 | ) | | (14,108 | ) | | (11,696 | ) | | (9,787 | ) | | (10,311 | ) |
Total noncommercial loans | (22,528 | ) | | (18,321 | ) | | (16,262 | ) | | (15,909 | ) | | (19,154 | ) |
Total non-PCI charge-offs | (36,386 | ) | | (29,587 | ) | | (25,304 | ) | | (20,499 | ) | | (33,118 | ) |
Non-PCI Recoveries: | | | | | | | | | |
Commercial: | | | | | | | | | |
Construction and land development | 521 |
| | 398 |
| | 566 |
| | 207 |
| | 1,039 |
|
Commercial mortgage | 2,842 |
| | 1,281 |
| | 2,027 |
| | 2,825 |
| | 996 |
|
Other commercial real estate | 27 |
| | 176 |
| | 45 |
| | 124 |
| | 109 |
|
Commercial and industrial | 3,740 |
| | 1,539 |
| | 909 |
| | 938 |
| | 1,213 |
|
Lease financing | 249 |
| | 190 |
| | 38 |
| | 110 |
| | 107 |
|
Other | 285 |
| | 539 |
| | 91 |
| | — |
| | 1 |
|
Total commercial loans | 7,664 |
| | 4,123 |
| | 3,676 |
| | 4,204 |
| | 3,465 |
|
Noncommercial: | | | | | | | | | |
Residential mortgage | 539 |
| | 467 |
| | 861 |
| | 191 |
| | 559 |
|
Revolving mortgage | 1,282 |
| | 916 |
| | 1,173 |
| | 854 |
| | 660 |
|
Construction and land development | — |
| | 66 |
| | 74 |
| | 84 |
| | 209 |
|
Consumer | 4,603 |
| | 4,267 |
| | 3,650 |
| | 2,869 |
| | 2,396 |
|
Total noncommercial loans | 6,424 |
| | 5,716 |
| | 5,758 |
| | 3,998 |
| | 3,824 |
|
Total non-PCI recoveries | 14,088 |
| | 9,839 |
| | 9,434 |
| | 8,202 |
| | 7,289 |
|
Non-PCI loans and leases charged-off, net | (22,298 | ) | | (19,748 | ) | | (15,870 | ) | | (12,297 | ) | | (25,829 | ) |
PCI loans charged-off, net | (296 | ) | | (614 | ) | | (3,044 | ) | | (17,271 | ) | | (34,908 | ) |
Allowance for loan and lease losses at end of period | $ | 221,893 |
| | $ | 218,795 |
| | $ | 206,216 |
| | $ | 204,466 |
| | $ | 233,394 |
|
Reserve for unfunded commitments (1) | $ | 1,032 |
| | $ | 1,133 |
| | $ | 379 |
| | $ | 333 |
| | $ | 357 |
|
(1) During 2013, BancShares modified the ALLL model and the methodology for estimating losses on unfunded commitments. As a result of these modifications, $7.4 million of the balance previously reported as a reserve of unfunded commitments was reclassified to the ALLL.
Table 15provides trends of the ALLL ratios for the past five years.
Table 15
ALLOWANCE FOR LOAN AND LEASE LOSSES RATIOS
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Average loans and leases: | | | | | | | | | |
PCI | $ | 845,030 |
| | $ | 898,706 |
| | $ | 1,112,286 |
| | $ | 1,195,238 |
| | $ | 1,403,341 |
|
Non-PCI | 21,880,635 |
| | 19,998,689 |
| | 18,415,867 |
| | 13,624,888 |
| | 11,760,402 |
|
Loans and leases at period end: | | | | | | | | | |
PCI | 762,998 |
| | 809,169 |
| | 950,516 |
| | 1,186,498 |
| | 1,029,426 |
|
Non-PCI | 22,833,827 |
| | 20,928,709 |
| | 19,289,474 |
| | 17,582,967 |
| | 12,104,298 |
|
Allowance for loan and lease losses allocated to loans and leases: | | | | | | | | | |
PCI | $ | 10,026 |
| | $ | 13,769 |
| | $ | 16,312 |
| | $ | 21,629 |
| | $ | 53,520 |
|
Non-PCI | 211,867 |
| | 205,026 |
| | 189,904 |
| | 182,837 |
| | 179,874 |
|
Total | $ | 221,893 |
| | $ | 218,795 |
| | $ | 206,216 |
| | $ | 204,466 |
| | $ | 233,394 |
|
| | | | | | | | | |
Net charge-offs to average loans and leases: | | | | | | | | | |
PCI | 0.04 | % | | 0.07 | % | | 0.27 | % | | 1.44 | % | | 2.49 | % |
Non-PCI | 0.10 |
| | 0.10 |
| | 0.09 |
| | 0.09 |
| | 0.22 |
|
Total | 0.10 |
| | 0.10 |
| | 0.10 |
| | 0.20 |
| | 0.46 |
|
Allowance for loan and lease losses to total loans and leases: | | | | | | | | | |
PCI | 1.31 |
| | 1.70 |
| | 1.72 |
| | 1.82 |
| | 5.20 |
|
Non-PCI | 0.93 |
| | 0.98 |
| | 0.98 |
| | 1.04 |
| | 1.49 |
|
Total | 0.94 |
| | 1.01 |
| | 1.02 |
| | 1.09 |
| | 1.78 |
|
Table 16details the allocation of the ALLL among the various loan types. See Note E in the Notes to Consolidated Financial Statements for additional disclosures regarding the ALLL.
Table 16
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
(dollars in thousands) | Allowance for loan and lease losses | | Percent of loans to total loans | | Allowance for loan and lease losses | | Percent of loans to total loans | | Allowance for loan and lease losses | | Percent of loans to total loans | | Allowance for loan and lease losses | | Percent of loans to total loans | | Allowance for loan and lease losses | | Percent of loans to total loans | |
Allowance for loan and lease losses allocated to: | | | | | | | | | | | | | | | | | | | | |
Non-PCI loans and leases | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Construction and land development - commercial | $ | 24,470 |
| | 2.8 | % | $ | 28,877 |
| | 3.0 | % | $ | 16,288 |
| | 3.1 | % | $ | 11,961 |
| | 2.9 | % | $ | 10,335 |
| | 2.4 | % |
Commercial mortgage | 45,005 |
| | 41.2 | | 48,278 |
| | 41.4 | | 69,896 |
| | 40.8 | | 85,189 |
| | 40.3 | | 100,257 |
| | 48.5 | |
Other commercial real estate | 4,571 |
| | 2.0 | | 3,269 |
| | 1.6 | | 2,168 |
| | 1.6 | | 732 |
| | 1.3 | | 1,009 |
| | 1.4 | |
Commercial and industrial | 53,697 |
| | 11.6 | | 50,225 |
| | 11.8 | | 43,116 |
| | 11.7 | | 30,727 |
| | 10.6 | | 22,362 |
| | 8.2 | |
Lease financing | 6,127 |
| | 3.8 | | 5,907 |
| | 3.8 | | 5,524 |
| | 3.6 | | 4,286 |
| | 3.0 | | 4,749 |
| | 2.9 | |
Other | 4,689 |
| | 1.3 | | 3,127 |
| | 1.6 | | 1,855 |
| | 1.6 | | 3,184 |
| | 1.9 | | 190 |
| | 1.3 | |
Total commercial | 138,559 |
| | 62.7 | | 139,683 |
| | 63.2 | | 138,847 |
| | 62.4 | | 136,079 |
| | 60.0 | | 138,902 |
| | 64.7 | |
Noncommercial: | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | 15,706 |
| | 15.0 | | 12,366 |
| | 13.3 | | 14,105 |
| | 13.3 | | 10,661 |
| | 13.4 | | 10,511 |
| | 7.5 | |
Revolving mortgage | 22,436 |
| | 11.4 | | 23,094 |
| | 12.0 | | 15,971 |
| | 12.5 | | 18,650 |
| | 13.7 | | 16,239 |
| | 16.1 | |
Construction and land development - noncommercial | 3,962 |
| | 1.1 | | 1,596 |
| | 1.1 | | 1,485 |
| | 1.1 | | 892 |
| | 0.6 | | 681 |
| | 1.0 | |
Consumer | 31,204 |
| | 6.6 | | 28,287 |
| | 6.7 | | 19,496 |
| | 6.0 | | 16,555 |
| | 6.0 | | 13,541 |
| | 2.9 | |
Total noncommercial | 73,308 |
| | 34.1 | | 65,343 |
| | 33.1 | | 51,057 |
| | 32.9 | | 46,758 |
| | 33.7 | | 40,972 |
| | 27.5 | |
Total allowance for non-PCI loan and lease losses | 211,867 |
| | 96.8 | | 205,026 |
| | 96.3 | | 189,904 |
| | 95.3 | | 182,837 |
| | 93.7 | | 179,874 |
| | 92.2 | |
PCI loans | 10,026 |
| | 3.2 | | 13,769 |
| | 3.7 | | 16,312 |
| | 4.7 | | 21,629 |
| | 6.3 | | 53,520 |
| | 7.8 | |
Total allowance for loan and lease losses | $ | 221,893 |
| | 100.0 | % | $ | 218,795 |
| | 100.0 | % | $ | 206,216 |
| | 100.0 | % | $ | 204,466 |
| | 100.0 | % | $ | 233,394 |
| | 100.0 | % |
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans and leases and OREO resulting from both non-PCI and PCI loans. The accrual of interest on non-PCI loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Non-PCI loans and leases are generally removed from nonaccrual status when they become current for some sustained period of time as to both principal and interest and concern no longer exists as to the collectability of principal and interest. Accretion of income for PCI loans is discontinued when we are unable to estimate the amount or timing of cash flows. PCI loans may begin or resume accretion of income when information becomes available that allows us to estimate the amount and timing of future cash flows. In addition, impaired, accruing non-PCI loans less than 90 days past due that have not been restructured are closely monitored by management. There were none to report atDecember 31, 2017, compared to $652 thousand at December 31, 2016.
Table 17 provides details on nonperforming assets and other risk elements.
Table 17
NONPERFORMING ASSETS
|
| | | | | | | | | | | | | | | | | | | |
| December 31 |
(Dollars in thousands, except ratios) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Nonaccrual loans and leases: | | | | | | | | | |
Non-PCI | $ | 92,534 |
| | $ | 82,307 |
| | $ | 95,854 |
| | $ | 44,005 |
| | $ | 53,170 |
|
PCI | 624 |
| | 3,451 |
| | 7,579 |
| | 33,422 |
| | 28,493 |
|
Other real estate | 51,097 |
| | 61,231 |
| | 65,559 |
| | 93,436 |
| | 83,979 |
|
Total nonperforming assets | $ | 144,255 |
| | $ | 146,989 |
| | $ | 168,992 |
| | $ | 170,863 |
| | $ | 165,642 |
|
| | | | | | | | | |
Nonaccrual loans and leases: | | | | | | | | | |
Covered under shared-loss agreements | $ | 95 |
| | $ | 93 |
| | $ | 2,992 |
| | $ | 27,020 |
| | $ | 28,493 |
|
Not covered under shared-loss agreements | 93,063 |
| | 85,665 |
| | 100,441 |
| | 50,407 |
| | 53,170 |
|
Other real estate owned: | | | | | | | | | |
Covered | 271 |
| | 472 |
| | 6,817 |
| | 22,982 |
| | 47,081 |
|
Noncovered | 50,826 |
| | 60,759 |
| | 58,742 |
| | 70,454 |
| | 36,898 |
|
Total nonperforming assets | $ | 144,255 |
| | $ | 146,989 |
| | $ | 168,992 |
| | $ | 170,863 |
| | $ | 165,642 |
|
| | | | | | | | | |
Loans and leases at December 31: | | | | | | | | | |
Covered | $ | 67,757 |
| | $ | 84,821 |
| | $ | 272,554 |
| | $ | 485,308 |
| | $ | 1,029,426 |
|
Noncovered | 23,529,068 |
| | 21,653,057 |
| | 19,967,436 |
| | 18,284,157 |
| | 12,104,298 |
|
| | | | | | | | | |
Accruing loans and leases 90 days or more past due | | | | | | | | | |
Non-PCI | 2,978 |
| | 2,718 |
| | 3,315 |
| | 11,250 |
| | 8,784 |
|
PCI | 58,740 |
| | 65,523 |
| | 73,751 |
| | 104,430 |
| | 193,892 |
|
Interest income recognized on nonperforming loans and leases | 1,527 |
| | 1,873 |
| | 3,204 |
| | 1,364 |
| | 2,062 |
|
Interest income that would have been earned on nonperforming loans and leases had they been performing | 6,237 |
| | 7,304 |
| | 9,628 |
| | 6,600 |
| | 18,430 |
|
Ratio of nonperforming assets to total loans, leases, and other real estate owned: | | | | | | | | | |
Covered | 0.54 | % | | 0.66 | % | | 3.51 | % | | 9.84 | % | | 7.02 | % |
Noncovered | 0.61 |
| | 0.67 |
| | 0.79 |
| | 0.66 |
| | 0.74 |
|
Total | 0.61 |
| | 0.67 |
| | 0.83 |
| | 0.91 |
| | 1.25 |
|
At December 31, 2017, BancShares’ nonperforming assets, including nonaccrual loans and OREO, were $144.3 million, or 0.61 percent, of total loans and leases plus OREO, compared to $147.0 million, or 0.67 percent, at December 31, 2016 and $169.0 million, or 0.83 percent, at December 31, 2015.
For the year, nonperforming assets decreased by $2.7 million, or 1.9 percent, compared to December 31, 2016. The decline in nonperforming assets from December 31, 2016 results from a $10.1 million decline in OREO balances due to problem asset resolutions, offset by a $7.4 million increase in nonaccrual loans and leases, primarily in residential and revolving mortgage loans.
Nonperforming assets decreased by $22.0 million, or 13.02 percent, between December 31, 2016 and December 31, 2015 due to declines in nonaccrual loans and leases and OREO balances due to problem asset resolutions.
Of the $144.3 million in nonperforming assets at December 31, 2017, $366 thousand related to loans and OREO covered by shared-loss agreements, compared to $565 thousand at December 31, 2016 and $9.8 million at December 31, 2015. Covered nonperforming assets continue to decline due to the expiration and termination of FDIC shared-loss agreements and loan resolutions.
OREO includes foreclosed property and branch facilities that we have closed but not sold. Once acquired, net book values of OREO are reviewed at least annually to evaluate if write-downs are required. Real estate appraisals are reviewed by the appraisal review department to ensure the quality of the appraised value in the report. The level of review is dependent on the value and type of the collateral, with higher value and more complex properties receiving a more detailed review. 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. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information. Since OREO is carried at the lower of cost or market less estimated selling costs, only when fair values have declined are adjustments recorded. Decisions regarding write-downs are based on factors that include appraisals, previous offers received on the property, market conditions and the number of days the property has been on the market.
TROUBLED DEBT RESTRUCTURINGS
We have selectively agreed to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans and leases. TDRs which are accruing at the time of restructure and continue to perform based on the restructured terms are considered performing. See Note A in the Notes to Consolidated Financial Statements for discussion of our accounting policies for TDRs.
Total PCI and non-PCI loans classified as TDRs as of December 31, 2017 were $164.6 million, compared to $150.9 million at December 31, 2016, and $144.8 million at December 31, 2015. At December 31, 2017, accruing non-PCI TDRs were $112.2 million, an increase of $10.7 million from $101.5 million at December 31, 2016, primarily due to an increase in revolving mortgage loan modifications. At December 31, 2017, nonaccruing non-PCI TDRs were $33.9 million, an increase of $10.8 million from $23.1 million at December 31, 2016, primarily related to an increase in residential and revolving mortgage loan modifications. The increase in residential mortgage loans modifications is primarily related to non-payment on nonconforming loans. Revolving mortgage loan modifications increased as customers entered the repayment phase of the note or the line of credit matured and the customer needed adjustments to make payments manageable. PCI TDRs continue to decline as a result of loan pay downs and pay offs.
Between December 31, 2016 and December 31, 2015, accruing TDRs increased $14.2 million, primarily related to an increase in commercial and residential mortgage loan modifications, and nonaccruing TDRs decreased $8.2 million, primarily due to payoffs in the commercial loan portfolio.
Table 18 provides further details on performing and nonperforming TDRs for the last five years.
Table 18
TROUBLED DEBT RESTRUCTURINGS
|
| | | | | | | | | | | | | | | | | | | |
| December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Accruing TDRs: | | | | | | | | | |
PCI | $ | 18,163 |
| | $ | 26,068 |
| | $ | 29,231 |
| | $ | 44,647 |
| | $ | 90,829 |
|
Non-PCI | 112,228 |
| | 101,462 |
| | 84,065 |
| | 91,316 |
| | 85,126 |
|
Total accruing TDRs | $ | 130,391 |
| | $ | 127,530 |
| | $ | 113,296 |
| | $ | 135,963 |
| | $ | 175,955 |
|
Nonaccruing TDRs: | | | | | | | | | |
PCI | $ | 272 |
| | $ | 301 |
| | $ | 1,420 |
| | $ | 2,225 |
| | $ | 11,479 |
|
Non-PCI | 33,898 |
| | 23,085 |
| | 30,127 |
| | 13,291 |
| | 19,322 |
|
Total nonaccruing TDRs | $ | 34,170 |
| | $ | 23,386 |
| | $ | 31,547 |
| | $ | 15,516 |
| | $ | 30,801 |
|
All TDRs: | | | | | | | | | |
PCI | $ | 18,435 |
| | $ | 26,369 |
| | $ | 30,651 |
| | $ | 46,872 |
| | $ | 102,308 |
|
Non-PCI | 146,126 |
| | 124,547 |
| | 114,192 |
| | 104,607 |
| | 104,448 |
|
Total TDRs | $ | 164,561 |
| | $ | 150,916 |
| | $ | 144,843 |
| | $ | 151,479 |
| | $ | 206,756 |
|
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, short-termsecurities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and long-term obligations.other borrowings. Interest-bearing liabilities were $19.59at December 31, 2022 totaled $71.13 billion, compared to $31.79 billion at December 31, 2017, an2021. The increase of $125.7 million from December 31, 2016, primarily resulting2021 was mostly due to deposits and borrowings from additionalthe CIT Merger and higher FHLB borrowings, of $175.0 million during 2017. This increase waspartially offset by current year activity that included a FHLB borrowing maturity of $10.0 million, lower customer repurchase agreements of $34.6 million, adecline in total deposits and the redemption of $5.0 million aggregate principal amount of Trust Preferred Securities issued by FCB/SC Capital Trust II and a $1.9 million decrease in interest-bearing deposit accounts. Average interest-bearing liabilities increased $418.0 million, or by 2.2 percent, from 2016 to 2017, due to organic growth in interest-bearing checking and savingsassumed debt during the first quarter. See Note 2 — Business Combinations for details on deposits and incremental FHLB borrowings of $175.0 million during 2017.associated with the CIT Merger.
Deposits
AtTotal deposits at December 31, 2017, total deposits2022 were $29.27$89.41 billion, an increase of $1.10$38.00 billion or 3.9 percent, sincecompared to December 31, 20162021, reflecting the addition of $39.43 billion from the CIT Merger. Total deposits declined during the second quarter and third quarters of 2022, reflecting the most rate sensitive customers moving funds in response to increases in the target federal funds rate. This decline in total deposits was primarily concentrated in branches acquired in the CIT Merger and the Commercial Banking segment. Deposits increased during the fourth quarter of 2022, primarily related to the Direct Bank and the Corporate segment which includes brokered deposits. In the fourth quarter of 2022, increases in savings and time deposit accounts offset declines in noninterest-bearing demand accounts and money market accounts.
Interest-bearing deposits totaled $64.49 billion and $30.00 billion at December 31, 2022 and 2021, respectively. Noninterest-bearing deposits totaled $24.92 billion and $21.41 billion at December 31, 2022 and 2021, respectively.
The reduction in deposits since the CIT Merger were primarily concentrated in acquired higher cost channels. As part of the CIT Merger, we acquired the Digital Bank and an increase of $1.23 billion, or 4.6 percent, between December 31, 2016 and December 31, 2015. The increase for both periods was due to organic growth in demandHOA deposit accounts, checking with interest and savings accounts, offset by run-off in time deposits and lower money market account balances. Demand deposits increased by $1.11 billion during 2017, following an increase of $856.1 million during 2016. Time deposits decreased by $419.0 million during 2017, following a decrease of $278.1 million in 2016. Additionally, deposit balances from the Guaranty acquisition of $541.3 million contributed to the increase during 2017.channel.
Table 19 provides deposit balances as of December 31, 2017, December 31, 2016 and December 31, 2015.
Table 1920
DEPOSITSDeposits
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Noninterest-bearing demand | $ | 24,922 | | | $ | 21,405 | | | $ | 18,014 | |
Checking with interest | 16,202 | | | 12,694 | | | 10,592 | |
Money market | 21,040 | | | 10,590 | | | 8,633 | |
Savings | 16,634 | | | 4,236 | | | 3,304 | |
Time | 10,610 | | | 2,481 | | | 2,889 | |
Total deposits | $ | 89,408 | | | $ | 51,406 | | | $ | 43,432 | |
|
| | | | | | | | | | | |
| December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
Demand | $ | 11,237,375 |
| | $ | 10,130,549 |
| | $ | 9,274,470 |
|
Checking with interest | 5,230,060 |
| | 4,919,727 |
| | 4,445,353 |
|
Money market | 8,059,271 |
| | 8,193,392 |
| | 8,205,705 |
|
Savings | 2,340,449 |
| | 2,099,579 |
| | 1,909,021 |
|
Time | 2,399,120 |
| | 2,818,096 |
| | 3,096,206 |
|
Total deposits | $ | 29,266,275 |
| | $ | 28,161,343 |
| | $ | 26,930,755 |
|
DueWe strive to our focus on maintainingmaintain a strong liquidity position, coreand therefore a focus on deposit retention remains a key business objective. We believe that traditional bank deposit products remain an attractive option for many customers but, ascustomers. As economic conditions improve,change, we recognize that our liquidity position could be adversely affected asif bank deposits are withdrawn and invested elsewhere.withdrawn. Our ability to fund future loan growth is significantly dependent on our success atin retaining existing deposits and generating new deposits at a reasonable cost.
Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to our regulators. We estimate total uninsured deposits were $29.13 billion and $22.95 billion at December 31, 2022 and 2021, respectively. Table 21 provides the expected maturity of time deposits in excess of $250,000, the FDIC insurance limit, as of December 31, 2022.
Table 2021
MATURITIES OF TIME DEPOSITS OF $100,000 OR MOREMaturities of Time Deposits In Excess of $250,000
| | | | | |
dollars in millions | December 31, 2022 |
Time deposits maturing in: | |
Three months or less | $ | 186 | |
Over three months through six months | 195 | |
Over six months through 12 months | 1,158 | |
More than 12 months | 619 | |
Total | $ | 2,158 | |
|
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | Regulatory minimum (1) | | Well-capitalized requirement (1) |
Tier 1 risk-based capital | $ | 3,287,364 |
| | $ | 2,995,557 |
| | $ | 2,831,242 |
| | | | |
Tier 2 risk-based capital | 339,425 |
| | 344,429 |
| | 308,970 |
| | | | |
Total risk-based capital | $ | 3,626,789 |
| | $ | 3,339,986 |
| | $ | 3,140,212 |
| | | | |
Common equity Tier 1 capital | $ | 3,287,364 |
| | $ | 2,995,557 |
| | $ | 2,799,163 |
| | | | |
Risk-adjusted assets | 25,528,286 |
| | 24,113,117 |
| | 22,376,034 |
| | | | |
Risk-based capital ratios | | | | | | | | | |
Tier 1 risk-based capital | 12.88 | % | | 12.42 | % | | 12.65 | % | | 6.00 | % | | 8.00 | % |
Common equity Tier 1 | 12.88 |
| | 12.42 |
| | 12.51 |
| | 4.50 |
| | 6.50 |
|
Total risk-based capital | 14.21 |
| | 13.85 |
| | 14.03 |
| | 8.00 |
| | 10.00 |
|
Tier 1 leverage ratio | 9.47 |
| | 9.05 |
| | 8.96 |
| | 4.00 |
| | 5.00 |
|
Capital conservation buffer (2) | 6.21 |
| | 5.85 |
| | N/A |
| | 1.25 |
| | N/A |
|
(1) Regulatory minimum and well-capitalized requirements are based on 2016 Basel III regulatory capital guidelines.
(2) The capital conservation buffer, which only applies to minimum risk-based capital requirements, became effective under Basel III guidelines January 1, 2016; therefore, this data is not applicable for periods prior to January 1, 2016.
As aligned with expectations and incorporated in our capital planning process, BancShares remained well-capitalized under Basel III capital requirements with a leverage capital ratio of 9.47 percent, Tier 1 risk-based capital ratio of 12.88 percent, common equity Tier 1 ratio of 12.88 percent and total risk-based capital ratio of 14.21 percent at December 31, 2017. BancShares had a capital conservation buffer above minimum risk-based capital requirements of 6.21 percent at December 31, 2017. The buffer exceeded the 1.25 percent requirement and, therefore, results in no limit on distributions.
BancShares had no trust preferred capital securities included in Tier 1 capital at December 31, 2017 or December 31, 2016, compared to $32.1 million at December 31, 2015. Effective January 1, 2015, 75 percent of our trust preferred capital securities were excluded from Tier 1 capital, and the remaining 25 percent were phased out on January 1, 2016 under Basel III requirements. At December 31, 2017 and December 31, 2016, BancShares had $116.5 million and $121.5 million, respectively, of trust preferred capital securities that were excluded from Tier 1 capital as a result of Basel III implementation. Trust preferred capital securities continue to be a component of total risk-based capital.
At December 31, 2017 and December 31, 2016, Tier 2 capital of BancShares included $0 and $3.0 million, respectively, of qualifying subordinated debt acquired in the Bancorporation merger with a scheduled maturity date of June 1, 2018. Under current regulatory guidelines, when subordinated debt is within five years of its scheduled maturity date, issuers must discount the amount included in Tier 2 capital by 20 percent for each year until the debt matures. Once the debt is within one year of its scheduled maturity date, no amount of the debt is allowed to be included in Tier 2 capital.
RISK MANAGEMENT
Risk is inherent in any business. SeniorBancShares has defined a moderate risk appetite, a balanced approach to risk taking, with a philosophy which does not preclude higher risk business activities commensurate with acceptable returns while meeting regulatory objectives. Through the comprehensive Risk Management Framework and Risk Appetite Framework and Statement, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all company associates. TheSenior management applies various strategies to reduce the risks to which BancShares may be exposed, with effective challenge and oversight by management committees. Our Board of Directors strives to ensure that risk management is a part of theour business culture and that our policies and procedures for identifying, assessing, measuring, monitoring, and managing risk are part of the decision-making process. The Board of Director’sBoard’s role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Boardits Risk Committee.
The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk relatedrisk-related issues. The Board Risk Committee is directed to monitor and advise the full Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic, legal,Credit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic and reputationalReputational risks; review, approve, and monitor adherence to the risk appetiteRisk Appetite Statement and supporting risk tolerance levels;levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Enterprise Risk Management Framework.Framework and Risk Appetite Framework and Statement. The Board Risk Committee also reviews reports of examination by and communications from regulatory agencies;agencies, the results of internal and third party testing analyses and reviews,qualitative and quantitative assessments related to risks; risk management;management, and any other matters within the scope of the Risk Committee’s oversight responsibilities. The Board Risk Committee reviews and monitors management'smanagement’s response to certain risk relatedrisk-related regulatory orand audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information securitycompensation risk management and other areas of joint responsibility.
In combination with other risk management and monitoring practices, the results of enterprise wideenterprise-wide stress testing activities are consideredconducted within a keydefined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.
BancShares monitors and stress tests its capital and liquidity consistent with the safety and soundness expectations of the federal regulators. Refer to the “Regulatory Considerations” section of Item 1. Business included in this Annual Report on Form 10-K for further discussion.
BancShares returned to business as usual operations and lifted internal COVID-19 related restrictions in early April of 2022. Monitoring of associated credit and operational risks is integrated into normal risk monitoring activities.
BancShares has been assessing the emerging impacts of the international tensions that could impact the economy and exacerbate headwinds of rising inflation, elevated market volatility, global supply chain disruptions, and recessionary pressures as well as operational risks such as those associated with potential cyberattacks for FCB and third parties upon whom it relies. Assessments have not identified material impacts to date, but those assessments will remain ongoing as the condition continues to exist. BancShares is also assessing the potential risk of an economic slowdown or recession that could create increased credit and market risk having downstream impacts on earnings, capital, and/or liquidity. Economic data has been mixed and markets have experienced elevated levels of volatility in 2022. Key indicators will continue to be monitored and impacts assessed as part of our ongoing risk management program. One key component of enterprise wide stress testing includes stress tests as mandated in the Dodd-Frank Act. The Dodd-Frank Act requires that stress tests be developed and performed to ensure that financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. Bank holding companies with total consolidated assets between $10 billion and $50 billion, including BancShares, will undergo annual company-run stress tests. As directed by the Federal Reserve, summaries of BancShares’ results in the severely adverse stress tests are available to the public.framework.
Credit risk management
CREDIT RISK MANAGEMENT
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases other than acquired loans,we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCIPCD or non-PCI,Non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both acquiredoriginated and originatedacquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. The riskThese reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ALLLappropriate ACL that accounts for expected losses that are inherent inover the life of the loan and lease portfolio.portfolios.
Our ACL estimate as of December 31, 2022, included extensive reviews of the changes in credit risk associated with the uncertainties around economic forecasts. These loss estimates additionally considered BancShares industry risk, historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen significant deterioration as of December 31, 2022. Our ACL methodology is discussed further in Note 1 — Significant Accounting Policies and Basis of Presentation.
Commercial Lending and Leasing
BancShares employs a dual ratings system where each commercial loan is assigned a probability of default (“PD”) and loss given default (“LGD”) rating using scorecards developed to rate each type of transaction incorporating assessments of both quantitative and qualitative factors. When commercial loans and leases are graded during underwriting, or when updated periodically thereafter, a model is run to generate a preliminary risk rating. These models incorporate both internal and external historical default and loss data to develop loss rates for each risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts and circumstances, that in management’s judgment, warrant a modification of the modeled risk rating to arrive at the final approved risk ratings.
Consumer Lending
Consumer lending begins with an evaluation of a consumer borrower’s credit profile against published standards. Credit decisions are made after analyzing quantitative and qualitative factors, including borrower’s ability to repay the loan, collateral values, and considering the transaction from a judgmental perspective.
Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Credit standards follow industry standard documentation requirements. Performance is largely evaluated based on an acceptable pay history along with a quarterly assessment which incorporates current market conditions. Loans may also be monitored during quarterly reviews of the borrower’s refreshed credit score. When warranted, an additional review of the loan-to-value of the underlying collateral may be conducted.
Allowance for Credit Losses
The ACL at December 31, 2022 was $922 million, an increase of $744 million compared to $178 million at December 31, 2021. The ACL as a percentage of total loans and leases at December 31, 2022 was 1.30%, compared to 0.55% at December 31, 2021. The increase in the ACL is primarily due to the impact of the CIT Merger, including the initial ACL for PCD loans and leases (the “Initial PCD ACL”) of $272 million and the Day 2 provision for loans and leases of $454 million related to Non-PCD loans and leases. The increase was also related to loan growth and deterioration in the economic outlook that impacts the macroeconomic variables utilized by our ACL models, including gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads. In contemplation of additional uncertainty, primarily based on the elevated levels of inflation and its impact on other macroeconomic variables such as interest rates, which could in turn impact home prices, commercial real estate values, and other variables, we do not believe the current baseline scenario fully incorporates the potential downside impacts of future macroeconomic deterioration, so an additional weighting on the downside scenario was incorporated into the estimate. Our ACL methodology is discussed in Note 1 — Significant Accounting Policies and Basis of Presentation.
The ACL for commercial and consumer loans and leases increased $709 million and $35 million, respectively, at December 31, 2022 compared to December 31, 2021. The main reasons for the increases are addressed in the paragraph above.
Table 23
Allowance for Credit Losses
| | | | | | | | | | | | | | | | | |
dollars in millions | Year Ended December 31, 2022 |
| Commercial | | Consumer | | Total |
Balance at January 1, 2022 | $ | 80 | | | $ | 98 | | | $ | 178 | |
Initial PCD ACL(1) | 258 | | | 14 | | | 272 | |
Day 2 provision for loans and leases | 432 | | | 22 | | | 454 | |
Provision (benefit) for credit losses - loans and leases | 101 | | | (4) | | | 97 | |
Total provision for credit losses - loans and leases | 533 | | | 18 | | | 551 | |
Charge-offs(1) | (126) | | | (20) | | | (146) | |
Recoveries | 44 | | | 23 | | | 67 | |
| | | | | |
Balance at December 31, 2022 | $ | 789 | | | $ | 133 | | | $ | 922 | |
Net charge-off ratio | | | | | 0.12 | % |
Net charge-offs (recoveries) | $ | 82 | | | $ | (3) | | | $ | 79 | |
Average loans | | | | | $ | 67,730 | |
Percent of loans in each category to total loans | 76 | % | | 24 | % | | 100 | % |
| | | | | |
| Year Ended December 31, 2021 |
| Commercial | | Consumer | | Total |
Balance at January 1, 2021 | $ | 92 | | | $ | 133 | | | $ | 225 | |
Benefit for credit losses - loans and leases | (7) | | | (30) | | | (37) | |
Charge-offs | (18) | | | (18) | | | (36) | |
Recoveries | 13 | | | 13 | | | 26 | |
| | | | | |
Balance at December 31, 2021 | $ | 80 | | | $ | 98 | | | $ | 178 | |
Net charge-off ratio | | | | | 0.03 | % |
Net charge-offs | $ | 5 | | | $ | 5 | | | $ | 10 | |
Average loans | | | | | $ | 32,750 | |
Percent of loans in each category to total loans | 70 | % | | 30 | % | | 100 | % |
| | | | | |
| Year Ended December 31, 2020 |
| Commercial | | Consumer | | Total |
Balance at December 31, 2019 | $ | 150 | | | $ | 75 | | | $ | 225 | |
Adoption of ASC 326 | (84) | | | 46 | | | (38) | |
Balance after adoption of ASC 326 | 66 | | | 121 | | | 187 | |
Provision for credit losses - loans and leases | 34 | | | 24 | | | 58 | |
Initial balance on PCD loans | 1 | | | 1 | | | 2 | |
Charge-offs | (20) | | | (25) | | | (45) | |
Recoveries | 11 | | | 12 | | | 23 | |
| | | | | |
Balance at December 31, 2020 | $ | 92 | | | $ | 133 | | | $ | 225 | |
Net charge-off ratio | | | | | 0.07 | % |
Net charge-offs | $ | 9 | | | $ | 13 | | | $ | 22 | |
Average loans | | | | | $ | 31,417 | |
Percent of loans in each category to total loans | 70 | % | | 30 | % | | 100 | % |
(1) The Initial PCD ACL related to the CIT Merger was $272 million, net of an additional $243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial), which met BancShares’ charge-off policy at the Merger Date.
Net charge-offs for the year ended December 31, 2022 and 2021 were $79 million (net charge-off ratio of 0.12%) and $10 million (net charge-off ratio of 0.03%), respectively. The increase in net charge-offs in 2022 was primarily related to the Commercial Banking segment.
The following table presents trends in the ACL ratios.
Table 24
ACL Ratios
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Allowance for credit losses | $ | 922 | | | $ | 178 | | | $ | 225 | |
Total loans and leases | $ | 70,781 | | | $ | 32,372 | | | $ | 32,792 | |
Allowance for credit losses to total loans and leases: | 1.30 | % | | 0.55 | % | | 0.68 | % |
Commercial loans and leases: | | | | | |
Allowance for credit losses - commercial | $ | 789 | | | $ | 80 | | | $ | 92 | |
Commercial loans and leases | $ | 53,455 | | | $ | 22,586 | | | $ | 22,900 | |
Commercial allowance for credit losses to commercial loans and leases: | 1.48 | % | | 0.35 | % | | 0.40 | % |
Consumer loans: | | | | | |
Allowance for credit losses - consumer | $ | 133 | | | $ | 98 | | | $ | 133 | |
Consumer loans | $ | 17,326 | | | $ | 9,786 | | | $ | 9,892 | |
Consumer allowance for credit losses to consumer loans: | 0.77 | % | | 1.01 | % | | 1.34 | % |
The reserve for unfunded loan commitments was $106 million at December 31, 2022, an increase of $94 million compared to $12 million at December 31, 2021. The increase is primarily due to the Day 2 provision for unfunded commitments of $59 million related to the CIT Merger. The increase is also due to an increase in off-balance sheet commitments and deterioration in the economic outlook that impacts the macroeconomic variables utilized by our ACL models. The additional off-balance sheet commitments primarily reflect loan commitments or lines of credit, and DPAs associated with factoring. See Note 24 — Commitments and Contingencies for information relating to off-balance sheet commitments and Note 5 — Allowance for Credit Losses for a roll forward of the ACL for unfunded commitments.
The following table presents the ACL by loan class for the years ending December 31, 2022, 2021, and 2020.
Table 25
ACL by Loan Class
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
dollars in millions: | Allowance for Credit Losses | | Allowance for Credit Losses as a Percentage of Loans | | Allowance for Credit Losses | | Allowance for Credit Losses as a Percentage of Loans | | Allowance for Credit Losses | | Allowance for Credit Losses as a Percentage of Loans |
Commercial | | | | | | | | | | | |
Commercial construction | $ | 40 | | | 1.43 | % | | $ | 5 | | | 0.44 | % | | $ | 8 | | | 0.69 | % |
Owner occupied commercial mortgage | 61 | | | 0.42 | | | 28 | | | 0.23 | | | 32 | | | 0.28 | |
Non-owner occupied commercial mortgage | 181 | | | 1.83 | | | 16 | | | 0.52 | | | 24 | | | 0.79 | |
Commercial and industrial | 476 | | | 1.98 | | | 29 | | | 0.49 | | | 26 | | | 0.37 | |
Leases | 31 | | | 1.41 | | | 2 | | | 0.76 | | | 2 | | | 0.61 | |
Total commercial | 789 | | | 1.48 | | | 80 | | | 0.35 | | | 92 | | | 0.40 | |
Consumer | | | | | | | | | | | |
Residential mortgage | 74 | | | 0.55 | | | 39 | | | 0.63 | | | 55 | | | 0.92 | |
Revolving mortgage | 13 | | | 0.67 | | | 18 | | | 1.02 | | | 29 | | | 1.38 | |
Consumer auto | 5 | | | 0.37 | | | 5 | | | 0.43 | | | 9 | | | 0.75 | |
Consumer other | 41 | | | 6.32 | | | 36 | | | 6.60 | | | 40 | | | 7.13 | |
Total consumer | 133 | | | 0.77 | | | 98 | | | 1.01 | | | 133 | | | 1.34 | |
Total Allowance for Credit Losses | $ | 922 | | | 1.30 | % | | $ | 178 | | | 0.55 | % | | $ | 225 | | | 0.68 | % |
Credit Metrics
Non-performing Assets
Non-performing assets include non-accrual loans and leases and OREO. Non-performing assets at December 31, 2022 totaled $674 million, compared to $161 million at December 31, 2021. The increase from December 31, 2021 was mostly due to the non-owner occupied commercial real estate portfolio acquired in the CIT Merger.
Nonperforming assets include both Non-PCD and PCD loans. Non-PCD loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable that principal or interest is not fully collectable. When Non-PCD loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. Non-PCD loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time as to both principal and interest and there is no longer concern as to the collectability of principal and interest. Accretion of income for PCD loans is discontinued when we are unable to estimate the amount or timing of cash flows. PCD loans may begin or resume accretion of income when information becomes available that allows us to estimate the amount and timing of future cash flows.
OREO includes foreclosed property and branch facilities that we have closed but not sold. Net book values of OREO are reviewed at least annually to evaluate reasonableness of the carrying value. The level of review is dependent on the value and type of the collateral, with higher value and more complex properties receiving a more detailed review. Changes to the value of the assets between scheduled valuation dates are monitored through communication with brokers and monthly reviews by the asset manager assigned to each asset. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.
Since OREO is carried at the lower of cost or market value, less estimated selling costs, book value adjustments are only recorded when fair values have declined. Decisions regarding write-downs are based on factors including appraisals, previous offers received on the property, market conditions and the number of days the property has been on the market.
The following table presents total nonperforming assets.
Table 26
Non-Performing Assets
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Non-accrual loans: | | | | | |
Commercial loans | $ | 529 | | | $ | 45 | | | $ | 70 | |
Consumer loans | 98 | | | 76 | | | 121 | |
Total non-accrual loans | 627 | | | 121 | | | 191 | |
Other real estate owned | 47 | | | 40 | | | 51 | |
Total non-performing assets | $ | 674 | | | $ | 161 | | | $ | 242 | |
| | | | | |
Allowance for credit losses to total loans and leases | 1.30 | % | | 0.55 | % | | 0.68 | % |
Ratio of total non-performing assets to total loans, leases and other real estate owned | 0.95 | % | | 0.49 | % | | 0.74 | % |
Ratio of non-accrual loans and leases to total loans and leases | 0.89 | % | | 0.37 | % | | 0.58 | % |
Ratio of allowance for credit losses to non-accrual loans and leases | 146.88 | % | | 148.37 | % | | 117.15 | % |
Non-accrual loans and leases at December 31, 2022 were $627 million, an increase of $506 million since December 31, 2021. The increases in non-accrual loans from December 31, 2021 was primarily due to non-owner occupied commercial real estate portfolio and other loans acquired in the CIT Merger. The commercial non-accruals increased during the fourth quarter as a result of an increase in the non-owner occupied commercial real estate portfolio, and more specifically related to general office exposure in the Commercial Banking segment. See Note 4 — Loans and Leases for tabular presentation of non-accrual loans by loan class. Non-accrual loans and leases as a percentage of total loans and leases was 0.89% and 0.37% at December 31, 2022 and December 31, 2021, respectively. OREO at December 31, 2022 totaled $47 million, representing an increase of $7 million since December 31, 2021. Non-performing assets as a percentage of total loans, leases and OREO at December 31, 2022 was 0.95% compared to 0.49% at December 31, 2021.
Past Due Accounts
The percentage of loans 30 days or more past due at December 31, 2022 was 1.22% of loans, compared to 0.43% at December 31, 2021. Delinquency status of loans is presented in Note 4 — Loans and Leases.
Troubled Debt Restructurings
A loan is considered a troubled debt restructuring (“TDR”) when both of the following occur: (1) a modification to a borrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include deferrals of interest, modifications of payment terms, or, in certain limited instances, forgiveness of principal or interest. Acquired loans are classified as TDRs if a modification is made subsequent to acquisition. We further classify TDRs as performing and nonperforming. Performing TDRs accrue interest at the time of restructure and continue to perform based on the restructured terms. Nonperforming TDRs do not accrue interest and are included with other nonperforming assets within nonaccrual loans and leases in Table 26 above.
We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans.
The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty. BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in most cases, did not record these as TDRs. Beginning January 1, 2022, this guidance was no longer applied.
Table 27
Troubled Debt Restructurings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 |
| Commercial | | Consumer | | Total | | Commercial | | Consumer | | Total |
Accruing TDRs | $ | 98 | | | $ | 52 | | | $ | 150 | | | $ | 97 | | | $ | 49 | | | $ | 146 | |
Non-accruing TDRs | 49 | | | 22 | | | 71 | | | 21 | | | 25 | | | 46 | |
Total TDRs | $ | 147 | | | $ | 74 | | | $ | 221 | | | $ | 118 | | | $ | 74 | | | $ | 192 | |
| | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
In March 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This pronouncement eliminates the recognition and measurement guidance on TDRs and is effective for BancShares as of January 1, 2023. See “Recent Accounting Pronouncements” in this MD&A and Note 1 — Significant Accounting Policies and Basis of Presentation for further information.
Concentration Risk
We maintain a well-diversified loan and lease portfolio and seek to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to significant risk, such as our concentrations of real estate secured loans, revolving mortgage loans and medical-and dental-relatedhealthcare-related loans.
Commercial Concentrations
Geographic Concentrations
The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location.
Table 28
Commercial Loans and Leases - Geography
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
State | | | | | | | | | | | |
California | $ | 9,226 | | | 17.3 | % | | $ | 3,163 | | | 14.0 | % | | $ | 2,940 | | | 12.8 | % |
North Carolina | 8,699 | | | 16.3 | % | | 7,181 | | | 31.8 | % | | 7,649 | | | 33.4 | % |
Texas | 3,624 | | | 6.8 | % | | 879 | | | 3.9 | % | | 816 | | | 3.6 | % |
Florida | 3,273 | | | 6.1 | % | | 1,496 | | | 6.6 | % | | 1,478 | | | 6.5 | % |
South Carolina | 3,142 | | | 5.9 | % | | 2,855 | | | 12.6 | % | | 2,944 | | | 12.9 | % |
All other states | 24,243 | | | 45.4 | % | | 7,012 | | | 31.1 | % | | 7,073 | | | 30.8 | % |
Total U.S. | 52,207 | | | 97.8 | % | | 22,586 | | | 100.0 | % | | 22,900 | | | 100.0 | % |
Total International | 1,248 | | | 2.2 | % | | — | | | — | % | | — | | | — | % |
Total | $ | 53,455 | | | 100.0 | % | | $ | 22,586 | | | 100.0 | % | | $ | 22,900 | | | 100.0 | % |
Industry Concentrations
The following table represents loans and leases by industry of obligor:
Table 29
Commercial Loans and Leases - Industry
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Real Estate | $ | 11,684 | | | 21.9 | % | | $ | 4,279 | | | 18.9 | % | | $ | 4,348 | | | 19.0 | % |
Healthcare | 8,146 | | | 15.2 | % | | 6,997 | | | 31.0 | % | | 6,381 | | | 27.9 | % |
Business Services | 5,518 | | | 10.3 | % | | 2,307 | | | 10.2 | % | | 2,175 | | | 9.5 | % |
Transportation, Communication, Gas, Utilities | 5,002 | | | 9.4 | % | | 774 | | | 3.4 | % | | 596 | | | 2.6 | % |
Manufacturing | 4,387 | | | 8.2 | % | | 1,347 | | | 6.0 | % | | 1,101 | | | 4.8 | % |
Service Industries | 4,213 | | | 7.9 | % | | 722 | | | 3.2 | % | | 686 | | | 3.0 | % |
Retail | 3,462 | | | 6.5 | % | | 1,301 | | | 5.8 | % | | 1,310 | | | 5.7 | % |
Wholesale | 2,605 | | | 4.9 | % | | 882 | | | 3.9 | % | | 875 | | | 3.8 | % |
Finance and Insurance | 2,604 | | | 4.9 | % | | 1,361 | | | 6.0 | % | | 1,251 | | | 5.5 | % |
Other | 5,834 | | | 10.8 | % | | 2,616 | | | 11.6 | % | | 4,177 | | | 18.2 | % |
Total | $ | 53,455 | | | 100.0 | % | | $ | 22,586 | | | 100.0 | % | | $ | 22,900 | | | 100.0 | % |
We have historically carried a significant concentration of real estate secured loans, but actively mitigate that exposure through our underwriting policies, thatwhich primarily rely on borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner occupied. At December 31, 2017,2022, commercial loans secured by real estate were $18.10$27.18 billion, or 76.7 percent,51%, of totalcommercial loans and leases compared to $16.54$16.38 billion, or 76.1 percent,73% at December 31, 2021. The change primarily reflects the impact of totalthe CIT Merger and respective loans acquired.
Loans and leases to borrowers in medical, dental or other healthcare fields were $8.15 billion as of December 31, 2022, which represents 15.2% of commercial loans and leases, compared to $7.00 billion or 31.0% of commercial loans and leases at December 31, 2016,2021. The credit risk of this industry concentration is mitigated through our underwriting policies which emphasize reliance on adequate borrower cash flow rather than underlying collateral value and $15.59 billion,our preference for financing secured by owner-occupied real property.
Consumer Concentrations
Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or 77.0 percent, at December 31, 2015.other conditions. The following table summarizes state concentrations greater than 5.0% based on property address.
Table 2330
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE COLLATERALConsumer Loans - Geography
|
| |
| December 31, 2017 |
Collateral location | Percent of real estate secured loans with collateral located in the state |
North Carolina | 39.9% |
South Carolina | 16.1 |
California | 9.5 |
Virginia | 7.6 |
Georgia | 5.9 |
Florida | 3.7 |
Washington | 2.9 |
Texas | 2.6 |
Tennessee | 1.7 |
All other locations | 10.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| | | | | | | | | | | |
State | | | | | | | | | | | |
North Carolina | $ | 5,702 | | | 32.9 | % | | $ | 4,931 | | | 50.4 | % | | $ | 4,741 | | | 47.9 | % |
California | 4,014 | | | 23.2 | % | | 161 | | | 1.6 | % | | 141 | | | 1.4 | % |
South Carolina | 3,001 | | | 17.3 | % | | 2,626 | | | 26.9 | % | | 2,533 | | | 25.6 | % |
Other states | 4,609 | | | 26.6 | % | | 2,068 | | | 21.1 | % | | 2,477 | | | 25.1 | % |
Total | $ | 17,326 | | | 100.0 | % | | $ | 9,786 | | | 100.0 | % | | $ | 9,892 | | | 100.0 | % |
Among consumer real estate secured loans, our revolving mortgage loans (also known as (“Home Equity Lines of CreditCredit” or HELOCs)“HELOCs”) present a heightened risk due to long commitment periods during which the financial position of individual borrowers or collateral values may deteriorate significantly. In addition, a large percentage of our revolving mortgage loansHELOCs are secured by junior liens. Substantial declines in collateral values could cause junior lien positions to become effectively unsecured. Revolving mortgage loansHELOCs secured by real estate were $2.77$1.95 billion, or 11.7 percent,11%, of total consumer loans at December 31, 2017,2022, compared to $2.64$1.82 billion, or 12.1 percent,19%, at December 31, 2016, and $2.58 billion, or 12.7 percent, at December 31, 2015.2021. The CIT Merger had minimal impact on the outstanding balance, as the acquired consumer portfolio was primarily residential mortgages.
Except for loans acquired through mergers and acquisitions, we have not purchased revolving mortgagesHELOCs in the secondary market, nor have we originated these loans to customers outside of our market areas. All originated revolving mortgage loansHELOCs were underwritten by us based on our standard lending criteria. The revolving mortgage loanHELOC portfolio consists largely of variable rate lines of credit which allow customer draws during the entire contractuala specified period of the line of credit, typically 15 years.with a portion switching to an amortizing term following the draw period. Approximately 78.9 percent81.8% of the revolving mortgage portfolio relates to properties in North Carolina and South Carolina. Approximately 35.3 percent32.3% of the loan balances outstanding are secured by senior collateral positions while the remaining 64.7 percent67.7% are secured by junior liens.
We actively monitor the portion of our HELOC loans that areHELOCs in the interest-only period and when they will mature. Approximately 83.6 percent of outstanding balances at December 31, 2017, require interest-only payments, while the remaining require monthly payments equal to the greater of 1.5 percent of the outstanding balance or $100. When HELOC loansHELOCs switch from interest-only to fully amortizing, including principal and interest, some borrowers may not be able to afford the higher monthly payments. AsWe have not experienced a significant increase in defaults as a result of December 31, 2017, approximately 5 percent of the HELOC portfolio is due to mature by the end of 2019 with remaining loan maturities spread similarly over future years thereafter.these increased payments. In the normal course of business, the bankwe will work with each borrower as they approach the revolving period maturity date to discuss options for refinance or repayment.
Loans
Counterparty Risk
We enter into interest rate derivatives and leasesforeign exchange forward contracts as part of our overall risk management practices and also on behalf of our clients. We establish risk metrics and evaluate and manage the counterparty risk associated with these derivative instruments in accordance with the comprehensive Risk Management Framework and Risk Appetite Framework and Statement.
Counterparty credit exposure or counterparty risk is a primary risk of derivative instruments, relating to borrowers in medical, dental or related fields were $4.86 billion asthe ability of December 31, 2017, which represents 20.6 percent of total loans and leases, compareda counterparty to $4.66 billion or 21.5 percent of total loans and leases at December 31, 2016, and $4.28 billion or 21.2 percent of total loans and leases at December 31, 2015. Theperform its financial obligations under the derivative contract. We seek to control credit risk of this industry concentrationderivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures, which are integrated with our cash and issuer related credit processes.
The applicable Chief Credit Officer, or delegate, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements for BancShares’ risk management purposes and for the hedging of client transactions are executed with major financial institutions and are settled through the major clearing exchanges, which are rated investment grade by nationally recognized statistical rating agencies. Credit exposure is mitigated via the exchange of collateral between the counterparties covering mark-to-market valuations. Client related derivative transactions, which are primarily related to lending activities, are incorporated into our loan underwriting and reporting processes.
ASSET RISK
Asset risk is a form of price risk and is a primary risk of our leasing businesses related to the risk to earning of capital arising from changes in the value of owned leasing equipment. Reflecting the addition of operating lease equipment and additional asset-based lending from the CIT Merger, we are subject to increased asset risk. Asset risk in our leasing business is evaluated and managed in the divisions and overseen by risk management processes. In our asset-based lending business, we also use residual value guarantees to mitigate or partially mitigate exposure to end of lease residual value exposure on certain of our finance leases. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic periodic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and product, are reviewed as part of the quarterly financial and asset quality review. Reviews for impairment are performed at least annually.
In combination with other risk management and monitoring practices, asset risk is monitored through our underwriting policiesreviews of the equipment markets including utilization rates and traffic flows, the evaluation of supply and demand dynamics, the impact of new technologies and changes in regulatory requirements on different types of equipment. At a high level, demand for equipment is correlated with GDP growth trends for the markets the equipment serves, as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in trade flows due to specific events represent risks to the earnings that emphasize reliance on adequate borrower cash flow rather than underlying collateral valuecan be realized by these businesses. For instance, in the Rail business, BancShares seeks to mitigate these risks by maintaining a relatively young fleet of assets, which can bolster attractive lease and our preference for financing secured by owner-occupied real property. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2017.utilization rates.
MARKET RISK
Interest rate risk management
BancShares is exposed to the risk that changes in market conditions may affect interest rates and negatively impact earnings. The risk arises from the nature of BancShares’ business activities, the composition of BancShares’ balance sheet, and changes in the level or shape of the yield curve. BancShares manages this inherent risk strategically based on prescribed guidelines and approved limits.
Interest rate risk (IRR) results principallycan arise from assetsmany of the BancShares’ business activities, such as lending, leasing, investing, deposit taking, derivatives, and liabilities maturing or repricing at different pointsfunding activities. We evaluate and monitor interest rate risk primarily through two metrics.
•Net Interest Income Sensitivity (“NII Sensitivity”) measures the net impact of hypothetical changes in time, from assets and liabilities repricing at the same point in time but in different amounts, and from short-term and long-term interest rates changing in different magnitudes.on forecasted NII; and
•Economic Value of Equity Sensitivity (“EVE Sensitivity”) measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.
We assess our short-term IRR by forecasting net interest income over 24 months under various interest
BancShares uses a holistic process to measure and monitor both short term and long term risks which includes, but is not limited to, gradual and immediate parallel rate scenarios and comparing those results to forecast net interest income assuming stable rates. Rate shock scenarios represent an instantaneous and parallel shift in rates, up or down, from a base yield curve. Despite the current increase in market interest rates, the overall rate on interest-bearing deposits remains at cycle lows and as such, it is unlikely that the rates on most interest-bearing deposits can decline materially from current levels. Our shock projections incorporate assumptions of likely customer migration from low rate deposit instruments to intermediate term fixed rate instruments, such as certificates of deposit, as rates rise. Various other IRR scenarios
are modeled to supplement shock scenarios. This may include interest rate ramps,shocks, changes in the shape of the yield curve, and changes in the relationshipsrelationship of FCB ratesvarious yield curves.NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the longer-term risk of the existing balance sheet.
Our exposure to market rates. Table 24 providesNII Sensitivity is guided by the impact on net interest income over 24 months resulting from various instantaneousRisk Appetite Framework and Statement and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest rate shock scenariosrisk exposures, including through business line actions and actions within the investment, funding and derivative portfolios.
The composition of our interest rate sensitive assets and liabilities generally results in a net asset-sensitive position for NII Sensitivity, whereby our assets will reprice faster than our liabilities, which is generally concentrated at the short end of the yield curve.
Our funding sources consist primarily of deposits and we also support our funding needs through wholesale funding sources (including unsecured and secured borrowings).
The deposit rates we offer are influenced by market conditions and competitive factors. Market rates are the key drivers of deposit costs and we continue to optimize deposit costs by improving our deposit mix. Changes in interest rates, expected funding needs, as well as actions by competitors, can affect our deposit taking activities and deposit pricing. We believe our targeted non-maturity deposit customer retention is strong and we remain focused on optimizing our mix of deposits. We regularly assess the effect of deposit rate changes on our balances and seek to achieve optimal alignment between assets and liabilities.
The following table below summarizes the results of 12-month NII Sensitivity simulations produced by our asset/liability management system. These simulations assume static balance sheet replacement with like products and implied forward market rates, but also incorporates additional assumptions, such as, but not limited to prepayment estimates, pricing estimates and deposit behaviors. The below simulations assume an immediate 25, 100 and 200 bps parallel increase and 25 and 100 bps decrease from the market-based forward curve for December 31, 20172022 and 2016.2021.
Table 24
NET INTEREST INCOME SENSITIVITY SIMULATION ANAYLYSIS
|
| | | | | |
| Estimated increase (decrease) in net interest income |
Change in interest rate (basis point) | December 31, 2017 | | December 31, 2016 |
-100 | (12.25 | )% | | (11.21 | )% |
+100 | 3.66 |
| | 4.12 |
|
+200 | 4.61 |
| | 5.06 |
|
+300 | 2.43 |
| | 2.08 |
|
31
Net interest income sensitivityInterest Income Sensitivity Simulation Analysis
| | | | | | | | | | | | | | |
| | Estimated (Decrease) Increase in NII |
Change in interest rate (bps) | | December 31, 2022 | | December 31, 2021 |
-100 | | (4.0) | % | | (5.8) | % |
-25 | | (0.9) | % | | (1.2) | % |
+25 | | 0.8 | % | | 1.1 | % |
+100 | | 3.4 | % | | 3.2 | % |
+200 | | 6.7 | % | | 6.3 | % |
NII Sensitivity metrics at December 31, 20172022, compared to December 31, 2016 remained relatively stable with the slight decline2021, were primarily affected by a reduction in the -100 bps, +100 bpscash as well as liability management actions which included borrowing FHLB advances to support loan growth and +200 bps scenarios primarily driven by growth in the fixed rate loan portfolio. FCB assumes that a portion of low cost non-maturity deposits will be replaced with higher cost time deposits in rising rate shock scenarios and at +300 bps net interest income could modestly increase as a the rise in asset yields is enough to offset the higher deposit expenses.
Long-termrunoff. BancShares continues to have an asset sensitive interest rate risk profile and the potential exposure to forecasted earnings is measured usinglargely due to the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as estimates of modest cumulative future deposit betas. Approximately 45% of our loans have floating contractual reference rates, indexed primarily to 1-month LIBOR, 3-month LIBOR, Prime and SOFR. Deposit betas for the combined company are modeled to have a portfolio average of approximately 25% over the forecast horizon. Impacts to NII Sensitivity may change due to actual results differing from modeled expectations.
As noted above, EVE Sensitivity supplements NII simulations as it estimates risk exposures beyond a twelve-month horizon. EVE Sensitivity measures the change in value of the economic value of equity (EVE) sensitivity analysisreflecting changes in assets, liabilities, and off-balance sheet instruments in response to studya change in interest rates. EVE Sensitivity is calculated by estimating the impact of long-term cash flows on earnings and capital. EVE representschange in the difference between the sum of thenet present value of all asset cash flowsassets, liabilities, and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balanceoff-balance sheet items under different interestvarious rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. movements.
The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Table 25following table presents the EVE profile as of December 31, 20172022, and 2016.2021.
Table 32
Table 25Economic Value of Equity Modeling Analysis
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS | | | | | | | | | | | | | | |
| | Estimated (Decrease) Increase in EVE |
Change in interest rate (bps) | | December 31, 2022 | | December 31, 2021 |
-100 | | (5.3) | % | | (13.7) | % |
-25 | | (1.2) | % | | — | % |
+100 | | 4.1 | % | | 6.1 | % |
+200 | | 3.0 | % | | 5.9 | % |
| | | | |
|
| | | | | |
| Estimated increase (decrease) in EVE |
Change in interest rate (basis point) | December 31, 2017 | | December 31, 2016 |
-100 | (15.44 | )% | | (15.72 | )% |
+100 | 3.38 |
| | 3.10 |
|
+200 | 1.06 |
| | 0.85 |
|
+300 | (5.52 | ) | | (5.44 | ) |
The economic value of equity metrics at December 31, 20172022 compared to December 31, 2016 remained relatively stable2021 were primarily affected by balance sheet composition changes as well as increasing market interest rates.
In addition to the above reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that impact management volumes, specific risk events, or the sensitivity to key assumptions are also evaluated.
We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the minor improvementAsset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility.
The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the -100 bps, +100 bpscompetition for business in the industries we serve. They also do not account for other business developments and +200 bps scenarios primarily dueother actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to the growth in demand deposit account balances. However, given the extended period of historically low market rates and FCB's balance sheet risk management, the economic value of equity could be negatively impacted if rates suddenly increase at least +300 bps where FCB expects that somerepresent our current view of the non-maturity deposit balances will be replace with higher cost time deposits. This will reduce the economic valueexpected range of equity as the duration of FCB's deposit book shortens.
We do not typically utilizefuture interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our overall balance sheet rate sensitivity and interest rate risk.movements.
Table 26The following provides loan maturity distribution andinformation by contractual maturity date.
Table 33
Loan Maturity Distribution
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | At December 31, 2022, Maturing |
| Within One Year | | One to Five Years | | Five to 15 Years | | After 15 Years | | Total |
Commercial | | | | | | | | | |
Commercial construction | $ | 600 | | | $ | 1,326 | | | $ | 765 | | | $ | 113 | | | $ | 2,804 | |
Owner occupied commercial mortgage | 719 | | | 4,159 | | | 9,140 | | | 455 | | | 14,473 | |
Non-owner occupied commercial mortgage | 2,283 | | | 5,293 | | | 2,012 | | | 314 | | | 9,902 | |
Commercial and industrial | 6,804 | | | 13,490 | | | 3,617 | | | 194 | | | 24,105 | |
Leases | 779 | | | 1,352 | | | 40 | | | — | | | 2,171 | |
Total commercial | $ | 11,185 | | | $ | 25,620 | | | $ | 15,574 | | | $ | 1,076 | | | $ | 53,455 | |
Consumer | | | | | | | | | |
Residential mortgage | 275 | | | 1,096 | | | 3,584 | | | 8,354 | | | 13,309 | |
Revolving mortgage | 86 | | | 149 | | | 67 | | | 1,649 | | | 1,951 | |
Consumer auto | 12 | | | 693 | | | 709 | | | — | | | 1,414 | |
Consumer other | 332 | | | 163 | | | 119 | | | 38 | | | 652 | |
Total consumer | $ | 705 | | | $ | 2,101 | | | $ | 4,479 | | | $ | 10,041 | | | $ | 17,326 | |
Total loans and leases | $ | 11,890 | | | $ | 27,721 | | | $ | 20,053 | | | $ | 11,117 | | | $ | 70,781 | |
The following provides information regarding the sensitivity of loans and leases to changes in interest rates.
Table 2634
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITYLoan Interest Rate Sensitivity
| | | | | | | | | | | |
dollars in millions | Loans Maturing One Year or After with |
| Fixed Interest Rates | | Variable Interest Rates |
Commercial | | | |
Commercial construction | $ | 999 | | | $ | 1,205 | |
Owner occupied commercial mortgage | 12,183 | | | 1,571 | |
Non-owner occupied commercial mortgage | 2,966 | | | 4,653 | |
Commercial and industrial | 7,803 | | | 9,498 | |
Leases | 1,392 | | | — | |
Total commercial | $ | 25,343 | | | $ | 16,927 | |
Consumer | | | |
Residential mortgage | 7,325 | | | 5,709 | |
Revolving mortgage | 36 | | | 1,829 | |
Consumer auto | 1,402 | | | — | |
Consumer other | 287 | | | 33 | |
Total consumer | $ | 9,050 | | | $ | 7,571 | |
Total loans and leases | $ | 34,393 | | | $ | 24,498 | |
Reference Rate Reform
The administrator of LIBOR has announced that publication of the most commonly used tenors of U.S. Dollar LIBOR will cease to be provided or cease to be representative after June 30, 2023. The U.S. federal banking agencies had also issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021 at the latest. Accordingly, prior to the CIT Merger, FCB and CIT had ceased originating new products using LIBOR by the end of 2021.
|
| | | | | | | | | | | | | | | |
| At December 31, 2017, maturing |
(Dollars in thousands) | Within One Year | | One to Five Years | | After Five Years | | Total |
Loans and leases: | | | | | | | |
Secured by real estate | $ | 1,239,684 |
| | $ | 5,668,584 |
| | $ | 11,189,753 |
| | $ | 18,098,021 |
|
Commercial and industrial | 801,116 |
| | 1,048,933 |
| | 886,732 |
| | 2,736,781 |
|
Other | 516,070 |
| | 1,413,293 |
| | 832,660 |
| | 2,762,023 |
|
Total loans and leases | $ | 2,556,870 |
| | $ | 8,130,810 |
| | $ | 12,909,145 |
| | $ | 23,596,825 |
|
Loans maturing after one year with: | | | | | | | |
Fixed interest rates | | | $ | 6,731,497 |
| | $ | 8,252,103 |
| | $ | 14,983,600 |
|
Floating or adjustable rates | | | 1,399,313 |
| | 4,657,042 |
| | 6,056,355 |
|
Total | | | $ | 8,130,810 |
| | $ | 12,909,145 |
| | $ | 21,039,955 |
|
Liquidity risk management
Liquidity risk isIn April 2018, the riskFRB of New York commenced publication of SOFR, which has been recommended as an alternative to U.S. Dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act, which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that an institution is unable to generatedo not provide for the use of a clearly defined or obtain sufficient cash or its equivalentspracticable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a cost-effective basisproposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. The final rule was approved by the FRB on December 16, 2022 and will become effective 30 days after it is published in the Federal Register. BancShares anticipates using Board-selected benchmark replacements to take advantage of the safe harbors that are afforded in the rule.
BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares’ LIBOR exposure is primarily to tenures other than one week and two-month USD LIBOR.
LIBOR is a benchmark interest rate for most of our floating rate loans and our Series B Preferred Stock, as well as certain liabilities and off-balance sheet exposures. We continue to monitor industry and regulatory developments and have a well-established transition program in place to manage the implementation of alternative reference rates as the market transitions away from LIBOR. Coordination is being handled by a cross-functional project team governed by executive sponsors. Its mission is to work with our businesses to ensure a smooth transition for BancShares and its customers to an appropriate LIBOR alternative. Certain financial markets and products have already migrated to alternatives. The project team ensures that BancShares is ready to move quickly and efficiently as consensus around LIBOR alternatives emerge. BancShares has processes in place to complete its review of the population of legal contracts impacted by the LIBOR transition, and updates to our operational systems and processes are substantially in place.
BancShares is utilizing SOFR as our preferred replacement index for LIBOR. As loans mature and new originations occur a larger percentage of BancShares’ variable-rate loans are expected to reference SOFR in response to the discontinuation of LIBOR. However, we are positioned to accommodate other alternative reference rates (e.g., credit sensitive rates) in response to how the market evolves. Further, BancShares plans to move to SOFR for its Series B Preferred Stock since the dividends for the Series B Preferred Stock after June 15, 2022 are based on a floating rate tied to three-month LIBOR.
For a further discussion of risks BancShares faces in connection with the replacement of LIBOR on its operations, see “Risk Factors—Market Risks—We may be adversely impacted by the transition from LIBOR as a reference rate.” in Item 1A. Risk Factors of this Annual Report on Form 10-K.
LIQUIDITY RISK
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet commitments as they fall due. The most commonour obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain sufficient amounts of Available Cash and High Quality Liquid Securities (“HQLS”). Additional sources of liquidity risk arise from mismatches in the timinginclude FHLB borrowing capacity, committed credit facilities, repurchase agreements, brokered CD issuances, unsecured debt issuances, and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term deposits (liabilities). Other forms of liquidity risk include market constraints on the abilitycollections generated by portfolio asset sales to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile.third parties.
We utilize various limit-based measuresa series of measurement tools to assess and monitor measurethe level and control liquidity risk across three different types of liquidity:
Tactical liquidity measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
Structural liquidity measures the amount by which illiquid assets are supported by long-term funding; and
Contingent liquidity utilizes cash flow stress testing across three crisis scenarios to determine the adequacy of our liquidity.liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business strategy, risk appetite, levels of liquid assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in identifying potential liquidity risk and stress events.
BancShares maintains a framework to establish liquidity risk tolerances, monitoring, and breach escalation protocol to alert management of potential funding and liquidity risks and to initiate mitigating actions as appropriate. Further, BancShares maintains a contingent funding plan which details protocols and potential actions to be taken under liquidity stress conditions.
Liquidity includes Available Cash and HQLS. At December 31, 2022 we had $18.24 billion of total Liquid Assets (16.7% of total assets) and $13.52 billion of contingent liquidity sources available.
Table 35
Liquidity
| | | | | |
dollars in millions | December 31, 2022 |
Available Cash | $ | 4,894 | |
High Quality Liquid Securities | 13,350 | |
Liquid Assets | $ | 18,244 | |
| |
FHLB capacity(1) | $ | 9,218 | |
FRB capacity | 4,203 | |
Line of credit | 100 | |
Total contingent sources | $ | 13,521 | |
Total Liquid Assets and contingent sources | $ | 31,765 | |
(1) See Table 36 for additional details.
We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifyingfund our external funding with respect to maturities, counterpartiesoperations through deposits and nature.borrowings. Our primary source of liquidity is our retailbranch-generated deposit bookportfolio due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank,cost. Deposits totaled $89.41 billion and various other correspondent bank accounts and unencumbered securities, which totaled $3.70$51.41 billion at December 31, 2017, compared2022 and December 31, 2021, respectively. As needed, we use borrowings to $3.88diversify the funding of our business operations. Borrowings totaled $6.65 billion and $1.78 billion at December 31, 2016. Another2022 and 2021, respectively. Borrowings primarily consist of FHLB advances, senior unsecured notes, securities sold under customer repurchase agreements, and subordinated notes.
A source of available funds is advances from the FHLB of Atlanta. OutstandingWe may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted.
FHLB Advances
Table 36
FHLB Balances
| | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Total | | Total | | Total |
Total borrowing capacity | $ | 14,918 | | | $ | 9,564 | | | $ | 8,638 | |
Less: | | | | | |
Advances | 4,250 | | | 645 | | | 655 | |
Letters of credit(1) | 1,450 | | | — | | | — | |
Available capacity | $ | 9,218 | | | $ | 8,919 | | | $ | 7,983 | |
Pledged Non-PCD loans (contractual balance) | $ | 23,491 | | | $ | 14,507 | | | $ | 12,157 | |
Weighted Average Rate | 3.28 | % | | 1.28 | % | | 1.28 | % |
(1) Letters of credit were established with the FHLB to collateralize public funds.
The increase in advances were $835.2 million as offrom December 31, 2017, and we had sufficient collateral pledged to secure $5.242021 reflected FHLB borrowings of $6.15 billion, partially offset by repayments of additional borrowings. Also,$2.55 billion. FHLB borrowings remaining at December 31, 2017, $2.772022 consisted of $1.75 billion short-term and $2.50 billion long-term. We grew FHLB advances during 2022 to supplement funding due to the decrease in noncovered loansdeposits and increase in loans. With the growth in deposits in the fourth quarter of 2022, we were able to rebalance our funding and we repaid $1.75 billion of the outstanding FHLB advances in January 2023 and an additional $600 million in February 2023.
Under borrowing arrangements with the FRB of Richmond, FCB has access to an additional $4.20 billion on a lendable collateral value of $2.08 billionsecured basis. There were used to create additional borrowing capacity atno outstanding borrowings with the Federal Reserve Bank. We also maintain Federal Funds lines and other borrowing facilities which had $665.0 million of available capacityFRB Discount Window at December 31, 2017.2022 and 2021.
We entered into forward-starting advances with the FHLB of Atlanta in June 2016 to receive $200.0 million of fixed rate long-term funding. There were two advances of $100.0 million each scheduled to fund in June 2018, but both advances were terminated in December 2017. BancShares received cash of $12.5 million associated with the early termination
Commitments and recorded this as a gain in other noninterest income in the Consolidated Statements of Income.Contractual Obligations
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Table 2737 identifies significant obligations and commitments as of December 31, 20172022, representing required and potential cash outflows. See Note T24 — Commitments and Contingencies for additional information regarding total commitments. Financing commitments, letters of credit and deferred purchase commitments are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used.
Table 2737
COMMITMENTS AND CONTRACTUAL OBLIGATIONSCommitments and Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Payments Due by Period |
Type of Obligation | Less than 1 year | | 1-3 years | | 4-5 years | | Thereafter | | Total |
Contractual obligations: | | | | | | | | | |
Time deposits | $ | 6,896 | | | $ | 3,481 | | | $ | 107 | | | $ | 126 | | | $ | 10,610 | |
Short-term borrowings | 2,186 | | | — | | | — | | | — | | | 2,186 | |
Long-term obligations | 518 | | | 2,865 | | | 35 | | | 1,041 | | | 4,459 | |
Total contractual obligations | $ | 9,600 | | | $ | 6,346 | | | $ | 142 | | | $ | 1,167 | | | $ | 17,255 | |
Commitments: | | | | | | | | | |
Financing commitments | $ | 11,445 | | | $ | 4,627 | | | $ | 2,875 | | | $ | 4,505 | | | $ | 23,452 | |
Letters of credit | 212 | | | 121 | | | 138 | | | 9 | | | 480 | |
Deferred purchase agreements | 2,039 | | | — | | | — | | | — | | | 2,039 | |
Purchase and funding commitments | 913 | | | 28 | | | — | | | — | | | 941 | |
Affordable housing partnerships(1) | 132 | | | 137 | | | 16 | | | 10 | | | 295 | |
Total commitments | $ | 14,741 | | | $ | 4,913 | | | $ | 3,029 | | | $ | 4,524 | | | $ | 27,207 | |
(1) On-balance sheet commitments, included in other liabilities.
CRA Investment Commitment
As part of the CIT Merger, BancShares adopted a community benefit plan, developed in collaboration with representatives of community reinvestment organizations. See further discussion on CRA, including details on investment commitments, in the subsection “Subsidiary Bank - FCB” in Item 1. Business — Regulatory Considerations of this Annual Report on Form 10-K.
CAPITAL
Capital requirements applicable to BancShares are discussed in “Regulatory Considerations” section in Item 1. Business of this Annual Report of Form 10-K.
BancShares maintains a comprehensive capital adequacy process. BancShares establishes internal capital risk limits and warning thresholds, which utilize Risk-Based and Leverage-Based Capital calculations, internal and external early warning indicators, its capital planning process, and stress testing to evaluate BancShares' capital adequacy for multiple types of risk in both normal and stressed environments. The capital management framework requires contingency plans be defined and may be employed at management’s discretion.
Share Repurchase Program
On July 26, 2022, the Board authorized a share repurchase program for up to 1,500,000 shares of BancShares’ Class A common stock for the period commencing August 1, 2022 through July 28, 2023. We purchased 1,027,414 shares of Class A common stock during the third quarter of 2022, and we repurchased the remaining 472,586 shares of Class A common stock during the fourth quarter of 2022, thereby completing the share repurchase program. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K for further details on purchases.
Common and Preferred Stock Dividends
During the first three quarters of 2022, we paid a quarterly dividend of $0.47 on the Class A common stock and Class B common stock. On October 25, 2022, our Board of Directors declared a quarterly dividend increase on the Class A common stock and Class B common stock to $0.75 per common share. The fourth quarter dividends were paid on December 15, 2022. On January 24, 2023, our Board of Directors declared a quarterly dividend on the Class A common stock and Class B common stock of $0.75 per common share. The dividends are payable on March 15, 2023 to stockholders of record as of February 28, 2023.
On January 24, 2023, our Board of Directors also declared dividends on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The dividends are payable on March 15, 2023. Dividend payment information on our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is disclosed in Note 17 — Stockholders’ Equity.
|
| | | | | | | | | | | | | | | | | | | |
Type of obligation | Payments due by period |
(Dollars in thousands) | Less than 1 year | | 1-3 years | | 3-5 years | | Thereafter | | Total |
Contractual obligations: | | | | | | | | | |
Time deposits | $ | 1,684,017 |
| | $ | 580,368 |
| | $ | 134,732 |
| | $ | 3 |
| | $ | 2,399,120 |
|
Short-term borrowings | 693,807 |
| | — |
| | — |
| | — |
| | 693,807 |
|
Long-term obligations | 1,298 |
| | 2,724 |
| | 147,672 |
| | 718,546 |
| | 870,240 |
|
Operating leases | 25,797 |
| | 31,529 |
| | 19,961 |
| | 45,138 |
| | 122,425 |
|
Estimated payment to FDIC due to claw-back provisions under shared-loss agreements | — |
| | 88,019 |
| | 13,323 |
| | — |
| | 101,342 |
|
Total contractual obligations | $ | 2,404,919 |
| | $ | 702,640 |
| | $ | 315,688 |
| | $ | 763,687 |
| | $ | 4,186,934 |
|
Commitments: | | | | | | | | | |
Loan commitments | $ | 5,268,707 |
| | $ | 877,249 |
| | $ | 649,854 |
| | $ | 2,833,555 |
| | $ | 9,629,365 |
|
Standby letters of credit | 68,150 |
| | 12,809 |
| | 571 |
| | — |
| | 81,530 |
|
Affordable housing partnerships | 34,297 |
| | 22,928 |
| | 3,797 |
| | 797 |
| | 61,819 |
|
Total commitments | $ | 5,371,154 |
| | $ | 912,986 |
| | $ | 654,222 |
| | $ | 2,834,352 |
| | $ | 9,772,714 |
|
Capital Composition and Ratios
In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of its Class A common stock. Additionally, shares of CIT Series A Preferred Stock were automatically converted into the right to receive shares of BancShares Series B Preferred Stock and shares of CIT Series B Preferred Stock were automatically converted into the right to receive shares of BancShares Series C Preferred Stock. In connection with the consummation of the CIT Merger, the Parent Company issued (a) 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in a total liquidation preference of $325 million, and (b) 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $25 per share, resulting in a total liquidation preference of $200 million.
The table below shows activities that caused the change in outstanding shares of Class A common stock for the year.
Table 38
Changes in Shares of Class A Common Stock Outstanding
| | | | | |
| Year Ended December 31, 2022 |
Class A shares outstanding at beginning of period | 8,811,220 | |
Share issuance in conjunction with the CIT Merger | 6,140,010 | |
Restricted stock units vested, net of shares held to cover taxes | 49,787 | |
Shares purchased under authorized repurchase plan | (1,500,000) | |
Class A shares outstanding at end of period | 13,501,017 | |
We also had 1,005,185 shares of Class B common stock outstanding at December 31, 2022 and 2021.
We are committed to effectively managing our capital to protect our depositors, creditors and stockholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.
In accordance with GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within stockholders’ equity. These amounts are excluded from regulatory in the calculation of our regulatory capital ratios under current regulatory guidelines.
Table 39
Analysis of Capital Adequacy
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | Requirements to be Well-Capitalized | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
BancShares | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 11,799 | | | 13.18 | % | | $ | 5,042 | | | 14.35 | % | | $ | 4,577 | | | 13.81 | % |
Tier 1 risk-based capital | 8.00 | % | | 9,902 | | | 11.06 | % | | 4,380 | | | 12.47 | % | | 3,856 | | | 11.63 | % |
Common equity Tier 1 | 6.50 | % | | 9,021 | | | 10.08 | % | | 4,041 | | | 11.50 | % | | 3,516 | | | 10.61 | % |
Tier 1 leverage ratio | 5.00 | % | | 9,902 | | | 8.99 | % | | 4,380 | | | 7.59 | % | | 3,856 | | | 7.86 | % |
| | | | | | | | | | | | | |
FCB | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | |
Total risk-based capital | 10.00 | % | | $ | 11,627 | | | 12.99 | % | | $ | 4,858 | | | 13.85 | % | | $ | 4,543 | | | 13.72 | % |
Tier 1 risk-based capital | 8.00 | % | | 10,186 | | | 11.38 | % | | 4,651 | | | 13.26 | % | | 4,277 | | | 12.92 | % |
Common equity Tier 1 | 6.50 | % | | 10,186 | | | 11.38 | % | | 4,651 | | | 13.26 | % | | 4,277 | | | 12.92 | % |
Tier 1 leverage ratio | 5.00 | % | | 10,186 | | | 9.25 | % | | 4,651 | | | 8.07 | % | | 4,277 | | | 8.72 | % |
At December 31, 2022, BancShares and FCB had risk-based capital ratio conservation buffers of 5.06% and 4.99%, respectively, which are in excess of the Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers of 6.35% and 5.85%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of December 31, 2022 and 2021 over the Basel III minimum for the ratio that is the binding constraint. Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 17 — Stockholders’ Equity. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
CRITICAL ACCOUNTING ESTIMATES
The accounting and reporting policies of BancShares are in accordance with GAAP and are described in Note 1 — Significant Accounting Policies and Basis of Presentation. The preparation of financial statements in conformity with GAAP requires us to exercise judgment in determining many of the estimates and assumptions utilized to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Our financial position and results of operations could be materially affected by changes to these estimates and assumptions.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting estimates related to BancShares’ ACL and certain purchase accounting fair value estimates for the CIT Merger related to loans, core deposit intangibles, and operating lease equipment in the Rail segment (“Rail Assets”) are considered to be critical accounting estimates because considerable judgment and estimation is applied by management.
ACL
The ACL represents management’s best estimate of credit losses expected over the life of the loan or lease, adjusted for expected contractual payments and the impact of prepayment expectations. Estimates for loan and lease losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. The ACL is calculated based on a variety of considerations, including, but not limited to actual net loss history of the various loan and lease pools, delinquency trends, changes in forecasted economic conditions, loan growth, estimated loan life, and changes in portfolio credit quality. Loans and leases are segregated into pools with similar risk characteristics and each have a model that is utilized to estimate the ACL. The ACL models utilize economic variables, including unemployment, GDP, home price index, commercial real estate index, corporate profits, and credit spreads. These economic variables are based on macroeconomic scenario forecasts with a forecast horizon that covers the lives of the loan portfolios.
While management utilizes its best judgment and information available, the ultimate adequacy of our ACL is dependent upon a variety of factors beyond our control which are inherently difficult to predict, the most significant being the macroeconomic scenario forecasts that determine the economic variables utilized in the ACL models. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations. At December 31, 2022, ACL estimates in these scenarios ranged from approximately $685 million when weighting the upside scenario 100%, to approximately $1.23 billion when weighting the downside scenario 100%. BancShares management determined that an ACL of $922 million was appropriate as of December 31, 2022.
Current economic conditions and forecasts can change which could affect the anticipated amount of estimated credit losses and therefore the appropriateness of the ACL. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACL because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
Accounting policies related to the ACL are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. For more information regarding the ACL, refer to the Credit Risk Management — ACL section of this MD&A and Note 5 — Allowance for Credit Losses.
Purchase Accounting Fair Value Estimates
Acquired assets and liabilities in a business combination are recorded at their fair values as of the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments. The fair values for these items are further discussed in Note 2 — Business Combinations.
Fair values of acquired loans and leases, core deposit intangibles recorded and Rail Assets associated with the CIT Merger are considered critical accounting estimates and discussed further below.
Loans and Leases
Fair values for loans acquired in the CIT Merger were based on a discounted cash flow methodology that forecasts expected credit and prepayment adjusted cash flows, which were discounted using market-based discount rates. This approach also considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, and amortization status.
Selected larger, impaired loans were specifically reviewed to evaluate fair value. 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. In our valuation analysis, the discount rate had the most significant impact on the valuation. An increase of 0.25% to the discount rates used to derive the fair value of the loans at the time of the merger would have reduced the approximate fair value by $201 million, whereas a decrease of 0.25% to the discount rates would have increased the fair value by approximately $202 million.
Core Deposit Intangibles
Certain core deposits were acquired as part of the CIT Merger, which provide an additional source of funds for BancShares. Core deposit intangibles represent the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. The core deposit intangibles were recorded at fair value of $143 million. See Note 1 — Significant Accounting Policies and Basis of Presentation for further accounting policy information and Note 8 — Goodwill and Other Intangibles.
Core deposit intangibles were 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. The discounted cash flow methodology considered discount rate, client attrition rates, cost of the deposit base, reserve requirements, net maintenance cost, and an estimate of the cost associated with alternative funding sources. In our valuation analysis, the discount rate had the most significant impact on the valuation. An increase of 0.25% to the discount rates used to derive the core deposit intangibles at the Merger Date would have decreased core deposit intangibles by approximately $6 million, whereas a decrease to the discount rates of 0.25% would have increased core deposit intangibles by approximately $8 million.
Rail Assets
Our Rail Assets consist of railcars and locomotives. Fair values for acquired Rail Assets were based primarily on a cost approach under an in-use premise. The sales approach was used to value Rail Assets when market information was available. A discount was recorded for Rail Assets to reduce the carrying value to fair value. Rail Assets are discussed further in the Rail discussion in the section entitled “Results by Business Segment” of this MD&A.
RECENT ACCOUNTING PRONOUNCEMENTS
The following ASUs issued by the FASB were adopted by BancShares as of January 1, 2023. There were no other recent accounting pronouncements issued but not yet adopted by BancShares as of January 1, 2023.
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Standard | Summary of Guidance | Effect on BancShares’ Financial Statements |
ASU 2022-01, Fair Value Hedging - Portfolio Layer Method Issued March 2022 | The amendments in this Update allow entities to designate multiple hedged layers of a single closed portfolio, and expands the scope of the portfolio layer method to include non-prepayable financial assets. Provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method. In addition, as of the adoption date the Update permits reclassification of debt securities from the held-to-maturity category to the available-for-sale category if the entity intends to include those securities in a portfolio designated in a portfolio layer method hedge. | BancShares adopted ASU 2022-01 as of January 1, 2023.
Adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares did not have any hedged portfolios.
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ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures Issued March 2022 | For creditors that have adopted CECL, the amendments in this ASU: (i) eliminate the previous recognition and measurement guidance for TDRs, (ii) require new disclosures for loan modifications when a borrower is experiencing financial difficulty (the “Modification Disclosures”) and (iii) require disclosures of current period gross charge-offs by year of origination in the vintage disclosures (the “Gross Charge-off Vintage Disclosures”) The Modification Disclosures apply to the following modification types: principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or a combination thereof. Creditors will be required to disclose the following by loan class: (i) amounts and relative percentages of each modification type, (ii) the financial effect of each modification type, including the incremental effect of principal forgiveness or reduction in weighted average interest rate, (iii) the performance of the loan in the 12 months following the modification and (iv) qualitative information discussing how the modifications factored into the determination of the ACL. | BancShares adopted ASU 2022-02 as of January 1, 2023 and elected to apply the modified retrospective transition method for ACL recognition and measurement.
As a result of adopting this ASU, BancShares does not expect a material change to its ACL related to loans previously modified as a TDR and, therefore, does not expect a material cumulative effect adjustment to retained earnings as of January 1, 2023.
The Modification Disclosures and Gross Charge-off Vintage Disclosures are required to be applied prospectively, beginning in BancShares’ Quarterly Report on Form 10-Q as of and for the three months ending March 31, 2023. |
The following ASUs related to reference rate reform can be applied through December 31, 2024:
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Standard | Summary of Guidance | Effect on BancShares’ Financial Statements |
ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020
ASU 2021-01, Reference Rate Reform (Topic 848): Scope Issued January 2021
ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 Issued December 2022
| The amendments in these updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Allows entities to prospectively apply certain optional expedients for contract modifications and removes the requirements to remeasure contract modifications or de-designate hedging relationships. In addition, potential sources of ineffectiveness as a result of reference rate reform may be disregarded when performing certain effectiveness assessments.
The main purpose of the practical expedients is to ease the administrative burden of accounting for contracts impacted by reference rate reform.
ASU 2021-01 refines the scope of ASC 848 and clarifies which optional expedients may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified in connection with the market-wide transition to new reference rates.
ASU 2022-06 extends the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to December 31, 2024.
| BancShares continues to assess the impact of the optional expedients available through December 31, 2024 for eligible contract modifications and hedge relationships.
However, the reference rate reform optional expedients have not yet been applied to any contracts and adoption of this guidance has not had, and is expected to continue to not have, a material impact on the financial statements. |
NON-GAAP FINANCIAL MEASUREMENTS
BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares’ consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions.
Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation between the U.S. GAAP financial measure and the non-GAAP financial measure. We describe each of these measures below and explain why we believe the measure to be useful.
The following table provides a reconciliation of net income (GAAP) to net revenue on operating leases (non-GAAP) for the Rail Segment.
Adjusted Rental Income on Operating Lease Equipment for Rail Segment
Adjusted rental income on operating lease equipment within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses.
The table below presents a reconciliation of net income to adjusted rental income on operating lease equipment.
Table 40
Rail Segment
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dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Net income (GAAP) | $ | 112 | | | $ | — | | | $ | — | |
Plus: Provision for income taxes | 37 | | | — | | | — | |
Plus: Other noninterest expense | 63 | | | — | | | — | |
Less: Other noninterest income | 5 | | | — | | | — | |
Plus: Interest expense, net | 80 | | | — | | | — | |
Adjusted rental income on operating lease equipment (non-GAAP) | $ | 287 | | | $ | — | | | $ | — | |
FOURTH QUARTER ANALYSIS
Table 41
Selected Financial Data
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dollars in millions, except share data | Three Months Ended |
| December 31, 2022 | | September 30, 2022 | | December 31, 2021 |
SUMMARY OF OPERATIONS | | | | | |
Interest income | $ | 1,040 | | | $ | 906 | | | $ | 371 | |
Interest expense | 238 | | | 111 | | | 14 | |
Net interest income | 802 | | | 795 | | | 357 | |
Provision (benefit) for credit losses | 79 | | | 60 | | | (5) | |
Net interest income after provision for credit losses | 723 | | | 735 | | | 362 | |
Noninterest income | 429 | | | 433 | | | 114 | |
Noninterest expense | 760 | | | 760 | | | 323 | |
Income before income taxes | 392 | | | 408 | | | 153 | |
Income taxes | 135 | | | 93 | | | 30 | |
Net income | 257 | | | 315 | | | 123 | |
Preferred stock dividends | 14 | | | 12 | | | 4 | |
Net income available to common stockholders | $ | 243 | | | $ | 303 | | | $ | 119 | |
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PER COMMON SHARE DATA | | | | | |
Average diluted common shares | 14,607,426 | | | 15,727,993 | | | 9,816,405 | |
Net income available to common stockholders (diluted) | $ | 16.67 | | | $ | 19.25 | | | $ | 12.09 | |
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KEY PERFORMANCE METRICS | | | | | |
Return on average assets (ROA) | 0.93 | % | | 1.16 | % | | 0.84 | % |
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Net interest margin (NIM) (1) | 3.36 | % | | 3.40 | % | | 2.58 | % |
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SELECTED QUARTERLY AVERAGE BALANCES | | | | | |
Total investments | $ | 18,876 | | | $ | 19,119 | | | $ | 11,424 | |
Total loans and leases (1) | 70,465 | | | 68,824 | | | 32,488 | |
Total operating lease equipment (net) | 8,049 | | | 7,981 | | | — | |
Total assets | 109,792 | | | 107,987 | | | 58,116 | |
Total deposits | 89,042 | | | 88,422 | | | 51,239 | |
Total stockholders’ equity | 9,621 | | | 10,499 | | | 4,633 | |
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ASSET QUALITY | | | | | |
Ratio of nonaccrual loans to total loans | 0.89 | % | | 0.65 | % | | 0.37 | % |
Allowance for credit losses to loans ratio | 1.30 | % | | 1.26 | % | | 0.55 | % |
Net charge off ratio | 0.14 | % | | 0.10 | % | | (0.01) | % |
(1) Calculation is further discussed below in Table 42 of this MD&A.
For the quarterthree months ended December 31, 2017, BancShares reported consolidated net2022 compared to the three months ended September 30, 2022:
•Net income for the three months ended December 31, 2022 was $257 million, a decrease of $54.4$58 million, or 18% compared to the three months ended September 30, 2022. Net income available to common stockholders for the three months ended December 31, 2022 totaled $243 million, a decrease of $60 million, or 20% compared to the linked quarter. Net income per diluted common share for the three months ended December 31, 2022. was $16.67, a decrease of 13% from the linked quarter. The decreases were primarily due to higher provision for income taxes, reflecting taxes on the early surrender of BOLI contracts, and higher provision for credit losses.
◦Fourth quarter results were impacted by the strategic decision to exit $1.25 billion of BOLI policies. The surrender of the policies resulted in a tax charge of $55 million. Favorable market conditions prompted us to exit this long-term, illiquid asset. As we receive proceeds from the surrender, those will increase our capital and liquidity positions while at the same time allow us to invest in highly liquid assets at higher yields.
•Return on average assets for the three months ended December 31, 2022 was 0.93%, compared to 1.16% for the three months ended September 30, 2022, impacted by the higher income taxes noted above.
•NII for the three months ended December 31, 2022 was $802 million, an increase of $7 million, or 1% compared to the three months ended September 30, 2022. See average balances and rates below for more detail.
•NIM for the three months ended December 31, 2022 was 3.36%, a decrease of 4 bps from 3.40% for the three months ended September 30, 2022. See average balances and rates below for more detail.
•Provision for credit losses for the three months ended December 31, 2022 was $79 million compared to $52.7a provision of $60 million for the corresponding period of 2016. Per share income was $4.53 for the fourth quarter of 2017 and $4.39 for the same period a year ago.
Income tax expense totaled $68.7 million in the fourth quarter of 2017, up from $28.4 million in the fourth quarter of 2016, representing effective tax rates of 55.8 percent and 35.0 percentduring the respective periods. The increase in income tax expense was due to higher pre-tax earnings during the fourth quarter and the increase in the effective tax rate was primarily due to the impact of the Tax Act, which was enacted on December 22, 2017. Earnings in the fourth quarter of 2017 included income tax expense of $25.8 million due primarily to the re-measurement of deferred taxes as a result of the Tax Act reducing the federal tax rate to 21 percent effective January 1, 2018.
Net interest income increased $30.9 million, or by 12.6 percent, to $274.8 million over the fourth quarter of 2016.three months ended September 30, 2022. The increase was primarily due to higher non-PCI loan interest income of $21.0 million as a result of originatedchanges in reserves on individually evaluated loans, an increase in net charge-offs, loan growth and the contribution from the Guaranty acquisition, a $5.7 million improvement in interest income earned on investments and a $3.7 million increase in interest income earned on excess cash held in overnight investments. Interest income earned on overnight investments was positively impacted by three 25 basis point increasesdeterioration in the federal funds rate since the fourth quarter of 2016. These favorable impacts wereeconomic outlook, partially offset by an increasea change in interest expense of $324 thousand primarily related to higher rates paid on short-term borrowings.
portfolio mix. The taxable-equivalent net interest margincharge-off ratio for the fourth quarterthree months ended December 31, 2022 was 0.14%, up from 0.10% for the three months ended September 30, 2022.
•Noninterest income for the three months ended December 31, 2022 was $429 million, a decrease of 2017 was 3.34 percent, an increase of 20 basis points from$4 million compared to $433 million for the same quarter in the prior year.three months ended September 30, 2022. The margin improvementchange was primarily due to improved loan and investment yields anddeclines in other noninterest income (spread among various accounts), partially offset by higher loan balances.
BancShares recorded a net provision credit of $2.8 million for loan and lease losses during the fourth quarter of 2017, compared to a net provision expense of $16.0 million for the fourth quarter of 2016. The net provision credit in the current quarter was primarily due to favorable experience in certain loan loss factors.
Noninterestrental income was $140.2 million for the fourth quarter of 2017, an increase of $15.5 million from the same period of 2016. The increase was primarily driven by a gain of $12.5 million related to the early termination of two forward-starting FHLB advances. Noninterest income also benefited from higher merchant and cardholder income of $6.0 million resulting from higher sales volume, a $4.8 million increase inon operating leases, factoring commissions, service charges on deposit accounts and insurance commissions. Rental income on operating lease equipment increased $5 million on a gross basis, reflecting continued improvement in utilization and a higher lease rate. Noninterest income from fee generating lines of business including service charges on deposit accounts, factoring and insurance commissions, card services and fee income and other service charges increased $8 million. All other noninterest income declined by $17 million, spread among various accounts.
•Noninterest expense for the three months ended December 31, 2022 was $760 million, unchanged from the three months ended September 30, 2022. While the total was unchanged over the prior quarter, there was a $6 million increase in marketing costs, primarily related to the Guaranty acquisition,Direct Bank and a $3.2$3 million increase in wealth management fees.net occupancy expense due to increased repairs and utilities costs. These were offset by a $4 million decline in maintenance and depreciation expense on operating lease equipment, a $4 million decline in merger-related expenses and a $1 million decline in other operating expenses spread among various accounts.
•Select items in the current and linked quarters include:
•For the three months ended December 31, 2022:
•CIT Merger-related expenses of $29 million in noninterest expense.
•A provision for income taxes of $55 million related to the BOLI termination.
•For the three months ended September 30, 2022:
•CIT Merger-related expenses of $33 million in noninterest expense.
For the three months ended December 31, 2022 compared to the three months ended December 31, 2021:
•Net income for the three months ended December 31, 2022 was $257 million, an increase of $134 million, or 108% compared to the three months ended December 31, 2021. Net income available to common stockholders for the three months ended December 31, 2022 totaled $243 million, an increase of $124 million, or 105% compared to the three months ended December 31, 2021. Net income per diluted common share for the three months ended December 31, 2022 was $16.67, an increase of 38% over the three months ended December 31, 2021. The increases wereare primarily attributed to the CIT Merger.
•Select items for the three months ended December 31, 2022 are mentioned above.
•Return on average assets for the three months ended December 31, 2022 was 0.93%, compared to 0.84% in the same quarter in 2021.
•NII was $802 million for the three months ended December 31, 2022, an increase of $445 million, or 124% compared to the three months ended December 31, 2021. This was primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by lower securities gainsa decline in interest income on SBA-PPP loans.
•NIM was 3.36% for the three months ended December 31, 2022, an increase of $9.578 bps from 2.58% for the three months ended December 31, 2021. The increase reflected the higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger.
•Provision for credit losses for the three months ended December 31, 2022 was $79 million, compared to a benefit of $5 million for the three months ended December 31, 2021. The increase primarily reflects the CIT Merger, as well as deterioration in the macroeconomic forecasts used in the CECL forecasting process and loan growth. The net charge-off ratio for the three months ended December 31, 2022 was 0.14%, compared to a decreasenet recovery of $3.90.01% for the three months ended December 31, 2021.
•Noninterest income for the three months ended December 31, 2022 was $429 million, in mortgagean increase of $315 million compared to $114 million for the three months ended December 31, 2021. The increase was due primarily to the added activity due to the CIT Merger, including rental income on operating leases totaling $224 million.
•Noninterest expense for the three months ended December 31, 2022was $760 million, an increase of $437 million compared to $323 million for the three months ended December 31, 2021. The increase is primarily associated with the CIT Merger, including higher salaries and benefit costs of $159 million, primarily due to mortgage servicing rights valuation adjustments in the fourth quarter of 2016.
Noninterest expense was $294.6 million for the fourth quarter of 2017, an increase of $23.1 million from the same quarter last year, due to a $16.1 million increase in personnel expenses, primarily due to higher wages fromemployees and $135 million of depreciation and maintenance costs associated with the Guaranty and HCB acquisitions, annual merit increases and higher benefit costs. Noninterest expense also increased due to growth in cardholder and merchant processing expense of $3.0 million resulting from higher sales volume and an increase of $2.4 million and $1.4 million in consultant services and processing fees paid to third parties, respectively.operating lease equipment.
Table 28 provides quarterly information for each of the quarters in 2017 and 2016. Table 29 analyzes the components of changes in net interest income between the fourth quarter of 2017 and 2016.
Table 2842
SELECTED QUARTERLY DATAAverage Balances and Rates
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dollars in millions | Three Months Ended | | | | | | |
| December 31, 2022 | | September 30, 2022 | | Change in NII Due to: |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Volume(1) | | Yield /Rate(1) | | Total Change |
Loans and leases (1)(2) | $ | 69,290 | | | $ | 892 | | | 5.09 | % | | $ | 67,733 | | | $ | 785 | | | 4.58 | % | | $ | 18 | | | $ | 89 | | | $ | 107 | |
Total investment securities | 18,876 | | | 92 | | | 1.95 | | | 19,119 | | | 90 | | | 1.88 | | | (1) | | | 3 | | | 2 | |
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Interest-earning deposits at banks | 6,193 | | | 56 | | | 3.60 | | | 5,685 | | | 31 | | | 2.17 | | | 3 | | | 22 | | | 25 | |
Total interest-earning assets (2) | $ | 94,359 | | | $ | 1,040 | | | 4.36 | % | | $ | 92,537 | | | $ | 906 | | | 3.87 | % | | $ | 20 | | | $ | 114 | | | $ | 134 | |
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Operating lease equipment, net | $ | 8,049 | | | | | | | $ | 7,981 | | | | | | | | | | | |
Cash and due from banks | 500 | | | | | | | 489 | | | | | | | | | | | |
Allowance for credit losses | (886) | | | | | | | (851) | | | | | | | | | | | |
All other noninterest-earning assets | 7,770 | | | | | | | 7,831 | | | | | | | | | | | |
Total assets | $ | 109,792 | | | | | | | $ | 107,987 | | | | | | | | | | | |
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Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 15,985 | | | $ | 13 | | | 0.24 | % | | $ | 16,160 | | | $ | 7 | | | 0.14 | % | | $ | — | | | $ | 6 | | | $ | 6 | |
Money market | 21,200 | | | 60 | | | 1.13 | | | 22,993 | | | 32 | | | 0.55 | | | (3) | | | 31 | | | 28 | |
Savings | 15,831 | | | 69 | | | 1.73 | | | 13,956 | | | 28 | | | 0.78 | | | 4 | | | 37 | | | 41 | |
Time deposits | 9,516 | | | 34 | | | 1.42 | | | 8,436 | | | 11 | | | 0.54 | | | 2 | | | 21 | | | 23 | |
Total interest-bearing deposits | 62,532 | | | 176 | | | 1.12 | | | 61,545 | | | 78 | | | 0.50 | | | 3 | | | 95 | | | 98 | |
Borrowings: | | | | | | | | | | | | | | | | | |
Securities sold under customer repurchase agreements | 514 | | | — | | | 0.27 | | | 617 | | | 1 | | | 0.16 | | | (1) | | | — | | | (1) | |
Short-term FHLB borrowings | 2,080 | | | 20 | | | 3.72 | | | 1,188 | | | 8 | | | 2.57 | | | 8 | | | 4 | | | 12 | |
Short-term borrowings | 2,594 | | | 20 | | | 3.04 | | | 1,805 | | | 9 | | | 1.74 | | | 7 | | | 4 | | | 11 | |
Federal Home Loan Bank borrowings | 2,818 | | | 28 | | | 3.85 | | | 1,784 | | | 11 | | | 2.45 | | | 9 | | | 8 | | | 17 | |
Senior unsecured borrowings | 906 | | | 4 | | | 2.03 | | | 898 | | | 5 | | | 2.00 | | | (1) | | | — | | | (1) | |
Subordinated debt | 1,051 | | | 9 | | | 3.38 | | | 1,054 | | | 8 | | | 3.21 | | | — | | | 1 | | | 1 | |
Other borrowings | 25 | | | 1 | | | 6.57 | | | 67 | | | — | | | 4.51 | | | — | | | 1 | | | 1 | |
Long-term borrowings | 4,800 | | | 42 | | | 3.42 | | | 3,803 | | | 24 | | | 2.59 | | | 8 | | | 10 | | | 18 | |
Total borrowings | 7,394 | | | 62 | | | 3.28 | | | 5,608 | | | 33 | | | 2.32 | | | 15 | | | 14 | | | 29 | |
Total interest-bearing liabilities | $ | 69,926 | | | $ | 238 | | | 1.35 | % | | $ | 67,153 | | | $ | 111 | | | 0.65 | % | | $ | 18 | | | $ | 109 | | | $ | 127 | |
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Noninterest-bearing deposits | $ | 26,510 | | | | | | | $ | 26,877 | | | | | | | | | | | |
Credit balances of factoring clients | 1,174 | | | | | | | 1,089 | | | | | | | | | | | |
Other noninterest-bearing liabilities | 2,561 | | | | | | | 2,369 | | | | | | | | | | | |
Stockholders' equity | 9,621 | | | | | | | 10,499 | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 109,792 | | | | | | | $ | 107,987 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate spread (2) | | | | | 3.01 | % | | | | | | 3.22 | % | | | | | | |
Net interest income and net yield on interest-earning assets (2) | | | $ | 802 | | | 3.36 | % | | | | $ | 795 | | | 3.40 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
(Dollars in thousands, except share data and ratios) | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
SUMMARY OF OPERATIONS | | | | | | | | | | | | | | | |
Interest income | $ | 285,958 |
| | $ | 284,333 |
| | $ | 272,542 |
| | $ | 260,857 |
| | $ | 254,782 |
| | $ | 246,494 |
| | $ | 243,369 |
| | $ | 243,112 |
|
Interest expense | 11,189 |
| | 11,158 |
| | 10,933 |
| | 10,514 |
| | 10,865 |
| | 10,645 |
| | 11,180 |
| | 10,392 |
|
Net interest income | 274,769 |
| | 273,175 |
| | 261,609 |
| | 250,343 |
| | 243,917 |
| | 235,849 |
| | 232,189 |
| | 232,720 |
|
Provision (credit) for loan and lease losses | (2,809 | ) | | 7,946 |
| | 12,324 |
| | 8,231 |
| | 16,029 |
| | 7,507 |
| | 4,562 |
| | 4,843 |
|
Net interest income after provision for loan and lease losses | 277,578 |
| | 265,229 |
| | 249,285 |
| | 242,112 |
| | 227,888 |
| | 228,342 |
| | 227,627 |
| | 227,877 |
|
Gain on acquisitions | — |
| | — |
| | 122,728 |
| | 12,017 |
| | — |
| | 837 |
| | 3,290 |
| | 1,704 |
|
Noninterest income | 140,150 |
| | 125,387 |
| | 125,472 |
| | 115,275 |
| | 124,698 |
| | 117,004 |
| | 136,960 |
| | 103,578 |
|
Noninterest expense | 294,617 |
| | 286,967 |
| | 285,606 |
| | 264,345 |
| | 271,531 |
| | 267,233 |
| | 258,303 |
| | 251,671 |
|
Income before income taxes | 123,111 |
| | 103,649 |
| | 211,879 |
| | 105,059 |
| | 81,055 |
| | 78,950 |
| | 109,574 |
| | 81,488 |
|
Income taxes | 68,704 |
| | 36,585 |
| | 77,219 |
| | 37,438 |
| | 28,365 |
| | 27,546 |
| | 40,258 |
| | 29,416 |
|
Net income | $ | 54,407 |
| | $ | 67,064 |
| | $ | 134,660 |
| | $ | 67,621 |
| | $ | 52,690 |
| | $ | 51,404 |
| | $ | 69,316 |
| | $ | 52,072 |
|
Net interest income, taxable equivalent | $ | 276,002 |
| | $ | 274,272 |
| | $ | 262,549 |
| | $ | 251,593 |
| | $ | 245,330 |
| | $ | 237,146 |
| | $ | 233,496 |
| | $ | 234,187 |
|
PER SHARE DATA | | | | | | | | | | | | | | | |
Net income | $ | 4.53 |
| | $ | 5.58 |
| | $ | 11.21 |
| | $ | 5.63 |
| | $ | 4.39 |
| | $ | 4.28 |
| | $ | 5.77 |
| | $ | 4.34 |
|
Cash dividends | 0.35 |
| | 0.30 |
| | 0.30 |
| | 0.30 |
| | 0.30 |
| | 0.30 |
| | 0.30 |
| | 0.30 |
|
Market price at period end (Class A) | 403.00 |
| | 373.89 |
| | 372.70 |
| | 335.37 |
| | 355.00 |
| | 293.89 |
| | 258.91 |
| | 251.07 |
|
Book value at period end | 277.60 |
| | 275.91 |
| | 269.75 |
| | 258.17 |
| | 250.82 |
| | 256.76 |
| | 252.76 |
| | 246.55 |
|
SELECTED QUARTERLY AVERAGE BALANCES | | | | | | | | | | | | |
Total assets | $ | 34,864,720 |
| | $ | 34,590,503 |
| | $ | 34,243,527 |
| | $ | 33,494,500 |
| | $ | 33,223,995 |
| | $ | 32,655,417 |
| | $ | 32,161,905 |
| | $ | 31,705,658 |
|
Investment securities | 7,044,534 |
| | 6,906,345 |
| | 7,112,267 |
| | 7,084,986 |
| | 6,716,873 |
| | 6,452,532 |
| | 6,786,463 |
| | 6,510,248 |
|
Loans and leases (1) | 23,360,235 |
| | 22,997,195 |
| | 22,575,323 |
| | 21,951,444 |
| | 21,548,313 |
| | 21,026,510 |
| | 20,657,094 |
| | 20,349,091 |
|
Interest-earning assets | 32,874,233 |
| | 32,555,597 |
| | 32,104,717 |
| | 31,298,970 |
| | 31,078,428 |
| | 30,446,592 |
| | 29,976,629 |
| | 29,558,629 |
|
Deposits | 29,525,843 |
| | 29,319,384 |
| | 29,087,852 |
| | 28,531,166 |
| | 28,231,477 |
| | 27,609,418 |
| | 27,212,814 |
| | 26,998,026 |
|
Long-term obligations | 866,198 |
| | 887,948 |
| | 799,319 |
| | 816,953 |
| | 835,509 |
| | 842,715 |
| | 817,750 |
| | 750,446 |
|
Interest-bearing liabilities | 19,425,404 |
| | 19,484,663 |
| | 19,729,956 |
| | 19,669,075 |
| | 19,357,282 |
| | 19,114,740 |
| | 19,092,287 |
| | 19,067,251 |
|
Shareholders’ equity | $ | 3,329,562 |
| | $ | 3,284,044 |
| | $ | 3,159,004 |
| | $ | 3,061,099 |
| | $ | 3,056,426 |
| | $ | 3,058,155 |
| | $ | 2,989,097 |
| | $ | 2,920,611 |
|
Shares outstanding | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
|
SELECTED QUARTER-END BALANCES | | | | | | | | | | | | | | |
Total assets | $ | 34,527,512 |
| | $ | 34,584,154 |
| | $ | 34,769,850 |
| | $ | 34,018,405 |
| | $ | 32,990,836 |
| | $ | 32,971,910 |
| | $ | 32,230,403 |
| | $ | 32,195,657 |
|
Investment securities | 7,180,256 |
| | 6,992,955 |
| | 6,596,530 |
| | 7,119,944 |
| | 7,006,678 |
| | 6,384,940 |
| | 6,557,736 |
| | 6,687,483 |
|
Loans and leases: | | | | | | | | | | | | | | | |
PCI | 762,998 |
| | 834,167 |
| | 894,863 |
| | 848,816 |
| | 809,169 |
| | 868,200 |
| | 921,467 |
| | 945,887 |
|
Non-PCI | 22,833,827 |
| | 22,314,906 |
| | 21,976,602 |
| | 21,057,633 |
| | 20,928,709 |
| | 20,428,780 |
| | 19,821,104 |
| | 19,471,802 |
|
Deposits | 29,266,275 |
| | 29,333,949 |
| | 29,456,338 |
| | 29,002,768 |
| | 28,161,343 |
| | 27,925,253 |
| | 27,257,774 |
| | 27,365,245 |
|
Long-term obligations | 870,240 |
| | 866,123 |
| | 879,957 |
| | 727,500 |
| | 832,942 |
| | 840,266 |
| | 850,504 |
| | 779,087 |
|
Shareholders’ equity | $ | 3,334,064 |
| | $ | 3,313,831 |
| | $ | 3,239,851 |
| | $ | 3,100,696 |
| | $ | 3,012,427 |
| | $ | 3,083,748 |
| | $ | 3,035,704 |
| | $ | 2,961,194 |
|
Shares outstanding | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
|
SELECTED RATIOS AND OTHER DATA | | | | | | | | | | | | | | |
Rate of return on average assets (annualized) | 0.62 | % | | 0.77 | % | | 1.58 | % | | 0.82 | % | | 0.63 | % | | 0.63 | % | | 0.87 | % | | 0.66 | % |
Rate of return on average shareholders’ equity (annualized) | 6.48 |
| | 8.10 |
| | 17.10 |
| | 8.96 |
| | 6.86 |
| | 6.69 |
| | 9.33 |
| | 7.17 |
|
Net yield on interest-earning assets (taxable equivalent) | 3.34 |
| | 3.35 |
| | 3.28 |
| | 3.25 |
| | 3.14 |
| | 3.10 |
| | 3.13 |
| | 3.18 |
|
Allowance for loan and lease losses to loans and leases: | | | | | | | | | | | | | | | |
PCI | 1.31 |
| | 1.55 |
| | 1.51 |
| | 1.29 |
| | 1.70 |
| | 1.34 |
| | 1.25 |
| | 1.45 |
|
Non-PCI | 0.93 |
| | 0.98 |
| | 0.98 |
| | 1.00 |
| | 0.98 |
| | 0.98 |
| | 0.99 |
| | 0.99 |
|
Total | 0.94 |
| | 1.00 |
| | 1.00 |
| | 1.01 |
| | 1.01 |
| | 1.01 |
| | 1.00 |
| | 1.01 |
|
Nonperforming assets to total loans and leases and other real estate at period end: | | | | | | | | | | | | | | | |
Covered | 0.54 |
| | 0.35 |
| | 0.35 |
| | 0.59 |
| | 0.66 |
| | 0.75 |
| | 1.17 |
| | 4.74 |
|
Noncovered | 0.61 |
| | 0.63 |
| | 0.66 |
| | 0.66 |
| | 0.67 |
| | 0.75 |
| | 0.77 |
| | 0.74 |
|
Total | 0.61 |
| | 0.63 |
| | 0.65 |
| | 0.66 |
| | 0.67 |
| | 0.75 |
| | 0.77 |
| | 0.80 |
|
Tier 1 risk-based capital ratio | 12.88 |
| | 12.95 |
| | 12.69 |
| | 12.57 |
| | 12.42 |
| | 12.50 |
| | 12.63 |
| | 12.58 |
|
Common equity Tier 1 ratio | 12.88 |
| | 12.95 |
| | 12.69 |
| | 12.57 |
| | 12.42 |
| | 12.50 |
| | 12.63 |
| | 12.58 |
|
Total risk-based capital ratio | 14.21 |
| | 14.34 |
| | 14.07 |
| | 13.99 |
| | 13.85 |
| | 13.96 |
| | 14.10 |
| | 14.09 |
|
Leverage capital ratio | 9.47 |
| | 9.43 |
| | 9.33 |
| | 9.15 |
| | 9.05 |
| | 9.07 |
| | 9.09 |
| | 9.00 |
|
Dividend payout ratio | 7.73 |
| | 5.38 |
| | 2.68 |
| | 5.33 |
| | 6.83 |
| | 7.01 |
| | 5.20 |
| | 6.91 |
|
Average loans and leases to average deposits | 79.12 |
| | 78.44 |
| | 77.61 |
| | 76.94 |
| | 76.33 |
| | 76.16 |
| | 75.91 |
| | 75.37 |
|
(1)Average loan and lease balances include PCI loans, non-PCI loans and leases, loans held for sale and nonaccrual loans and leases.
Table 29
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - FOURTH QUARTER
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | Increase (decrease) due to: |
| | | Interest | | | | | | Interest | | | | | | | | |
| Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | | | Yield/ | | Total |
(Dollars in thousands) | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Volume | | Rate | | Change |
Assets | |
Loans and leases | $ | 23,360,235 |
| | $ | 248,151 |
| | 4.22 |
| % | $ | 21,548,313 |
| | $ | 226,651 |
| | 4.19 |
| % | $ | 19,503 |
| | $ | 1,997 |
| | $ | 21,500 |
|
Investment securities: | | | | | | | | | | | | | | | | | |
U. S. Treasury | 1,627,968 |
| | 4,784 |
| | 1.17 |
| | 1,593,610 |
| | 3,328 |
| | 0.83 |
| | 81 |
| | 1,375 |
| | 1,456 |
|
Government agency | 9,659 |
| | 69 |
| | 2.85 |
| | 172,037 |
| | 396 |
| | 0.92 |
| | (765 | ) | | 438 |
| | (327 | ) |
Mortgage-backed securities | 5,233,293 |
| | 25,351 |
| | 1.94 |
| | 4,802,198 |
| | 20,937 |
| | 1.74 |
| | 1,944 |
| | 2,470 |
| | 4,414 |
|
Corporate bonds | 63,911 |
| | 991 |
| | 6.20 |
| | 54,255 |
| | 772 |
| | 5.69 |
| | 144 |
| | 75 |
| | 219 |
|
Other | 109,703 |
| | 246 |
| | 0.89 |
| | 94,773 |
| | 253 |
| | 1.06 |
| | 37 |
| | (44 | ) | | (7 | ) |
Total investment securities | 7,044,534 |
| | 31,441 |
| | 1.78 |
| | 6,716,873 |
| | 25,686 |
| | 1.53 |
| | 1,441 |
| | 4,314 |
| | 5,755 |
|
Overnight investments | 2,469,464 |
| | 7,599 |
| | 1.22 |
| | 2,813,242 |
| | 3,858 |
| | 0.55 |
| | (743 | ) | | 4,484 |
| | 3,741 |
|
Total interest-earning assets | 32,874,233 |
| | $ | 287,191 |
| | 3.47 |
| % | 31,078,428 |
| | $ | 256,195 |
| | 3.28 |
| % | $ | 20,201 |
| | $ | 10,795 |
| | $ | 30,996 |
|
Cash and due from banks | 316,851 |
| | | | | | 478,779 |
| | | | | | | | | | |
Premises and equipment | 1,137,075 |
| | | | | | 1,134,228 |
| | | | | | | | | | |
FDIC shared-loss receivable | 5,104 |
| | | | | | 5,584 |
| | | | | | | | | | |
Allowance for loan and lease losses | (232,653 | ) | | | | | | (214,463 | ) | | | | | | | | | | |
Other real estate owned | 52,103 |
| | | | | | 65,670 |
| | | | | | | | | | |
Other assets | 712,007 |
| | | | | | 675,769 |
| | | | | | | | | | |
Total assets | $ | 34,864,720 |
| | | | | | $ | 33,223,995 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
Checking with interest | $ | 5,028,978 |
| | $ | 262 |
| | 0.02 |
| % | $ | 4,696,279 |
| | $ | 261 |
| | 0.02 |
| % | $ | 9 |
| | $ | (8 | ) | | $ | 1 |
|
Savings | 2,337,993 |
| | 172 |
| | 0.03 |
| | 2,080,598 |
| | 161 |
| | 0.03 |
| | 15 |
| | (4 | ) | | 11 |
|
Money market accounts | 8,047,691 |
| | 1,732 |
| | 0.09 |
| | 8,113,686 |
| | 1,619 |
| | 0.08 |
| | (52 | ) | | 165 |
| | 113 |
|
Time deposits | 2,421,749 |
| | 1,623 |
| | 0.27 |
| | 2,892,143 |
| | 2,411 |
| | 0.33 |
| | (371 | ) | | (417 | ) | | (788 | ) |
Total interest-bearing deposits | 17,836,411 |
| | 3,789 |
| | 0.08 |
| | 17,782,706 |
| | 4,452 |
| | 0.10 |
| | (399 | ) | | (264 | ) | | (663 | ) |
Repurchase agreements | 615,244 |
| | 622 |
| | 0.40 |
| | 726,318 |
| | 485 |
| | 0.27 |
| | (88 | ) | | 225 |
| | 137 |
|
Other short-term borrowings | 107,551 |
| | 1,031 |
| | 3.77 |
| | 12,749 |
| | 52 |
| | 1.63 |
| | 650 |
| | 329 |
| | 979 |
|
Long-term obligations | 866,198 |
| | 5,747 |
| | 2.61 |
| | 835,509 |
| | 5,876 |
| | 2.81 |
| | 252 |
| | (381 | ) | | (129 | ) |
Total interest-bearing liabilities | 19,425,404 |
| | $ | 11,189 |
| | 0.23 |
| % | 19,357,282 |
| | $ | 10,865 |
| | 0.22 |
| % | $ | 415 |
| | $ | (91 | ) | | $ | 324 |
|
Demand deposits | 11,689,432 |
| | | | | | 10,448,771 |
| | | | | | | | | | |
Other liabilities | 420,322 |
| | | | | | 361,516 |
| | | | | | | | | | |
Shareholders' equity | 3,329,562 |
| | | | | | 3,056,426 |
| | | | | | | | | | |
Total liabilities and shareholders' equity | $ | 34,864,720 |
| | | | | | $ | 33,223,995 |
| | | | | | | | | | |
Interest rate spread | | | | | 3.24 |
| % | | | | | 3.06 |
| % | | | | | |
Net interest income and net yield | | | | | | | | | | | | | | | | | |
on interest-earning assets | | | $ | 276,002 |
| | 3.34 | % | | | $ | 245,330 |
| | 3.14 |
| % | $ | 19,786 |
| | $ | 10,886 |
| | $ | 30,672 |
|
Loans and leases include PCI loans, non-PCINon-PCD and PCD loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were $15.6 million
(2) The balance and $12.1 millionrate presented is calculated net of average credit balances of factoring clients.
Fourth Quarter 2022 compared to Third Quarter 2022
•NII for the three months ended December 31, 20172022 was $802 million, an increase of $7 million, or 1% compared to the three months ended September 30, 2022. The increase was primarily due to a higher yield on earning assets and 2016, respectively. Yields related toloan growth, partially offset by higher funding costs and average balances.
•Interest income earned on loans leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 35.0 percent for each period and state income tax rates of 3.1 percent and 3.1 percentleases for the three months ended December 31, 20172022 was $892 million, an increase of $107 million compared to the third quarter of 2022. The increase was primarily due to higher yields and 2016, respectively. The taxable-equivalent adjustment was $1,233growth in the average loans and $1,413leases balance from $67.73 billion in the previous quarter to $69.29 billion in the current quarter.
•Interest income earned on investment securities for the three months ended December 31, 20172022 was $92 million, an increase of $2 million compared to the third quarter of 2022. The slight increase was primarily due to higher reinvestment rates.
•Interest income earned on interest earning deposits at banks for the three months ended December 31, 2022 was $56 million, an increase of $25 million, primarily reflecting higher interest rates.
•Interest expense on interest-bearing deposits for the three months ended December 31, 2022 was $176 million, an increase of $98 million compared to the third quarter of 2022. The increase reflected higher deposit rates as well as the higher average balance, with the increase primarily concentrated in time deposits and 2016, respectively.savings accounts.
•Interest expense on borrowings for the three months ended December 31, 2022 was $62 million, an increase of $29 million compared to the third quarter of 2022. The rate/volume varianceincrease was due to higher average FHLB borrowings that supplemented funding our loan growth. Due to the fourth quarter increase in deposits, we repaid some of the borrowings in the fourth quarter.
•NIM for the three months ended December 31, 2022 was 3.36%, a decrease of 4 bps from 3.40% for the three months ended September 30, 2022. The yield on earning assets increased by 49 basis points, but was offset by the increase to the cost of funding them. The cost of funding earning assets increased due to higher rates paid on interest bearing deposits and borrowings, as well as a mix shift between noninterest-bearing and interest-bearing deposits
•Average interest-earning assets for the three months ended December 31, 2022 were $94.36 billion. This is allocated equally betweenan increase from $92.54 billion for the three months ended September 30, 2022, primarily reflecting higher average loans and leases.
•Average interest-bearing liabilities for the three months ended December 31, 2022 were $69.93 billion. This is an increase from $67.15 billion for the three months ended September 30, 2022, primarily reflecting higher FHLB borrowings and deposits. The average rate on interest-bearing liabilities for the three months ended December 31, 2022 was 1.35%. This is an increase of 70 bps compared to the three months ended September 30, 2022, reflecting the higher interest rate environment.
GLOSSARY OF KEY TERMS
To assist the users of this document, we have added the following Glossary of key terms:
Allowance for Credit Losses (“ACL”) reflects the estimated credit losses over the full remaining expected life of the portfolio. See CECL below.
Assets Held for Sale include loans and operating lease equipment that we no longer have the intent or ability to hold until maturity. As applicable, assets held for sale could also include a component of goodwill associated with portfolios or businesses held for sale.
Available Cash consists of the unrestricted portions of ‘Cash and due from banks’ and ‘Interest-bearing deposits at banks’, excluding cash not accessible for liquidity, such as vault cash and deposits in transit.
Available for Sale is a classification that pertains to debt securities. We classify debt securities as available for sale when they are not considered trading securities, securities carried at fair value, or held-to-maturity securities. Available for sale securities are included in investment securities in the balance sheet.
Average Interest-Earning Assets is a measure that is the sum of average loans and leases (as defined below, less the credit balances of factoring clients), loans and leases held for sale, interest-bearing deposits at banks, and investment securities. Average interest earning assets is computed using daily balances. We use this average for certain key profitability ratios, including NIM (as defined below) for the respective period.
Average Loans and Leases is computed using daily balances and is used to measure the rate of return on loans and leases (finance leases) and the rate of net charge-offs, for the respective period.
Capital Conservation Buffer (“CCB”) is the excess 2.5% of each of the capital tiers that banks are required to hold in accordance with Basel III rules, above the minimum CET 1 Capital, Tier 1 capital and Total capital requirements, designed to absorb losses during periods of economic stress.
Common Equity Tier 1 ("CET1"), Additional Tier 1 Capital, Tier 1 Capital, Tier 2 Capital, and Total Capital are regulatory capital measures as defined in the capital adequacy guidelines issued by the Federal Reserve. CET1 is common stockholders' equity reduced by capital deductions such as goodwill, intangible assets and DTAs that arise from net operating loss and tax credit carryforwards and adjusted by elements of other comprehensive income and other items. Tier 1 Capital is Common Equity Tier 1 Capital plus other Additional Tier 1 Capital instruments, including non-cumulative preferred stock. Total Capital consists of Tier 1 Capital and Tier 2 Capital, which includes subordinated debt, and qualifying allowance for credit losses and other reserves.
Current Expected Credit Losses (“CECL”) is a forward-looking “expected loss” model used to estimate credit losses over the full remaining expected life of the portfolio. Estimates under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forecasts regarding the collectability of reported amounts. Generally, the model requires that an ACL be estimated and recognized for financial assets measured at amortized cost within its scope.
Delinquent Loan categorization occurs when payment is not received when contractually due. Delinquent loan trends are used as a gauge of potential portfolio degradation or improvement.
Derivative Contract is a contract whose value is derived from a specified asset or an index, such as an interest rate. As the value of that asset or index changes, so does the value of the derivative contract.
Economic Value of Equity Sensitivity ("EVE Sensitivity") measures the net impact of hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.
Finance leases - lessor is an agreement in which the party who owns the property (lessor), which is BancShares as part of our finance business, permits another party (lessee), which is our customer, to use the property with substantially all of the economic benefits and risks of asset ownership passed to the lessee. Finance leases are commonly known as sales-type leases and direct finance leases and are included in the consolidated balance sheet in the line “Loans and leases.”
High Quality Liquid Securities(“HQLS”) consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.
Impaired Loan is a loan for which, based on current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan.
Interest income includes interest earned on loans, interest-bearing deposits at banks, debt investments and dividends on investments.
Liquid Assets includes Available Cash and HQLS.
Loansand Leases include loans, finance lease receivables, and factoring receivables, and do not include amounts contained within assets held for sale (unless otherwise noted) or operating leases.
Loan-to-Value Ratio("LTV") is a calculation of a loan's collateral coverage that is used in underwriting and assessing risk in our lending portfolio. LTV is calculated as the total loan obligations (unpaid principal balance) secured by collateral divided by the fair value of the collateral.
Net Interest Income (“NII”) reflects Interest Income less interest expense on deposits and borrowings. When divided by average interest earning assets, the quotient is defined as Net Interest Margin ("NIM").
Net Interest Income Sensitivity("NII Sensitivity") measures the net impact of hypothetical changes in volumeinterest rates on forecasted NII.
Net Operating Loss Carryforward / Carryback("NOLs") is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. The rules pertaining to the number of years allowed for the carryback or carryforward of an NOL varies by jurisdiction.
Non-accrual Loans include loans greater than or equal to $500,000 that are individually evaluated and rate.
Item 9A. Controlsdetermined to be impaired, as well as loans less than $500,000 that are delinquent (generally for 90 days or more), unless it is both well secured and Procedures
BancShares' management,in the process of collection. Non-accrual loans also include loans with revenue recognition on a cash basis because of deterioration in the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectivenessfinancial position of the designborrower.
Non-performing Assets include Non-accrual Loans, OREO, and operationrepossessed assets.
Operating leases - lessor is a lease in which BancShares retains ownership of BancShares' disclosure controlsthe asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and proceduresretains the risks of ownership, including obsolescence.
Other Noninterest Income includes (1) fee income and other service charges, (2) wealth management services, (3) service charges on deposit accounts, (4) factoring commissions, (5) cardholder services, net, (6) merchant services, (7) insurance commissions, (8) realized gains and losses on investment securities available for sale, net, (9) fair value adjustment on marketable equity securities, net, (10) BOLI, (11) gains and losses on leasing equipment, net, (12) gain on acquisition, (13) gain and losses on extinguishments of debt, and (14) other noninterest income.
Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.
Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain HQLS that are available for secured funding at the FHLB.
Purchase Accounting Adjustments(“PAA”) reflect the fair value adjustments to acquired assets and liabilities assumed in a business combination.
Purchased Credit Deteriorated (“PCD”) financial assets are acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment.
Regulatory Credit Classifications used by BancShares are as follows:
•Pass — A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification;
•Special Mention — A special mention asset has potential weaknesses which deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification;
•Substandard — A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected;
•Doubtful — An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values; and
•Loss — Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.
Residual Values for finance leases represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the period coveredvalue to which the asset is depreciated at the end of lease term or at the end of estimated useful life.
Right of Use Asset (“ROU Asset”) represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.
Risk Weighted Assets("RWA") is the denominator to which CET1, Tier 1 Capital and Total Capital is compared to derive the respective risk based regulatory ratios. RWA is comprised of both on-balance sheet assets and certain off-balance sheet items (for example loan commitments, purchase commitments or derivative contracts). RWA items are adjusted by certain risk-weightings as defined by the regulators, which are based upon, among other things, the relative credit risk of the counterparty.
Troubled Debt Restructuring("TDR") occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower's financial difficulties that it would not otherwise consider.
Variable Interest Entity("VIE") is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity's operations; and/or have equity owners that do not have an obligation to absorb the entity's losses or the right to receive the entity's returns.
Yield-related Fees are collected in connection with our assumption of underwriting risk in certain transactions in addition to interest income. We recognize yield-related origination fees in interest income over the life of the lending transaction and recognize yield-related prepayment fees when the loan is prepaid.
Forward-Looking Statements
Statements in this Annual Report in accordance with Rule 13a-15on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities ExchangeLitigation Reform Act of 1934 (Exchange Act). Based upon1995 regarding the financial condition, results of operations, business plans and future performance of BancShares. Words such as “anticipates,” “believes,” “estimates,” “expects,” “predicts,” “forecasts,” “intends,” “plans,” “projects,” “targets,” “designed,” “could,” “may,” “should,” “will,” “potential,” “continue,” “aims” or other similar words and expressions are intended to identify these forward-looking statements. These forward-looking statements are based on BancShares’ current expectations and assumptions regarding BancShares’ business, the economy, and other future conditions.
Because forward-looking statements relate to future results and occurrences, they are subject to inherent risks, uncertainties, changes in circumstances and other factors that evaluation, asare difficult to predict. Many possible events or factors could affect BancShares’ future financial results and performance and could cause the actual results, performance or achievements of BancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including the military conflict between Russia and Ukraine) and market conditions, the impacts of the endglobal COVID-19 pandemic on BancShares’ business, and customers, the financial success or changing conditions or strategies of BancShares’ customers or vendors, fluctuations in interest rates, actions of government regulators, including the recent and projected interest rate hikes by the Board of Governors of the period coveredFederal Reserve Board (the “Federal Reserve”), the potential impact of decisions by this report, the Chief Executive OfficerFederal Reserve on BancShares’ capital plans, adverse developments with respect to U.S. or global economic conditions, including the significant turbulence in the capital or financial markets, the impact of the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, the availability of capital and personnel, and the Chief Financial Officer concludedfailure to realize the anticipated benefits of BancShares’ previously announced acquisition transaction(s), including the recently-completed transaction with CIT, which acquisition risks include (1) disruption from the transaction, or recently completed mergers, with customer, supplier or employee relationships, (2) the possibility that BancShares' disclosure controlsthe amount of the costs, fees, expenses and procedures were effectivecharges related to provide reasonable assurancethe transaction may be greater than anticipated, including as a result of unexpected or unknown factors, events or liabilities, (3) reputational risk and the reaction of the parties’ customers to the transaction, (4) the risk that it is able to record, process, summarizethe cost savings and report in a timely mannerany revenue synergies from the information requiredtransaction may not be realized or take longer than anticipated to be disclosedrealized, and (5) difficulties experienced in completing the reports it files underintegration of the Exchange Act.businesses.
NoExcept to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss resulting from changes in BancShares' internal control overmarket prices and interest rates. This risk can either result in diminished current fair values of financial reporting occurred duringinstruments or reduced NII in future periods. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the fourth quarterimpact that future changes in market rates will have on the fair values of 2017 thatfinancial instruments is uncertain.
As of December 31, 2022, BancShares’ market risk profile had changed since December 31, 2021, primarily due to the CIT Merger.
Market risk information is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations within the “Risk Management” section and in Item 8. Notes to Consolidated Financial Statements within Note 1 — Significant Accounting Policies and Basis of Presentation, Note 14 — Derivative Financial Instruments and Note 16 — Fair Value.
Item 8. Financial Statements and Supplementary Data
REPORT OF PREDECESSOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors
First Citizens BancShares, Inc.
Opinion on the Consolidated Financial Statements
We have materially affected, or are reasonably likely to materially affect, BancShares' internal control over financial reporting.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The managementaudited the accompanying statements of income, comprehensive income, changes in stockholders’ equity and cash flows of First Citizens BancShares, Inc. (BancShares)and Subsidiaries (the "Company") for the year ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is responsible for establishingto express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and maintaining adequate internal control over financial reporting. BancShares’ internal control system was designedare required to provide reasonable assurancebe independent with respect to the company’s managementCompany in accordance with the U.S. federal securities laws and Boardthe applicable rules and regulations of Directors regarding the preparation and fair presentation of published financial statements. As permitted by guidance provided by the Staff of U.S. Securities and Exchange Commission and the scopePCAOB.
We conducted our audit in accordance with the standards of management's assessmentthe PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ FORVIS, LLP (Formerly Dixon Hughes Goodman LLP)
We served as the Company’s auditor from 2004 to 2021.
Raleigh, North Carolina
February 24, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
First Citizens BancShares, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of First Citizens BancShares, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017 has excluded Harvest Community Bank (HCB) acquired2022, based on January 13, 2017 and Guaranty Bank (Guaranty) acquired on May 5, 2017. HCB and Guaranty represented 0.27 percent and 2.04 percent of consolidated revenue (total interest income and total noninterest income, excluding any related gains on acquisition) for the year ended December 31, 2017, respectively, and 0.20 percent and 0.81 percent of consolidated total assets as of December 31, 2017, respectively.
BancShares' management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forthestablished in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO)and our report dated February 24, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in Internal Control-Integrated Framework (2013). Based accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that assessment, BancShares' management believesour audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Quantitative component of the allowance for credit losses for legacy First Citizens BancShares, Inc. loans and leases evaluated on a collective basis
As discussed in Notes 1 and 5 to the consolidated financial statements, as of December 31, 2017, BancShares' internal control over financial reporting2022, the Company had an allowance for credit losses (ACL) of $922 million, which includes the quantitative component for loans evaluated on a collective basis for legacy First Citizens BancShares, Inc. loans and leases (the FCB quantitative collective ACL). Loans and leases are segregated into pools with similar risk characteristics, and each have a model that is effectiveutilized to estimate the quantitative collective ACL. The FCB quantitative collective ACL models estimate the probability of default (PD) and loss given default (LGD) for individual loans and leases within the risk pool based on those criteria.historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. Loan and lease level undiscounted ACL is calculated by applying the modeled PD and LGD to forecasted loan and lease balances which are adjusted for contractual payments, pre-payments, and prior defaults. The Company uses a life of loan reasonable and supportable forecast period which incorporates macroeconomic forecasts at the time of the evaluation. The Company’s ACL forecasts utilize scenario weighting of a range of economic scenarios, including baseline, upside and downside scenarios. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes.
AllWe identified the assessment of the FCB quantitative collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the FCB quantitative collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the models used to estimate the PD and LGD, the selection of the economic scenarios, and the weighting of each economic scenario. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal control systems, no matter how well designed,controls related to the Company’s measurement of the FCB quantitative collective ACL including controls related to the:
•development and approval of the ACL methodology
•continued use and appropriateness of changes to the PD and LGD models, including the significant assumptions used in the PD and LGD models
•selection of the economic scenarios and the weighting of each economic scenario
•performance monitoring of the PD and LGD models
•analysis of the ACL results, trends, and ratios.
We evaluated the Company’s process to develop the FCB quantitative collective ACL by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the FCB quantitative collective ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating judgments made by the Company relative to the assessment and performance testing of the PD and LGD models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•assessing the conceptual soundness of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the selection of the economic scenarios and the weighting applied to each economic scenario by comparing them to the Company’s business environment and relevant industry practices
We also assessed the sufficiency of the audit evidence obtained related to the FCB quantitative collective ACL by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimate.
Quantitative component of the allowance for credit losses for loans and leases evaluated on a collective basis acquired in the merger with CIT as of the date of the merger and as of year-end
As discussed in Notes 1 and 5 to the consolidated financial statements, on January 3, 2022, First Citizens BancShares, Inc. (the Company) closed on a merger transaction with CIT Group Inc. The Company’s allowance for credit losses (ACL) on legal day one (LD1) for the CIT acquired loans and leases was $726 million, which includes the quantitative component for loans and leases evaluated on a collective basis at January 3, 2022 (the LD1 CIT quantitative collective ACL). As discussed in Notes 1 and 5 to the consolidated financial statements, as of December 31, 2022, the Company’s ACL was $922 million, which includes the quantitative component for loans and leases evaluated on a collective basis for legacy CIT Group (together with the LD1 CIT quantitative collective ACL, the CIT quantitative collective ACL). Loans and leases are segregated into pools with similar risk characteristics, and each have inherent limitations. Therefore, even those systems determineda model that is utilized to estimate the quantitative collective ACL. The CIT quantitative collective ACL models estimate the probability of default (PD) and loss given default (LGD) for individual loans within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries, loan grades and other factors. Loan level undiscounted ACL is calculated by applying the modeled PD and LGD to forecasted loan balances which are adjusted for contractual payments, pre-payments, and prior defaults. The Company uses a life of loan reasonable and supportable forecast period which incorporates macroeconomic forecasts at the time of the evaluation. The CIT quantitative collective ACL forecasts utilize scenario weighting of a range of economic scenarios, including baseline, upside and downside scenarios. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes.
We identified the assessment of the CIT quantitative collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the methods and models used to estimate the PD and LGD, the selection of the economic scenarios, and the weighting of each economic scenario. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of the audit evidence obtained.
The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the CIT quantitative collective ACL including controls related to the:
•development and approval of the CIT quantitative collective ACL methodology
•continued use and appropriateness of changes to the PD and LGD models, including the significant assumptions used in the PD and LGD models
•selection of the economic scenarios and the weighting of each economic scenario
•performance monitoring of the PD and LGD models
•analysis of the ACL results, trends and ratios
We evaluated the Company’s process to develop the CIT quantitative collective ACL by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the CIT quantitative collective ACL methodology for compliance with U.S. generally accepted accounting principles.
•evaluating judgments made by the Company relative to the assessment and performance testing of the PD and LGD models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices.
•assessing the conceptual soundness of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the selection of the economic scenarios and the weighting applied to each economic scenario by comparing them to the Company’s business environment and relevant industry practices
We also assessed the sufficiency of the audit evidence obtained related to the CIT quantitative collective ACL by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimate
Valuation of loans and leases, rail operating lease equipment and the core deposit intangible acquired in the merger with CIT
As discussed in Note 2 to the consolidated financial statements, on January 3, 2022, First Citizens BancShares, Inc. (the Company) closed on a merger transaction with CIT Group Inc. (the Merger). The assets acquired and liabilities assumed are required to be effective can provide only reasonable assurancemeasured at fair value at the date of acquisition under the purchase method of accounting. The Company acquired loans and leases with respecta fair value of $33 billion, rail operating lease equipment of $8 billion and established a core deposit intangible (CDI) asset with a fair value of $143 million.
•The fair value of the acquired loans and leases is 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, and certain assumptions including market implied credit losses (probability of default, loss given default), discount rates, and prepayment rates.
•The fair value of the rail operating lease equipment is based primarily on a cost approach that considers factors including the railcar type, age, leasing status and certain assumptions including replacement cost, functional and economic obsolescence and salvage values. For certain rail operating lease equipment, a market approach was used that considers factors including railcar type, age and certain assumptions including estimated sales values and salvage values.
•The fair value of the CDI asset is based on an income approach, after-tax savings method. This method estimates the fair value by discounting to financial statement preparationpresent value the favorable funding spread attributable to the core deposit balances. The favorable funding spread is calculated as the difference in the alternative cost of funds and presentation. A control deficiency exists whenthe net deposit cost whereby projected net cash flow benefits are derived from estimating costs to carry deposits compared to alternative funding costs, and certain assumptions including the discount rates, interest costs, deposit attrition rates, alternative costs of funds, and net maintenance costs.
We identified the valuation of the acquired loans and leases, rail operating lease equipment and CDI asset in the Merger as a critical audit matter. Specifically, the evaluation of the methodologies and the determination of certain assumptions used to estimate the fair values involved a high degree of auditor judgment and specialized skills and knowledge. Such assumptions included the market implied credit losses, discount rates, and prepayment rates for the loans and leases; the replacement costs and the functional and economic obsolescence for the rail operating lease equipment; and the discount rate for the CDI asset. These assumptions required subjective auditor judgment as changes in the assumptions could have a significant impact on the estimated fair value.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design or operationand tested the operating effectiveness of a control does not allow management or employees, incertain internal controls over the normal courseprocess to measure the estimate of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversightfair values of the company's financial reporting. A material weaknessacquired loans and leases, the rail operating lease equipment and the CDI asset, including controls over:
•evaluating the fair value methodologies
•determining the market implied credit losses, discount rates, and prepayment rates for the loans and leases
•determining the replacement costs and the functional and economic obsolescence for the rail operating lease equipment
•determining the discount rate for the CDI asset
We evaluated the Company’s process to develop the fair values of the acquired loans and leases, the rail operating lease equipment and the CDI asset by testing certain sources of data and assumptions that the Company used and considered the relevance and reliability of such data and assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in internal control over financial reporting is a control deficiency, or combinationevaluating the Company’s estimate of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatementthese fair values by:
•evaluating the valuation methodologies used by the Company to estimate the fair values for reasonableness and compliance with U.S. generally accepted accounting principles
Specific to the acquired loans and leases:
•developing independent ranges of a company's annual or interim financial statements will not be prevented or detectedfair value for certain acquired loans and leases, including the development of independent assumptions utilizing market data for implied credit loss, discount rate and prepayment rate assumptions
•assessing the Company’s estimate of fair value for certain acquired loans and leases by comparing them to the independently developed rangesSpecific to the rail operating lease equipment:
•developing independent assumptions for replacement costs on a timely basis.rail operating lease equipment by assessing market information from third-party sources
•evaluating the Company’s process for developing the functional and economic obsolescence, including the criteria used to determine extent of obsolescence, for reasonableness
BancShares'•developing independent registered public accounting firm has issued an audit report onranges of fair value for certain acquired rail operating lease equipment using multiple approaches and comparing the company's internal control over financial reporting. This report appears on page 64.Company’s estimate to the independently developed estimates
Specific to the CDI asset:
•evaluating the Company’s process for developing the discount rate, by assessing the approach used to derive the assumption, reviewing the peer group used to determine the market beta for comparability, assessing market information from third-party sources and developing the size premium and company specific risk premiums and comparing to those selected by management
/s/ KPMG LLP
We have served as the Company’s auditor since 2021.
Raleigh, North Carolina
February 24, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Stockholders
First Citizens BancShares, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited First Citizens BancShares, Inc. and Subsidiaries’subsidiaries' (the “Company”)Company) internal control overfinancial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-IntegratedControl – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, First Citizens BancShares, Inc. and Subsidiariesthe Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on the criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated financial statementsbalance sheets of the Company as of December 31, 20172022 and 20162021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 21, 201824, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, the scope of management’s assessment of internal control over financial reporting as of December 31, 2017 has excluded Harvest Community Bank (HCB) acquired on January 13, 2017 and Guaranty Bank (Guaranty) acquired on May 5, 2017. We have also excluded HCB and Guaranty from the scope of our audit of internal control over financial reporting. HCB and Guaranty represent 0.27 percent and 2.04 percent of consolidated revenue (total interest income and total noninterest income, excluding the related gains on acquisition) for the year ended December 31, 2017, respectively, and 0.20 percent and 0.81 percent of consolidated total assets as of December 31, 2017, respectively.
Definition and Limitations of Internal Control Over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Dixon Hughes GoodmanKPMG LLP
Charlotte,
Raleigh, North Carolina
February 21, 2018
24, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of First Citizens BancShares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2004.
Charlotte, North Carolina
February 21, 2018
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
|
| | | | | | | |
(Dollars in thousands, except share data) | December 31, 2017 | | December 31, 2016 |
Assets | | | |
Cash and due from banks | $ | 336,150 |
| | $ | 539,741 |
|
Overnight investments | 1,387,927 |
| | 1,872,594 |
|
Investment securities available for sale (cost of $7,229,014 at December 31, 2017 and $7,079,287 at December 31, 2016) | 7,180,180 |
| | 7,006,580 |
|
Investment securities held to maturity (fair value of $81 at December 31, 2017 and $104 at December 31, 2016) | 76 |
| | 98 |
|
Loans held for sale | 51,179 |
| | 74,401 |
|
Loans and leases | 23,596,825 |
| | 21,737,878 |
|
Allowance for loan and lease losses | (221,893 | ) | | (218,795 | ) |
Net loans and leases | 23,374,932 |
| | 21,519,083 |
|
Premises and equipment | 1,138,431 |
| | 1,133,044 |
|
Other real estate owned | 51,097 |
| | 61,231 |
|
Income earned not collected | 95,249 |
| | 79,839 |
|
FDIC shared-loss receivable | 2,223 |
| | 4,172 |
|
Goodwill | 150,601 |
| | 150,601 |
|
Other intangible assets | 73,096 |
| | 78,040 |
|
Other assets | 686,371 |
| | 471,412 |
|
Total assets | $ | 34,527,512 |
| | $ | 32,990,836 |
|
Liabilities | | | |
Deposits: | | | |
Noninterest-bearing | $ | 11,237,375 |
| | $ | 10,130,549 |
|
Interest-bearing | 18,028,900 |
| | 18,030,794 |
|
Total deposits | 29,266,275 |
| | 28,161,343 |
|
Short-term borrowings | 693,807 |
| | 603,487 |
|
Long-term obligations | 870,240 |
| | 832,942 |
|
FDIC shared-loss payable | 101,342 |
| | 97,008 |
|
Other liabilities | 261,784 |
| | 283,629 |
|
Total liabilities | 31,193,448 |
| | 29,978,409 |
|
Shareholders’ equity | | | |
Common stock: | | | |
Class A - $1 par value (16,000,000 shares authorized; 11,005,220 shares issued and outstanding at December 31, 2017 and December 31, 2016) | 11,005 |
| | 11,005 |
|
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at December 31, 2017 and December 31, 2016) | 1,005 |
| | 1,005 |
|
Preferred stock - $0.01 par value (10,000,000 shares authorized; no shares issued and outstanding at December 31, 2017 and December 31, 2016) | — |
| | — |
|
Surplus | 658,918 |
| | 658,918 |
|
Retained earnings | 2,785,430 |
| | 2,476,691 |
|
Accumulated other comprehensive loss | (122,294 | ) | | (135,192 | ) |
Total shareholders’ equity | 3,334,064 |
| | 3,012,427 |
|
Total liabilities and shareholders’ equity | $ | 34,527,512 |
| | $ | 32,990,836 |
|
| | | | | | | | | | | |
dollars in millions, except share data | December 31, 2022 | | December 31, 2021 |
Assets | | | |
Cash and due from banks | $ | 518 | | | $ | 338 | |
Interest-earning deposits at banks | 5,025 | | | 9,115 | |
| | | |
Investment in marketable equity securities (cost of $75 at December 31, 2022 and $73 at December 31, 2021) | 95 | | | 98 | |
Investment securities available for sale (cost of $9,967 at December 31, 2022 and $9,215 at December 31, 2021) | 8,995 | | | 9,203 | |
Investment securities held to maturity (fair value of $8,795 at December 31, 2022 and $3,759 at December 31, 2021) | 10,279 | | | 3,809 | |
Assets held for sale | 60 | | | 99 | |
Loans and leases | 70,781 | | | 32,372 | |
Allowance for credit losses | (922) | | | (178) | |
Loans and leases, net of allowance for credit losses | 69,859 | | | 32,194 | |
Operating lease equipment, net | 8,156 | | | — | |
Premises and equipment, net | 1,456 | | | 1,233 | |
Goodwill | 346 | | | 346 | |
Other intangible assets | 140 | | | 19 | |
Other assets | 4,369 | | | 1,855 | |
Total assets | $ | 109,298 | | | $ | 58,309 | |
Liabilities | | | |
Deposits: | | | |
Noninterest-bearing | $ | 24,922 | | | $ | 21,405 | |
Interest-bearing | 64,486 | | | 30,001 | |
Total deposits | 89,408 | | | 51,406 | |
Credit balances of factoring clients | 995 | | | — | |
Borrowings: | | | |
| | | |
| | | |
| | | |
Short-term borrowings | 2,186 | | | 589 | |
| | | |
| | | |
| | | |
| | | |
Long-term borrowings | 4,459 | | | 1,195 | |
Total borrowings | 6,645 | | | 1,784 | |
Other liabilities | 2,588 | | | 381 | |
Total liabilities | 99,636 | | | 53,571 | |
Stockholders’ equity | | | |
Preferred stock - $0.01 par value (10,000,000 shares authorized at December 31, 2022 and December 31, 2021) | 881 | | | 340 | |
Common stock: | | | |
Class A - $1 par value (16,000,000 shares authorized; 13,501,017 and 8,811,220 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively) | 14 | | | 9 | |
Class B - $1 par value (2,000,000 shares authorized; 1,005,185 shares issued and outstanding at December 31, 2022 and December 31, 2021) | 1 | | | 1 | |
Additional paid in capital | 4,109 | | | — | |
Retained earnings | 5,392 | | | 4,378 | |
Accumulated other comprehensive (loss) income | (735) | | | 10 | |
Total stockholders’ equity | 9,662 | | | 4,738 | |
Total liabilities and stockholders’ equity | $ | 109,298 | | | $ | 58,309 | |
See accompanying Notes to the Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
|
| | | | | | | | | | | |
| Year ended December 31 |
(Dollars in thousands, except share and per share data) | 2017 | | 2016 | | 2015 |
Interest income | | | | | |
Loans and leases | $ | 955,637 |
| | $ | 876,472 |
| | $ | 874,892 |
|
Investment securities: | | | | | |
U. S. Treasury | 17,657 |
| | 11,837 |
| | 15,353 |
|
Government agency | 634 |
| | 2,883 |
| | 6,843 |
|
Mortgage-backed securities | 98,341 |
| | 79,336 |
| | 65,815 |
|
Corporate bonds | 3,877 |
| | 1,783 |
| | — |
|
Other | 698 |
| | 912 |
| | 239 |
|
Total investment securities interest and dividend income | 121,207 |
| | 96,751 |
| | 88,250 |
|
Overnight investments | 26,846 |
| | 14,534 |
| | 6,067 |
|
Total interest income | 1,103,690 |
| | 987,757 |
| | 969,209 |
|
Interest expense | | | | | |
Deposits | 16,196 |
| | 18,169 |
| | 21,230 |
|
Short-term borrowings | 4,838 |
| | 1,965 |
| | 4,660 |
|
Long-term obligations | 22,760 |
| | 22,948 |
| | 18,414 |
|
Total interest expense | 43,794 |
| | 43,082 |
| | 44,304 |
|
Net interest income | 1,059,896 |
| | 944,675 |
| | 924,905 |
|
Provision for loan and lease losses | 25,692 |
| | 32,941 |
| | 20,664 |
|
Net interest income after provision for loan and lease losses | 1,034,204 |
| | 911,734 |
| | 904,241 |
|
Noninterest income | | | | | |
Gain on acquisitions | 134,745 |
| | 5,831 |
| | 42,930 |
|
Cardholder services | 95,365 |
| | 83,417 |
| | 77,342 |
|
Merchant services | 103,962 |
| | 95,774 |
| | 84,207 |
|
Service charges on deposit accounts | 101,201 |
| | 89,359 |
| | 90,546 |
|
Wealth management services | 86,719 |
| | 80,221 |
| | 82,865 |
|
Securities gains, net | 4,293 |
| | 26,673 |
| | 10,817 |
|
Other service charges and fees | 28,321 |
| | 27,011 |
| | 23,987 |
|
Mortgage income | 23,251 |
| | 20,348 |
| | 18,168 |
|
Insurance commissions | 12,465 |
| | 11,150 |
| | 11,757 |
|
ATM income | 9,143 |
| | 7,283 |
| | 7,119 |
|
Adjustments to FDIC shared-loss receivable | (6,232 | ) | | (9,725 | ) | | (19,009 | ) |
Net impact from FDIC shared-loss agreement terminations | (45 | ) | | 16,559 |
| | — |
|
Other | 47,841 |
| | 34,170 |
| | 36,359 |
|
Total noninterest income | 641,029 |
| | 488,071 |
| | 467,088 |
|
Noninterest expense | | | | | |
Salaries and wages | 475,214 |
| | 428,351 |
| | 429,742 |
|
Employee benefits | 113,231 |
| | 104,518 |
| | 113,309 |
|
Occupancy expense | 104,690 |
| | 102,609 |
| | 98,191 |
|
Equipment expense | 97,478 |
| | 92,501 |
| | 92,639 |
|
Merchant processing | 78,537 |
| | 71,150 |
| | 62,473 |
|
Cardholder processing | 30,573 |
| | 29,207 |
| | 25,296 |
|
FDIC insurance expense | 22,191 |
| | 20,967 |
| | 18,340 |
|
Collection and foreclosure-related expenses | 14,407 |
| | 13,379 |
| | 12,311 |
|
Merger-related expenses | 9,015 |
| | 5,341 |
| | 14,174 |
|
Other | 186,199 |
| | 180,715 |
| | 172,440 |
|
Total noninterest expense | 1,131,535 |
| | 1,048,738 |
| | 1,038,915 |
|
Income before income taxes | 543,698 |
| | 351,067 |
| | 332,414 |
|
Income taxes | 219,946 |
| | 125,585 |
| | 122,028 |
|
Net income | $ | 323,752 |
| | $ | 225,482 |
| | $ | 210,386 |
|
Net income per share | $ | 26.96 |
| | $ | 18.77 |
| | $ | 17.52 |
|
Dividends declared per share | $ | 1.25 |
| | $ | 1.20 |
| | $ | 1.20 |
|
Average shares outstanding | 12,010,405 |
| | 12,010,405 |
| | 12,010,405 |
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31 |
dollars in millions, except share and per share data | 2022 | | 2021 | | 2020 |
Interest income | | | | | |
Interest and fees on loans | $ | 2,953 | | | $ | 1,295 | | | $ | 1,333 | |
Interest on investment securities | 354 | | | 145 | | | 144 | |
Interest on deposits at banks | 106 | | | 11 | | | 7 | |
Total interest income | 3,413 | | | 1,451 | | | 1,484 | |
Interest expense | | | | | |
Deposits | 335 | | | 33 | | | 67 | |
Borrowings | 132 | | | 28 | | | 29 | |
Total interest expense | 467 | | | 61 | | | 96 | |
Net interest income | 2,946 | | | 1,390 | | | 1,388 | |
Provision (benefit) for credit losses | 645 | | | (37) | | | 58 | |
Net interest income after provision for credit losses | 2,301 | | | 1,427 | | | 1,330 | |
Noninterest income | | | | | |
Rental income on operating lease equipment | 864 | | | — | | | — | |
Fee income and other service charges | 163 | | | 42 | | | 37 | |
Wealth management services | 142 | | | 129 | | | 103 | |
Service charges on deposit accounts | 100 | | | 95 | | | 88 | |
Factoring commissions | 104 | | | — | | | — | |
Cardholder services, net | 102 | | | 87 | | | 74 | |
Merchant services, net | 35 | | | 33 | | | 24 | |
Insurance commissions | 47 | | | 16 | | | 15 | |
Realized gain on sale of investment securities available for sale, net | — | | | 33 | | | 60 | |
Fair value adjustment on marketable equity securities, net | (3) | | | 34 | | | 29 | |
Bank-owned life insurance | 32 | | | 3 | | | 3 | |
Gain on sale of leasing equipment, net | 15 | | | — | | | — | |
Gain on acquisition | 431 | | | — | | | — | |
Gain on extinguishment of debt | 7 | | | — | | | — | |
Other noninterest income | 97 | | | 36 | | | 44 | |
Total noninterest income | 2,136 | | | 508 | | | 477 | |
Noninterest expense | | | | | |
Depreciation on operating lease equipment | 345 | | | — | | | — | |
Maintenance and other operating lease expenses | 189 | | | — | | | — | |
Salaries and benefits | 1,396 | | | 759 | | | 722 | |
Net occupancy expense | 194 | | | 117 | | | 117 | |
Equipment expense | 216 | | | 119 | | | 116 | |
Professional fees | 57 | | | 20 | | | 17 | |
Third-party processing fees | 103 | | | 60 | | | 45 | |
FDIC insurance expense | 31 | | | 14 | | | 13 | |
Marketing expense | 53 | | | 10 | | | 10 | |
Merger-related expenses | 231 | | | 29 | | | 17 | |
Intangible asset amortization | 23 | | | 12 | | | 15 | |
Other noninterest expense | 237 | | | 94 | | | 117 | |
Total noninterest expense | 3,075 | | | 1,234 | | | 1,189 | |
Income before income taxes | 1,362 | | | 701 | | | 618 | |
Income tax expense | 264 | | | 154 | | | 126 | |
Net income | $ | 1,098 | | | $ | 547 | | | $ | 492 | |
Preferred stock dividends | 50 | | | 18 | | | 14 | |
Net income available to common stockholders | $ | 1,048 | | | $ | 529 | | | $ | 478 | |
Earnings per common share | | | | | |
Basic | $ | 67.47 | | | $ | 53.88 | | | $ | 47.50 | |
Diluted | $ | 67.40 | | | $ | 53.88 | | | $ | 47.50 | |
Weighted average common shares outstanding | | | | | |
Basic | 15,531,924 | | 9,816,405 | | 10,056,654 |
Diluted | 15,549,944 | | 9,816,405 | | 10,056,654 |
See accompanying Notes to the Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| Year ended December 31 |
| 2017 | | 2016 | | 2015 |
(Dollars in thousands) | |
Net income | $ | 323,752 |
| | $ | 225,482 |
| | $ | 210,386 |
|
Other comprehensive income (loss) | | | | | |
Unrealized gains (losses) on securities: | | | | | |
Change in unrealized securities gains (losses) arising during period | 28,166 |
| | (21,530 | ) | | (22,030 | ) |
Tax effect | (10,531 | ) | | 7,584 |
| | 8,486 |
|
Reclassification adjustment for net gains realized and included in income before income taxes | (4,293 | ) | | (26,673 | ) | | (10,817 | ) |
Tax effect | 1,588 |
| | 9,869 |
| | 4,138 |
|
Total change in unrealized gains (losses) on securities, net of tax | 14,930 |
| | (30,750 | ) | | (20,223 | ) |
Change in fair value of cash flow hedges: | | | | | |
Change in unrecognized loss on cash flow hedges | — |
| | 1,429 |
| | 2,908 |
|
Tax effect | — |
| | (537 | ) | | (1,136 | ) |
Total change in unrecognized loss on cash flow hedges, net of tax | — |
| | 892 |
| | 1,772 |
|
Change in pension obligation: | | | | | |
Change in pension obligation | (12,945 | ) | | (70,424 | ) | | 691 |
|
Tax effect | 4,789 |
| | 25,077 |
| | (297 | ) |
Amortization of actuarial losses and prior service cost | 9,720 |
| | 7,069 |
| | 11,586 |
|
Tax effect | (3,596 | ) | | (2,616 | ) | | (4,988 | ) |
Total change in pension obligation, net of tax | (2,032 | ) | | (40,894 | ) | | 6,992 |
|
Other comprehensive income (loss) | 12,898 |
| | (70,752 | ) | | (11,459 | ) |
Total comprehensive income | $ | 336,650 |
| | $ | 154,730 |
| | $ | 198,927 |
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31 |
dollars in millions | 2022 | | 2021 | | 2020 |
Net income | $ | 1,098 | | | $ | 547 | | | $ | 492 | |
Other comprehensive (loss) income, net of tax | | | | | |
Net unrealized (loss) gain on securities available for sale | (730) | | | (88) | | | 73 | |
Net change in unrealized loss on securities available for sale transferred to securities held to maturity | 1 | | | (11) | | | 4 | |
Net change in defined benefit pension items | (16) | | | 97 | | | 62 | |
| | | | | |
| | | | | |
Other comprehensive (loss) income, net of tax | $ | (745) | | | $ | (2) | | | $ | 139 | |
Total comprehensive income | $ | 353 | | | $ | 545 | | | $ | 631 | |
See accompanying Notes to the Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’Stockholders’ Equity
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
(Dollars in thousands, except share data) | |
Balance at December 31, 2014 | $ | 11,005 |
| | $ | 1,005 |
| | $ | 658,918 |
| | $ | 2,069,647 |
| | $ | (52,981 | ) | | $ | 2,687,594 |
|
Net income | — |
| | — |
| | — |
| | 210,386 |
| | — |
| | 210,386 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (11,459 | ) | | (11,459 | ) |
Cash dividends ($1.20 per share) | — |
| | — |
| | — |
| | (14,412 | ) | | — |
| | (14,412 | ) |
Balance at December 31, 2015 | 11,005 |
| | 1,005 |
| | 658,918 |
| | 2,265,621 |
| | (64,440 | ) | | 2,872,109 |
|
Net income | — |
| | — |
| | — |
| | 225,482 |
| | — |
| | 225,482 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (70,752 | ) | | (70,752 | ) |
Cash dividends ($1.20 per share) | — |
| | — |
| | — |
| | (14,412 | ) | | — |
| | (14,412 | ) |
Balance at December 31, 2016 | 11,005 |
| | 1,005 |
| | 658,918 |
| | 2,476,691 |
| | (135,192 | ) | | 3,012,427 |
|
Net income | — |
| | — |
| | — |
| | 323,752 |
| | — |
| | 323,752 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 12,898 |
| | 12,898 |
|
Cash dividends ($1.25 per share) | — |
| | — |
| | — |
| | (15,013 | ) | | — |
| | (15,013 | ) |
Balance at December 31, 2017 | $ | 11,005 |
| | $ | 1,005 |
| | $ | 658,918 |
| | $ | 2,785,430 |
| | $ | (122,294 | ) | | $ | 3,334,064 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
dollars in millions, except share data | | Preferred Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity |
Balance at December 31, 2019 | | $ | — | | | $ | 10 | | | $ | 1 | | | $ | 44 | | | $ | 3,658 | | | $ | (127) | | | $ | 3,586 | |
Cumulative effect of adoption of ASC 326 | | — | | | — | | | — | | | — | | | 37 | | | — | | | 37 | |
Net income | | — | | | — | | | — | | | — | | | 492 | | | — | | | 492 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | 139 | | | 139 | |
Issuance of preferred stock | | 340 | | | — | | | — | | | — | | | — | | | — | | | 340 | |
Repurchased 813,090 shares of Class A common stock | | — | | | (1) | | | — | | | (44) | | | (289) | | | — | | | (334) | |
Cash dividends declared ($1.67 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (15) | | | — | | | (15) | |
Class B common stock | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Preferred stock dividends declared | | — | | | — | | | — | | | — | | | (14) | | | — | | | (14) | |
Balance at December 31, 2020 | | 340 | | | 9 | | | 1 | | | — | | | 3,867 | | | 12 | | | 4,229 | |
Net income | | — | | | — | | | — | | | — | | | 547 | | | — | | | 547 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
Cash dividends declared ($1.88 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (16) | | | — | | | (16) | |
Class B common stock | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Preferred stock dividends declared | | — | | | — | | | — | | | — | | | (18) | | | — | | | (18) | |
Balance at December 31, 2021 | | 340 | | | 9 | | | 1 | | | — | | | 4,378 | | | 10 | | | 4,738 | |
Net income | | — | | | — | | | — | | | — | | | 1,098 | | | — | | | 1,098 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (745) | | | (745) | |
Issued in CIT Merger: | | | | | | | | | | | | | | |
Common stock | | — | | | 6 | | | — | | | 5,273 | | | — | | | — | | | 5,279 | |
Series B preferred stock | | 334 | | | — | | | — | | | — | | | — | | | — | | | 334 | |
Series C preferred stock | | 207 | | | — | | | — | | | — | | | — | | | — | | | 207 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | — | | | 75 | | | — | | | — | | | 75 | |
Repurchased 1,500,000 shares of Class A common stock | | — | | | (1) | | | — | | | (1,239) | | | — | | | — | | | (1,240) | |
Cash dividends declared ($2.16 per common share): | | | | | | | | | | | | | | |
Class A common stock | | — | | | — | | | — | | | — | | | (32) | | | — | | | (32) | |
Class B common stock | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Preferred stock dividends declared: | | | | | | | | | | | | | | |
Series A | | — | | | — | | | — | | | — | | | (19) | | | — | | | (19) | |
Series B | | — | | | — | | | — | | | — | | | (20) | | | — | | | (20) | |
Series C | | — | | | — | | | — | | | — | | | (11) | | | — | | | (11) | |
Balance at December 31, 2022 | | $ | 881 | | | $ | 14 | | | $ | 1 | | | $ | 4,109 | | | $ | 5,392 | | | $ | (735) | | | $ | 9,662 | |
| | | | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
dollars in millions | 2022 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | $ | 1,098 | | | $ | 547 | | | $ | 492 | |
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | | | |
Provision (benefit) for credit losses | 645 | | | (37) | | | 58 | |
Deferred tax expense (benefit) | 206 | | | (8) | | | (26) | |
Depreciation, amortization, and accretion, net | 533 | | | 143 | | | 133 | |
Stock based compensation expense | 19 | | | — | | | — | |
Realized gain on sale of investment securities available for sale, net | — | | | (33) | | | (60) | |
Fair value adjustment on marketable equity securities, net | 3 | | | (34) | | | (29) | |
Gain on sale of loans, net | (22) | | | (33) | | | (38) | |
Gain on sale of operating lease equipment, net | (15) | | | — | | | — | |
Loss on sale of premises and equipment, net | 5 | | | — | | | — | |
(Gain) loss on other real estate owned, net | (14) | | | (1) | | | 4 | |
Gain on acquisition | (431) | | | — | | | — | |
| | | | | |
Gain on extinguishment of debt | (7) | | | — | | | — | |
Origination of loans held for sale | (499) | | | (1,123) | | | (1,042) | |
Proceeds from sale of loans held for sale | 562 | | | 1,036 | | | 1,046 | |
Net change in other assets | 484 | | | (733) | | | (135) | |
Net change in other liabilities | 260 | | | 5 | | | (15) | |
Other operating activities | (36) | | | (13) | | | (12) | |
Net cash provided by (used in) operating activities | 2,791 | | | (284) | | | 376 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Net decrease (increase) in interest-earning deposits at banks | 6,965 | | | (4,767) | | | (3,204) | |
Purchase of marketable equity securities | — | | | (2) | | | (333) | |
Proceeds from sales of investments in marketable equity securities | — | | | 30 | | | 353 | |
Purchase of investment securities available for sale | (1,985) | | | (6,375) | | | (8,667) | |
Proceeds from maturities of investment securities available for sale | 1,237 | | | 2,455 | | | 2,791 | |
Proceeds from sale of investment securities available for sale | 2 | | | 1,367 | | | 4,585 | |
Purchase of investment securities held to maturity | (755) | | | (1,401) | | | (1,633) | |
Proceeds from maturities of investment securities held to maturity | 835 | | | 809 | | | 301 | |
| | | | | |
Net change in loans | (5,344) | | | 423 | | | (3,850) | |
Proceeds from sale of loans | 245 | | | — | | | 13 | |
Net decrease in credit balances of factoring clients | (538) | | | — | | | — | |
Purchase of operating lease equipment | (771) | | | — | | | — | |
Proceeds from sale of operating lease equipment | 95 | | | — | | | — | |
Purchase of premises and equipment | (155) | | | (107) | | | (133) | |
Proceeds from sales of premises and equipment | 13 | | | 1 | | | 1 | |
| | | | | |
Proceeds from sales of other real estate owned | 48 | | | 41 | | | 28 | |
Acquisition, net of cash acquired | 134 | | | — | | | (60) | |
Other investing activities | 49 | | | (42) | | | (100) | |
Net cash provided by (used in) investing activities | 75 | | | (7,568) | | | (9,908) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net increase (decrease) in time deposits | 568 | | | (406) | | | (1,010) | |
Net (decrease) increase in demand and other interest-bearing deposits | (2,259) | | | 8,382 | | | 9,989 | |
Net decrease in securities sold under customer repurchase agreements | (153) | | | (52) | | | (97) | |
Repayment of short-term borrowings | (1,355) | | | — | | | — | |
Proceeds from issuance of short-term borrowings | 3,105 | | | — | | | — | |
Repayment of long-term borrowings | (5,099) | | | (54) | | | (87) | |
Proceeds from issuance of long-term borrowings | 3,854 | | | — | | | 746 | |
Net proceeds from issuance of preferred stock | — | | | — | | | 340 | |
| | | | | |
Repurchase of Class A common stock | (1,240) | | | — | | | (334) | |
Cash dividends paid | (83) | | | (42) | | | (30) | |
Other financing activities | (24) | | | — | | | — | |
Net cash (used in) provided by financing activities | (2,686) | | | 7,828 | | | 9,517 | |
| | | | | |
Change in cash and due from banks | 180 | | | (24) | | | (15) | |
Cash and due from banks at beginning of year | 338 | | | 362 | | | 377 | |
Cash and due from banks at end of year | $ | 518 | | | $ | 338 | | | $ | 362 | |
|
| | | | | | | | | | | |
| Year ended December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
Net income | $ | 323,752 |
| | $ | 225,482 |
| | $ | 210,386 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
Provision for loan and lease losses | 25,692 |
| | 32,941 |
| | 20,664 |
|
Deferred tax expense | 125,838 |
| | 33,146 |
| | 550 |
|
Net change in current taxes | (10,616 | ) | | (24,380 | ) | | (19,477 | ) |
Depreciation | 90,804 |
| | 88,777 |
| | 87,717 |
|
Net change in accrued interest payable | 155 |
| | (1,916 | ) | | (2,481 | ) |
Net change in income earned not collected | (8,899 | ) | | (7,805 | ) | | (12,782 | ) |
Gain on acquisitions | (134,745 | ) | | (5,831 | ) | | (42,930 | ) |
Gain on branch sale | — |
| | — |
| | (216 | ) |
Net securities gains | (4,293 | ) | | (26,673 | ) | | (10,817 | ) |
Loss on termination of FDIC shared-loss agreements | 45 |
| | 3,377 |
| | — |
|
Origination of loans held for sale | (622,503 | ) | | (795,963 | ) | | (685,631 | ) |
Proceeds from sale of loans held for sale | 660,808 |
| | 797,123 |
| | 701,412 |
|
Gain on sale of loans held for sale | (14,843 | ) | | (15,795 | ) | | (11,851 | ) |
Gain on sale of portfolio loans | (1,007 | ) | | (3,758 | ) | | — |
|
Net write-downs/losses on other real estate | 4,460 |
| | 6,201 |
| | 2,168 |
|
Gain on sale of premises and equipment | (524 | ) | | — |
| | — |
|
Gain on extinguishment of long-term obligations | (919 | ) | | (1,717 | ) | | — |
|
Net amortization of premiums and discounts | (40,028 | ) | | (44,618 | ) | | (85,066 | ) |
Amortization of intangible assets | 22,842 |
| | 21,808 |
| | 22,894 |
|
Reduction in FDIC receivable for shared-loss agreements | 7,764 |
| | 14,745 |
| | 47,044 |
|
Net change in FDIC payable for shared-loss agreements | 4,334 |
| | (11,245 | ) | | 9,918 |
|
Net change in other assets | (46,920 | ) | | (27,873 | ) | | (12,904 | ) |
Net change in other liabilities | (29,542 | ) | | (25,520 | ) | | 14,458 |
|
Net cash provided by operating activities | 351,655 |
| | 230,506 |
| | 233,056 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Net change in loans outstanding | (1,213,686 | ) | | (1,214,433 | ) | | (1,311,447 | ) |
Purchases of investment securities available for sale | (3,648,312 | ) | | (4,086,855 | ) | | (2,467,993 | ) |
Proceeds from maturities/calls of investment securities held to maturity | 22 |
| | 157 |
| | 263 |
|
Proceeds from maturities/calls of investment securities available for sale | 1,842,563 |
| | 2,149,130 |
| | 1,478,608 |
|
Proceeds from sales of investment securities available for sale | 1,345,746 |
| | 1,829,305 |
| | 1,286,120 |
|
Net change in overnight investments | 586,279 |
| | 233,433 |
| | (338,213 | ) |
Cash paid to the FDIC for shared-loss agreements | (7,440 | ) | | (21,059 | ) | | (33,296 | ) |
Net cash paid to the FDIC for termination of shared-loss agreements | (285 | ) | | (20,115 | ) | | — |
|
Proceeds from sales of other real estate | 40,709 |
| | 34,944 |
| | 80,932 |
|
Proceeds from sale of premises and equipment | 3,061 |
| | — |
| | — |
|
Proceeds from sales of portfolio loans | 162,649 |
| | 77,665 |
| | 45,862 |
|
Additions to premises and equipment | (84,798 | ) | | (81,841 | ) | | (89,734 | ) |
Net cash used in branch sale | — |
| | — |
| | (22,242 | ) |
Net cash acquired in business acquisitions | 304,820 |
| | (727 | ) | | 123,137 |
|
Net cash used by investing activities | (668,672 | ) | | (1,100,396 | ) | | (1,248,003 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net decrease in time deposits | (538,250 | ) | | (505,548 | ) | | (590,773 | ) |
Net increase in demand and other interest-bearing deposits | 539,120 |
| | 1,287,856 |
| | 1,607,487 |
|
Net decrease in short-term borrowings | (44,680 | ) | | (33,072 | ) | | (397,952 | ) |
Repayment of long-term obligations | (6,955 | ) | | (9,279 | ) | | (5,896 | ) |
Origination of long-term obligations | 175,000 |
| | 150,000 |
| | 350,000 |
|
Cash dividends paid | (10,809 | ) | | (14,412 | ) | | (18,015 | ) |
Net cash provided by financing activities | 113,426 |
| | 875,545 |
| | 944,851 |
|
Change in cash and due from banks | (203,591 | ) | | 5,655 |
| | (70,096 | ) |
Cash and due from banks at beginning of period | 539,741 |
| | 534,086 |
| | 604,182 |
|
Cash and due from banks at end of period | $ | 336,150 |
| | $ | 539,741 |
| | $ | 534,086 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 43,639 |
| | $ | 44,998 |
| | $ | 46,785 |
|
Income taxes | 88,565 |
| | 108,741 |
| | 136,900 |
|
Noncash investing and financing activities: | | | | | |
Transfers of loans to other real estate | 34,980 |
| | 35,272 |
| | 55,032 |
|
Dividends declared but not paid | 4,204 |
| | — |
| | — |
|
Unsettled sales of investment securities | 309,623 |
| | — |
| | — |
|
Reclassification of portfolio loans to loans held for sale | 161,719 |
| | 73,907 |
| | — |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
dollars in millions | 2022 | | 2021 | | 2020 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | |
Cash paid (refunded) during the period for: | | | | | |
Interest | $ | 525 | | | $ | 62 | | | $ | 105 | |
Income taxes | (551) | | | 870 | | | 117 | |
Significant non-cash investing and financing activities: | | | | | |
Transfers of loans to other real estate | 14 | | | 14 | | | 12 | |
Transfers of premises and equipment to other real estate | 19 | | | 14 | | | 15 | |
Transfer of investment securities available for sale to held to maturity | — | | | 452 | | | 1,461 | |
Dividends declared but not paid | 1 | | | — | | | 5 | |
Transfer of assets from held for investment to held for sale | 188 | | | 88 | | | 49 | |
Transfer of assets from held for sale to held for investment | 21 | | | 4 | | | 6 | |
Loans held for sale exchanged for investment securities | 38 | | | 231 | | | 11 | |
Commitments extended during the period on affordable housing investment credits | 110 | | | 15 | | | 15 | |
Issuance of common stock as consideration for acquisition | 5,279 | | | — | | | — | |
Stock-based compensation as consideration for acquisition | 81 | | | — | | | — | |
Issuance of preferred stock as consideration for acquisition | 541 | | | — | | | — | |
See accompanying Notes to the Consolidated Financial Statements.
First Citizens BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A
1 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Nature of Operations
First Citizens BancShares, Inc. (BancShares)(the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” “BancShares”) is a financial holding company organized under the laws of Delaware andthat conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (FCB)(“FCB,” or the “Bank”), which is headquartered in Raleigh, North Carolina.
FCB operates 545 BancShares and its subsidiaries operate a network of over 500 branches in Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Maryland, Minnesota, Missouri, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin. FCB provides full-service banking services designed to meet the needs of retail and commercial customers22 states, predominantly located in the markets in which they operate. The services provided include transactionSoutheast, Mid-Atlantic, Midwest and savings deposit accounts,Western United States. BancShares provides various types of commercial and consumer loans, trust and asset management. Investmentbanking services, including sales of annuitieslending, leasing and third party mutual funds are offered through First Citizens Investor Services, Inc. (FCIS), title insurance is offered through Neuse Financial Services, Inc.,wealth management services. Deposit services include checking, savings, money market and investment advisory services are provided through First Citizens Asset Management, Inc. (FCAM).time deposit accounts.
BASIS OF PRESENTATION
Principles of Consolidation and Segment ReportingBasis of Presentation
The accounting and reporting policies of BancShares and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America (GAAP). Additionally, where applicable, BancShares' policies conform to(“GAAP”) and general practices within the accounting and reporting guidelines prescribed by bank regulatory authorities.banking industry.
The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, that are majority or wholly-owned, certain partnership interests and variable interest entities.entities (“VIEs”) where BancShares is the primary beneficiary, if applicable. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companieseliminated upon consolidation. Assets held in agency or assets acquiredfiduciary capacity are not included onlyin the consolidated financial statements.
VIEs are legal entities that either do not have sufficient equity to finance their activities without the support from the dates of acquisition.other parties or whose equity investors lack a controlling financial interest. BancShares operates with centralized management and combined reporting, thus BancShares operates as one consolidated reportable segment.
FCB has investments in certain partnerships and limited liability entities primarily for the purposes of fulfilling Community Reinvestment Act requirements and/or obtaining tax credits. These entitiesthat have been evaluated and determined to be variable interest entities (VIEs). VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity.VIEs. Consolidation of a VIE is considered appropriate if a reporting entity holds a controlling financial interest in the VIE. Management concluded that FCBVIE and is the primary beneficiary. BancShares is not the primary beneficiary and does not hold a controlling interest in the VIEs as it does not have the power to direct the activities that most significantly impact the VIEsVIEs’ economic performance. AssetsAs such, assets and liabilities of these entities are not consolidated into the financial statements of FCB or BancShares. The recorded investment in these entities is reported within other assets in the Consolidated Balance Sheets.assets. See Note 10 — Other Assets and Note 12 — Variable Interest Entities for additional information.
Reclassifications
In certain instances, amounts reported in prior years'the 2021 and 2020 consolidated financial statements have been reclassified to conform to the current2022 financial statement presentation.presentation, primarily reflecting impacts from the CIT Merger (as defined below). Such reclassifications had no effect on previously reported cash flows, shareholders'stockholders’ equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affectimpacting the amounts reported.reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The significant estimates include the allowance for credit losses (“ACL”) and different assumptions in the applicationfair value estimates of these policies could result in material changes in BancShares' consolidated financial position, the consolidated results of its operations or related disclosures. Material estimates that are particularly susceptible to significant change include:acquired loans and operating lease equipment and core deposit intangibles.
Allowance for loan and lease losses;
Fair value of financial instruments, including acquired assets and assumed liabilities;
Pension plan assumptions;
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash flow estimates on purchased credit-impaired (PCI) loans;
Goodwill and other intangible assets;
FDIC shared-loss receivable and payable; and
Income tax assets, liabilities and expense
Business Combinations
BancShares accounts for all business combinations using the acquisition method of accounting. Under this method, of accounting, acquired assets and assumed liabilities are included with the acquirer'sacquirer’s accounts at their estimated fair value as of the date of acquisition, with any excess of purchase price over the fair value of the net tangible and intangible assets acquired recognized as either finite lived intangibles or capitalized as goodwill. In addition, acquisition-related costs and restructuringTo the extent the fair value of identifiable net assets acquired exceeds the purchase price, a gain on acquisition is recognized. Merger-related 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”). See Note B2 — Business Combinations for additional information regardinginformation.
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 and now reports General Banking, Commercial Banking, Rail, and Corporate segments. 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. See Note 23 — Business Combinations.Segment Information for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due fromSIGNIFICANT ACCOUNTING POLICIES
Interest-Earning Deposits at Banks
Interest-earning deposits at banks are primarily comprised of interest-bearing deposits with banks and federal funds sold. Cash and cash equivalentsInterest-earning deposits at banks have initial maturities of three months or less. The carrying value of cash and cash equivalentsinterest-earning deposits at banks approximates its fair value due to its short-term nature.
Investment
Investments
Debt Securities
BancShares classifies marketable investmentdebt securities as held to maturity (“HTM”) or available for sale or trading. At December 31, 2017 and 2016, BancShares had no investment securities held for trading purposes. Interest income and dividends on securities are recognized in interest income on an accrual basis. Premiums and discounts on debt securities are amortized as an adjustment to interest income using the interest method.
(“AFS”). Debt securities are classified as held to maturity whereHTM when BancShares has both the intent and ability to hold the securities to maturity. TheseHTM securities are reported at amortized cost.
Investment Other debt securities that may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements or unforeseen changes in market conditions, are classified as available for sale. Securities available for sale areAFS and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in accumulated other comprehensive income or loss, netAccumulated Other Comprehensive Income (“AOCI”). Amortization of deferred income taxes,premiums and accretion of discounts for debt securities are recorded in the shareholders' equity section of the Consolidated Balance Sheets. Gains orinterest income. Realized gains and losses realized from the sale of debt securities available for sale are determined by specific identification on a trade date basis and are included in noninterest income. BancShares performs pre-purchase due diligence and evaluates the credit risk of AFS and HTM debt securities purchased directly into BancShares' portfolio or via acquisition. If securities have evidence of more than insignificant credit deterioration since issuance, they are designated as purchased credit deteriorated (“PCD”).
BancShares evaluates each held
For AFS debt securities, management performs a quarterly analysis of the investment portfolio to maturity and available for sale securityevaluate securities currently in aan unrealized loss position for other-than-temporary impairment (OTTI) at least quarterly.potential credit-related impairment. If BancShares considers such factors asintends to sell a security, or does not have the lengthintent and ability to hold a security before recovering the amortized cost, the entirety of time andthe unrealized loss is immediately recorded in earnings to the extent that it exceeds the associated ACL previously established. For the remaining securities, an analysis is performed to whichdetermine if any portion of the market value has been below amortized cost, long term expectationsunrealized loss recorded relates to credit impairment. If credit-related impairment exists, the amount is recorded through the ACL and recent experience regardingrelated provision. This review includes indicators such as changes in credit rating, delinquency, bankruptcy or other significant news event impacting the issuer. BancShares determined that there were no expected credit losses on the HTM or AFS portfolios.
Debt securities are also classified as past due when the payment of principal and interest based upon contractual terms is 30 days delinquent or greater. Missed interest payments BancShares' intenton debt securities are rare. Management reviews all debt securities with delinquent interest and immediately charges off any accrued interest determined to sell,be uncollectible. See Note 3 — Investment Securities for additional information.
Equity Securities
Investments in equity securities having readily determinable fair values are stated at fair value. Realized and whether it is more likely than not that it would be required to sell thoseunrealized gains and losses on these securities before the anticipated recoveryare included in noninterest income. Non-marketable equity securities are securities with no readily determinable fair values and are measured at cost. BancShares evaluates its equity securities for impairment and recoverability of the amortized cost basis. The credit componentrecorded investment by considering positive and negative evidence, including the profitability and asset quality of an OTTI lossthe issuer, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in earningsother noninterest expense. See Note 10 — Other Assets for amounts of non-marketable equity securities at December 31, 2022 and the non-credit component is recognized in accumulated other comprehensive income in situations where BancShares does not intend to sell the security, and it is more likely than not that BancShares will not be required to sell the security prior to recovery.2021.
Non-marketable
Other Securities
Federal law requires a member institution ofMembership in the Federal Home Loan Bank (FHLB) system to purchase and hold(“FHLB”) network requires ownership of FHLB restricted stock of its district FHLB according to a predetermined formula.stock. This stock is restricted in thatas it may only be sold to the FHLB and all sales must be at par. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges.
Non-marketable securities are periodically evaluated for impairment. BancShares considers positivecharges 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 recorded investment. Non-marketable securities areis recorded within other assets in the Consolidated Balance Sheets. FHLBassets. Additionally, BancShares holds shares of Visa Inc. (“Visa”) Class B common stock. See Note 3 — Investment Securities and non-marketable securities were $53.0 million and $43.8 million at December 31, 2017 and 2016, respectively.Note 10 — Other Assets for additional information.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
InvestmentsInvestment in Qualified Affordable Housing Projects
BancShares and FCB havehas investments in certain partnerships and limited liability entities that typically include qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, and the net investment performance is recognized in the income statement as a component of income tax expense. All of the investments held in qualified affordable housing projects qualify for the proportional amortization methodmethod. See Note 10 — Other Assets and were $128.0 million and $109.8 millionNote 12 — Variable Interest Entities for additional information.
Assets Held for Sale
Assets held for sale (“AHFS”) at December 31, 2017 and December 31, 2016, respectively, and are included in other assets on the Consolidated Balance Sheets.
Loans Held For Sale
BancShares elected to apply the fair value option for new originations2022 consist of prime residential mortgage loans to be sold. BancShares elected the fair value option and accounts for the forward commitments used to economically hedge the loans held for sale of $4 million carried at fair value and commercial loans held for sale of $48 million carried at the lower of the cost or fair value (“LOCOM”). The remainder related to operating lease equipment held for sale, which is carried at LOCOM. AHFS at December 31, 2021 consist of residential mortgage loans held for sale of $99 million carried at fair value. Gains and losses on sales of mortgage loans are recognized in the Consolidated Statements of Income in mortgage income. Origination fees collected are deferred and recorded in mortgage income in the period the corresponding loan is sold.
Loans and Leases
BancShares' accounting methodsBancShares extends credit to commercial customers through a variety of financing arrangements including term loans, revolving credit facilities, finance leases and operating leases. BancShares also extends credit through consumer loans, including residential mortgages and auto loans.
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) no longer having PCD loans and leases differ depending on whether theyas a separate loan class. Our loan classes as of December 31, 2022 are purchased credit impaired (PCI) or non-PCI loans. All acquired loans are recorded at fair value atdescribed below. Prior period disclosures have been conformed to the date of acquisition.current presentation.
Non-Purchased Credit Impaired (Non-PCI)
Commercial Loans and Leases
LoansCommercial Construction - Commercial construction consists of loans to finance land for commercial development of real property and leasesconstruction 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.
Owner OccupiedCommercial Mortgage - Owner occupied commercial mortgage consists of loans to purchase or refinance owner occupied nonresidential properties. This includes office buildings, other commercial facilities and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Non-owner Occupied Commercial Mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Commercial and Industrial - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and business credit cards. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk that the borrower will be unable to service the debt consistent with the contractual terms of the loan.
Factoring - 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. Factoring receivables are primarily included in the commercial and industrial loan class.
Leases – Leases consists of finance lease arrangements for technology and office equipment and large and small industrial, medical, and transportation equipment.
Consumer Loans
Residential Mortgage- Consumer mortgage consists of loans to purchase, construct, or refinance the borrower’s primary dwelling, secondary residence or vacation home and are often secured by 1-4 family residential properties or undeveloped or partially developed 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, if any.
ConsumerOther -Other consumer loans consist of loans to finance unsecured home improvements, student loans, and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral.
Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment (“HFI”) and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans and leases outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield.
Non-PCI loans include originated commercial, originated noncommercial, purchased non-credit impaired
Acquired Loans and Leases
BancShares’ accounting methods for acquired loans and leases depends on whether or not the loans reflect more than insignificant credit deterioration since origination at the date of acquisition.
Non-Purchased Credit Deteriorated Loans and certain purchased revolving credit. Purchased non-credit impairedLeases
Non-Purchased Credit Deteriorated (“Non-PCD”) loans are acquired loans thatand leases do not reflect more than insignificant credit deterioration since origination at the date of acquisition. These loans are recorded at fair value and an increase to the ACL is recorded with a corresponding increase to the provision for credit losses at the date of acquisition. The difference between the fair value and the unpaid principal balance of the loan(“UPB”) at the acquisition date is amortized or accreted to interest income over the estimatedcontractual life of the loansloan using the effective interest method or on a straight-line basis for revolving credits.method.
Purchased Credit Impaired (PCI)Deteriorated Loans and Leases
PCIPurchased loans are recorded at fair valueand leases that reflect a more than insignificant credit deterioration since origination at the date of acquisition. No allowanceacquisition are classified as PCD loans and leases. PCD loans and leases are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus BancShares' initial ACL, which results in a gross up of the loan balance (the “PCD Gross-Up”). The initial ACL for loanPCD loans and lease lossesleases is recorded onestablished through the PCD Gross-Up and there is no corresponding increase to the provision for credit losses. The difference between the UPB and the acquisition date asamortized cost resulting from the fair value of the acquired assets incorporates assumptions regarding credit risk.
PCI loans are evaluated at acquisition and where a discountPCD Gross-Up is required at least in part dueamortized or accreted to credit, the loans are accounted for under the guidance in Accounting Standard Codification (ASC) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that BancShares will be unable to collect all contractually required payments. If the timing and amount of the future cash flows is reasonably estimable, any excess of cash flows expected at acquisition over the estimated fair value are recognized as interest income over the contractual life of the loansloan using the effective yieldinterest method. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan losses.
Impaired
Past Due and Non-Accrual Loans Troubled Debt Restructurings (TDR) and Nonperforming AssetsLeases
Management will deem non-PCI loansLoans and leases to be impairedare classified as past due when the payment of principal and interest based upon contractual terms is 30 days or greater delinquent. Loans and leases are generally placed on current information and events,nonaccrual when principal or interest becomes 90 days past due or when it is probable thatthe principal or interest is not fully collectible. When loans are placed on nonaccrual, previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a borrower will be unablereduction of the outstanding balance until the account is collected, charged-off or returned to pay all amounts due accordingaccrual status. Loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the contractual terms of the loan agreement. Generally, management considers the following loans to be impaired: all TDR loans, commercial and consumer relationships which are nonaccrual or 90+ days past due and greater than $500,000 as well as any other loan management deems impaired. Non-PCI loans and leases $500,000 and greater are individually evaluated for impairment where as those less than $500,000 are collectively evaluated for impairment. When the ultimate collectability of an impaired loan's principal is doubtful, all cash receipts are appliedand interest.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied first to all previously charged-off principal until fully collected, then to interest income, to the extent that any interest has been foregone.Troubled Debt Restructurings
A loan is considered a TDRtroubled debt restructuring (“TDR”) when both of the following occur: (1) a modification to a borrower'sborrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower'sborrower’s financial difficulties that otherwise would not be granted. TDRs are undertaken in order to improve the likelihoodTDR concessions could include short-term deferrals of collection on the loan and may result in a stated interest, rate lower than the current market rate for new debt with similar risk, other modifications to the structure of the loan that fall outside of normal underwriting policies and procedurespayment terms or, in certain limited circumstances,instances, forgiveness of principal or interest. Loans that have been restructured as a TDR are treated and reported as such for the remaining life of the loan. Modifications of PCITDR loans that are part of a pool accounted for as a single asset are not designated as TDRs. Modifications of non-pooled PCI loans are designated as TDRs in the same manner as non-PCI loans and leases. TDRs can be loans remaining on nonaccrual, moving to nonaccrual or continuing on accruing status,accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, BancShares typically classifies the remaining balance is typically classified as nonaccrual. Refer to further discussion in the “Recently Issued Accounting Standards” section of Note 1 — Significant Accounting Policies and Basis of Presentation.
In connection with commercial TDRs,
Loan Charge-Offs and Recoveries
Loan charge-offs are recorded after considering such factors as the decision to maintain accrualborrower’s financial condition, the value of underlying collateral, guarantees, and the status for loans that have been restructured is based on a current credit evaluationof collection activities. Loan balances considered uncollectible are charged-off against the ACL and deducted from the carrying value of the borrower's financial condition and prospects for repayment under the modified terms. This evaluation includes consideration of the borrower's current capacity to pay, which may include a review of the borrower's current financial statements, an analysis of cash flow documenting the borrower's capacity to pay all debt obligations and an evaluation of secondary sources of payment from the borrower and any guarantors. This process also includes an evaluation of the borrower's payment history, an evaluation of the borrower's willingness to provide information on a timely basis and consideration of offers from the borrower to provide additional collateral or guarantor support. The credit evaluation also reflects consideration of the adequacy of collateral, where applicable, to cover all principal and interest and trends indicating improving profitability and collectability of receivables.
Nonperforming assets include nonaccrual loans and leases and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of loan defaults.
BancShares classifies all non-PCI loans and leases as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Generally, commercial loans are placed on nonaccrual status when principal or interest becomes 90 days past due or when it is probable that principal or interest is not fully collectible, whichever occurs first. Once a loan is placed on nonaccrual status it is evaluated for impairment and a charge-off is recorded in the amount of the impairment if the loss is deemed confirmed.related loans. Consumer loans are subject to mandatory charge-off at a specified delinquency date consistentdates in accordance with regulatory guidelines. The value of the underlying collateral for consumer loans is considered when determining the charge-off amount if repossession is reasonably assured and in process. See Note 4 — Loans and Leases for additional information. Realized recoveries of amounts previously charged-off are credited to the ACL.
Generally, when
Allowance for Credit Losses
Loans and Leases
The ACL represents management’s best estimate of credit losses expected over the life of the loan or lease, adjusted for expected contractual payments and the impact of prepayment expectations. Estimates for loan and lease losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to the provision or benefit for credit losses in accordance with FASB Accounting Standard Codification (“ASC”) 326 Financial Instruments- Credit Losses (“ASC 326”). ASC 326 introduced the current expected credit losses methodology (“CECL”) for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. BancShares adopted ASC 326 on January 1, 2020 and CECL is applied for all periods presented in these consolidated financial statements.
The ACL is calculated based on a variety of considerations, including, but not limited to actual net loss history of the various loan and lease pools, delinquency trends, changes in forecasted economic conditions, loan growth, estimated loan life, and changes in portfolio credit quality. Loans and leases are segregated into pools with similar risk characteristics and each have a model that is utilized to estimate the ACL. These ACL models estimate the probability of default (“PD”) and loss given default (“LGD”) for individual loans and leases within each risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of future economic conditions, expected future recoveries and other factors. The loan and lease level, undiscounted ACL is calculated by applying the modeled PD and LGD to monthly forecasted loan and lease balances which are placedadjusted for contractual payments, prior defaults, and prepayments. Prepayment assumptions were developed through a review of BancShares’ historical prepayment activity and considered forecasts of future economic conditions. Forecasted LGDs are adjusted for expected recoveries. Model outputs may be adjusted through a qualitative assessment to reflect trends not captured within the models, which could include economic conditions, credit quality, concentrations, and significant policy and underwriting changes. Risk pools for estimating the ACL are aggregated into commercial and consumer loan classes for reporting purposes in Note 5 — Allowance for Credit Losses.
The ACL models utilize economic variables, including unemployment, gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads. These economic variables are based on nonaccrual status all previously uncollectedmacroeconomic scenario forecasts with a forecast horizon that covers the lives of the loan portfolios. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations.
When loans do not share risk characteristics similar to others in the pool, the ACL is evaluated on an individual basis. Given that BancShares' CECL models are loan level models, the population of loans evaluated individually is not significant and consists primarily of loans greater than $500 thousand. A specific ACL is established, or partial charge-off is recorded, for the difference between the excess amortized cost of loan and the loan’s estimated fair value.
Certain aspects of BancShares’ ACL methodology were changed during the first quarter of 2022 in order to integrate the methodologies of BancShares and CIT. The changes include the following: (i) applying a forecast horizon that covers 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) implementing scenario weighting of baseline, upside, and downside macroeconomic scenarios instead of utilizing just the consensus baseline scenario as the basis of the quantitative ACL estimate.
Accrued Interest Receivable
BancShares' accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner. Therefore, BancShares elected to not measure an ACL for accrued interest receivable and it is excluded from interestthe amortized cost basis of loans and HTM debt securities.
Unfunded Commitments
A reserve for unfunded commitments is established for off-balance sheet exposures such as unfunded balances for existing lines of credit, deferred purchase agreements, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). These unfunded commitments are assessed to determine both the probability of funding as well as the expectation of future losses. BancShares estimates the expected funding amounts and applies its PD and LGD models to those expected funding amounts to estimate the reserve for unfunded commitments. See Note 5 — Allowance for Credit Losses for additional information.
Leases
Lessor Arrangements
BancShares did not have significant amounts of equipment related to operating leases prior to completion of the CIT Merger. At December 31, 2022, BancShares has operating lease equipment of $8.16 billion, primarily related to the Rail segment. Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Rail equipment has estimated useful lives of 40-50 years and the useful lives of other equipment are generally 3-10 years.
Where management’s intention is to sell the operating lease equipment, it is marked to LOCOM and classified as AHFS. Depreciation is no longer recognized, and the assets are evaluated for impairment, with any further marks to LOCOM recorded in other noninterest income. AllEquipment received at the end of the lease to be sold, is marked to LOCOM with the adjustment recorded in other noninterest income. Initial direct costs are amortized over the lease term.
Sales-type and direct financing leases are carried at the aggregate of lease payments received thereafterreceivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment.Our finance lease activity primarily relates to leasing of new equipment with the equipment purchase price equal to fair value and therefore there is no selling profit or loss at lease commencement.
Lease components are appliedseparated from non-lease components that transfer a good or service to the customer; and the non-lease components in our lease contracts are accounted for in accordance with ASC 310 Receivables. BancShares utilizes the operating lease practical expedientfor its Rail portfolio leases to not separate non-lease components of railcar maintenance services from associated lease components, and as a reductionresult rental income includes the maintenance non-lease component. This practical expedient is available when both of the remaining principal balance as long as doubt exists as tofollowing are met: (i) the ultimate collectiontiming and pattern of transfer of the principal. Loansnon-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.
We manage and evaluate residual riskby performing periodic reviews of estimated residual values and monitoring levels of residual realizations. A change in estimated operating lease residual values would result in a change in future depreciation expense. A change in estimated finance lease residual values during the lease term impacts the ACL as the lessor considers both the lease receivable and the unguaranteed residual asset when determining the finance lease net investment allowance.
Impairment of Operating Lease Equipment
A review for impairment of our operating lease equipment is performed at least annually or when events or changes in circumstances indicate that the carrying amount of these 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.
Lessee Arrangements
BancShares leases including TDRs,certain branch locations, administrative offices and equipment. Operating lease right of use assets (“ROU assets”) are generally removedincluded in other assets and the associated lease obligations are included in other liabilities. Finance leases are included in premises and equipment and other borrowings. See Note 13 — Borrowings for additional information. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; BancShares instead recognizes lease expense for these leases on a straight-line basis over the lease term.
ROU assets represent BancShares' right to use an underlying asset for the lease term and lease liabilities represent BancShares' corresponding obligation to make lease payments arising from nonaccrual statusthe lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets also include initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of BancShares' leases do not provide an implicit rate, BancShares uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at BancShares' sole discretion. When it is reasonably certain BancShares will exercise its option to renew or extend the lease term, the option is included in calculating the value of the ROU asset and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
BancShares determines if an arrangement is a lease at inception. BancShares’ lease agreements do not contain any material residual value guarantees or material restrictive covenants. BancShares does not lease any properties or facilities from any related party. As of December 31, 2022,there were no leases that have not yet commenced that would have a material impact on BancShares’ consolidated financial statements. See Note 6 — Leases for additional information.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the identifiable assets acquired. Goodwill is not amortized, but is evaluated at least annually for impairment during the third quarter, or when they become currentevents or changes in circumstances indicate a potential impairment exists. Other acquired intangible assets with finite lives, such as to both principalcore deposit intangibles, are initially recorded at fair value and interest, the borrower has demonstratedare amortized over their average estimated useful lives. Intangible assets are evaluated for impairment when events or changes in circumstances indicate a sustained period of repayment performancepotential impairment exists. See Note 8 — Goodwill and Other Intangibles for a reasonable period, generally a minimum of six months, and doubt no longer exists as to the collectability of principal and interest.additional information.
Other Real Estate Owned
Other Real Estate Owned (OREO)
(“OREO”) includes foreclosed real estate property and closed branch properties. Foreclosed real estate property in OREO acquired as a result of foreclosure is initially recorded at the asset’s estimated fair value less costs to sell. Any excess in the recorded investment in the loan over the estimated fair value less costs to sell is charged-off against the allowance for loan lossesACL at the time of foreclosure. If the estimated value of the OREO exceeds the recorded investment of the loan, the difference is recorded as a gain within other income.
OREO is subsequently carried at the lower of cost or market value less estimated selling costs. OREOcosts and is subject toevaluated at least annual periodic evaluations of the underlying collateral.annually. The periodic evaluations are generally based on the appraised value of the property and may include additional adjustments based upon management'smanagement’s review of the valuation estimate and specific knowledge of the OREO.property. Routine maintenance costs, income and expenses related to the operation of the foreclosed asset, subsequent declines in market value and net gains or losses on disposal are included in collection and foreclosure-related expense.
Covered Assets and Receivable from FDIC for Shared-Loss Agreements
Assets subject to shared-loss agreements with the FDIC include certain loans and leases and OREO. These shared-loss agreements afford BancShares significant protection as they cover realized losses on certain loans and other assets purchased from the FDIC during the time period specified in the agreements. Realized losses covered include loan contractual balances, accrued interest on loans for up to 90 days, the book value of foreclosed real estate acquired and certain direct costs, less cash or other consideration received by BancShares.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The FDIC indemnification asset is a receivable recorded for expected losses incurred by the bank subject to shared-loss agreements where the FDIC reimburses a certain percentage (dependent on each agreement). The indemnification asset is measured on the same basis as the underlying assets and initially valued during the same time period. Subsequent to initial valuation, the indemnification asset is adjusted quarterly for changes in loss expectations. The indemnification asset is amortized based on the calculated remaining difference between the carrying value of the indemnification assets and the gross undiscounted cash flows of the asset over the remaining contractual life of the loans or the respective shared-loss agreement, whichever is shorter.
Payable to the FDIC for Shared-Loss Agreements
The purchase and assumption agreements for certain FDIC-assisted transactions include payments that may be owed to the FDIC at the termination of the shared-loss agreements. The payment is due to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The liability is calculated by discounting estimated future payments and is reported in the Consolidated Balance Sheets as an FDIC shared-loss payable. The ultimate settlement amount of the payment is dependent upon the performance of the underlying covered loans, recoveries, the passage of time and actual claims submitted to the FDIC.
Allowance for Loan and Lease Losses (ALLL)
The ALLL represents management's best estimate of probable credit losses within the loan and lease portfolio at the balance sheet date. Management determines the ALLL based on an ongoing evaluation of the loan portfolio. Estimates for loan losses are determined by analyzing historical loan losses, historical loan migration to charge-off experience, current trends in delinquencies and charge-offs, expected cash flows on PCI loans, current assessment of impaired loans, changes in the size, and composition and risk assessment of the loan portfolio. This allowance estimate also contains qualitative components that allow management to adjust reserves based on changes in the economic environment and other factors not captured in the quantitative calculation. Adjustments to the ALLL are recorded with a corresponding entry to provision for loan and lease losses. Loan balances deemed to be uncollectible are charged-off against the ALLL. Recoveries of amounts previously charged-off are generally credited to the ALLL.
Accounting standards require the presentation of certain ALLL information at the portfolio segment level, which represents the level at which the company has developed and documents a systematic methodology to determine its ALLL. BancShares evaluates its loan and lease portfolio using three portfolio segments; non-PCI commercial, non-PCI noncommercial and PCI. The non-PCI commercial segment includes classes as follows: commercial construction and land development, commercial mortgage, commercial and industrial, lease financing and other commercial real estate loans. The non-PCI noncommercial segment includes classes as follows: noncommercial construction and land development, residential mortgage, revolving mortgage and consumer loans. The PCI segment includes classes as follows: commercial construction and land development, commercial mortgage, commercial and industrial, other commercial real estate, noncommercial construction and land development, residential mortgage, and revolving mortgage loans.
A primary component of determining the general allowance for performing and classified loans not analyzed specifically is the actual loss history of the various classes. Loan loss factors based on historical experience may be adjusted for significant factors that in management's judgment affect the collectability of the portfolio at the balance sheet date. For non-PCI commercial loans and leases, management incorporates historical net loss data to develop the applicable loan loss factors. For the non-PCI noncommercial segment, management incorporates specific loan class and delinquency status trends into the loan loss factors. In accordance with our allowance methodology, loan loss factors are monitored quarterly and may be adjusted based on changes in the level of historical net charge-offs and updates by management, such as the number of periods included in the calculation of loss factors, loss severity and portfolio attrition.
The qualitative framework used in estimating the general allowance considers economic conditions, composition of the loan portfolio, trends in delinquent and nonperforming loans, historical loss experience by categories of loans, concentrations of credit, changes in lending policies and underwriting standards, regulatory exam results and other factors indicative of inherent losses remaining in the portfolio. Management may adjust the ALLL by the factors in the qualitative framework to address environmental factors not reflected in the historical experience. These adjustments are specific to the loan class level.
If it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement a specific valuation allowance component is determined when management believes a loss is probable. For purchased impaired loans, the methodology also considers the remaining discounts recognized upon acquisition in estimating a general allowance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PCI loans are aggregated into loan pools based upon common risk characteristics or evaluated at the loan level. At each balance sheet date, BancShares evaluates whether the estimated cash flows and corresponding present value of its loans determined using their effective interest rates has decreased and if so, recognizes provision for loan losses. Management continuously monitors and actively manages the credit quality of the entire loan portfolio and adjusts the ALLL to an appropriate level. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and general loss estimates based upon the most recent information available. Future adjustments to the ALLL may be necessary based on changes in economic and other conditions. Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of December 31, 2017.
Each portfolio segment and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan and lease portfolio and the related ALLL. Management has identified the most significant risks as described below that are generally similar among the segments and classes. While the list is not exhaustive, it provides a description of the risks management has determined are the most significant.
Non-PCI Commercial Loans and Leases
Non-PCI commercial loans or leases, excluding purchased non-impaired loans, purchased leases and certain purchased revolving credit, are centrally underwritten based primarily upon the customer's ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower's business, including the experience and background of the principals, is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed.
The significant majority of relationships in the non-PCI commercial segment are assigned credit risk grades based upon an assessment of conditions that affect the borrower's ability to meet contractual obligations under the loan agreement. This process includes reviewing the borrowers' financial information, payment history, credit documentation, public information and other information specific to each borrower. Credit risk grades are reviewed annually, or at any point management becomes aware of information affecting the borrowers' ability to fulfill their obligations. Our credit risk grading standards are described in Note D.
The impairment assessment and determination of the related specific reserve for each impaired loan is based on the loan's characteristics. Impairment measurement for loans that are dependent on borrower cash flow for repayment is based on the present value of expected cash flows discounted at the loan's effective interest rate. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs, is used to calculate a fair value estimate. A specific valuation allowance is established or partial charge-off is recorded for the difference between the excess recorded investment in the loan and the loans estimated fair value less costs to sell.
General reserves for collective impairment are based on estimated incurred losses related to unimpaired commercial loans as of the balance sheet date. Incurred loss estimates for the originated commercial segment are based on average loss rates by credit risk ratings, which are estimated using historical loss experience and credit risk rating migrations. Incurred loss estimates may be adjusted through a qualitative assessment to reflect current economic conditions and portfolio trends including credit quality, concentrations, aging of the portfolio and significant policy and underwriting changes.
Common risks to each class of commercial loans include general economic conditions within the markets BancShares serves, as well as risks that are specific to each transaction including demand for products and services, personal events, such as disability or change in marital status and reductions in the value of collateral. Due to the concentration of loans in the medical, dental and related fields, BancShares is susceptible to risks that governmental actions will materially alter the medical care industry in the United States.
In addition to these common risks for the majority of the non-PCI commercial segment, additional risks are inherent in certain classes of non-PCI commercial loans and leases.
Commercial construction and land development
Commercial construction and land development loans are highly dependent on the supply and demand for commercial real estate in the markets served by BancShares as well as the demand for newly constructed residential homes and lots that customers are developing. Deterioration in demand could result in decreases in collateral values and could make repayment of the outstanding loans more difficult for customers.
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Commercial mortgage, commercial and industrial and lease financing
Commercial mortgage loans, commercial and industrial loans and lease financing are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer's business results are materially unfavorable versus the original projections, the ability for the loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by real property, personal property or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Other commercial real estate
Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in borrowers having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.
Non-PCI Noncommercial Loans and Leases
Non-PCI noncommercial loans, excluding purchased non-impaired loans and certain purchased revolving credit, are centrally underwritten using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated.
The ALLL for the non-PCI noncommercial segment is primarily calculated on a pooled basis using a delinquency-based approach. Estimates of incurred losses are based on historical loss experience and the migration of receivables through the various delinquency pools applied to the current risk mix. These estimates may be adjusted through a qualitative assessment to reflect current economic conditions, portfolio trends and other factors. The remaining portion of the ALLL related to the non-PCI noncommercial segment results from loans that are deemed impaired.
The impairment assessment and determination of the related specific reserve for each impaired loan is based on the loan's characteristics. Impairment measurement for loans that are dependent on borrower cash flow for repayment is based on the present value of expected cash flows discounted at the loan's effective interest rate. Impairment measurement for most real estate loans, particularly when a loan is considered to be a probable foreclosure, is based on the fair value of the underlying collateral. Collateral is appraised and market value, appropriately adjusted for an assessment of the sales and marketing costs, are used to calculate a fair value estimate. A specific valuation allowances is established or partial charge-off is recorded for the excess of the recorded investment in the loan and the loan’s estimated fair value less cost to sell.
Common risks to each class of noncommercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BancShares serves, particularly unemployment and declines in real estate values. Personal events such as death, disability or change in marital status also add risk to noncommercial loans.
In addition to these common risks for the majority of noncommercial loans, additional risks are inherent in certain classes of noncommercial loans.
Revolving mortgage
Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies, disputes with first lienholders and uncertainty regarding the customer's performance with respect to the first lien that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer
The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt and student loans. The value of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination, potentially in excess of principal balances.
Residential mortgage and noncommercial construction and land development
Residential mortgage and noncommercial construction and land development loans are made to individuals and are typically secured by 1-4 family residential property, undeveloped land and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Noncommercial construction and land development projects can experience delays in completion and cost overruns that exceed the borrower's financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.
PCI Loans
The risks associated with PCI loans are generally consistent with the risks identified for commercial and noncommercial non-PCI loans and the classes of loans within those segments. However, these loans were underwritten by other institutions, often with different lending standards and methods. Additionally, in some cases, collateral for PCI loans is located in regions that have experienced deterioration in real estate values and the underlying collateral may therefore not support full repayment of these loans.
The ALLL for PCI loans is estimated based on the expected cash flows over the life of the loan. BancShares continues to estimate and update cash flows expected to be collected on individual loans or pools of loans sharing common risk characteristics. BancShares compares the carrying value of all PCI loans to the present value at each balance sheet date. The present value is calculated by updating the life of loan cash flows and discounting that result by the individual loan's effective interest rate. If the updated present value is less than the current value, then ALLL is recorded and if so, recognizes provision for loan and lease losses. For any increases in cash flows expected to be collected, BancShares adjusts any prior recorded allowance for loan and lease losses first and then the amount of accretable yield recognized on a prospective basis over the loan's or pool's remaining life.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probable losses related to standby letters of credit and other commitments to extend credit. The reserve is calculated in a manner similar to the loans evaluated collectively for impairment, while also considering the applicable regulatory capital credit conversion factors for these off-balance sheet instruments as well as the exposure upon default. The reserve for unfunded commitments is presented within other liabilities on the Consolidated Balance Sheets, distinct from the ALLL, and adjustments to the reserve for unfunded commitments are included in other noninterest expense in the Consolidated Statements of Income. The reserve for unfunded commitments was not material at December 31, 2017 or 2016.
Premises and Equipment
Premises and equipment and capital leases are statedcarried at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization aredepreciation. Land is carried at cost. Depreciation expense is generally computed using the straight-line method and are expensed over the estimated useful lives of the assets, which range from 3 to 40 years for premises and 3 to 10 years for furniture, software and equipment.assets. Leasehold improvements and capitalized leases are amortized on a straight-line basis over the termslesser of the respective leases, including renewal period if renewal period is reasonably assured (often throughlease terms or the presence of a bargain renewal option), or theestimated useful lives of the improvements, whichever is shorter. Gainsassets. BancShares reviews premises and losses on dispositions are recorded in other noninterest expense. Maintenance and repairs are charged to occupancy expense or equipment expense as incurred. Obligations under capital leases are amortized over the life of the lease using the effective interest method to allocate payments between principal and interest. Rent expense and rental income on operating leases are recorded in noninterest expense and noninterest income, respectively, using the straight-line method over the appropriate lease terms.
Goodwill and Other Intangible Assets
BancShares accounts for acquisitions using the acquisition method of accounting. Under that methodology, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer's balance sheet as goodwill. An intangible asset is recognized as an asset apart from goodwill if it arises from contractual or other legal rights, or if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. Intangible assets that are separately identifiable assets, such as core deposit intangibles, resulting from acquisitions are amortized on an accelerated basis over an estimated useful life and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assetsan asset may not be recoverable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill is not amortized, but is evaluated at least annually for impairment as of July 31st or more frequently if events occur or circumstances change that may trigger a decline in the value of the reporting unit or otherwise indicate that a potential impairment exists. The evaluation of goodwill is based on a variety of factors, including common stock trading multiplesrecoverable, and data from recent market transactions. Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value.
If the carrying value of the reporting unit exceeds its fair value, a second analysis is performed that requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, an impairment loss is recognized the adjusted carrying amount will be its new cost basis to depreciate over the remaining useful life of the asset.
Derivative Financial Instruments
BancShares did not have any significant derivative financial instruments prior to completion of the CIT Merger. However, BancShares acquired various derivative financial instruments in connection with the CIT Merger as further described in Note 14 — 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, options contracts and risk participations. 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 excessbuyer 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 carryingtime. A risk participation is a financial guarantee, in exchange for a fee, that gives the buyer the right to be made whole in the event of a predefined default event.
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 December 31, 2022.
BancShares provides interest rate derivative contracts to support the business requirements of its customers. The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, BancShares enters into similar offsetting positions with broker-dealers.
BancShares has both bought and sold credit protection in the form of participations in interest rate swaps (risk participations).These risk participations were entered into in the ordinary course of business to facilitate customer credit needs. Swap participations where BancShares has sold credit protection have maturities ranging between 2023 and 2036 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.
Based BancShares reports all derivatives on a gross basis in the Consolidated Balance Sheets and does not offset derivative assets and liabilities and cash collateral under master netting agreements except for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet. These swap contracts are accounted as “settled-to-market” and cash variation margin paid or received is characterized as settlement of the derivative exposure. Variation margin balances are offset against the corresponding derivative asset and liability balances on the July 31, 2017 impairment tests,balance sheet. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, 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 concluded there was no indicationjudgment or estimation. Valuations of goodwill impairment. Subsequentderivative 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 annual impairment test, no events occurredextent 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 circumstances changed that would indicate goodwill shouldmay be testedentitled 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. See Note 14 — Derivative Financial Instruments for impairment during the interim period between annual tests.additional information.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) are recognized separately(“MSRs”) represent the right to provide servicing under various loan servicing contracts when they areservicing is retained as loans are soldin connection with a loan sale or acquired through acquisition. When mortgage loans are sold, servicing rightsin a business combination. MSRs are initially recorded at fair value within other assets in the Consolidated Balance Sheets and gains on sale of loans are recorded within mortgage income in the Consolidated Statements of Income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized against mortgage income in noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans with the offset being a reduction in the cost basis of the servicing asset.loan. At each reporting period, MSRs are evaluated for impairment quarterly based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics and is recorded as a reduction of mortgage income invalue. See Note 9 — Mortgage Servicing Rights for additional information.
Fair Values
Fair Value Hierarchy
BancShares measures the Consolidated Statements of Income. If BancShares later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation reserve may be recorded as an increase to mortgage income in the Consolidated Statements of Income, but only to the extent of previous impairment recognized.
Other intangible assets with estimable lives are amortized over their estimated useful lives, which are periodically reviewed for reasonableness. Identifiable intangible assets represent the estimatedfair value of the core deposits acquiredits financial assets and certain customer relationships.
Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements primarilyliabilities in accordance with commercial customers generally have maturities of one dayASC 820 Fair Value Measurement, which defines fair value, establishes a consistent framework for measuring fair value and are reflected as short-term borrowings on the Consolidated Balance Sheets and are recordedrequires disclosures about fair value measurements. BancShares categorizes its financial instruments based on the amountsignificance of cash received in connection withinputs to the borrowing.
Fair Values
Fair value disclosures are required for all financial instruments, whether or not recognized invaluation techniques according to the balance sheet, for which it is practicable to estimate that value. Under GAAP, individualfollowing three-tier fair value estimates are ranked on a three-tier scale based on the relative reliability of the inputs usedhierarchy:
•Level 1 - Quoted prices (unadjusted) in the valuation. Fair values determined using level 1 inputs rely on active and observable markets to pricefor identical assets or liabilities. In situations where identicalliabilities that are accessible at the measurement date. Level 1 assets and liabilities include equity securities that are not traded in an active markets, fair values may be determined based on levelexchange market.
•Level 2 - Observable inputs which represent observable dataother than Level 1 prices, such as quoted prices for similar assets andor liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Fair values forLevel 2 assets and liabilities include certain commercial loans, debt and equity securities with quoted prices that are not actively traded less frequently than exchange-traded instruments, borrowings, time deposits, securities sold under customer repurchase agreements and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable marketsmarket data.
•Level 3 - Unobservable inputs that are based on level 3 inputs, whichsupported by little or no market activity and are considered to be nonobservable. Fair value estimates derived from level 3 inputs cannot be substantiated by comparison to independent markets and, in many cases, cannot be realized through immediate settlement of the instrument. Additionally, valuation adjustments, such as those pertaining to counterparty and BancShares' own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty's credit quality. As determined by BancShares management, liquidity valuation adjustments may be madesignificant to the fair value of certainthe assets to reflect the uncertainty in the pricing and trading of the instruments when recent market transactions for identical or similar instruments are not observed. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value to BancShares. For additional information, see Note M.
Income Taxes
Deferred income taxes are reported when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes. Deferred taxes are computed using the asset and liability approach as prescribed in ASC 740, Income Taxes. Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of existingliabilities. Level 3 assets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and liabilities are expected to be reported in BancShares' income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
BancShares continually monitorsinclude financial instruments such as collateral dependent commercial and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns,consumer loans, as well as potentialloans held for sale, certain available for sale corporate securities and derivative contracts whose values are determined using valuation models, discounted cash flow methodologies or pending auditssimilar techniques, as well as instruments for which the determination of fair value requires significant management judgment or assessments by such tax auditors.
BancShares has unrecognized tax benefits related to the uncertain portion of tax positions that BancShares has taken or expects to take. A liability may be created or an amount refundable may be reduced for the amount of unrecognized tax benefits. These uncertainties result from the application of complex tax laws, rules, regulations and interpretations, primarily in state taxing jurisdictions. Unrecognized tax benefits are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Estimated penalties and interest on uncertain tax positions are recognized in income tax expense.
BancShares files a consolidated federal income tax return and various combined and separate company state tax returns.estimation. See Note P in the Notes to Consolidated Financial Statements16 — Fair Value for additional disclosures.information.
Derivative Financial Instruments
A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. These instruments include interest rate swaps, caps, floors, collars, options or other financial instruments designed to hedge exposures to interest rate risk or for speculative purposes.
BancShares selectively uses interest rate swaps for interest rate risk management purposes. BancShares had an interest rate swap, entered into during 2011, that qualified as a cash flow hedge under GAAP and which converted variable-rate exposure on outstanding debt to a fixed rate. BancShares' interest rate swap expired in June 2016.
Per Share Data
Net incomeEarnings per common share is computed by dividing net income available to common stockholders by the weighted average number of both classesClass A Common Stock and Class B Common Stock outstanding during each period. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period.increased by the weighted-average potential impact of dilutive shares. BancShares’ potential dilutive instruments include unvested RSUs assumed in the CIT Merger. The dilutive effect is computed using the treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the diluted earnings per common share computation as the result would have an anti-dilutive effect. BancShares had no potential dilutive common shares outstanding in any periodprior to the CIT Merger and did not report diluted netearnings per common share for prior periods. See Note 20 — Earnings Per Common Share for additional information.
Income Taxes
Income taxes are accounted for using the asset and liability approach as prescribed in ASC 740, Income Taxes. Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in BancShares’ income per share.tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period which includes the enactment date.
Cash dividends per
BancShares has unrecognized tax benefits related to the uncertain portion of tax positions BancShares has taken or expects to take. The potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities is continually monitored and evaluated. Income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where income tax returns are filed, as well as potential or pending audits or assessments by such tax auditors are evaluated on a periodic basis. BancShares files a consolidated federal income tax return and various combined and separate company state tax returns.
As a result of the Inflation Reduction Act of 2022, effective for tax years beginning after December 31, 2022, BancShares may be subject to a Corporate Alternative Minimum Tax (“CAMT”). BancShares will treat any CAMT that may be applicable to tax years beginning after December 31, 2022 as a period cost. Refer to Note 21 — Income Taxes, for additional disclosures.
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 records BOLI at each policy’s respective cash surrender value (“CSV”), with changes in the CSV recorded as noninterest income in the Consolidated Statements of Income.
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 CIT 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 apply to bothprice 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 Class B common stock. Shares(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 (as defined below), 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 22 — Employee Benefit Plans.
Members of the CIT Board of Directors had RSU awards, stock settled annual awards, and deferred stock-settled annual awards (collectively, the “CIT Director Equity Awards”), which vested immediately upon the completion of the CIT Merger. The fair value of the CIT Director Equity Awards was determined based on the Exchange Ratio and the closing share price of the Class A common stock carry one vote per share, while shares of Class B common stock carry 16 votes per share.Common Stock on January 3, 2022, and was included in the purchase price consideration disclosed in Note 2 — Business Combinations.
Defined Benefit Pension PlanPlans and Other Postretirement Benefits
BancShares maintainshas both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain qualifying employees. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. All assumptions are reviewed annually for appropriateness. The discount rate assumption used to measure the plan obligations is based on a yield curve developed from high-quality corporate bonds across a full maturity spectrum. The projected cash flows of the pension plans are discounted based on this yield curve, and a single discount rate is calculated to achieve the same present value. The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. WeBancShares also estimateestimates a long-term rate of return on pension plan assets that is used to estimate the future value of plan assets. In developing the long-term rate of return, we considerBancShares considers such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plans and projections of future returns on various asset classes. Refer toIn conjunction with the CIT Merger, BancShares assumed the funded and unfunded noncontributory defined benefit pension and postretirement plans of CIT. The postretirement plans acquired were terminated during the year. See Note N22 — Employee Benefit Plans for disclosures related to BancShares' defined benefit pensionthe plans.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
This ASU adds an SEC paragraph and amends other Topics pursuant to an SEC Staff Announcement that states a registrant should evaluate ASUs that have not yet been adopted, including ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842), and ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to determine the appropriate financial statement disclosures about the potential material effects of those
Revenue Recognition
Interest income on HFI loans is recognized using the effective interest method or on a basis approximating a level rate of Contentsreturn over the life of the asset. Interest income includes components of accretion of the fair value discount on loans and lease receivables recorded in connection with purchase accounting adjustments (“PAA”), which are accreted using the effective interest method as a yield adjustment over the remaining contractual term of the loan and recorded in interest income. If the loan is subsequently classified as held for sale, accretion (amortization) of the discount (premium) will cease. Interest income on loans HFI and held for sale is included in interest and fees on loans in the Consolidated Statements of Income. Interest on investment securities and interest on interest-earning deposits at banks is recognized in interest income on an accrual basis. Amortization of premiums and accretion of discounts for investment securities are included in interest on investment securities. Dividends received from marketable equity securities are recognized within interest on investment securities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BancShares generally acts in a principal capacity, on its own behalf, in its contracts with customers. In these transactions, BancShares recognizes revenues and the related costs to generate those revenues on a gross basis. In certain, circumstances, BancShares acts in an agent capacity, on behalf of the customers with other entities, and recognizes revenues and the related costs to provide BancShares' services on a net basis. BancShares acts as an agent when providing certain cardholder and merchant, insurance, and brokerage services.
ASUsDescriptions of BancShares' noninterest revenue-generating activities are broadly segregated as follows:
Rental income on operating leases –Rental income 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.
Cardholder and Merchant Services – These represent interchange fees from customer debit and credit card transactions earned when a cardholder engages in a transaction with a merchant as well as fees charged to merchants for providing them the ability to accept and process the debit and credit card transaction. Revenue is recognized when the performance obligation has been satisfied, which is upon completion of the card transaction. Additionally, as BancShares is acting as an agent for the customer and transaction processor, costs associated with cardholder and merchant services transactions are netted against the fee income.
Service charges on deposit accounts – These deposit account-related fees represent monthly account maintenance and transaction-based service fees, such as overdraft fees, stop payment fees and charges for issuing cashier’s checks and money orders. For account maintenance services, revenue is recognized at the end of the statement period when BancShares' performance obligation has been satisfied. All other revenues from transaction-based services are recognized at a point in time when the performance obligation has been completed.
Wealth management services – These primarily represent sales commissions on various product offerings, transaction fees and trust and asset management fees. The performance obligation for wealth management services is the provision of services to place annuity products issued by the counterparty to investors and the provision of services to manage the client’s assets, including brokerage custodial and other management services. Revenue from wealth management services is recognized over the period in which services are performed, and is based on a percentage of the value of the assets under management/administration.
Fees and other service charges – These include, but are not limited to, check cashing fees, international banking fees, internet banking fees, wire transfer fees, safe deposit fees, as well as capital market-related fees and fees on lines and letters of credit. The performance obligation is fulfilled and revenue is recognized at the point in time the requested service is provided to the customer.
Insurance commissions – These represent commissions earned on the financial statements when adopted. If a registrant does not know or cannot reasonably estimateissuance of insurance products and services. The performance obligation is generally satisfied upon the impact that adoptionissuance of the ASUs referencedinsurance policy and revenue is recognized when the commission payment is remitted by the insurance carrier or policy holder depending on whether the billing is performed by BancShares or the carrier.
ATM income - These represent fees imposed on customers and non-customers for engaging in an ATM transaction. Revenue is recognized at the time of the transaction as the performance obligation of rendering the ATM service has been met.
Factoring commissions –These are expectedearned in the Commercial Banking segment and are driven by factoring volumes, principally in the retail sectors. Factoring commissions are charged as a percentage of the invoice amount of the receivables assigned to haveBancShares. 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 financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significanceunderlying terms of the impactassigned receivables. See Commercial Loans and Leases section for additional commentary on factoring.
Gains on leasing equipment – These 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 – This reflects income earned on changes in the adoption will have on the financial statements, and a comparison to the registrant's current accounting policies. A registrant should describe the status of its process to implement the new standards and the significant matters yet to be addressed.
This ASU also addresses the accounting for tax benefits resulting from investments in qualified affordable housing projects where the decision to apply the proportional amortization method of accounting is an accounting policy decision to be applied consistently to all investments that meet the conditions, rather than a decision to be applied to individual investments that qualify for the useCSV of the proportional amortization method.BOLI policies.
Other – This consists of several forms of recurring revenue, such as FHLB dividends. For the remaining transactions, revenue is recognized when, or as, the performance obligation is satisfied.
Newly Adopted Accounting Standards
The following pronouncements or ASUs were issued by the 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 are effective upon issuance. We adoptedreduce the guidance effectivenumber 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 the first quarteran entity’s own shares to be classified in equity, and expand disclosure requirements for convertible instruments. The adoption of 2017. The disclosures required by this ASU are included within the “Recently Issued Accounting Pronouncements” section below. The adoption did not have ana material impact to ouron BancShares’ consolidated financial position or consolidated results of operations.
FASB ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control
This ASU does not change the characteristics of a primary beneficiary in current GAAP; however, it requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIEstatements and on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that itdisclosures as BancShares does not have the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary, then the partyany convertible instruments within the related party group that is most closely associated with the VIE is the primary beneficiary.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 are effectiveclarify an issuer's accounting for public business entities for fiscal years beginningcertain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after December 15, 2016, including interim periods within those fiscal years. We adopted the guidance effective in the first quarter of 2017. The adoption did not have an impact to our consolidated financial positionmodification or consolidated results of operations.
FASB ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.exchange. The ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basissuch modifications or exchanges be treated as an exchange of the investor's previously held interest and adoptoriginal instrument for a new instrument. An issuer should measure the equity methodeffect of accounting assuch modifications or exchanges based on analysis of the datedifference between the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustmentfair value of the investmentmodified 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 required. Further,then based upon the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for usesubstance of the equity method.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 effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adoptedno 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 guidance effectivelease as a sales-type lease or a direct financing lease would result in the first quarterrecognition of 2017.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 ana material impact on ourBancShares’ consolidated financial position or consolidated results of operations.statements and disclosures as BancShares has not originated finance leases which required a day-one selling loss at lease commencement.
Recently Issued Accounting PronouncementsStandards
FASB ASU 2018-02, Income Statement - Reporting Comprehensive Income2022-02 Financial Instruments—Credit Losses (Topic 220)326): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeTroubled Debt Restructurings and Vintage Disclosures- Issued March 2022
This ASU requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (Tax Act), which was enacted on December 22, 2017. The Tax Act included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We will adopt the guidance during the first quarter of 2018. The change in accounting principle will be accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $27.2 million increase to retained earnings and a corresponding decrease to AOCI on January 1, 2018.
FASB ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
This ASU requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers will present the other components separately from the line itemFor creditors that includes the service cost. In addition, only the service cost component of net benefit cost is eligible for capitalization.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will adopt the guidance during the first quarter of 2018. BancShares does not anticipate any material impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, underhave adopted CECL, the amendments in this ASU, an entity should perform its annual,ASU: (i) eliminate the previous recognition and measurement guidance for TDRs, (ii) require new disclosures for loan modifications when a borrower is experiencing financial difficulty (the “Modification Disclosures”) and (iii) require disclosures of current period gross charge-offs by year of origination in the vintage disclosures (the “Gross Charge-off Vintage Disclosures”).
The Modification Disclosures apply to the following modification types: principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or interim, goodwill impairment testa combination thereof. Creditors will be required to disclose the following by comparingloan class: (i) amounts and relative percentages of each modification type, (ii) the fair valuefinancial effect of a reporting unit with its carrying amount. An entity should recognize an impairment charge foreach modification type, including the amount by whichof principal forgiveness and reduction in weighted average interest rate, (iii) the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amountperformance of the reporting unit when measuringloan in the goodwill impairment loss, if applicable. An entity still has12 months following the option to performmodification and (iv) qualitative information discussing how the qualitative assessment for a reporting unit to determine ifmodifications factored into the quantitative impairment test is necessary. Thisdetermination of the ACL.
BancShares adopted ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.
This ASU will be effective for BancShares' annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after2022-02 as of January 1, 2017. We expect2023 and elected to adoptapply the guidancemodified retrospective transition method for our annual impairment test in fiscal year 2020.ACL recognition and measurement. As a result of adopting this ASU, BancShares does not anticipate any impactexpect a material change to our consolidated financial position or consolidated results of operationsits ACL related to loans previously modified as a result of the adoption.
FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash ReceiptsTDR and, Cash Payments
This ASU addresses the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU provide guidance on (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance requires application using a retrospective transition method. We will adopt the guidance during the first quarter of 2018. BancSharestherefore, does not anticipateexpect a material impact to our Consolidated Statements of Cash Flows.
FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU eliminates the delayed recognition of the full amount of credit losses until the loss was probable of occurring and instead will reflect an entity's current estimate of all expected credit losses. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. We will adopt the guidance by the first quarter of 2020 with a cumulative-effectcumulative effect adjustment to retained earnings as of the beginning of the year of adoption. For BancShares, the standard will apply to loans, unfunded loan commitmentsJanuary 1, 2023. The Modification Disclosures and debt securities held to maturity. We have formed a cross-functional team co-led by Finance and Risk Management and engaged a third party to assist with the adoption. The implementation team has developed a detailed project plan and is staying informed about the broader industry's perspective and insights, and identifying and researching key decision points. We have completed the readiness assessment and gap analysis related to data, modeling IT, accounting policy, controls and reporting which has enabled us to determine the areas of focus and estimate total body of work. Our current critical activities include model design, accounting policy development, data feasibility analysis, evaluation of reporting and disclosure solutions and completion of specific work stream project plans. We will continue to evaluate the impact the new standard will have on our consolidated financial statements as the final impact will be dependent, among other items, upon the loan portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts at that time.
FASB ASU 2016-02, Leases (Topic 842)
This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The key difference between existing standards and this ASU is the requirement for lessees to recognize on their balance sheet all lease contracts. An entity may make an accounting election by classification to not recognize leases with terms less than 12 months on their balance sheet. Both a right-of-use asset, representing the right to use the leased asset, and a lease liability, representing the contractual obligation,Gross Charge-off Vintage Disclosures are required to be recognizedapplied prospectively, beginning in BancShares’ Quarterly Report on Form 10-Q as of and for the three months ending March 31, 2023.
NOTE 2 — BUSINESS COMBINATIONS
CIT Group Inc.
BancShares completed the CIT Merger on January 3, 2022 (the “Merger Date”). Pursuant to the Merger Agreement, each share of CIT common stock, par value $0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, par value $1.00 per share, plus cash in lieu of fractional shares of Class A Common Stock. The Parent Company issued approximately 6.1 million shares of Class A Common Stock in connection with the consummation of the CIT Merger. The closing share price of Class A Common Stock on the balance sheetNasdaq 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 lessee at lease commencement. Further, this ASU requires lesseesMerger 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 classify leasesreceive 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 either operating or finance leases, whicha whole, that are substantially similarnot materially less favorable to the current operatingholders thereof than the rights, preferences, privileges and capital leases classifications. The distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment in the statements of incomevoting powers, and cash flows. Lessor guidance remains largely unchanged with the exception of how a lessor determines the appropriate lease classification for each lease to better align the lessor guidance with revised lessee classification guidance.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For BancShares, the impact of this ASU will primarily relate to its accountinglimitations and reporting of leasesrestrictions, taken as a lessee. We will adopt during the first quarter of 2019. We have engaged a third party and completed an inventory of all leases and their terms and service contracts with embedded leases. While we continue to evaluate the impactwhole, of the new standard, we expect an increase toCIT Series A Preferred Stock and the Consolidated Balance SheetsCIT Series B Preferred Stock, respectively. The non-callable period for right-of-use assets and associated lease liabilities, as well as resulting depreciation expensethe New BancShares Preferred Stock is January 4, 2027, which is five years from the original issuance date of the right-of-use assets and interest expenseNew BancShares Preferred Stock. There are 325,000 shares of the lease liabilitiesBancShares Series B Preferred Stock with a liquidation preference of $1,000 per share, resulting in the Consolidated Statementsa total liquidation preference of Income, for arrangements previously accounted for$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 operating leases. Additionally, adding these assetsTier 1 capital. The purchase price consideration related to our balance sheet will impact our total risk-weighted assets used to determine our regulatory capital levels. Our impact analysis on this change in accounting principle estimates an increase to the Consolidated Balance Sheets for total lease liability ranging between $65.0 million and $85.0 million, as the initial gross up of both assets and liabilities. Capital is expected to be impacted by an estimated four to six basis points. These preliminary ranges are subject to change and will continue to be refined closer to adoption.
FASB ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of certain financial instruments. The amendments in this ASU (1) require most equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without a readily determinable fair value; (3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use exit price notion, rather than entry prices, when measuring fair value of financial instruments for disclosure purposes; (5) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; (6) require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a changethe New BancShares Preferred Stock was $541 million.
CIT RSUs and PSUs converted to BancShares RSUs, and CIT Director Equity Awards immediately vested upon completion of the CIT Merger, as further described in the instrument-specific credit risk when the organization has elected to measure the liability at fair value“Stock-Based Compensation” discussion in accordance with the fair value option for financial instruments;Note 1 — Significant Accounting Policies and (7) state that a valuation allowance on deferred tax assetsBasis of Presentation. The aggregate purchase price consideration related to available-for-sale securities should be evaluated in combination with other deferred tax assets.these compensation awards was $81 million.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will adopt the ASU during the first quarter of 2018. The change in accounting principle will beCIT Merger has been accounted for as a cumulative-effect adjustment to the balance sheet resulting in an $18.7 million increase to retained
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings and a decrease to AOCI on January 1, 2018. With the adoption of this ASU equity securities can no longer be classified as available for sale, as such marketable equity securities will be disclosed as a separate line item on the balance sheet with changes in the fair value of equity securities reflected in net income.
For equity investments without a readily determinable fair value, BancShares has elected to measure the equity investments using the measurement alternative which requires BancShares to make a qualitative assessment of whether the investment is impaired at each reporting period. Under the measurement alternative these investments will be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. If a qualitative assessment indicates that the investment is impaired, BancShares will have to estimate the investment's fair value in accordance with ASC 820 and, if the fair value is less than the investment's carrying value, recognize an impairment loss in net income equal to the difference between carrying value and fair value. Equity investments without a readily determinable fair value are recorded within other assets in the consolidated balance sheets.
FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued a standard on the recognition of revenue from contracts with customers with the core principle being for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify guidance for identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify and improve the guidance for certain aspects of Topic 606. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to clarify guidance for certain aspects of Topic 606. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update). This ASU adds SEC paragraphs to the new revenue and leases sections of the Codification pursuant to an SEC Staff announcement made on July 20, 2017 as well as supersedes certain SEC paragraphs related to previous SEC staff announcements. In November 2017, the FASB issued ASU 2017-14, Income Statement - Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606) (SEC Update), to supersede, amend and add SEC paragraphs to the Codification to reflect the August 2017 issuance of SEC staff Accounting Bulletin (SAB) 116 and SEC Release No. 33-10403.
Per ASU 2015-14, Deferral of the Effective Date, this guidance was deferred and is effective for fiscal periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We will adopt the guidance during the first quarter of 2018. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are in scope of the guidance are primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. Based on our overall assessment of revenue streams and review of related contracts affected by the ASU, BancShares does not anticipate a material impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
NOTE B
BUSINESS COMBINATIONS
HomeBancorp, Inc.
On December 18, 2017, FCB and HomeBancorp, Inc. (HomeBancorp) entered into a definitive merger agreement. The agreement provides for the acquisition of Tampa, Florida-based HomeBancorp by FCB. Under the terms of the agreement, cash consideration of $15.03 will be paid to the shareholders of HomeBancorp for each share of HomeBancorp's common stock totaling approximately $113.6 million. The transaction is expected to close no later than the second quarter of 2018, subject to the receipt of regulatory approvals and the approval of HomeBancorp's shareholders, and will be accounted forbusiness combination under the acquisition method of accounting. The merger will allow FCB to expand its presence in Florida and enter into two new markets in Tampa and Orlando. As of September 30, 2017, HomeBancorp reported $954.9 million in consolidated assets, $699.4 million in deposits and $637.5 million in loans.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guaranty Bank
On May 5, 2017, FCB entered into an agreement withAccordingly, the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of Guaranty Bank (Guaranty) of Milwaukee, Wisconsin. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.
The Guaranty transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values based on the acquisition date. FairThe 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 preliminaryhighly subjective in nature. Purchase accounting could change until management finalized its analysis of the acquired assets and subject to refinement forassumed liabilities, up to one year afterfrom the closing date of the relevant acquisition as additional information regarding closing date fair values becomes available.Merger Date. As of December 31, 2017, there have been no refinements to the2022, fair value of these assets acquired and liabilities assumed.measurements were finalized.
The fair value of the assets acquired was $875.1 million, including $574.6 million in non-PCI loans, $114.5 million in PCI loans and $9.9 million in a core deposit intangible. Liabilities assumed were $982.7 million, of which $982.3 million were deposits. The total gain on the transaction was $122.7 million which is included in noninterest income in the Consolidated Statements of Income.
The following table provides a purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the Merger Date:
Purchase Price Consideration and Net Assets Acquired | | | | | | | | | | | | | | | | | |
dollars in millions, except shares issued and price per share | | | | | Purchase Price Allocation |
Common share consideration | | | | | |
Shares of Class A Common Stock issued | | | | | 6,140,010 | |
Price per share on January 3, 2022 | | | | | $ | 859.76 | |
Common stock consideration | | | | | $ | 5,279 | |
Preferred stock consideration | | | | | 541 | |
Stock-based compensation consideration | | | | | 81 | |
Cash in lieu of fractional shares and other consideration paid | | | | | 51 | |
Purchase price consideration | | | | | $ | 5,952 | |
Assets | | | | | |
Cash and interest-earning deposits at banks | | | | | $ | 3,060 | |
Investment securities | | | | | 6,561 | |
Assets held for sale | | | | | 59 | |
Loans and leases | | | | | 32,714 | |
Operating lease equipment | | | | | 7,838 | |
Bank-owned life insurance | | | | | 1,202 | |
Intangible assets | | | | | 143 | |
Other assets | | | | | 2,198 | |
Total assets acquired | | | | | $ | 53,775 | |
Liabilities | | | | | |
Deposits | | | | | $ | 39,428 | |
Borrowings | | | | | 4,536 | |
Credit balances of factoring clients | | | | | 1,534 | |
Other liabilities | | | | | 1,894 | |
Total liabilities assumed | | | | | $ | 47,392 | |
Fair value of net assets acquired | | | | | 6,383 | |
Gain on acquisition | | | | | $ | 431 | |
BancShares recorded a gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The gain on acquisition 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-earning deposits at banks
For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value.
Investment securities
Fair values for 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.
Assets held for sale and loans and leases
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.
BancShares’ accounting methods for acquired loans and leases are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger. The UPB for PCD loans and leases includes the PCD Gross-Up of $272 million as discussed further in Note 4 — Loans and Leases.
Loans Acquired
| | | | | | | | | | | |
dollars in millions | Loans and Leases |
| UPB | | Fair Value |
| | | |
Non-PCD loans and leases | $ | 29,542 | | | $ | 29,481 | |
PCD loans and leases | 3,550 | | | 3,233 | |
Total loans and leases | $ | 33,092 | | | $ | 32,714 | |
Operating Lease Equipment
Operating lease equipment were comprised of two sub-groups: rail and non-rail equipment. Fair values for both were based on the cost approach where market values were not available. The sales approach was used to value rail assets where market information was available, or when replacement cost less depreciation was lower than the current market value. An intangible liability was recorded for net below market lease contracts rental rates, for which fair value was estimated using the income approach and market lease rates and other key inputs.
A discount was recorded for operating lease equipment, which includes railcars, locomotives and other equipment, to reduce it to fair value. This adjustment will reduce depreciation expense over the remaining useful lives of the equipment on a straight-line basis. The intangible liability (see Note 8 — Goodwill and Other Intangibles) will be amortized, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements on a straight-line basis.
Bank Owned Life Insurance
The fair values of BOLI policies were determined by the policy administrator and calculated based on the net present value of investment cash flows. Expected premium payments, death benefits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysis and management’s review of the analysis, fair value was determined to equate to book value as of the merger date.
|
| | | |
(Dollars in thousands) | As recorded by FCB |
Assets | |
Cash and due from banks | $ | 48,824 |
|
Overnight investments | 94,134 |
|
Investment securities | 12,140 |
|
Loans | 689,086 |
|
Premises and equipment | 8,603 |
|
Income earned not collected | 6,720 |
|
Intangible assets | 9,870 |
|
Other assets | 5,748 |
|
Total assets acquired | 875,125 |
|
Liabilities | |
Deposits | 982,307 |
|
Other liabilities | 440 |
|
Total liabilities assumed | 982,747 |
|
Fair value of net liabilities assumed | (107,622 | ) |
Cash received from FDIC | 230,350 |
|
Gain on acquisition of Guaranty | $ | 122,728 |
|
Intangible assets
Merger-related expenses of $7.4 million fromThe following table presents the Guaranty transaction wereintangible 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 8 — Goodwill and Other Intangibles for further discussion.
Other assets
The following table details other assets acquired:
Other Assets | | | | | |
dollars in millions | Fair Value |
Low-income housing tax credits and other investments | $ | 777 |
Right of use assets | 327 |
Premises and equipment | 230 |
Fair value of derivative financial instruments | 209 | |
Counterparty receivables | 133 |
Other | 522 | |
Total other assets | $ | 2,198 |
The fair values of the tax credit investments considered the ongoing equity installments that are regularly allocated to each of the underlying tax credit funds comprising the low-income housing tax credits investments, along with changes to projected tax benefits and the impact this has on future capital contributions, and an appropriately determined discount rate. The fair value of the investments in unconsolidated entities was valued using the income approach.
The right of use asset associated with real estate operating leases were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. The lease liability was measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the acquirer at the acquisition date and using BancShares incremental borrowing rate. The lease term was determined for individual leases based on management’s assessment of the probability of exercising the existing renewal, termination and/or purchase option.
Fair values for property, including leasehold improvements, furniture and fixtures, computer software and other digital equipment were determined using the cost approach. Certain tangible assets that are expected to be sold in the short term were reported at net book. Real estate property, such as land and buildings, was valued using the sales comparison approach, where sales of comparable properties are adjusted for differences to estimate the value of each subject property.
The fair values of the derivative financial instruments, as well as counterparty receivables, were valued using prices of financial instruments with similar characteristics and observable inputs.
Deposits
The fair values for time deposits were estimated using a discounted cash flow analysis whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.
Borrowings
In connection with the CIT Merger, BancShares assumed the outstanding borrowings of CIT. The fair values of borrowings were estimated based on readily observable prices using reliable market sources.
Credit balances of Factoring Clients
Credit balance amounts represent short-term payables that are tied to the factoring receivables. Due to the short-term nature of these payables and given that amounts are settled at book value, it was determined that the carrying value is equivalent to fair value.
Other Liabilities
Other liabilities include items such as accounts payable and accrued liabilities, lease liabilities, current and deferred taxes, commitments to fund tax credit investments and other miscellaneous liabilities. The fair value of lease liabilities was measured using the present value of remaining lease payments, using BancShares’ discount rate at the merger date. The fair value of the remaining liabilities was determined to approximate book value. For all accrued liabilities and accounts payable, it was determined that the carrying value equals book value.
Unaudited Pro Forma Information
The amount of interest income, noninterest income and net income of $1.75 billion, $1.24 billion and $587 million, respectively, attributable to the acquisition of CIT were included in BancShares’ Consolidated StatementsStatement of Income for the year ended December 31, 2017. Loan-related2022. CIT’s interest income, generated from Guaranty was approximately $20.5 million since the acquisition date. While the acquisition gain of $122.7 million is significant for 2017, the ongoing contributions of this transaction to BancShares' financial statements is not considered material and therefore pro forma financial data is not included.
Based on such credit factors as past due status, nonaccrual status, loan-to-value, credit scores, and other quantitative and qualitative considerations, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (included in PCI loans), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (included in non-PCI loans).
Harvest Community Bank
On January 13, 2017, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of Harvest Community Bank (HCB) of Pennsville, New Jersey. The acquisition provides FCB with the opportunity to grow capital and enhance earnings.
The HCB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the relevant acquisition as additional information regarding closing date fair values
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
becomes available. As of December 31, 2017, there have been no refinements to the fair value of these assets acquired and liabilities assumed.
The fair value of the assets acquired was $111.6 million, including $85.1 million in PCI loans and $850 thousand in a core deposit intangible. Liabilities assumed were $121.8 million, of which the majority were deposits. As a result of the transaction, FCB recorded a gain on the acquisition of $12.0 million which is included in noninterest income inand net income noted above reflect management’s best estimates, based on information available at the Consolidated Statements of Income.reporting date.
The following table providespresents certain unaudited pro forma financial information for illustrative purposes only, for the identifiable assetsyear ended December 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 and liabilities assumed at their estimated fair values as ofBancShares and includes certain pro forma adjustments. The key pro forma adjustments relate to the acquisition date.
|
| | | |
(Dollars in thousands) | As recorded by FCB |
Assets | |
Cash and due from banks | $ | 3,350 |
|
Overnight investments | 7,478 |
|
Investment securities | 14,455 |
|
Loans | 85,149 |
|
Income earned not collected | 31 |
|
Intangible assets | 850 |
|
Other assets | 237 |
|
Total assets acquired | 111,550 |
|
Liabilities | |
Deposits | 121,755 |
|
Other liabilities | 74 |
|
Total liabilities assumed | 121,829 |
|
Fair value of net liabilities assumed | (10,279 | ) |
Cash received from FDIC | 22,296 |
|
Gain on acquisition of HCB | $ | 12,017 |
|
Merger-related expenses of $1.2 millionfollowing items that were recordedrecognized in theBancShares Consolidated StatementsStatement of Income for the year ended December 31, 2017. Loan-related interest income generated from HCB was approximately $3.8 million2022, but were reflected in 2021 for the year ended December 31, 2017. The transaction is not considered material to BancShares' financial statements and therefore pro forma financial data isinformation: (i) provision for credit losses of $513 million related to the Non-PCD loans and leases and unfunded commitments; (ii) merger-related expenses of $231 million; (iii) estimated PAA accretion and amortization related to fair value adjustments and intangibles associated with the CIT Merger; and (iv) $431 million gain on acquisition. BancShares expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not included.
All loans resultingreflected 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 HCB transactionunaudited pro forma information presented below and the differences could be significant.
Selected Unaudited Pro Forma Financial Information for Consolidated BancShares
| | | | | | | | | | | | | | |
dollars in millions | | Year Ended December 31, |
| | 2022 | | 2021 |
Interest income | | $ | 3,413 | | | $ | 2,867 | |
Noninterest income | | 1,705 | | | 2,537 | |
Net income | | 1,225 | | | 1,497 | |
NOTE 3 — INVESTMENT SECURITIES
The following tables as of December 31, 2022 include the investment security balances acquired in the CIT Merger, which were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI under ASC 310-30.
Cordia Bancorp, Inc.
On September 1, 2016, FCB completed the merger of Midlothian, Virginia-based Cordia Bancorp, Inc. (Cordia) and its subsidiary, Bank of Virginia (BVA), into FCB. Under the terms of the merger agreement, cash consideration of $5.15 was paid to Cordia’s shareholders for each of their shares of Cordia’s common stock, with total consideration paid of $37.1 million. The Cordia transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair valuesvalue on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on August 31, 2017.
The fair value of assets acquired was $349.3 million, including $241.4 million in loans and $2.2 million in a core deposit intangible. Liabilities assumed were $323.1 million, including $292.2 million in deposits. As a result of the transaction, FCB recorded $10.8 million of goodwill. The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired. This premium paid reflects the increased market share and related synergies that are expected to result from the acquisition. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a qualified stock purchase.
Merger-related expenses of $260 thousand and $3.8 million were recorded in the Consolidated Statements of Income for the years ended December 31, 2017 and 2016, respectively. Loan-related interest income generated from Cordia was approximately $5.6 million and $4.2 million for the years ended December 31, 2017 and 2016, respectively. The transaction is not considered material to BancShares' financial statements and therefore pro forma financial data is not included.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the immaterial amount of loans resulting from the Cordia transaction that had evidence of credit quality deterioration, all loans were accounted for as non-PCI loans under ASC 310-20.
First CornerStone Bank
On May 6, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of First Cornerstone Bank (FCSB) of King of Prussia, Pennsylvania. The FCSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on May 5, 2017.
The fair value of the assets acquired was $87.4 million, including $43.8 million in loans and $390 thousand of cored deposit intangible. Liabilities assumed were $96.9 million, of which the majority were deposits. The fair value of the net liabilities assumed was $9.5 million and cash received from the FDIC was $12.5 million. The total gain on the transaction was $3.0 million which is included in noninterest income in the Consolidated Statements of Income for the year ended December 31, 2016.
Merger-related expenses were immaterial for the year ended December 31, 2017 and $1.0 million were recorded in the Consolidated Statements of Income for the year ended December 31, 2016. Loan-related interest income generated from FCSB was approximately $1.7 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively. The transaction is not considered material to BancShares' financial statements and therefore pro forma financial data is not included.
All loans resulting from the FCSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI loans under ASC 310-30.
North Milwaukee State Bank
On March 11, 2016, FCB entered into an agreement with the FDIC, as Receiver, to purchase certain assets and assume certain liabilities of North Milwaukee State Bank (NMSB) of Milwaukee, Wisconsin. The NMSB transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. These fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on March 10, 2017.
The fair value of the assets acquired was $53.6 million, including $36.9 million in loans and $240 thousand of core deposit intangible. Liabilities assumed were $60.9 million, of which $59.2 million were deposits. The fair value of the net liabilities assume was $7.3 million and cash received from the FDIC was $10.2 million. The total gain on the transaction was $2.9 million which is included in noninterest income in the Consolidated Statements of Income for the year ended December 31, 2016.
Merger-related expenses of $112 thousand and $517 thousand were recorded in the Consolidated Statements of Income for the years ended December 31, 2017 and 2016, respectively. Loan-related interest income generated from NMSB was approximately $2.4 million and $1.9 million for the years ended December 31, 2017 and 2016, respectively. The transaction is not considered material to BancShares' financial statements and therefore pro forma financial data is not included.
All loans resulting from the NMSB transaction were recorded at the acquisition date with a discount attributable, at least in part, to credit quality deterioration, and are therefore accounted for as PCI loans under ASC 310-30.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C
INVESTMENTS
The amortized cost and fair value of investment securities classified as available for sale and held to maturity at December 31, 20172022 and 2016,2021, were as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
(Dollars in thousands) | Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 1,658,410 |
| | $ | — |
| | $ | 546 |
| | $ | 1,657,864 |
|
Mortgage-backed securities | 5,428,074 |
| | 1,544 |
| | 80,192 |
| | 5,349,426 |
|
Equity securities | 75,471 |
| | 29,737 |
| | — |
| | 105,208 |
|
Corporate bonds | 59,414 |
| | 557 |
| | 8 |
| | 59,963 |
|
Other | 7,645 |
| | 256 |
| | 182 |
| | 7,719 |
|
Total investment securities available for sale | $ | 7,229,014 |
| | $ | 32,094 |
| | $ | 80,928 |
| | $ | 7,180,180 |
|
| | | | | | | |
| December 31, 2016 |
| Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
U.S. Treasury | $ | 1,650,675 |
| | $ | 579 |
| | $ | 935 |
| | $ | 1,650,319 |
|
Government agency | 40,291 |
| | 107 |
| | — |
| | 40,398 |
|
Mortgage-backed securities | 5,259,466 |
| | 2,809 |
| | 86,850 |
| | 5,175,425 |
|
Equity securities | 71,873 |
| | 11,634 |
| | — |
| | 83,507 |
|
Corporate bonds | 49,367 |
| | 195 |
| | — |
| | 49,562 |
|
Other | 7,615 |
| | — |
| | 246 |
| | 7,369 |
|
Total investment securities available for sale | $ | 7,079,287 |
| | $ | 15,324 |
| | $ | 88,031 |
| | $ | 7,006,580 |
|
| | | | | | | |
| December 31, 2017 |
| Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Investment securities held to maturity | | | | | | | |
Mortgage-backed securities | $ | 76 |
| | $ | 5 |
| | $ | — |
| | $ | 81 |
|
| | | | | | | |
| December 31, 2016 |
| Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Mortgage-backed securities | $ | 98 |
| | $ | 6 |
| | $ | — |
| | $ | 104 |
|
Amortized Cost and Fair Value - Debt Securities | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,035 | | | $ | — | | | $ | (137) | | | $ | 1,898 | |
Government agency | 164 | | | — | | | (2) | | | 162 | |
Residential mortgage-backed securities | 5,424 | | | 1 | | | (630) | | | 4,795 | |
Commercial mortgage-backed securities | 1,774 | | | — | | | (170) | | | 1,604 | |
Corporate bonds | 570 | | | — | | | (34) | | | 536 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,967 | | | $ | 1 | | | $ | (973) | | | $ | 8,995 | |
Investment in marketable equity securities | $ | 75 | | | $ | 21 | | | $ | (1) | | | $ | 95 | |
Investment securities held to maturity | | | | | | | |
U.S. Treasury | $ | 474 | | | $ | — | | | $ | (50) | | | $ | 424 | |
Government agency | 1,548 | | | — | | | (186) | | | 1,362 | |
Residential mortgage-backed securities | 4,605 | | | — | | | (723) | | | 3,882 | |
Commercial mortgage-backed securities | 3,355 | | | — | | | (484) | | | 2,871 | |
Supranational securities | 295 | | | — | | | (41) | | | 254 | |
Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | $ | 10,279 | | | $ | — | | | $ | (1,484) | | | $ | 8,795 | |
Total investment securities | $ | 20,321 | | | $ | 22 | | | $ | (2,458) | | | $ | 17,885 | |
| | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Investment securities available for sale | | | | | | | |
U.S. Treasury | $ | 2,007 | | | $ | — | | | $ | (2) | | | $ | 2,005 | |
Government agency | 221 | | | 1 | | | (1) | | | 221 | |
Residential mortgage-backed securities | 4,757 | | | 8 | | | (36) | | | 4,729 | |
Commercial mortgage-backed securities | 1,648 | | | 9 | | | (17) | | | 1,640 | |
Corporate bonds | 582 | | | 27 | | | (1) | | | 608 | |
| | | | | | | |
Total investment securities available for sale | $ | 9,215 | | | $ | 45 | | | $ | (57) | | | $ | 9,203 | |
Investment in marketable equity securities | $ | 73 | | | $ | 25 | | | $ | — | | | $ | 98 | |
Investment securities held to maturity | | | | | | | |
Residential mortgage-backed securities | $ | 2,322 | | | $ | 6 | | | $ | (22) | | | $ | 2,306 | |
Commercial mortgage-backed securities | 1,485 | | | — | | | (34) | | | 1,451 | |
Other | 2 | | | — | | | — | | | 2 | |
Total investment securities held to maturity | $ | 3,809 | | | $ | 6 | | | $ | (56) | | | $ | 3,759 | |
Total investment securities | $ | 13,097 | | | $ | 76 | | | $ | (113) | | | $ | 13,060 | |
Investments in mortgage-backed securities primarily represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. U.S. Treasury investments represents T-bills and Notes issued by the U.S. Treasury. Investments in equitygovernment agency securities represent securities issued by the Small Business Association, FHLB and other agencies. Investments in supranational securities represent securities issued by the Supranational Entities and Multilateral Development Banks. Investments in corporate bonds represent positions in debt securities of other financial institutions. Investments in marketable equity securities represent positions in common stock of publicly traded financial institutions. Other held to maturity investments include trust preferredcertificates of deposit with other financial institutions.
BancShares also holds approximately 354,000 shares of Class B common stock of 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.
Accrued interest receivables for available for sale and held to maturity debt securities of financial institutions. were excluded from the estimate for credit losses. At December 31, 2022, accrued interest receivables for available for sale and held to maturity debt securities were $33 million and $19 million, respectively. At December 31, 2021, accrued interest receivables for available for sale and held to maturity debt securities were $22 million and $7 million, respectively. During the year ended December 31, 2022 and 2021, there was no accrued interest that was deemed uncollectible and written off against interest income.
The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Repayments ofResidential and commercial mortgage-backed and government agency securities are dependentstated separately as they are not due at a single maturity date.
Maturities - Debt Securities
| | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 |
| Cost | | Fair Value | | Cost | | Fair Value |
Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 37 | | | $ | 37 | | | $ | — | | | $ | — | |
After one through five years | 2,068 | | | 1,928 | | | 2,049 | | | 2,048 | |
After five through 10 years | 483 | | | 455 | | | 523 | | | 548 | |
After 10 years | 17 | | | 14 | | | 17 | | | 17 | |
| | | | | | | |
Government agency | 164 | | | 162 | | | 221 | | | 221 | |
Residential mortgage-backed securities | 5,424 | | | 4,795 | | | 4,757 | | | 4,729 | |
Commercial mortgage-backed securities | 1,774 | | | 1,604 | | | 1,648 | | | 1,640 | |
Total investment securities available for sale | $ | 9,967 | | | $ | 8,995 | | | $ | 9,215 | | | $ | 9,203 | |
Investment securities held to maturity | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 51 | | | $ | 51 | | | $ | 2 | | | $ | 2 | |
After one through five years | 1,479 | | | 1,328 | | | — | | | — | |
After five through 10 years | 789 | | | 663 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | 4,605 | | | 3,882 | | | 2,322 | | | 2,306 | |
Commercial mortgage-backed securities | 3,355 | | | 2,871 | | | 1,485 | | | 1,451 | |
| | | | | | | |
| | | | | | | |
Total investment securities held to maturity | $ | 10,279 | | | $ | 8,795 | | | $ | 3,809 | | | $ | 3,759 | |
| | | | | | | |
The following table presents interest and dividend income on investment securities.
Interest and Dividends on Investment Securities
| | | | | | | | | | | | | | | | | | | | |
dollars in millions | | Year ended December 31 |
| | 2022 | | 2021 | | 2020 |
Interest income - taxable investment securities | | $ | 352 | | | $ | 143 | | | $ | 140 | |
| | | | | | |
| | | | | | |
| | | | | | |
Dividend income - marketable equity securities | | 2 | | | 2 | | | 4 | |
Interest on investment securities | | $ | 354 | | | $ | 145 | | | $ | 144 | |
The following table provides the gross realized gains and losses on the repaymentssales of investment securities available for sale:
Realized Gains on Debt Securities Available For Sale
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Gross realized gains on sales of investment securities available for sale | $ | — | | | $ | 33 | | | $ | 61 | |
Gross realized losses on sales of investment securities available for sale | — | | | — | | | (1) | |
Net realized gains on sales of investment securities available for sale | $ | — | | | $ | 33 | | | $ | 60 | |
The following table provides the underlying loan balances.fair value adjustment on marketable equity securities:
Fair Value Adjustment on Marketable Equity securities do not have a stated maturity date.Securities
| | | | | | | | | | | | | | | | | |
dollars in millions | Year ended December 31 |
| 2022 | | 2021 | | 2020 |
Fair value adjustment on marketable equity securities, net | $ | (3) | | | $ | 34 | | | $ | 29 | |
| | | | | |
| | | | | |
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 |
(Dollars in thousands) | Cost | | Fair value | | Cost | | Fair value |
Investment securities available for sale | | | | | | | |
Non-amortizing securities maturing in: | | | | | | | |
One year or less | $ | 808,768 |
| | $ | 808,301 |
| | $ | 842,798 |
| | $ | 842,947 |
|
One through five years | 849,642 |
| | 849,563 |
| | 848,168 |
| | 847,770 |
|
Five through 10 years | 59,414 |
| | 59,963 |
| | 49,367 |
| | 49,562 |
|
Over 10 years | 7,645 |
| | 7,719 |
| | 7,615 |
| | 7,369 |
|
Mortgage-backed securities | 5,428,074 |
| | 5,349,426 |
| | 5,259,466 |
| | 5,175,425 |
|
Equity securities | 75,471 |
| | 105,208 |
| | 71,873 |
| | 83,507 |
|
Total investment securities available for sale | $ | 7,229,014 |
| | $ | 7,180,180 |
| | $ | 7,079,287 |
| | $ | 7,006,580 |
|
Investment securities held to maturity | | | | | | | |
Mortgage-backed securities held to maturity | $ | 76 |
| | $ | 81 |
| | $ | 98 |
| | $ | 104 |
|
For each period presented, securities gains (losses) include the following:
|
| | | | | | | | | | | |
| Year ended December 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2015 |
Gross gains on retirement/sales of investment securities available for sale | $ | 11,635 |
| | $ | 27,104 |
| | $ | 10,834 |
|
Gross losses on sales of investment securities available for sale | (7,342 | ) | | (431 | ) | | (17 | ) |
Net securities gains | $ | 4,293 |
| | $ | 26,673 |
| | $ | 10,817 |
|
The following table provides information regarding investment securities available for sale with unrealized losses asfor which an ACL has not been recorded:
Gross Unrealized Losses on Debt Securities Available For Sale
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
dollars in millions | December 31, 2022 |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 403 | | | $ | (27) | | | $ | 1,495 | | | $ | (110) | | | $ | 1,898 | | | $ | (137) | |
Government agency | 65 | | | (1) | | | 62 | | | (1) | | | 127 | | | (2) | |
Residential mortgage-backed securities | 1,698 | | | (165) | | | 3,001 | | | (465) | | | 4,699 | | | (630) | |
Commercial mortgage-backed securities | 836 | | | (53) | | | 752 | | | (117) | | | 1,588 | | | (170) | |
Corporate bonds | 499 | | | (30) | | | 37 | | | (4) | | | 536 | | | (34) | |
Total | $ | 3,501 | | | $ | (276) | | | $ | 5,347 | | | $ | (697) | | | $ | 8,848 | | | $ | (973) | |
| | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale | | | | | | | | | | | |
U.S. Treasury | $ | 1,811 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | 1,811 | | | $ | (2) | |
Government agency | 17 | | | — | | | 79 | | | (1) | | | 96 | | | (1) | |
Residential mortgage-backed securities | 3,992 | | | (36) | | | 1 | | | — | | | 3,993 | | | (36) | |
Commercial mortgage-backed securities | 852 | | | (15) | | | 111 | | | (2) | | | 963 | | | (17) | |
Corporate bonds | 52 | | | (1) | | | — | | | — | | | 52 | | | (1) | |
Total | $ | 6,724 | | | $ | (54) | | | $ | 191 | | | $ | (3) | | | $ | 6,915 | | | $ | (57) | |
As of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 months | | 12 months or more | | Total |
(Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale: | | | | | | | | | | | |
U.S. Treasury | $ | 1,408,166 |
| | $ | 345 |
| | $ | 249,698 |
| | $ | 201 |
| | $ | 1,657,864 |
| | $ | 546 |
|
Mortgage-backed securities | 2,334,102 |
| | 20,923 |
| | 2,725,933 |
| | 59,269 |
| | 5,060,035 |
| | 80,192 |
|
Corporate bonds | 5,025 |
| | 8 |
| | — |
| | — |
| | 5,025 |
| | 8 |
|
Other | 5,349 |
| | 182 |
| | — |
| | — |
| | 5,349 |
| | 182 |
|
Total | $ | 3,752,642 |
| | $ | 21,458 |
| | $ | 2,975,631 |
| | $ | 59,470 |
| | $ | 6,728,273 |
| | $ | 80,928 |
|
| | | | | | | | | | | |
| December 31, 2016 |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Investment securities available for sale: | | | | | | | | | | | |
U.S. Treasury | $ | 807,822 |
| | $ | 935 |
| | $ | — |
| | $ | — |
| | $ | 807,822 |
| | $ | 935 |
|
Mortgage-backed securities | 4,442,700 |
| | 82,161 |
| | 362,351 |
| | 4,689 |
| | 4,805,051 |
| | 86,850 |
|
Other | 7,369 |
| | 246 |
| | — |
| | — |
| | 7,369 |
| | 246 |
|
Total | $ | 5,257,891 |
| | $ | 83,342 |
| | $ | 362,351 |
| | $ | 4,689 |
| | $ | 5,620,242 |
| | $ | 88,031 |
|
Investment2022, there were 151 investment securities available for sale with an aggregate fair value of $2.98 billion have had continuous unrealized losses for more than 12 months, as of December 31, 2017 with an aggregate unrealized loss of $59.5 million. As of December 31, 2017, 227 of these investments arewhich 144 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and 4 are U.S. Treasury securities.
the remaining seven related to corporate bonds. None of the unrealized losses identified as of December 31, 20172022 or December 31, 20162021, relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relatedrelate to changes in interest rates relative to when the investment securities were purchased. For all periods presented,purchased, and do not indicate credit-related impairment. BancShares hadconsidered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the available for sale 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. Therefore, none
BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the Supranational Entities and Multilateral Development Banks and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the Supranational Entities and Multilateral Development Banks and the long history of no credit losses on debt securities were deemedissued by government agencies and government sponsored entities, as of December 31, 2022 and 2021, no ACL was required for held to be other than temporarily impaired.maturity debt securities.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment securities having an aggregate carrying value of $4.59$4.2 billion at December 31, 20172022, and $4.55$5.7 billion at December 31, 20162021, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of December 31, 2022 and 2021.
There were no debt securities held to maturity on non-accrual status as of December 31, 2022 and 2021.
Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $197 million and $40 million at December 31, 2022 and 2021, respectively; these securities are recorded at cost. BancShares held $58 million and $1 million of nonmarketable securities without readily determinable fair values, which are measured at cost at December 31, 2022 and December 31, 2021, respectively. Investments in qualified affordable housing projects, all of which qualify for the proportional amortization method, were $598 million and $157 million at December 31, 2022 and 2021, respectively.
NOTE D
4 — LOANS AND LEASES
BancShares' accounting methods for loans
The following tables as of December 31, 2022 include loan and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined thatlease balances acquired in the loans do not have any credit deterioration at the time of acquisition. Conversely, loans forCIT Merger, which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered impaired and, therefore, classified as PCI loans. PCI loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans arewere recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date asMerger Date. Refer to Note 2 — Business Combinations for further information and to Note 1 — Significant Accounting Policies and Basis of Presentation for our accounting policies related to loans.
Unless otherwise noted, loans held for sale are not included in the fair valuefollowing tables. Leases in the following tables include finance leases, but exclude operating lease equipment.
Loans by Class | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 |
Commercial | | | |
Commercial construction | $ | 2,804 | | | $ | 1,238 | |
Owner occupied commercial mortgage | 14,473 | | | 12,099 | |
Non-owner occupied commercial mortgage | 9,902 | | | 3,041 | |
Commercial and industrial | 24,105 | | | 5,937 | |
Leases | 2,171 | | | 271 | |
Total commercial | 53,455 | | | 22,586 | |
Consumer | | | |
Residential mortgage | 13,309 | | | 6,088 | |
Revolving mortgage | 1,951 | | | 1,818 | |
Consumer auto | 1,414 | | | 1,332 | |
Consumer other | 652 | | | 548 | |
Total consumer | 17,326 | | | 9,786 | |
Total loans and leases | $ | 70,781 | | | $ | 32,372 | |
At December 31, 2022 and 2021, accrued interest receivable on loans included in other assets was $203 million and $87 million, respectively, and was excluded from the estimate of credit losses.
The following table presents selected components of the acquired assets incorporates assumptions regarding credit risk over the lifeamortized cost of the loans. An allowance is recorded if there is additional credit deterioration after the acquisition date. See Note A for additional information on PCI and non-PCI loans and leases.
BancShares reports PCI and non-PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial based on the type
Components of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.Amortized Cost
Commercial – Commercial loan classes include construction and land development, commercial mortgage, other commercial real estate, commercial and industrial, lease financing and other. | | | | | | | | | | | |
dollars in millions | December 31, 2022 | | December 31, 2021 |
Deferred fees, including unearned fees and unamortized costs on Non-PCD loans | $ | 85 | | $ | 32 |
| | | |
Net unamortized discount on purchased loans | | | |
Non-PCD | $ | 73 | | $ | 11 |
PCD | 45 | | 29 | |
Total net unamortized discount | $ | 118 | | $ | 40 |
Construction and land development – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise; multifamily apartments; and other commercial buildings that may be owner-occupied or income generating investments for the owner.
Commercial mortgage – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.
Other commercial real estate – Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (5 or more) residential properties.
Commercial and industrial – Commercial and industrial consists of loans or lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.
Lease financing – Lease financing consists solely of lease financing agreements for business equipment, vehicles and other assets.
Other – Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations, and certain loans repurchased with government guarantees.
Noncommercial – Noncommercial loan classes consist of residential and revolving mortgage, construction and land development, and consumer loans.
Residential mortgage – Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.
Revolving mortgage – Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.
Construction and land development – Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.
Consumer – Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards.
The aging of Contentsthe outstanding loans and leases, by class, at December 31, 2022 and 2021 is provided in the tables below. Loans and leases less than 30 days past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and remain in compliance with the respective agreement.
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial and noncommercial loans and leases and consumer loans have different credit quality indicators as a result of the unique characteristics of the loan segmentclasses being evaluated. The credit quality indicators for non-PCI and PCI 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 more severely criticized loans or leases. The credit quality indicators for PCI and non-PCI noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases.loans. The indicators represent the rating for loans or leases as of the date presented are based on the most recent assessment performed. These credit quality indicatorsperformed and are defined as follows:below: